Exhibit 10.25      
    

 
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION THEREFROM.
 
AVISTAR COMMUNICATIONS CORPORATION
 
4.5% CONVERTIBLE SUBORDINATED SECURED NOTE DUE 2010
 
No. ____ U.S.$__________
 
1.  Securities.
 
This Security is one of a duly authorized series of 4.5% Convertible
Subordinated Secured Notes due 2010 (the “Securities”) of Avistar Communications
Corporation, a Delaware corporation (including any successor corporation, the
“Company”).  Capitalized terms used and not otherwise defined herein, shall have
the respective meanings given to those terms in Section 8 hereof.
 
2.  Principal and Interest.
 
(a)  The Company for value received, hereby promises to pay to _____________, or
its registered assigns, the principal sum of U.S $____________ on January 4,
2010 (the “Final Maturity Date”) and to pay interest thereon at the Interest
Rate (as defined below) from January __, 2008, until repayment in full at the
Final Maturity Date or conversion.  Interest is payable in cash in accordance
with Section 2(b) hereof.
 
(b)  This Security shall bear interest at the rate equal to 4.5% per
annum.  Interest shall be paid semi-annually in arrears on June 4 and December 4
of each year (each an “Interest Payment Date”), commencing June ___, 2008, with
interest payable in U.S. dollars to the Holder in whose name this Security (or
one or more predecessor Securities) was registered at the close of business on
the preceding June 4 and December 4, respectively, of each year (each a “Regular
Record Date”) (or, if such date is not a Business Day, at the close of business
on the immediately succeeding Business Day).
 
(c)  Interest on this Security shall be computed (i) for any full semi-annual
period for which a particular Interest Rate is applicable, on the basis of a
360-day year of twelve 30-day months and (ii) for any period for less than a
full semi-annual period for which a particular Interest Rate is applicable, on
the basis of a 30-day month and, for such periods of less than a month, the
actual number of days elapsed over a 30-day month.
 
(d)  Interest shall be due and payable on this Security as follows:
 
(1)  The Holder of this Security as of the close of business on a Regular Record
Date shall be entitled (except as otherwise indicated in this Section 2) to
receive and shall receive, as the registered Holder as of such Regular Record
Date, interest on this Security on the corresponding Interest Payment Date.
 
(2)  In the event that this Security is converted pursuant to Section 3, the
Holder who converts this Security on any date other than an Interest Payment
Date shall be entitled to accrued and unpaid interest from the preceding
Interest Payment Date until the Conversion Date, or otherwise, on such Security;
and the Holder that converts this Security after a Regular Record Date but prior
to the corresponding Interest Payment Date will receive accrued and unpaid
interest for such period on such Interest Payment Date.
 
(e)  Payment of the principal of (and premium, if any, on) this Security shall
be made upon the surrender of this Security to the Company, at its chief
executive office (or such other office within the United States as shall be
designated by the Company to the holder hereof) (the “Designated Office”), in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts.  Payment of
principal (and premium, if any), interest and all other amounts payable with
respect to the Securities (i) shall be made by check mailed to a Holder that
holds an aggregate principal amount of securities of $100,000 or less or (ii)
shall be made by wire transfer in immediately available funds to a Holder that
holds an aggregate principal amount of Securities in excess of $100,000;
provided that if the Holder entitled thereto shall not have furnished wire
instructions in writing to the Company on or prior to the third Business Day
immediately prior to the date on which the Company makes such payment, such
payment may be made by U.S. dollar check mailed to the address of the Holder
entitled thereto as such address shall appear in the Note Register.
 
(f)  This Note shall not be prepaid prior to the Final Maturity Date without the
consent of the Holder.
 
3.  Conversion.
 
(a)  (1)           The holder of this Security may convert the principal amount
of this Security (or any portion thereof equal to $1,000 or any integral
multiple of $1,000 in excess thereof) into Common Stock at any time on or after
January 4, 2009 and prior to the repayment of this Note in full on or after the
close of business on the Final Maturity Date, at the Conversion Price then in
effect.
 
The number of shares of Common Stock issuable upon conversion of this Security
shall be determined by dividing the principal amount of this Security or portion
hereof surrendered for conversion by the Conversion Price in effect on the
Conversion Date.  The initial conversion price is $0.70 per share and is subject
to adjustment as provided in this Section 3 (as such price may be adjusted, the
“Conversion Price”).  To convert this Security, the Holder hereof shall:
(w) send by facsimile (or otherwise deliver) a copy of the fully executed
conversion notice in the form attached as Exhibit A hereto (the “Conversion
Notice”) to the Company, (x) surrender or cause to be surrendered this Security,
duly endorsed or assigned to the Company or in blank, along with a copy of the
Conversion Notice as soon as practicable thereafter to the Company, and (y) pay
all interest to which the Holder is not entitled, if any, pursuant to
Section 2(d).  Upon receipt by the Company of a facsimile copy of a Conversion
Notice from the Holder, the Company shall promptly send, via facsimile, a
confirmation to the Holder stating that the Conversion Notice has been received,
the date upon which the Company expects to deliver the Common Stock issuable
upon such conversion and the name and telephone number of a contact person at
the Company regarding the conversion.  The Company shall not be obligated to
issue shares of Common Stock upon a conversion unless either this Security is
delivered to the Company as provided above, or the Holder notifies the Company
or the transfer agent for the Common Stock that this Security has been lost,
stolen or destroyed and delivers the documentation to the Company required by
Section 9(g)(4) hereof.
 
As promptly as practicable on or after the Conversion Date, the Company shall
issue and deliver to the Holder or its nominee (x) that number of shares of
Common Stock issuable upon conversion of the portion of this Security being
converted, (y) a new Security in the form hereof representing the balance of the
principal amount hereof not being converted, if any, and (z) cash in lieu of any
fractional shares pursuant to Section 3(a)(6).  The Company shall deliver to the
Holder physical certificates representing the Common Stock issuable upon
conversion.
 
(2)  The Holder is not entitled to any rights of a holder of Common Stock until
the Holder has converted this Security into Common Stock, and only to the extent
this Security is deemed to have been converted into Common Stock pursuant to
this Section 3.
 
(3)  This Security shall be deemed to have been converted immediately prior to
the close of business on the day of surrender of this Security for conversion in
accordance with the foregoing provisions (such day, the “Conversion Date”), and
at such time the rights of the Holder of this Security as the Holder hereof
shall cease, and the Person or Persons entitled to receive the shares of Common
Stock issuable upon conversion shall be deemed to be a stockholder of record on
the Conversion Date; provided, however, that no surrender of this Security on
any date that is not a Business Day shall be effective to constitute the person
or persons entitled to receive the shares of Common Stock upon such conversion
as the record holder or holders of such shares of Common Stock on such date, but
such surrender shall be effective to constitute the person or persons entitled
to receive such shares of Common Stock as the record holder or holders thereof
for all purposes at the close of business on the next succeeding Business Day.
 
(4)  If the Holder converts more than one Security at the same time, the number
of shares of Common Stock issuable upon the conversion shall be based on the
aggregate principal amount of Securities converted.
 
(5)  If this Security is converted in part, the Company shall execute and
deliver to the Holder a new Security equal in principal amount to the
unconverted portion of this Security.
 
(6)  The Company will not issue fractional shares of Common Stock upon
conversion of this Security.  In lieu thereof, the Company will pay an amount in
cash for the current market value of the fractional shares.  The current market
value of a fractional share shall be determined (calculated to the nearest
1/1000th of a share) by multiplying the Trading Price of the Common Stock on the
Trading Day immediately prior to the Conversion Date by such fractional share
and rounding the product to the nearest whole cent.
 
(7)  The Company shall, if the Holder so elects, deliver the Common Stock
issuable upon conversion of this Security to any third party designated by the
Holder, subject to compliance with Sections 3(e) and 9(c) hereof.
 
(b)  The Conversion Price will be subject to adjustments from time to time as
follows:
 
(1)  In case the Company shall hereafter pay a dividend or make a distribution
to all holders of the outstanding Common Stock in shares of Common Stock, the
Conversion Price in effect at the opening of business on the day following the
Conversion Record Date shall be reduced by multiplying such Conversion Price by
a fraction:
 
(A)  the numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the Conversion Record Date fixed for the
determination of the holders entitled to such dividend or distribution; and
 
(B)  the denominator of which shall be the sum of such number of shares referred
to in (A) above and the total number of shares constituting such dividend or
other distribution.
 
