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  EXHIBIT 10.40         

  Execution copy         

  AMENDMENT NO. 1         

    AMENDMENT NO. 1 dated as of October 30, 2000 to the Credit Agreement referred to below, between BIRCH TELECOM, INC., a corporation duly organized
and validly existing under the laws of the State of Delaware (the "Company"); BIRCH TELECOM fINANCE, INC., a Delaware corporation duly organized
and validly existing under the laws of the State of Delaware (the "Borrower"); each of the lenders that is a signatory hereto (individually, a
"Lender" and, collectively, the "Lenders"); and LEHMAN COMMERCIAL PAPER INC., as administrative
agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent"). 

    The
Company, the Borrower, the Lenders and the Administrative Agent are parties to an Amended and Restated Credit Agreement dated as of February 2, 2000 (as heretofore modified
and supplemented and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of
credit to be made by said Lenders to the Borrower in an original aggregate principal or face amount not exceeding $125,000,000. The Borrower, the Company, the Subsidiary Guarantors, the Lenders and
the Administrative Agent wish to increase the aggregate amount of the Commitments under the Existing Credit Agreement from $125,000,000 to $195,000,000, and to amend the Existing Credit Agreement in
certain other respects, and accordingly, the parties hereto hereby agree as follows: 

    Section 1.  Definitions.  Except as otherwise defined in this Amendment No. 1, terms
defined in the Credit Agreement are used herein as defined therein. 

    Section 2.  Amendments.  Subject to the satisfaction of the conditions precedent specified in
Section 4 of this Amendment No. 1, but effective as of the date hereof, the Credit Agreement shall be amended as follows: 

    2.1. References
in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as
"hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 

    2.2.  Definitions.  Section 1.01 of the Credit Agreement shall be amended by adding the following
new definitions (to the extent not already included in said Section 1.01) and inserting the same in the appropriate alphabetical locations and amending in their entirety the following
definitions (to the extent already included in said Section 1.01), as follows: 

    "Aggregate Exposure": with respect to any Lender at any time, an amount equal to the sum of (i) the amount of such Lender's Term
Loan Commitment then in effect or, if the Term Loan Commitments have been terminated, the aggregate then unpaid principal amount of such Lender's Term Loans, (ii) the amount of such Lender's
Revolving Credit Commitment then in effect or, if the Revolving Credit Commitments have been terminated, the amount of such Lender's Revolving Extensions of Credit then outstanding and
(iii) the amount of such Lender's Incremental Term Loan Commitment, if any, then in effect or, if such Incremental Term Loan Commitment has been terminated, the amount of such Lender's
Incremental Loans then outstanding. 

    "Amendment No. 1": Amendment No. 1 dated as of October 30, 2000 to this Agreement. 

    "Amendment No. 1 Effective Date": the effective date of Amendment No. 1. 

    "Amendment No. 1 Lender Addendum": with respect to any Lender which is increasing its Revolving Credit Commitment and/or
agreeing to a Tranche A-1 Term Loan Commitment as of the Amendment No. 1 Effective Date, a Lender Addendum, substantially in the form of 

Exhibit H (with such changes thereto as the Administrative Agent shall require), to be executed and delivered by such Lender pursuant to Section 4.1 of Amendment No. 1. 

    "Application": an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to open
a Letter of Credit. 

    "Class": when used in reference to any Loans, refers to whether such Loan is a Tranche A Term Loan, a Tranche A-1 Term
Loan, a Revolving Credit Loan, a Swing Line Loan or an Incremental Term Loan and, when used in reference to any Commitment, refers to whether such Commitment is a Term Loan Commitment, a Revolving
Credit Commitment or an Incremental Term Loan Facility. 

    "Facility": each of (a) the Term Loan Commitments and the Term Loans made thereunder (the "Term Loan
Facility"), (b) the Revolving Credit Commitments and the extensions of credit made thereunder (the "Revolving Credit
Facility") and (c) the Incremental Term Loan Commitments and the Incremental Term Loans made thereunder (if any) (the "Incremental Term Loan
Facility"). 

    "Incremental Term Loan": as defined in Section 2.25(b). 

    "Incremental Term Loan Activation Date": the date designated as such in the Incremental Term Loan Activation Notice. 

    "Incremental Term Loan Activation Notice": a notice substantially in the form of Exhibit J. 

    "Incremental Term Loan Commitment": as to any Lender, the obligation of such Lender, if any, to make one or more Incremental Term Loans
on and after the relevant Incremental Term Loan Activation Date in an aggregate principal amount not to exceed the amount specified in the related Incremental Term Loan Activation Notice under the
heading "Incremental Term Loan Commitment" or in the Assignment and Acceptance pursuant to which such Lender became a party hereto. The aggregate principal amount of the Incremental Term Loan
Commitments and the Incremental Term Loans as of the Amendment No. 1 Effective Date is zero. The maximum principal amount of Incremental Term Loans that may be made hereunder is $100,000,000. 

    "Incremental Term Loan Commitment Period": as defined in Section 2.25(a). 

    "Incremental Term Loan Commitment Termination Date": December 31, 2001. 

    "Incremental Term Loan Facility": as defined in the definition of "Facility" in this Section. 

    "Incremental Term Loan Lender": each Lender which has an Incremental Term Loan Commitment or is the holder of an Incremental Term Loan. 

    "Incremental Term Note": any Note evidencing a Lender's Term Loan Commitment and Term Loans of any Class, substantially in the form of
Exhibit F-4. 

    "Issuing Lender": any Lender who consents to be designated as such by the Administrative Agent and the Borrower, in its capacity as
issuer of any Letter of Credit. 

    "L/C Commitment": $10,000,000. 

    "L/C Fee Payment Date": the last day of each March, June, September and December and the last day of the Revolving Credit Commitment
Period. 

    "L/C Obligations": at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then
outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 2A.5. 

2

    "L/C Participants": the collective reference to all the Revolving Credit Lenders other than the Issuing Lender. 

    "Letters of Credit": as defined in Section 2A.1. 

    "Reimbursement Obligation": the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 2A.5 for amounts
drawn under Letters of Credit. 

    "Reinvestment Deferred Amount": with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by the Company or any
of its Subsidiaries in connection therewith which are not applied to prepay the Term Loans or the Incremental Term Loans or reduce the Commitments pursuant to Section 2.12(b) as a result of the
delivery of a Reinvestment Notice. 

    "Required Lenders": at any time, the holders of more than 50% of the sum of (i) the Term Loan Commitments then in effect or, if
the Term Loan Commitments have been terminated, the aggregate unpaid principal amount of the Term Loans then outstanding, (ii) the Total Revolving Credit Commitments then in effect or, if the
Revolving Credit Commitments have been terminated, the Total Revolving Extensions of Credit then outstanding and (iii) the Incremental Term Loan Commitments (if any) then in effect, or if such
Incremental Term Loan Commitments have been terminated, the aggregate unpaid amount of the Incremental Term Loans then outstanding (if any). 

    "Revolving Credit Commitment": as to any Lender, the obligation of such Lender, if any, to make Revolving Credit Loans and participate
in Swing Line Loans and Letters of Credit, in an aggregate principal amount not to exceed the amount set forth under the heading "Revolving Credit Commitment" opposite such Lender's name on
Schedule I to the Lender Addendum (or the Amendment No. 1 Lender Addendum, as the case may be) delivered by such Lender, or, as the case may be, in the Assignment and Acceptance pursuant
to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof. The aggregate amount of the Total Revolving Credit Commitments is $50,000,000 as
of the Amendment No. 1 Effective Date. 

    "Revolving Credit Termination Date": the earlier of (a) the Scheduled Revolving Credit Termination Date and (b) the date
on which the Term Loans and the Incremental Term Loans shall be paid in full. 

    "Revolving Extensions of Credit": as to any Revolving Credit Lender at any time, an amount equal to the sum of (a) the aggregate
principal amount of all Revolving Credit Loans made by such Lender then outstanding, (b) such Lender's Revolving Credit Percentage of the L/C Obligations then outstanding and (c) such
Lender's Revolving Credit Percentage of the aggregate principal amount of Swing Line Loans then outstanding. 

    "Stage 1": the period prior to September 30, 2002. 

    "Stage 2": the period from and after September 30, 2002. 

    "Term Loan Commitments": the collective reference to (a) the Term Loan Commitments under (and as defined in) this Agreement (as
in effect immediately prior to the Amendment No. 1 Effective Date) in an original aggregate principal amount of $100,000,000 and (b) the Tranche A-1 Term Loan Commitments. 

    "Term Loans": the collective reference to (a) the term loans made pursuant to Section 2.1(a) hereof (as in effect
immediately prior to the Amendment No. 1 Effective Date) and outstanding on the Amendment No. 1 Effective Date and (b) the Tranche A-1 Term Loans. 

    "Tranche A Term Loans": as defined in Section 2.1(a). 

3

    "Tranche A-1 Term Loan Commitment": as to any Lender, the obligation of such Lender, if any, to make or continue one or
more Tranche A-1 Term Loans to the Borrower hereunder in an aggregate principal amount not to exceed the amount set forth under the heading "Tranche A-1 Term Loan Commitment"
opposite such Lender's name on Schedule I to the Amendment No. 1 Lender Addendum delivered by such Lender, or, as the case may be, in the Assignment and Acceptance pursuant to which such
Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof. The aggregate principal amount of the Tranche A-1 Term Loan Commitments is
$45,000,000 as of the Amendment No. 1 Effective Date. 

    "Tranche A-1 Term Loan Commitment Period": the period from and including the Amendment No. 1 Effective Date to the
Tranche A-1 Term Loan Commitment Termination Date. 

    "Tranche A-1 Term Loan Commitment Termination Date": October 5, 2001. 

    "Tranche A-1 Term Loans": as defined in Section 2.1(a). 

    2.3. The
definition of "Consolidated EBITDA" in Section 1.01 of the Credit Agreement is hereby amended by deleting the word "and" immediately preceding
clause (h) thereof and inserting, immediately after the words "acquisitions permitted under Section 6.7(j)" appearing therein, the word "and" and a new clause (i) to read as
follows: 

    "(i) any
charges reflecting costs or expenses in an aggregate amount of up to but not exceeding $1,500,000 incurred in the year 2000 in connection with the proposed
initial public offering of equity securities in the Company" 

    2.4. The
definition of "Excess Cash Flow" in Section 1.01 of the Credit Agreement is hereby amended by inserting, immediately following each reference to the
"Term Loans" in clauses (b)(iii) and (b)(iv) thereof, the words "and the Incremental Term Loans". 

    2.5. The
definition of "Facility Usage" in Section 1.01 of the Credit Agreement is hereby amended by inserting, immediately before each reference to the "Term
Loan Commitment Termination Date" thereof, the words "Tranche A-1". 

    2.6. The
definition of "Obligations" in Section 1.01 of the Credit Agreement is hereby amended by (i) inserting the words "Reimbursement Obligations and"
immediately before the words "interest accruing" appearing therein and (ii) inserting the words "the Letters of Credit," immediately before the words "any Hedge Agreement" appearing therein. 

    2.7. Term Loan Commitments.  Section 2.1 of the Credit Agreement is hereby amended as follows: 

    A.  Section 2.1(a)
is hereby amended in its entirety to read as follows: 

    "(a) Subject
to the terms and conditions hereof, each Term Loan Lender which has a Tranche A-1 Term Loan Commitment severally agrees to make term loans to
the Borrower during the Tranche A-1 Term
Loan Commitment Period in an aggregate principal amount not exceeding such Tranche A-1 Term Loan Commitment (the "Tranche A-1 Term
Loans"). The Term Loans (including the Tranche A-1 Term Loans) may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and
notified to the Administrative Agent in accordance with Sections 2.2 and 2.13." 

    B.  Section 2.1(b)
is hereby amended by inserting the words "Tranche A-1" immediately before the words "Term Loan Commitment Termination Date"
appearing therein. 

4

    2.8.  Repayment of Term Loans.  Section 2.3 of the Credit Agreement is hereby amended by inserting
the words "Tranche A-1" immediately before the words "Term Loan Commitment Termination Date" appearing therein. 

    2.9. Section 2.4(a)
of the Credit Agreement is hereby amended by inserting, immediately before the words "the aggregate principal amount" appearing in the first
sentence thereof, the words "the sum of (i) the L/C Obligations then outstanding and (ii)" 

    2.10.  Revolving Credit Commitments.  Section 2.4(c) of the Credit Agreement is hereby amended in
its entirety to read as follows: 

    "(c) The
Total Revolving Credit Commitments shall be automatically reduced on each Commitment Reduction Date specified below in an aggregate amount equal to the
percentage set forth below opposite such day: 

	Commitment Reduction Date

Falling on or Nearest to:
 
	 	Commitment

Reduction

Percentage
	 
	March 31, 2003	 	2.5	%
	June 30, 2003	 	2.5	%
	September 30, 2003	 	2.5	%
	December 31, 2003	 	2.5	%
	 

March 31, 2004	 
 	 

2.5	 
%
	June 30, 2004	 	2.5	%
	September 30, 2004	 	2.5	%
	December 31, 2004	 	2.5	%
	 

March 31, 2005	 
 	 

2.5	 
%
	June 30, 2005	 	2.5	%
	September 30, 2005	 	2.5	%
	December 31, 2005	 	2.5	%
	 

March 31, 2006	 
 	 

17.5	 
%
	June 30, 2006	 	17.5	%
	September 30, 2006	 	17.5	%
	December 31, 2006	 	17.5	%

;
provided that if upon any date after giving effect to such reduction the Total Revolving Extensions of Credit shall exceed the amount of the Total
Revolving Credit Commitments as so reduced, the Borrowers shall prepay Revolving Credit Loans and/or Swing Line Loans, if any, to the extent of such excess (such prepayment to be applied,  first, to Base
Rate Loans and, second, on Eurodollar Loans). 

    2.11.  Commitment Fees, etc.  Section 2.9(a) of the Credit Agreement is hereby amended by
replacing the words "(in the case of the Term Lenders) the Term Loan Commitment Termination Date" with the following: "(in the case of the Term Lenders holding Tranche A-1 Term Loan
Commitments) the Tranche A-1 Term Loan Commitment Termination Date". 

    2.12.  Optional Prepayments.  The penultimate sentence of Section 2.11 of the Credit Agreement is
hereby amended in its entirety to read as follows: 

    "Partial
prepayments of Revolving Credit Loans, Term Loans and the Incremental Term Loans shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof." 

5

    2.13.  Mandatory Prepayments.  Section 2.12 of the Credit Agreement is hereby amended as follows: 

    A.  Section 2.12(a)
is hereby amended by inserting the words "and the Incremental Term Loans" immediately after the words "Term Loans" appearing therein. 

    B.  Section 2.12(b)
is hereby amended by inserting the words "and the Incremental Term Loans" immediately after the words "Term Loans" appearing therein. 

