Exhibit 10.1


 


FOCUS ENHANCEMENTS, INC.


 


 


SENIOR
SECURED CONVERTIBLE NOTE

PURCHASE AGREEMENT


 


 

















 


TABLE OF CONTENTS


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
   

  	
  RECITALS; AGREEMENT

  	
  1

  
	
   

  	
   

  	
   

  
	
  1.

  	
  DEFINITIONS

  	
  2

  
	
  2.

  	
  PURCHASE AND SALE OF NOTES

  	
  7

  
	
   

  	
  2.1

  	
  Note
  Issuance

  	
  7

  
	
   

  	
  2.2

  	
  Closing Date

  	
  7

  
	
   

  	
  2.3

  	
  Separate
  Agreements

  	
  7

  
	
   

  	
  2.4

  	
  Security
  Interest

  	
  7

  
	
   

  	
  2.5

  	
  Registration
  Rights Agreement

  	
  8

  
	
   

  	
  2.6

  	
  Eligibility

  	
  8

  
	
   

  	
  2.7

  	
  Transfer and
  Exchange

  	
  8

  
	
   

  	
  2.8

  	
  Replacement
  Notes

  	
  8

  
	
   

  	
  2.9

  	
  Optional
  Redemption

  	
  9

  
	
   

  	
  2.10

  	
  Payment of
  Interest

  	
  10

  
	
  3.

  	
  REPURCHASE UPON A FUNDAMENTAL CHANGE; CONVERSION UPON SEMICONDUCTOR
  BUSINESS SPIN-OFF

  	
  10

  
	
   

  	
  3.1

  	
  Repurchase
  at Option of the Holder upon a Fundamental Change

  	
  10

  
	
   

  	
  3.2

  	
  Conversion
  Upon Semiconductor Business Spin-Off

  	
  12

  
	
  4.

  	
  CONVERSION

  	
  13

  
	
   

  	
  4.1

  	
  Conversion
  Right

  	
  13

  
	
   

  	
  4.2

  	
  Conversion
  Procedure

  	
  13

  
	
   

  	
  4.3

  	
  Fractional
  Shares

  	
  14

  
	
   

  	
  4.4

  	
  Taxes on
  Conversion

  	
  14

  
	
   

  	
  4.5

  	
  Company to
  Provide Stock

  	
  15

  
	
   

  	
  4.6

  	
  Anti-Dilution
  Adjustments

  	
  15

  
	
   

  	
  4.7

  	
  Notice of
  Adjustments of Conversion Rate

  	
  16

  
	
  5.

  	
  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

  	
  17

  
	
   

  	
  5.1

  	
  Organization
  and Standing; Organization Documents

  	
  17

  
	
   

  	
  5.2

  	
  Corporate
  Power

  	
  17

  
	
   

  	
  5.3

  	
  Subsidiaries

  	
  17

  
	
   

  	
  5.4

  	
  Capitalization

  	
  17

  
	
   

  	
  5.5

  	
  Authorization

  	
  18

  



 


i

















 


	
   

  	
  5.6

  	
  SEC Reports;
  Financial Statements

  	
  18

  
	
   

  	
  5.7

  	
  Material
  Contracts and Commitments

  	
  19

  
	
   

  	
  5.8

  	
  Title to
  Properties and Assets, Liens, Etc

  	
  19

  
	
   

  	
  5.9

  	
  Obligations
  to Related Parties; Interested Party Transaction

  	
  19

  
	
   

  	
  5.10

  	
  Compliance
  with Other Instruments; Laws

  	
  19

  
	
   

  	
  5.11

  	
  Changes

  	
  20

  
	
   

  	
  5.12

  	
  Litigation,
  Etc

  	
  21

  
	
   

  	
  5.13

  	
  Employees

  	
  21

  
	
   

  	
  5.14

  	
  Proprietary
  Information Agreements

  	
  21

  
	
   

  	
  5.15

  	
  Intellectual
  Property

  	
  22

  
	
   

  	
  5.16

  	
  Permits

  	
  22

  
	
   

  	
  5.17

  	
  Governmental
  Consent, Etc

  	
  22

  
	
   

  	
  5.18

  	
  Offering

  	
  22

  
	
   

  	
  5.19

  	
  Brokers or
  Finders; Other Offers

  	
  23

  
	
   

  	
  5.20

  	
  Tax Returns
  and Payments

  	
  23

  
	
   

  	
  5.21

  	
  Environmental
  Matters

  	
  23

  
	
  6.

  	
  REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

  	
  23

  
	
   

  	
  6.1

  	
  Investment
  Experience

  	
  23

  
	
   

  	
  6.2

  	
  Investment;
  Legend

  	
  24

  
	
   

  	
  6.3

  	
  No Public
  Market

  	
  24

  
	
   

  	
  6.4

  	
  Authorization

  	
  24

  
	
   

  	
  6.5

  	
  Brokers or
  Finders

  	
  24

  
	
   

  	
  6.6

  	
  Tax
  Liability

  	
  24

  
	
  7.

  	
  COVENANTS

  	
  25

  
	
   

  	
  7.1

  	
  Payment of
  Notes

  	
  25

  
	
   

  	
  7.2

  	
  SEC Reports

  	
  25

  
	
   

  	
  7.3

  	
  Compliance
  Certificates

  	
  25

  
	
   

  	
  7.4

  	
  Further
  Instruments and Acts

  	
  25

  
	
   

  	
  7.5

  	
  Registration
  of Shares

  	
  25

  
	
   

  	
  7.6

  	
  Maintenance
  of Corporate Existence

  	
  26

  
	
   

  	
  7.7

  	
  Stay,
  Extension and Usury Laws

  	
  26

  



 


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  8.

  	
  NEGATIVE COVENANTS

  	
  26

  
	
   

  	
  8.1

  	
  Company
  May Consolidate, etc

  	
  26

  
	
   

  	
  8.2

  	
  Successor
  Substituted

  	
  27

  
	
   

  	
  8.3

  	
  Additional
  Debt

  	
  27

  
	
  9.

  	
  DEFAULT AND REMEDIES

  	
  27

  
	
   

  	
  9.1

  	
  Events of a
  Default

  	
  27

  
	
   

  	
  9.2

  	
  Acceleration

  	
  29

  
	
   

  	
  9.3

  	
  Other
  Remedies

  	
  29

  
	
   

  	
  9.4

  	
  Waiver of
  Defaults and Events of Default

  	
  29

  
	
   

  	
  9.5

  	
  Limitations
  on Suits

  	
  29

  
	
   

  	
  9.6

  	
  Rights of
  Holders to Receive Payment and to Convert

  	
  30

  
	
  10.

  	
  CONDITIONS TO CLOSING

  	
  30

  
	
   

  	
  10.1

  	
  Conditions
  to Closing of the Purchasers

  	
  30

  
	
   

  	
  10.2

  	
  Conditions
  to Closing of the Company

  	
  30

  
	
  11.

  	
  APPOINTMENT OF PURCHASERS’ AGENT

  	
  31

  
	
   

  	
  11.1

  	
  Appointment;
  Joint Action

  	
  31

  
	
   

  	
  11.2

  	
  Duties

  	
  31

  
	
   

  	
  11.3

  	
  Reliance by
  Purchasers’ Agent

  	
  31

  
	
   

  	
  11.4

  	
  Indemnification

  	
  31

  
	
   

  	
  11.5

  	
  Resignation
  or Removal of Purchasers’ Agent

  	
  31

  
	
  12.

