**Exhibit 4.10**

 

THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVENOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIESACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERREDEXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THESECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THESTATES OF THE UNITED STATES AND OTHER JURISDICTIONS.

 

**RAINING DATA CORPORATION**

 

**5% CONVERTIBLESUBORDINATED NOTE DUE 2008**

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| No.   -    |   | $                      |
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RAINING DATA CORPORATION, a Delaware corporation (the “Company”),for value received, hereby promises to pay to                                        ,or registered assigns, the principal sum of                                                      Dollars($                    )on May 30, 2008 and to pay interest thereon, from                      ,200  , or from the most recent interest payment date to whichinterest has been paid, quarterly on each January 1, April 1, July 1and October 1 in each year, commencing                      ,200  , at the rate of 5% per annum until the principal hereof is due and in the mannerset forth below. The Company, at its option, may pay interest due on eachinterest payment date either in cash or by issuing a note in substantially theform of this Security (but bearing interest from such interest payment date) (a“PIK Note”) having a principal amount equal to the interest due on suchdate.*** ***Theinterest so payable on any interest payment date or******the PIK Note soissuable******will be paid or issued******to the Person in whose name thisSecurity (or one or more predecessor Securities) is registered at 5:00 p.m.,California time, on the regular record date for such interest, which shall bethe date Five (5) Business Days immediately prior to the interest paymentdate.  Payment of the principal of thisSecurity shall be made upon the surrender of this Security to the Company, atits chief executive office (or such other office within the United States asshall be designated by the Company to the holder hereof) (the “DesignatedOffice”), in such coin or currency of the United States of America as atthe time of payment shall be legal tender for the payment of public and privatedebts.  Payment of interest in cash******and all other amounts payable incash with respect to this Security shall be made by wire transfer to theholder, provided that if the holder shall not have furnished wire instructionsin writing to the Company on or prior to the third Business Day immediatelyprior to the date on which the Company makes such payment, such payment may bemade by U.S. dollar check mailed to the address of the Person entitled theretoas such address shall appear in the Company security register.  PIK Notes issued from time to time shall be mailedvia certified mail, return receipt requested, to the address of the Personentitled thereto as such address shall appear in the Company security register.****** Capitalized terms used and not otherwisedefined herein, shall have the respective meanings given to those terms in Section 8hereof.

 

# **1.  Redemption. **This Security is subjectto redemption, as a whole or from time to time in part (in any amount that isan integral multiple of $1,000), upon not less than 30 nor more than 60 

 

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# days’ notice in the mannerprovided in Section 9(b) (provided that any conditions set forthbelow in this Section 1 are satisfied), at the election of the Company, ata redemption price of 100% of the principal amount thereof, together with accruedinterest to the redemption date, but interest installments whose statedmaturity is on or prior to such redemption date will be payable to the holderof this Security, or one or more predecessor Securities, of record at the closeof business on the relevant record dates referred to on the face hereof.

#  

# **2.  Conversion.**

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## (a)  (1) The holder of this Security is entitled at anytime and from time to time on or after              ,200   and before the close of business on May 29, 2008 (or,in case this Security is called for redemption or the holder hereof hasexercised his right to require the Company to repurchase this Security or aportion hereof pursuant to Section 3 hereof, then in respect of thisSecurity or such portion hereof, as the case may be, until and including, but(unless the Company defaults in making the payment due upon redemption orrepurchase) not after, 5:00 p.m., California time, on the Business Dayprior to the redemption date or the Repurchase Date, as the case may be), toconvert this Security (or any portion of the principal amount hereof that is anintegral multiple of $1,000), into fully paid and nonassessable Common Stock(as hereinafter defined) (calculated as to each conversion to the nearest 1/100of a share) of the Company at the rate (or at the then current adjusted rate ifan adjustment has been made as provided below) of 200 shares of Common Stockfor each $1,000 principal amount of Security (the “Conversion Rate”) bysurrender of this Security, duly endorsed or assigned to the Company or inblank to the Company at the Designated Office, accompanied by written notice tothe Company that the holder hereof elects to convert this Security (or if lessthan the entire principal amount hereof is to be converted, specifying the portionhereof to be converted).  Notwithstanding the foregoing, such holder shall be deemed for allpurposes to have converted this Security against delivery of the Common Stockand cash payable for fractional shares upon such conversion (which surrendermay take place before or after the date of such deemed conversion, withoutaffecting the validity thereof), immediately prior to the close of business onthe redemption date, if this Security is redeemed pursuant to Section 1hereof, if the Closing Price of the Common Stock for at least 20 Trading Dayswithin a period of any 30 consecutive Trading Days ending on the date prior tothe date of sending of the notice of redemption exceeds 150% of the ConversionPrice.  The term “Conversion Price” onany day shall equal $1,000 divided by the Conversion Rate in effect on suchday.

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(2)                                  In the event that the conversion of this Securityinto shares of Common Stock would require the Company and the holder of thisSecurity to file notification and report forms with the Federal TradeCommission and Antitrust Division of the Department of Justice (the “FTC”)pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended (the “HSR Act”), then the holder of this Security and theCompany agree (i) to use their best efforts to complete all applicablefilings and provide all necessary information as required pursuant to the HSRAct, and (ii) such conversion of this Security into shares of Common Stockshall not occur until such time as the required filings are made pursuant tothe HSR Act and the required waiting periods have passed or early terminationnotifications have been granted by the FTC.

 

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TheCompany shall, if the holder so elects, deliver the Common Stock issuable uponconversion of this Security to any third party designated by the holder,subject to compliance with Sections 2(f) and 9(c) – (g) hereof.

 

## (b)  The Conversion Rate will besubject to adjustments from time to time as follows:

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#### (1)                                  In case the Company shall pay or make a dividendor other distribution on Common Stock of the Company payable in Common Stock,the Conversion Rate in effect at the opening of business on the day followingthe Determination Date (as hereinafter defined) for such dividend or otherdistribution shall be increased by dividing such Conversion Rate by a fractionof which the numerator shall be the number of shares of Common Stockoutstanding at the close of business on such Determination Date and thedenominator shall be the sum of such number of shares of Common Stock and thetotal number of shares of Common Stock constituting such dividend or otherdistribution, such increase to become effective immediately after the openingof business on the day following such Determination Date.  For the purposes of this paragraph (1), thenumber of shares of Common Stock at any time outstanding shall not includeCommon Stock held in the treasury of the Company but shall include Common Stockissuable in respect of scrip certificates issued in lieu of fractions of CommonStock.  The Company will not pay anydividend or make any distribution on Common Stock held in the treasury of theCompany.

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#### (2)                                  In case the Company shall issue rights, optionsor warrants to all holders of its Common Stock entitling them to subscribe foror purchase Common Stock at a price per share less than the current marketprice per share (determined as provided in paragraph (8) of this Section 2(b))of the Common Stock on the Determination Date for such distribution, theConversion Rate in effect at the opening of business on the day following suchDetermination Date shall be increased by dividing such Conversion Rate by afraction of which the numerator shall be the number of shares of Common Stockoutstanding at the close of business on such Determination Date plus the numberof shares of Common Stock which the aggregate of the offering price of thetotal number of shares of Common Stock so offered for subscription or purchasewould purchase at such current market price and the denominator shall be thenumber of shares of Common Stock outstanding at the close of business on suchDetermination Date plus the number of shares of Common Stock so offered forsubscription or purchase, such increase to become effective immediately afterthe opening of business on the day following such Determination Date.  The Company will not issue any rights,options or warrants in respect of Common Stock held in the treasury of theCompany.  Upon the expiration ofany right, option or warrant to purchase Common Stock the issuance of whichresulted in an adjustment to the Conversion Rate pursuant to thisparagraph (2) of Section 2(b), if any such right, option orwarrant shall expire and shall not have been exercised, the Conversion Rate shallimmediately upon such expiration be recomputed to the Conversion Rate whichwould have been in effect had the adjustment of the Conversion Rate made uponthe issuance of such right, option or warrant been made on the basis ofoffering for subscription or purchase only that number of shares of CommonStock actually purchased upon the exercise of such right, option and warrantactually exercised.

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#### (3)                                  In case outstanding Common Stock shall besubdivided into a greater number of shares of Common Stock, the Conversion Ratein effect at the opening of business on the day following the day upon whichsuch subdivision becomes effective shall be 

 

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#### proportionatelyincreased, and, conversely, in case outstanding Common Stock shall each becombined into a smaller number of shares of Common Stock, the Conversion Ratein effect at the opening of business on the day following the day upon whichsuch combination becomes effective shall be proportionately reduced, suchincrease or reduction, as the case may be, to become effective immediatelyafter the opening of business on the day following the day upon which suchsubdivision or combination becomes effective.