    C.  Section 2.12(c)
is hereby amended in its entirety to read as follows: 

    "(c) Amounts
to be applied in connection with prepayments and Commitment reductions made pursuant to this Section shall be applied,  first, to reduce permanently the unused portion (if any) of Term Loan Commitments,
second, to the
prepayment of the Term Loans and the Incremental Term Loans and, third, to reduce permanently the Revolving Credit Commitments. Any such reduction of
the Revolving Credit Commitments shall be accompanied by prepayment of the Revolving Credit Loans and/or Swing Line Loans to the extent, if any, that the Total Revolving Extensions of Credit exceed
the amount of the Total Revolving Credit Commitments as so reduced; provided that if the aggregate principal amount of Revolving Credit Loans and Swing
Line Loans then outstanding is less than the
amount of such excess (because L/C Obligations constitute a portion thereof), the Borrower shall, to the extent of the balance of such excess, replace outstanding Letters of Credit and/or deposit an
amount in cash in a cash collateral account established with the Administrative Agent for the benefit of the Lenders on terms and conditions satisfactory to the Administrative Agent. The application
of any prepayment pursuant to this Section shall be made, first, to Base Rate Loans and, second, to
Eurodollar Loans. Each prepayment of the Loans under this Section (except in the case of Revolving Credit Loans that are Base Rate Loans and Swing Line Loans) shall be accompanied by accrued interest
to the date of such prepayment on the amount prepaid." 

    2.14.
Section 2.15(c) of the Credit Agreement is hereby amended in its entirety to read as follows: 

    "(a) (i) If
all or a portion of the principal amount of any Loan or Reimbursement Obligation shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to (x) in the case of the Loans, the rate that would otherwise be applicable thereto
pursuant to the foregoing provisions of this Section plus 2% or (y) in the case of Reimbursement Obligations, the rate applicable to Base Rate
Loans under the Revolving Credit Facility plus 2%, and (ii) if all or a portion of any interest payable on any Loan or Reimbursement Obligation
or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per
annum equal to the rate then applicable to Base Rate Loans under the relevant Facility plus 2%, in each case, with respect to clauses (i) and
(ii) above, from the date of such non-payment until such amount is paid in full (after as well as before judgment)." 

6

    2.15.  Pro Rata Treatment and Payments.  Section 2.18 of the Credit Agreement is hereby amended as
follows: 

    A.  Section 2.18(a)
is hereby amended by (i) inserting the terms ", and each payment in respect of Reimbursement Obligations," immediately after the words
"fees payable hereunder" appearing therein and (ii) by adding the following language at the end thereof: 

    "Notwithstanding
anything herein to the contrary, any borrowing in respect of an Incremental Term Loan Commitment of any Incremental Term Loan Lender shall be made only from such
Incremental Term Loan Lender and any payment in respect of principal of any Incremental Term Loan held by any Incremental Term Loan Lender (including principal, interest, commitment fee or other
amounts) shall
be applied only to the obligations of such Incremental Term Loan Lender in respect of such Incremental Term Loan." 

    B.  Section 2.18(b)
is hereby amended in its entirety to read as follows: 

    "(b)
Each optional prepayment pursuant to Section 2.11 to be applied to the Term Loans and the Incremental Term Loans shall be allocated between the Term Loan Facility and the
Incremental Term Loan Facility pro rata according to the respective outstanding principal amounts of Loans under such Facilities, and shall be applied
to the installments of such Loans pro rata based on the remaining outstanding principal amount of such installments." 

    C.  Section 2.18(c)
is hereby amended in its entirety to read as follows: 

    "(c)
Each mandatory prepayment to be applied to the Term Loans and the Incremental Term Loans pursuant to Section 2.12 shall be allocated between the Term Loan Facility and the
Incremental Term Loan Facility pro rata according to the respective outstanding principal amounts of Loans under such Facilities and shall be applied to
the installments of such Loans pro rata based on the remaining outstanding principal amount of such installments. Amounts prepaid on account of the Term
Loans and the Incremental Term Loan Facility may not be reborrowed. 

    2.16.Section 2.19
of the Credit Agreement is hereby amended as follows: 

    A.  Section 2.19(a)(i) is
hereby amended by inserting the terms ", any Letter of Credit, any Application" immediately after the words "with respect to
this Agreement" appearing therein. 

    B.  The
penultimate sentence of Section 2.19(a) is hereby amended by inserting the words "or issuing or participating in Letters of Credit" immediately after the
words "maintaining Eurodollar Loans" appearing therein. 

    C.  Section 2.19(b)
is hereby amended by inserting the words "or under or in respect of any Letter of Credit" immediately after the words "its obligations
hereunder" appearing therein. 

    2.17.  Incremental Loans.  A new Section 2.25 is hereby added to the Credit Agreement to read as
follows: 

    "2.25  Incremental Loans.  (a) The Borrower and any Lender (including any Person that was not
theretofore a Lender selected by the Borrower and reasonably satisfactory to the Administrative Agent (each a "New Lender")) may, at any time during the
period from and including the Amendment No. 1 Effective Date to the Incremental Term Loan Commitment Termination Date, agree that such Lender shall become an Incremental Term Lender by
executing and delivering to the Administrative Agent an Incremental Term Loan Activation 

7

Notice specifying (i) the respective Incremental Term Loan Commitment of such Lender, (ii) the Incremental Term Loan Activation Date, (iii) the rate of commitment fee, if any,
payable by the Borrower in respect of such Incremental Term Loan Commitment, (iv) the Applicable Margin that will apply to the Incremental Term Loans made under such Incremental Term Loan
Commitment, (v) the period of availability of such Incremental Term Loan Commitment (which shall in no event end later than the Incremental Term Loan Commitment Termination Date) (the
"Incremental Term Loan Commitment Period") and (vi) the principal installments (if any) payable in respect of any Incremental Term Loans made
thereunder and the final maturity date of such Incremental Loans, which shall be scheduled to be paid only on dates that are also Principal Payment Dates;  provided that, with respect to each Incremental
Term Loan Commitment and Incremental Term Loan, the terms referred to in (iii) through
(vi) above shall be subject to the consent of the Administrative Agent (which consent shall not be unreasonably withheld). Upon execution and delivery of such Incremental Term Loan Activation
Notice (and the consent of the Administrative Agent thereto, to the extent required by the proviso to the immediately preceding sentence) such Lender shall have an Incremental Term Loan Commitment in
the amount specified therein and, in the case of any New Lender, shall be a "Lender" party to this Agreement and, to the extent provided in such Incremental Term Loan Activation Notice, have the
rights and obligations of a Lender hereunder. 

    (b) Subject
to the terms and conditions hereof, each Incremental Term Loan Lender severally agrees to make term loans (the "Incremental Term
Loans") to the Borrower during the relevant Incremental Term Loan Commitment Period in an aggregate amount not exceeding the amount of the Incremental Term Loan Commitment of
such Lender. In addition, the Incremental Term Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance
with Sections 2.25(d) and 2.13. 

    (c) Any
unused portion of any Incremental Term loan Commitment shall automatically terminate at 5:00 p.m. (New York City time) on the Incremental Term Loan
Commitment Termination Date. 

    (d) The
Borrower may borrow under any Incremental Term Loan Commitment from the relevant Incremental Term Loan Lender during the relevant Incremental Term Loan
Commitment Period on any Business Day; provided that the Borrower shall give the Administrative Agent irrevocable notice (by delivering to the
Administrative Agent a Notice of Borrowing, which Notice of Borrowing must be received by the Administrative Agent prior to 12:00 Noon, New York City time, (a) three Business Days prior to the
requested Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans), specifying (i) the identity of
the Incremental Term Lender, (ii) the amount and Type of Incremental Term Loans to be borrowed, (iii) the requested Borrowing Date and (iv) in the case of Eurodollar Loans, the
length of the initial Interest Period therefor. Each borrowing under the Incremental Term Loan Commitments shall be in an amount equal to (x) in the case of Base Rate Loans, $1,000,000 or a
whole multiple of $100,000 in excess thereof (or, if the then unused amount of such Incremental Term Loan Commitment is less than $1,000,000, such lesser amount) and (y) in the case of
Eurodollar Loans, $1,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of such notice the Administrative Agent shall promptly notify the relevant Incremental Term Loan Lender
thereof. Such Incremental Term Lender will make the amount of each borrowing available to the Administrative Agent for the account of the Borrower at the Funding Officer prior to 12:00 Noon, New York
City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. 

8

Such borrowing will then be made available to the Borrower, upon its instructions, by the Administrative Agent in like funds as received by the Administrative Agent. 

    (e) The
Incremental Term Loan(s) of each Incremental Term Loan Lender shall be repaid in such number of quarterly installments and/or on such final maturity date, as
shall be specified in the relevant Incremental Term Loan Activation Notice; provided that in no event shall the percentage of the original principal
amount of such Incremental Term Loan payable on any Principal Payment Date exceed the percentage set forth below opposite such date: 

	Principal Payment Date

Falling on or Nearest to
 
	 	Percentage
	 
	March 31, 2003	 	2.5	%
	June 30, 2003	 	2.5	%
	September 30, 2003	 	2.5	%
	December 31, 2003	 	2.5	%
	March 31, 2004	 	5.0	%
	June 30, 2004	 	5.0	%
	September 30, 2004	 	5.0	%
	December 31, 2004	 	5.0	%
	March 31, 2005	 	7.5	%
	June 30, 2005	 	7.5	%
	September 30, 2005	 	7.5	%
	December 31, 2005	 	7.5	%
	March 31, 2006	 	10.0	%
	June 30, 2006	 	10.0	%
	September 30, 2006	 	10.0	%
	December 31, 2006	 	10.0	%

    Notwithstanding
anything herein to the contrary, no scheduled principal payments in respect of any Incremental Term Loan may be made prior to March 31, 2003. 

    (f)  Nothing
in this Agreement shall be construed to obligate any Lender to provide any Incremental Term Loan Commitment." 

    2.18.
A new SECTION 2A entitled "LETTERS OF CREDIT" is hereby added to the Credit Agreement to read as follows: 

    "2A.1  L/C Commitment.  Subject to the terms and conditions hereof, the Issuing Lender, in reliance on
the agreements of the other Revolving Credit Lenders set forth in Section 2A.4(a), agrees to issue standby letters of credit ("Letters of
Credit") for the account of the Borrower or any Subsidiary Guarantor on any Business Day during the Revolving Credit Commitment Period in such form as may be approved from time
to time by the Issuing Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such
issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the aggregate amount of the Available Commitments as to the Revolving Credit Lenders would be less than zero.
Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date
which is five Business Days prior to the Revolving Credit Termination Date; provided that any Letter of Credit with a one-year term may
provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above)." 

9

    2A.2  Procedure for Issuance of Letter of Credit.  The Borrower may from time to time request that the
Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender,
and such other certificates, documents and other papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the
certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested
thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other
certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing
Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Lender shall promptly furnish to the
Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of the issuance of each Letter of Credit (including the amount thereof). 

    2A.3  Fees and Other Charges.  (a) The Borrower will pay a fee in respect of all outstanding
Letters of Credit on the aggregate drawable amount of all such outstanding Letters of Credit at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans under
the Revolving Credit Facility, in each case shared ratably among the Revolving Credit Lenders and payable quarterly
in arrears on each L/C Fee Payment Date after the issuance date. In addition, the Borrower shall pay to the Issuing Lender for its own account a fronting fee on the aggregate drawable amount of all
outstanding Letters of Credit of 0.25% per annum, payable quarterly in arrears on each L/C Fee Payment Date after the issuance date. 

    (b) In
addition to the foregoing fees, the Borrower shall pay or reimburse the Issuing Lender, on demand, for such normal and customary costs and expenses as are
incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit. 

    2A.4  L/C Participations.  (a) The Issuing Lender irrevocably agrees to grant and hereby grants
to each L/ C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from
the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Revolving Credit Percentage in
the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and
irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of
this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Revolving Credit
Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. 

    (b) If
any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 2A.4(a) in respect of any unreimbursed portion of any
payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing
Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Effective Rate during the period from and including the date 

10

such
payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during
such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 2A.4(a) is not made available to the Issuing Lender by such
L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon
calculated from such due date at the rate per annum applicable to Base Rate Loans under the Revolving Credit Facility. A certificate of the Issuing Lender submitted to any L/C Participant with respect
to any amounts owing under this Section shall be conclusive in the absence of manifest error. 

    (c) Whenever,
at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro
rata share of such payment in accordance with Section 2A.4(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the
Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C
Participant its pro rata share thereof; provided,  however, that in the event that any such payment received
by the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C
Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 

    2A.5  Reimbursement Obligation of the Borrower.  The Borrower agrees to reimburse the Issuing Lender on
each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender for the amount of (a) such
draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender
at its address for notices specified herein in lawful money of the United States of America and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the
Borrower under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate set forth in (i) until the
second Business Day following the date of the applicable drawing, Section 2.15(b) and (ii) thereafter, Section 2.15(c). Each drawing under any Letter of Credit shall (unless an
event of the type described in clause (i) or (ii) of Section 7(f) shall have occurred and be continuing with respect to the Borrower, in which case the procedures specified in
Section 2A.4 for funding by L/C Participants shall apply) constitute a request by the Borrower to the Administrative Agent for a borrowing pursuant to Section 2.5 of Base Rate Loans (or,
at the option of the Administrative Agent and the Swing Line Lender in their sole discretion, a borrowing pursuant to Section 2.7 of Swing Line Loans) in the amount of such drawing. The
Borrowing Date with respect to such borrowing shall be the date of such drawing. 

    2A.6  Obligations Absolute.  The Borrower's obligations under this Section 2A shall be absolute
and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender, any beneficiary
of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower's Reimbursement Obligations under
Section 2A.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid,
fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims
whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing 

11

Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit,
except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Lender.
The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross
negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York, shall be binding on the Borrower and shall not result
in any liability of the Issuing Lender to the Borrower. 

    2A.7  Letter of Credit Payments.  If any draft shall be presented for payment under any Letter of Credit,
the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under
any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under
such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit. 

    2A.8  Applications.  To the extent that any provision of any Application related to any Letter of Credit
is inconsistent with the provisions of this Section 2A, the provisions of this Section 2A shall apply. 

    2A.9  Amendments and Waivers.  The consent of the Issuing Lender shall be required to (i) forgive
any principal amount or extend the final scheduled date of maturity of any Reimbursement Obligation, extend the expiration of any Letter of Credit beyond the Revolving Credit Termination Date, reduce
the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or (ii) amend, modify or waive any provision of this Section 2A." 

    2.19.  The
introductory sentence to Section 3 of the Credit Agreement is hereby amended by inserting the words "and issue or participate in the
Letters of Credit" immediately after the word "Loans" appearing therein. 

    2.20.  Section 3.5
of the Credit Agreement is hereby amended by inserting the terms ", the issuance of Letters of Credit," immediately after the
words "the other Credit Documents" appearing therein. 

    2.21.  Purpose of Loans.  Section 3.15 of the Credit Agreement is hereby amended in its entirety
to read as follows: 

    "3.15  Purpose of Loans.  The proceeds of the Term Loans, the Revolving Extensions of Credit and the
Incremental Loans shall be used to finance or reimburse the cost (including the cost of design, development, acquisition, construction, installation, improvement, transportation or integration) of
telecommunications equipment, inventory and/or network assets and back office systems for the business of the Subsidiaries of the Company and for purposes reasonably related thereto. The proceeds of
the Revolving Extensions of Credit shall also be used to finance the general corporate purposes of the Subsidiaries of the Company." 

    2.22.  The
last sentence of Section 4.2 of the Credit Agreement is hereby amended by inserting the words "and issuance of a Letter of Credit on
behalf of" after the words "Each borrowing by" appearing therein. 

