CYBERONICS, INC. PURCHASE AGREEMENT

CYBERONICS, INC.

(A Delaware corporation)

$125,000,000

3% Senior Subordinated Convertible Notes due 2012

PURCHASE AGREEMENT

Dated: September 21, 2005

1

Table of Contents

Table of Contents

Page

SECTION 1 Representations and Warranties.

 

(a)

Representations and Warranties by the Company

 

(b)

Officer’s Certificates

 

SECTION 2 Sale and Delivery to Initial Purchaser; Closing.

 

(a)

Initial Securities

 

(b)

Option Securities

 

(c)

Payment

 

(d)

Denominations; Registration

 

SECTION 3 Covenants of the Company

 

(a)

Offering Memorandum

 

(b)

Notice and Effect of Material Events

 

(c)

Amendments to Offering Memorandum and Supplements

 

(d)

Qualifications of Securities for Offer and Sale

 

(e)

DTC

 

(f)

Use of Proceeds

 

(g)

Listing on Securities Exchange

 

(h)

Restriction on Sale of Convertible Securities and Common Stock

 

(i)

Restriction on Sale of Securities

 

(j)

Stabilization and Manipulation

 

(k)

PORTAL Designation

 

(l)

Reporting Requirements

 

(m)

Reservation of Shares of Common Stock

 

(n)

Registration Rights Agreement

 

(o)

Qualification Under the Trust Indenture Act

 

(p)

No Advisory or Fiduciary Relationship

 

SECTION 4 Payment of Expenses.

 

(a)

Expenses

 

(b)

Termination of Agreement

 

SECTION 5 Conditions of Initial Purchaser’s Obligations

 

(a)

Opinion of Counsel for Company

 

(b)

Opinion of Internal Counsel for Company

 

(c)

Opinion of Internal IP Counsel for Company

 

(d)

Opinion of Counsel for Initial Purchaser

 

(e)

Officers’ Certificate

 

(f)

Accountant’s Comfort Letter

 

(g)

Bring-down Comfort Letter

 

(h)

Lock-up Agreements

 

(i)

Indenture and Registration Rights Agreement

 

(j)

Rating

 

(k)

Conditions to Purchase of Option Securities

 

(l)

PORTAL Market

 

(m)

Additional Documents

 

(n)

Termination of Agreement

 

SECTION 6 Subsequent Offers and Resales of the Securities.

 

(a)

Offer and Sale Procedures

 

(b)

Covenants of the Company

 

(c)

Qualified Institutional Buyer

 

SECTION 7 Indemnification.

 

(a)

Indemnification of the Initial Purchaser

 

(b)

Indemnification of Company

 

(c)

Actions Against Parties; Notification

 

(d)

Settlement without Consent if Failure to Reimburse

 

 

(a)

Termination; General

 

(b)

Liabilities

 

2

SCHEDULES

Schedule A — Cyberonics, Inc. – 3% Senior Subordinated Convertible Notes Due 2012

3

CYBERONICS, INC.

(A Delaware corporation)

$125,000,000

3% Senior Subordinated Convertible Notes due 2012

PURCHASE AGREEMENT

September 21, 2005

MERRILL LYNCH & CO.

Merrill Lynch, Pierce, Fenner & Smith

Incorporated

North Tower
World Financial Center
New York, New York 10281-1209

Ladies and Gentlemen:

Cyberonics, Inc., a Delaware corporation (the “ Company ”), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (“ Merrill Lynch ” or the “ Initial Purchaser ”), with respect to (i) the issue and sale by the Company and the purchase by the Initial Purchaser of $125,000,000 aggregate principal amount of the Company’s 3% Senior Subordinated Convertible Notes due 2012 (the “ Notes ”), and (ii) the grant by the Company to the Initial Purchaser of the option described in Section 2(b) hereof to purchase all or any part of an additional $18,750,000 aggregate principal amount of Notes. The aforesaid $125,000,000 aggregate principal amount of Notes (the “ Initial Securities ”) to be purchased by the Initial Purchaser and all or any part of the $18,750,000 aggregate principal amount of Notes subject to the option described in Section 2(b) hereof (the “ Option Securities ”) are hereinafter called, collectively, the “ Securities ”. The Securities are to be issued pursuant to an indenture, to be dated as of the Closing Time (as defined in Section 2(c) hereof) (the “ Indenture ”), between the Company and Wells Fargo Bank, National Association, as trustee (the “ Trustee ”).