Such reduction in the Conversion Price shall become effective immediately after
the opening of business on the day following the Conversion Record Date.  If any
dividend or distribution of the type described in this Section 3(b)(1) is
declared but not so paid or made, the Conversion Price shall again be adjusted
to the Conversion Price that otherwise would then be in effect if such dividend
or distribution had not been declared.
 
(2)  In case the outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Conversion Price in effect at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as
applicable, to become effective immediately after the opening of business on the
day following the day upon which such subdivision or combination becomes
effective.
 
(3)  In case the Company shall issue rights or warrants (other than any rights
or warrants issued pursuant to a rights plan for which an adjustment shall be
provided pursuant to  Section 3(b)(4)) to all or substantially all holders of
its outstanding shares of Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the Current
Market Price on the Conversion Record Date fixed for the determination of the
stockholders entitled to receive such rights or warrants, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect at the opening of business on the day
after such Conversion Record Date by a fraction:
 
(A)  the numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the Conversion Record Date, plus the
number of shares which the aggregate offering price of the total number of
shares so offered for subscription or purchase would purchase at such Current
Market Price; and
 
(B)  the denominator of which shall be the number of shares of Common Stock
outstanding at the close of business on the Conversion Record Date, plus the
total number of additional shares of Common Stock so offered for subscription or
purchase.
 
Such adjustment shall become effective immediately after the opening of business
on the day following the Conversion Record Date fixed for determination of the
stockholders entitled to receive such rights or warrants.  To the extent that
shares of Common Stock are not delivered pursuant to such rights or warrants,
upon the expiration or termination of such rights or warrants, the Conversion
Price shall be readjusted to the Conversion Price that otherwise would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made on the basis of the delivery of only the number of shares of Common
Stock actually delivered.  In the event that such rights or warrants are not so
issued, the Conversion Price shall again be adjusted to be the Conversion Price
that otherwise would then be in effect if the Conversion Record Date had not
been fixed.  In determining whether any rights or warrants entitle the holders
to subscribe for or purchase Common Stock at less than such Current Market
Price, and in determining the aggregate offering price of such shares of Common
Stock, there shall be taken into account any consideration received for such
rights or warrants, the value of such consideration if other than cash to be
determined by the Board of Directors.
 
(4)  (A)           In case the Company shall, by dividend or otherwise,
distribute to all or substantially all holders of its Common Stock shares of any
class of capital stock of the Company (other than any dividends or distributions
to which Section 3(b)(1) applies) or evidences of its indebtedness, cash or
other assets, including securities, but excluding (i) any rights or warrants
referred to in Section 3(b)(3), and (ii) dividends or distributions of stock,
securities or other property or assets (including cash) in connection with a
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance to which Section 3(f) applies (such capital
stock, evidences of its indebtedness, cash, other assets or securities being
distributed hereinafter in this Section 3(b)(4) called the “Distributed
Assets”), then, in each such case, subject to clause (B) of this
Section 3(b)(4), the Conversion Price shall be reduced so that the same shall be
equal to the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the Conversion Record Date with
respect to such distribution by a fraction:
 
(i)  the numerator of which shall be the Current Market Price (as defined in
Section 3(b)(9)) on such date less the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and set forth in a
board resolution) on such date of the portion of the Distributed Assets so
distributed applicable to one share of Common Stock (determined on the basis of
the number of shares of Common Stock outstanding on the Conversion Record Date);
and
 
(ii)  the denominator of which shall be such Current Market Price.
 
Such reduction in the Conversion Price shall become effective immediately prior
to the opening of business on the day following the Conversion Record
Date.  However, in the event that the then fair market value (as so determined)
of the portion of the Distributed Assets so distributed applicable to one share
of Common Stock is equal to or greater than the Current Market Price on the
Conversion Record Date, in lieu of the foregoing adjustment, adequate provision
shall be made so that the Holder of this Security shall have the right to
receive upon conversion hereof (or any portion hereof) the amount of Distributed
Assets the Holder would have received had the Holder converted this Security (or
portion hereof) immediately prior to such Conversion Record Date.  In the event
that such dividend or distribution is not so paid or made, the Conversion Price
shall again be adjusted to be the Conversion Price that otherwise would then be
in effect if such dividend or distribution had not been declared.
 
(B)  If the Board of Directors determines the fair market value of any
Distributed Assets with respect to any distribution for purposes of this
Section 3(b)(4) by reference to the actual or when issued trading market for any
Distributed Assets comprising all or part of such distribution, it must in doing
so consider the prices in such market over the same period (the “Reference
Period”) used in computing the Current Market Price to the extent possible,
unless the Board of Directors in a board resolution determines in good faith
that determining the fair market value during the Reference Period would not be
in the best interest of the Holders.
 
(5)  The Company may make such reductions in the Conversion Price, in addition
to those required by Sections 3(b)(1), (2), (3) or (4), as the Board of
Directors considers to be advisable to avoid or diminish any income tax to
holders of Common Stock or rights to purchase Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any even
treated as such for income tax purposes or otherwise.
 
(6)  No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in such price;
provided, however, that any adjustments which by reason of this Section 3(b)(6)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment.  All calculations under this Section 3 shall be made
by the Company in good faith and shall be made to the nearest cent or to the
nearest one hundredth of a share, as applicable.  No adjustment need be made for
a change in the par value or no par value of the Common Stock.
 
(7)  Whenever the Conversion Price is adjusted as provided in Section 3(b), the
Company shall compute the adjusted Conversion Price in accordance with
Section 3(b) and shall prepare a certificate signed by an officer of the Company
setting forth the adjusted Conversion Price and showing in reasonable detail the
facts upon which such adjustment is based, and shall promptly deliver such
certificate to the Holder of this Security.
 
(8)  For purposes of this Section 3(b), the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Company but shall include shares issuable in respect of scrip certificates
issued in lieu of fractions of shares of Common Stock.  The Company will not pay
any dividend or make any distribution on shares of Common Stock held in the
treasury of the Company.
 
(9)  For purposes hereof:
 
(A)  “Conversion Record Date” shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of stockholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
 
(i)  “Current Market Price” shall mean the average of the daily Trading Prices
per share of Common Stock (or such other security as specified herein) for the
ten consecutive Trading Days immediately prior to the date in question
 
(c)  For purposes of this Section 3, the term “ex” date, when used with respect
to any issuance or distribution, means the first date on which the Common Stock
trades regular way on the relevant exchange or in the relevant market from which
the Trading Price was obtained without the right to receive such issuance or
distribution, with respect to any subdivision or combination of shares of Common
Stock, means the first date on which the shares of Common Stock trade regular
way on such exchange or in such market after the time at which such subdivision
or combination becomes effective and with respect to any tender or exchange
offer, means the first date on which the Common Stock trades regular way on such
exchange or in such market after the Expiration Time of such offer.
 
(d)  Whenever successive adjustments to the Conversion Price are called for
pursuant to this Section 3(b), such adjustments shall be made to the Current
Market Price as may be necessary or appropriate to effectuate the intent of this
Section 3(b) and to avoid unjust or inequitable results as determined in good
faith by the Board of Directors.
 
(e)  In case at any time after the date hereof:
 
(1)  the Company shall declare a dividend (or any other distribution) on its
Common Stock that would result in an adjustment to the Conversion Price pursuant
to this Section 3;
 
(2)  the Company shall authorize the granting to the holders of its Common Stock
of rights or warrants to subscribe for or purchase any shares of capital stock
of any class (or of securities convertible into shares of capital stock of any
class) or of any other rights;
 
(3)  there shall occur any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding Common Stock, a
change in par value, a change from par value to no par value or a change from no
par value to par value), or any merger, consolidation, statutory share exchange
or combination to which the Company is a party and for which approval of any
stockholders of the Company is required, or the sale, transfer or conveyance of
all or substantially all of the assets of the Company; or
 
(4)  there shall occur the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
 
the Company shall cause to be provided to the Holder of this Security in
accordance with Section 9(f), at least 20 days (or 10 days in any case specified
in clause (1) or (2) above) prior to the applicable record or effective date
hereinafter specified, a notice stating:
 
(A)  the date on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of shares of Common Stock of record to be entitled to
such dividend, distribution, rights or warrants are to be determined; or
 
(B)  the date on which such reclassification, merger, consolidation, statutory
share exchange, combination, sale, transfer, conveyance, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of shares of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, merger, consolidation,
statutory share exchange, sale, transfer, dissolution, liquidation or winding
up.
 