12

    2.23.  Conditions to Each Term Loan and Each Incremental Loan.  Section 4.3 of the Credit
Agreement is hereby amended in its entirety as follows: 

    "4.3  Conditions to Each Incremental Term Loan.  The obligations of each Incremental Term Loan Lender to
make an Incremental Term Loan requested to be made by it pursuant to its Incremental Term Loan
Commitment on any date, are subject to the satisfaction of the conditions precedent that on or prior to the date of such Incremental Term Loan: 

    (a) The
Company shall have received at least $105,000,000 in cash from the issuance of equity of the Company after the Amendment No. 1 Effective Date. 

    (b) The
Tranche A-1 Term Loans in an aggregate principal amount of $45,000,000 shall have been made." 

    2.24.  The
introductory sentence to Section 5 of the Credit Agreement is hereby amended by inserting the terms ", any Letter of Credit remains
outstanding" immediately after the words "Commitments remain in effect" appearing therein. 

    2.25.  The
introductory sentence to Section 6 of the Credit Agreement is hereby amended by inserting the terms ", any Letter of Credit remains
outstanding" immediately after the words "Commitments remain in effect" appearing therein. 

    2.26.  Financial Condition Covenants.  Section 6.1 of the Credit Agreement is hereby amended in
its entirety to read as follows: 

    "6.1  Financial Condition Covenants.  

    I.  Stage 1 Financial Covenants.  During Stage 1: 

    (a)  Revenues.  Permit the Revenues for any fiscal quarter set forth below to be less than the amount set
forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	Minimum Revenues

	September 30, 2000	 	$	27,200,000
	December 31, 2000	 	$	33,300,000
	 

March 31, 2001	 
 	 
$	 

38,000,000
	June 30, 2001	 	$	43,400,000
	September 30, 2001	 	$	47,700,000
	December 31, 2001	 	$	55,800,000
	 

March 31, 2002	 
 	 
$	 

63,000,000
	June 30, 2002	 	$	71,900,000

13

    (b)  Consolidated EBITDA.  Permit Consolidated EBITDA for any fiscal quarter set forth below to be less
than the amount (or, if the amount specified below is a negative number, to be greater than such amount) set forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	EBITDA
	 
	September 30, 2000	 	$	(31,500,000	)
	December 31, 2000	 	$	(34,500,000	)
	 

March 31, 2001	 
 	 
$	 

(33,500,000	 
)
	June, 30, 2001	 	$	(16,000,000	)
	September 30, 2001	 	$	(12,000,000	)
	December 31, 2001	 	$	(8,000,000	)
	 

March 31, 2002	 
 	 
$	 

(3,500,000	 
)
	June, 30, 2002	 	$	1,000,000	 

    (c)  Lines.  Permit the aggregate number of Lines as at the last day of any fiscal quarter set forth
below to be less than the amount set forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	Minimum

Number of Lines

	September 30, 2000	 	180,600
	December 31, 2000	 	222,000
	 

March 31, 2001	 
 	 

264,000
	June, 30, 2001	 	310,000
	September 30, 2001	 	340,000
	December 31, 2001	 	390,000
	 

March 31, 2002	 
 	 

440,000
	June, 30, 2002	 	490,000

    (d)  Senior Secured Debt to Total Capitalization Ratio.  Permit, as at the last day of any fiscal quarter
ending during Stage 1, the ratio of (a) Senior Secured Debt on such day to (b) Total Capitalization on such day to exceed 0.50 to 1. 

14

    II.  Stage 2 Financial Covenants.  During Stage 2: 

    (a)  Senior Leverage Ratio.  Permit the Senior Leverage Ratio as at the last day of any fiscal quarter
set forth below to exceed the ratio set forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	Senior Leverage Ratio

	September 30, 2002	 	6.0 to 1
	December 31, 2002	 	5.0 to 1
	 

March 31, 2003	 
 	 

4.0 to 1
	June 30, 2003	 	4.0 to 1
	September 30, 2003	 	3.5 to 1
	December 31, 2003	 	3.0 to 1
	 

March 31, 2004	 
 	 

2.5 to 1
	June 30, 2004	 	2.0 to 1
	September 30, 2004	 	2.0 to 1
	December 31, 2004	 	2.0 to 1
	 

March 31, 2005	 
 	 

2.0 to 1
	June 30, 2005	 	2.0 to 1
	September 30, 2005	 	2.0 to 1
	December 31, 2005	 	2.0 to 1
	 

March 31, 2006	 
 	 

2.0 to 1
	June 30, 2006	 	2.0 to 1
	September 30, 2006	 	2.0 to 1
	December 31, 2006	 	2.0 to 1

15

    (b)  Total Leverage Ratio.  Permit the Total Leverage Ratio as at the last day of any fiscal quarter set
forth below to exceed the ratio set forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	Total Leverage Ratio

	September 30, 2002	 	9.0 to 1
	December 31, 2002	 	9.0 to 1
	 

March 31, 2003	 
 	 

8.0 to 1
	June 30, 2003	 	8.0 to 1
	September 30, 2003	 	8.0 to 1
	December 31, 2003	 	8.0 to 1
	 

March 31, 2004	 
 	 

7.0 to 1
	June 30, 2004	 	7.0 to 1
	September 30, 2004	 	7.0 to 1
	December 31, 2004	 	7.0 to 1
	 

March 31, 2005	 
 	 

6.0 to 1
	June 30, 2005	 	6.0 to 1
	September 30, 2005	 	6.0 to 1
	December 31, 2005	 	6.0 to 1
	 

March 31, 2006	 
 	 

6.0 to 1
	June 30, 2006	 	6.0 to 1
	September 30, 2006	 	6.0 to 1
	December 31, 2006	 	6.0 to 1

16

    (c)  Interest Coverage Ratio.  Permit the Interest Coverage Ratio as at the last day of any fiscal
quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	Interest Coverage Ratio

	September 30, 2002	 	1.00 to 1
	December 31, 2002	 	1.25 to 1
	 

March 31, 2003	 
 	 

1.50 to 1
	June 30, 2003	 	1.75 to 1
	September 30, 2003	 	2.00 to 1
	December 31, 2003	 	2.25 to 1
	 

March 31, 2004	 
 	 

2.50 to 1
	June 30, 2004	 	2.75 to 1
	September 30, 2004	 	2.75 to 1
	December 31, 2004	 	2.75 to 1
	 

March 31, 2005	 
 	 

2.75 to 1
	June 30, 2005	 	2.75 to 1
	September 30, 2005	 	2.75 to 1
	December 31, 2005	 	2.75 to 1
	 

March 31, 2006	 
 	 

2.75 to 1
	June 30, 2006	 	2.75 to 1
	September 30, 2006	 	2.75 to 1
	December 31, 2006	 	2.75 to 1

17

    (d)  Pro Forma Debt Service Coverage.  Permit the Pro Forma Debt Service Coverage Ratio as at the last
day of any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter: 

	Fiscal Quarter Ending
 
	 	Pro Forma Debt Service

Coverage Ratio
	 
	December 31, 2002	 	1.00 to 1	 
	 

March 31, 2003	 
 	 

1.00 to 1	 
 
	June 30, 2003	 	1.25 to 1	 
	September 30, 2003	 	1.50 to 1	 
	December 31, 2003	 	1.50 to 1	 
	 

March 31, 2004	 
 	 

1.75 to 1	 
 
	June 30, 2004	 	2.00 to 1	 
	September 30, 2004	 	2.00 to 1	 
	December 31, 2004	 	2.00 to 1	 
	 

March 31, 2005	 
 	 

2.00 to 1	 
 
	June 30, 2005	 	2.00 to 1	 
	September 30, 2005	 	2.00 to 1	 
	December 31, 2005	 	2.00 to 1	 
	 

March 31, 2006	 
 	 

2.00 to 1	 
 
	June 30, 2006	 	2.00 to 1	 
	September 30, 2006	 	2.00 to 1	 
	December 31, 2006	 	2.00 to 1	"

    2.27.  Indebtedness.  Section 6.2(f) of the Credit Agreement is hereby amended by replacing the
amount "$5,000,000" with "$10,000,000". 

    2.28.  Limitation on Capital Expenditures.  Section 6.15 of the Credit Agreement is amended in its
entirety to read as follows: 

    "6.15  Limitation on Capital Expenditures.  Make or commit to make any Capital Expenditure, except
Capital Expenditures of the Company and its Subsidiaries in the ordinary course of business in an aggregate amount not exceeding (a) $120,000,000 in fiscal year 2000, (b) $60,000,000 in
fiscal year 2001 and (c) for each fiscal year thereafter, the amount set forth below opposite such fiscal year: 

	Fiscal Year
 
	 	Capital Expenditures

	2002	 	$	50,000,000
	2003	 	$	50,000,000
	2004	 	$	75,000,000
	2005	 	$	75,000,000
	2006	 	$	75,000,000

;
provided that (i) up to 25% of any such amount referred to above, if not so expended in the fiscal year for which it is permitted, may be
carried over for expenditure in the next succeeding fiscal year, (ii) up to 25% of the amount referred to above for any fiscal year may be expended in the immediately prior fiscal year (but any
amount so expended in any such prior fiscal year may not be expended in such fiscal year) and (iii) Capital Expenditures made pursuant to this Section during any fiscal year shall be deemed
made, first, in respect of 

18

amounts permitted for such fiscal year as provided above and, second, in respect of amounts carried over from the prior fiscal year pursuant to subclause (i) above; and  provided, further, that no more than 20% of Capital Expenditures in any fiscal year may be incurred for
expenditures not related to the Company's and its Subsidiaries' core CLEC switched access business as conducted as of the Closing Date and similar or related businesses. Notwithstanding the foregoing
limitations, the Company and its Subsidiaries may make Capital Expenditures with (i) the proceeds of any Reinvestment Deferred Amount received in connection with a Recovery Event and
(ii) the Available Amount at the time any such Capital Expenditure is made." 

    2.29.  Section 7
of the Credit Agreement is hereby amended as follows: 

    A.  by
inserting in the portion of the sentences immediately after paragraph (k) thereof, immediately following each reference to "other Credit Documents"
thereof, the parenthetical "(including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the
documents required thereunder)" and 

    B.  by
inserting the following new sentences at the end thereof: 

    "With
respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower
shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in
such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit
shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the other Credit Documents. After all such Letters of Credit shall
have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other Obligations of the Borrower hereunder and under the other Credit Documents shall have been
paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto)." 

    2.30.  Events of Default.  Section 7(k) of the Credit Agreement is hereby amended by inserting the
word "or" immediately after the semicolon appearing at the end thereof and a new Section 7(l) is hereby added to the Credit Agreement to read as follows: 

    "(l) the
Company shall fail to receive aggregate cash proceeds from the issuance of additional equity of the Company after the Amendment Effective Date in an amount of
at least $105,000,000 on or before July 31, 2001, of which not less than $75,000,000 of such amount shall have been received on or before March 31, 2001;" 

    2.31.    The
last sentence of Section 8.8 of the Credit Agreement is hereby amended by inserting the terms "and with respect to
any Letter of Credit issued or participated in by it," immediately following the words "Loans made or renewed by it" appearing therein. 

    2.32.  Successors and Assigns; Participations and Assignments.  Section 9.6(e) of the Credit
Agreement is amended in its entirety to read as follows: 

    "(e) Upon
its receipt of an Assignment and Acceptance executed by an Assignor and an Assignee (and, in any case where the consent of any other Person is required by
Section 9.6(c), by each such other Person) together with payment to the Administrative Agent of a registration and processing fee of $3,500 (except that no such registration and processing fee
shall be payable (y) in connection with an assignment by or to LCPI or any of its Affiliates 

19

or (z) in the case of an Assignee which is already a Lender or is an Affiliate of a Lender (including, without limitation in the case of any Lender that is an investment fund which is regularly
engaged in making, purchasing or investing in loans or securities, any other such fund which is under common (or affiliated) management with such Lender), the Administrative Agent shall
(i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of
such acceptance and recordation to the Lenders and the Borrower. On or prior to such effective date, the Borrower, at its own expense, upon request, shall execute and deliver to the Administrative
Agent (in exchange for the Revolving Credit Note and/or Term Notes and/or Incremental Term Loan Notes, as the case may be, of the assigning Lender) a new Revolving Credit Note and/or Term Notes and/or
Incremental Term Loan Notes, as the case may be, to the order of such Assignee in an amount equal to the Revolving Credit Commitment and/or Term Commitment or Term Loans, as the case may be, assumed
or acquired by it pursuant to such Assignment and Acceptance and, if the Assignor has retained a Revolving Credit Commitment and/or Term Commitment or Term Loans, and/or the Incremental Term Loan
Commitments or Incremental Term Loans, as the case may be, upon request, a new Revolving Credit Note and/or Term Notes and/or Incremental Term Loan Notes, as the case may be, to the order of the
Assignor in an amount equal to the Revolving Credit Commitment and/or applicable Term Commitment or Term Loans and/or the Incremental Term Loan Commitments or Incremental Term Loans, as the case may
be, retained by it hereunder. Such new Note or Notes shall be dated the Closing Date and shall otherwise be in the form of the Note or Notes replaced thereby." 

    2.33.  Pricing Grid.  Schedule I to the Credit Agreement is hereby amended in its entirety and
replaced with Schedule I attached to this Amendment No. 1, and each reference in the Credit Agreement to "Schedule I" or the "Pricing Grid" (or words of like import) shall be deemed to
refer to Schedule I attached to this Amendment No. 1. 

    2.34.  Form of Incremental Term Note.  A new Exhibit F-4 attached to this Amendment
No. 1 is hereby added to the Credit Agreement. 

    2.35.  Form of Incremental Term Loan Activation Notice.  A new Exhibit J attached to this
Amendment No. 1 is hereby added to the Credit Agreement. 

    Section 3.  Representations and Warranties.  Each of the Company and the Borrower represents and
warrants to the Lenders that (a) after giving effect to the amendments set forth in Section 2 of this Amendment No. 1, no Default or Event of Default shall have occurred and be
continuing and (b) the representations and warranties set forth in Section 3 of the Credit Agreement are true and complete on the date hereof as if made on and as of the date hereof (or,
if any such representations and warranties expressly relate to any earlier date, as of such earlier date), after giving effect to such amendments and as if each reference in said Section 3 to
"this Agreement" included reference to this Amendment No. 1. 

    Section 4.  Conditions Precedent.  As provided in Section 2 of this Amendment No. 1,
the amendments to the Credit Agreement set forth in said Section 2 shall become effective as of the date hereof upon satisfaction of the following conditions precedent (the
"Amendment Closing Date"): 

    4.1.  Amendment No. 1.  The Administrative Agent shall have received (a) one or more
counterparts of this Amendment No. 1, duly executed and delivered by the Company, the Borrower and the Required Lenders (or the Administrative Agent, with the written consent of the Required
Lenders) and (b) an Amendment No. 1 Lender Addendum executed by each Lender which is increasing its Revolving Credit Commitment and/or agreeing to a Tranche A-1 Term Loan
Commitment as of the Amendment No. 1 Effective Date, the Borrower and the Administrative Agent. 

