exhibit10-25.htm


    
       

      
              

                  Exhibit
            10.25      
    

      

    


    


     

    THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE
      SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, ASSIGNED, PLEDGED
      OR
      HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
      SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
      SECURITIES LAWS OR AN EXEMPTION THEREFROM.

     

    AVISTAR
      COMMUNICATIONS CORPORATION

     

    4.5%
      CONVERTIBLE SUBORDINATED SECURED NOTE DUE 2010

     

    No.
      ____ U.S.$__________

     

    1.  Securities.

     

    This
      Security is one of a duly authorized series of 4.5% Convertible Subordinated
      Secured Notes due 2010 (the “Securities”) of Avistar Communications Corporation,
      a Delaware corporation (including any successor corporation, the
“Company”).  Capitalized terms used and not otherwise defined herein,
      shall have the respective meanings given to those terms in Section 8
      hereof.

     

    2.  Principal
      and Interest.

     

    (a)  The
      Company for value received, hereby promises to pay to _____________, or its
      registered assigns, the principal sum of U.S $____________ on January 4, 2010
      (the “Final Maturity Date”) and to pay interest thereon at the Interest Rate (as
      defined below) from January __, 2008, until repayment in full at the Final
      Maturity Date or conversion.  Interest is payable in cash in
      accordance with Section 2(b) hereof.

     

    (b)  This
      Security shall bear interest at the rate equal to 4.5% per
      annum.  Interest shall be paid semi-annually in arrears on June 4 and
      December 4 of each year (each an “Interest Payment Date”), commencing June ___,
      2008, with interest payable in U.S. dollars to the Holder in whose name this
      Security (or one or more predecessor Securities) was registered at the close
      of
      business on the preceding June 4 and December 4, respectively, of each year
      (each a “Regular Record Date”) (or, if such date is not a Business Day, at the
      close of business on the immediately succeeding Business Day).

     

    (c)  Interest
      on this Security shall be computed (i) for any full semi-annual period for
      which a particular Interest Rate is applicable, on the basis of a 360-day year
      of twelve 30-day months and (ii) for any period for less than a full
      semi-annual period for which a particular Interest Rate is applicable, on the
      basis of a 30-day month and, for such periods of less than a month, the actual
      number of days elapsed over a 30-day month.

     

    (d)  Interest
      shall be due and payable on this Security as follows:

     

    (1)  The
      Holder of this Security as of the close of business on a Regular Record Date
      shall be entitled (except as otherwise indicated in this Section 2) to
      receive and shall receive, as the registered Holder as of such Regular Record
      Date, interest on this Security on the corresponding Interest Payment
      Date.

     

    (2)  In
      the
      event that this Security is converted pursuant to Section 3, the Holder who
      converts this Security on any date other than an Interest Payment Date shall
      be
      entitled to accrued and unpaid interest from the preceding Interest Payment
      Date
      until the Conversion Date, or otherwise, on such Security; and the Holder that
      converts this Security after a Regular Record Date but prior to the
      corresponding Interest Payment Date will receive accrued and unpaid interest
      for
      such period on such Interest Payment Date.

     

    (e)  Payment
      of the principal of (and premium, if any, on) this Security shall be made upon
      the surrender of this Security to the Company, at its chief executive office
      (or
      such other office within the United States as shall be designated by the Company
      to the holder hereof) (the “Designated Office”), in such coin or currency of the
      United States of America as at the time of payment shall be legal tender for
      the
      payment of public and private debts.  Payment of principal (and
      premium, if any), interest and all other amounts payable with respect to the
      Securities (i) shall be made by check mailed to a Holder that holds an aggregate
      principal amount of securities of $100,000 or less or (ii) shall be made by
      wire
      transfer in immediately available funds to a Holder that holds an aggregate
      principal amount of Securities in excess of $100,000; provided that if
      the Holder entitled thereto shall not have furnished wire instructions in
      writing to the Company on or prior to the third Business Day immediately prior
      to the date on which the Company makes such payment, such payment may be made
      by
      U.S. dollar check mailed to the address of the Holder entitled thereto as such
      address shall appear in the Note Register.

     

    (f)  This
      Note
      shall not be prepaid prior to the Final Maturity Date without the consent of
      the
      Holder.

     

    3.  Conversion.

     

    (a)  (1)           The
      holder of this Security may convert the principal amount of this Security (or
      any portion thereof equal to $1,000 or any integral multiple of $1,000 in excess
      thereof) into Common Stock at any time on or after January 4, 2009 and prior
      to
      the repayment of this Note in full on or after the close of business on the
      Final Maturity Date, at the Conversion Price then in effect.

     

    The
      number of shares of Common Stock issuable upon conversion of this Security
      shall
      be determined by dividing the principal amount of this Security or portion
      hereof surrendered for conversion by the Conversion Price in effect on the
      Conversion Date.  The initial conversion price is $0.70 per share and
      is subject to adjustment as provided in this Section 3 (as such price may
      be adjusted, the “Conversion Price”).  To convert this Security, the
      Holder hereof shall: (w) send by facsimile (or otherwise deliver) a copy of
      the fully executed conversion notice in the form attached as Exhibit A
      hereto (the “Conversion Notice”) to the Company, (x) surrender or cause to
      be surrendered this Security, duly endorsed or assigned to the Company or in
      blank, along with a copy of the Conversion Notice as soon as practicable
      thereafter to the Company, and (y) pay all interest to which the Holder is
      not entitled, if any, pursuant to Section 2(d).  Upon receipt by
      the Company of a facsimile copy of a Conversion Notice from the Holder, the
      Company shall promptly send, via facsimile, a confirmation to the Holder stating
      that the Conversion Notice has been received, the date upon which the Company
      expects to deliver the Common Stock issuable upon such conversion and the name
      and telephone number of a contact person at the Company regarding the
      conversion.  The Company shall not be obligated to issue shares of
      Common Stock upon a conversion unless either this Security is delivered to
      the
      Company as provided above, or the Holder notifies the Company or the transfer
      agent for the Common Stock that this Security has been lost, stolen or destroyed
      and delivers the documentation to the Company required by
      Section 9(g)(4) hereof.

     

    As
      promptly as practicable on or after the Conversion Date, the Company shall
      issue
      and deliver to the Holder or its nominee (x) that number of shares of
      Common Stock issuable upon conversion of the portion of this Security being
      converted, (y) a new Security in the form hereof representing the balance
      of the principal amount hereof not being converted, if any, and (z) cash in
      lieu of any fractional shares pursuant to Section 3(a)(6).  The
      Company shall deliver to the Holder physical certificates representing the
      Common Stock issuable upon conversion.

     

    (2)  The
      Holder is not entitled to any rights of a holder of Common Stock until the
      Holder has converted this Security into Common Stock, and only to the extent
      this Security is deemed to have been converted into Common Stock pursuant to
      this Section 3.

     

    (3)  This
      Security shall be deemed to have been converted immediately prior to the close
      of business on the day of surrender of this Security for conversion in
      accordance with the foregoing provisions (such day, the “Conversion Date”), and
      at such time the rights of the Holder of this Security as the Holder hereof
      shall cease, and the Person or Persons entitled to receive the shares of Common
      Stock issuable upon conversion shall be deemed to be a stockholder of record
      on
      the Conversion Date; provided, however, that no surrender of this
      Security on any date that is not a Business Day shall be effective to constitute
      the person or persons entitled to receive the shares of Common Stock upon such
      conversion as the record holder or holders of such shares of Common Stock on
      such date, but such surrender shall be effective to constitute the person or
      persons entitled to receive such shares of Common Stock as the record holder
      or
      holders thereof for all purposes at the close of business on the next succeeding
      Business Day.

     

    (4)  If
      the
      Holder converts more than one Security at the same time, the number of shares
      of
      Common Stock issuable upon the conversion shall be based on the aggregate
      principal amount of Securities converted.

     

    (5)  If
      this
      Security is converted in part, the Company shall execute and deliver to the
      Holder a new Security equal in principal amount to the unconverted portion
      of
      this Security.

     

    (6)  The
      Company will not issue fractional shares of Common Stock upon conversion of
      this
      Security.  In lieu thereof, the Company will pay an amount in cash for
      the current market value of the fractional shares.  The current market
      value of a fractional share shall be determined (calculated to the nearest
      1/1000th of a
      share) by multiplying the Trading Price of the Common Stock on the Trading
      Day
      immediately prior to the Conversion Date by such fractional share and rounding
      the product to the nearest whole cent.

     

    (7)  The
      Company shall, if the Holder so elects, deliver the Common Stock issuable upon
      conversion of this Security to any third party designated by the Holder, subject
      to compliance with Sections 3(e) and 9(c) hereof.

     

    (b)  The
      Conversion Price will be subject to adjustments from time to time as
      follows:

     

    (1)  In
      case
      the Company shall hereafter pay a dividend or make a distribution to all holders
      of the outstanding Common Stock in shares of Common Stock, the Conversion Price
      in effect at the opening of business on the day following the Conversion Record
      Date shall be reduced by multiplying such Conversion Price by a
      fraction:

     

    (A)  the
      numerator of which shall be the number of shares of Common Stock outstanding
      at
      the close of business on the Conversion Record Date fixed for the determination
      of the holders entitled to such dividend or distribution; and

     

    (B)  the
      denominator of which shall be the sum of such number of shares referred to
      in
      (A) above and the total number of shares constituting such dividend or
      other distribution.

     

    Such
      reduction in the Conversion Price shall become effective immediately after
      the
      opening of business on the day following the Conversion Record
      Date.  If any dividend or distribution of the type described in this
      Section 3(b)(1) is declared but not so paid or made, the Conversion Price
      shall again be adjusted to the Conversion Price that otherwise would then be
      in
      effect if such dividend or distribution had not been declared.

     

    (2)  In
      case
      the outstanding shares of Common Stock shall be subdivided into a greater number
      of shares of Common Stock, the Conversion Price in effect at the opening of
      business on the day following the day upon which such subdivision becomes
      effective shall be proportionately reduced, and conversely, in case the
      outstanding shares of Common Stock shall be combined into a smaller number
      of
      shares of Common Stock, the Conversion Price in effect at the opening of
      business on the day following the day upon which such combination becomes
      effective shall be proportionately increased, such reduction or increase, as
      applicable, to become effective immediately after the opening of business on
      the
      day following the day upon which such subdivision or combination becomes
      effective.