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#### (4)                                  In case the Company shall, by dividend orotherwise, distribute to all holders of its Common Stock evidences of itsindebtedness, shares of any class of capital stock, or other property(including securities, but excluding (i) any rights, options or warrantsreferred to in paragraph (2) of this Section 2(b), (ii) anydividend or distribution paid exclusively in cash, (iii) any dividend ordistribution referred to in paragraph (1) of this Section 2(b) and(iv) any merger or consolidation to which Section 2(h) applies(the “Distributed Property”)), the Conversion Rate shall be adjusted sothat the same shall equal the rate determined by dividing the Conversion Ratein effect immediately prior to the close of business on the Determination Datefor such distribution by a fraction of which the numerator shall be the currentmarket price per share (determined as provided in paragraph (8) of this Section 2(b))of the Common Stock on such Determination Date less the then fair market value(as determined in good faith by the Board of Directors of the Company inaccordance with the provisions of this paragraph (4) of Section 2(b))of the portion of the assets, shares or evidences of indebtedness sodistributed applicable to one share of Common Stock and the denominator shallbe such current market price per share of the Common Stock, such adjustment tobecome effective immediately prior to the opening of business on the dayfollowing such Determination Date; provided, however, that if the DistributedProperty consists of shares of capital stock of a Subsidiary, the Company may,at its option and in lieu of the foregoing adjustment to the Conversion Rate,elect to make adequate provision so that the holder of this Security shall havethe right to receive upon conversion the amount of such shares of capital stockthat such holder of this Security would have received if such holder of thisSecurity had converted such Security on the record date.  If the Board of Directors determines the fairmarket value of any distribution for purposes of this paragraph (4) byreference to the actual or when issued trading market for any securitiesconstituting such distribution, it must in doing so consider the prices in suchmarket over the same period used in computing the current market price pershare pursuant to paragraph (8) of this Section 2(b).

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If theCompany should adopt a shareholder rights plan (a “Rights Plan”), uponconversion of this Security into Common Stock, the holder of this Security willreceive, in addition to the Common Stock, the rights described therein (whetheror not the rights have separated from the Common Stock at the time ofconversion), subject to the limitations set forth in the Rights Plan.  Any distribution of rights or warrantspursuant to the Rights Plan in compliance with the requirements set forth inthe immediately preceding sentence of this paragraph shall not constitute adistribution of rights or warrants pursuant to this Section 2(b).

 

Rights or warrantsdistributed by the Company to all holders of Common Stock entitling the holdersthereof to subscribe for or purchase shares of the Company’s capital stock(either initially or under certain circumstances), which rights or warrants,until the occurrence of a specified event or events (“TriggerEvent”):  (i) are deemed to be transferred withsuch shares of Common Stock; (ii) are not exercisable; and (iii) arealso issued in respect of future issuances of Common Stock, shall be 

 

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deemednot to have been distributed for purposes of this Section 2(b) (andno adjustment to the Conversion Rate under this Section 2(b) will berequired) until the occurrence of the earliest Trigger Event, whereupon suchrights and warrants shall be deemed to have been distributed and an appropriateadjustment (if any is required) to the Conversion Rate shall be made under thisSection 2(b).  If any such right orwarrant, including any such existing rights or warrants distributed prior tothe original issue date of this Security, are subject to events, upon theoccurrence of which such rights or warrants become exercisable to purchasedifferent securities, evidences of indebtedness or other assets, then the dateof the occurrence of any and each such event shall be deemed to be the date ofdistribution and record date with respect to new rights or warrants with suchrights (and a termination or expiration of the existing rights or warrantswithout exercise by any of the holders thereof).  In addition, in the event of any distribution(or deemed distribution) of rights or warrants, or any Trigger Event or otherevent (of the type described in the preceding sentence) with respect theretothat was counted for purposes of calculating a distribution amount for which anadjustment to the Conversion Rate under this Section was made, (x) in thecase of any such rights or warrants which shall all have been redeemed orrepurchased without exercise by any holders thereof, the Conversion Rate shallbe readjusted upon such final redemption or repurchase to give effect to suchdistribution or Trigger Event, as the case may be, as though it were a cashdistribution, equal to the per share redemption or repurchase price received bya holder or holders of Common Stock with respect to such rights or warrants(assuming such holder had retained such rights or warrants), made to allholders of Common Stock as of the date of such redemption or repurchase, and(y) in the case of such rights or warrants which shall have expired or beenterminated without exercise by any holders thereof, the Conversion Rate shall bereadjusted as if such rights and warrants had not been issued.

 

#### (5)                                  Incase the Company shall, by dividend or otherwise, distribute to all holders ofits Common Stock cash (excluding any cash that is distributed as part of adistribution referred to in paragraph (4) of Section 2(b)) inaggregate amount that, combined together with (I) the aggregate amount of anyother cash distributions to all holders of its Common Stock made exclusively incash within the twelve (12) months preceding the date of payment of suchdistribution and in respect of which no adjustment pursuant to thisparagraph (5) of Section 2(b) has been made and (II) theaggregate of any cash plus the fair market value (as determined by the Board ofDirectors, whose determination shall be conclusive and described in a boardresolution) of consideration payable in respect of any tender offer by theCompany or any of its subsidiaries for all or any portion of the Common Stockconcluded within the twelve (12) months preceding the date of payment of suchdistribution and in respect of which no adjustment pursuant to paragraph (6) ofSection 2(b) has been made (the “combined cash and tender amount”),exceeds ten percent (10%) of the product of the current market price per shareof the Common Stock (determined as provided in paragraph (7) of this Section 2(b))on the date for the determination of holders of shares of Common Stock entitledto receive such distribution times the number of shares of Common Stockoutstanding on such date (the “aggregate current market price”), then, and ineach such case, immediately after the close of business on such date fordetermination, the Conversion Rate shall be adjusted so that the same shallequal the rate determined by dividing the Conversion Rate in effect immediatelyprior to the close of business on the date fixed for determination of thestockholders entitled to receive such distribution by a fraction (i) thenumerator of which shall be equal to the current market price per share of theCommon Stock on the date fixed for such determination less an amount equal tothe quotient of (x) the excess of such combined cash and tender amount over tenpercent (10%) of such 

 

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#### aggregate current marketprice divided by (y) the number of shares of Common Stock outstanding on suchdate for determination and (ii) the denominator of which shall be equal tothe current market price per share of the Common Stock on such date fordetermination.

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(6)                                  In case of a tender offer made by theCompany or any Subsidiary of the Company for all or any portion of the CommonStock shall expire and such tender offer or exchange (as amended upon theexpiration thereof) shall require the payment to stockholders (based on theacceptance (up to any maximum specified in the terms of the tender offer) ofPurchased Shares (as defined below)) of an aggregate consideration having afair market value (as determined by the Board of Directors, whose determinationshall be conclusive and described in a board resolution), that combinedtogether with (I) the aggregate of the cash plus the fair market value (asdetermined by the Board of Directors, whose determination shall be conclusiveand described in a board resolution), as of the expiration of such tender orexchange offer, of consideration payable in respect of any other tender orexchange offer by the Company or any Subsidiary of the Company for all or anyportion of the Common Stock expiring within the 12 months preceding theexpiration of such tender or exchange offer and in respect of which noadjustment pursuant to this paragraph (6) of Section 2(b) hasbeen made and (II) the aggregate amount of any cash distributions to allholders of the Company’s Common Stock within twelve (12) months preceding the expirationof such tender or exchange offer and in respect of which no adjustment pursuantto paragraph (5) of Section 2(b) has been made (the “combinedtender and cash amount”) exceeds ten percent (10%) of the product of thecurrent market price per share of the Common Stock (determined as provided inparagraph (7) of this Section 2(b)) as of the last time (the “ExpirationTime”) tenders or exchange could have been made pursuant to such tenderor exchange offer (as it may be amended) times the number of shares of CommonStock outstanding (including any tendered or exchange shares) as of theExpiration Time, then, and in each such case, immediately prior to the openingof business on the day after the date of the Expiration Time, the ConversionRate shall be adjusted so that the same shall equal the rate determined bydividing the Conversion Rate immediately prior to close of business on the dateof the Expiration Time by a fraction (i) the numerator of which shall beequal to (A) the product of (I) the current market price per share ofCommon Stock on the date of the Expiration Time multiplied by (II) the numberof shares of Common Stock outstanding (including any tendered or exchangedshares) on the date of the Expiration Time less (B) the combined tenderand cash amount, and (ii) the denominator of which shall be equal to theproduct of (A) the current market price per share of the Common Stock asof the Expiration Time multiplied by (B) the number of shares of CommonStock outstanding (including any tendered or exchanged shares) as of theExpiration Time less the number of all shares validly tendered or exchanged andnot withdrawn as of the Expiration Time (the shares deemed so accepted up toand any such maximum, being referred to as the “PurchasedShares”).