Neither the failure to give such notice nor any defect therein shall affect the
legality or validity of the proceedings or actions described in clauses (1)
through (4) of this Section 3(c).
 
(f)  The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of this Security, the full number of shares
of Common Stock then issuable upon the conversion of this Security.  The Company
covenants that all shares of Common Stock that may be issued upon conversion of
this Security will upon issue be fully paid and nonassessable.
 
(g)  Except as provided in the next sentence, the Company will pay any and all
taxes (other than taxes on income) and duties that may be payable in respect of
the issue or delivery of Common Stock upon conversion of this Security.  The
Company shall not, however, be required to pay any tax or duty that may be
payable in respect of any transfer involved in the issue and delivery of Common
Stock in a name other than that of the Holder of this Security, and no such
issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Company the amount of any such tax or duty, or has
established to the satisfaction of the Company that such tax or duty has been
paid.
 
(h)  If any of following events occur:
 
(1)  any reclassification or change of the outstanding shares of Common Stock
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination), as a
result of which holders of Common Stock shall be entitled to receive capital
stock, securities or other property or assets (including cash) with respect to
or in exchange for such Common Stock;
 
(2)  any merger, consolidation, statutory share exchange or combination of the
Company with another Person as a result of which holders of Common Stock shall
be entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Common Stock; or
 
(3)  any sale or conveyance of the properties and assets of the Company as, or
substantially as, an entirety to any other Person as a result of which holders
of Common Stock shall be entitled to receive stock, securities or other property
or assets (including cash) with respect to or in exchange for such Common Stock,
 
then the Company or the successor or purchasing corporation, as applicable,
shall execute with the Holder of this Security a supplemental agreement
providing that this Security shall be convertible into the kind and amount of
shares of capital stock and other securities or property or assets (including
cash) that such Holder would have been entitled to receive upon such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance had this Security been converted into Common
Stock immediately prior to such reclassification, change, merger, consolidation,
statutory share exchange, combination, sale or conveyance assuming the Holder,
as a holder of Common Stock, did not exercise its rights of election, if any, as
to the kind or amount of securities, cash or other property receivable upon such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance (provided that, if the kind or amount of
securities, cash or other property receivable upon such reclassification,
change, merger, consolidation, statutory share exchange, combination, sale or
conveyance is not the same for each of the shares of Common Stock in respect of
which such rights of election shall not have been exercised (“Non-Electing
Share”), then for the purposes of this Section 3(f) the kind and amount of
securities, cash or other property receivable upon such reclassification,
change, merger, consolidation, statutory share exchange, combination, sale or
conveyance for each Non-Electing Share shall be deemed to be the kind and amount
so receivable per share by a plurality of the Non-Electing Shares).  Such
supplemental agreement shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 3.  If, in the case of any such reclassification, change, merger,
consolidation, statutory share exchange, combination, sale or conveyance, the
stock or other securities and assets receivable thereupon by a holder of Common
Stock includes shares of stock or other securities and assets of a corporation
other than the successor or purchasing corporation, as applicable, in such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance, then such supplemental agreement shall also be
executed by such other corporation and shall contain such additional provisions
to protect the interests of the Holder as the Board of Directors shall
reasonably consider necessary by reason of the foregoing.
 
The above provisions of this Section shall apply to successive or series of
related reclassifications, changes, mergers, consolidations, statutory share
exchanges, combinations, sales and conveyances.
 
(i)  The Company (i) shall use its reasonable efforts to effect all
registrations with, and obtain all approvals by, all governmental authorities
that may be necessary under any United States federal or state law (including
the Securities Act, the Exchange Act and state securities and Blue Sky laws) for
the Common Stock issuable upon conversion of this Security to be lawfully issued
and delivered as provided herein, and thereafter publicly traded (if permissible
under the Securities Act) and qualified or listed as contemplated by
clause (ii); and (ii) shall use its reasonable efforts to list the Common Stock
required to be issued and delivered upon conversion of this Security, prior to
such issuance or delivery, on any national securities exchange on which
outstanding Common Stock is listed immediately prior to such time of delivery.
 
(j)  Unless and until the Company receives any necessary stockholder approval,
no adjustment pursuant to Section 3(b)(3), 3(b)(4), 3(b)(5) or 3(k) shall cause
the Conversion Price to be less than $0.35 (as adjusted for stock splits,
combinations, reclassifications or similar events).
 
(k)  If and whenever on or after the Issue Date, the Company issues or sells, or
in accordance with this Section 3(k) is deemed to have issued or sold, any
shares of Common Stock (including the issuance or sale of shares of Common Stock
owned or held by or for the account of the Company, but excluding shares of
Common Stock deemed to have been issued or sold by the Company in connection
with any Excluded Security) for a consideration per share less than a  price
(the "Applicable Price") equal to the Conversion Price in effect immediately
prior to such issue or sale (the foregoing a "Dilutive Issuance"), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal to the product of (A) the Conversion Price
in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the
Conversion Price in effect immediately prior to such Dilutive Issuance and the
number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance plus (II) the consideration, if any, received by the Company
upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the
Conversion Price in effect immediately prior to such Dilutive Issuance by
(II) the number of shares of Common Stock Deemed Outstanding immediately after
such Dilutive Issuance.  For purposes of determining the adjusted Conversion
Price under this Section 3(k), the following shall be applicable:
 
(1)  If the Company in any manner grants or sells any Options and the lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange or exercise of any
Convertible Securities issuable upon exercise of such Option is less than the
Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share.  For purposes of this
Section 3(k)(1), the "lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or exchange
or exercise of any Convertible Securities issuable upon exercise of such Option"
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one share of Common
Stock upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable upon
exercise of such Option.  No further adjustment of the Conversion Price shall be
made upon the actual issuance of such share of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of such
Convertible Securities.
 
(2)  If the Company in any manner issues or sells any Convertible Securities and
the lowest price per share for which one share of Common Stock is issuable upon
such conversion or exchange or exercise thereof is less than the Applicable
Price, then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the issuance of sale of
such Convertible Securities for such price per share.  For the purposes of this
Section 3(k)(2), the "lowest price per share for which one share of Common Stock
is issuable upon such conversion or exchange or exercise" shall be equal to the
sum of the lowest amounts of consideration (if any) received or receivable by
the Company with respect to any one share of Common Stock upon the issuance or
sale of the Convertible Security and upon the conversion or exchange or exercise
of such Convertible Security.  No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock upon
conversion or exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Conversion Price had been or are to be made
pursuant to other provisions of this Section 3(k), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
 
(3)  If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion,  exchange or exercise
of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable or exercisable for Common Stock changes at
any time, the Conversion Price in effect at the time of such change shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.  For purposes of this Section
3(k)(3), if the terms of any Option or Convertible Security that was outstanding
as of the Issue Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change.  No adjustment shall
be made if such adjustment would result in an increase of the Conversion Price
then in effect.
 
(4)  The fair value of any consideration other than cash or securities will be
determined in good faith by the Board of Directors of the Company.
 
(5)  If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (A) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities or (B) to
subscribe for or purchase Common Stock, Options or Convertible Securities, then
such record date will be deemed to be the date of the issue or sale of the
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
 
4.  Covenants of the Company.
 
(a)  The Company covenants and agrees that it will duly and punctually pay or
cause to be paid the principal of, premium (if any) and interest on this
Security, at the respective times and in the manner provided for herein.
 
(b)  Unless otherwise permitted herein, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its existence
and the rights (charter and statutory) of the Company; provided, however, that
the Company shall not be required to preserve any such right if (a) the Company
shall determine in good faith that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holder or (b) the
Company shall no longer continue to have such right as a result of a good faith,
arms-length transaction with a Person that is not an Affiliate of the Company.
 
(c)  The Company covenants that it shall not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law or other law that would prohibit or forgive the Company
from paying all or any portion of the principal of, premium (if any), interest
or other amounts due on this Security as contemplated herein, whenever enacted,
now or at any time hereinafter in force, or which may affect the covenants of
performance in this Security and the Company hereby expressly waives all benefit
or advantage of any such law, and covenants that it will not, by resort to any
such law, hinder, delay or impede the execution of any power granted herein to
the Holder of this Security, but will suffer and permit the execution of every
such power as though no such law had been enacted.
 