     

    (3)  In
      case
      the Company shall issue rights or warrants (other than any rights or warrants
      issued pursuant to a rights plan for which an adjustment shall be provided
      pursuant to  Section 3(b)(4)) to all or substantially all holders
      of its outstanding shares of Common Stock entitling them to subscribe for or
      purchase shares of Common Stock at a price per share less than the Current
      Market Price on the Conversion Record Date fixed for the determination of the
      stockholders entitled to receive such rights or warrants, the Conversion Price
      shall be adjusted so that the same shall equal the price determined by
      multiplying the Conversion Price in effect at the opening of business on the
      day
      after such Conversion Record Date by a fraction:

     

    (A)  the
      numerator of which shall be the number of shares of Common Stock outstanding
      at
      the close of business on the Conversion Record Date, plus the number of shares
      which the aggregate offering price of the total number of shares so offered
      for
      subscription or purchase would purchase at such Current Market Price;
      and

     

    (B)  the
      denominator of which shall be the number of shares of Common Stock outstanding
      at the close of business on the Conversion Record Date, plus the total number
      of
      additional shares of Common Stock so offered for subscription or
      purchase.

     

    Such
      adjustment shall become effective immediately after the opening of business
      on
      the day following the Conversion Record Date fixed for determination of the
      stockholders entitled to receive such rights or warrants.  To the
      extent that shares of Common Stock are not delivered pursuant to such rights
      or
      warrants, upon the expiration or termination of such rights or warrants, the
      Conversion Price shall be readjusted to the Conversion Price that otherwise
      would then be in effect had the adjustments made upon the issuance of such
      rights or warrants been made on the basis of the delivery of only the number
      of
      shares of Common Stock actually delivered.  In the event that such
      rights or warrants are not so issued, the Conversion Price shall again be
      adjusted to be the Conversion Price that otherwise would then be in effect
      if
      the Conversion Record Date had not been fixed.  In determining whether
      any rights or warrants entitle the holders to subscribe for or purchase Common
      Stock at less than such Current Market Price, and in determining the aggregate
      offering price of such shares of Common Stock, there shall be taken into account
      any consideration received for such rights or warrants, the value of such
      consideration if other than cash to be determined by the Board of
      Directors.

     

    (4)  (A)           In
      case the Company shall, by dividend or otherwise, distribute to all or
      substantially all holders of its Common Stock shares of any class of capital
      stock of the Company (other than any dividends or distributions to which
      Section 3(b)(1) applies) or evidences of its indebtedness, cash or other
      assets, including securities, but excluding (i) any rights or warrants
      referred to in Section 3(b)(3), and (ii) dividends or distributions of
      stock, securities or other property or assets (including cash) in connection
      with a reclassification, change, merger, consolidation, statutory share
      exchange, combination, sale or conveyance to which Section 3(f) applies
      (such capital stock, evidences of its indebtedness, cash, other assets or
      securities being distributed hereinafter in this Section 3(b)(4) called the
“Distributed Assets”), then, in each such case, subject to clause (B) of
      this Section 3(b)(4), the Conversion Price shall be reduced so that the
      same shall be equal to the price determined by multiplying the Conversion Price
      in effect immediately prior to the close of business on the Conversion Record
      Date with respect to such distribution by a fraction:

     

    (i)  the
      numerator of which shall be the Current Market Price (as defined in Section
      3(b)(9)) on such date less the fair market value (as determined by the Board
      of
      Directors, whose determination shall be conclusive and set forth in a board
      resolution) on such date of the portion of the Distributed Assets so distributed
      applicable to one share of Common Stock (determined on the basis of the number
      of shares of Common Stock outstanding on the Conversion Record Date);
      and

     

    (ii)  the
      denominator of which shall be such Current Market Price.

     

    Such
      reduction in the Conversion Price shall become effective immediately prior
      to
      the opening of business on the day following the Conversion Record
      Date.  However, in the event that the then fair market value (as so
      determined) of the portion of the Distributed Assets so distributed applicable
      to one share of Common Stock is equal to or greater than the Current Market
      Price on the Conversion Record Date, in lieu of the foregoing adjustment,
      adequate provision shall be made so that the Holder of this Security shall
      have
      the right to receive upon conversion hereof (or any portion hereof) the amount
      of Distributed Assets the Holder would have received had the Holder converted
      this Security (or portion hereof) immediately prior to such Conversion Record
      Date.  In the event that such dividend or distribution is not so paid
      or made, the Conversion Price shall again be adjusted to be the Conversion
      Price
      that otherwise would then be in effect if such dividend or distribution had
      not
      been declared.

     

    (B)  If
      the
      Board of Directors determines the fair market value of any Distributed Assets
      with respect to any distribution for purposes of this Section 3(b)(4) by
      reference to the actual or when issued trading market for any Distributed Assets
      comprising all or part of such distribution, it must in doing so consider the
      prices in such market over the same period (the “Reference Period”) used in
      computing the Current Market Price to the extent possible, unless the Board
      of
      Directors in a board resolution determines in good faith that determining the
      fair market value during the Reference Period would not be in the best interest
      of the Holders.

     

    (5)  The
      Company may make such reductions in the Conversion Price, in addition to those
      required by Sections 3(b)(1), (2), (3) or (4), as the Board of Directors
      considers to be advisable to avoid or diminish any income tax to holders of
      Common Stock or rights to purchase Common Stock resulting from any dividend
      or
      distribution of stock (or rights to acquire stock) or from any even treated
      as
      such for income tax purposes or otherwise.

     

    (6)  No
      adjustment in the Conversion Price shall be required unless such adjustment
      would require an increase or decrease of at least 1% in such price;
provided, however, that any adjustments which by reason of this
      Section 3(b)(6) are not required to be made shall be carried forward and
      taken into account in any subsequent adjustment.  All calculations
      under this Section 3 shall be made by the Company in good faith and shall
      be made to the nearest cent or to the nearest one hundredth of a share, as
      applicable.  No adjustment need be made for a change in the par value
      or no par value of the Common Stock.

     

    (7)  Whenever
      the Conversion Price is adjusted as provided in Section 3(b), the Company
      shall compute the adjusted Conversion Price in accordance with Section 3(b)
      and shall prepare a certificate signed by an officer of the Company setting
      forth the adjusted Conversion Price and showing in reasonable detail the facts
      upon which such adjustment is based, and shall promptly deliver such certificate
      to the Holder of this Security.

     

    (8)  For
      purposes of this Section 3(b), the number of shares of Common Stock at any
      time outstanding shall not include shares held in the treasury of the Company
      but shall include shares issuable in respect of scrip certificates issued in
      lieu of fractions of shares of Common Stock.  The Company will not pay
      any dividend or make any distribution on shares of Common Stock held in the
      treasury of the Company.

     

    (9)  For
      purposes hereof:

     

    (A)  “Conversion
      Record Date” shall mean, with respect to any dividend, distribution or other
      transaction or event in which the holders of Common Stock have the right to
      receive any cash, securities or other property or in which the Common Stock
      (or
      other applicable security) is exchanged for or converted into any combination
      of
      cash, securities or other property, the date fixed for determination of
      stockholders entitled to receive such cash, securities or other property
      (whether such date is fixed by the Board of Directors or by statute, contract
      or
      otherwise).

     

    (i)  “Current
      Market Price” shall mean the average of the daily Trading Prices per share of
      Common Stock (or such other security as specified herein) for the ten
      consecutive Trading Days immediately prior to the date in question

     

    (c)  For
      purposes of this Section 3, the term “ex” date, when used with respect to any
      issuance or distribution, means the first date on which the Common Stock trades
      regular way on the relevant exchange or in the relevant market from which the
      Trading Price was obtained without the right to receive such issuance or
      distribution, with respect to any subdivision or combination of shares of Common
      Stock, means the first date on which the shares of Common Stock trade regular
      way on such exchange or in such market after the time at which such subdivision
      or combination becomes effective and with respect to any tender or exchange
      offer, means the first date on which the Common Stock trades regular way on
      such
      exchange or in such market after the Expiration Time of such offer.

     

    (d)  Whenever
      successive adjustments to the Conversion Price are called for pursuant to this
      Section 3(b), such adjustments shall be made to the Current Market Price as
      may be necessary or appropriate to effectuate the intent of this
      Section 3(b) and to avoid unjust or inequitable results as determined in
      good faith by the Board of Directors.

     

    (e)  In
      case
      at any time after the date hereof:

     

    (1)  the
      Company shall declare a dividend (or any other distribution) on its Common
      Stock
      that would result in an adjustment to the Conversion Price pursuant to this
      Section 3;

     

    (2)  the
      Company shall authorize the granting to the holders of its Common Stock of
      rights or warrants to subscribe for or purchase any shares of capital stock
      of
      any class (or of securities convertible into shares of capital stock of any
      class) or of any other rights;

     

    (3)  there
      shall occur any reclassification of the Common Stock of the Company (other
      than
      a subdivision or combination of its outstanding Common Stock, a change in par
      value, a change from par value to no par value or a change from no par value
      to
      par value), or any merger, consolidation, statutory share exchange or
      combination to which the Company is a party and for which approval of any
      stockholders of the Company is required, or the sale, transfer or conveyance
      of
      all or substantially all of the assets of the Company; or

     

    (4)  there
      shall occur the voluntary or involuntary dissolution, liquidation or winding
      up
      of the Company;

     

    the
      Company shall cause to be provided to the Holder of this Security in accordance
      with Section 9(f), at least 20 days (or 10 days in any case specified in
      clause (1) or (2) above) prior to the applicable record or effective date
      hereinafter specified, a notice stating:

     

    (A)  the
      date
      on which a record is to be taken for the purpose of such dividend, distribution,
      rights or warrants, or, if a record is not to be taken, the date as of which
      the
      holders of shares of Common Stock of record to be entitled to such dividend,
      distribution, rights or warrants are to be determined; or

     

    (B)  the
      date
      on which such reclassification, merger, consolidation, statutory share exchange,
      combination, sale, transfer, conveyance, dissolution, liquidation or winding
      up
      is expected to become effective, and the date as of which it is expected that
      holders of shares of Common Stock of record shall be entitled to exchange their
      shares of Common Stock for securities, cash or other property deliverable upon
      such reclassification, merger, consolidation, statutory share exchange, sale,
      transfer, dissolution, liquidation or winding up.

     

    Neither
      the failure to give such notice nor any defect therein shall affect the legality
      or validity of the proceedings or actions described in clauses (1) through
      (4) of this Section 3(c).