  	
  MISCELLANEOUS

  	
  32

  
	
   

  	
  12.1

  	
  Governing
  Law

  	
  32

  
	
   

  	
  12.2

  	
  Survival

  	
  32

  
	
   

  	
  12.3

  	
  Successors
  and Assigns

  	
  32

  
	
   

  	
  12.4

  	
  Entire
  Agreement; Amendment

  	
  32

  
	
   

  	
  12.5

  	
  Notices, Etc

  	
  32

  
	
   

  	
  12.6

  	
  Delay or
  Omissions

  	
  33

  
	
   

  	
  12.7

  	
  Severability

  	
  33

  
	
   

  	
  12.8

  	
  Attorneys’
  Fees

  	
  33

  
	
   

  	
  12.9

  	
  Counterparts;
  Faxed Counterparts

  	
  33

  
	
   

  	
  12.10

  	
  Confidentiality

  	
  33

  



 


iii

















 


FOCUS
ENHANCEMENTS, INC.



SENIOR SECURED CONVERTIBLE NOTE

PURCHASE AGREEMENT


 


THIS SENIOR SECURED CONVERTIBLE NOTE
PURCHASE AGREEMENT (this “Agreement”) is made as of January 24,
2006 by and among Focus Enhancements, Inc., a Delaware corporation (the “Company”),
and each purchaser of a Senior Secured Convertible Note Due January 1,
2011 (as defined below) identified in Part 3 of Exhibit A
hereto (each a “Purchaser” and collectively referred to as the “Purchasers”).  Capitalized terms not otherwise defined in
this Agreement shall have the meanings ascribed to them in Section 1
below.


 


RECITALS


 


A.                                   The Company and each Purchaser wish to consummate a loan transaction
in an aggregate amount of up to $10,000,000 through the issuance to the
Purchasers of certain Senior Secured Convertible Notes Due January 1, 2011
in the form of Exhibit B hereto (the “Notes”).


 


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


 


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


 


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


 


E.                                      The Bank and Berg are parties to an Intercreditor Agreement dated as
of November 15, 2004 which sets forth their relative rights and priorities
as between themselves with respect to the shared collateral subject to Bank’s
Security Interest and Berg’s Security Interest, to which Intercreditor
Agreement the Purchasers shall be added as parties by an Amendment to
Intercreditor Agreement in the form of Exhibit D.


 


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


 


G.                                     The Purchasers will subordinate the Purchasers’ Security Interest to
the Bank’s Security Interest with respect to a maximum of $6,500,000 under the
Bank Loan.


 


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


 

















 


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


 


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


 


1.2                                 “Amended Intercreditor Agreement” means the amendment to the
Increditor Agreement dated as of November 15, 2004 between Berg and Bank
which adds the Purchasers as parties to such Agreement.


 


1.3                                 “Applicable Conversion Price” means, at the time any
determination thereof is to be made, $100,000 divided by the Applicable Conversion
Rate, rounded to the nearest 1/10th of a cent.


 


1.4                                 “Applicable Conversion Rate” means, at the time any
determination thereof is to be made, the Initial Conversion Rate as adjusted
pursuant to Section 4.6, rounded down to the nearest 1/100 of a share.


 


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


 


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


 


1.7                                 “Closing Sale Price” of the Common Stock on any date means
the last reported sales price per share or, in case no such reported sale takes
place on such date, the average of the reported closing bid and ask prices, in
either case on the Nasdaq Capital Market, or, if the Common Stock is not quoted
on the Nasdaq Capital Market, the last reported closing price per share on the
principal national or regional securities exchange on which the Common Stock is
then listed, or, if the Common Stock is not listed on any national or regional
securities exchange, the last reported sales price per share or, in case no
such reported sale takes place on such date, the average of the closing bid and
ask prices, in either case as quoted on the National Association of Notes
Dealers Automated Quotation System or other established automated
over-the-counter trading market in the United States, or, if the Common Stock
is not quoted on the National Association of Notes Dealers Automated Quotation
System or other established automated over-the-counter trading market in the
United States, the last reported closing price per share on the principal other
market on which the Common Stock is then traded.  If no such prices are available, the board of
directors of the Company shall make a good faith determination of the Closing
Sale Price.


 


1.8                                 “Common Stock” means the common stock of the Company, $0.01
par value per share, as it exists on the date of this Agreement, and any shares
of any class or classes of capital stock of the Company resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or


 


2

















 


involuntary
liquidation, dissolution or winding-up of the Company and which are not subject
to redemption by the Company; provided, however, that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable on conversion of Notes shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.


 


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


 


1.10                           “Continuing Director” means, as of any date of determination,
any member of the board of directors who (a) was a member of the board of
directors of the Company on the date of this Agreement or (b) becomes a
member of the board of directors subsequent to the date of this Agreement and
was appointed, nominated for election or elected to the board of directors with
the approval of a majority of the Continuing Directors who were members of the
board of directors at the time of such appointment, nomination or election.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


3

















 


continuing or
surviving corporation immediately after the transaction; or


 


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


 


(d)                             the Continuing Directors cease to constitute a majority of the board
of directors of the Company (or, if applicable, the board of directors of a
successor Person to the Company) within a 12- month period.


 


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


 


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


 


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


 


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


 


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


 


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


 


4

















 


Person
evidenced by a note or similar instrument given in connection with the
acquisition of any business, properties or assets of any kinds, (e) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (excluding trade accounts payable and accrued liabilities
arising in the ordinary course of business), (f) all obligations and other
liabilities (contingent or otherwise) of such Person under any lease or related
document (including a purchase agreement) in connection with the lease of real
property or improvements (or any personal property included as part of any such
lease) that provides that such Person is contractually obligated to purchase or
cause a third party to purchase the leased property and thereby guarantee a
minimum residual value of the leased property to the lessor and the obligations
of such Person under such lease or related document to purchase or to cause a
third party to purchase such leased property (whether or not such lease
transaction is characterized as an operating lease or a capitalized lease in
accordance with GAAP), (g) all obligations (contingent or otherwise) of
such Person with respect to any interest rate, currency or other swap, cap,
floor or collar agreement, hedge agreement, forward contract, or other similar
instrument or agreement or foreign currency hedge, exchange, purchase or
similar instrument or agreement, (h) all direct or indirect guarantees,
agreements to be jointly liable or similar agreements by such Person in respect
of, and obligations or liabilities (contingent or otherwise) of such Person to
purchase or otherwise acquire or otherwise assure a creditor against loss in
respect of, indebtedness, obligations or liabilities of another Person of the
kind described in clauses (a) through (g), and (i) any and all
deferrals, renewals, extensions, restatements, replacements, refinancings and
refundings of, or amendments, modifications, or supplements to, or any indebtedness
or obligation issued in exchange for, any indebtedness, obligation or liability
of the kind described in clauses (a) through (h).


 


1.19                           “Initial Conversion Rate” means one share of Common Stock per
$1.00 principal amount of Notes, or 1.0.


 


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


 


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


 


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


 


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


 


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


 


5

















 


1.25                           “Original Issuance Date” means the date on which shares of
capital stock of Newco are first issued pursuant to the Semiconductor Business
Spin-off.