The Securities are convertible, subject to certain conditions, at the option of the holder prior to maturity into shares of common stock, par value $0.01 per share, of the Company (the “ Common Stock ”) in accordance with the terms of the Securities and the Indenture, as described in Schedule A attached hereto. Securities issued in book-entry form will be issued to Cede & Co. as nominee of The Depository Trust Company (“ DTC ”) pursuant to a letter agreement, to be dated as of the Closing Time (as defined in Section 2(c) hereof), among the Company, the Trustee and DTC (the “ DTC Agreement ”).

The Company understands that the Initial Purchaser proposes to make an offering of the Securities on the terms and in the manner set forth herein and agrees that the Initial Purchaser may initially resell, subject to the conditions set forth herein, all or a portion of the Securities to purchasers (“ Subsequent Purchasers ”) at any time after this Agreement has been executed and delivered. The Securities are to be offered and sold through the Initial Purchaser and offered and resold by the Initial Purchaser without being registered under the Securities Act of 1933, as amended (the “ 1933 Act ”), in reliance upon exemptions therefrom. Pursuant to the terms of the Securities and the Indenture, investors that acquire Securities may only resell or otherwise transfer such Securities if such Securities are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A (“ Rule 144A ”) of the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the “ Commission ”).

It is also understood and acknowledged that holders (including subsequent transferees) of the Securities and the shares of Common Stock issuable upon the conversion thereof will have the registration rights set forth in the registration rights agreement (the “ Registration Rights Agreement ”), to be dated as of Closing Time (as defined in Section 2(c) hereof), substantially in the form attached hereto as Exhibit D . Pursuant to the Registration Rights Agreement, the Company will agree (i) to file with the Commission, a registration statement on the appropriate form under the 1933 Act relating to the resale of the Securities and the shares of Common Stock issuable upon the conversion thereof by certain holders thereof from time to time in accordance with the methods of distribution set forth in such registration statement and Rule 415 under the Act (the “ Shelf Registration Statement ”) and (ii) to use its best efforts to cause any such Shelf Registration Statement to be declared effective.

The Company has prepared and delivered to the Initial Purchaser copies of a preliminary offering memorandum dated September 19, 2005 (the “ Preliminary Offering Memorandum ”) and has prepared and will deliver to the Initial Purchaser, on the date hereof or the next succeeding day, copies of a final offering memorandum dated September 21, 2005 (the “ Final Offering Memorandum ”) to be used by the Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities. “Offering Memorandum” means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum or the Final Offering Memorandum, or any amendment or supplement to either such document), including exhibits thereto and any documents incorporated therein by reference, which has been prepared and delivered by the Company to the Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities.

All references in this Agreement to financial statements and schedules and other information which is “given,” “discussed,” “contained,” “included,” “stated” or “described” in the Offering Memorandum (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which are incorporated by reference in the Offering Memorandum; and all references in this Agreement to amendments or supplements to the Offering Memorandum shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), which is incorporated by reference in the Offering Memorandum.

SECTION 1 Representations and Warranties .

(a)  Representations and Warranties by the Company . The Company represents and warrants to the Initial Purchaser as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with the Initial Purchaser, as follows:

(i) Offering Memorandum . The Preliminary Offering Memorandum and the Final Offering Memorandum as of their respective dates do not, and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery) will not, include an untrue statement of a material fact or omit to state a material fact (except, in the case of the Preliminary Offering Memorandum, for pricing and other financial terms intentionally left blank) necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that this representation, warranty and agreement shall not apply to statements in or omissions from the Offering Memorandum made in reliance upon and in conformity with information furnished in writing to the Company by the Initial Purchaser for use in the Offering Memorandum.

(ii) Incorporated Documents . The Offering Memorandum as delivered from time to time shall incorporate by reference the most recent Annual Report of the Company on Form 10-K filed with the Commission including those portions of the Company’s most recent definitive proxy statement on Schedule 14A incorporated therein, each Quarterly Report on Form 10-Q and each Current Report of the Company on Form 8-K, filed with the Commission since the end of the fiscal year to which such Annual Report relates (excluding that Form 8-K filed on August 19, 2005). The documents incorporated or deemed to be incorporated by reference in the Offering Memorandum at the time they were or hereafter are filed with the Commission complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the “ 1934 Act Regulations ”), and did not and do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and when read together with the other information in the Offering Memorandum, at the time the Offering Memorandum was issued and at the Closing Time (and, if any Option Securities are purchased, at Date of Delivery), did not and will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

(iii) Independent Accountants . The accountants who certified the financial statements and supporting schedules incorporated by reference in the Offering Memorandum are independent public accountants with respect to the Company within the meaning of Regulation S-X under the 1933 Act.

(iv) Financial Statements . The financial statements included in the Offering Memorandum, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders’ equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with United States generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods involved. The supporting schedules included in the Offering Memorandum present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Offering Memorandum present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Offering Memorandum.