 

#### (7)                                  For the purpose of any computation underparagraphs (2), (4), (5) or (6) of this Section 2(b), thecurrent market price per share of Common Stock on any date shall be calculatedby the Company and be deemed to be the average of the daily Closing Prices forthe five (5) consecutive Trading Days commencing ten (10) TradingDays before the earlier of (i) the day in question and (ii) the daybefore the “ex” date with respect to the issuance or distribution requiringsuch computation.  For purposes of thisparagraph, the term “ex date”, when used with respect to any issuance ordistribution, means the first date on which the Common Stock trades regular wayin the applicable securities market or on the applicable securities exchangewithout the right to receive such issuance or distribution.

 

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#### (8)                                  No adjustment in the Conversion Rate shall berequired unless such adjustment (plus any adjustments not previously made byreason of this paragraph (8)) would require an increase or decrease of at leastone percent (1%) in such rate; provided, however, that any adjustments which byreason of this paragraph (8) are not required to be made shall be carriedforward and taken into account in any subsequent adjustment.  All calculations under this Section 1shall be made to the nearest cent or to the nearest one-hundredth of a share,as the case may be.

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#### (9)                                  The Company may make such increases in theConversion Rate, for the remaining term of the Securities or any shorter term,in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) ofthis Section 2(b) as it considers to be advisable in order to avoidor diminish any income tax to any holders of Common Stock resulting from anydividend or distribution of stock or issuance of rights or warrants to purchaseor subscribe for stock or from any event treated as such for income taxpurposes.

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## (c)  Whenever the Conversion Rateis adjusted as provided in Section 2(b), the Company shall compute theadjusted Conversion Rate in accordance with Section 2(b) and shallprepare a certificate signed by the chief financial officer of the Companysetting forth the adjusted Conversion Rate and showing in reasonable detail thefacts upon which such adjustment is based, and shall promptly deliver suchcertificate to the holder of this Security.

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## (d)  In case:

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##### (1)  the Company shall declare adividend or other distribution on its Common Stock that would require anyadjustment pursuant to Section 2(b); or

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##### (2)  the Company shall authorizethe granting to the holders of its Common Stock of rights, options or warrantsto subscribe for or purchase any shares of capital stock of any class or of anyother rights; or

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##### (3)  of any reclassification of theCommon Stock of the Company, or of any consolidation, merger or share exchangeto which the Company is a party and for which approval of any shareholders ofthe Company is required, or of the conveyance, sale, transfer or lease of allor substantially all of the assets of the Company; or

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##### (4)  of the voluntary orinvoluntary dissolution, liquidation or winding up of the Company; or

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##### (5)  the Company or any Subsidiaryshall commence a tender offer for all or a portion of the Company’s outstandingCommon Stock (or shall amend any such tender offer);

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then the Company shall cause to be delivered to theholder of this Security, at least twenty (20) days (or ten (10) days inany case specified in clause (1) or (2) above) prior to theapplicable record, expiration or effective date hereinafter specified, a noticestating (x) the date on which a record is to be taken for the purpose of suchdividend, distribution, rights, options or warrants, or, if a record is 

 

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not to be taken, the date as of which the holders ofCommon Stock of record to be entitled to such dividend, distribution, rights,options or warrants are to be determined, (y) the date on which the right tomake tenders under such tender offer expires or (z) the date on which suchreclassification, consolidation, merger, conveyance, transfer, sale, lease,dissolution, liquidation or winding up is expected to become effective, and thedate as of which it is expected that holders of Common Stock of record shall beentitled to exchange their Common Stock for securities, cash or other propertydeliverable upon such reclassification, consolidation, merger, conveyance,transfer, sale, lease, dissolution, liquidation or winding up.  Neither the failure to give such notice norany defect therein shall affect the legality or validity of the proceedingsdescribed in clauses (1) through (5) of this Section 2(d).

 

## (e)  The Company shall at all timesreserve and keep available, free from preemptive rights, out of its authorizedbut unissued Common Stock, for the purpose of effecting the conversion of theSecurity, the full number of shares of Common Stock then issuable upon theconversion of this Security.

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## (f)  Except as provided in the nextsentence, the Company will pay any and all taxes and duties that may be payablein respect of the issue or delivery of Common Stock on conversion of theSecurity.  The Company shall not,however, be required to pay any tax or duty which may be payable in respect ofany transfer involved in the issue and delivery of Common Stock in a name otherthan that of the holder of this Security, and no such issue or delivery shallbe made unless and until the Person requesting such issue has paid to theCompany the amount of any such tax or duty, or has established to the satisfactionof the Company that such tax or duty has been paid.

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## (g)  The Company agrees that allCommon Stock which may be delivered upon conversion of the Security, upon suchdelivery, will have been duly authorized and validly issued and will be fullypaid and nonassessable (and shall be issued out of the Company’s authorized butunissued Common Stock) and, except as provided in Section 2(f), theCompany will pay all taxes, liens and charges with respect to the issuethereof.

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## (h)  In case of any recapitalizationor reclassification of the Common Stock (other than a change in par value, oras a result of a subdivision or combination covered by paragraph (3) ofthis Section 2(b)), or any consolidation of the Company with any otherPerson, any merger of the Company into another Person or of another Person intothe Company (other than a merger which does not result in a reclassification,conversion, exchange or cancellation of the outstanding Common Stock), or anyconveyance, sale, transfer or lease of all or substantially all of theproperties and assets of the Company (collectively, a “CapitalReorganization”), the Company or the Person formed by such CapitalReorganization, as the case may be, shall execute and deliver to the holder ofthis Security a supplemental agreement providing that such holder has the rightthereafter, during the period this Security shall be convertible as specifiedin Section 2(a), to convert this Security only into the kind and amount ofsecurities, cash and other property receivable upon such Capital Reorganizationby a holder of the number of shares of Common Stock of the Company into whichthis Security might have been converted immediately prior to such CapitalReorganization, assuming such holder of Common Stock of the Company (i) isnot a Person with which the Company consolidated, into which the Company mergedor which merged into the Company or to which any conveyance, sale, transfer orlease was made, as the case may be (a “ConstituentPerson”), oran 

 

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## Affiliateof a Constituent Person and (ii) failed to exercise its rights ofelection, if any, as to the kind or amount of securities, cash and otherproperty receivable upon such Capital Reorganization (provided that if the kindor amount of securities, cash and other property receivable upon such CapitalReorganization is not the same for each share of Common Stock of the Companyheld immediately prior to such Capital Reorganization by others than aConstituent Person or an Affiliate thereof and in respect of which such rightsof election shall not have been exercised (“Non-electingShare”),then for the purpose of this Section 2(h) the kind and amount ofsecurities, cash and other property receivable upon such Capital Reorganizationby the holders of each Non-electing Share shall be deemed to be the kind andamount so receivable per share by a plurality of the Non-electing Shares).  Such supplemental agreement shall provide foradjustments which, for events subsequent to the effective date of suchsupplemental agreement, shall be equivalent to the adjustments provided for inthis Section 2.  The aboveprovisions of this Section 2(h) shall similarly apply to successiveCapital Reorganizations.  If this Section 2(h) appliesto any event or occurrence, then the other provisions of Section 2(b) shallnot apply.

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## (i)  The Company (i) willeffect all registrations with, and obtain all approvals by, all governmentalauthorities that may be necessary under any United States Federal or state law(including the Securities Act, the Exchange Act and state securities and BlueSky laws) for the Common Stock issuable upon conversion of this Security to belawfully issued and delivered as provided herein, and thereafter publiclytraded (if permissible under the Securities Act) and qualified or listed ascontemplated by clause (ii) (it being understood that the Company shallnot be required to register the offer, sale or resale of Common Stock issuableon conversion hereof under the Securities Act except pursuant to theRegistration Rights Agreement between the Company and the initial holder ofthis Security); and (ii) if required, will list the Common Stock requiredto be issued and delivered upon conversion of Securities, prior to suchissuance or delivery, on each national securities exchange on which outstandingCommon Stock is listed or quoted at the time of such delivery, or if the CommonStock is not then listed on any securities exchange, to qualify the CommonStock for quotation on the Nasdaq National Market or such other inter-dealerquotation system, if any, on which the Common Stock is then quoted.

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# **3.  Right to Require Repurchase.**

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## (a)  In the event that a Change inControl (as hereinafter defined) shall occur, then the holder of this Security shallhave the right, at such holder’s option, to require the Company to repurchase,and upon the exercise of such right the Company shall repurchase, thisSecurity, or any portion of the principal amount hereof that is equal to $1,000or any integral multiple thereof, on the date (the “Repurchase Date”) that is30 Trading Days (or such longer period as required by applicable law) after thedate on which the Company gives notice of such Change of Control to the holderof this Security, at a purchase price equal to the Repurchase Price (ashereinafter defined).  The Company agreesto give the holder of this Security notice, in the manner provided in Section 9(b),of any Change in Control, promptly and in any event within five (5) TradingDays of the occurrence thereof.