(d)  The Company covenants not to incur any secured indebtedness for borrowed
money, except for (i) indebtedness evidenced by the Securities issued under the
Purchase Agreement, (ii) indebtedness secured by a lien that is otherwise
permitted pursuant to clause (e), (k), (m), (n) and (o) of the definition of
Permitted Liens as defined in the Security Agreement, (iii) Senior Indebtedness
and (iv) any extension, refinance, renewal, replacement, defeasance or refunding
of any indebtedness described in clauses (i) through (iii) above, provided that
the principal amount of such indebtedness does not exceed the original principal
amount of such indebtedness except by an amount equal to a reasonable premium
and any other reasonable amount paid, including, fees and expenses reasonably
incurred in connection with such extension, refinance, renewal, replacement,
defeasance or refunding of such indebtedness.
 
(e)  The Company covenants to make all payments under this Security, whether
principal payments or interest payments, pro rata to each holder of a Security
that has been issued pursuant to the Purchase Agreement.  For purposes of this
Security, the term “pro rata” shall mean, when calculating a holder’s portion of
any payment, that payment (expressed as a percentage) equal to a fraction (i)
the numerator of which is the then outstanding principal amount of such holder’s
Security and (ii) the denominator of which is the then aggregate outstanding
principal amount of all Securities issued under the Purchase Agreement.  In the
event that a holder receives payments in excess of its pro rata amount, then
such holder shall hold in trust all such excess payments for the benefit of the
other holders of the Securities and shall pay such amounts held in trust to such
other holders upon demand by such holders.
 
5.  Events of Default.
 
(a)  “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
 
(1)  the Company defaults in the payment of the principal or premium, if any (a
“Defaulted Payment”) on any of the Securities when the same becomes due and
payable at the Final Maturity Date, upon declaration, when due for purchase, by
the Company or otherwise, whether or not such payment is prohibited by Section 7
hereof;
 
(2)  the Company defaults in the payment of an installment of interest on any of
the Securities when the same becomes due and payable and such default continues
for a period of seven days, whether or not such payment is prohibited by Section
7;
 
(3)  the Company fails to perform or observe any other term, covenant or
agreement contained in this Security or Security Agreement and the default
continues for a period of 20 days after written notice of such failure (or such
shorter period as is provided for herein or therein), requiring the Company to
remedy the same, shall have been given to the Company by the holders of more
than 50% in aggregate principal amount of the outstanding Securities;
 
(4)  the Company, or a Significant Subsidiary (A) fails to make any payment at
maturity, including any grace period, in respect of any obligation for borrowed
money evidenced by a note, debenture or bond in an outstanding principal amount
in excess of $100,000 and such failure continues or (B) defaults with respect to
any Instrument, which default results in the acceleration of Indebtedness
represented by such Instrument in an amount in excess of $100,000 in the case of
clause (A) without such Indebtedness having been discharged or in the case of
clause (B) such acceleration having been cured, waived, rescinded or annulled,
and in the case of either of the foregoing clauses (A) and (B), for a period of
30 days after written notice to the Company by the holders of more than 50% in
aggregate principal amount of the outstanding Securities;
 
(5)  the entry by a court having jurisdiction in the premises of (A) a decree or
order for relief in respect of the Company or any Significant Subsidiary in an
involuntary case or proceeding under any applicable U.S. federal or state
bankruptcy, insolvency, reorganization or other similar law or (B) a decree or
order adjudging the Company or any Significant Subsidiary bankrupt or insolvent,
or approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any Significant
Subsidiary, under any applicable U.S. federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order for relief or any such other decree or order unstayed
and in effect for a period of 60 consecutive days; or
 
(6)  the commencement by the Company or any Significant Subsidiary, of a
voluntary case or proceeding under any applicable U.S. federal or state
bankruptcy, insolvency, reorganization or other similar law or of any other case
or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the
Company or any Significant Subsidiary, to the entry of a decree or order for
relief in respect of the Company or any Significant Subsidiary in an involuntary
case or proceeding under any applicable U.S. federal or state bankruptcy,
insolvency, reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against the Company or any
Significant Subsidiary, or the filing by the Company or any Significant
Subsidiary of a petition or answer or consent seeking reorganization or relief
under any applicable U.S. federal or state law, or the consent by the Company or
any Significant Subsidiary to the filing of such petition or to the appointment
of or the taking possession by a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Significant Subsidiary or of any substantial part of its property, or the making
by the Company or any Significant Subsidiary of an assignment for the benefit of
creditors, or the admission by the Company or any Significant Subsidiary in
writing of its inability to pay its debts generally as they become due, or the
taking of corporate action by the Company or any Significant Subsidiary
expressly in furtherance of any such action.
 
A default under clause (3) or (4) above is not an Event of Default until the
holders of more than 50% of the principal amount of the Securities at the time
outstanding notify the Company of the default and the Company does not cure such
default (and such default is not waived) within the time specified in clause (3)
or (4) above after actual receipt of such notice. Any such notice must specify
the default, demand that it be remedied and state that such notice is a "Notice
of Default".
 
The Company shall, within 30 days of the occurrence of a default, give to the
Holder of this Security notice of all uncured defaults known to it and written
notice of any event which with the giving of notice or the lapse of time, or
both, would become an Event of Default, its status and what action the Company
is taking or proposes to take with respect thereto.
 
(b)  If an Event of Default (other than an Event of Default specified in
Section 5(a)(5) or 5(a)(6) hereof with respect to the Company) occurs and is
continuing, the holders of more than 50% in principal amount of the outstanding
Securities, by written notice to the Company, may declare due and payable the
principal and premium, if any, of this Security and all other outstanding
Securities, plus any accrued and unpaid interest to the date of payment.  Upon a
declaration of acceleration, such principal and premium, if any, and accrued and
unpaid interest to the date of payment shall be immediately due and payable.
 
If an Event of Default specified in Section 5(a)(5) or 5(a)(6) occurs with
respect to the Company, the principal and premium, if any, and accrued and
unpaid interest on this Security shall become and be immediately due and
payable, without any declaration or other act on the part of the Holder.
 
The holders of not less than a majority of the principal of the outstanding
Securities may, on behalf of the holders of all of the Securities, rescind and
annul an acceleration and its consequences (including waiver of any defaults)
if:
 
(1)  all existing Events of Default, other than the nonpayment of a Defaulted
Payment on this Security and any of the other Securities that have become due
solely because of the acceleration, have been remedied, cured or waived, and
 
(2)  the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction;
 
provided, however, that in the event such declaration of acceleration has been
made based on the existence of an Event of Default under Section 5(a)(4) and the
default with respect to the instrument for money borrowed which gave rise to
such Event of Default has ceased or been cured, waived, rescinded or annulled,
then such Event of Default shall be deemed to be likewise cured and any
acceleration with respect thereto rescinded.  No such rescission shall affect
any subsequent default or impair any right consequent thereon.
 
(c)  If an Event of Default with respect to this Security occurs and is
continuing, the holders of more than 50% in principal amount of the outstanding
Securities may pursue any available remedy by proceeding at law or in equity to
collect the Defaulted Payment or interest due and payable on this Security or to
enforce the performance of any provision of this Security.
 
(d)  Notwithstanding any other provision in this Security, the Holder of this
Security shall have the right, which is absolute and unconditional, to receive
payment of the principal, premium, if any, interest in respect of the Securities
held by the Holder, on or after the respective due dates, to convert the
Securities in accordance with Section 3 or to bring suit for the enforcement of
any such payment on or after such respective dates or the right to convert, and
such rights shall not be impaired or affected adversely without the consent of
the Holder.
 
(e)  If the Holder of this Security has instituted any proceeding to enforce any
right or remedy under this Security and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Holder, then
and in every such case, subject to any determination in such proceeding, the
Company and the Holder shall be restored severally and respectively to their
former positions hereunder and thereafter all rights and remedies of the Holder
shall continue as though no such proceeding had been instituted.
 
(f)  Except as otherwise provided herein, no right or remedy conferred in this
Security upon the Holder is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
hereafter existing at law or in equity or otherwise.  The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
 
(g)  No delay or omission of the Holder of this Security to exercise any right
or remedy accruing upon any Event of Default shall impair any such right or
remedy or constitute a waiver of any such Event of Default or any acquiescence
therein.  Every right and remedy given by this Section 5 or by law to the Holder
may be exercised from time to time, and as often as may be deemed expedient, by
the Holder.
 
(h)  The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim to
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Security; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Holder hereof, but will suffer and permit the
execution of every such power as though no such law had been enacted.
 