20

    4.2.  Documents.  The Administrative Agent shall have received the following documents, each of which
shall be satisfactory to the Administrative Agent in form and substance: 

    (1)  Authorizations.  All authorizations and approvals referred to in Section 3.4 of the Credit
Agreement (as amended hereby) shall have been obtained and be in full force and effect. 

    (2)  Opinions of Counsel.  The Administrative Agent shall have received an executed legal opinion dated
the Amendment No. 1 Effective Date from (a) Latham & Watkins, counsel to the Company and its Subsidiaries and (b) the General Counsel of the Company, which opinions shall
cover such matters incident to the transactions contemplated by this Amendment No. 1 as the Administrative Agent may reasonably require and shall be in form and substance satisfactory to the
Administrative Agent. 

    (3)  Fees and Expenses.  The Administrative Agent shall have received all fees and other amounts due and
payable on or prior to the Amendment No. 1 Effective Date, including, to the extent invoiced, reimbursement or payment of all out of pocket expenses required to be reimbursed or paid by the
Company or the Borrower under the Credit Agreement. 

    (4)  Other Documents.  Receipt by the Administrative Agent of such other documents as the Administrative
Agent or any Lender or Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to the Administrative Agent may reasonably request. 

    Section 5.  Miscellaneous.  Except as herein provided, the Credit Agreement shall remain unchanged
and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of
the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of
New York. 

21

    IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. 

	 

 	 
 	 
  BIRCH TELECOM, INC.
	 

 	 
 	 
 By:	 

 Name:

Title:
	 

 	 
 	 
  BIRCH TELECOM FINANCE, INC.
	 

 	 
 	 
 By:	 

 Name:

Title:
	 

 	 
 	 
 LENDERS
	 

 	 
 	 
  LEHMAN COMMERCIAL PAPER INC,

individually, as Swingline Lender and as

Administrative Agent
	 

 	 
 	 

By:	 

 Name:

Title:

22

 

SHEDULE I

  PRICING GRID
       (for Revolving Credit Facility and Term Loan Facility)         

	Total Leverage Ratio
 
	 	Applicable Margin for

Eurodollar Loans
	 	Applicable Margin for

Base Rate Loans
	 
	>	8.0 to 1 (or negative EBITDA)	 	4.00	%	2.75	%
	>	7.0 to 1	 	3.75	%	2.50	%
	>	6.0 to 1	 	3.50	%	2.25	%
	>	5.0 to 1	 	3.25	%	2.00	%
	less than or equal to 5.0 to 1	 	3.00	%	1.75	%

 

  EXHIBIT F-4         

       [FORM OF INCREMENTAL TERM NOTE]         

    THIS
NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO BELOW. TRANSFERS OF THIS
NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE TERMS OF SUCH CREDIT AGREEMENT. 

	 

$	 
 	 

New York, New York

    
FOR VALUE RECEIVED, the undersigned, BIRCH TELECOM FINANCE, INC., a corporation duly organized and validly existing under the law of the State of Delaware (the
"Borrower"), hereby unconditionally promises to pay to            (the "Lender") or its
registered assigns at the Payment Office specified in the Credit Agreement (as hereinafter defined) in lawful money of the United States and in immediately available funds, the principal amount of
(a)             ($      ) or, if less, (b) the unpaid principal amount of all Incremental Term Loans made by the Lender pursuant to Section 2.25
of the Credit
Agreement. The principal amount shall be paid in the amounts and on the dates specified in Section 2.25 of the Credit Agreement. The Borrower further agrees to pay interest in like money at
such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 2.25 of the Credit Agreement. 

    The
holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part
hereof the date, Type and amount of each Incremental Term Loan and the date and amount of each payment or prepayment of principal with respect thereto, each conversion of all or a portion thereof to
another Type, each continuation of all or a portion thereof as the same Type and, in the case of Eurodollar
Loans, the length of each Interest Period with respect thereto. Each such endorsement shall constitute prima facie evidence of the accuracy of the
information endorsed. The failure to make any such endorsement or any error in any such endorsement shall not affect the obligations of the Borrower in respect of any Incremental Term Loan. 

    This
Note (a) is one of the Incremental Term Notes referred to in the Credit Agreement dated as of February 2, 2000 (as amended, supplemented or otherwise modified from
time to time, the "Credit Agreement"), among BIRCH TELECOM, INC., the Borrower, the several banks and other financial institutions or entities
from time to time parties thereto (the "Lenders"), LEHMAN BROTHERS INC., as advisor, lead arranger and book manager (in such capacity, the
"Arranger"), LEHMAN COMMERCIAL PAPER INC., as syndication agent (in such capacity, the "Syndication
Agent"), and LEHMAN COMMERCIAL PAPER INC., as administrative agent (in such capacity, the "Administrative Agent"),
(b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is
secured and guaranteed as provided in the Credit Documents. Reference is hereby made to the Credit Documents for a description of the properties and assets in which a security interest has been
granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note
in respect thereof. 

    Upon
the occurrence of any one or more of the Events of Default, all principal and all accrued interest then remaining unpaid on this Note shall become, or may be declared to be,
immediately due and payable, all as provided in the Credit Agreement. 

    All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all
other notices of any kind. 

    Unless
otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement 

    NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND
IN ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 9.6 OF THE CREDIT AGREEMENT.

    THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

	 

 	 
 	 
  BIRCH TELECOM FINANCE, INC.
	 

 	 
 	 
 By:	 

 Name:

Title:

2

Schedule A

to Incremental Term Note  

 LOANS, CONVERSIONS AND REPAYMENT OF BASE RATE LOANS  

	

	Date
 
	 	Amount of

Base Rate Loans
	 	Amount Converted to Base Rate Loans
	 	Amount of Principal of Base Rate Loans Repaid
	 	Amount of Base Rate

Loans Converted to Eurodollar Loans
	 	Unpaid Principal Balance of Base Rate Loans
	 	Notation Made By

	

	

	

	

	

	

	

	

	

	

	

	

	

	

Schedule B

to Incremental Term Note  

 LOANS, CONVERSIONS AND REPAYMENT OF EURODOLLAR LOANS  

	

	Date
 
	 	Amount of Eurodollar Loans
	 	Amount Converted to Eurodollar Loans
	 	Interest Period and Eurodollar Rate with Respect Thereto
	 	Amount of Principal of Eurodollar Loans Repaid
	 	Amount of Eurodollar Loans Converted to Base Rate Loans
	 	Unpaid Principal Balance of Eurodollar Loans
	 	Notation Made By

	

	

	

	

	

	

	

	

	

	

	

	

	

EXHIBIT J  

 [FORM OF INCREMENTAL TERM LOAN ACTIVATION NOTICE]

To:  Lehman
Commercial Paper Inc.,

as Administrative Agent under the Credit Agreement

referred to below 

    Reference
is hereby made to the Credit Agreement, dated as of February 2, 2000 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among BIRCH TELECOM, INC., a corporation duly organized and validly existing under the law of the State of Delaware (the
"Company"), BIRCH TELECOM FINANCE, INC., a corporation duly organized and validly existing under the law of the State of Delaware (the
"Borrower"), the several banks and other financial institutions or entities from time to time parties thereto (the
"Lenders"), LEHMAN BROTHERS INC., as advisor, lead arranger and book manager (in such capacity, the
"Arranger"), LEHMAN COMMERCIAL PAPER INC., as syndication agent (in such capacity, the "Syndication
Agent"), and LEHMAN COMMERCIAL PAPER INC., as administrative agent (in such capacity, the "Administrative Agent"). Terms
defined in the Credit Agreement and not defined herein are used herein as defined therein. 

    This
notice is an Incremental Term Loan Activation Notice referred to in the Credit Agreement, and the Borrower and the Lender signatory hereto (the
"Incremental Term Loan Lender") hereby notify you that: 

	1.
	The
Incremental Term Loan Activation Date is            .

	2.
	The
Incremental Term Loan Commitment of the Incremental Term Loan Lender is set forth opposite the Incremental Term Loan Lender's name on the signature pages hereof under the
caption "Incremental Term Loan Commitment". 

    The
Incremental Term Loan Lender and the Borrower hereby agree that (a) the rate of commitment fee payable by the Borrower to the Incremental Term Loan Lender under
Section 2.25 of the Credit Agreement on the average daily unused amount of the Incremental Term Loan Lender's Incremental Term Loan Commitment shall be             
 , (b) the Applicable Margin for Incremental Term Loans shall be              , (c) the Incremental Term
Loan Commitment of the Incremental Term Loan Lender shall terminate on
[specify date (not to be later than the Incremental Term Loan Commitment Termination Date)], (d) principal installments
of the Incremental Term Loans shall be payable as follows: [            ] and (e) the final maturity date of the
Incremental Term Loan is             . 

	 	 	BIRCH TELECOM FINANCE, INC.
	 

 	 
 	 

By
 Name:

Title:
	 
 Incremental Term Loan Commitment	 
 	 
 [NAME OF INCREMENTAL TERM LOAN LENDER]
	 

$                  	 
 	 

 
	 

 	 
 	 

By
 Name:

Title:
	 

CONSENTED TO:	 
 	 

 
	 
 LEHMAN COMMERCIAL PAPER INC.,
 as Administrative Agent	 
 	 

 
	 

By
	 
 	 

 
	 	Name:	 	 
	 	Title:	 	 

2

QuickLinks

EXHIBIT 10.40

Execution copy

AMENDMENT NO. 1

PRICING GRID (for Revolving Credit Facility and Term Loan Facility)

EXHIBIT F-4

[FORM OF INCREMENTAL TERM NOTE]<PAGE>

                                  EXHIBIT 10.12
                                  -------------

                         STRATEGIC INVESTMENT AGREEMENT

                                     BETWEEN

                              DIGIMARC CORPORATION

                                       AND

                             MACROVISION CORPORATION

                         DATED AS OF SEPTEMBER 17, 2000

<PAGE>

                              TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                                PAGE

<S>                                                                                                           <C>

ARTICLE I.PURCHASE AND SALE OF ADDITIONAL SHARES..................................................................2
              1.1    PURCHASE AND SALE OF THE ADDITIONAL SHARES...................................................2
              1.2    THE CLOSING..................................................................................2
              1.3    JDA AMENDMENT................................................................................2

ARTICLE II.REPRESENTATIONS AND WARRANTIES.........................................................................2
              2.1    REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................2
              2.2    REPRESENTATIONS AND WARRANTIES OF THE INVESTOR...............................................9

ARTICLE III.COVENANTS............................................................................................12
              3.1    [RESERVED]..................................................................................12
              3.2    INVESTOR'S STANDSTILL AGREEMENT.............................................................12
              3.3    TRANSFER....................................................................................13
              3.4    COMPLIANCE WITH SECTION 13..................................................................14
              3.5    DIRECTOR APPOINTMENTS AND ELECTION..........................................................14

ARTICLE IV.REGISTRATION RIGHTS...................................................................................14
              4.1    LEGEND......................................................................................14
              4.2    REGISTRATION ON FORM S-3....................................................................15
              4.3    PIGGYBACK REGISTRATION......................................................................16
              4.4    REGISTRATION PROCEDURES.....................................................................17
              4.5    DELAY OF REGISTRATION; FURNISHING INFORMATION...............................................20
              4.6    TERMINATION OF REGISTRATION RIGHTS..........................................................20
              4.7    INDEMNIFICATION.............................................................................20
              4.8    ASSIGNMENT OF REGISTRATION RIGHTS...........................................................23
              4.9    LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS................................................23
              4.10   MARKET STAND-OFF AGREEMENT..................................................................23
              4.11   RULE 144 REPORTING..........................................................................24

ARTICLE V.ADDITIONAL AGREEMENTS..................................................................................24
              5.1    CONSENTS; APPROVALS.........................................................................24
              5.2    PROCEDURAL SAFEGUARDS.......................................................................25

ARTICLE VI.CONDITIONS PRECEDENT..................................................................................25
              6.1    INVESTOR CONDITIONS TO CLOSING..............................................................25
              6.2    COMPANY CONDITIONS TO CLOSING...............................................................27

ARTICLE VII.MISCELLANEOUS........................................................................................29
              7.1    FEES AND EXPENSES...........................................................................29
              7.2    SEVERABILITY................................................................................29
              7.3    CONSENT TO JURISDICTION.....................................................................29
              7.4    DISPUTE RESOLUTION PROCEDURES...............................................................30
              7.5    BROKERS.....................................................................................32
              7.6    ENTIRE AGREEMENT; AMENDMENTS................................................................32

                                       i
<PAGE>

              7.7    NOTICES.....................................................................................33
              7.8    NO WAIVER...................................................................................34
              7.9    HEADING.....................................................................................34
              7.10   SUCCESSORS AND ASSIGNS......................................................................34
              7.11   NO THIRD PARTY BENEFICIARIES................................................................34
              7.12   GOVERNING LAW...............................................................................34
              7.13   FURTHER ASSURANCES..........................................................................34
              7.14   RELATIONSHIP OF THE PARTIES.................................................................35
              7.15   PUBLICITY...................................................................................35
              7.16   NUMBER AND GENDER OF WORDS..................................................................35
              7.17   INTERPRETATION..............................................................................36
              7.18   COUNTERPARTS................................................................................36

</TABLE>

                                       ii

<PAGE>

                                TABLE OF EXHIBITS

Exhibit A - Definitions
Exhibit B - JDA Amendment
Exhibit C - Schedule of Exceptions
Exhibit D - Director Agreement

<PAGE>

                                  EXHIBIT 10.12
                                  -------------

                              DIGIMARC CORPORATION

                         STRATEGIC INVESTMENT AGREEMENT

         THIS STRATEGIC INVESTMENT AGREEMENT (this "AGREEMENT") is made as of
September 17, 2000 by and between MACROVISION CORPORATION, a Delaware
corporation (the "INVESTOR"), and DIGIMARC CORPORATION, a Delaware corporation
(the "COMPANY"), (each a "PARTY", collectively, the "PARTIES"). Capitalized
terms used in this Agreement and not otherwise defined are defined in EXHIBIT A,
attached hereto and incorporated by reference herein.

         A. The Investor and the Company believe that a more extensive business
relationship between them would be mutually advantageous.

         B. As part of such current and potential business relationship, the
Parties desire that the Investor further increase its equity stake in the
Company by purchasing additional shares of the Company's Common Stock (the
"COMMON STOCK", and such shares, the "ADDITIONAL SHARES") at a purchase price of
the lower of (i) $20.00 per share and (ii) the price to be paid for the Common
Stock by Koninklijke Philips Electronics N.V. or an Affiliate thereof
("PHILIPS") for the purchase of approximately twelve percent (12%) of the issued
and outstanding Common Stock pursuant to the Strategic Investment Agreement
between the Company and Philips of even date herewith (the "PHILIPS STRATEGIC
INVESTMENT AGREEMENT"), such that after its purchase of the Additional Shares
the Investor will hold an aggregate amount of Common Stock equal to the
Macrovision Percentage (defined below). The "MACROVISION PERCENTAGE" of the
Common Stock shall be an amount equal to twelve and five tenths of a percent
(12.5%) of the issued and outstanding Common Stock at the Closing, including the
924,475 shares of Common Stock currently owned by the Investor (the "ORIGINAL
SHARES") and the Additional Shares to be issued to the Investor hereunder and
the shares issued or to be issued pursuant to the Philips Strategic Investment
Agreement, but excluding shares subject to warrants, options or other contracts
for the sale of the Common Stock existing on the date of this Agreement. If the
Company issues any warrants, options or other contracts for the purchase of
Common Stock after the date of this Agreement but prior to the Closing (other
than pursuant to the Company's existing employee stock purchase plans), then the
Investor may purchase (at its option) a number of shares of Common Stock such
that the Macrovision Percentage may be calculated including the Common Stock
available for issuance under such warrants, options and other contracts.