     

    (f)  The
      Company shall at all times reserve and keep available, free from preemptive
      rights, out of its authorized but unissued Common Stock, for the purpose of
      effecting the conversion of this Security, the full number of shares of Common
      Stock then issuable upon the conversion of this Security.  The Company
      covenants that all shares of Common Stock that may be issued upon conversion
      of
      this Security will upon issue be fully paid and nonassessable.

     

    (g)  Except
      as
      provided in the next sentence, the Company will pay any and all taxes (other
      than taxes on income) and duties that may be payable in respect of the issue
      or
      delivery of Common Stock upon conversion of this Security.  The
      Company shall not, however, be required to pay any tax or duty that may be
      payable in respect of any transfer involved in the issue and delivery of Common
      Stock in a name other than that of the Holder of this Security, and no such
      issue or delivery shall be made unless and until the Person requesting such
      issue has paid to the Company the amount of any such tax or duty, or has
      established to the satisfaction of the Company that such tax or duty has been
      paid.

     

    (h)  If
      any of
      following events occur:

     

    (1)  any
      reclassification or change of the outstanding shares of Common Stock (other
      than
      a change in par value, or from par value to no par value, or from no par value
      to par value, or as a result of a subdivision or combination), as a result
      of
      which holders of Common Stock shall be entitled to receive capital stock,
      securities or other property or assets (including cash) with respect to or
      in
      exchange for such Common Stock;

     

    (2)  any
      merger, consolidation, statutory share exchange or combination of the Company
      with another Person as a result of which holders of Common Stock shall be
      entitled to receive stock, securities or other property or assets (including
      cash) with respect to or in exchange for such Common Stock; or

     

    (3)  any
      sale
      or conveyance of the properties and assets of the Company as, or substantially
      as, an entirety to any other Person as a result of which holders of Common
      Stock
      shall be entitled to receive stock, securities or other property or assets
      (including cash) with respect to or in exchange for such Common
      Stock,

     

    then
      the
      Company or the successor or purchasing corporation, as applicable, shall execute
      with the Holder of this Security a supplemental agreement providing that this
      Security shall be convertible into the kind and amount of shares of capital
      stock and other securities or property or assets (including cash) that such
      Holder would have been entitled to receive upon such reclassification, change,
      merger, consolidation, statutory share exchange, combination, sale or conveyance
      had this Security been converted into Common Stock immediately prior to such
      reclassification, change, merger, consolidation, statutory share exchange,
      combination, sale or conveyance assuming the Holder, as a holder of Common
      Stock, did not exercise its rights of election, if any, as to the kind or amount
      of securities, cash or other property receivable upon such reclassification,
      change, merger, consolidation, statutory share exchange, combination, sale
      or
      conveyance (provided that, if the kind or amount of securities, cash or
      other property receivable upon such reclassification, change, merger,
      consolidation, statutory share exchange, combination, sale or conveyance is
      not
      the same for each of the shares of Common Stock in respect of which such rights
      of election shall not have been exercised (“Non-Electing Share”), then for the
      purposes of this Section 3(f) the kind and amount of securities, cash or
      other property receivable upon such reclassification, change, merger,
      consolidation, statutory share exchange, combination, sale or conveyance for
      each Non-Electing Share shall be deemed to be the kind and amount so receivable
      per share by a plurality of the Non-Electing Shares).  Such
      supplemental agreement shall provide for adjustments that shall be as nearly
      equivalent as may be practicable to the adjustments provided for in this
      Section 3.  If, in the case of any such reclassification, change,
      merger, consolidation, statutory share exchange, combination, sale or
      conveyance, the stock or other securities and assets receivable thereupon by
      a
      holder of Common Stock includes shares of stock or other securities and assets
      of a corporation other than the successor or purchasing corporation, as
      applicable, in such reclassification, change, merger, consolidation, statutory
      share exchange, combination, sale or conveyance, then such supplemental
      agreement shall also be executed by such other corporation and shall contain
      such additional provisions to protect the interests of the Holder as the Board
      of Directors shall reasonably consider necessary by reason of the
      foregoing.

     

    The
      above
      provisions of this Section shall apply to successive or series of related
      reclassifications, changes, mergers, consolidations, statutory share exchanges,
      combinations, sales and conveyances.

     

    (i)  The
      Company (i) shall use its reasonable efforts to effect all registrations
      with, and obtain all approvals by, all governmental authorities that may be
      necessary under any United States federal or state law (including the Securities
      Act, the Exchange Act and state securities and Blue Sky laws) for the Common
      Stock issuable upon conversion of this Security to be lawfully issued and
      delivered as provided herein, and thereafter publicly traded (if permissible
      under the Securities Act) and qualified or listed as contemplated by
      clause (ii); and (ii) shall use its reasonable efforts to list the
      Common Stock required to be issued and delivered upon conversion of this
      Security, prior to such issuance or delivery, on any national securities
      exchange on which outstanding Common Stock is listed immediately prior to such
      time of delivery.

     

    (j)  Unless
      and until the Company receives any necessary stockholder approval, no adjustment
      pursuant to Section 3(b)(3), 3(b)(4), 3(b)(5) or 3(k) shall cause the Conversion
      Price to be less than $0.35 (as adjusted for stock splits, combinations,
      reclassifications or similar events).

     

    (k)  If
      and
      whenever on or after the Issue Date, the Company issues or sells, or in
      accordance with this Section 3(k) is deemed to have issued or sold, any shares
      of Common Stock (including the issuance or sale of shares of Common Stock owned
      or held by or for the account of the Company, but excluding shares of Common
      Stock deemed to have been issued or sold by the Company in connection with
      any
      Excluded Security) for a consideration per share less than a  price
      (the "Applicable Price") equal to the Conversion Price in effect immediately
      prior to such issue or sale (the foregoing a "Dilutive Issuance"), then
      immediately after such Dilutive Issuance, the Conversion Price then in effect
      shall be reduced to an amount equal to the product of (A) the Conversion
      Price in effect immediately prior to such Dilutive Issuance and (B) the
      quotient determined by dividing (1) the sum of (I) the product derived by
      multiplying the Conversion Price in effect immediately prior to such Dilutive
      Issuance and the number of shares of Common Stock Deemed Outstanding immediately
      prior to such Dilutive Issuance plus (II) the consideration, if any,
      received by the Company upon such Dilutive Issuance, by (2) the product derived
      by multiplying (I) the Conversion Price in effect immediately prior to such
      Dilutive Issuance by (II) the number of shares of Common Stock Deemed
      Outstanding immediately after such Dilutive Issuance.  For purposes of
      determining the adjusted Conversion Price under this Section 3(k), the following
      shall be applicable:

     

    (1)  If
      the
      Company in any manner grants or sells any Options and the lowest price per
      share
      for which one share of Common Stock is issuable upon the exercise of any such
      Option or upon conversion or exchange or exercise of any Convertible Securities
      issuable upon exercise of such Option is less than the Applicable Price, then
      such share of Common Stock shall be deemed to be outstanding and to have been
      issued and sold by the Company at the time of the granting or sale of such
      Option for such price per share.  For purposes of this Section
      3(k)(1), the "lowest price per share for which one share of Common Stock is
      issuable upon the exercise of any such Option or upon conversion or exchange
      or
      exercise of any Convertible Securities issuable upon exercise of such Option"
      shall be equal to the sum of the lowest amounts of consideration (if any)
      received or receivable by the Company with respect to any one share of Common
      Stock upon granting or sale of the Option, upon exercise of the Option and
      upon
      conversion or exchange or exercise of any Convertible Security issuable upon
      exercise of such Option.  No further adjustment of the Conversion
      Price shall be made upon the actual issuance of such share of Common Stock
      or of
      such Convertible Securities upon the exercise of such Options or upon the actual
      issuance of such Common Stock upon conversion or exchange or exercise of such
      Convertible Securities.

     

    (2)  If
      the
      Company in any manner issues or sells any Convertible Securities and the lowest
      price per share for which one share of Common Stock is issuable upon such
      conversion or exchange or exercise thereof is less than the Applicable Price,
      then such share of Common Stock shall be deemed to be outstanding and to have
      been issued and sold by the Company at the time of the issuance of sale of
      such
      Convertible Securities for such price per share.  For the purposes of
      this Section 3(k)(2), the "lowest price per share for which one share of Common
      Stock is issuable upon such conversion or exchange or exercise" shall be equal
      to the sum of the lowest amounts of consideration (if any) received or
      receivable by the Company with respect to any one share of Common Stock upon
      the
      issuance or sale of the Convertible Security and upon the conversion or exchange
      or exercise of such Convertible Security.  No further adjustment of
      the Conversion Price shall be made upon the actual issuance of such share of
      Common Stock upon conversion or exchange or exercise of such Convertible
      Securities, and if any such issue or sale of such Convertible Securities is
      made
      upon exercise of any Options for which adjustment of the Conversion Price had
      been or are to be made pursuant to other provisions of this Section 3(k), no
      further adjustment of the Conversion Price shall be made by reason of such
      issue
      or sale.

     

    (3)  If
      the
      purchase price provided for in any Options, the additional consideration, if
      any, payable upon the issue, conversion,  exchange or exercise of any
      Convertible Securities, or the rate at which any Convertible Securities are
      convertible into or exchangeable or exercisable for Common Stock changes at
      any
      time, the Conversion Price in effect at the time of such change shall be
      adjusted to the Conversion Price which would have been in effect at such time
      had such Options or Convertible Securities provided for such changed purchase
      price, additional consideration or changed conversion rate, as the case may
      be,
      at the time initially granted, issued or sold.  For purposes of this
      Section 3(k)(3), if the terms of any Option or Convertible Security that was
      outstanding as of the Issue Date are changed in the manner described in the
      immediately preceding sentence, then such Option or Convertible Security and
      the
      Common Stock deemed issuable upon exercise, conversion or exchange thereof
      shall
      be deemed to have been issued as of the date of such change.  No
      adjustment shall be made if such adjustment would result in an increase of
      the
      Conversion Price then in effect.

     

    (4)  The
      fair
      value of any consideration other than cash or securities will be determined
      in
      good faith by the Board of Directors of the Company.

     

    (5)  If
      the
      Company takes a record of the holders of Common Stock for the purpose of
      entitling them (A) to receive a dividend or other distribution payable in Common
      Stock, Options or in Convertible Securities or (B) to subscribe for or purchase
      Common Stock, Options or Convertible Securities, then such record date will
      be
      deemed to be the date of the issue or sale of the Common Stock deemed to have
      been issued or sold upon the declaration of such dividend or the making of
      such
      other distribution or the date of the granting of such right of subscription
      or
      purchase, as the case may be.