 


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


 


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


 


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


 


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


 


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


 


1.31                           “SEC” means the Securities and Exchange Commission.


 


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


 


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


 


1.34                           “Semiconductor Business Spin-Off” means the transfer by the
Company of all or substantially all of the assets, liabilities, rights,
contracts, personnel, research and development and 


 


6

















 


operations
of its semiconductor business, which consists of all of the Company’s
integrated circuit products for video applications including WiMedia UWB
compliant semiconductor devices, to one or more entities controlled by the
Company (referred to hereby as “Newco”), whether or not followed by the
distribution of a significant percentage of the capital stock or other equity
interests of such entity or other entities to existing stockholders of the
Company either as a distribution without the payment of consideration by such
stockholders, or in exchange for all or part of their shares of Common Stock
subsequent to the transfer, which transfer is effected pursuant to a written
agreement or plan or arrangement approved by the board of directors prior to June 30,
2007.


 


1.35                           “Shares” means shares of the Company’s Common Stock issuable
upon conversion of the Notes pursuant to Section 4.1.


 


1.36                           “Subsidiaries” means COMO Computer and Motion GmbH.


 


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


 


2.                                       PURCHASE AND SALE OF NOTES


 


2.1                                 Note Issuance.  Subject to the terms and conditions of this
Agreement, in return for the Purchase Price provided by each Purchaser, the
Company shall sell and issue to such Purchaser one or more Notes.  Each Note shall have a principal balance
equal to the Purchase Price paid by such Purchaser for the Note, as set forth
in the Schedule of Purchasers.


 


2.2                                 Closing Date.  The purchase and sale of the Notes shall take
place at the offices of Ingalls & Snyder LLC, 61 Broadway, New York,
New York at 11:00 a.m. New York time on January 24, 2006 or such
other place, date and time as the Company and the Purchasers’ Agent shall agree
(the “Purchase Agreement Closing Date”). 
Each Purchaser shall deliver to the Company the Purchase Price together
with an executed counterpart to this Agreement, and each of the other Loan
Documents, and the Company shall deliver to each Purchaser one or more executed
Notes together with fully executed copies of the Loan Documents;


 


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


 


2.4                                 Security Interest.  The indebtedness represented by the Notes
shall be secured by all of the assets of the Company in accordance with the
terms and conditions of the Security Agreement, which shall be subject to the
terms of the Amended Intercreditor Agreement and the New Intercreditor
Agreement.


 


7

















 


2.5                                 Registration Rights Agreement.  In connection with the transactions
contemplated hereby, the Company, the Purchasers’ Agent and each Purchaser are
entering into the Registration Rights Agreement.


 


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


 


2.7                                 Transfer and Exchange.


 


(a)                              Subject to compliance with any applicable additional requirements
contained in Section 3 or Section 4, when a Note is presented to the
Company with a request to register a transfer thereof or to exchange such Note
for an equal principal amount of Notes of other authorized denominations, the
Company shall register the transfer or make the exchange as requested; provided,
however, that every Note presented or surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by an assignment
form and, if applicable, a transfer certificate each in the form included in
the Note, and in form satisfactory to the Company duly executed by the Holder
thereof or its attorney duly authorized in writing.  Any exchange or registration of transfer
shall be without charge, except that the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto, and provided, that this sentence shall not apply to any exchange
pursuant to Section 2.9.


 


(b)                             The Company shall not be required to exchange or register a transfer
of (i) any Notes for the 15-day period immediately preceding the date of
mailing of a notice of Notes to be redeemed, (ii) any Notes or portions
thereof selected or called for redemption (except, in the case of redemption of
a Note in part, the portion thereof not to be redeemed) or (iii) any Notes
or portions thereof in respect of which a notice pursuant to Section 3.1(c),
3.2 or Section 4.2 hereof has been delivered and not withdrawn by the
Holder thereof (except, in the case of the purchase of a Note in part, the
portion thereof not to be purchased).


 


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


 


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


 


2.8                                 Replacement Notes.


 


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


 


8

















 


the
Company pursuant to Section 2.9, the Company in its discretion may,
instead of issuing a new Note, pay, redeem or purchase such Note, as the case
may be.


 


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


 


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


 


2.9                                 Optional Redemption.


 


(a)                                      The Company shall have the option to redeem the Notes pursuant to
this Section 2.9 at any time, in whole or in part, upon 30 days’ prior
written notice, at a redemption price in cash equal to 102% of the principal
amount of the Notes (the “Redemption Price”) to be redeemed together
with accrued and unpaid interest, if any, on the principal amount of the Notes
redeemed to the date of redemption.


 


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


 


(1)                                the Redemption Date;


 


(2)                                the Redemption Price;


 


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


 


(4)                                that Holders who wish to convert Notes pursuant to Section 3.2
or Section 4.1 must surrender Notes for conversion no later than the close
of business on the Business Day immediately preceding the Redemption Date and
must satisfy the other requirements set forth in Paragraph 7 of the Notes;


 


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


 


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


 


(c)                                      Once notice of redemption is mailed, Notes called for redemption
become due and payable on the Redemption Date and at the Redemption Price
stated in the notice, together with accrued and unpaid interest, if any, except
for Notes that are converted in accordance with the provisions of Section 3.2
or Section 4.1.  Upon presentation
and surrender to the Company, Notes 


 


9

















 


called
for redemption shall be paid at the Redemption Price, plus accrued interest up
to but not including the Redemption Date.


 


2.10                           Payment of Interest.


 


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


 


(b)                             Notwithstanding the foregoing, the Company, at its sole option, may
pay interest due on each of June 30, 2006 and/or December 30, 2006,
and/or June 30, 2007 through the issuance of new Notes in the principal
amount of the interest due to the Holders, if there is no pending Event of
Default as of such interest payment date. 
The Company shall issue and deliver the new Notes to the Holders within
three Business Days after the interest payment date.  The Company shall notify the Purchasers’
Agent and the Holders of any election pursuant to this Section 2.10(b) at
least 10 days prior to the related interest payment date.  Any election by the Company pursuant to this Section 2.10(b) shall
apply to all Notes outstanding as of the related interest payment date, other
than Notes as to which the Holder has submitted a Fundamental Change Repurchase
Right Notice or a Spin-off Conversion Notice prior to the date the Company
sends a notice pursuant to this Section 2.10(b).


 


3.                                     REPURCHASE
UPON A FUNDAMENTAL CHANGE; CONVERSION UPON SEMICONDUCTOR BUSINESS SPIN-OFF


 


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


 


(a)                                      Subject to the satisfaction of the requirements of this Section 3.1,
if a Fundamental Change (other than the Semiconductor Business Spin-off
pursuant to Section 3.2) occurs at any time prior to the Final Maturity
Date, each Holder will, upon receipt of the notice of the occurrence of a
Fundamental Change described in Section 3.1(c), have the right to require
the Company to repurchase any or all of such Holder’s Notes for cash in an
amount equal to 101% of the principal amount of the Notes to be repurchased
plus accrued and unpaid interest, if any, to (but not including) the
Fundamental Change Repurchase Date (the “Fundamental Change Repurchase Price”).