(v) No Material Adverse Change in Business . Since the respective dates as of which information is given in the Offering Memorandum, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a “ Material Adverse Effect ”), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock.

(vi) Good Standing of the Company . The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.

(vii) Good Standing of Subsidiaries . Each “significant subsidiary” of the Company (as such term is defined in Rule 1-02 of Regulation S-X) and Cyberonics Europe, S.A. (each a “ Subsidiary ” and, collectively, the “ Subsidiaries ”) has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Offering Memorandum, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. Other than the Subsidiaries, there are no other subsidiaries of the Company with any assets, operations or any significant liabilities.

(viii) Capitalization . The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum in the column entitled “Actual” under the caption “Capitalization” (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Offering Memorandum or pursuant to the exercise of convertible securities or options referred to in the Offering Memorandum). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company.

(ix) Authorization of Agreement . This Agreement has been duly authorized, executed and delivered by the Company.

(x) Authorization of the Indenture . The Indenture has been duly authorized by the Company and, when executed and delivered by the Company and the Trustee (assuming due authorization thereof by the Trustee), shall constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). The Company has full corporate power and authority to enter into the Indenture.

(xi) Authorization of the Registration Rights Agreement . The Registration Rights Agreement has been authorized by the Company and, when executed and delivered by the Company and the Initial Purchaser (assuming due authorization thereof by the Initial Purchaser), shall constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).

(xii) Authorization of the Securities . The Securities have been duly authorized and, at the Closing Time (or, if any Option Securities are being purchased, at the Date of Delivery), shall have been duly executed by the Company and, when authenticated, issued and delivered in the manner provided for in the Indenture and delivered against payment of the purchase price therefor as provided in this Agreement, shall constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be substantially in the form contemplated by, and entitled to the benefits of, the Indenture. The Company has full corporate power and authority to issue, sell and deliver the Securities to be sold by it to the Initial Purchaser as provided herein and therein.

(xiii) Description of the Securities, the Indenture and the Registration Rights Agreement . As of the Closing Time, the terms and conditions of the Securities, the Indenture, the Registration Rights Agreement and the rights, preferences and privileges of the capital stock of the Company, including the shares of Common Stock issuable on conversion of the Securities, shall conform in all material respects to the respective statements thereto contained in the Offering Memorandum.

(xiv) Authorization and Description of Common Stock . The Common Stock conforms in all material respects to the description thereof set forth in the Offering Memorandum, or any document incorporated by reference therein. Upon issuance and delivery of the Securities in accordance with this Agreement and the Indenture, the Securities shall be convertible at the option of the holder thereof into shares of Common Stock in accordance with the terms of the Securities and the Indenture; the shares of Common Stock issuable upon conversion of the Securities have been duly authorized and reserved for issuance upon such conversion by all necessary corporate action and such shares, when issued upon such conversion in accordance with the terms of the Securities, shall be validly issued and shall be fully paid and non-assessable; the issuance of such shares upon such conversion shall not be subject to the preemptive or other similar rights of any securityholder of the Company; and, to the Company’s knowledge, no holder of such shares shall be subject to personal liability by reason of being such a holder. All corporate action required to be taken by the Company for the issuance and delivery of the shares of Common Stock issuable upon conversion of the Securities has been duly and validly taken by the Company. The Company has authorized and has reserved and covenants to continue to reserve free of any preemptive rights or similar rights, a sufficient number of authorized but reserved shares of Common Stock to satisfy the conversion rights of the Securities. Except as set forth in the Offering Memorandum or the documents incorporated by reference in the Offering Memorandum, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or rights related to or entitling any person to purchase or otherwise to acquire any shares of, or any security convertible into or exchangeable or exercisable for, the capital stock of, or other ownership interest in, the Company.

(xv) Absence of Defaults and Conflicts . Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, “ Agreements and Instruments ”) except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture, the Registration Rights Agreement, and the Securities and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Offering Memorandum and the consummation of the transactions contemplated hereby or thereby and in the Offering Memorandum (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption “Use of Proceeds”) and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a “Repayment Event” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary.

(xvi) Absence of Labor Dispute . No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary’s principal suppliers, vendors, manufacturers, customers or contractors, which, in either case, would result in a Material Adverse Effect.

(xvii) Absence of Proceedings . Except for those disclosed in the Company’s filings with the Commission, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which might result in a Material Adverse Effect, or which might materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Offering Memorandum, including ordinary routine litigation incidental to the business, could not result in a Material Adverse Effect.