     

    4.  Covenants
      of the Company.

     

    (a)  The
      Company covenants and agrees that it will duly and punctually pay or cause
      to be
      paid the principal of, premium (if any) and interest on this Security, at the
      respective times and in the manner provided for herein.

     

    (b)  Unless
      otherwise permitted herein, the Company will do or cause to be done all things
      necessary to preserve and keep in full force and effect its existence and the
      rights (charter and statutory) of the Company; provided, however,
      that the Company shall not be required to preserve any such right if
      (a) the Company shall determine in good faith that the preservation thereof
      is no longer desirable in the conduct of the business of the Company and that
      the loss thereof is not disadvantageous in any material respect to the Holder
      or
      (b) the Company shall no longer continue to have such right as a result of
      a good faith, arms-length transaction with a Person that is not an Affiliate
      of
      the Company.

     

    (c)  The
      Company covenants that it shall not at any time insist upon, plead, or in any
      manner whatsoever claim or take the benefit or advantage of, any stay, extension
      or usury law or other law that would prohibit or forgive the Company from paying
      all or any portion of the principal of, premium (if any), interest or other
      amounts due on this Security as contemplated herein, whenever enacted, now
      or at
      any time hereinafter in force, or which may affect the covenants of performance
      in this Security and the Company hereby expressly waives all benefit or
      advantage of any such law, and covenants that it will not, by resort to any
      such
      law, hinder, delay or impede the execution of any power granted herein to the
      Holder of this Security, but will suffer and permit the execution of every
      such
      power as though no such law had been enacted.

     

    (d)  The
      Company covenants not to incur any secured indebtedness for borrowed money,
      except for (i) indebtedness evidenced by the Securities issued under the
      Purchase Agreement, (ii) indebtedness secured by a lien that is otherwise
      permitted pursuant to clause (e), (k), (m), (n) and (o) of the definition of
      Permitted Liens as defined in the Security Agreement, (iii) Senior Indebtedness
      and (iv) any extension, refinance, renewal, replacement, defeasance or refunding
      of any indebtedness described in clauses (i) through (iii) above, provided
      that
      the principal amount of such indebtedness does not exceed the original principal
      amount of such indebtedness except by an amount equal to a reasonable premium
      and any other reasonable amount paid, including, fees and expenses reasonably
      incurred in connection with such extension, refinance, renewal, replacement,
      defeasance or refunding of such indebtedness.

     

    (e)  The
      Company covenants to make all payments under this Security, whether principal
      payments or interest payments, pro rata to each holder of a Security that has
      been issued pursuant to the Purchase Agreement.  For purposes of this
      Security, the term “pro rata” shall mean, when calculating a holder’s portion of
      any payment, that payment (expressed as a percentage) equal to a fraction (i)
      the numerator of which is the then outstanding principal amount of such holder’s
      Security and (ii) the denominator of which is the then aggregate outstanding
      principal amount of all Securities issued under the Purchase
      Agreement.  In the event that a holder receives payments in excess of
      its pro rata amount, then such holder shall hold in trust all such excess
      payments for the benefit of the other holders of the Securities and shall pay
      such amounts held in trust to such other holders upon demand by such
      holders.

     

    5.  Events
      of Default.

     

    (a)  “Event
      of
      Default”, wherever used herein, means any one of the following events (whatever
      the reason for such Event of Default and whether it shall be voluntary or
      involuntary or be effected by operation of law or pursuant to any judgment,
      decree or order of any court or any order, rule or regulation of any
      administrative or governmental body):

     

    (1)  the
      Company defaults in the payment of the principal or premium, if any (a
“Defaulted Payment”) on any of the Securities when the same becomes due and
      payable at the Final Maturity Date, upon declaration, when due for purchase,
      by
      the Company or otherwise, whether or not such payment is prohibited by Section
      7
      hereof;

     

    (2)  the
      Company defaults in the payment of an installment of interest on any of the
      Securities when the same becomes due and payable and such default continues
      for
      a period of seven days, whether or not such payment is prohibited by Section
      7;

     

    (3)  the
      Company fails to perform or observe any other term, covenant or agreement
      contained in this Security or Security Agreement and the default continues
      for a
      period of 20 days after written notice of such failure (or such shorter period
      as is provided for herein or therein), requiring the Company to remedy the
      same,
      shall have been given to the Company by the holders of more than 50% in
      aggregate principal amount of the outstanding Securities;

     

    (4)  the
      Company, or a Significant Subsidiary (A) fails to make any payment at
      maturity, including any grace period, in respect of any obligation for borrowed
      money evidenced by a note, debenture or bond in an outstanding principal amount
      in excess of $100,000 and such failure continues or (B) defaults with
      respect to any Instrument, which default results in the acceleration of
      Indebtedness represented by such Instrument in an amount in excess of $100,000
      in the case of clause (A) without such Indebtedness having been discharged
      or in
      the case of clause (B) such acceleration having been cured, waived, rescinded
      or
      annulled, and in the case of either of the foregoing clauses (A) and (B), for
      a
      period of 30 days after written notice to the Company by the holders of
      more than 50% in aggregate principal amount of the outstanding
      Securities;

     

    (5)  the
      entry
      by a court having jurisdiction in the premises of (A) a decree or order for
      relief in respect of the Company or any Significant Subsidiary in an involuntary
      case or proceeding under any applicable U.S. federal or state bankruptcy,
      insolvency, reorganization or other similar law or (B) a decree or order
      adjudging the Company or any Significant Subsidiary bankrupt or insolvent,
      or
      approving as properly filed a petition seeking reorganization, arrangement,
      adjustment or composition of or in respect of the Company or any Significant
      Subsidiary, under any applicable U.S. federal or state law, or appointing a
      custodian, receiver, liquidator, assignee, trustee, sequestrator or other
      similar official of the Company or of any substantial part of its property,
      or
      ordering the winding up or liquidation of its affairs, and the continuance
      of
      any such decree or order for relief or any such other decree or order unstayed
      and in effect for a period of 60 consecutive days; or

     

    (6)  the
      commencement by the Company or any Significant Subsidiary, of a voluntary case
      or proceeding under any applicable U.S. federal or state bankruptcy, insolvency,
      reorganization or other similar law or of any other case or proceeding to be
      adjudicated a bankrupt or insolvent, or the consent by the Company or any
      Significant Subsidiary, to the entry of a decree or order for relief in respect
      of the Company or any Significant Subsidiary in an involuntary case or
      proceeding under any applicable U.S. federal or state bankruptcy, insolvency,
      reorganization or other similar law or to the commencement of any bankruptcy
      or
      insolvency case or proceeding against the Company or any Significant Subsidiary,
      or the filing by the Company or any Significant Subsidiary of a petition or
      answer or consent seeking reorganization or relief under any applicable U.S.
      federal or state law, or the consent by the Company or any Significant
      Subsidiary to the filing of such petition or to the appointment of or the taking
      possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator
      or other similar official of the Company or any Significant Subsidiary or of
      any
      substantial part of its property, or the making by the Company or any
      Significant Subsidiary of an assignment for the benefit of creditors, or the
      admission by the Company or any Significant Subsidiary in writing of its
      inability to pay its debts generally as they become due, or the taking of
      corporate action by the Company or any Significant Subsidiary expressly in
      furtherance of any such action.

     

    A
      default
      under clause (3) or (4) above is not an Event of Default until the holders
      of more than 50% of the principal amount of the Securities at the time
      outstanding notify the Company of the default and the Company does not cure
      such
      default (and such default is not waived) within the time specified in
      clause (3) or (4) above after actual receipt of such notice. Any such
      notice must specify the default, demand that it be remedied and state that
      such
      notice is a "Notice of Default".

     

    The
      Company shall, within 30 days of the occurrence of a default, give to the Holder
      of this Security notice of all uncured defaults known to it and written notice
      of any event which with the giving of notice or the lapse of time, or both,
      would become an Event of Default, its status and what action the Company is
      taking or proposes to take with respect thereto.

     

    (b)  If
      an
      Event of Default (other than an Event of Default specified in
      Section 5(a)(5) or 5(a)(6) hereof with respect to the Company) occurs and
      is continuing, the holders of more than 50% in principal amount of the
      outstanding Securities, by written notice to the Company, may declare due and
      payable the principal and premium, if any, of this Security and all other
      outstanding Securities, plus any accrued and unpaid interest to the date of
      payment.  Upon a declaration of acceleration, such principal and
      premium, if any, and accrued and unpaid interest to the date of payment shall
      be
      immediately due and payable.

     

    If
      an
      Event of Default specified in Section 5(a)(5) or 5(a)(6) occurs with
      respect to the Company, the principal and premium, if any, and accrued and
      unpaid interest on this Security shall become and be immediately due and
      payable, without any declaration or other act on the part of the
      Holder.

     

    The
      holders of not less than a majority of the principal of the outstanding
      Securities may, on behalf of the holders of all of the Securities, rescind
      and
      annul an acceleration and its consequences (including waiver of any defaults)
      if:

     

    (1)  all
      existing Events of Default, other than the nonpayment of a Defaulted Payment
      on
      this Security and any of the other Securities that have become due solely
      because of the acceleration, have been remedied, cured or waived,
      and

     

    (2)  the
      rescission would not conflict with any judgment or decree of a court of
      competent jurisdiction;

     

    provided,
      however, that in the event such declaration of acceleration has been made
      based on the existence of an Event of Default under Section 5(a)(4) and the
      default with respect to the instrument for money borrowed which gave rise to
      such Event of Default has ceased or been cured, waived, rescinded or annulled,
      then such Event of Default shall be deemed to be likewise cured and any
      acceleration with respect thereto rescinded.  No such rescission shall
      affect any subsequent default or impair any right consequent
      thereon.

     

    (c)  If
      an
      Event of Default with respect to this Security occurs and is continuing, the
      holders of more than 50% in principal amount of the outstanding Securities
      may
      pursue any available remedy by proceeding at law or in equity to collect the
      Defaulted Payment or interest due and payable on this Security or to enforce
      the
      performance of any provision of this Security.

     

    (d)  Notwithstanding
      any other provision in this Security, the Holder of this Security shall have
      the
      right, which is absolute and unconditional, to receive payment of the principal,
      premium, if any, interest in respect of the Securities held by the Holder,
      on or
      after the respective due dates, to convert the Securities in accordance with
      Section 3 or to bring suit for the enforcement of any such payment on or
      after such respective dates or the right to convert, and such rights shall
      not
      be impaired or affected adversely without the consent of the
      Holder.