                  NOW, THEREFORE, in consideration of the mutual promises
contained herein and made pursuant hereto, and good and valuable consideration,
receipt of which is hereby acknowledged, the Parties hereto do hereby agree as
follows:

                                       1
<PAGE>

                                   ARTICLE I.

                     Purchase and Sale of Additional Shares
                     --------------------------------------

1.1      PURCHASE AND SALE OF THE ADDITIONAL SHARES.

         Subject to the terms and conditions hereof, the Company will issue and
sell to the Investor, and the Investor will purchase from the Company, at the
Closing (defined in Section 1.2), that number of Additional Shares at a purchase
price per share (the "SHARE PRICE") equal to the lower of (a) $20.00 per share
and (b) the price for the Common Stock to be paid by Philips pursuant to the
Philips Strategic Investment Agreement, such that the Investor will hold an
aggregate amount of Common Stock equal to the Macrovision Percentage. The "TOTAL
PURCHASE PRICE" shall be the Share Price multiplied by the number of Additional
Shares purchased by the Investor, such number of shares when taken together with
the Original Shares not to exceed the Macrovision Percentage.

1.2      THE CLOSING.

         The purchase and sale of the Additional Shares shall take place at the
offices of Morrison & Foerster LLP, 425 Market Street, San Francisco,
California, on October 19, 2000, or at such other time and place as the Company
and the Investor mutually agree upon orally or in writing (the "CLOSING"). At
the Closing, the Company shall deliver to the Investor a stock certificate
representing the Additional Shares purchased by the Investor, and the Investor
shall pay the Total Purchase Price by wire transfer of immediately available
funds in the manner requested by the Company, all in accordance with
Section 1.1.

1.3      JDA AMENDMENT.

         On the date hereof the Parties will execute an amendment to the Joint
Development Agreement between them, dated as of August 22, 1997 and as
previously amended, which is attached hereto as EXHIBIT B (the "JDA AMENDMENT").
[***] The remaining terms and conditions are more fully set forth in the JDA
Amendment.

                                  ARTICLE II.

                         Representations and Warranties
                         ------------------------------

2.1      REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         Except as set forth on the Schedule of Exceptions, attached hereto as
EXHIBIT C ("SCHEDULE OF EXCEPTIONS"), or as disclosed in the SEC Documents (as
defined in Section 2.1(f)), the Company represents and warrants to the Investor
as follows:

                                       2
<PAGE>

         (a)      ORGANIZATION AND QUALIFICATION.

         The Company is a corporation duly organized and existing in good
standing under the laws of the jurisdiction in which it is incorporated, and has
the requisite corporate power to own its properties and to carry on its business
as now being conducted. The Company is duly qualified as a foreign corporation
to do business and is in good standing in every jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary and where the failure to qualify would have a Material Adverse Effect
with respect to the Company.

         (b) AUTHORIZATION; ENFORCEMENT.

         The Company has the requisite corporate power and authority to enter
into and perform this Agreement and to issue the Additional Shares in accordance
with the terms hereof. The execution and delivery by the Company of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Company's Board of Directors, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required. This Agreement has been duly executed and delivered by the Company.
Subject to the Company's receipt of the Total Purchase Price, this Agreement
constitutes the valid and binding obligation of the Company enforceable against
the Company in accordance with its respective terms, except as such
enforceability may be limited by applicable insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by equitable principles of
general application.

         (c) CAPITALIZATION.

         The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock, of which as of September 13, 2000, 13,085,930 shares
were issued and outstanding and 5,000,000 shares of Preferred Stock, none of
which is outstanding. All of such outstanding shares have been validly issued
and are fully paid and nonassessable. As of September 15, 2000, the Company has:
(1) granted options to purchase a total of 4,028,438 shares of Common Stock; (2)
issued warrants covering 150,000 shares of Common Stock; (3) not entered into
other contracts covering the future issuance of any shares of Common Stock; (4)
reserved for issuance 1,167,470 shares of Common Stock under its employee stock
option plans; and (5) reserved for issuance 575,603 shares of Common Stock under
its employee stock purchase plans. The Company has furnished to the Investor
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof (the "CERTIFICATE OF INCORPORATION") and the Company's
By-laws, as in effect on the date hereof (the "BY-LAWS").

         (d) VALIDITY OF ADDITIONAL SHARES.

         The Additional Shares, when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable.

                                       3
<PAGE>

         (e) NO CONFLICTS.

         The execution, delivery and performance by the Company of this
Agreement and the consummation by the Company of the transactions contemplated
hereby do not (i) result in a violation of the Company's Certificate of
Incorporation or By-laws, or (ii) conflict with, or constitute a default (or an
event which with material notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, material indenture or
material instrument to which the Company is a Party, or result in a violation of
any law, rule, regulation, order, judgment or decree applicable to the Company
or by which any property or asset of the Company is bound or affected (except
for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the aggregate,
have a Material Adverse Effect on the Company). No action, suit, dispute or
proceeding is pending or, to the best knowledge of the Company, threatened
against the Company which, if adversely determined, would prevent the Company
from carrying out its obligations under this Agreement or which would have a
Material Adverse Effect on the Company or on any of the Company's Intellectual
Property (as defined in Section 2(m)(i) hereof). The business of the Company is
not being conducted in violation of any law, ordinance or regulation of any
Governmental Authority, except for possible violations which either singly or in
the aggregate do not and will not have a Material Adverse Effect with respect to
the Company. Except as contemplated by this Agreement, the Company is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court or Governmental Authority in order for it to
execute, deliver or perform any of its obligations under this Agreement.

         (f) SEC DOCUMENTS, FINANCIAL STATEMENTS.

         Since December 7, 1999, the Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
pursuant to the reporting requirements of the Exchange Act (all filings with the
SEC since such date through the date of this Agreement are hereinafter the "SEC
DOCUMENTS"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC Documents,
and none of the SEC Documents (when read together with all exhibits included
therein and financial statement schedules thereto and documents (other than
exhibits) incorporated by reference) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial

                                       4
<PAGE>

statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or year-end adjustments
or may be condensed or summary statements) and fairly present in all material
respects the consolidated financial position of the Company as of the dates
thereof and the consolidated results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).

         (g) LIABILITIES.

         The Company has no debt, obligation, duty or liability of any nature
including any unknown, undisclosed, unmatured, unaccrued, unasserted,
contingent, indirect, conditional, implied, vicarious, derivative, joint,
several or secondary liability, regardless of whether such debt, obligation,
duty or liability would be required to be disclosed on a balance sheet prepared
in accordance with GAAP, consistently applied, and regardless of whether such
debts, obligations, duties or liabilities are immediately due and payable
(hereinafter, "LIABILITIES"), and the executive officers of the Company have no
knowledge that could result in any such debts, obligations, duties or
liabilities of the Company except:

            (i) Those Liabilities disclosed in the SEC Documents; or

            (ii) Those Liabilities reflected or reserved against on the
Company's June 30, 2000 balance sheet (the "INTERIM BALANCE SHEET") or incurred
by the Company in the ordinary course of business since June 30, 2000, none of
which individually or in the aggregate had or will have a Material Adverse
Effect on the business of the Company or its property, assets, financial
condition, earnings, profits or prospects or which would have a material adverse
effect on any of the Intellectual Property.

         (h) OFFERING.

         Assuming (i) the accuracy of the representations and warranties of the
Investor contained in Section 2.2 hereof and (ii) that the principal office of
the Investor is at 1341 Orleans Drive, Sunnyvale, California, the offer,
issuance, and sale of the Additional Shares are and will be exempt from the
registration and prospectus delivery requirements of the Securities Act and are
exempt from the registration, permit, or qualification requirements of all
applicable state securities laws.

         (i) SUBSIDIARIES.

         The Company does not presently own or control, directly, or indirectly,
any interest in any other corporation, association, partnership, or other
business entity.

         (j) LITIGATION.

         There are no civil, criminal or administrative actions, suits, claims,
hearings or proceedings pending, initiated or, to the best knowledge of the
executive officers of the

                                       5
<PAGE>

Company, threatened, against the Company which, if decided adversely, are
reasonably expected to have a Material Adverse Effect with respect to the
Company. There are no actions, suits, claims, hearings or proceedings pending,
initiated or, to the best knowledge of the Company, threatened, by the Company
against any other Person for claims in excess of $500,000.

         (k) WATERMARKING TECHNOLOGY.

         There is no present intention by the Company to depart from its
business plan of aggressively developing and marketing its watermarking
technology.

         (l) ABSENCE OF CERTAIN CHANGES.

         Since the date of the Company's most recent quarterly report filed with
the SEC (the "AUDIT DATE"), the Company has conducted its businesses only in,
and has not engaged in any material transaction other than according to, the
ordinary and usual course of its business. Without limiting the generality of
the foregoing, since the Audit Date there has not been any damage, destruction
or other casualty or loss with respect to any asset or property owned, leased or
otherwise used by the Company or any of its subsidiaries, whether or not covered
by insurance, which will have a Material Adverse Effect on the Company.

         (m) INTELLECTUAL PROPERTY.

            (i) The Company is the sole legal and beneficial owner of all
intellectual property, proprietary technology and proprietary information held
or used in the business of the Company (the "INTELLECTUAL PROPERTY"), except for
Intellectual Property that is the subject of any license for Third Party
Intellectual Property Rights (a "THIRD PARTY INTELLECTUAL PROPERTY LICENSE") or
commercially available or user licenses. Notwithstanding the foregoing, the
Company makes no warranty about third party patents that have not, to the
knowledge of the Company's executive officers, been asserted in writing against
the Company as of the date hereof, other than: (A) third party patents that the
Company has asked outside legal counsel to analyze to determine whether such
patents apply to the Company's products; (B) any third-party patent for which
the Company's in-house attorneys have prepared a written analysis relating to
the relevance of such patent to the Company's products; (C) third-party patents
that have been identified by or brought to the attention to any of the executive
officers of the Company (which includes its Chief Technology Officer and the
general managers of each of its three lines of business) or the Vice President
of Engineering or the Vice President of Corporate Development of the Company as
being potentially infringed by the Company's products or methods, or (D) third
party patents that the Company is willfully infringing.

            (ii) With the exception of immaterial licenses and agreements
entered into in the normal course of business and except for as set forth in the
Schedule of Exceptions, [***].

                                       6
<PAGE>

            (iii) The Company is in compliance in all material respects with all
Third Party Intellectual Property Licenses.

            (iv) The Company is not, nor will it be as a result of the execution
and delivery of this Agreement or the performance of obligations hereunder in
violation or breach of any contracts as to which the Company licenses or
sublicenses the Intellectual Property or any Third Party Intellectual Property
Licenses.

            (v) The Company has the right to license to third parties the use of
the Intellectual Property other than commercially available and user software
licenses and other than the Intellectual Property that, in the aggregate, would
be immaterial to the Company's business.

            (vi) All registrations and filings relating to the Company's
Intellectual Property are in good standing. All maintenance and renewal fees
necessary to preserve the rights of the Company in respect of its Intellectual
Property have been made. The registrations and filings relating to the Company's
Intellectual Property are proceeding, and there are no facts of which the
executive officers of the Company have knowledge which could significantly
undermine those registrations or filings or reduce to a significant extent the
scope of protection of any patents arising from such applications beyond that
which ordinarily might occur in a patent prosecution proceeding. Notwithstanding
the foregoing, the Company only makes the foregoing warranties under this
subsection (vi) to the knowledge of the Company's executive officers as of the
Closing as applied to the Third Party Intellectual Property Rights.

            (vii) The manufacturing, marketing, distribution or sale of any
product currently manufactured, marketed, distributed or sold by, or identified
for development by, the Company, any of its subsidiaries, licensees or
sublicensees in the countries where the Company has conducted or proposes to
conduct such activities does not and would not infringe, induce infringement or
contributorily infringe the intellectual property rights throughout the world of
any third party (collectively, "THIRD PARTY INTELLECTUAL PROPERTY RIGHTS"),
except the Company makes no warranty about third party patents that have not, to
the knowledge of the Company's executive officers, been asserted in writing
against the Company as of the date hereof, other than: (A) third party patents
that the Company has asked outside legal counsel to analyze to determine whether
such patents apply to the Company's products; (B) any third-party patent for
which the Company's in-house attorneys have prepared a written analysis relating
to the relevance of such patent to the Company's products; (C) third-party
patents that have been identified by or brought to the attention to any of the
executive officers of the Company or the Vice President of Engineering or the
Vice President of Corporate Development of the Company as being potentially
infringed by the Company's products or methods, or (D) third party patents that
the Company is willfully infringing.

            (viii) Except as set forth in the Schedule of Exceptions, there are
no allegations, claims or proceedings instituted or pending which challenge the
rights

                                       7
<PAGE>

possessed by the Company to use the Intellectual Property or the validity
or effectiveness of the Intellectual Property, including without limitation any
interferences, oppositions, cancellations or other contested proceedings.

            (ix) There are no outstanding claims or proceedings instituted or
pending by any third party challenging the ownership, priority, scope or
validity or effectiveness of any Intellectual Property.

            (x) There are no Third Party Intellectual Property Rights that would
be infringed by the continued practice of any technologies previously used or
presently used by the Company, except the Company makes no warranty about third
party patents that have not, to the knowledge of the Company's executive
officers, been asserted in writing against the Company as of the date hereof,
other than: (A) third party patents that the Company has asked outside legal
counsel to analyze to determine whether such patents apply to the Company's
products; (B) any third-party patent for which the Company's in-house attorneys
have prepared a written analysis relating to the relevance of such patent to the
Company's products; (C) third-party patents that have been identified by or
brought to the attention to any of the executive officers of the Company or the
Vice President of Engineering or the Vice President of Corporate Development of
the Company as being potentially infringed by the Company's products or methods,
or (D) third party patents that the Company is willfully infringing.

            (xi) Except as set forth in the Schedule of Exceptions, to the
knowledge of the executive officers of the Company, there is no unauthorized
use, infringement or misappropriation of the Intellectual Property by any third
party, including any employee or former employee of the Company or any of its
subsidiaries, except for use, infringement or misappropriation that would not
have a Material Adverse Effect.

            (xii) The Company has taken commercially reasonable measures to
maintain the confidentiality of the inventions, trade secrets, formulae,
know-how, technical information, research data, research raw data, laboratory
notebooks, procedures, designs, proprietary technology and information of the
Company, and all other information the value of which to the Company is
contingent upon maintenance of the confidentiality thereof.

         (n) PAYMENTS.

         To the knowledge of the executive officers of the Company, none of the
current stockholders, directors, officers, representatives, agents or employees
of the Company (i) has used or is using any corporate funds for any illegal or
improper contributions, gifts, entertainment or other unlawful expenses, (ii)
has used or is using any corporate funds for any direct or indirect unlawful or
improper payments to any domestic government officials or employees, (iii) has
established or maintained, or is maintaining, any unlawful, improper or
unrecorded fund of corporate monies or other properties, (iv) has made any false
or fictitious entries on the books and records of the Company, (v) has made any
bribe, rebate, payoff, influence payment, kickback or other unlawful or

                                       8
<PAGE>

improper payment of any nature using corporate funds or otherwise on behalf of
the Company, or (vi) has made any material favor or gift that is not deductible
for federal income tax purposes using corporate funds or otherwise on behalf of
the Company.