 


(b)                                     on or before the 20th Business Day prior to the effective date of a
Fundamental Change (which Fundamental Change results in the Holders of such
Notes having the right to cause the Company to repurchase their Notes), the
Company will provide to all Holders of the Notes, a notice of the occurrence of
the Fundamental Change and of the resulting repurchase right (the “Fundamental
Change Repurchase Right Notice”). 
The Fundamental Change Repurchase Right Notice shall state:


 


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


 


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


 


10

















 


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


 


(4)                                  the Fundamental
Change Repurchase Price;


 


(5)                                  the Fundamental
Change Repurchase Date;


 


(6)                                  that the Notes
with respect to which a Repurchase Exercise Notice has been given by the Holder
may be converted pursuant to Section 3.2 or Section 4.1 only if the
Holder withdraws the Repurchase Exercise Notice as described in Section 3.1(d);
and


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


11

















 


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


 


(f)                                        In connection with any offer to purchase or purchase of Notes under Section 3.1,
the Company shall comply with all tender offer rules applicable to the
Company under the Exchange Act.  In the
absence of an available exemption as determined by the Company in its sole
discretion, the Company shall (a) comply with Rule 13e-4 and Rule 14e-l
(or any successor to either such Rule), if applicable, under the Exchange Act, (b) file
the related Schedule TO (or any successor or similar schedule, form or
report) if required under the Exchange Act, and (c) otherwise comply with
all federal and state securities laws in connection with such offer to purchase
or purchase of Notes, all so as to permit the rights of the Holders and obligations
of the Company under Section 3.1 to be exercised in the time and in the
manner specified therein.


 


3.2                                 Conversion Upon Semiconductor Business Spin-Off.


 


(a) Upon
the occurrence of the Semiconductor Business Spin-off, the entire principal
balance outstanding of each Note may be converted at the Holder’s sole option
at the time described below into the senior class of voting equity interests of
the entity or entities to which the Semiconductor Business is transferred
(referred to as “Newco”) representing a maximum (excluding Notes issued in lieu
of interest pursuant to Section 3.2(c)) of 25% of the total voting power
and value of Newco at a conversion rate equal to 1% of such Newco equity
interests for $400,000 of Note principal (.0025% per $1,000) (the “Spin-off
Conversion Rate”); provided that such conversion will not be effected for
any Holder unless Holders of at least $1,000,000 of Note principal exercise the
conversion right under this Section 3.2. 
Conversions pursuant to this Section 3.2 shall be made
substantially in the manner provided in Section 4.2(a) by checking
the appropriate box on the form of Conversion Notice included in the Note and
sending such notice (the “Spin-off Conversion Notice”) to the Company
prior to the Conversion Date.  The conversion
of Notes principal into the Newco equity interests shall be effective upon the
Original Issuance Date of the equity interests of Newco into which the Notes
are convertible. The Holder may convert some or all of such Holder’s Notes
pursuant to this Section 3.2.  The
Company shall act as registrar and transfer agent to record the conversion of
Notes and deliver Newco equity interests to the electing Holders.


 


(b) In
connection with the Semiconductor Business Spin-off, the Company shall send a
notice (the “Spin-off Notice”) to each Holder specifying (1) the
nature of the proposed transaction, (2) the proposed effective date of the
transaction, which shall not be less than 20 days from the date of the notice
or less than 20 days from the Original Issuance Date, (3) the proposed
capitalization of Newco, (4) the type of security to be offered to the
Holders upon conversion of Notes pursuant to this Section 3.2, (5) a
description of the proposed rights, preferences, privileges and restrictions
applicable to each class or series of equity securities of Newco, (6) pro
forma financial statements for Newco prepared substantially in accordance with
SEC Regulation S-X Rule 11-02, (7) a description of Newco’s
prospective business and material contracts, (8) the date by which the
Holder must submit an election to convert Notes pursuant to this Section 3.2,
which shall be not more than five Business Days prior to the proposed effective
date of the Semiconductor Business Spin-off, and (9) the Original Issuance
Date.  In addition, the Company shall
comply with all applicable securities laws and SEC rules and regulations
in connection with the Semiconductor Business Spin-off and shall be obligated
to file such registration statements and/or a Schedule TO as may be required
under applicable laws in connection with the exchange of Newco equity interests
for Notes pursuant to this Section 3.2. 
The Company also shall comply with the Hart-Scott-Rodino Antitrust
Improvements Act, as amended, to the extent required by that statute and
regulations promulgated thereunder.


 


12

















 


(c) All
accrued and unpaid interest on Notes, and all new Notes issued pursuant to Section 2.10(b),
that are surrendered for conversion pursuant to this Section 3.2 shall be
converted into Newco equity interests at the Spin-off Conversion Rate at the
Original Issuance Date.


 


(d) Notwithstanding
the Company’s delivery of the Spin-off Notice to the Holders and the election
of any Holders to convert Notes pursuant to this Section 3.2, the Company
may abandon the Semiconductor Business Spin-off and reject the conversion of
Notes at any time prior to midnight of the day immediately preceding the
proposed effective date of the Semiconductor Business Spin-off, and, in this
event shall send a notice of the abandonment of the transaction to the
Purchasers’ Agent and all Holders who had sent previously a Spin-off Conversion
Notice to the Company.  In addition, the
Company may modify the terms and content of the Spin-off Notice by sending an
amended Spin-off Notice to the Holders at any time, provided that upon receipt
of such Notice a Holder shall have at least 10 days from the date of such
amended notice within which to elect to convert the Holders Notes or to
withdraw a prior notice of conversion.


 


4.                                       CONVERSION


 


4.1                                 Conversion Right.


 


(a)                              Subject to the further provisions of this Section 4 and
Paragraph 9 of the Notes, a Holder of a Note may convert the principal amount
of such Note (or any portion thereof equal to $100,000 or any integral multiple
of $100,000 in excess thereof) together with all accrued and unpaid interest
into Shares at any time prior to the close of business on the last Business
Date prior to the Final Maturity Date, at the Applicable Conversion Rate in
effect on the Conversion Date; provided, however, that, if such
Note is called for redemption or submitted or presented for purchase or
conversion pursuant to Section 2.9 or Section 3.1 or 3.2, such
conversion right shall terminate at the close of business on the Business Day
immediately preceding the Redemption Date or Fundamental Change Repurchase Date
or the effective time of the Semiconductor Business Spin-off, as the case may
be, for such Note or such earlier date as the Holder presents such Note for redemption
or for purchase (unless the Company shall default in making the redemption
payment or Fundamental Change Repurchase Price payment when due, as the case
may be, in which case the conversion right shall terminate at the close of
business on the date such default is cured and such Note is redeemed or
purchased, as the case may be).  The
Initial Conversion Rate is subject to adjustment as provided in this Section 4.


 


(b)                             Provisions of
this Agreement that apply to conversion of all of a Note also apply to
conversion of a portion of a Note.


 


(c)                              A Holder of Notes is not entitled to any rights of a holder of
Common Stock until such Holder has converted its Notes to Shares, and only to
the extent such Notes are deemed to have been converted into Shares pursuant to
this Section 4.


 


4.2                                 Conversion Procedure.


 


(a)                              To convert a
Note, a Holder must (1) complete and manually sign the conversion notice
included in the Note and deliver such notice to the Company, (2) surrender
the Note to the Company, (3) furnish appropriate endorsements and transfer
documents if required by the Company’s transfer agent or the Company, and (4) pay
any transfer or similar tax, if required. 
The date on which the Holder satisfies all of these requirements is the “Conversion
Date.”