(xviii) Accuracy of Exhibits . There are no contracts or documents which are required to be filed as exhibits to documents incorporated by reference in the Offering Memorandum which have not been so filed as required.

(xix) Absence of Manipulation . Neither the Company nor any of its affiliates, as such term is defined in Rule 501(b) under the 1933 Act (each, an “Affiliate”) over which the Company has control has taken, nor shall the Company or any such Affiliate take, directly or indirectly, any action which is designed to or which has constituted or which would be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.

(xx) Possession of Intellectual Property . The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, “ Intellectual Property ”) necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect.

(xxi) Absence of Further Requirements . No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement or for the due execution, delivery or performance of the Indenture by the Company except such as have been already obtained or as may be required under state securities laws.

(xxii) Possession of Licenses and Permits . The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “ Governmental Licenses ”) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.

(xxiii) Title to Property . The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Offering Memorandum or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Offering Memorandum, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.

(xxiv) Investment Company Act . The Company is not required, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Offering Memorandum will not be required to register as an “investment company” under the Investment Company Act of 1940, as amended (the “ 1940 Act ”).

(xxv) Environmental Laws . Except as described in the Offering Memorandum and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials or mold (collectively, “ Hazardous Materials ”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “ Environmental Laws ”), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws.

(xxvi) Registration Rights . There are no persons with registration rights or other similar rights to have any securities registered by the Company under the 1933 Act.

(xxvii) Similar Offerings . Neither the Company nor any of its Affiliates, has, directly or indirectly, solicited any offer to buy, sold or offered to sell or otherwise negotiated in respect of, or will solicit any offer to buy, sell or offer to sell or otherwise negotiate in respect of, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities in a manner that would require the Securities to be registered under the 1933 Act.

(xxviii) Rule 144A Eligibility . The Securities are eligible for resale pursuant to Rule 144A and (except for the shares of Common Stock into which they are convertible) will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system.

(xxix) No General Solicitation . None of the Company, its Affiliates or any person acting on its or any of their behalf (other than the Initial Purchaser or any of its Affiliates, as to whom the Company makes no representation) has engaged or will engage, in connection with the offering of the Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act Regulations.

(xxx) No Registration Required . Subject to compliance by the Initial Purchaser with the representations and warranties set forth in Section 2 hereof and the procedures set forth in Section 6 hereof and its other covenants and agreements set forth herein, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchaser and to each Subsequent Purchaser in the manner contemplated by this Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the “1939 Act”).

(xxxi) ERISA . The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ ERISA ”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company would have any material liability; the Company has not incurred and does not expect to incur material liability under (A) Title IV of ERISA with respect to the termination of, or withdrawal from, any “pension plan” or (B) Section 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “Code”); and each “pension plan” for which the Company would have any material liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

(xxxii) No Unlawful Payments . To the Company’s knowledge, neither the Company nor any director, officer, or employee of the Company, has (a) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity or (b) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.

(xxxiii) No Brokerage Commission; Finder’s Fee . To the Company’s knowledge, except as disclosed in the Offering Memorandum, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or the Initial Purchaser for a brokerage commission, finder’s fee or other like payment in connection with this offering.

(xxxiv) Reporting Company . The Company is subject to the reporting requirements of Section 13 of the 1934 Act.

(xxxv) Suppliers . No supplier to the Company has ceased shipments to the Company or indicated an interest in decreasing or ceasing its sales to the Company or otherwise modifying its relationship with the Company, other than in the normal and ordinary course of business consistent with past practices in a manner which would not, singly or in the aggregate, result in a Material Adverse Effect.

(xxxvi) Related Party Transactions . No relationship, direct or indirect, exists between or among any of the Company or any affiliate of the Company, on the one hand, and any director, officer, stockholder, customer or supplier of the Company or any affiliate of the Company, on the other hand, which is required by the 1933 Act, the 1934 Act or the rules and regulations promulgated thereunder to be described in the Offering Memorandum or the documents incorporated by reference in the Offering Memorandum which is not so described as required. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members, except as disclosed in the Offering Memorandum or the documents incorporated by reference in the Offering Memorandum. The Company has not, in violation of Section 402 of the Sarbanes-Oxley Act of 2002, directly or indirectly, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company.

(xxxvii) Listing of Common Stock . The Company’s Common Stock is registered pursuant to Section 12(g) of the 1934 Act and is listed on the Nasdaq National Market (“ NASDAQ ”) and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the 1934 Act or delisting the Common Stock from NASDAQ, nor has the Company received any notification that the Commission or NASDAQ is contemplating terminating such registration or listing.