     

    (e)  If
      the
      Holder of this Security has instituted any proceeding to enforce any right
      or
      remedy under this Security and such proceeding has been discontinued or
      abandoned for any reason, or has been determined adversely to the Holder, then
      and in every such case, subject to any determination in such proceeding, the
      Company and the Holder shall be restored severally and respectively to their
      former positions hereunder and thereafter all rights and remedies of the Holder
      shall continue as though no such proceeding had been instituted.

     

    (f)  Except
      as
      otherwise provided herein, no right or remedy conferred in this Security upon
      the Holder is intended to be exclusive of any other right or remedy, and every
      right and remedy shall, to the extent permitted by law, be cumulative and in
      addition to every other right and remedy given hereunder or hereafter existing
      at law or in equity or otherwise.  The assertion or employment of any
      right or remedy hereunder, or otherwise, shall not prevent the concurrent
      assertion or employment of any other appropriate right or remedy.

     

    (g)  No
      delay
      or omission of the Holder of this Security to exercise any right or remedy
      accruing upon any Event of Default shall impair any such right or remedy or
      constitute a waiver of any such Event of Default or any acquiescence
      therein.  Every right and remedy given by this Section 5 or by law to
      the Holder may be exercised from time to time, and as often as may be deemed
      expedient, by the Holder.

     

    (h)  The
      Company covenants (to the extent that it may lawfully do so) that it will not
      at
      any time insist upon, or plead, or in any manner whatsoever claim to take the
      benefit or advantage of, any stay or extension law wherever enacted, now or
      at
      any time hereafter in force, which may affect the covenants or the performance
      of this Security; and the Company (to the extent that it may lawfully do so)
      hereby expressly waives all benefit or advantage of any such law and covenants
      that it will not hinder, delay or impede the execution of any power herein
      granted to the Holder hereof, but will suffer and permit the execution of every
      such power as though no such law had been enacted.

     

    6.  Consolidation,
      Merger, Etc.

     

    (a)  The
      Company shall not consolidate with or merge into any other Person or, directly
      or indirectly, convey, transfer, sell or lease its properties and assets
      substantially as an entirety to any Person (other than to a wholly-owned
      subsidiary of the Company) unless:

     

    (1)  in
      the
      event that the Company shall consolidate with or merge into another Person
      or
      convey, transfer, sell or lease its properties and assets substantially as
      an
      entirety to any Person, the Person formed by such consolidation or into which
      the Company is merged or the Person which acquires by conveyance, transfer
      or
      sale, or which leases, all or substantially all of the properties and assets
      of
      the Company shall be a corporation organized and validly existing under the
      laws
      of the United States of America, any State thereof or the District of Columbia,
      which shall expressly assume, if other than the Company, by an agreement
      supplemental hereto, executed and delivered to the Holder of this Security
      in
      form satisfactory to the Holder, the due and punctual payment of the principal
      of and any interest on this Security and the performance or observance of every
      covenant of this Security on the part of the Company to be performed or
      observed, including without limitation the conversion rights provided herein;
      and

     

    (2)  immediately
      after giving effect to such transaction, no Event of Default, and no event
      which, after notice or lapse of time or both, would become an Event of Default,
      shall have happened and be continuing.

     

    (b)  Upon
      any
      consolidation of the Company with, or merger of the Company into, any other
      Person or any conveyance, transfer, sale or lease of all or substantially all
      of
      the properties and assets of the Company in accordance with Section 6(a),
      the successor Person formed by such consolidation or into which the Company
      is
      merged or to which such conveyance, transfer, sale or lease is made shall
      succeed to, and be substituted for, and may exercise every right and power
      of,
      the Company under this Security with the same effect as if such successor Person
      had been named as the Company herein, and thereafter, except in the case of
      a
      lease, the predecessor Person shall be relieved of all obligations and covenants
      under this Security.

     

    7.  Subordination.

     

    (a)  The
      Company covenants and agrees, and the Holder of this Security by its acceptance
      hereof likewise covenants and agrees, that this Security is subject to the
      provisions of this Section 7, and each other Person holding this Security,
      whether upon original issue or upon transfer, assignment or exchange thereof,
      accepts and agrees to be bound by such provisions.

     

    The
      payment of the principal of, premium, if any, and interest on this Security
      shall, to the extent and in the manner hereinafter set forth, be subordinated
      in
      right of payment to the prior payment in full, in cash or in such other form
      of
      payment as may be acceptable to the holders of Senior Indebtedness, of all
      Senior Indebtedness, whether outstanding at the date of original issuance of
      this Security or thereafter incurred or created.

     

    The
      expression “payment in full” or “paid in full” or any similar term or phrase
      when used in this Security with respect to Senior Indebtedness shall mean the
      payment in full of all such Senior Indebtedness in cash or such other form
      of
      payment as may be acceptable to the holders of Senior Indebtedness, or, in
      the
      case of Senior Indebtedness consisting of contingent obligations in respect
      of
      letters of credit or other reimbursement obligations, the setting apart of
      cash
      sufficient to discharge such portion of Senior Indebtedness in an account for
      the exclusive benefit of the holders thereof, in which account such holders
      shall be granted a first priority perfected security interest in a manner
      reasonably acceptable to such holders.

     

    No
      provision of this Section 7 shall prevent the occurrence of any default or
      Event of Default under this Security.

     

    (b)  Payments
      to Holders.  No payment shall be made with respect to the principal of,
      or premium, if any, or interest on this Security, if:

     

    (1)  a
      default
      in the payment of principal, premium, if any, or interest or other payment
      due
      on any Senior Indebtedness occurs and is continuing beyond any applicable period
      of grace (a “Payment Default”); or

     

    (2)  a
      default, other than a Payment Default, occurs and is continuing with respect
      to
      Senior Indebtedness that then permits holders of the Senior Indebtedness as
      to
      which such default related to accelerate its maturity and the Company receives
      written notice of such default (a “Payment Blockage Notice”) from a
      representative of Senior Indebtedness (a “Non-Payment Default”).

     

    The
      Company may and shall resume payments on this Security (1) in the case of a
      Payment Default, on the date upon which such default is cured, waived or ceases
      to exist, and (2) in the case of a Non-Payment Default, on the earlier of
      the date on which the Non-Payment Default is cured, waived or ceases to exist
      or
      179 days have passed after the date on which the applicable Payment Blockage
      Notice is received and this Security otherwise permits payment at that
      time.

     

    No
      new
      period of payment blockage for a Non-Payment Default may be commenced pursuant
      to a Payment Blockage Notice unless and until 365 days shall have elapsed since
      the Company’s receipt of the immediately prior Payment Blockage
      Notice.  No Non-Payment Default that existed or was continuing on the
      date of delivery of any Payment Blockage Notice to the Company of this Security
      shall be, or be made, the basis for a subsequent Payment Blockage
      Notice.

     

    If
      payment of this Security is accelerated because of an Event of Default, the
      Company shall promptly notify holders of Senior Indebtedness of the
      acceleration.  The Company may not make any payments on the Securities
      until 120 days have passed after the occurrence of the acceleration of the
      Securities and the Company may then resume payments on the Securities at such
      time if the Company is then permitted to make such payments under the
      Securities.

     

    (c)  Bankruptcy
      and Dissolution, Etc.  Upon any payment by the Company, or distribution
      of assets of the Company of any kind or character, whether in cash, property
      or
      securities, to creditors upon any dissolution, winding-up, liquidation or
      reorganization of the Company, whether voluntary or involuntary or in
      bankruptcy, insolvency, receivership or other proceedings, all amounts due
      or to
      become due upon all Senior Indebtedness shall first be paid in full, in cash
      or
      in such other form of payment as may be acceptable to the holders of Senior
      Indebtedness, before any payment is made on account of the principal of,
      premium, if any, and interest on this Security; and upon any such dissolution,
      winding-up, liquidation or reorganization or bankruptcy, insolvency,
      receivership or other such proceedings, any payment by the Company, or
      distribution of assets of the Company of any kind or character, whether in
      cash,
      property or securities, to which the Holder of this Security would be entitled,
      but for the provisions of this Section 7, shall (except as aforesaid) be
      paid by the Company or by any receiver, trustee in bankruptcy, liquidating
      trustee, agent or other Person making such payment or distribution, or by the
      Holder of this Security if received by it, directly to the holders of Senior
      Indebtedness (pro rata to such holders on the basis of the respective amounts
      of
      Senior Indebtedness held by such holders, or as otherwise required by law or
      a
      court order) or their respective representative or representatives, or to the
      trustee or trustees under any indenture pursuant to which any instruments
      evidencing any Senior Indebtedness may have been issued, as their respective
      interests may appear, to the extent necessary to pay all Senior Indebtedness
      in
      full in cash or in such other form of payment as may be acceptable to the
      holders of Senior Indebtedness after giving effect to any concurrent payment
      or
      distribution to or for the holders of Senior Indebtedness, before any payment
      or
      distribution is made to the Holder of this Security.

     

    Notwithstanding
      the foregoing, in the event that the Holder of this Security receives any
      payment or distribution of assets of the Company of any kind in contravention
      of
      any term of this Security, whether in cash, property or securities, before
      all
      Senior Indebtedness is paid in full, in cash or such other form of payment
      as
      may be acceptable to the holders of Senior Indebtedness, then such payment
      or
      distribution shall be held by the recipient or recipients in trust for the
      benefit of, and shall immediately be paid over or delivered to, the holders
      of
      Senior Indebtedness or their respective representative or representatives,
      or to
      the trustee or trustees under any indenture pursuant to which any instruments
      evidencing any Senior Indebtedness may have been issued, as their respective
      interests may appear, as calculated by the Company, for application to the
      payment of all Senior Indebtedness remaining unpaid to the extent necessary
      to
      make payment in full, in cash or such other form of payment as may be acceptable
      to the holders of Senior Indebtedness, of all Senior Indebtedness remaining
      unpaid, after giving effect to any concurrent payment or distribution, or
      provision therefore, to or for the holders of such Senior
      Indebtedness.