         (o) REGISTRATION RIGHTS.

         The Company has not granted registration rights with respect to the
Company's securities, except as set forth in the Company's Second Amended and
Restated Investor Rights Agreement, dated as of November 2, 1999.

         (p) FULL DISCLOSURE.

         No representation or warranty made by the Company in this Agreement nor
any of the exceptions, qualifications or other information set forth in the
Schedule of Exceptions (i) contains any statement that is false or misleading
with respect to any material fact, or (ii) omits to state any material fact that
is necessary to make the statements made in the context in which made, not false
or misleading. Notwithstanding anything in the foregoing to the contrary,
nothing in this Agreement shall require the Company to provide to the Investor
information which (A) the Company must, under confidentiality obligations to
third parties, not disclose to the Investor; (B) is protected by the
attorney-client privilege of the Company; or (C) is the Company's attorney work
product.

         (q) DISCLAIMER.

         The Company shall not be deemed to have made to the Investor any
representation or warranty other than as expressly made by the Company in this
Section 2.1. Without limiting the generality of the foregoing, and without
prejudice to any express representations and warranties made by the Company in
this Section 2.1, the Company makes no representation or warranty to the
Investor with regard to any projections, estimates or budgets or as to any
matters addressed in other materials previously delivered to or made available
to the Investor with respect to future revenues, expenses, expenditures or
future results of operations. Within the limits of the foregoing disclaimer,
nothing in this Section 2.1(q) shall limit any remedy that may be available to
the Investor pursuant to Applicable Law.

2.2      REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.

         The Investor hereby makes the following representations and warranties
to the Company:

         (a) AUTHORIZATION; ENFORCEMENT.

         The Investor is a corporation duly organized and existing in good
standing under the laws of the jurisdiction in which it is incorporated, and has
the requisite corporate power and authority to enter into and perform this
Agreement. The execution and

                                       9
<PAGE>

delivery of this Agreement by the Investor and the consummation by the Investor
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action, and no further consent or authorization of the
Investor or its Board of Directors or stockholders is required. This Agreement
has been duly authorized, executed and delivered by the Investor. Upon receipt
of the Additional Shares, this Agreement constitutes a valid and binding
obligation of the Investor enforceable against the Investor in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.

         (b) PRESENT OWNERSHIP.

         Other than the Original Shares and the Additional Shares to be acquired
pursuant to this Agreement, the Investor does not Beneficially Own any other
securities issued by the Company.

         (c) INVESTMENT INTENT.

         The Investor is acquiring the Additional Shares solely for the purpose
of investment within the meaning of 16 C.F.R. Section 802.9. Based upon the
Company's representation in Section 2.1(c) regarding its issued and outstanding
stock, as a result of this investment, the Investor and all other entities
controlled by the Investor will not own more than 12.5% of the outstanding
voting securities of the Company. As used in the preceding sentence, the term
"controlled" shall have the meaning set forth in 16 C.F.R. Section 801.1(b).
This representation and warranty is made solely for the purpose of determining
the applicability to the transactions contemplated by this Agreement of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT").

         (d) NO CONFLICTS.

         The execution, delivery and performance of this Agreement by the
Investor and the consummation by the Investor of the transactions contemplated
hereby do not (i) result in a violation of the Investor's certificate of
incorporation or by-laws or (ii) conflict with, or constitute a default (or an
event which with material notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, material indenture or
material instrument to which the Investor or any of its subsidiaries is a Party,
or result in a violation of any law, rule, regulation, order, judgment or decree
applicable to the Investor, any of its subsidiaries or by which any property or
asset of the Investor or any of its subsidiaries is bound or affected (except in
the case of subclause (ii) for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect with respect to
the Investor or materially impair the Investor's ability to perform its
obligations under this Agreement). No action, suit, dispute or proceeding is
pending or, to the best knowledge of the Investor, threatened against the
Investor which, if adversely

                                       10
<PAGE>

determined, would prevent the Investor from carrying out its obligations under
this Agreement. Except as contemplated by this Agreement, the Investor is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or to purchase
the Additional Shares in accordance with the terms hereof.

         (e) INVESTMENT REPRESENTATION.

         The Investor understands and acknowledges that none of the Additional
Shares have been registered or qualified under the federal or applicable state
securities laws and the Additional Shares are being sold to and purchased by the
Investor in reliance upon applicable exemptions from such registration and
qualification requirements. The Investor is an "ACCREDITED INVESTOR" within the
meaning of the federal securities laws and acknowledges that it has been
furnished with access to, and has been afforded access to, and afforded the
opportunity to ask questions and receive answers concerning such information
pertaining to the Additional Shares, the Company, and its assets and liabilities
as it deemed necessary to decide whether to purchase the Additional Shares
pursuant to the terms of this Agreement. The Additional Shares will be acquired
by the Investor for investment only and not with a view to any public
distribution thereof. The Investor understands that the Additional Shares are
"RESTRICTED SECURITIES" within the meaning of the federal securities laws. The
Investor agrees that it will not offer to sell or otherwise dispose of any of
the Additional Shares in violation of the registration and qualification
requirements of the federal and applicable state securities laws. All
certificates to be delivered at the Closing evidencing the Additional Shares
will contain appropriate legends incorporating any applicable securities laws
restrictions.

         (f) DISCLAIMER.

         The Investor shall not be deemed to have made to the Company any
representation or warranty other than as expressly made by the Investor in this
Section 2.2. Without limiting the generality of the foregoing, and without
prejudice to any express representations and warranties made by the Investor in
this Section 2.2, the Investor makes no representation or warranty to the
Company with regard to any issues related to projections, estimates or budgets
or other matters previously delivered to or made available to the Company with
respect to future revenues, expenses, expenditures or future results of
operations. Nothing in this Section 2.2(f) shall limit any remedy that may be
available to Company pursuant to Applicable Law.

                                       11
<PAGE>

                                  ARTICLE III.

                                    Covenants
                                    ---------

3.1      [RESERVED].

3.2      INVESTOR'S STANDSTILL AGREEMENT.

         (a) STANDSTILL PERIOD.

         Subject to subsection (b) below, during the period commencing on the
Closing and ending [***] (the "STANDSTILL Period"), the Investor agrees that,
except as specifically permitted by this Agreement, the Investor and each of its
Affiliates will not, in any manner, directly or indirectly:

            (i) acquire, or offer or agree to acquire, any Common Stock of the
Company or any of its successors, except by way of stock dividends or other
distributions or offerings made available to holders of Common Stock generally,
[***];

            (ii) disclose any intention, plan or arrangement inconsistent with
the foregoing; or

            (iii) enter into any discussions, negotiations, arrangements or
understanding with any third party with respect to, or aid, abet or encourage
any action prohibited by, any of the foregoing.

         (b) EXCEPTIONS.

            (i) Notwithstanding any provision of this Section 3.2 to the
contrary, the provisions of subsection (a) above shall terminate on the
following events:

               (A) [***]; or

               (B) [***].

            (ii) Notwithstanding any provision of this Section 3.2 to the
contrary, the provisions of subsection (a) above shall not be construed to
prohibit or otherwise restrict [***].

         (c) NOTICE OF ACQUISITION; COMPLIANCE.

         So long as the Investor complies with this Agreement, during the
Standstill Period, the Investor agrees that within thirty (30) days following
the Investor's acquisition of Company Securities in any open market purchase or
other purchase which is specifically permitted by this Agreement, it will give
the Company notice of such acquisition. All open market purchases of shares of
Company Securities by the Investor and its Affiliates shall be made in
compliance with this Agreement and Applicable Laws.

                                       12
<PAGE>

3.3      TRANSFER.

         (a) TRANSFER RESTRICTIONS.

         The Investor shall not, at any time, directly or indirectly, sell or
transfer, or offer to sell or transfer, all or any portion of the Additional
Shares acquired pursuant to this Agreement, except:

            (i) as provided in Section 3.3(b);

            (ii) in transactions in compliance with Rule 144 promulgated under
the Securities Act, as such rule exists on the date hereof as hereafter amended
(or any successor or similar provision governing the resale of the restricted
securities); or

            (iii) in any other bona fide sales or transfers to any Person
pursuant to an exemption from the registration requirements of the Securities
Act, but only if:

               (A) such Person, together with all of such Person's Affiliates,
certify to the Company that such Person, together with such Person's Affiliates
and associates (as defined in the Exchange Act), would not Beneficially Own or
be a member of any Group that Beneficially Owns, after such sale or transfer,
Voting Securities representing Beneficial Ownership of in excess of 12.5% of all
then outstanding Voting Securities;

               (B) the Investor has previously delivered to the Company an
opinion of counsel reasonably satisfactory to the Company to the effect that any
sale or transfer pursuant to this Section 3.3 is exempt from registration under
the Securities Act;

               (C) the Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition; and

               (D) the transferee(s) agrees by written instrument to be subject
to the terms of this Agreement to the same extent as if such transferee(s) was
the original investor hereunder.

         (b) PERMITTED TRANSFERS.

         The Investor shall be permitted to sell Company Securities that are
registered pursuant to an effective registration statement under the Securities
Act under Article IV below.

         (c) RECOVERY OF LEGAL FEES.

         The Company shall be entitled to recover from the Investor all costs
and expenses (including, without limitation, court costs and reasonable
attorneys fees) incurred by the Company in connection with the enforcement of
this Article III against the Investor, or its

                                       13
<PAGE>

Affiliates, and all actions or proceedings, in any way, manner or respect
arising out of or relating to the enforcement by the Company of its rights under
this Article III.

3.4      COMPLIANCE WITH SECTION 13.

         The Investor shall, promptly and at all times after the date hereof,
use Best Efforts to comply with its obligations to make any filings required by
Section 13 of the Exchange Act..

3.5      DIRECTOR APPOINTMENTS AND ELECTION.

         At the Closing, the Company shall appoint either John Ryan or William
Krepick, whichever the Investor shall specify, to a seat on the Company's Board
of Directors with a term expiring at the Company's annual shareholders meeting
in calendar year 2003.

                                  ARTICLE IV.

                               Registration Rights
                               -------------------

4.1      LEGEND.

         (a) LEGEND.

         All certificates evidencing the Additional Shares shall bear the
following legend, to the extent applicable, which legend will remain on such
certificates until such time as the securities represented by such certificates
are no longer subject to the legended restrictions, and there is delivered to
the Company an opinion of counsel reasonably acceptable to the Company to the
effect that such legend is no longer required (at which time new certificates
shall be issued at the Company's expense without such legend):

         THIS SECURITY IS SUBJECT TO THE PROVISIONS OF THE STRATEGIC INVESTMENT
         AGREEMENT DATED AS OF SEPTEMBER 17, 2000 BETWEEN THE ISSUER AND
         MACROVISION CORPORATION AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN
         ACCORDANCE THEREWITH. A COPY OF SUCH AGREEMENT IS ON FILE AT THE OFFICE
         OF THE CORPORATE SECRETARY OF THE ISSUER. THIS SECURITY WAS SOLD IN A
         PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF
         1933 (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
         TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
         THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON OTHER WRITTEN
         EVIDENCE IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE

                                       14
<PAGE>

         SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
         COMPLIANCE THEREWITH.

         (b) REMOVAL OF SECURITIES ACT LEGEND.

         The Company shall be obligated to reissue promptly unlegended
certificates at the request of the Investor, if the Investor shall have obtained
an opinion of counsel reasonably acceptable to the Company to the effect that
the securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.

         (c) REMOVAL OF BLUE SKY LEGEND.

         Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.

4.2      REGISTRATION ON FORM S-3.

         If after the earlier of the [***] of the Closing and the occurrence of
an event detailed in Section 3.2(b)(i)(B) the Company shall receive from the
Investor a written request or requests (such requests shall state the number of
Registrable Securities to be disposed of and the intended methods of disposition
of such shares by the Investor) that the Company effect a registration on Form
S-3 (or any successor to Form S-3) or any similar short-form registration
statement and any related qualification or compliance with respect to all or a
part of the Registrable Securities, the Company will:

         (a) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of the Investor's
Registrable Securities as are specified in such request; provided, however, that
the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 4.2:

            (i) if the Company shall have already effected two (2) registrations
for the Investor under this Section 4.2

            (ii) if Form S-3 (or such successor or similar form) is not
available for such offering by the Investor; or

            (iii) if the Investor, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
offering price to the public of less than $1,000,000; or

            (iv) if the Company shall furnish to the Investor a certificate
signed by the President or Chief Executive Officer of the Company stating that,
in the good faith

                                       15
<PAGE>

judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a single period of
not more than ninety (90) days after receipt of the request of the Investor
under this Section 4.2 and provided that such right to delay a request shall be
exercised by the Company no more than twice in any one-year period; or

            (v) during the period starting with the date of filing of, and
ending on the date one hundred eighty (180) days following, the effective date
of any other registration statement filed by the Company under the Securities
Act; or

            (vi) if the Company has already effected one (1) registration on
Form S-3 for the Investor pursuant to this Section 4.2 within the previous
twelve (12) months.

         (b) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request by the Investor.

4.3      PIGGYBACK REGISTRATION.

         (a) PIGGYBACK REGISTRATION.

         If after the earlier of the first (1st) anniversary of the Closing and
the occurrence of an event detailed in Section 3.2(b)(i)(B) the Company proposes
to effect a registration statement under the Securities Act for purposes of a
public offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to acquisitions by the
Company, employee benefit plans and corporate reorganizations) for itself and/or
its stockholders, the Company shall notify the Investor in writing at least
thirty (30) days prior to filing such registration statement. Thereafter, the
Company shall use its Best Efforts to include in such registration statement all
or part of such Registrable Securities held by the Investor pursuant to this
Section 4.3, provided however, nothing in this Article IV shall obligate the
Company to effect such a registration statement. If the Investor desires to
include all or any part of its Registrable Securities in any such registration
statement, it shall, within fifteen (15) days after delivery of the
above-described notice from the Company, notify the Company in writing of the
Investor's intention; the Investor's notice shall state the intended method of
disposition of the Registrable Securities by the Investor. If the Investor
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, the Investor shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by
the Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.

                                       16
<PAGE>

         (b) UNDERWRITTEN OFFERINGS, CUTBACK.