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## (b)  To exercise a repurchaseright, the holder shall deliver to the Company on or before the 5th day priorto the Repurchase Date, together with this Security, written notice of theholder’s exercise of such right, which notice shall set forth the name of theholder, the principal 

 

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## amountof this Security to be repurchased (and, if this Security is to be repurchasedin part, the portion of the principal amount thereof to be repurchased) and a statementthat an election to exercise the repurchase right is being made thereby.  Such written notice shall be irrevocable,except that the right of the holder to convert this Security (or the portionhereof with respect to which the repurchase right is being exercised) shallcontinue until the close of business on the Trading Day prior to the RepurchaseDate.

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## (c)  In the event a repurchaseright shall be exercised in accordance with the terms hereof, the Company shallpay or cause to be paid to the holder the Repurchase Price in cash on theRepurchase Date in the manner set forth in the introductory paragraph to thisSecurity.

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## (d)  If this Security is to berepurchased only in part, it shall be surrendered to the Company at theDesignated Office (with, if the Company so requires, due endorsement by, or awritten instrument of transfer in form satisfactory to the Company dulyexecuted by, the holder hereof or his attorney duly authorized in writing), andthe Company shall execute and make available for delivery to the holder withoutservice charge, a new Security or Securities, containing identical terms andconditions, each in an authorized denomination in aggregate principal amountequal to and in exchange for the unrepurchased portion of the principal of theSecurity so surrendered.

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## (e)  For purposes of this Section 3:

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(1)                                  the term “beneficial owner” shall be determinedin accordance with Rule 13d-3 promulgated by the Securities and ExchangeCommission pursuant to the Exchange Act;

 

#### (2)                                  a “Change in Control” shall be deemed to haveoccurred at the time, after the original issuance of this Security, of:

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### (i) the acquisition by any Person of beneficial ownership, directly orindirectly, through a purchase, merger or other acquisition transaction orseries of transactions, of shares of capital stock of the Company entitlingsuch Person to exercise 50% or more of the total voting power of all shares ofcapital stock of the Company entitled to vote generally in the elections ofdirectors (any shares of voting stock of which such Person is the beneficialowner that are not then outstanding being deemed outstanding for purposes ofcalculating such percentage) other than any such acquisition by the Company orany employee benefit plan of the Company; or

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### (ii) any consolidation or merger of the Company with or into, any other Person, any merger of another Personwith or into the Company, or any conveyance, transfer, sale, lease or otherdisposition of all or substantially all of the assets of the Company to anotherPerson (other than (a) any such transaction pursuant to which holders ofCommon Stock immediately prior to such transaction have the entitlement toexercise, directly or indirectly, 50% or more of the total voting power of allshares of capital stock entitled to vote generally in the election of directorsof the continuing or surviving Person immediately after such transaction and (b) anymerger (x) which does not result in any reclassification, conversion, exchangeor cancellation of outstanding Common Stock or (y) which is effected solely tochange the jurisdiction of incorporation of the Company and results in areclassification, conversion or exchange of outstanding Common Stock intosolely shares of common stock);

 

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###  

However, a Change inControl will not be deemed to have occurred if (i) the Closing Price pershare of the Company’s Common Stock for any five (5) Trading Days withinthe period of ten (10) consecutive Trading Days ending immediately after thelater of the Change in Control or the public announcement of the Change inControl, in the case of a Change in Control relating to an acquisition ofcapital stock, or the period of ten (10) consecutive Trading Days endingimmediately before the Change in Control, in the case of Change in Controlrelating to a merger, consolidation or asset sale, equals or exceeds 105% ofthe Conversion Price of this Security; or (ii) 95% of the consideration(excluding cash payments for fractional shares and cash payments made pursuantto dissenters’ appraisal rights) in a merger or consolidation otherwiseconstituting the Change of Control described in clause (ii) aboveconsists of shares of common stock traded or to be traded immediately followingsuch Change of Control on a national securities exchange or quoted on theNasdaq National Market and as a result of such transaction or transactions thisSecurity becomes convertible solely into such common stock.

 

### (iii) the “current market price” of a share of Common Stock shall be theClosing Price of the Common Stock on the Trading Day immediately preceding theRepurchase Date; and

###  

### (iv) “Repurchase Price” means the sum of (a) 100% of the principalamount of this Security to be repurchased pursuant to this Section 3 and (b) accruedand unpaid interest on this Security to the date of payment.

###  

# **4.  Certain Covenants.**

#  

## (a)  This Security is entitled to the benefits of the covenants set forth in the Note Agreement.

##  

## (b)  Whether or not required bythe rules and regulations of the Commission, so long as this Security isoutstanding, the Company will furnish to the holders of this Security (i) allquarterly and annual financial information that would be required to becontained in a filing with the Commission on Forms 10-QSB and 10-KSB (orany successor forms) if the Company were required to file such Forms, includinga “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and, with respect to the annual information only, a report thereonby the Company’s certified independent accountants and (ii) all currentreports that would be required to be filed with the Commission on Form 8-K(or any successor form) if the Company were required to file such reports.  In addition, whether or not required by the rules andregulations of the Commission, the Company will file a copy of all suchinformation and reports with the Commission for public availability (unless theCommission will not accept such a filing) and make such information availableto securities analysts and prospective investors upon request.  In addition, the Company has agreed that, forso long as this Security remains outstanding, it will furnish to the holder ofthis Security and to securities analysts and prospective investors, upon theirrequest, the information required to be delivered pursuant to Rule 144A(d)(4) underthe Securities Act.

 

11

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# **5.  Events of Default.**

#  

## (a)  “Event of Default”, whereverused herein, means any one of the following events (whatever the reason forsuch Event of Default and whether it shall be voluntary or involuntary or beeffected by operation of law or pursuant to any judgment, decree or order ofany court or any order, rule or regulation of any administrative or governmentalbody):

##  

#### (1)                                  default in the payment of any principal on thisSecurity when due or interest upon this Security when it becomes due andpayable, and continuance of such default for a period of 30 days; or

####  

#### (2)                                  default by the Company in the performance of itsobligations in respect of any conversion of this Security (or any portionhereof) in accordance with Section 2 for a period of 5 days; or

####  

#### (3)                                  failure by the Company to give any notice of aChange of Control required to be delivered in accordance with Section 3(a);or

####  

#### (4)                                  default in the performance, or breach, of anyother covenant of the Company herein (other than a covenant a default in theperformance or breach of which is specifically dealt with elsewhere in this Section 5(a))and continuance of such default or breach for a period of 60 days after therehas been given, by registered or certified mail, to the Company by the holderof this Security a written notice specifying such default or breach andrequiring it to be remedied and stating that such notice is a “Notice ofDefault” hereunder; or

####  

#### (5)                                  a default under any bond, debenture, note orother evidence of indebtedness for money borrowed by the Company, or under anyagreement, mortgage, indenture or instrument under which there may be issued orby which there may be secured or evidenced any indebtedness for money borrowedby the Company, with a principal amount then outstanding in excess of$10,000,000, whether such indebtedness now exists or shall hereafter becreated, which default shall constitute a failure to pay the principal of suchindebtedness (in whole or in any part greater than $10,000,000) when due andpayable or shall have resulted in such indebtedness (in whole or in any partgreater than $10,000,000) becoming or being declared due and payable prior tothe date on which it would otherwise have become due and payable, without suchindebtedness having been discharged, or such acceleration having been rescindedor annulled, within a period of 30 days after there shall have been given, byregistered or certified mail, to the Company by the holder of this Security awritten notice specifying such default and requiring the Company to cause suchindebtedness to be discharged or cause such acceleration to be rescinded orannulled and stating that such notice is a “Notice of Default” hereunder; or

####  

#### (6)                                  the entry by a court having jurisdiction in thepremises of (A) a decree or order for relief in respect of the Company inan involuntary case or proceeding under any applicable Federal or Statebankruptcy, insolvency, reorganization or other similar law or (B) adecree or order approving as properly filed a petition seeking reorganization,arrangement, adjustment or composition of or in respect of the Company underany applicable Federal or State law, or appointing a custodian, receiver,liquidator, assignee, trustee, sequestrator or other similar 

 

12

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#### officialof the Company or of any substantial part of its property, or ordering thewinding up or liquidation of its affairs, and the continuance of any suchdecree or order for relief or any such other decree or order unstayed and ineffect for a period of 60 consecutive days; or

####  

#### (7)                                  the commencement by the Company of a voluntarycase or proceeding under any applicable Federal or State bankruptcy,insolvency, reorganization or other similar law or of any other case orproceeding to be adjudicated a bankrupt or insolvent, or the consent by theCompany to the entry of a decree or order for relief in respect of the Companyin an involuntary case or proceeding under any applicable Federal or Statebankruptcy, insolvency, reorganization or other similar law or to thecommencement of any bankruptcy or insolvency case or proceeding against eitherthe Company, or the filing by either the Company of a petition or answer orconsent seeking reorganization or similar relief under any applicable Federalor State law, or the consent by it to the filing of such petition or to theappointment of or taking possession by a custodian, receiver, liquidator,assignee, trustee, sequestrator or other similar official of the Company or ofany substantial part of the property of the Company, or the making by eitherthe Company of an assignment for the benefit of creditors, or the admission byeither the Company in writing of its inability to pay its debts generally asthey become due, or the taking of corporate action by the Company infurtherance of any such action.