     

    For
      purposes of Section 7(b) hereof and this Section 7(c), the words
“cash, property or securities” shall not be deemed to include shares of stock of
      the Company as reorganized or readjusted, or securities of the Company or any
      other corporation provided for by a plan of reorganization or readjustment,
      the
      payment of which is subordinated (at least to the extent provided in this
      Section 7 with respect to this Security) to the payment of all Senior
      Indebtedness which may at the time be outstanding.  The consolidation
      of the Company with, or the merger of the Company into, another corporation
      or
      the liquidation or dissolution of the Company following the conveyance or
      transfer of its property as an entirety, or substantially as an entirety, to
      another corporation upon the terms and conditions provided for in Section 6
      shall not be deemed a dissolution, winding-up, liquidation or reorganization
      for
      the purposes of this Section 7(c) if such other corporation shall, as
      a part of such consolidation, merger, conveyance or transfer, comply with the
      conditions stated in Section 6.

     

    (d)  Subrogation. 
      Subject to the payment in full in cash, or in such other form of payment as
      may
      be acceptable to the holders of Senior Indebtedness, of all Senior Indebtedness,
      the rights of the Holder of this Security shall be subrogated to the extent
      of
      the payments or distributions made to the holders of such Senior Indebtedness
      pursuant to the provisions of this Section 7 (equally and ratably with the
      holders of all indebtedness of the Company which by its express terms is
      subordinated to other indebtedness of the Company to substantially the same
      extent as this Security is subordinated and is entitled to like rights of
      subrogation) to the rights of the holders of Senior Indebtedness to receive
      payments or distributions of cash, property or securities of the Company
      applicable to the Senior Indebtedness until the principal of, and premium,
      if
      any, and interest on this Security shall be paid in full; and, for the purposes
      of such subrogation, no payments or distributions to the holders of the Senior
      Indebtedness of any cash, property or securities to which the Holder of this
      Security would be entitled except for the provisions of this Section 7, and
      no payment over pursuant to the provisions of this Section 7, to or for the
      benefit of the holders of Senior Indebtedness by holders of this Security,
      shall, as between the Company, its creditors other than holders of Senior
      Indebtedness, and the Holder of this Security, be deemed to be a payment by
      the
      Company to or on account of the Senior Indebtedness; and no payments or
      distributions of cash, property or securities to or for the benefit of the
      holder of this Security pursuant to the subrogation provisions of this
      Section 7, which would otherwise have been paid to the holders of Senior
      Indebtedness shall be deemed to be a payment by the Company to or for the
      account of this Security.  It is understood that the provisions of
      this Section 7 are and are intended solely for the purposes of defining the
      relative rights of the Holder of this Security, on the one hand, and the holders
      of the Senior Indebtedness, on the other hand.

     

    Nothing
      contained in this Section 7 or elsewhere in this Security is intended to or
      shall impair, as among the Company, its creditors other than the holders of
      Senior Indebtedness, and the Holder of this Security, the obligation of the
      Company, which is absolute and unconditional, to pay to the Holder of this
      Security the principal of, and premium, if any, and interest on the Security
      as
      and when the same shall become due and payable in accordance with their terms,
      or is intended to or shall affect the relative rights of the Holder of this
      Security and creditors of the Company other than the holders of the Senior
      Indebtedness, nor shall anything herein or therein prevent the Holder of this
      Security from exercising all remedies otherwise permitted by applicable law
      upon
      default under this Security, subject to the rights, if any, under this
      Section 7 of the holders of Senior Indebtedness in respect of cash,
      property or securities of the Company received upon the exercise of any such
      remedy.

     

    Upon
      any
      payment or distribution of assets of the Company referred to in this
      Section 7, the Holder of this Security shall be entitled to rely upon any
      order or decree made by any court of competent jurisdiction in that such
      bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings
      are pending, or a certificate of the receiver, trustee in bankruptcy,
      liquidating trustee, agent or other Person making such payment or distribution,
      delivered to the Holder of this Security, for the purpose of ascertaining the
      Persons entitled to participate in such distribution, the holders of the Senior
      Indebtedness and other indebtedness of the Company, the amount thereof or
      payable thereon, the amount or amounts paid or distributed thereon and all
      other
      facts pertinent thereto or to this Section 7.

     

    (e)  Notice. 
      The Company shall give prompt written notice to the Holder of this Security
      of
      any fact known to the Company that would prohibit the making of any payment
      of
      monies to in respect of this Security pursuant to the provisions of this
      Section 7.

     

    The
      Holder of this Security shall be entitled to rely on the delivery to it of
      a
      written notice by a Person representing itself to be a holder of Senior
      Indebtedness (or a trustee on behalf of such holder) to establish that such
      notice has been given by a holder of Senior Indebtedness or a trustee on behalf
      of any such holder or holders.  In the event that the Holder of this
      Security determines in good faith that further evidence is required with respect
      to the right of any Person as a holder of Senior Indebtedness to participate
      in
      any payment or distribution pursuant to this Section 7, the Holder of this
      Security may request such Person to furnish evidence to the reasonable
      satisfaction of the Holder of this Security as to the amount of Senior
      Indebtedness held by such Person, the extent to which such Person is entitled
      to
      participate in such payment or distribution and any other facts pertinent to
      the
      rights of such Person under this Section 7, and if such evidence is not
      furnished the Holder of this Security may defer any payment to such Person
      pending judicial determination as to the right of such Person to receive such
      payment.

     

    (f)  No
      Impairment of Subordination.  No right of any present or future holder
      of any Senior Indebtedness to enforce subordination as herein provided shall
      at
      any time in any way be prejudiced or impaired by any act or failure to act
      on
      the part of the Company or by any act or failure to act, in good faith, by
      any
      such holder, or by any noncompliance by the Company with the terms, provisions
      and covenants of this Security, regardless of any knowledge thereof which any
      such holder may have or otherwise be charged with.

     

    Without
      in any way limiting the generality of the foregoing paragraph, the holders
      of
      the Senior Indebtedness may, at any time and from time to time, without the
      consent of or notice to the Holder of this Security, without incurring
      responsibility to the Holder of this Security, and without impairing or
      releasing the subordination provided in this Security or the obligations of
      the
      Holder of this Security to the holders of the Senior Indebtedness, do any one
      or
      more of the following:  (a) change the manner, place, or terms of
      payment (including any change in the rate of interest) or extend the time of
      payment of, or renew, amend, modify, alter, or grant any waiver or release
      with
      respect to, or consent to any departure from, any Senior Indebtedness or any
      instrument evidencing the same or any agreement evidencing, governing, creating,
      guaranteeing or securing any Senior Indebtedness; (b) sell, exchange,
      release, or otherwise deal with any property pledged, mortgaged or otherwise
      securing Senior Indebtedness; (c) release any Person liable under or in
      respect of the Senior Indebtedness; (d) fail or delay in the perfection of
      liens securing the Senior Indebtedness; (e) exercise or refrain from
      exercising any rights against the Company and any other Person; or
      (f) amend, or grant any waiver or release with respect to, or consent to
      any departure from, any guarantee for all or any of the Senior
      Indebtedness.

     

    (g)  Certain
      Conversions Deemed Payment.  For the purposes of this Section 7
      only, (1) the issuance and delivery of junior securities upon conversion of
      this Security in accordance with Section 3 and in connection with the
      payment of interest in accordance with Section 2 shall not be deemed to
      constitute a payment or distribution on account of the principal of (or premium,
      if any) or interest on this Security or on account of the purchase or other
      acquisition of this Security, and (2) the payment, issuance or delivery of
      cash (excluding cash paid for fractional shares upon conversion of this Security
      in accordance with Section 3) shall be deemed to constitute payment on
      account of the principal of this Security.  For the purposes of this
      Section 7, the term “junior securities” means (a) shares of any stock of
      any class of the Company and (b) securities of the Company that are
      subordinated in right of payment to all Senior Indebtedness that may be
      outstanding at the time of issuance or delivery of such securities to
      substantially the same extent as, or to a greater extent than, this Security
      is
      so subordinated as provided in this Section 7.  Nothing contained
      in this Section 7 or elsewhere in this Security is intended to or shall
      impair, as among the Company, its creditors other than holders of Senior
      Indebtedness and the Holder of this Security, the right, which is absolute
      and
      unconditional, of the Holder of this Security to convert this Security in
      accordance with Section 3.

     

    (h)  Exclusions
      from Subordination and Subrogation.  Notwithstanding anything to
      the contrary set forth in this Section 7 or elsewhere in this Agreement, the
      obligations of the Holder of this Security set forth in this Section 7 shall
      not
      apply to the Segregated Assets (as defined in Section 8) and the Holder’s rights
      in the Segregated Assets shall be senior to, and take priority over, any and
      all
      rights of the holders of the Senior Indebtedness in the Segregated
      Assets.  The holders of the Senior Indebtedness have released any and
      all Liens (as defined in the Security Agreement) in the Segregated
      Assets.  In the event that the Holder receives the Segregated Assets
      pursuant to the terms of this Note and/or the Security Agreement, the Holder
      will have no obligation to transfer, assign or account for such Segregated
      Assets to the holders of the Senior Indebtedness.

     

    8.  Definitions.  Unless
      otherwise defined in this Security, the following capitalized
      terms shall have the following respective meanings when used
      herein:

     

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

     

    “Board
      of
      Directors” means the board of directors of the Company or any authorized
      committee of the board of directors.

     

    “Business
      Day” means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a
      day on which the banking institutions in the City of New York or Minneapolis,
      Minnesota are authorized or obligated by law or executive order to close or
      be
      closed.

     

    “Commission”
      means the United States Securities and Exchange Commission, or any other federal
      agency at the time administering the Securities and Exchange Act of 1934, as
      amended, or the Securities Act, whichever is the relevant statute for the
      particular purpose.

     

    “Common
      Stock” means any stock of any class of the Company which has no preference in
      respect of dividends or of amounts payable in the event of any voluntary or
      involuntary liquidation, dissolution or winding up of the Company and which
      is
      not subject to redemption by the Company.  However, subject to the
      provisions of Section 3(f) hereof, shares assumable on conversion of the
      Securities shall include only shares of the class designated as Common Stock,
      par value $0.001 per share, of the Company at the date of execution of this
      Security or shares of any class or classes resulting from any reclassification
      or reclassifications thereof and which have no preference in respect of
      dividends or of amounts payable in the event of any voluntary or involuntary
      liquidation, dissolution or winding up of the Company and which are not subject
      to redemption by the Company, provided that if at any time there shall be
      more than one such resulting class, the shares of each such class then so
      assumable shall be substantially in the proportion which the total number of
      shares of such class resulting from all such reclassifications bears to the
      total number of shares of all such classes resulting from all such
      reclassifications.