         If the registration statement under which the Company gives notice
under this Section 4.3 is for an underwritten offering, the Company shall so
advise the Investor. In such event, or if the registration statement under which
the Investor proposes to sell the Registrable Securities under Section 4.2
above, the right of the Investor to be included in a registration pursuant to
either Sections 4.2 or 4.3 shall be conditioned upon the Investor's
participation in such underwriting and the inclusion of the Investor's
Registrable Securities in the underwriting to the extent provided herein. If the
Investor proposes to distribute its Registrable Securities through such
underwriting, it shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the underwriter
determines in good faith that marketing factors require a limitation of the
number of Registrable Securities to be underwritten in a registration effected
under this Section 4.3, the number of Registrable Securities that may be
included in the underwriting shall be reduced among the Investor and all other
holders of securities who are relying on piggyback rights to include shares in
such registration (together, the "PIGGYBACK INVESTORS") on a pro rata basis
based on the total number of Registrable Securities sought to be included in the
registration by the Piggyback Investors, provided no such reduction shall reduce
to less than 25% of any offering the number of shares of the Piggyback Investors
requested to be registered. The foregoing limitations in the previous sentence
shall not apply to registrations effected pursuant to Section 4.2. In no event
will shares of any other shareholder who does not have piggyback rights or other
written contractual rights to require that the Company register its securities
be included in such registration, which would reduce the number of shares of
Common Stock which may be included by the Piggyback Investors, without the
written consent of holders of not less than a majority of the securities
proposed to be sold in the offering by the Piggyback Investors.

         (c) COMPANY'S RIGHT TO TERMINATE.

         The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 4.3 prior to the effectiveness
of such registration, whether or not the Investor has elected to include
securities in such registration. The Registration Expenses of such withdrawn
registration shall be borne by the Company in accordance with Section 4.4(c)
hereof.

4.4      REGISTRATION PROCEDURES.

         (a) OBLIGATIONS OF THE COMPANY.

         Whenever the Company determines to effect any registration in which
Registrable Securities held by the Investor are to be included pursuant to
Section 4.3 (the "SUBJECT SECURITIES"), the Company will use its Best Efforts to
effect the registration and sale of the Subject Securities in accordance with
the intended method of disposition. Without

                                       17
<PAGE>

limiting the generality of the foregoing, the Company will expeditiously and as
soon as reasonably possible:

            (i) furnish the Investor, without charge, such number of copies of
the prospectus included in a registration statement (including each preliminary
prospectus), and such other documents, as the Investor may reasonably request;

            (ii) use its Best Efforts to register or qualify the Subject
Securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions as the Investor shall reasonably request or as
the managing underwriter(s) shall reasonably recommend, and do any and all other
acts and things which may be reasonably necessary or advisable to enable the
Investor to consummate the disposition in such jurisdictions of the Subject
Securities covered by such registration statement in accordance with the plan of
distribution, except that the Company shall not for any such purpose be required
to (A) qualify generally to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified; (B) subject itself to taxation in
any such jurisdiction wherein it is not so subject; or (C) consent to general
service of process in any such jurisdiction or otherwise take any action that
may subject it to the general jurisdiction of the courts of any jurisdiction in
which it is not so subject;

            (iii) otherwise use its Best Efforts to comply with all applicable
rules and regulations of the SEC, including, without limitation, the following:

               (A) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its Best Efforts to cause such
registration statement to become effective, and, upon the request of the
Investor, keep such registration statement effective for up to one hundred
eighty (180) days or, if earlier, until the Investor has completed the
distribution related thereto; and

               (B) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;

            (iv) immediately notify the Investor, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, if the
Company, in its sole judgment, becomes aware that the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and at the request of
Investor, deliver a reasonable number of copies of an amended or supplemental
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of the securities covered thereby, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to

                                       18
<PAGE>

make the statements therein, in light of the circumstances under which they were
made, not misleading;

            (v) furnish, at the request of the Investor, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (A) an opinion, dated as of
such date, of counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering and reasonably satisfactory to the Investor,
addressed to the underwriters, if any, and to the Investor, and (B) a letter
dated as of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to the Investor, addressed to the underwriters, if any,
and, if permitted by applicable accounting standards, to the Investor; and

            (vi) execute and deliver all instruments and documents (including an
underwriting agreement in customary form) and take such other actions and obtain
such certificates and opinions as are customary in underwritten public
offerings.

         (b) OBLIGATIONS OF THE INVESTOR.

         The Investor shall provide (in writing and signed by the Investor and
stated to be specifically for use in the related registration statement,
preliminary prospectus, prospectus or other document incident thereto) all such
information and materials regarding the Investor and the plan of distribution
and take all such action as may be reasonably required in order to permit the
Company to comply with all applicable requirements of the SEC and any applicable
state securities laws and to obtain any desired acceleration of the effective
date of any registration statement prepared and filed by the Company pursuant to
this Agreement.

            (i) In connection with any registration by the Company of Company
Securities pursuant to Section 4.3, each Holder agrees, whether or not any of
such Holder's Registrable Securities are included in such registration, not to
effect any sale or distribution, including any sale pursuant to Rule 144, of any
Company Securities which are similar to the securities included in such
registration (other than as part of such underwritten offering), without the
consent of the managing underwriter, for a period of 90 days after the date the
Company notifies the Holders of its intent to register such Company Securities
either Section 4.2 or Section 4.3; provided, however, that if the registration
statement filed in connection therewith becomes effective within such 90-day
period, such 90-day period shall be extended for such period (not to exceed 45
days after the date such registration statement is declared effective) as may be
required pursuant to the terms and conditions of any underwriting agreement
entered into in connection with such proposed registration.

                                       19
<PAGE>

            (ii) In connection with a registration effected under Section 4.3,
the Company shall at all times retain the right, in its sole discretion, to
select any underwriters necessary for making an offering in conjunction with
such registration.

         (c) EXPENSES OF REGISTRATION.

         All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Sections 4.2 and 4.3 shall be borne by
the Company. All Selling Expenses incurred in connection with any registrations
hereunder, shall be borne by the Investor.

4.5      DELAY OF REGISTRATION; FURNISHING INFORMATION.

         (a) NO INJUNCTIONS.

         The Investor shall not have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Article IV.

         (b) THE INVESTOR'S DATA CONDITIONS PRECEDENT.

         It shall be a condition precedent to the obligations of the Company to
take any action with respect to the registration of Registrable Securities held
by the Investor that the Investor shall furnish to the Company such information
regarding itself, the Registrable Securities held by it, and the intended method
of disposition of such securities as shall be reasonably required to effect the
registration of its Registrable Securities.

4.6      TERMINATION OF REGISTRATION RIGHTS.

         All registration rights granted under this Agreement shall terminate
and be of no further force and effect after December 6, 2009, provided, however,
that registration rights granted under this Article IV shall terminate and be of
no further force and effect as to the Investor (or transferee holding
registration rights hereunder) prior to December 6, 2009, if the Investor and
its Affiliates or transferee and its Affiliates can either (a) sell all of its
Registrable Securities pursuant to Rule 144 of the Securities Act within any
calendar quarter or (b) sell its Registrable Securities pursuant to Rule 144(k)
of the Securities Act.

4.7      INDEMNIFICATION.

         (a) INDEMNIFICATION.

         In the event any Registrable Securities held by Investor are included
in a registration statement:

                                       20
<PAGE>

            (i) COMPANY INDEMNIFICATION. To the extent permitted by Applicable
Law, the Company will indemnify and hold harmless the Investor, the partners,
officers and directors of the Investor, any underwriter (as defined in the
Securities Act) for the Investor and each Person, if any, who controls the
Investor or underwriter within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively, a
"VIOLATION") by the Company: (A) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (B) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (C) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state securities law in connection with the offering covered by such
registration statement; and the Company will reimburse the Investor, partner,
officer or director, underwriter or controlling Person for any legal or other
expenses as reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided however,
that the indemnity agreement contained in this Section 4.7(a)(i) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by the Investor, partner, officer,
director, underwriter or controlling Person of the Investor.

            (ii) INVESTOR INDEMNIFICATION. To the extent permitted by Applicable
Law, the Investor will indemnify and hold harmless the Company, each of its
directors, each of its officers, each Person, if any, who controls the Company
within the meaning of the Securities Act, any underwriter and any other holder
selling securities under such registration statement or any of such other
holder's partners, directors or officers or any Person who controls such holder
against any losses, claims, damages or liabilities (joint or several) to which
the Company or any such director, officer, controlling Person, underwriter or
other such holder, or partner, director, officer or controlling Person of such
other holder may become subject under the Securities Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by the Investor under an instrument duly executed by the Investor and
stated to be specifically for use in connection with such registration; and the
Investor will reimburse any legal or other expenses reasonably incurred by the

                                       21
<PAGE>

Company or any such director, officer, controlling Person, underwriter or other
holder, or partner, officer, director or controlling Person of such other holder
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 4.7(a)(ii) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Investor, which consent shall not be unreasonably
withheld; provided further, that in no event shall any indemnity under this
Section 4.7 exceed the net proceeds from the offering received by the Investor.

            (b) PROCEDURE ON INDEMNIFICATION CLAIMS.

            Promptly after receipt by an indemnified party under this Section
4.7 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 4.7, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the indemnifying and indemnified parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party would
be inappropriate due to actual or potential differing interests between such
indemnified party and any other Party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
4.7, but the omission to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 4.7.

            (c) ALTERNATE REMEDIES.

            If the indemnification provided for in this Section 4.7 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any losses, claims, damages or liabilities referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified party hereunder,
shall, to the extent permitted by Applicable Law, contribute to the amount paid
or payable by such indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the Violation(s) that resulted in such loss, claim, damage or
liability, as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative

                                       22
<PAGE>

intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

            (d) INDEMNIFICATION OBLIGATIONS SURVIVE.

            The obligations of the Company and the Investor under this Section
4.7 shall survive the completion of any offering of Registrable Securities in a
registration statement, and otherwise.

            (e) LIMITS ON SETTLEMENT OBLIGATION.

            The Investor shall not be obligated to consent to any settlement of
any claim entered into by the Company in satisfaction of its indemnification
obligations hereunder unless the settlement includes a full and complete release
of the Investor.

4.8      ASSIGNMENT OF REGISTRATION RIGHTS.

         The rights to cause the Company to register Registrable Securities
pursuant to this Article IV may be assigned by the Investor to a transferee or
assignee of all [***] of the Registrable Securities, and by any such transferee
or assignee to successive transferees or assignees. The Investor and all such
transferees or assignees shall retain all of their rights under this Article IV
with respect to any Registrable Securities retained by such Person.

4.9      LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS.

         Nothing in this Agreement shall be construed to limit or prevent the
Company from granting additional parties registration rights on parity with or
superior to those granted the Investor hereunder.

4.10     MARKET STAND-OFF AGREEMENT.

         If requested by the Company or a representative of the underwriters of
Common Stock (or other securities) of the Company acting reasonably, the
Investor shall not sell or otherwise transfer or dispose of any Common Stock (or
other securities) of the Company held by the Investor (other than those included
in the registration) for a period specified by the representative of the
underwriters, not to exceed one hundred eighty (180) days following the
effective date of a registration statement of the Company filed under the
Securities Act, and shall enter into an agreement with any of the underwriters
stating the same upon such underwriter's request. The foregoing commitment has
two limitations: (a) the Investor shall not be required to refrain from selling
under this paragraph, unless all officers of the Company enter into similar
agreements; and (b) the Investor shall not be required to refrain from selling
under this paragraph unless all other holders of the Company's Common Stock
owning an equal or a larger percentage of the Company's Common Stock (on an
as-converted basis) as the Investor is also required by a representative of the
underwriter to enter into market stand-off agreements on the same terms.

                                       23
<PAGE>

         The obligations described in this Section 4.10 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.

4.11     RULE 144 REPORTING.

         With a view to making available to the Investor the benefits of certain
rules and regulations of the SEC which may permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its
good faith efforts to:

         (a) DO THINGS THAT MAKE RULE 144 AVAILABLE.

         Make and keep public information available, as those terms are
understood and defined in Rule 144 or any similar or analogous rule promulgated
under the Securities Act, at all times after the effective date of the first
registration filed by the Company for an offering of its securities to the
general public;

         (b) FILE SECURITIES ACT AND EXCHANGE ACT REPORTS TIMELY.

         File with the SEC, in a timely manner, all reports and other documents
required of the Company under the Securities Act and the Exchange Act;

         (c) DATA TO THE INVESTOR.

         So long as the Investor owns any Registrable Securities, furnish to the
Investor forthwith upon written request: a written statement by the Company as
to its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any time after it has become subject
to such reporting requirements); a copy of the most recent annual or quarterly
report of the Company; and such other reports and documents as the Investor may
reasonably request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration.

                                   ARTICLE V.

                              Additional Agreements
                              ---------------------

5.1      CONSENTS; APPROVALS.

         The Company and the Investor shall each use their reasonable efforts to
obtain all consents, waivers, approvals, authorizations or orders (including,
without limitation, all governmental and regulatory rulings and approvals), and
the Company and the Investor shall make all filings (including, without
limitation, all filings with governmental or

                                       24
<PAGE>

regulatory agencies) required in connection with the authorization, execution
and delivery of this Agreement by the Company and the Investor and the
consummation by them of the transactions contemplated hereby. The Company and
the Investor shall furnish all information required to be included in any
application or other filing to be made pursuant to the rules and regulations of
any Governmental Authority in connection with the transactions contemplated by
this Agreement. Except where prohibited by applicable statutes and regulations,
and subject to that certain confidentiality letter agreement between the Company
and the Investor, dated September 15, 2000 (the "CONFIDENTIALITY AGREEMENT"),
each Party shall promptly provide the other (or its counsel) with copies of all
filings made by such Party with any state or federal government entity in
connection with this Agreement or the transactions contemplated hereby.

5.2      PROCEDURAL SAFEGUARDS.

         Each Party will take such actions and implement such rules, procedures
and methodologies as are reasonably necessary to ensure that the disclosing
party's nonpublic, confidential and proprietary business information, including
in particular information relating to the disclosing party's specific customers
and customer contracts or bids and its prices, pricing plans and policies, and
retail selling activities, will not be improperly disclosed by the receiving
party. Each Party shall certify in writing, at the request of the other Party
made not more often than twice each calendar year, that such procedural
safeguards remain in effect and have not been violated as of such date.

                                  ARTICLE VI.

                              Conditions Precedent
                              ---------- ---------

6.1      INVESTOR CONDITIONS TO CLOSING.

         The obligation of the Investor to make the investment in the Company
contemplated herein shall be subject to the satisfaction of the following
conditions precedent, in form and substance satisfactory to the Investor:

         (a) RESOLUTIONS; INCUMBENCY.

         The Investor shall have received each of the following:

            (i) Copies of the resolutions of the Board of Directors of the
Company authorizing the transactions contemplated hereby, certified as of the
Closing by the Secretary or an Assistant Secretary of the Company; and

            (ii) Certificates of the Secretary or Assistant Secretary of the
Company, dated as of the Closing, certifying the names, titles and true
signatures of the officers of the Company authorized to execute, deliver and
perform this Agreement and all other documents to be delivered by it hereunder;

                                       25
<PAGE>

         (b) ORGANIZATION DOCUMENTS; GOOD STANDING.

         The Investor shall have received each of the following:

            (i) A copy of the Certificate of Incorporation and By-laws as in
effect on the Closing, certified by the Secretary or Assistant Secretary of the
Company as of the Closing; and

            (ii) A good standing certificate for the Company from the Secretary
of State (or similar, applicable Governmental Authority) of its state of
incorporation, as of a recent date;

         (d) NO INJUNCTION OR RESTRAINTS; ILLEGALITY.