6.  Consolidation, Merger, Etc.
 
(a)  The Company shall not consolidate with or merge into any other Person or,
directly or indirectly, convey, transfer, sell or lease its properties and
assets substantially as an entirety to any Person (other than to a wholly-owned
subsidiary of the Company) unless:
 
(1)  in the event that the Company shall consolidate with or merge into another
Person or convey, transfer, sell or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which acquires
by conveyance, transfer or sale, or which leases, all or substantially all of
the properties and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America, any State
thereof or the District of Columbia, which shall expressly assume, if other than
the Company, by an agreement supplemental hereto, executed and delivered to the
Holder of this Security in form satisfactory to the Holder, the due and punctual
payment of the principal of and any interest on this Security and the
performance or observance of every covenant of this Security on the part of the
Company to be performed or observed, including without limitation the conversion
rights provided herein; and
 
(2)  immediately after giving effect to such transaction, no Event of Default,
and no event which, after notice or lapse of time or both, would become an Event
of Default, shall have happened and be continuing.
 
(b)  Upon any consolidation of the Company with, or merger of the Company into,
any other Person or any conveyance, transfer, sale or lease of all or
substantially all of the properties and assets of the Company in accordance with
Section 6(a), the successor Person formed by such consolidation or into which
the Company is merged or to which such conveyance, transfer, sale or lease is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Security with the same effect as if such
successor Person had been named as the Company herein, and thereafter, except in
the case of a lease, the predecessor Person shall be relieved of all obligations
and covenants under this Security.
 
7.  Subordination.
 
(a)  The Company covenants and agrees, and the Holder of this Security by its
acceptance hereof likewise covenants and agrees, that this Security is subject
to the provisions of this Section 7, and each other Person holding this
Security, whether upon original issue or upon transfer, assignment or exchange
thereof, accepts and agrees to be bound by such provisions.
 
The payment of the principal of, premium, if any, and interest on this Security
shall, to the extent and in the manner hereinafter set forth, be subordinated in
right of payment to the prior payment in full, in cash or in such other form of
payment as may be acceptable to the holders of Senior Indebtedness, of all
Senior Indebtedness, whether outstanding at the date of original issuance of
this Security or thereafter incurred or created.
 
The expression “payment in full” or “paid in full” or any similar term or phrase
when used in this Security with respect to Senior Indebtedness shall mean the
payment in full of all such Senior Indebtedness in cash or such other form of
payment as may be acceptable to the holders of Senior Indebtedness, or, in the
case of Senior Indebtedness consisting of contingent obligations in respect of
letters of credit or other reimbursement obligations, the setting apart of cash
sufficient to discharge such portion of Senior Indebtedness in an account for
the exclusive benefit of the holders thereof, in which account such holders
shall be granted a first priority perfected security interest in a manner
reasonably acceptable to such holders.
 
No provision of this Section 7 shall prevent the occurrence of any default or
Event of Default under this Security.
 
(b)  Payments to Holders.  No payment shall be made with respect to the
principal of, or premium, if any, or interest on this Security, if:
 
(1)  a default in the payment of principal, premium, if any, or interest or
other payment due on any Senior Indebtedness occurs and is continuing beyond any
applicable period of grace (a “Payment Default”); or
 
(2)  a default, other than a Payment Default, occurs and is continuing with
respect to Senior Indebtedness that then permits holders of the Senior
Indebtedness as to which such default related to accelerate its maturity and the
Company receives written notice of such default (a “Payment Blockage Notice”)
from a representative of Senior Indebtedness (a “Non-Payment Default”).
 
The Company may and shall resume payments on this Security (1) in the case of a
Payment Default, on the date upon which such default is cured, waived or ceases
to exist, and (2) in the case of a Non-Payment Default, on the earlier of the
date on which the Non-Payment Default is cured, waived or ceases to exist or 179
days have passed after the date on which the applicable Payment Blockage Notice
is received and this Security otherwise permits payment at that time.
 
No new period of payment blockage for a Non-Payment Default may be commenced
pursuant to a Payment Blockage Notice unless and until 365 days shall have
elapsed since the Company’s receipt of the immediately prior Payment Blockage
Notice.  No Non-Payment Default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Company of this Security shall
be, or be made, the basis for a subsequent Payment Blockage Notice.
 
If payment of this Security is accelerated because of an Event of Default, the
Company shall promptly notify holders of Senior Indebtedness of the
acceleration.  The Company may not make any payments on the Securities until 120
days have passed after the occurrence of the acceleration of the Securities and
the Company may then resume payments on the Securities at such time if the
Company is then permitted to make such payments under the Securities.
 
(c)  Bankruptcy and Dissolution, Etc.  Upon any payment by the Company, or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to creditors upon any dissolution, winding-up,
liquidation or reorganization of the Company, whether voluntary or involuntary
or in bankruptcy, insolvency, receivership or other proceedings, all amounts due
or to become due upon all Senior Indebtedness shall first be paid in full, in
cash or in such other form of payment as may be acceptable to the holders of
Senior Indebtedness, before any payment is made on account of the principal of,
premium, if any, and interest on this Security; and upon any such dissolution,
winding-up, liquidation or reorganization or bankruptcy, insolvency,
receivership or other such proceedings, any payment by the Company, or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to which the Holder of this Security would be entitled,
but for the provisions of this Section 7, shall (except as aforesaid) be paid by
the Company or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other Person making such payment or distribution, or by the Holder of
this Security if received by it, directly to the holders of Senior Indebtedness
(pro rata to such holders on the basis of the respective amounts of Senior
Indebtedness held by such holders, or as otherwise required by law or a court
order) or their respective representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, to the extent necessary to pay all Senior Indebtedness in full in cash
or in such other form of payment as may be acceptable to the holders of Senior
Indebtedness after giving effect to any concurrent payment or distribution to or
for the holders of Senior Indebtedness, before any payment or distribution is
made to the Holder of this Security.
 
Notwithstanding the foregoing, in the event that the Holder of this Security
receives any payment or distribution of assets of the Company of any kind in
contravention of any term of this Security, whether in cash, property or
securities, before all Senior Indebtedness is paid in full, in cash or such
other form of payment as may be acceptable to the holders of Senior
Indebtedness, then such payment or distribution shall be held by the recipient
or recipients in trust for the benefit of, and shall immediately be paid over or
delivered to, the holders of Senior Indebtedness or their respective
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any Senior Indebtedness
may have been issued, as their respective interests may appear, as calculated by
the Company, for application to the payment of all Senior Indebtedness remaining
unpaid to the extent necessary to make payment in full, in cash or such other
form of payment as may be acceptable to the holders of Senior Indebtedness, of
all Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution, or provision therefore, to or for the holders of such
Senior Indebtedness.
 
For purposes of Section 7(b) hereof and this Section 7(c), the words “cash,
property or securities” shall not be deemed to include shares of stock of the
Company as reorganized or readjusted, or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment, the
payment of which is subordinated (at least to the extent provided in this
Section 7 with respect to this Security) to the payment of all Senior
Indebtedness which may at the time be outstanding.  The consolidation of the
Company with, or the merger of the Company into, another corporation or the
liquidation or dissolution of the Company following the conveyance or transfer
of its property as an entirety, or substantially as an entirety, to another
corporation upon the terms and conditions provided for in Section 6 shall not be
deemed a dissolution, winding-up, liquidation or reorganization for the purposes
of this Section 7(c) if such other corporation shall, as a part of such
consolidation, merger, conveyance or transfer, comply with the conditions stated
in Section 6.
 
(d)  Subrogation.  Subject to the payment in full in cash, or in such other form
of payment as may be acceptable to the holders of Senior Indebtedness, of all
Senior Indebtedness, the rights of the Holder of this Security shall be
subrogated to the extent of the payments or distributions made to the holders of
such Senior Indebtedness pursuant to the provisions of this Section 7 (equally
and ratably with the holders of all indebtedness of the Company which by its
express terms is subordinated to other indebtedness of the Company to
substantially the same extent as this Security is subordinated and is entitled
to like rights of subrogation) to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
principal of, and premium, if any, and interest on this Security shall be paid
in full; and, for the purposes of such subrogation, no payments or distributions
to the holders of the Senior Indebtedness of any cash, property or securities to
which the Holder of this Security would be entitled except for the provisions of
this Section 7, and no payment over pursuant to the provisions of this
Section 7, to or for the benefit of the holders of Senior Indebtedness by
holders of this Security, shall, as between the Company, its creditors other
than holders of Senior Indebtedness, and the Holder of this Security, be deemed
to be a payment by the Company to or on account of the Senior Indebtedness; and
no payments or distributions of cash, property or securities to or for the
benefit of the holder of this Security pursuant to the subrogation provisions of
this Section 7, which would otherwise have been paid to the holders of Senior
Indebtedness shall be deemed to be a payment by the Company to or for the
account of this Security.  It is understood that the provisions of this
Section 7 are and are intended solely for the purposes of defining the relative
rights of the Holder of this Security, on the one hand, and the holders of the
Senior Indebtedness, on the other hand.
 