####  

## (b)  If an Event of Default (otherthan an Event of Default specified in Section 5(a)(6) or 5(a)(7))occurs and is continuing, then in every such case the holder of this Securitymay declare the principal hereof (or, if there is at such time more than oneholder, holders of least twenty-five percent (25%) of the outstanding principalamount of all then outstanding securities of the same series as this Securitymay declare the principal amount of this Security and all other such securitiesthen outstanding to be due and payable immediately, by a notice in writing tothe Company, and upon any such declaration such principal and all accruedinterest thereon shall become immediately due and payable.  For purposes of the immediately precedingsentence, “securities of the same series” shall mean collectively this Security,any PIK Notes and any notes issued upon a Transfer of a portion of thisSecurity.  If an Event of Defaultspecified in Section 5(a)(6) or 5(a)(7) occurs and is continuingwith respect to the Company, the principal of, and accrued interest on, thisSecurity shall ipso facto become immediately due and payable without anydeclaration or other act of the holders.

##  

## (c)  The Company will give theholder of this Security notice, within ten (10) Trading Days of theoccurrence thereof, of any Event of Default or any event that, with the givingof notice or passage of time or both, would become an Event of Default.  Such notice shall be given in the mannerprovided in Section 9(b).

##  

# **6.  Consolidation, Merger, Etc.**

#  

## (a)  The Company shall notconsolidate with or merge into any other Person or, directly or indirectly,convey, transfer, sell or lease all or substantially all of its properties andassets to any Person, and the Company shall not permit any Person toconsolidate with or merge into the Company or, directly or indirectly, convey,transfer, sell or lease all or substantially all of its properties and assetsto the Company, unless:

 

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##### (1)  in case the Company shallconsolidate with or merge into another Person or convey, transfer, sell orlease all or substantially all of its properties and assets to any Person, thePerson formed by such consolidation or into which the Company is merged or thePerson which acquires by conveyance, transfer or sale, or which leases, all orsubstantially all the properties and assets of the Company shall be acorporation, limited liability company, partnership or trust, shall beorganized and validly existing under the laws of the United States of America,any State thereof or the District of Columbia, and shall expressly assume, ifother than the Company, by an agreement supplemental hereto, executed anddelivered 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 thisSecurity and the performance or observance of every covenant of this Securityon the part of the Company to be performed or observed, including theconversion rights provided herein;

#####  

##### (2)  immediately after givingeffect to such transaction, no Event of Default, and no event which, afternotice or lapse of time or both, would become an Event of Default, shall havehappened and be continuing; and

#####  

## (b)  Upon any consolidation of theCompany with, or merger of the Company into, any other Person or anyconveyance, transfer, sale or lease of all or substantially all of theproperties and assets of the Company in accordance with Section 6(a), thesuccessor Person formed by such consolidation or into which the Company ismerged or to which such conveyance, transfer, sale or lease is made shallsucceed 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 successorPerson had been named as the Company herein, and thereafter, except in the caseof a lease, the predecessor Person shall be relieved of all obligations andcovenants under this Security.

##  

# 7.  **Subordination**.

#  

## (a)  The Company covenants and agrees, and theholder of this Security by its acceptance hereof likewise covenants and agrees,that this Security is subject to the provisions of this Section 7; andeach Person holding this Security, whether upon original issue or upontransfer, assignment or exchange thereof, accepts and agrees to be bound bysuch provisions.

##  

The payment of theprincipal of, premium, if any, and interest on this Security (including, butnot limited to, the redemption price or repurchase price with respect to thisSecurity) shall, to the extent and in the manner hereinafter set forth, be subordinatedto the prior payment in full, in cash or in such other form of payment as maybe acceptable to the holders of Senior Indebtedness, of all SeniorIndebtedness, whether outstanding at the date of original issuance of thisSecurity or thereafter incurred or created.

 

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

 

## (b)  Payments to Holders.  No payment(including pursuant to any redemption or repurchase of this Security) shall bemade with respect to the principal of, or premium, if any, or interest on thisSecurity, if:

 

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##### (1)  a default in the payment of principal,premium, if any, or interest or other payment due on Senior Indebtedness occursand 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 Designated Senior Indebtedness thatthen permits holders of the Designated Senior Indebtedness as to which suchdefault related to accelerate its maturity and the holder of this Security andthe Company receive a written notice of such default (a “Payment BlockageNotice”) from a representative of Designated Senior Indebtedness or aholder of Designated Senior Indebtedness or the Company (a “Non-PaymentDefault”).

#####  

The Company may and shallresume payments on this Security (1) in the case of a Payment Default, onthe date upon which such default is cured or waived or ceases to exist, and (2) inthe case of a Non-Payment Default with respect to Designated SeniorIndebtedness, on the earlier of the date on which the Non-Payment Default iscured or waived or ceases to exist or 179 days have passed after the date onwhich the applicable Payment Blockage Notice is received.

 

No new period of paymentblockage may be commenced pursuant to a Payment Blockage Notice unless at least365 days shall have elapsed since the Company’s receipt of the immediatelyprior Payment Blockage Notice.  Nodefault (whether or not such event of default is on the same issue ofDesignated Senior Indebtedness) that existed or was continuing on the date ofdelivery of any Payment Blockage Notice to the holder of this Security shallbe, or be made, the basis for a subsequent Payment Blockage Notice.

 

If payment of thisSecurity is accelerated because of an Event of Default, the Company shallpromptly notify holders of Senior Indebtedness of the acceleration.

 

Notwithstanding theforegoing, in the event that the holder of this Security receives any paymentor distribution of assets of the Company of any kind in contravention of anyterm of this Section 7, whether in cash, property or securities,including, without limitation, by way of setoff or otherwise, before all SeniorIndebtedness is paid in full, in cash or such other form of payment as may beacceptable to the holders of Senior Indebtedness, then such payment ordistribution shall be held by the recipient or recipients in trust for thebenefit of, and shall immediately be paid over or delivered to, the holders ofSenior Indebtedness or their respective representative or representatives, orto the trustee or trustees under any indenture pursuant to which anyinstruments evidencing any Senior Indebtedness may have been issued, as theirrespective interests may appear, as calculated by the Company, for applicationto the payment of all Senior Indebtedness remaining unpaid to the extentnecessary to make payment in full, in cash or such other form of payment as maybe acceptable to the holders of Senior Indebtedness, of all Senior Indebtednessremaining unpaid, after giving effect to any concurrent payment ordistribution, or provision therefor, to or for the holders of such SeniorIndebtedness.

 

## (c)  Bankruptcy and Dissolution, Etc. Upon any payment by the Company, or distribution of assets of the Company ofany kind or character, whether in cash, property or securities, to creditorsupon any dissolution, winding-up, liquidation or reorganization of the Company,whether voluntary or involuntary or in bankruptcy, insolvency, receivership orother 

 

15

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## proceedings, all amountsdue 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 ofSenior Indebtedness, before any payment is made on account of the principal orpremium, 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, ordistribution of assets of the Company of any kind or character, whether incash, property or securities, to which the holders of this Security would beentitled, except for the provisions of this Section 7, shall (except asaforesaid) 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 ofSenior Indebtedness (pro rata to such holders on the basis of the respectiveamounts of Senior Indebtedness held by such holders, or as otherwise requiredby law or a court order) or their respective representative or representatives,or to the trustee or trustees under any indenture pursuant to which anyinstruments evidencing any Senior Indebtedness may have been issued, as theirrespective interests may appear, to the extent necessary to pay all SeniorIndebtedness in full in cash or in such other form of payment as may beacceptable to the holders of Senior Indebtedness after giving effect to anyconcurrent payment or distribution to or for the holders of SeniorIndebtedness, before any payment or distribution is made to the holder of thisSecurity.