 


13

















 


(b)                             A Note in
respect of which a Holder has delivered a Repurchase Exercise Notice pursuant
to Section 3.1 may be converted pursuant to Section 3.2(a) or Section 4.1
only if such notice is withdrawn by a written notice of withdrawal delivered to
the Company prior to the close of business on the second Business Day
immediately preceding the Fundamental Change Repurchase Date in accordance with
Section 3.1.


 


(c)                              The Company
shall deliver any Shares and cash in lieu of any fractional shares deliverable
upon conversion to the respective Holders or to the Purchasers’ Agent for their
accounts no later than the third Business Day on or after the Conversion Date.


 


(d)                             The person in
whose name the certificate for the Shares is registered shall be deemed to be a
stockholder of record on the Conversion Date; provided, however,
that no surrender of a Note on any date when the stock transfer books of the
Company shall be closed 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 day on which such
stock transfer books are open; provided, further, that such
conversion shall be at the Applicable Conversion Rate in effect on the
Conversion Date as if the stock transfer books of the Company had not been
closed.  Upon conversion of a Note, such
person shall no longer be a Holder of such Note.  No payment or adjustment will be made for
dividends or distributions on shares of Common Stock issued upon conversion of
a Note.


 


(e)                              Except as
otherwise provided in this Section 4.2, the Company’s delivery to the
Holder of the full number of Shares into which the Note is convertible,
together with any cash payment for such Holder’s fractional shares pursuant to Section 4.3,
shall be deemed to satisfy the Company’s obligation to pay the principal amount
of the Note and accrued but unpaid interest, if any, attributable to the period
from the most recent interest payment date to the conversion date.  As a result, accrued but unpaid interest, if
any, to the conversion date is deemed to be paid in full rather than cancelled,
extinguished or forfeited.


 


(f)                                Upon surrender of a Note that is converted in part, the Company
shall execute and deliver to the Holder a new Note equal in principal amount to
the unconverted portion of the Note surrendered.


 


4.3                                 Fractional Shares.  The Company will not issue fractional shares
of Common Stock upon conversion of Notes pursuant to Section 3.2 or Section 4.1.  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 l/100th of a
share) by multiplying the Closing Sale 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.


 


4.4                                 Taxes on Conversion.  If a Holder converts a Note, the Company
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon such conversion.  The Company may refuse to deliver the
certificate representing the Shares being issued in a name other than the
Holder’s name until the Company receives a sum sufficient to pay any tax which
will be due because the shares are to be issued in a name other than the Holder’s
name.  Nothing herein shall preclude any
tax withholding required by law or regulation.


 


14

















 


4.5                                 Company to Provide Stock.


 


(a)                              The Company
shall, prior to issuance of any Notes hereunder, and from time to time as may
be necessary, reserve, out of its authorized but unissued Common Stock, a
sufficient number of Shares to permit the conversion of all outstanding Notes
into Shares.


 


(b)                             All Shares
delivered upon conversion of the Notes shall be newly issued shares, shall be
duly authorized, validly issued, fully paid and nonassessable and shall be free
from preemptive rights and free of any lien or adverse claim.


 


(c)                              The Company
will endeavor promptly to comply with all federal and state securities laws
regulating the offer and delivery of shares of Common Stock upon conversion of
Notes, if any, and will list or cause to have quoted such shares of Common
Stock on each national securities exchange or on the NASDAQ Capital Market or
other available NASDAQ market, or other over-the-counter market or such other
market on which the Common Stock is then listed or quoted; provided, however,
that if rules of such automated quotation system or exchange permit the
Company to defer the listing of such Common Stock until the first conversion of
the Notes into Common Stock in accordance with the provisions of this
Agreement, the Company covenants to list such Common Stock issuable upon
conversion of the Notes in accordance with the requirements of such automated
quotation system or exchange at such time.


 


In no event will the Company take any
action that would require adjustment to the Applicable Conversion Rate, nor
will the Company adjust the Applicable Conversion Rate, if such Applicable
Conversion Rate adjustment would require the Company to issue, upon conversion
of the Notes, a number of shares of Common Stock that would require the Company
to obtain prior stockholder approval under the rules and regulations of
the NASDAQ Stock Market, and, if applicable, the rules of the exchange or
quotation system on which the Common Stock is then traded, without obtaining
such prior stockholder approval.


 


4.6                                 Anti-Dilution Adjustments.


 


(a)                                  The Applicable
Conversion Rate shall be subject to adjustment, without duplication, upon the
occurrence of any of the following events:


 


(1)                                  In the event
the Company pays a dividend or makes a distribution on the Common Stock,
payable exclusively in shares of Common Stock, the Applicable Conversion Rate
in effect immediately before the close of business on the record date fixed for
determination of stockholders entitled to receive that dividend or distribution
shall be increased by multiplying:


 


(x)                                 the Applicable Conversion Rate, by


 


(y)                               a fraction, (A) the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately before the close of
business on such record date and the total number of shares constituting such
dividend or other distribution, and (B) the denominator of which shall be
the number of shares of Common Stock outstanding immediately before the close
of business on such record date.


 


15

















 


(2)                                  In the event
the Company:


 


(A)                              subdivides or splits the
outstanding shares of Common Stock into a greater number of shares, the
Applicable Conversion Rate shall be proportionally increased immediately after
the effective date of such subdivision or split;


 


(B)                                combines or reclassifies the
outstanding shares of Common Stock into a smaller number of shares, the
Applicable Conversion Rate shall be proportionally reduced immediately after
the effective date of such combination or reclassification; or


 


(C)                                issues by reclassification
of the shares of Common Stock any shares of the Capital Stock of the Company,
the Applicable Conversion Rate in effect immediately after the effective date
of such reclassification shall be proportionally applied to the class or
classes of shares of Capital Stock of the Company into which the Common Stock
was reclassified.


 


(3)                                  In the event
the Company distributes shares or other equity interests of any subsidiary or
other entity now or hereafter owned by the Company to the stockholders of the
Company pro rata, as a matter of right, without the payment or exchange of
consideration by the stockholders, in addition to the Shares issuable upon
conversion by the Holder of a Note pursuant to Section 4.1 the Holder also
shall receive the number of shares or other equity interests of such subsidiary
or other entity which the Holder would have been entitled to receive if the
Holder had owned the Common Stock issuable under the Notes, which the Holder
has elected to convert, immediately prior to the date of such distribution by
the Company.  For purposes of this
Agreement and the Note, the term “Shares” shall be deemed to include the
additional equity interests provided under this subsection 4.6(a)(3) where
necessary to give effect to this provision.


 


(b)                                 In addition to the adjustments set forth in Section 4.7(a), the
Company may increase the Applicable Conversion Rate as the Board of Directors
considers 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 Capital Stock (or rights to acquire Capital Stock) or from any
event treated as such for income tax purposes.