Nothing contained in this Section 7 or elsewhere in this Security is intended to
or shall impair, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holder of this Security, the obligation of the
Company, which is absolute and unconditional, to pay to the Holder of this
Security the principal of, and premium, if any, and interest on the Security as
and when the same shall become due and payable in accordance with their terms,
or is intended to or shall affect the relative rights of the Holder of this
Security and creditors of the Company other than the holders of the Senior
Indebtedness, nor shall anything herein or therein prevent the Holder of this
Security from exercising all remedies otherwise permitted by applicable law upon
default under this Security, subject to the rights, if any, under this Section 7
of the holders of Senior Indebtedness in respect of cash, property or securities
of the Company received upon the exercise of any such remedy.
 
Upon any payment or distribution of assets of the Company referred to in this
Section 7, the Holder of this Security shall be entitled to rely upon any order
or decree made by any court of competent jurisdiction in that such bankruptcy,
dissolution, winding-up, liquidation or reorganization proceedings are pending,
or a certificate of the receiver, trustee in bankruptcy, liquidating trustee,
agent or other Person making such payment or distribution, delivered to the
Holder of this Security, for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Section 7.
 
(e)  Notice.  The Company shall give prompt written notice to the Holder of this
Security of any fact known to the Company that would prohibit the making of any
payment of monies to in respect of this Security pursuant to the provisions of
this Section 7.
 
The Holder of this Security shall be entitled to rely on the delivery to it of a
written notice by a Person representing itself to be a holder of Senior
Indebtedness (or a trustee on behalf of such holder) to establish that such
notice has been given by a holder of Senior Indebtedness or a trustee on behalf
of any such holder or holders.  In the event that the Holder of this Security
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Indebtedness to participate in any
payment or distribution pursuant to this Section 7, the Holder of this Security
may request such Person to furnish evidence to the reasonable satisfaction of
the Holder of this Security as to the amount of Senior Indebtedness held by such
Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
Person under this Section 7, and if such evidence is not furnished the Holder of
this Security may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment.
 
(f)  No Impairment of Subordination.  No right of any present or future holder
of any Senior Indebtedness to enforce subordination as herein provided shall at
any time in any way be prejudiced or impaired by any act or failure to act on
the part of the Company or by any act or failure to act, in good faith, by any
such holder, or by any noncompliance by the Company with the terms, provisions
and covenants of this Security, regardless of any knowledge thereof which any
such holder may have or otherwise be charged with.
 
Without in any way limiting the generality of the foregoing paragraph, the
holders of the Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Holder of this Security, without
incurring responsibility to the Holder of this Security, and without impairing
or releasing the subordination provided in this Security or the obligations of
the Holder of this Security to the holders of the Senior Indebtedness, do any
one or more of the following:  (a) change the manner, place, or terms of payment
(including any change in the rate of interest) or extend the time of payment of,
or renew, amend, modify, alter, or grant any waiver or release with respect to,
or consent to any departure from, any Senior Indebtedness or any instrument
evidencing the same or any agreement evidencing, governing, creating,
guaranteeing or securing any Senior Indebtedness; (b) sell, exchange, release,
or otherwise deal with any property pledged, mortgaged or otherwise securing
Senior Indebtedness; (c) release any Person liable under or in respect of the
Senior Indebtedness; (d) fail or delay in the perfection of liens securing the
Senior Indebtedness; (e) exercise or refrain from exercising any rights against
the Company and any other Person; or (f) amend, or grant any waiver or release
with respect to, or consent to any departure from, any guarantee for all or any
of the Senior Indebtedness.
 
(g)  Certain Conversions Deemed Payment.  For the purposes of this Section 7
only, (1) the issuance and delivery of junior securities upon conversion of this
Security in accordance with Section 3 and in connection with the payment of
interest in accordance with Section 2 shall not be deemed to constitute a
payment or distribution on account of the principal of (or premium, if any) or
interest on this Security or on account of the purchase or other acquisition of
this Security, and (2) the payment, issuance or delivery of cash (excluding cash
paid for fractional shares upon conversion of this Security in accordance with
Section 3) shall be deemed to constitute payment on account of the principal of
this Security.  For the purposes of this Section 7, the term “junior securities”
means (a) shares of any stock of any class of the Company and (b) securities of
the Company that are subordinated in right of payment to all Senior Indebtedness
that may be outstanding at the time of issuance or delivery of such securities
to substantially the same extent as, or to a greater extent than, this Security
is so subordinated as provided in this Section 7.  Nothing contained in this
Section 7 or elsewhere in this Security is intended to or shall impair, as among
the Company, its creditors other than holders of Senior Indebtedness and the
Holder of this Security, the right, which is absolute and unconditional, of the
Holder of this Security to convert this Security in accordance with Section 3.
 
(h)  Exclusions from Subordination and Subrogation.  Notwithstanding anything to
the contrary set forth in this Section 7 or elsewhere in this Agreement, the
obligations of the Holder of this Security set forth in this Section 7 shall not
apply to the Segregated Assets (as defined in Section 8) and the Holder’s rights
in the Segregated Assets shall be senior to, and take priority over, any and all
rights of the holders of the Senior Indebtedness in the Segregated Assets.  The
holders of the Senior Indebtedness have released any and all Liens (as defined
in the Security Agreement) in the Segregated Assets.  In the event that the
Holder receives the Segregated Assets pursuant to the terms of this Note and/or
the Security Agreement, the Holder will have no obligation to transfer, assign
or account for such Segregated Assets to the holders of the Senior Indebtedness.
 
8.  Definitions.  Unless otherwise defined in this Security, the following
capitalized terms shall have the following respective meanings when used herein:
 
“Affiliate” of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.  For the purposes of this definition,
“control”, when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms “controlling” and “controlled” have meanings correlative to the
foregoing.
 
“Board of Directors” means the board of directors of the Company or any
authorized committee of the board of directors.
 
“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which the banking institutions in the City of New York or
Minneapolis, Minnesota are authorized or obligated by law or executive order to
close or be closed.
 
“Commission” means the United States Securities and Exchange Commission, or any
other federal agency at the time administering the Securities and Exchange Act
of 1934, as amended, or the Securities Act, whichever is the relevant statute
for the particular purpose.
 
“Common Stock” means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
and which is not subject to redemption by the Company.  However, subject to the
provisions of Section 3(f) hereof, shares assumable on conversion of the
Securities shall include only shares of the class designated as Common Stock,
par value $0.001 per share, of the Company at the date of execution of this
Security or shares of any class or classes resulting from any reclassification
or reclassifications thereof and which have no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company and which are not subject
to redemption by the Company, provided that if at any time there shall be more
than one such resulting class, the shares of each such class then so assumable
shall be substantially in the proportion which the total number of shares of
such class resulting from all such reclassifications bears to the total number
of shares of all such classes resulting from all such reclassifications.
 
“Common Stock Deemed Outstanding” means, at any given time, the number of shares
of Common Stock outstanding immediately prior to such issue calculated on a
fully diluted basis, as if all Convertible Securities had been fully converted
into shares of Common Stock immediately prior to such issuance and any
outstanding warrants, options or other rights for the purchase of either shares
of Common Stock or Convertible Securities had been fully exercised immediately
prior to such issuance (and the resulting securities fully converted into shares
of Common Stock, if so convertible) as of such date, but excluding any Common
Stock owned or held by or for the account of the Company or issuable upon
conversion or exercise, as applicable of the Notes.
 
“Conversion Date” means the date on which the Holder has satisfied all the
requirements to convert this Security pursuant to Section 3(a).
 
“Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.
 
“Credit Agreement” shall mean that Revolving Credit Promissory Note, as dated as
of December 23, 2006, by the Company to the order of JPMorgan Chase Bank, N.A.,
as amended from time to time.
 
“Current Market Value” means the average of the high and low sales prices of the
Common Stock as reported on the Nasdaq Stock Market or other Eligible Market on
the applicable measurement date.
 
“Defaulted Payment” has the meaning set forth in Section 5.1 hereof.
 