 

Notwithstanding theforegoing, in the event that the holder of this Security receives any paymentor distribution of assets of the Company of any kind in contravention of anyterm of this Security, whether in cash, property or securities, including,without limitation, by way of setoff or otherwise, before all SeniorIndebtedness is paid in full, in cash or such other form of payment as may beacceptable to the holders of Senior Indebtedness, then such payment ordistribution shall be held by the recipient or recipients in trust for thebenefit of, and shall immediately be paid over or delivered to, the holders ofSenior Indebtedness or their respective representative or representatives, orto the trustee or trustees under any indenture pursuant to which anyinstruments evidencing any Senior Indebtedness may have been issued, as theirrespective interests may appear, as calculated by the Company, for applicationto the payment of all Senior Indebtedness remaining unpaid to the extentnecessary to make payment in full, in cash or such other form of payment as maybe acceptable to the holders of Senior Indebtedness, of all Senior Indebtednessremaining unpaid, after giving effect to any concurrent payment or distribution,or provision therefor, to or for the holders of such Senior Indebtedness.

 

For purposes ofSection 7(b) hereof and this Section 7(c), the words “cash, property orsecurities” shall not be deemed to include shares of stock of the Company asreorganized or readjusted, or securities of the Company or any othercorporation provided for by a plan of reorganization or readjustment, thepayment of which is subordinated (at least to the extent provided in thisSection 7 with respect to this Security) to the payment of all SeniorIndebtedness which may at the time be outstanding.  The consolidation of the Company with, or themerger of the Company into, another corporation or the liquidation ordissolution of the Company following the conveyance or transfer of its propertyas an entirety, or substantially as an entirety, to another corporation uponthe terms and conditions provided for in Section 6 shall not be deemed adissolution, winding-up, liquidation or reorganization for the purposes of thisSection 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.

 

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## (d)  Subrogation.  Subject to thepayment in full in cash, or in such other form of payment as may be acceptableto the holders of Senior Indebtedness, of all Senior Indebtedness, the rightsof the holder of this Security shall be subrogated to the extent of thepayments or distributions made to the holders of such Senior Indebtednesspursuant to the provisions of this Section 7 (equally and ratably with theholders of all indebtedness of the Company which by its express terms issubordinated to other indebtedness of the Company to substantially the same extentas this Security is subordinated and is entitled to like rights of subrogation)to the rights of the holders of Senior Indebtedness to receive payments ordistributions of cash, property or securities of the Company applicable to theSenior Indebtedness until the principal of, and premium, if any, and intereston this Security shall be paid in full; and, for the purposes of suchsubrogation, no payments or distributions to the holders of the SeniorIndebtedness of any cash, property or securities to which the holder of thisSecurity would be entitled except for the provisions of this Section 7,and no payment over pursuant to the provisions of this Section 7, to orfor the benefit of the holders of Senior Indebtedness by holders of thisSecurity, shall, as between the Company, its creditors other than holders ofSenior Indebtedness, and the holder of this Security, be deemed to be a paymentby the Company to or on account of the Senior Indebtedness; and no payments ordistributions of cash, property or securities to or for the benefit of theholder of this Security pursuant to the subrogation provisions of this Section 7,which would otherwise have been paid to the holders of Senior Indebtednessshall be deemed to be a payment by the Company to or for the account of thisSecurity.  It is understood that theprovisions of this Section 7 are and are intended solely for the purposesof defining the relative rights of the holder of this Security, on the onehand, and the holders of the Senior Indebtedness, on the other hand.

 

Nothing contained in thisSection 7 or elsewhere in this Security is intended to or shall impair, asamong the Company, its creditors other than the holders of Senior Indebtedness,and the holder of this Security, the obligation of the Company, which isabsolute and unconditional, to pay to the holder of this Security the principalof, and premium, if any, and interest on the Security as and when the sameshall become due and payable in accordance with their terms, or is intended toor shall affect the relative rights of the holder of this Security andcreditors of the Company other than the holders of the Senior Indebtedness, norshall anything herein or therein prevent the holder of this Security fromexercising all remedies otherwise permitted by applicable law upon defaultunder this Security, subject to the rights, if any, under this Section 7of the holders of Senior Indebtedness in respect of cash, property orsecurities of the Company received upon the exercise of any such remedy.

 

Upon any payment ordistribution of assets of the Company referred to in this Section 7, theholder of this Security shall be entitled to rely upon any order or decree madeby any court of competent jurisdiction in which such bankruptcy, dissolution,winding-up, liquidation or reorganization proceedings are pending, or acertificate of the receiver, trustee in bankruptcy, liquidating trustee, agentor other Person making such payment or distribution, delivered to the holder ofthis Security, for the purpose of ascertaining the Persons entitled toparticipate in such distribution, the holders of the Senior Indebtedness andother indebtedness of the Company, the amount thereof or payable thereon, theamount or amounts paid or distributed thereon and all other facts pertinentthereto or to this Section 7.

 

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## (e)  Notice.  The Company shallgive prompt written notice to the holder of this Security of any fact known tothe Company which would prohibit the making of any payment of monies in respectof this Security pursuant to the provisions of this Section 7.

 

The holder of thisSecurity shall be entitled to rely on the delivery to it of a written notice bya Person representing itself to be a holder of Senior Indebtedness (or atrustee on behalf of such holder) to establish that such notice has been givenby a holder of Senior Indebtedness or a trustee on behalf of any such holder orholders.  In the event that the holder ofthis Security determines in good faith that further evidence is required withrespect to the right of any Person as a holder of Senior Indebtedness toparticipate in any payment or distribution pursuant to this Section 7, theholder of this Security may request such Person to furnish evidence to thereasonable satisfaction of the holder of this Security as to the amount ofSenior Indebtedness held by such Person, the extent to which such Person isentitled to participate in such payment or distribution and any other factspertinent to the rights of such Person under this Section 7, and if suchevidence is not furnished the holder of this Security may defer any payment tosuch Person pending judicial determination as to the right of such Person toreceive such payment.

 

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

 

Withoutin any way limiting the generality of the foregoing paragraph, the holders ofthe Senior Indebtedness may, at any time and from time to time, without theconsent of or notice to the holder of this Security, without incurringresponsibility to the holder of this Security, and without impairing orreleasing the subordination provided in this Security or the obligations of theholder of this Security to the holders of the Senior Indebtedness, do any oneor more of the following:  (a) changethe manner, place, or terms of payment (including any change in the rate ofinterest) or extend the time of payment of, or renew, amend, modify, alter, orgrant any waiver or release with respect to, or consent to any departure from,any Senior Indebtedness or any instrument evidencing the same or any agreementevidencing, governing, creating, guaranteeing or securing any SeniorIndebtedness; (b) sell, exchange, release, or otherwise deal with anyproperty pledged, mortgaged or otherwise securing Senior Indebtedness; (c) releaseany Person liable under or in respect of the Senior Indebtedness; (d) failor delay in the perfection of liens securing the Senior Indebtedness; (e) exerciseor refrain from exercising any rights against Company and any other Person; or (f) amend,or grant any waiver or release with respect to, or consent to any departurefrom, 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 anddelivery of junior securities upon conversion of this Security in accordancewith Section 2 shall not be deemed to constitute a payment or distributionon account of the principal of (or premium, if any) or interest on thisSecurity or on account of the purchase or other acquisition of this Security,and (2) the payment, issuance or delivery of cash (including cash paid forfractional 

 

18

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## shares upon conversion ofthis Security in accordance with Section 2), property or securities (otherthan junior securities) upon conversion of this Security in accordance with Section 2shall be deemed to constitute payment on account of the principal of thisSecurity.  For the purposes of thisSection, the term “junior securities” means (a) shares of any stock of anyclass of the Company and (b) securities of the Company which aresubordinated in right of payment to all Senior Indebtedness which may beoutstanding at the time of issuance or delivery of such securities tosubstantially the same extent as, or to a greater extent than, this Security isso subordinated as provided in this Section 7.  Nothing contained in this Section 7 orelsewhere in this Security is intended to or shall impair, as among theCompany, its creditors other than holders of Senior Indebtedness and the holderof this Security, the right, which is absolute and unconditional, of the holderof this Security to convert this Security in accordance with Section 2.

 

# **8.  Definitions. **Unless otherwise defined inthis Security, the following capitalized terms shall have the followingrespective meanings when used herein:

#  

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

 

“Business Day” means eachMonday, Tuesday, Wednesday, Thursday and Friday which is not a day on which thebanking institutions in California are authorized or obligated by law orexecutive order to close or be closed.

 

“CashDistribution” means the distribution by the Company to all holders of itsCommon Stock of cash, other than any cash that is distributed upon a merger orconsolidation to which Section 2(h) applies or as part of adistribution referred to in paragraph (4) of Section 2(b).

 

“ClosingPrice” means, with respect to the Common Stock of the Company, for any day, thereported last sale price per share on the Nasdaq National Market, or, if theCommon Stock is not admitted to trading on the Nasdaq National Market, on theprincipal national securities exchange or inter-dealer quotation system onwhich the Common Stock is listed or admitted to trading, or if not admitted totrading on the Nasdaq National Market, or listed or admitted to trading on anynational securities exchange or inter-dealer quotation system, the closing bidprice per share in the over-the-counter market as furnished by any New YorkStock Exchange member firm selected from time to time by the Company for thatpurpose.