     

    “Common
      Stock Deemed Outstanding” means, at any given time, the number of shares of
      Common Stock outstanding immediately prior to such issue calculated on a fully
      diluted basis, as if all Convertible Securities had been fully converted into
      shares of Common Stock immediately prior to such issuance and any outstanding
      warrants, options or other rights for the purchase of either shares of Common
      Stock or Convertible Securities had been fully exercised immediately prior
      to
      such issuance (and the resulting securities fully converted into shares of
      Common Stock, if so convertible) as of such date, but excluding any Common
      Stock
      owned or held by or for the account of the Company or issuable upon conversion
      or exercise, as applicable of the Notes.

     

    “Conversion
      Date” means the date on
      which the Holder has satisfied all the requirements to convert this Security
      pursuant to Section 3(a).

     

    “Convertible
      Securities” means any stock or securities (other than Options) directly or
      indirectly convertible into or exercisable or exchangeable for Common
      Stock.

     

    “Credit
      Agreement” shall mean that Revolving Credit Promissory Note, as dated as of
      December 23, 2006, by the Company to the order of JPMorgan Chase Bank, N.A.,
      as
      amended from time to time.

     

    “Current
      Market Value” means the average of the high and low sales prices of the Common
      Stock as reported on the Nasdaq Stock Market or other Eligible Market on the
      applicable measurement date.

     

    “Defaulted
      Payment” has the meaning set forth in Section 5.1 hereof.

     

    “Eligible
      Market” means the New York Stock Exchange, the American Stock Exchange, the
      Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital
      Market, the OTC Bulletin Board, OTCQX or Pink Sheets.

     

    “Exchange
      Act” means the Securities Exchange Act of 1934, as amended and the rules and
      regulations promulgated thereunder.

     

    “Excluded
      Securities” means: (1)
      securities issued or issuable upon conversion of the Notes; (2) securities
      issued or issuable to officers, employees, directors, consultants, placement
      agents, and other service providers of the Company (or any subsidiary) pursuant
      to stock grants, option plans, purchase plans, agreements or other employee
      stock incentive programs or arrangements approved by the Board of Directors
      of
      the Company; (3) securities issued pursuant to the conversion or exercise of
      Options, warrants or any other Convertible Securities or exercisable securities
      outstanding as of the date of this Note; (4) securities issued or issuable
      as a
      dividend or distribution on Preferred Stock or Common Stock of the Company
      or
      pursuant to any stock split or recapitalization of the Company; (5) securities
      offered pursuant to a bona fide, firmly underwritten public offering pursuant
      to
      a registration statement filed under the Securities Act; (6) securities issued
      or issuable pursuant to the acquisition of another corporation by the Company
      by
      merger, purchase of substantially all of the assets or other reorganization
      or
      to a joint venture agreement, provided, that such issuances are approved
      by the Board of Directors of the Company; (7) securities issued or issuable
      to
      banks, equipment lessors or other financial institutions pursuant to a
      commercial leasing or debt financing transaction approved by the Board of
      Directors of the Company; (8) securities issued or issuable in connection with
      sponsored research, collaboration, technology license, development, OEM,
      marketing or other similar agreements or strategic partnerships approved by
      the
      Board of Directors of the Company; (9) securities issued to suppliers or third
      party service providers in connection with the provision of goods or services
      pursuant to transactions approved by the Board of Directors of the Company;
      (10)
      securities of the Company which are otherwise excluded by the affirmative vote
      or consent of more than 50% in principal amount of the outstanding Securities;
      and (11) any right, Option or warrant to acquire any security convertible into
      the securities included in the definition of Excluded Securities pursuant to
      subsections (1) through (10) above.

     

    “fair
      market value” shall mean, if there is a current market for the asset, debt or
      transaction in question, the amount that a willing buyer would pay a willing
      seller in an arm’s length transaction or, in the absence of a current market for
      such asset, debt or transaction, the amount determined in good faith by the
      Board of Directors that represents its determination of the fair market value
      of
      the asset.

     

    “Final
      Maturity Date” has the meaning set forth in Section 2 hereof.

     

    “Holder”
      means the person in whose name this Security is registered on the Note
      Register.

     

    “Issue
      Date” means January 4, 2008.

     

    “Note
      Register” means the register or other ledger maintained by the Company that
      records the record owners of the Securities.

     

    “Options”
      means any rights, warrants or options to subscribe for or purchase Common Stock
      or Convertible Securities.

     

    “Person”
      shall mean and include an individual, a partnership, a corporation (including
      a
      business trust), a joint stock company, a limited liability company, an
      unincorporated association, a joint venture or other entity or a governmental
      authority.

     

    “Purchase
      Agreement” means the Convertible Note Purchase Agreement, dated as of January 4,
      2008 among the Company and the initial holders of the Securities.

     

    “Securities”
      means the 4.5% Convertible Subordinated Secured Notes due January 4, 2010 or any of them
      (each, a “Security”), as amended or supplemented from time to time, that are
      issued under the Purchase Agreement.

     

    “Securities
      Act” means the Securities Act of 1933, as amended and the rules and regulations
      promulgated thereunder.

     

    “Security
      Agreement” means the Security Agreement, dated as of January 4, 2008 among the
      Company, the initial holders of the Securities and the Collateral Agent (as
      defined therein), as amended from time to time.

     

    “Segregated
      Assets” means the Company’s right, title and interest in the royalties or other
      funds or assets under that certain Patent License Agreement, dated July 17,
      2006, by and among, the Company, Sony Corporation and Sony Computer
      Entertainment, Inc., as amended, modified, supplemented or extended from time
      to
      time, or as any provision thereof may be waived, and any patent license
      agreement executed by the parties or their respective affiliates in substitution
      or replacement therefor and the
      Company’s rights to enforce payment or delivery of such royalties or other funds
      or assets.

     

    “Senior
      Indebtedness” means, unless expressly subordinated to or made on a parity with
      the amounts due under this Security, the principal of (and premium, if any),
      unpaid interest on and amounts reimbursable, fees, expenses, costs of
      enforcement and other amounts due in connection with, (i) indebtedness for
      borrowed money of the Company, to banks, commercial finance lenders or other
      lending institutions regularly engaged in the business of lending money and
      any
      guarantors of such indebtedness to whom the indebtedness may be assigned
      (excluding (A) any indebtedness convertible into equity securities of the
      Company and (B) indebtedness in connection with capital leases or operating
      leases used solely for the purchase, finance or acquisition of equipment and
      where such indebtedness is secured solely by such equipment), including, without
      limitation, indebtedness evidenced by the Credit Agreement, and (ii) any
      renewals, extensions, refinancings and refundings of, or amendments,
      modifications, or supplements to such facility, as such facility may be assigned
      to any guarantor of such facility; provided, however, that no indebtedness
      incurred by Company which causes the aggregate principal amount of such
      indebtedness outstanding to exceed $10,000,000 (but only to the extent of such
      excess) shall be Senior Indebtedness..

     

    “Significant
      Subsidiary” has the meaning assigned to it under Rule 405 of the Securities
      Act.

     

    “Subsidiary”
      means, in respect of any Person, any corporation, association, partnership
      or
      other business entity of which more than 50% of the total voting power of shares
      of capital stock or other interests (including partnership interests) entitled
      (without regard to the occurrence of any contingency) to vote in the election
      of
      directors, managers, general partners or trustees thereof is at the time owned
      or controlled, directly or indirectly, by (i) such Person; (ii) such
      Person and one or more Subsidiaries of such Person; or (iii) one or more
      Subsidiaries of such Person.

     

    “Trading
      Day” means:

     

    (1)  if
      the
      applicable security is listed on the Nasdaq Stock Market, a day on which the
      Nasdaq Stock Market is open for business;

     

    (2)  if
      that
      security is not listed on the Nasdaq Stock Market, a day on which trades may
      be
      made on the New York Stock Exchange;

     

    (3)  if
      that
      security is not so listed on the New York Stock Exchange or the Nasdaq Stock
      Market, a day on which the principal U.S. securities exchange on which the
      securities are listed is open for business; or

     

    (4)  if
      the
      applicable security is not so listed, admitted for trading or quoted, any day
      other than a Saturday or a Sunday or a day on which banking institutions in
      the
      State of New York are authorized or obligated by law or executive order to
      close.

     

    “Trading
      Price” of a security on any date of determination means:

     

    (1)  the
      closing sales price as reported by the Nasdaq Stock Market on such
      date;

     

    (2)  if
      such
      security is not so reported, the closing sale price (or, if no closing sale
      price is reported, the last reported sale price) of such security (regular
      way)
      on the New York Stock Exchange on such date;

     

    (3)  if
      such
      security is not listed for trading on the Nasdaq Stock Market or the New York
      Stock Exchange on any such date, the closing sale price as reported in the
      composite transactions for the principal U.S. securities exchange on which
      such
      security is so listed;

     

    (4)  if
      such
      security is not listed on a U.S. national or regional securities exchange,
      the
      OTC Bulletin Board or OTCQX or Pink Sheets;

     

    (5)  if
      such
      security is not so quoted on the OTC Bulletin Board or OTCQX or Pink Sheets,
      the
      average of the mid-point of the last bid and ask prices for such security on
      such date from at least two dealers recognized as market-makers for such
      security selected by the Company for this purpose; or

     

    (6)  if
      such
      security is not so quoted, the average of that last bid and ask prices for
      such
      security on such date from a dealer engaged in the trading of convertible
      securities selected by the Company for this purpose.

     

    9.  Miscellaneous.

     

    (a)  Any
      amount of principal, other than interest, on the Note which is not paid when
      due
      shall result in a late charge being incurred and payable by the Company in
      an
      amount equal to interest on such amount at the rate of twelve (12%) percent
      per
      annum from the date such amount was due until the same is paid in
      full.

     

    (b)  In
      any
      suit, action or proceeding for the collection of this Note or to enforce any
      of
      Holder's rights hereunder, Holder may recover all reasonable costs and expenses
      in connection with the suit, action or proceeding, including reasonable
      attorneys’ fees and disbursements, paid or incurred by the Holder, together with
      any and all other amounts provided by law.

     

    (c)  The
      rights and remedies provided to Holder in this Note (a) are not exclusive and
      are in addition to any other rights and remedies Holder may have at law or
      in
      equity, (b) shall be cumulative and may be exercised concurrent manner, and
      (c)
      may be exercised as often as occasion therefor shall arise.  The
      failure to exercise or delay in exercising any such right or remedy shall not
      be
      construed as a waiver or release thereof.