“Eligible Market” means the New York Stock Exchange, the American Stock
Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq
Capital Market, the OTC Bulletin Board, OTCQX or Pink Sheets.
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended and the
rules and regulations promulgated thereunder.
 
“Excluded Securities” means: (1) securities issued or issuable upon conversion
of the Notes; (2) securities issued or issuable to officers, employees,
directors, consultants, placement agents, and other service providers of the
Company (or any subsidiary) pursuant to stock grants, option plans, purchase
plans, agreements or other employee stock incentive programs or arrangements
approved by the Board of Directors of the Company; (3) securities issued
pursuant to the conversion or exercise of Options, warrants or any other
Convertible Securities or exercisable securities outstanding as of the date of
this Note; (4) securities issued or issuable as a dividend or distribution on
Preferred Stock or Common Stock of the Company or pursuant to any stock split or
recapitalization of the Company; (5) securities offered pursuant to a bona fide,
firmly underwritten public offering pursuant to a registration statement filed
under the Securities Act; (6) securities issued or issuable pursuant to the
acquisition of another corporation by the Company by merger, purchase of
substantially all of the assets or other reorganization or to a joint venture
agreement, provided, that such issuances are approved by the Board of Directors
of the Company; (7) securities issued or issuable to banks, equipment lessors or
other financial institutions pursuant to a commercial leasing or debt financing
transaction approved by the Board of Directors of the Company; (8) securities
issued or issuable in connection with sponsored research, collaboration,
technology license, development, OEM, marketing or other similar agreements or
strategic partnerships approved by the Board of Directors of the Company; (9)
securities issued to suppliers or third party service providers in connection
with the provision of goods or services pursuant to transactions approved by the
Board of Directors of the Company; (10) securities of the Company which are
otherwise excluded by the affirmative vote or consent of more than 50% in
principal amount of the outstanding Securities; and (11) any right, Option or
warrant to acquire any security convertible into the securities included in the
definition of Excluded Securities pursuant to subsections (1) through (10)
above.
 
“fair market value” shall mean, if there is a current market for the asset, debt
or transaction in question, the amount that a willing buyer would pay a willing
seller in an arm’s length transaction or, in the absence of a current market for
such asset, debt or transaction, the amount determined in good faith by the
Board of Directors that represents its determination of the fair market value of
the asset.
 
“Final Maturity Date” has the meaning set forth in Section 2 hereof.
 
“Holder” means the person in whose name this Security is registered on the Note
Register.
 
“Issue Date” means January 4, 2008.
 
“Note Register” means the register or other ledger maintained by the Company
that records the record owners of the Securities.
 
“Options” means any rights, warrants or options to subscribe for or purchase
Common Stock or Convertible Securities.
 
“Person” shall mean and include an individual, a partnership, a corporation
(including a business trust), a joint stock company, a limited liability
company, an unincorporated association, a joint venture or other entity or a
governmental authority.
 
“Purchase Agreement” means the Convertible Note Purchase Agreement, dated as of
January 4, 2008 among the Company and the initial holders of the Securities.
 
“Securities” means the 4.5% Convertible Subordinated Secured Notes due January
4, 2010 or any of them (each, a “Security”), as amended or supplemented from
time to time, that are issued under the Purchase Agreement.
 
“Securities Act” means the Securities Act of 1933, as amended and the rules and
regulations promulgated thereunder.
 
“Security Agreement” means the Security Agreement, dated as of January 4, 2008
among the Company, the initial holders of the Securities and the Collateral
Agent (as defined therein), as amended from time to time.
 
“Segregated Assets” means the Company’s right, title and interest in the
royalties or other funds or assets under that certain Patent License Agreement,
dated July 17, 2006, by and among, the Company, Sony Corporation and Sony
Computer Entertainment, Inc., as amended, modified, supplemented or extended
from time to time, or as any provision thereof may be waived, and any patent
license agreement executed by the parties or their respective affiliates in
substitution or replacement therefor and the Company’s rights to enforce payment
or delivery of such royalties or other funds or assets.
 
“Senior Indebtedness” means, unless expressly subordinated to or made on a
parity with the amounts due under this Security, the principal of (and premium,
if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of
enforcement and other amounts due in connection with, (i) indebtedness for
borrowed money of the Company, to banks, commercial finance lenders or other
lending institutions regularly engaged in the business of lending money and any
guarantors of such indebtedness to whom the indebtedness may be assigned
(excluding (A) any indebtedness convertible into equity securities of the
Company and (B) indebtedness in connection with capital leases or operating
leases used solely for the purchase, finance or acquisition of equipment and
where such indebtedness is secured solely by such equipment), including, without
limitation, indebtedness evidenced by the Credit Agreement, and (ii) any
renewals, extensions, refinancings and refundings of, or amendments,
modifications, or supplements to such facility, as such facility may be assigned
to any guarantor of such facility; provided, however, that no indebtedness
incurred by Company which causes the aggregate principal amount of such
indebtedness outstanding to exceed $10,000,000 (but only to the extent of such
excess) shall be Senior Indebtedness..
 
“Significant Subsidiary” has the meaning assigned to it under Rule 405 of the
Securities Act.
 
“Subsidiary” means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of capital stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers, general partners or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i) such
Person; (ii) such Person and one or more Subsidiaries of such Person; or
(iii) one or more Subsidiaries of such Person.
 
“Trading Day” means:
 
(1)  if the applicable security is listed on the Nasdaq Stock Market, a day on
which the Nasdaq Stock Market is open for business;
 
(2)  if that security is not listed on the Nasdaq Stock Market, a day on which
trades may be made on the New York Stock Exchange;
 
(3)  if that security is not so listed on the New York Stock Exchange or the
Nasdaq Stock Market, a day on which the principal U.S. securities exchange on
which the securities are listed is open for business; or
 
(4)  if the applicable security is not so listed, admitted for trading or
quoted, any day other than a Saturday or a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
 
“Trading Price” of a security on any date of determination means:
 
(1)  the closing sales price as reported by the Nasdaq Stock Market on such
date;
 
(2)  if such security is not so reported, the closing sale price (or, if no
closing sale price is reported, the last reported sale price) of such security
(regular way) on the New York Stock Exchange on such date;
 
(3)  if such security is not listed for trading on the Nasdaq Stock Market or
the New York Stock Exchange on any such date, the closing sale price as reported
in the composite transactions for the principal U.S. securities exchange on
which such security is so listed;
 
(4)  if such security is not listed on a U.S. national or regional securities
exchange, the OTC Bulletin Board or OTCQX or Pink Sheets;
 
(5)  if such security is not so quoted on the OTC Bulletin Board or OTCQX or
Pink Sheets, the average of the mid-point of the last bid and ask prices for
such security on such date from at least two dealers recognized as market-makers
for such security selected by the Company for this purpose; or
 
(6)  if such security is not so quoted, the average of that last bid and ask
prices for such security on such date from a dealer engaged in the trading of
convertible securities selected by the Company for this purpose.
 
9.  Miscellaneous.
 
(a)  Any amount of principal, other than interest, on the Note which is not paid
when due shall result in a late charge being incurred and payable by the Company
in an amount equal to interest on such amount at the rate of twelve (12%)
percent per annum from the date such amount was due until the same is paid in
full.
 
(b)  In any suit, action or proceeding for the collection of this Note or to
enforce any of Holder's rights hereunder, Holder may recover all reasonable
costs and expenses in connection with the suit, action or proceeding, including
reasonable attorneys’ fees and disbursements, paid or incurred by the Holder,
together with any and all other amounts provided by law.
 
(c)  The rights and remedies provided to Holder in this Note (a) are not
exclusive and are in addition to any other rights and remedies Holder may have
at law or in equity, (b) shall be cumulative and may be exercised concurrent
manner, and (c) may be exercised as often as occasion therefor shall arise.  The
failure to exercise or delay in exercising any such right or remedy shall not be
construed as a waiver or release thereof.
 
(d)  (1)  The Company waives presentment, demand, protest and notice of default,
dishonor and of any renewal or extension of this Note and consents to any such
renewal or extension.
 
(2)  All payments hereunder shall be made without set-off or counterclaim and in
such amounts as may be necessary in order that all such payments shall not be
less than the amounts otherwise specified to be paid hereunder.
 
(3)  If any provision hereof shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provisions hereof, and this Note
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
 
(4)  The Company hereby irrevocably submits, to the fullest extent it may
effectively do so under applicable law, to the exclusive jurisdiction of any
State or Federal Court in New York County, New York, for the purpose of any
suit, action, proceeding or judgment relating to or arising out of this Note.
 