 

“Commission”means the United States Securities and Exchange Commission, or any otherfederal agency at the time administering the Exchange Act or the SecuritiesAct, whichever is the relevant statute for the particular purpose.

 

“CommonStock” means the Common Stock, par value $0.10 per share, of the Companyauthorized at the date of this instrument as originally executed.  Subject to the provisions of Section 2,shares issuable on conversion of this Security shall include only Common Stockor shares of any class or classes of common stock resulting from anyreclassification or reclassifications 

 

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thereof; *provided, however,*that if at any time there shall be more than one such resulting class, theshares so issuable on conversion of this Security shall include shares of allsuch classes, and the shares of each such class then so issuable shall besubstantially in the proportion which the total number of shares of such classresulting from all such reclassifications bears to the total number of sharesof all such classes resulting from all such reclassifications.

 

“ConversionPrice” has the meaning given to such term in Section 2(a).

 

“ConversionRate” has the meaning given to such term in Section 2(a).

 

“Designated SeniorIndebtedness” means the Company’s obligations under any Senior Indebtedness inwhich the instrument creating or evidencing the same or the assumption orguarantee thereof (or related agreements or documents to which the Company is aparty) expressly provides that such Senior Indebtedness shall be “DesignatedSenior Indebtedness” for purposes of this Security (provided that suchinstrument, agreement or other document may place limitations and conditions onthe right of such Senior Indebtedness to exercise the rights of DesignatedSenior Indebtedness).

 

 “Determination Date” means, in the case of adividend or other distribution, including the issuance of rights, options orwarrants, to shareholders, the date fixed for the determination of shareholdersentitled to receive such dividend or other distribution and, in the case of atender offer, the last time that tenders could have been made pursuant to suchtender offer.

 

 “Excess Purchase Payment” means the product of(A) the excess, if any, of (i) the amount of cash plus the fairmarket value (as determined in good faith by the Company’s Board of Directors)of any non-cash consideration required to be paid with respect to one share ofCommon Stock acquired or to be acquired in a tender offer made by the Companyor any Subsidiary of the Company for all or any portion of the Common Stockover (ii) the current market price per share as of the last time thattenders could have been made pursuant to such tender offer and (B) thenumber of shares of Common Stock validly tendered and not withdrawn as of theDetermination Date in respect of such tender offer.

 

“ExchangeAct” means the Securities Exhange Act of 1934, as amended.

 

“Indebtedness”means, with respect to any Person:

 

(a)  All obligations, contingentor otherwise, of such Person (i) for borrowed money (whether or not therecourse of the lender is to the whole of the assets of such Person or only toa portion thereof), (ii) evidenced by a note, debenture, bond or writteninstrument (including a purchase money obligation), (iii) in respect ofleases of such Person required, in conformity with generally acceptedaccounting principles, to be accounted for as capitalized lease obligations onthe balance sheet of such Person and all obligations and other liabilities(contingent or otherwise) under any lease or related document (including apurchase agreement) in connection with the lease of real property whichprovides that such Person is contractually obligated to purchase or cause athird party to purchase the leased property and thereby guarantee a minimumresidual value of the leased property to the lessor and the 

 

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obligations ofsuch Person under such lease or related document to purchase or to cause athird party to purchase such leased property; or (iv) in respect ofletters of credit (including reimbursement obligations with respect thereto),local guarantees or bankers’ acceptances;

 

(b)  All obligations secured by amortgage, pledge, lien, encumbrance, charge or adverse claim affecting title orresulting in an encumbrance to which the property or assets of such Person aresubject, whether or not the obligations secured thereby shall have been assumedby or shall otherwise be such Person’s legal liability;

 

(c)  To the extent not otherwiseincluded, all obligations of such Person under interest rate and currency swapagreements, cap, floor and collar agreements, spot and forward contracts andsimilar agreements and arrangements;

 

(d)  All obligations of others ofthe type described in clauses (a), (b), or (c) above assumed by orguaranteed in any manner by such Person or in effect guaranteed by such Personthrough an agreement to purchase, contingent or otherwise (and the obligationsof such Person under any such assumptions, guarantees or other sucharrangements); and

 

(e)  All obligations, contingentor otherwise, of such Person under or in respect of any and all deferrals,renewals, extensions and refundings of, or amendments, modifications orsupplements to, any liability of the kinds described in any of the precedingclauses (a), (b), (c) or (d).

 

“Person” shall mean and include an individual, a partnership, acorporation (including a business trust), a joint stock company, a limitedliability company, an unincorporated association, a joint venture or otherentity or a governmental authority.

 

“PIK Note” has themeaning given to such term in the introductory paragraph of this Security.

 

 “Registration Rights Agreement” means theRegistration Rights Agreement, dated as of September 27, 2001, between theCompany and the initial holder of this Security, as amended, modified orotherwise supplemented from time to time.

 

“RepurchaseDate” has the meaning given to such term in Section 2(a) hereof.

 

“Securities” means the 5%Convertible Subordinated Note due 2008 issued by the Company pursuant to theAgreement and such other securities that are issued upon transfer or exchangeor replacement thereof (or successive transfers, exchanges or replacements)pursuant to Section 9 hereof and any PIK Notes, as amended, modified orsupplemented from time to time.

 

 “Securities Act” means the Securities Act of1933, as amended.

 

 “Senior Indebtedness” means the principal of,premium, if any, interest on (including any interest accruing after the filingof a petition by or against the Company under any bankruptcy law, whether ornot allowed as a claim after such filing in any proceeding under suchbankruptcy law) and any other payment due pursuant to, any Indebtedness,whether outstanding on the date of this 

 

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Securityor thereafter incurred or created; *provided* thatSenior Indebtedness shall not include (i)  any indebtedness of any kind ofthe Company to any Subsidiary of the Company, a majority of the voting stock ofwhich is owned, directly or indirectly, by the Company, (ii) indebtednessfor trade payables or constituting the deferred purchase price of assets orservices incurred in the ordinary course of business, or (iii) anyindebtedness which by its terms is *pari passu*inright of payment with or subordinate in right of payment to this Security.

 

 “Subsidiary” shall mean (a) anycorporation of which more than 50% of the issued and outstanding equity securities having ordinary voting power toelect a majority of the board of directors of such corporation is at the timedirectly or indirectly owned or controlled by the Company, (b) anypartnership, joint venture, limited liability company or other association ofwhich more than 50% of the equity interests having the power to vote, direct orcontrol the management of such partnership, joint venture, limited liabilitycompany or other association is at the time directly or indirectly owned andcontrolled by the Company, and (c) any other entity included in thefinancial statements of the Company on a consolidated basis.

 

 “Trading Day” means (i) if the CommonStock is admitted to trading on the Nasdaq National Market or any other systemof automated dissemination of quotations of securities prices, a day on whichtrades may be effected through such system; (ii) if the Common Stock islisted or admitted for trading on the New York Stock Exchange or any othernational securities exchange, a day on which such exchange is open forbusiness; or (iii) if the Common Stock is not admitted to trading on theNasdaq National Market or listed or admitted for trading on any nationalsecurities exchange or any other system of automated dissemination of quotationof securities prices, a day on which the Common Stock is traded regular way inthe over-the-counter market and for which a closing bid and a closing askedprice for the Common Stock are available.

 

# **9.  Other.**

#  

## (a)  No provision of this Securityshall alter or impair the obligation of the Company, which is absolute andunconditional, to pay the principal of and interest, if any, on this Securityat the times, places and rate, and in the coin or currency, herein prescribed orto convert this Security as herein provided.

##  

## (b)  The Company will give promptwritten notice to the holder of this Security of any change in the location ofthe Designated Office.  Any notice to theCompany or to the holder of this Security shall be given in the manner setforth in the Note Exchange Agreement, dated as of January 30, 2003, amongthe Company and the initial holder of this Security (the “Agreement”), providedthat the holder of this Security, if not a party to the Agreement, may specify alternativenotice instructions to the Company.

##  

## (c)  The transfer of this Securityis registrable on the register maintained by the Company upon surrender of thisSecurity for registration of transfer at the Designated Office, duly endorsedby, or accompanied by a written instrument of transfer in form satisfactory tothe Company duly executed by, the holder hereof or such holder’s attorney dulyauthorized in writing, and thereupon one or more new Securities, of authorizeddenominations and for the same aggregate principal amount, will be issued tothe designated transferee or transferees. Such Securities are 

 

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## issuableonly in registered form without coupons in denominations of $1,000 and anyintegral multiple thereof.  No servicecharge shall be made for any such registration of transfer, but the Company mayrequire payment of a sum sufficient to recover any tax or other governmentalcharge 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 namethis Security is registered as the owner thereof for all purposes, whether ornot this Security be overdue, and neither the Company nor any such agent shallbe affected by notice to the contrary.