 


4.7                                 Notice of Adjustments of Conversion Rate.  Whenever the Applicable Conversion Rate is
adjusted pursuant to Section 4.7(a) hereof:


 


(a)                                  the Company
shall compute the adjusted Applicable Conversion Rate in accordance with Section 4.6(a) hereof
and shall prepare an officers’ certificate setting forth (1) the adjusted
Applicable Conversion Rate, (2) the clause of Section 4.6(a) pursuant
to which such adjustment has been made, showing in reasonable detail the facts
upon which such adjustment is based, (3) the calculation of such
adjustment and (4) the date as of which such adjustment is effective, and
such certificate shall promptly be delivered to the Purchasers’ Agent (which
certificates shall be conclusive evidence of the accuracy of such adjustment
absent manifest error); and


 


16

















 


(b)                                 as soon as
practicable after each such adjustment, the Company shall deliver to the
Holders a notice stating that the Applicable Conversion Rate has been adjusted
and setting forth the adjusted Applicable Conversion Rate.


 


5.                                       REPRESENTATIONS AND WARRANTIES OF THE COMPANY


 


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


 


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


 


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


 


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


 


5.4                                 Capitalization.


 


(a)                              The authorized capital stock of the Company consists of (A) 100,000,000
shares, of which 67,885,058 shares are issued and outstanding as of the date of
this Agreement; (B) 3,000,000 Preferred Stock, of which 3,000 shares of Series B
Preferred Stock have been authorized 2,744 shares of which are issued and
outstanding as of the date hereof; and 500 shares of Series C Preferred
Stock have been authorized, 417 shares of which are issued and outstanding as
of the date hereof.  The outstanding
shares have been duly authorized and validly issued, and are fully paid and
nonassessable.


 


17

















 


(b)                             The Company has reserved (A) 6,010,005 of Common Stock for
issuance pursuant to the exercise of certain warrants, (B) 2,744,000
shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock, and (C) 417,000 shares of Common Stock for issuance upon
conversion of the Series C Preferred Stock.  In addition, the Company has reserved
8,771,918 shares of Common Stock for issuance to employees, consultants, or
directors pursuant to the Company’s Stock Option Plans (the “Option Plans”).  Of the foregoing shares, as of the date
hereof, 7,438,925 shares remain subject to outstanding options.


 


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


 


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


 


5.6                                 SEC Reports; Financial Statements.  The Company has filed all reports required to
be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the years ended December 31, 2003 and December 31,
2004 and the three quarterly periods ended March 31, June 30 and September 30,
2005 (the foregoing materials being collectively referred to herein as the “SEC
Reports”) on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates,
the SEC Reports complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated
thereunder, and none of the SEC Reports, when filed, contained any untrue
statement of a material act or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.  The Company is in compliance with the
Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated
thereunder by all government and regulatory authorities and agencies.  The financial statements of the Company
included in the SEC Reports (“Financial Statements”) comply in all
material respects with applicable accounting requirements and the rules and
regulations of the SEC with respect thereto as in effect at the time of
filing.  Such Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”), except as
may be otherwise specified in such Financial Statements or the notes thereto,
and fairly 


 


18

















 


present
in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.  To the Company’s knowledge, neither the
Company nor any Subsidiary has any material liabilities or obligations which
have not been disclosed in the SEC Reports for the periods included in such
reports.


 


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


 


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


 


5.9                                 Obligations to Related Parties; Interested Party Transaction.  Other than the Berg
Guaranty and Berg Security Interest, or as disclosed in the SEC Reports, there
are no obligations of the Company or the Subsidiaries to officers, directors,
stockholder owning 5% or more in interest of the Company, or employees of the
Company or the Subsidiaries other than (a) for payment of salary for
services rendered to the Company or its Subsidiaries in the ordinary course of
business, (b) for reimbursement for reasonable expenses incurred on behalf
of the Company or a Subsidiary, and (c) for other standard employee
benefits made generally available to all employees.  Except as set forth in SEC Reports, none of
the officers, directors or stockholders owning 5% or more in interest of the
Company or the Subsidiaries are indebted to the Company or the Subsidiaries, or
have any direct or indirect ownership interest in any firm or corporation with
which the Company or the Subsidiaries is affiliated or with which the Company
or the Subsidiaries has a business relationship, or any firm or corporation
which competes with the Company or the Subsidiaries, except that officers,
directors and/or stockholders owning 5% or more in interest of the Company may
own stock in publicly traded companies which may compete with the Company and
its Subsidiaries.  No officer, director
or stockholder owning 5% or more in interest of the Company is, directly or
indirectly, interested in any material contract with the Company or the
Subsidiaries (other than such contracts as relate to any such person’s ownership
of capital shares or other securities of the Company or the Subsidiaries).


 


5.10                           Compliance with Other Instruments; Laws.


 


(a)                                  Neither the Company nor any Subsidiary is in violation of any term
of its respective charter documents, each as amended to date.  Neither the Company nor any Subsidiary is 


 


19

















 


in
violation of, or in default in any material respect under, the terms of any
mortgage, indenture, contract, agreement, instrument, judgment or decree applicable
to it or to which it is a party.  The
execution, delivery and performance of and compliance with the Loan Documents,
and the issuance of the Shares upon any conversion of the Notes, will not
result in any such violation, or be in conflict with or constitute a default
under any such term, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company
pursuant to any such term or the suspension, revocation, impairment, forfeiture
or nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations or any of its assets or
properties.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


20

















 


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


 


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


 


5.13                           Employees.  The Company and each Subsidiary does not have
any collective bargaining agreements with any of its employees.  There is no labor union organizing activity
pending or, to the Company’s knowledge, threatened with respect to the
Company.  No employee of the Company has
been granted the right to continued employment by the Company or to any
material compensation following termination of employment with the
Company.  Neither the Company nor any
Subsidiary is aware that any officer or key employee, or that any group of key
employees of the Company, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any officer, key employee or group of key employees.  To the Company’s knowledge, no employee of
the Company, nor any consultant with whom the Company has contracted, is in
violation of any material term of any agreement relating to the right of any
such individual to be employed by, or to contract with, the Company because of
the nature of the business to be conducted by the Company; and to the Company’s
knowledge the continued employment by the Company of its present employees, and
the performance of the Company’s contracts with its independent contractors,
will not result in any such violation. 
Neither the Company nor any Subsidiary has received notice alleging that
any such violation has occurred.


 


5.14                           Proprietary Information Agreements.  Each current and former employee and
consultant of the Company has executed an agreement with the Company, in the
form made available to the Purchasers, agreeing to maintain the confidentiality
of proprietary information and agreeing to assign certain inventions to the
Company.  Except as set forth on the Schedule of
Exceptions and to the Company’s knowledge, none of its employees or consultants
is obligated under any contract 


 


21

















 


(including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of his or her best efforts to promote the
interests of the Company or that would conflict with the Company’s business as
proposed to be conducted.  Neither the
execution or delivery of any of this Agreement, nor the carrying on of the
Company’s business as proposed, will, to the Company’s knowledge, conflict with
or result in a breach of the terms, conditions, or provisions of, or constitute
a default under, any contract, covenant or instrument under which any such employee
or consultant is now obligated.  Neither
the Company nor any Subsidiary has received any notice alleging that any such
violation has occurred.  The Company does
not believe it is or will be necessary to use any inventions of its employees
or consultants (or persons it currently intends to hire or retain) made prior
to their employment or retention by the Company.


 


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


 


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


 


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


 


5.18                           Offering.  Subject to the accuracy of the Purchasers’
representations in Section 6 of the Agreement, the offer and issuance of
the Notes to be issued in conformity with the terms of this Agreement, and the
issuance of the Shares upon conversion of the Notes constitute transactions
exempt from the registration requirements of the Securities Act, and applicable
blue sky laws, which filings or qualifications, if required, will be timely
filed or obtained.  The Company and all
persons acting on its behalf have complied with the provisions relating to the
manner of offering and sale 


 


22

















 


contained
in Rule 502(c) as promulgated under the Securities Act, with respect
to the offer, sale and issuance of the Notes.