     

    (d)  (1)  The
      Company waives presentment, demand, protest and notice of default, dishonor
      and
      of any renewal or extension of this Note and consents to any such renewal or
      extension.

     

    (2)  All
      payments hereunder shall be made without set-off or counterclaim and in such
      amounts as may be necessary in order that all such payments shall not be less
      than the amounts otherwise specified to be paid hereunder.

     

    (3)  If
      any provision hereof shall for any reason be held to be invalid, illegal or
      unenforceable in any respect, such invalidity, illegality, or unenforceability
      shall not affect any other provisions hereof, and this Note shall be construed
      as if such invalid, illegal or unenforceable provision had never been contained
      herein.

     

    (4)  The
      Company hereby irrevocably submits, to the fullest extent it may effectively
      do
      so under applicable law, to the exclusive jurisdiction of any State or Federal
      Court in New York County, New York, for the purpose of any suit, action,
      proceeding or judgment relating to or arising out of this Note.

     

    (e)  No
      provision of this Security shall alter or impair the obligation of the Company,
      which is absolute and unconditional, to pay the principal of (and premium,
      if
      any) and interest, if any, on this Security at the times, places and rate,
      and
      in the coin or currency, herein prescribed or to convert this Security as herein
      provided.

     

    (f)  The
      Company will give prompt written notice to the Holder of this Security of any
      change in the location of the Designated Office.  Any notice to the
      Company or to the holder of this Security shall be given in the manner set
      forth
      in the Purchase Agreement; provided that the Holder of this Security, if
      not a party to such Purchase Agreement, may specify alternative notice
      instructions to the Company.

     

    (g)  (1)  The
      transfer of this Security is registrable on the Note Register upon surrender
      of
      this Security for registration of transfer at the Designated Office, duly
      endorsed by, or accompanied by a written instrument of transfer in form
      satisfactory to the Company duly executed by, the Holder hereof or such Holder’s
      attorney duly authorized in writing, and thereupon one or more new Securities,
      of authorized denominations and for the same aggregate principal amount, will
      be
      issued to the designated transferee or transferees.  Such Securities
      are issuable only in registered form without coupons in denominations of $1,000
      and any integral multiple thereof.  No service charge shall be made
      for any such registration of transfer, but the Company may require payment
      of a
      sum sufficient to recover any tax or other governmental charge payable in
      connection therewith.  Prior to due presentation of this Security for
      registration of transfer, the Company and any agent of the Company may treat
      the
      Person in whose name this Security is registered as the owner thereof for all
      purposes, whether or not this Security be overdue, and neither the Company
      nor
      any such agent shall be affected by notice to the contrary.

     

    (2)  This
      Security and the
      Common Stock issuable upon conversion of this Security have not been registered
      under the Securities Act, or the securities laws of any state or other
      jurisdiction.  Neither this Security nor the Common Stock issuable
      upon conversion of this Security nor any interest or participation herein may
      be
      reoffered, sold, assigned, transferred, pledged, encumbered or otherwise
      disposed of (a “Transfer”) in the absence of such registration or unless such
      transaction is exempt from, or not subject to, registration.  The
      Holder by its acceptance of this Security or the Common Stock issuable upon
      conversion of this Security agrees that it shall not offer, sell, assign,
      transfer, pledge, encumber or otherwise dispose of this Security or any portion
      thereof or interest therein (other than with respect to a Transfer pursuant
      to a
      registration statement that is effective at the time of such Transfer) only
      (a) to the Company, (b) to an Affiliate of the Holder, (c) to a
      person it reasonably believes to be an “accredited investor” within the meaning
      of Rule 501(a) under the Securities Act, or (d) pursuant to a
      transaction in compliance with Rule 144 under the Securities Act, and in
      the case of (b), (c) and (d) above in which the transferor furnishes
      the Company with such certifications, legal opinions or other information as
      the
      Company may reasonably request to confirm that such transfer is being made
      pursuant to an exemption from, or in a transaction not subject to, the
      registration requirements of the Securities Act.

     

    (3)  Upon
      presentation of this Security for registration of transfer at the Designated
      Office accompanied by (i) certification by the transferor that such
      transfer is in compliance with the terms hereof and (ii) by a written
      instrument of transfer in a form approved by the Company executed by the Holder,
      in person or by the Holder’s attorney thereunto duly authorized in writing, and
      including the name, address and telephone and fax numbers of the transferee
      and
      name of the contact person of the transferee, such Security shall be transferred
      on the Note Register, and a new Security of like tenor and bearing the same
      legends shall be issued in the name of the transferee and sent to the transferee
      at the address and c/o the contact person so indicated.  Transfers and
      exchanges of Securities shall be subject to such additional restrictions as
      are
      set forth in the legends on the Securities and to such additional reasonable
      regulations as may be prescribed by the Company as specified in
      Section 9(g)(2) hereof.  Successive registrations of
      transfers as aforesaid may be made from time to time as desired, and each such
      registration shall be noted on the Note register.

     

    (4)  Upon
      receipt by the Company of evidence reasonably satisfactory to it of the loss,
      theft, destruction or mutilation of this Security, and in the case of loss,
      theft or destruction, receipt of indemnity reasonably satisfactory to the
      Company and upon surrender and cancellation of this Security, if mutilated,
      the
      Company will deliver a new Security of like tenor and dated as of such
      cancellation, in lieu of such Security.

     

                          (5)  The
      Holder represents that it is an “accredited investor” within the meaning of
      Regulation D promulgated under the Securities Act.  The Holder has
      been advised that this Security has not been registered under the Securities
      Act, or any state securities laws and, therefore, cannot be resold unless it
      is
      registered under the Securities Act and applicable state securities laws or
      unless an exemption from such registration requirements is
      available.  The Holder is aware that the Company is under no
      obligation to effect any such registration or to file for or comply with any
      exemption from registration.  The Holder has not been formed solely
      for the purpose of making this investment and is acquiring the Security for
      its
      own account for investment, and not with a view to, or for resale in connection
      with, the distribution thereof.

     

    (6)  Neither
      this Security
      nor any term hereof may be amended or waived orally or in writing, except that
      any term of this Security and the other Securities may be amended and the
      observance of any term of this Security and the other Securities may be waived
      (either generally or in a particular instance and either retroactively or
      prospectively), and such amendment or waiver shall be applicable to all of
      the
      Securities, upon the approval of the Company and the holders of more than 50%
      of
      the outstanding principal amount of all then outstanding Securities;
provided, however, that any amendment that would (i) change the
      maturity of the principal of or any installment of interest on any of the
      Securities, (ii) reduce the principal amount of, or any premium or interest
      on,
      (iii) change the currency of payment of such note or interest thereon, (iv)
      impair the right to institute suit for the enforcement of any payment on or
      with
      respect to any note, (v) adversely affect the conversion rights of holders
      of
      the notes, (vi) reduce the percentage in aggregate principal amount of notes
      outstanding necessary to modify or amend the notes or to waive any past default;
      (vii) modify the provisions of the Securities with respect to subordination
      of the Securities in a manner adverse to the holders of the Securities in any
      material respect, (viii) impair the right of the holders of the Securities
      to
      convert the Securities into Common Stock or (ix) modify this
      Section 9(g)(6) shall, in each case, require the approval of the holder of
      each Security to which such amendment shall apply; providedfurther
      that the Company may, without the consent of any holder of the Securities,
      amend
      the Securities for the purpose (i) of adding to the Company’s covenants in the
      Securities for the benefit of the holders of the Securities, (ii) surrendering
      any right or power conferred upon the Company, (iii) providing for conversion
      rights of holders of the Securities if any reclassification or change of the
      Common Stock or any consolidation, merger or sale of all or substantially all
      of
      the Company’s assets occurs, (iv) providing for the assumption of the Company’s
      obligations to the holders of the Securities in the case of a merger,
      consolidation, conveyance, transfer or lease, (vi) curing any ambiguity or
      correcting or supplementing any defective provision contained in the Securities;
      provided that such modification or amendment does not, in the good faith opinion
      of the Board of Directors, materially adversely affect the interests of the
      holders of the Securities in any material respect, or (vii) adding or modifying
      any other provisions with respect to matters or questions arising under the
      Securities which the Company may deem necessary or desirable and which will
      not
      adversely affect the interests of the holders of the Securities.  The
      Company will not amend any provision of any other Security in a manner favorable
      to any holder thereof un­less a similar amendment is made or offered with
      respect to all of the Securities.  Each Holder of this Security by its
      acceptance hereof acknowledges and agrees that the subordination provisions
      of
      this instrument are for the benefit of the holders of the Senior Indebtedness
      and that, accordingly, no provision of Section 7 hereof may be amended or
      otherwise modified without the prior written consent of each holder of Senior
      Indebtedness at such time outstanding.

     

    (h)
      All
      covenants and agreements of the Company set forth in this Note shall be binding
      on the successors and assigns of the Company whether so expressed or
      not.

     

    (i)
      THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
      OF
      THE STATE OF NEW YORK.

     

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      of page intentionally left blank.]


    
      
              

                            
                          
      

               
    

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


     

    IN
      WITNESS WHEREOF, the Company has caused this Security to be duly
      executed.

     

    Dated:  January
      4, 2008

     

    AVISTAR
      COMMUNICATIONS CORPORATION

     

    By:                                                                

    Robert
      Habig, CFO

     

    Attest:                                                           

    Name:

    Title:

    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    [Avistar
      Communications Corporation Convertible Subordinated Secured
      Note]


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


     

    EXHIBIT
      A

     

    CONVERSION
      NOTICE

     

    


     

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

     

    Dated:                                                                    

     

    [Holder]

     

    By:

    Name:

    Title:

     

    If
      shares
      are to be registered in the name of a Person other than the holder, please
      print
      such Person’s name and address:

     

    


     

    Name

     

    


     

    Address

     

    


     

    Social
      Security or other Taxpayer Identification Number, if any

     

    If
      only a
      portion of the Securities is to be converted, please indicate:

     

    1.  Principal
      amount to be converted: $___________

     

    2.  Principal
      amount and denomination of Security representing unconverted principal amount
      to
      be issued:

     

    Amount:
      $________

     

    Denominations:
      $________ (any integral multiple of $1,000)

     

    


     

    


     

    


     

    



    
      
              

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            Convertible Subordinated Secured Note - EXECUTION
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