##  

## (d)  This Security and the Common Stock issuableupon conversion of this Security have not been registered under the SecuritiesAct, or the securities laws of any state or other jurisdiction.  Neither this Security nor the Common Stockissuable upon conversion of this Security nor any interest or participationherein may be reoffered, sold, assigned, transferred, pledged, encumbered orotherwise disposed of (a “Transfer”) in the absence of such registration orunless such transaction is exempt from, or not subject to, registration.  The holder by its acceptance of this Securityor the Common Stock issuable upon conversion of this Security agrees that itshall not offer, sell, assign, transfer, pledge, encumber or otherwise disposeof this Security or any portion thereof or interest therein other than (i) in aminimum denomination of $250,000 in principal amount if the holder is AstoriaCapital Partners, L.P. and (ii) in a minimum denomination equal to the lesserof (A) $5,000,000 in principal amount and (B) the entire aggregate principalamount of this Security and all PIK Notes held by the holder if the holder isnot Astoria Capital Partners, L.P., and then in each case (other than withrespect to a Transfer pursuant to a registration statement that is effective atthe time of such Transfer) only (a) to the Company, or (b) to a person itreasonably believes to be an institutional “accredited investor” within themeaning of Rule (501(a)(1)(2)(3) or (7) under the Securities Act or a qualifiedinstitutional buyer (as defined in Rule 144A under the Securities Act), and, inthe case of (b) above, the transferor shall furnish the Company with suchcertifications, legal opinions or other information as the Company mayreasonably request to confirm that such transfer is being made pursuant to anexemption from, or in a transaction not subject to, the registrationrequirements of the Securities Act.  Inaddition to the restrictions set forth above in this Section 9(d), Transferspermitted hereunder are further limited so that at no time may the number ofholders of Securities and PIK Notes on the register of the Company maintainedpursuant to Section 9(c) hereof exceed 40.

 

## (e)  Upon presentation of this Security forregistration of transfer at the office of the Company specified hereinaccompanied by (i) certification by the transferor that such transfer isin compliance with the terms hereof and (ii) by a written instrument oftransfer in a form approved by the Company executed by the registered holder,in person or by such holder’s attorney thereunto duly authorized in writing,and including the name, address and telephone and fax numbers of the transfereeand name of the contact person of the transferee, such Security shall betransferred on the Security register, and a new Security of like tenor andbearing the same legends shall be issued in the name of the transferee and sentto the transferee at the address and c/o the contact person so indicated.  Transfers and exchanges of Securities shallbe subject to such additional restrictions as are set forth in the legends onthe Securities and to such additional reasonable regulations as may beprescribed by the Company as specified in Section 9(d) hereof.  Subject to Section 9(d), successiveregistrations of transfers as aforesaid may be made from time to time asdesired, and each such registration shall be noted on the Security register.

 

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## (f)  Upon receipt by the Company of evidencereasonably satisfactory to it of the loss, theft, destruction or mutilation ofthis Security, and in the case of loss, theft or destruction, receipt ofindemnity or security reasonably satisfactory to the Company, and uponreimbursement to the Company of all reasonable expenses incidental thereto, andupon surrender and cancellation of such Security, if mutilated, the Companywill deliver a new Security of like tenor and dated as of such cancellation, inlieu of such Security.

##  

## (g)  Such holder represents that it is aninstitutional “accredited investor” within the meaning of Rule 501(a)(1)(3)(5) or(7) of the Securities Act or a qualified institutional buyer (as definedin Rule 144A under the Securities Act). Such holder has been advised that this Security has not been registeredunder the Securities Act, or any state securities laws and, therefore, cannotbe resold unless it is registered under the Securities Act and applicable statesecurities laws or unless an exemption from such registration requirements isavailable.  Such holder is aware that theCompany is under no obligation to effect any such registration or to file foror comply with any exemption from registration. Such holder has not been formedsolely for the purpose of making this investment and is acquiring the Securityfor its own account for investment, and not with a view to, or for resale inconnection with, the distribution thereof.

##  

## (h)  Neither this Security nor any term hereof maybe amended or waived orally or in writing, except that any term of theSecurities may be amended and the observance of any term of the Securities maybe waived (either generally or in a particular instance and eitherretroactively or prospectively), and such amendment or waiver shall be applicableto all of the Securities, upon the approval of the Company and the holders offifty percent (50%) or more of the outstanding principal amount of all thenoutstanding Securities; provided, however, that any amendmentthat would (i) reduce the outstanding principal amount or premium (if any)of the Securities, (ii) reduce the rate of interest borne by theSecurities, (iii) change the date of maturity or interest payment dates ofthe Securities, (iv) reduce any amount payable upon repurchase of the Securities,(v) impair the right of any holder of this Security to institute suit forthe payment thereof, (vi) make the principal, premium (if any) or interestpayable on the Securities in a coin or currency other than as set forth in theSecurities, (vii) modify the provisions of the Securities with respect tosubordination or seniority of the Securities in a manner adverse to the holdersof the Securities in any material respect, (viii) change in any respectthe obligation of the Company to repurchase the Securities, (ix) impairthe right of the holders of the Securities to convert the Securities intoCommon Stock or (x) modify this Section 9(h) shall require theapproval of the holder of each Security to which such amendment shall apply.The Company will not amend any provision of any other Security in a mannerfavorable to any holder thereof unless a similar amendment is made or offeredwith respect to all of the Securities. Each holder of this Security by its acceptance hereof acknowledges andagrees that the subordination provisions of this instrument are for the benefitof the holders of the Senior Indebtedness and that, accordingly, no provisionof Section 7 hereof may be amended or otherwise modified without the priorwritten consent of each holder of Senior Indebtedness at such time outstanding.

##  

## **(i)  This Security shall begoverned by and construed in accordance with the internal laws of the State ofCalifornia.**

##  

*[Remainder of page intentionallyleft blank.]*

 

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

 

Dated:                   ,200  

 
|   | RAINING DATA CORPORATION |
|--------|--------------------------|
|   |                     |
|   | By:                      |   |   |
|   | Name:                    | Brian C. Bezdek |
|   | Title:                   | Chief Financial Officer |
|        |                          |  |  |  |

 

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ELECTION OF HOLDERTO REQUIRE REPURCHASE

 

1.  Pursuant to Section 3(a) of thisSecurity, the undersigned hereby elects to have all or a portion of thisSecurity repurchased by the Company.

 

2.  The undersigned hereby directs the Company topay [choose one] (a) it or (b) Name:                              ;address:                             ;Social Security or Other Taxpayer Identification Number, if any:                        ,an amount in cash equal to the Repurchase Price, as provided herein.

 
|   | Dated:   |   |   |
|--------|----------|--------|--------|
|   |     |
|   | [Holder] |
|   |     |
|   |     |
|   | By:      |   |   |
|   | Name:    |
|   | Title:   |
|        |          |        |        |  |  |

 

[Number of sharesof Common Stock owned by the holder and its affiliates:                                           ]

 

Principal amount to be repurchased (an integral multipleof $1,000):                                         

 

Remaining principal amount following such repurchase(not less than $1,000):                              

 

NOTICE: The signature to the foregoing Election mustcorrespond to the name as written upon the face of this Security in everyparticular, without alteration or any change whatsoever.

 

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CONVERSION NOTICE

 

Theundersigned holder of this Security hereby irrevocably exercises the option toconvert this Security, or any portion of the principal amount hereof (which isan integral multiple of $1,000) below designated, into Common Stock inaccordance with the terms of this Security, and directs that such shares,together with a check in payment for any fractional share and any Securityrepresenting any unconverted principal amount hereof, be delivered to and beregistered in the name of the undersigned unless a different name has beenindicated below.  If Common Stock orSecurities are to be registered in the name of a Person other than theundersigned, the undersigned will pay all transfer taxes payable with respectthereto.

 
|   | Dated:   |   |   |
|--------|----------|--------|--------|
|   |     |
|   | [Holder] |
|   |     |
|   |     |
|   | By:      |   |   |
|   | Name:    |
|   | Title:   |
|        |          |        |        |  |  |

 

If shares or Securities are to be registered in the nameof 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 Securityrepresenting unconverted principal amount to be issued:

 

Amount: $                  

 

Denominations:$                (anyintegral multiple of $1,000)

 

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**Schedule ofHolders of 5% Convertible Subordinated Note due 2008**

 
| **Name**                        | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|
| Astoria  Capital Partners, L.P. |       | $          | 20,749,581 |   |
| CAM  Small Cap Fund L.P.        |       | 862,979    |       |
| GFAM  Hedge Partnership         |       | 888,853    |       |
|                                 |            |            |            |  |

 

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