 


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


 


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


 


5.21                           Environmental Matters.  The Company and its Subsidiaries are and have
been in material compliance with all Environmental Laws (as defined below); (ii) there
has been no release or threatened release of any pollutant, contaminant or toxic
or hazardous material, substance or waste, or petroleum or any fraction thereof
(each a “Hazardous Substance”) on, upon, into or from any site currently or
heretofore owned, leased or otherwise used by the Company or its Subsidiaries
which could reasonably be expected to result in a material liability of the
Company or its Subsidiaries; (iii) there have been no Hazardous Substances
generated by the Company or its Subsidiaries that have been disposed of or come
to rest at any site that has been included in any published U.S. federal, state
or local “superfund” site list or any other similar list of hazardous or toxic
waste sites published by any Governmental Entity within or outside the United
States which could reasonably be expected to result in a material liability of
the Company or its Subsidiaries; (iv) there are no underground storage
tanks located on, no polychlorinated biphenyls (“PCBs”) or PCB-containing
equipment used or stored on, and no hazardous waste as defined by the Resource
Conservation and Recovery Act, as amended, stored on, any site owned or
operated by the Company or its Subsidiaries, except for the storage of
hazardous waste in compliance with Environmental Laws.  For purposes of this Section 5.21, “Environmental
Laws” means any law, regulation, or other applicable requirement (whether
domestic or foreign) relating to (i) releases or threatened release of any
Hazardous Substance; (ii) pollution or protection of employee health or
safety, public health or the environment; or (iii) the manufacture,
handling, transport, use, treatment, storage, or disposal of any Hazardous
Substance.


 


6.                                       REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS


 


Each of the Purchasers hereby severally and
for itself alone represents and warrants to the Company with respect to its
purchase or acquisition of a Note and Shares to be issued upon conversion of
any Notes as follows:


 


6.1                                 Investment Experience.  Such Purchaser (i) is an “accredited
investor” as that term is defined in Rule 501(a) promulgated
under the Securities Act, (ii) is an investor experienced in the
evaluation of businesses similar to the Company, (iii) is able to fend for
himself or itself in the transactions contemplated by this Agreement, (iv) has
such knowledge and experience of financial, 


 


23

















 


business
and investment matters as to be capable of evaluating the merits and risks of
this investment, (v) has the ability to bear the economic risks of this
investment, (vi) was not organized or reorganized for the specific purpose
of acquiring the Notes, and (vii) has been afforded the opportunity to ask
questions of, and to receive answers from, the Company and to obtain additional
information, to the extent the Company has such information or could have acquired
it without unreasonable effort or expense, all as necessary for the Purchaser
to make an informed investment decision with respect to the purchase and/or
acquisition of the Notes; provided, that the foregoing shall not limit or
impair any representation, warranty, covenant or agreement of the Company
contained in any of this Agreement, or the right of such Purchaser to rely
thereon.


 


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


 


THIS NOTE AND
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS.  THIS NOTE AND SUCH
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THIS NOTE AND SUCH
SHARES AND UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF
SUCH ACT.


 


6.3                                 No Public Market.  The Purchaser understands that no public
market now exists for any of the Notes issued by the Company and that the
Company has made no assurances that a public market will ever exist for the
Notes.


 


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


 


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


 


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


 


24

















 


7.                                       COVENANTS


 


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


 


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


 


7.3                                 Compliance Certificates.  The Company shall deliver to the Purchasers’
Agent, within 120 days after the end of each fiscal year, an officers’
certificate stating that a review of the activities of the Company and its
Subsidiaries during the preceding fiscal year has been made under the
supervision of the signing officers with a view to determining whether the
Company has kept, observed, performed and fulfilled its obligations under this
Agreement, and further stating, as to each such officer signing such
certificate, that to the best of his or her knowledge, in such officer’s
capacity as an officer of the Company:


 


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


 


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


 


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


 


7.5                                 Registration of Shares.  Within 90 days after the Closing Date under
this Agreement the Company shall file a registration statement with the SEC to
register all of the Shares issuable upon conversion of the Notes pursuant to Section 4.1
and Shares payable in lieu of interest pursuant to Section 2.10 in
accordance with the terms of the Registration Rights Agreement.  The Company agrees to take the actions
reasonably necessary and within the Company’s power to have the SEC declare
such registration effective and to maintain the effectiveness of such
registration statement for 


 


25

















 


as long
as any Notes or Shares issuable upon conversion of the Notes remain
outstanding, except as otherwise provided in the Registration Rights Agreement.


 


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


 


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


 


8.                                       NEGATIVE COVENANTS


 


8.1                                 Company May Consolidate, etc. Only on Certain Terms.  The Company shall not,
directly or indirectly consolidate with or merge into any other Person (in a
transaction in which the Company is not the surviving corporation) or convey,
transfer or lease a substantial amount of its properties and assets to any
Person outside the ordinary course of business, unless:


 


(1)                                      in case the
Company shall consolidate with or merge into another Person (in a transaction
in which the Company is not the surviving corporation) or convey, transfer or
lease a substantial amount of its properties and assets to any Person, the
Person formed by such consolidation, or into which the Company is merged, or
the Person which acquires by conveyance or transfer, or which leases, a
substantial amount of the properties and assets of the Company shall be a
corporation or other limited liability entity organized and validly existing
under the laws of the United States of America, any State thereof or the
District of Columbia and shall expressly assume, by an indenture or guaranty
supplemental hereto, executed and delivered to the Purchasers, in form
satisfactory to the Purchasers’ Agent, the due and punctual payment of the
principal of, and interest on all the Notes and the performance or observance
of every covenant of this Agreement on the part of the Company to be performed
or observed and the conversion rights shall be provided for in accordance with Section 4,
by the Person (if other than the Company) formed by such consolidation or into
which the Company shall have been merged or by the Person which shall have
acquired the Company’s assets;


 


(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; and


 


(3)                                      the Company has
delivered to the Purchasers’ Agent an Officers’ Certificate stating that such
consolidation, merger, conveyance, transfer or lease and, comply with this Section and
that all conditions precedent herein provided for relating to such transaction
have been complied with.


 


26

















 


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


 


In the case of a
reclassification, consolidation, merger, sale or transfer of assets or other
transactions pursuant to which all or substantially all of the Common Stock
would be converted into other securities, cash or property, the right to
convert Notes into Shares pursuant to Section 4.1 will be changed into a
right to convert Notes into the kind and amount of other securities, cash or
property that the Holder would have received had the Holder converted such
Notes immediately prior to the transaction; provided that if the Common
Stock is converted into the right to receive more than a single type of
consideration (determined in part upon any form of stockholder election), the
kind and amount of consideration that the Holder would have received had the
Holder converted such Notes immediately prior to the transaction shall be
deemed to be the weighted average of the kind and amounts of consideration
received by the holders of any Common Stock that affirmatively make such an
election.