(xxxviii) Accounting Controls and Disclosure Controls . (A) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (1) transactions are executed in accordance with management’s general or specific authorization; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management’s general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Offering Memorandum, since the end of the Company’s most recent audited fiscal year, there has been (x) no material weakness in the Company’s internal control over financial reporting (whether or not remediated) and (y) no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(B) The Company and its consolidated subsidiaries employ disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “ 1934 Act ”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, as appropriate, to allow timely decisions regarding disclosure.

(xxxix) Compliance with the Sarbanes-Oxley Act . There is and has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith (the “ Sarbanes-Oxley Act ”), including Section 402 related to loans and Sections 302 and 906 related to certifications.

(xl) Payment of Taxes . All United States federal, state and local income and franchise tax returns of the Company and its subsidiaries required by law to be filed have been filed and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The United States federal income tax returns of the Company through the fiscal year ended December 31, 2004 have been settled and no assessment in connection therewith has been made against the Company. The Company and its subsidiaries have filed all other tax returns that are required to have been filed by them pursuant to applicable foreign, state, local or other law except insofar as the failure to file such returns would not result in a Material Adverse Effect, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and its subsidiaries, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not result in a Material Adverse Effect.

(xli) Insurance . The Company and its subsidiaries carry or are entitled to the benefits of insurance as described in Schedule C attached hereto, and all such insurance is in full force and effect. The Company has no reason to believe that it or any subsidiary will not be able (A) to renew its existing insurance coverage as and when such policies expire or (B) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied.

(xlii) Statistical and Market-Related Data . Any statistical and market-related data included in the Offering Memorandum are based on or derived from sources that the Company believes to be reliable and accurate, and the Company has obtained the written consent to the use of such data from such sources.

(xliii) Foreign Corrupt Practices Act . Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of the Company or any of its subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “ FCPA ”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

(xliv) Money Laundering Laws . The operations of the Company are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

(xlv) OFAC . Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or person acting on behalf of the Company is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(b)  Officer’s Certificates . Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Initial Purchaser or to counsel for the Initial Purchaser shall be deemed a representation and warranty by the Company to the Initial Purchaser as to the matters covered thereby.

SECTION 2 Sale and Delivery to Initial Purchaser; Closing .

(a)  Initial Securities . On the basis of the representations, warranties and agreements contained herein and subject to the terms and conditions set forth herein, the Company agrees to sell to the Initial Purchaser and the Initial Purchaser agrees to purchase from the Company, at the price set forth in Schedule A attached hereto, $125,000,000 aggregate principal amount of Notes.

(b)  Option Securities . In addition, on the basis of the representations, warranties and agreements contained herein and subject to the terms and conditions set forth herein, the Company hereby grants an option to the Initial Purchaser to purchase up to an additional $18,750,000 aggregate principal amount of Option Securities at the same price per Security set forth in Schedule A attached hereto for the Initial Securities. The option hereby granted will expire 13 days after the date hereof and may be exercised in whole or in part from time to time upon notice by the Initial Purchaser to the Company setting forth the number of Option Securities as to which it is then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a “ Date of Delivery ”) shall be determined by the Initial Purchaser, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, the Initial Purchaser will purchase that amount of the aggregate principal amount of Option Securities that it elected to purchase upon exercise of the option.

(c)  Payment . Payment of the purchase price for, and delivery of one or more global certificates for, the Initial Securities shall be made at the offices of Shearman & Sterling LLP, 1080 Marsh Road, Menlo Park, CA 94025, or at such other place as shall be agreed upon by the Initial Purchaser and the Company, at 10:00 A.M. (New York time) / 7:00 A.M. (California time) on the third (fourth, if the pricing occurs after 4:30 P.M. (New York time) on any given day) business day after the date hereof, or such other time not later than ten business days after such date as shall be agreed upon by the Initial Purchaser and the Company (such time and date of payment and delivery being herein called the “ Closing Time ”).

In addition, in the event that any or all of the Option Securities are purchased by the Initial Purchaser, payment of the purchase price for, and delivery of one or more global certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Initial Purchaser and the Company, on each Date of Delivery as specified in the notice from the Initial Purchaser to the Company.

Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Initial Purchaser of certificates for the Initial Securities or the Option Securities, if any to be purchased by it.

(d)  Denominations; Registration . Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations ($1,000 or integral multiples thereof) and registered in such names as the Initial Purchaser may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be; provided that any Securities in global form will be registered in the name of Cede & Co. The certificates representing the Initial Securities and the Option Securities, if any, will be made available for examination by the Initial Purchaser in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be.

SECTION 3 Covenants of the Company . The Company covenants with the Initial Purchaser as follows:

(a)  Offering Memorandum . The Company, as promp