(e)  No provision of this Security shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of (and
premium, if any) and interest, if any, on this Security at the times, places and
rate, and in the coin or currency, herein prescribed or to convert this Security
as herein provided.
 
(f)  The Company will give prompt written notice to the Holder of this Security
of any change in the location of the Designated Office.  Any notice to the
Company or to the holder of this Security shall be given in the manner set forth
in the Purchase Agreement; provided that the Holder of this Security, if not a
party to such Purchase Agreement, may specify alternative notice instructions to
the Company.
 
(g)  (1)  The transfer of this Security is registrable on the Note Register upon
surrender of this Security for registration of transfer at the Designated
Office, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company duly executed by, the Holder hereof or such
Holder’s attorney duly authorized in writing, and thereupon one or more new
Securities, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.  Such
Securities are issuable only in registered form without coupons in denominations
of $1,000 and any integral multiple thereof.  No service charge shall be made
for any such registration of transfer, but the Company may require payment of a
sum sufficient to recover any tax or other governmental charge payable in
connection therewith.  Prior to due presentation of this Security for
registration of transfer, the Company and any agent of the Company may treat the
Person in whose name this Security is registered as the owner thereof for all
purposes, whether or not this Security be overdue, and neither the Company nor
any such agent shall be affected by notice to the contrary.
 
(2)  This Security and the Common Stock issuable upon conversion of this
Security have not been registered under the Securities Act, or the securities
laws of any state or other jurisdiction.  Neither this Security nor the Common
Stock issuable upon conversion of this Security nor any interest or
participation herein may be reoffered, sold, assigned, transferred, pledged,
encumbered or otherwise disposed of (a “Transfer”) in the absence of such
registration or unless such transaction is exempt from, or not subject to,
registration.  The Holder by its acceptance of this Security or the Common Stock
issuable upon conversion of this Security agrees that it shall not offer, sell,
assign, transfer, pledge, encumber or otherwise dispose of this Security or any
portion thereof or interest therein (other than with respect to a Transfer
pursuant to a registration statement that is effective at the time of such
Transfer) only (a) to the Company, (b) to an Affiliate of the Holder, (c) to a
person it reasonably believes to be an “accredited investor” within the meaning
of Rule 501(a) under the Securities Act, or (d) pursuant to a transaction in
compliance with Rule 144 under the Securities Act, and in the case of (b),
(c) and (d) above in which the transferor furnishes the Company with such
certifications, legal opinions or other information as the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act.
 
(3)  Upon presentation of this Security for registration of transfer at the
Designated Office accompanied by (i) certification by the transferor that such
transfer is in compliance with the terms hereof and (ii) by a written instrument
of transfer in a form approved by the Company executed by the Holder, in person
or by the Holder’s attorney thereunto duly authorized in writing, and including
the name, address and telephone and fax numbers of the transferee and name of
the contact person of the transferee, such Security shall be transferred on the
Note Register, and a new Security of like tenor and bearing the same legends
shall be issued in the name of the transferee and sent to the transferee at the
address and c/o the contact person so indicated.  Transfers and exchanges of
Securities shall be subject to such additional restrictions as are set forth in
the legends on the Securities and to such additional reasonable regulations as
may be prescribed by the Company as specified in
Section 9(g)(2) hereof.  Successive registrations of transfers as aforesaid may
be made from time to time as desired, and each such registration shall be noted
on the Note register.
 
(4)  Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Security, and in the case of
loss, theft or destruction, receipt of indemnity reasonably satisfactory to the
Company and upon surrender and cancellation of this Security, if mutilated, the
Company will deliver a new Security of like tenor and dated as of such
cancellation, in lieu of such Security.
 
                      (5)  The Holder represents that it is an “accredited
investor” within the meaning of Regulation D promulgated under the Securities
Act.  The Holder has been advised that this Security has not been registered
under the Securities Act, or any state securities laws and, therefore, cannot be
resold unless it is registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration requirements is
available.  The Holder is aware that the Company is under no obligation to
effect any such registration or to file for or comply with any exemption from
registration.  The Holder has not been formed solely for the purpose of making
this investment and is acquiring the Security for its own account for
investment, and not with a view to, or for resale in connection with, the
distribution thereof.
 
(6)  Neither this Security nor any term hereof may be amended or waived orally
or in writing, except that any term of this Security and the other Securities
may be amended and the observance of any term of this Security and the other
Securities may be waived (either generally or in a particular instance and
either retroactively or prospectively), and such amendment or waiver shall be
applicable to all of the Securities, upon the approval of the Company and the
holders of more than 50% of the outstanding principal amount of all then
outstanding Securities; provided, however, that any amendment that would (i)
change the maturity of the principal of or any installment of interest on any of
the Securities, (ii) reduce the principal amount of, or any premium or interest
on, (iii) change the currency of payment of such note or interest thereon, (iv)
impair the right to institute suit for the enforcement of any payment on or with
respect to any note, (v) adversely affect the conversion rights of holders of
the notes, (vi) reduce the percentage in aggregate principal amount of notes
outstanding necessary to modify or amend the notes or to waive any past default;
(vii) modify the provisions of the Securities with respect to subordination of
the Securities in a manner adverse to the holders of the Securities in any
material respect, (viii) impair the right of the holders of the Securities to
convert the Securities into Common Stock or (ix) modify this Section 9(g)(6)
shall, in each case, require the approval of the holder of each Security to
which such amendment shall apply; providedfurther that the Company may, without
the consent of any holder of the Securities, amend the Securities for the
purpose (i) of adding to the Company’s covenants in the Securities for the
benefit of the holders of the Securities, (ii) surrendering any right or power
conferred upon the Company, (iii) providing for conversion rights of holders of
the Securities if any reclassification or change of the Common Stock or any
consolidation, merger or sale of all or substantially all of the Company’s
assets occurs, (iv) providing for the assumption of the Company’s obligations to
the holders of the Securities in the case of a merger, consolidation,
conveyance, transfer or lease, (vi) curing any ambiguity or correcting or
supplementing any defective provision contained in the Securities; provided that
such modification or amendment does not, in the good faith opinion of the Board
of Directors, materially adversely affect the interests of the holders of the
Securities in any material respect, or (vii) adding or modifying any other
provisions with respect to matters or questions arising under the Securities
which the Company may deem necessary or desirable and which will not adversely
affect the interests of the holders of the Securities.  The Company will not
amend any provision of any other Security in a manner favorable to any holder
thereof un­less a similar amendment is made or offered with respect to all of
the Securities.  Each Holder of this Security by its acceptance hereof
acknowledges and agrees that the subordination provisions of this instrument are
for the benefit of the holders of the Senior Indebtedness and that, accordingly,
no provision of Section 7 hereof may be amended or otherwise modified without
the prior written consent of each holder of Senior Indebtedness at such time
outstanding.
 
(h) All covenants and agreements of the Company set forth in this Note shall be
binding on the successors and assigns of the Company whether so expressed or
not.
 
(i) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.
 
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IN WITNESS WHEREOF, the Company has caused this Security to be duly executed.
 
Dated:  January 4, 2008
 
AVISTAR COMMUNICATIONS CORPORATION
 
By:                                                                
Robert Habig, CFO
 
Attest:                                                           
Name:
Title:

[Avistar Communications Corporation Convertible Subordinated Secured Note]

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EXHIBIT A
 
CONVERSION NOTICE
 

 
The undersigned holder of this Security hereby irrevocably exercises the option
to convert this Security, or any portion of the principal amount hereof (which
is an integral multiple of $1,000) below designated, into Common Stock in
accordance with the terms of this Security, and directs that such shares,
together with a check in payment for any fractional share and any Security
representing any unconverted principal amount hereof, be delivered to and be
registered in the name of the undersigned unless a different name has been
indicated below.  If shares of Common Stock are to be registered in the name of
a Person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto.
 
Dated:                                                                    
 
[Holder]
 
By:
Name:
Title:
 
If shares are to be registered in the name of a Person other than the holder,
please print such Person’s name and address:
 

 
Name
 

 
Address
 

 
Social Security or other Taxpayer Identification Number, if any
 
If only a portion of the Securities is to be converted, please indicate:
 
1.  Principal amount to be converted: $___________
 
2.  Principal amount and denomination of Security representing unconverted
principal amount to be issued:
 
Amount: $________
 
Denominations: $________ (any integral multiple of $1,000)
 

 

 

 

      
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