 


8.2                                 Successor Substituted.  Upon any consolidation of the Company with,
or merger of the Company into, any other Person or any conveyance, transfer or
lease of the properties and assets of the Company substantially as an entirety
in accordance with Section 8.1, there shall be an adjustment to the
Applicable Conversion Rate and the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Agreement, with the
same effect as if such successor Person had been named as the Company herein,
and thereafter, the predecessor Person shall be relieved of all obligations and
covenants under this Agreement and the Notes.


 


8.3                                 Additional Debt.  The Company shall not without the prior
written consent of the Purchaser’s Agent or the Holders of a
Majority-in-Interest of the Notes incur any debt for borrowed money subsequent
to the Purchase Agreement Closing Date, unless such debt by its terms is
expressly subordinated to the Notes in right of payment and to the Purchasers’
Security Interest in respect to the priority and enforcement of any security
interest in property of the Company securing such new debt.  In addition, without such consent, the
Company shall not issue any debt securities that are convertible into Common
Stock by the holders thereof at any conversion price that is effectively lower
than the Applicable Conversion Rate in effect from time to time.


 


9.                                       DEFAULT AND REMEDIES


 


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


 


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


 


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


 


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


 


27

















 


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


 


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


 


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


 


(A)                              commences a
voluntary case or proceeding;


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


28

















 


A default under clause (3) above
is not an Event of Default until the Purchasers’ Agent notifies the Company, or
the Holders of at least a Majority-in-Interest of the Notes then outstanding
notify the Company, in writing of the default, and the Company does not cure
the default within 30 days after receipt of such notice.  The notice given pursuant to this Section 9.1
must specify the default, demand that it be remedied and state that the notice
is a “Notice of Default.”  When any
default under this Section 9.1 is cured, it ceases.


 


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


 


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


 


9.4                                 Waiver of Defaults and Events of Default.  Subject to Section 9.6, the Holders of a
Majority-in-Interest of the Notes then outstanding by notice to the Company may
waive an existing default or Event of Default and its consequence, except a
default or Event of Default in the payment of the principal of, premium, if
any, or interest on any Note, a failure by the Company to convert any Notes
into Shares in accordance with the provisions of the Notes and this Agreement
or any default or Event of Default in respect of any provision of this
Agreement or the Notes which, under Section 9.6, cannot be modified or
amended without the consent of the Holder of each Note affected.  When a default or Event of Default is waived,
it is cured and ceases.


 


9.5                                 Limitations on Suits.  A Holder may not pursue any remedy with
respect to this Agreement or the Notes (except actions for payment of overdue
principal or interest or for the conversion of the Notes pursuant to Section 3.2
or Section 4) unless:


 


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


 


29

















 


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


 


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


 


9.6                                 Rights of Holders to Receive Payment and to Convert.  Notwithstanding any other
provision of this Agreement, the right of any Holder of a Note to receive
payment of the principal of and interest on the Note, on or after the
respective due dates expressed in the Note and this Agreement, to convert such
Note in accordance with Section 3.2 and Section 4 and to bring suit
for the enforcement of any such payment on or after such respective dates or
the right to convert, is absolute and unconditional and shall not be impaired
or affected without the consent of the Holder.


 


10.                                 CONDITIONS TO CLOSING


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


30

















 


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


 


11.                                 APPOINTMENT OF PURCHASERS’ AGENT


 


11.1                           Appointment; Joint Action.  Each Purchaser hereby irrevocably appoints
and authorizes the Purchasers’ Agent to act as its agent under this Agreement
and the other Loan Documents with such powers as are specifically delegated to
the Purchasers’ Agent by the terms of such Loan Documents, together with such
other powers as are reasonably incidental to such powers.


 


11.2                           Duties. 
The Purchasers’ Agent: (a) shall have no duties or responsibilities
except those expressly set forth in the Loan Documents, and shall not by reason
of any Loan Document be a trustee for any Purchaser; (b) shall not be
responsible to the Purchasers for any recitals, statements, representations or
warranties contained in any Loan Document, or in any certificate or other
document referred to or provided for in, or received by any of them under, any
Loan Document, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency or any Loan Document or any other document
referred to or provided for in any Loan Document or for any failure by the
Company or any other person or entity to perform any of its obligations under
any Loan Document (c) shall not be required to initiate or conduct any
litigation or collection proceedings under any Loan Document; and (d) shall
not be responsible for any action taken or omitted to be taken by it under any
Loan Document or under any other document or instrument referred to or provided
for in any Loan Document or in connection with any Loan Document.


 


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


 


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


 


11.5                           Resignation or Removal of Purchasers’ Agent.  Subject to the appointment
and acceptance of a successor Purchasers’ Agent as provided below, the
Purchasers’ Agent may resign at any time by notice to the Purchasers and the
Company, and either Purchasers’ Agent may be removed at any time with or
without cause by the Majority-in-Interest of the Notes.  Upon any such 


 


31

















 


resignation
or removal, the Purchasers shall have the right to appoint a successor
Purchasers’ Agent.  If no successor
Purchasers’ Agent shall have been so appointed by the Purchasers and shall have
accepted such appointment within 30 days after the retiring Purchasers’ Agent’s
giving of notice of resignation or the Majority-in-Interest of the Notes
removal of the retiring Purchasers’ Agent, then the retiring Purchasers’ Agent
may, on behalf of the Purchasers, appoint a successor Purchasers’ Agent,
provided that any such successor Purchasers’ Agent must be a Purchaser.  Upon the acceptance of any appointment as
Purchasers’ Agent by a successor Purchasers’ Agent, such successor Purchasers’
Agent shall thereupon succeed to and become vested with all the rights,
remedies, powers, privileges, duties and obligations of the retiring Purchasers’
Agent, and the retiring Purchasers’ Agent shall be discharged from its duties
and obligations under this Agreement and the other Loan Documents.  After any retiring Purchasers’ Agent’s
resignation or removal as Purchasers’ Agent, the provisions of this Section 11
shall continue in effect for its benefit in respect of any actions taken or omitted
to be taken by it while it was acting as Purchasers’ Agent.


 


12.                                 MISCELLANEOUS


 


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


 


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


 


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


 


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


 


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


 


32

















 


	
  If to Company:

  	
  Focus Enhancements, Inc.

  
	
   

  	
  1370 Dell
  Avenue

  
	
   

  	
  Campbell, CA
  95008

  
	
   

  	
  Fax: (408)
  866-4795

  
	
   

  	
  Email:
  [                   ]

  
	
   

  	
  Attention:
  Chief Financial Officer

  
	
   

  	
   

  
	
  If to
  Purchaser’s Agent:

  	
  Ingalls &
  Snyder LLC

  
	
   

  	
  61 Broadway

  
	
   

  	
  New York, NY
  10006

  
	
   

  	
  Fax: (212)
  269-7893

  
	
   

  	
  Attention:
  Thomas Boucher

  



 


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


 


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


 


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


 


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


 


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


 


33

















 


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


 


	
  COMPANY:

  	
  FOCUS
  ENHANCEMENTS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Brett Moyer

  	
   

  
	
   

  	
  Name:

  	
  Brett Moyer

  	
   

  
	
   

  	
  Title:

  	
  President
  & CEO

  	
   

  
	
   

  	
   

  
	
  PURCHASER:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
									



 


34

















 


EXHIBIT A


 


[Intentionally Omitted]


 


 


	
  Name

  	
   

  	
  Address

  	
   

  	
  Note Principal Amount

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  



 


1