            (i) HSR ACT. The waiting period (and any extension thereof
applicable to the consummation of the Agreement) under the HSR Act shall have
expired or been terminated;

            (ii) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Agreement
shall be in effect and no litigation by any governmental entity seeking any of
the foregoing shall have been commenced. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to this Agreement, which makes the consummation of this Agreement
illegal; and

            (iii) The Investor shall have received a certificate from an officer
of the Company certifying that all (A) authorizations, consents or approvals of,
notices to or filings with, any governmental agency, including pursuant to the
HSR Act, and (B) approvals and consents of any other Person, required in
connection with the agreement described herein, shall have been obtained or made
and that all applicable waiting periods have expired without notice of any
action which seeks to restrain, enjoin or otherwise prohibit or significantly
delay the Closing having been taken by any governmental agency;

         (d) CERTIFICATE.

         The Investor shall have received a certificate signed by an officer of
the Company, dated as of the Closing, stating that the representations and
warranties contained in Article II are true and correct on and as of such date,
as though made on and as of such date (except to the extent such representations
and warranties expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date);

                                       26
<PAGE>

         (e) REPRESENTATIONS AND WARRANTIES.

         The representations and warranties of the Company contained in Article
II shall be true and correct as of the Closing in all material respects as
though made on and as of such date (except to the extent such representations
and warranties expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date);

         (f) OPINION OF COMPANY COUNSEL.

         The Investor shall have received from Morrison & Foerster, LLP, counsel
for the Company, an opinion, dated as of the Closing, in form reasonably
acceptable to counsel to the Investor;

         (g) ADDITIONAL SHARE ISSUANCE.

         The Company shall have taken all steps necessary to instruct its
transfer agent to issue a share certificate to the Investor representing the
Additional Shares issued at Closing;

         (h) DUE DILIGENCE AND OTHER DOCUMENTS.

            (i) Within thirty (30) days of the execution of this Agreement, the
Investor shall have completed all desired due diligence investigations with
respect to the Company and its assets (including, but not limited to, the
Intellectual Property), business and operations and shall have concluded in good
faith that such investigations have revealed no facts or circumstances,
including facts or circumstances that are disclosed herein or in any exhibit
hereto, which could reasonably have a Material Adverse Effect on the Company;
and

            (ii) The Investor shall have received such other approvals,
opinions, documents or materials as the Investor may request; and

         (i) BOARD OF DIRECTORS.

         Either John Ryan or William Krepick, whichever the Investor shall
specify, shall have been appointed to the Board of Directors of the Company, and
shall have entered into an agreement with the Company regarding indemnification
and confidentiality, a form of which is attached hereto as EXHIBIT D (the
"DIRECTOR AGREEMENT").

6.2      COMPANY CONDITIONS TO CLOSING.

         The obligation of the Company to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction of the
following conditions precedent, in form and substance satisfactory to the
Company:

                                       27
<PAGE>

         (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS.

         The representations and warranties made by the Investor herein shall be
true and correct in all material respects as of the Closing Date, with the same
force and effect as if they had been made on and as of the same date, and the
Investor shall have performed all obligations and conditions required to be
performed or observed by it on or prior to the Closing Date and all documents
incident thereto shall be satisfactory in form and content to the Company and
its counsel;

         (b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY.

            (i) The waiting period (and any extension thereof applicable to the
consummation of the Agreement, under the HSR Act shall have expired or been
terminated; and

            (ii) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of this Agreement
shall be in effect and no litigation by any governmental entity seeking any of
the foregoing shall have been commenced. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to this Agreement, which makes the consummation of this Agreement
illegal;

         (c) CONSENTS.

         The Company shall have obtained all consents, permits and waivers
necessary or appropriate for consummation of the transactions contemplated by
this Agreement which need to be obtained prior to the Closing;

         (d) COMPLIANCE WITH ALL LAWS.

         At the Closing, the purchase of the Common Stock by the Investor
hereunder shall be legally permitted by all laws and regulations to which the
Investor or the Company are subject;

         (e) PAYMENT OF PURCHASE PRICE.

         The Investor shall have delivered the Total Purchase Price;

         (f) JDA AMENDMENTT.

         The Company and the Investor shall have entered into the JDA Amendment;
and

                                       28
<PAGE>

         (g) The Investor's designee for director shall have entered into the
Director Agreement and a side letter regarding confidentiality in form
reasonably acceptable to counsel to the Investor.

                                  ARTICLE VII.

                                  Miscellaneous
                                  -------------

7.1      FEES AND EXPENSES.

         Except as specifically noted herein, each Party shall be solely
responsible for the payment of the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
Party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.

7.2      SEVERABILITY.

         If any provision of this Agreement is held by a court of competent
jurisdiction (including pursuant to enforcement of any arbitration award under
this Agreement) or panel of arbitrators to be invalid, unlawful or
unenforceable, it shall be modified, if possible, to the minimum extent
necessary to make it valid, lawful and enforceable or, if such modification is
not possible, it shall be stricken from this Agreement and the remaining
provisions of this Agreement shall continue in full force and effect; provided,
however, that, if a provision is so stricken and is of a nature so as to
fundamentally alter the economic arrangements of this Agreement, the Party
adversely affected may terminate this Agreement by giving to the other Party
sixty (60) days' written notice of termination.

7.3      CONSENT TO JURISDICTION.

         For purposes of any suit, action, or legal proceeding permitted under
this Agreement, each Party to this Agreement (i) hereby irrevocably submits
itself to and consents to the non-exclusive jurisdiction of the United States
District Court for the Northern District of California for the purposes of any
such suit, action or legal proceeding in connection with this Agreement
including to enforce an arbitral resolution, settlement, order or award made
pursuant to this Agreement (including pursuant to the U.S. Arbitration Act, or
otherwise), and (ii) to the extent permitted by Applicable Law, hereby waives,
and agrees not to assert, by way of motion, as a defense, or otherwise, in any
such suit, action, or legal proceeding pending in such event, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or legal proceeding is brought in an inconvenient forum or that the venue
of the suit, action or legal proceeding is improper. Each Party to this
Agreement hereby agrees to the entry of an order to enforce any resolution,
settlement, order or award made pursuant to this Section by the United States
District Court for the Northern District of California.

                                       29
<PAGE>

7.4      DISPUTE RESOLUTION PROCEDURES.

         (a) Any controversy or claim arising out of or relating to this
contract, or the breach thereof between or among the Parties and/or any of their
Affiliates under this Agreement, shall be settled, if possible, through good
faith negotiations between the relevant parties. Prior to resolving any dispute
by means of arbitration or by means of any suit, action or legal proceeding
permitted under this Section 7.4, the relevant parties involved in such dispute
shall refer such dispute to their respective Chief Executive Officers or
equivalent, who shall meet in person to negotiate in good faith the possible
resolution thereof on at least two occasions within thirty (30) days before any
such party commences arbitration or other litigation permitted under this
Agreement (provided, that if any such party fails or refuses to have a
representative attend such meetings within such thirty (30) day period, the
procedures of this Section 7.4 shall be applicable after the conclusion of such
thirty (30) day period); and further provided that (i) any legal proceedings
seeking interim equitable relief (including a temporary restraining order or
preliminary injunction) until such time as such interim equitable relief can be
addressed through arbitration; (ii) proceedings for provisional relief
contemplated by Section 7.4(k) below; and (iii) third-party legal proceedings
may be commenced immediately.

         (b) In the event such good faith negotiations are unsuccessful, either
Party may, after thirty (30) days' written notice to the other, submit any
controversy or claim arising out of, relating to or in connection with this
Agreement, or the breach thereof, to arbitration administered by the American
Arbitration Association ("AAA") in accordance with its then existing Commercial
Arbitration rules and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.

         (c) It is the express agreement of the Parties that the provisions of
this Section, including the rules of the AAA and the laws of the State of
California referenced herein, as modified by the terms of this Section, shall
govern the arbitration of any disputes arising pursuant to this Agreement. In
the event of any conflict between the law of the State of California, the law of
the arbitral location, and the U.S. Arbitration Act (Title 9, U.S. Code), with
respect to any arbitration conducted pursuant to this Agreement, to the extent
permissible, it is the express intent of the Parties that the selected governing
law, as modified by this Section, shall prevail. To the extent this Section is
deemed a separate agreement, independent from this Agreement, Sections 7.2, 7.6,
7.7 and 7.8 are incorporated herein by reference.

         (d) The place of arbitration shall be San Francisco, California, U.S.A.

         (e) In any arbitration pursuant to this Section, the award shall be
rendered by a majority of the members of a board of arbitration consisting of
three members who shall be appointed by the Parties jointly or, if the Parties
cannot agree as to three arbitrators within thirty (30) days after the
commencement of the arbitration proceeding, then one arbitrator shall be
appointed by each of the Company and the Investor within sixty (60) days after
the commencement of the arbitration proceeding and the third arbitrator shall

                                       30
<PAGE>

be appointed by mutual agreement of such two arbitrators. If such two (2)
arbitrators shall fail to agree within seventy-five (75) days after commencement
of the arbitration proceeding upon the appointment of the third arbitrator, the
third arbitrator shall be appointed by the AAA in accordance with its then
existing rules, but shall be required to have legal experience relevant to the
adjudication of the dispute between the Parties. Notwithstanding the foregoing,
if any Party shall fail to appoint an arbitrator within the specified time
period, such arbitrator and the third arbitrator shall be appointed by the AAA
in accordance with its then existing rules. For purposes of this Section, the
"commencement of the arbitration proceeding" shall be deemed to be the date upon
which written demand for arbitration has been received by the AAA from one of
the Parties (and by the other Party from such Party).

         (f) So long as such award complies with subsection (j) below, an award
rendered in connection with an arbitration pursuant to this Section shall be
final and binding upon the Parties, and any judgment upon such an award may be
entered and enforced in any court of competent jurisdiction.

         (g) The Parties agree that the award of the arbitral tribunal will be
the sole and exclusive remedy between them regarding any and all claims and
counterclaims between them with respect to the subject matter of the arbitrated
dispute. The Parties hereby waive all jurisdictional defenses in connection with
any arbitration hereunder or the enforcement of an order or award rendered
pursuant thereto (assuming that the terms and conditions of this arbitration
clause have been complied with).

         (h) The Parties hereby agree that the relationship between the Parties
is commercial in nature, and that any disputes between the Parties related to
this Agreement shall be deemed commercial.

         (i) With respect to any order issued by the arbitrator(s) pursuant to
this Agreement, the Parties expressly agree (i) and consent to the bringing of
an action by one Party against the other in the federal courts of the Northern
District of California to enforce and confirm such order; (ii) that such order
shall be conclusive proof of the validity of the determination(s) of the
arbitrator(s) underlying such order; and (iii) that any court having
jurisdiction or any federal court sitting in the Northern District of California
may enter judgment upon and enforce such order, whether pursuant to the U.S.
Arbitration Act, or otherwise.

         (j) The arbitrators shall issue a written explanation of the reasons
for the award and a full statement of the facts as found and the rules of law
applied in reaching their decision to both Parties. The arbitrator shall
apportion to each Party all costs (other than attorneys' fees) incurred in
conducting the arbitration in accordance with what he deems just and equitable
under the circumstances. Any provisional remedy which would be available to a
court of law shall be available from the arbitrator(s) pending arbitration of
the dispute. Either Party may make an application to the arbitrator seeking
injunctive or other interim relief, and the arbitrator may take whatever interim
measures they deem

                                       31
<PAGE>

necessary in respect of the subject matter of the dispute, including measures to
maintain the status quo until such time as the arbitration award is rendered or
the controversy is otherwise resolved. The arbitrator shall have the authority
to award any remedy or relief that a court of the State of California could
order or grant, including, without limitation, specific performance or any
obligation created under the agreement, the awarding of punitive damages, the
issuance of an injunction, or the imposition of sanctions for abuse or
frustration of the arbitration process, but shall NOT have the authority to
award any remedy or relief that could not be granted by a court in the State of
California applying California law.

         (k) The Parties may file an application in any proper court for a
provisional remedy in connection with an arbitrable controversy, but only upon
the ground that the award to which the applicant may be entitled may be rendered
ineffectual without provisional relief.

         (l) After the appointment of the arbitrators, the parties to the
arbitration shall have the right to take depositions and to obtain discovery
regarding the subject matter of the arbitration, and, to that end, to use and
exercise all the same rights, remedies, and procedures, and be subject to all of
the same duties, liabilities, and obligations in the arbitration with respect to
the subject matter thereof, as provided in Chapter 2 (commencing with Section
1985) of, and Article 3 (commencing with Section 2016) of Chapter 3 of Title 3
of Part 4 of the California Code of Civil Procedure, as if the subject matter of
the arbitration were pending in a civil action before a superior court in
California.

7.5      BROKERS.

         Each of the Company and the Investor agrees that it shall indemnify and
hold harmless the other and its Affiliates from and against any and all claims,
liabilities, or obligations with respect to brokerage or finders' fees or
commissions or consulting fees in connection with the transactions contemplated
by this Agreement asserted by any Person on the basis of any agreement,
statement or representation alleged to have been made by such Party.

7.6      ENTIRE AGREEMENT; AMENDMENTS.

         This Agreement and the Schedules and Exhibits hereto collectively
contain the entire understanding of the Parties with respect to the matters
referred to hereby and thereby, and supercede all prior understandings and
agreements with respect to the subject matter of this Agreement. Except as
specifically set forth herein and the schedules and exhibits hereto, neither the
Company nor the Investor makes any representation, warranty, covenant or
undertaking with respect to the matters referred to hereby or thereby. No
provision of this Agreement may be amended, supplemented or waived other than by
a written instrument signed by the Party against whom enforcement of any such
amendment, supplement or waiver is sought.

                                       32
<PAGE>

7.7      NOTICES.

         Any notice or other communication required or permitted to be given
herein shall be in writing and shall be effective (a) upon hand delivery or
delivery by telex (with correct answerback received), telecopy or facsimile at
the address or number designated below (if delivered on a business day during
normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day
during normal business hours where such notice is to be received), or (b) on the
third business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur. The addresses for such communications
shall be:

<TABLE>
<CAPTION>

         If to the Company:

<S>                       <C>

                           DIGIMARC CORPORATION
                           19801 S.W. 72nd Avenue
                           Suite 250
                           Tualatin, OR  97062
                           Telephone:  (503) 885-9699
                           Facsimile:  (503) 495-4577

                           Attention:  Bruce Davis, President & CEO

                           With a copy to:

                           MORRISON & FOERSTER, LLP
                           425 Market Street
                           San Francisco, CA 94105
                           Telephone:  (415) 268-7000
                           Facsimile:  (415) 268-7522
                           Attention:  Gavin B. Grover, Esq.

                           If to the Investor:

                           MACROVISION CORPORATION

                           1341 Orleans Drive
                           Sunnyvale, CA 94089
                           Telephone:  (408) 743-8461
                           Facsimile:  (408) 743-8610

                           Attention:  Ian R. Halifax, Chief Financial Officer

                           With copies to:

                           MANATT, PHELPS & PHILLIPS, LLP
                           1001 Page Mill Road, Building 2
                           Palo Alto, CA 94304
                           Telephone:  (650) 812-1320

                                       33
<PAGE>

                           Facsimile:  (650) 213-0260
                           Attention:  David Herbst, Esq.

</TABLE>

Each Party may from time to time change its address for notices under this
Section 7.7 by giving at least ten (10) days' notice of such changed address to
the other Party.

7.8      NO WAIVER.

         No waiver by either Party of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future hereof or a waiver of any other provision, condition or
request hereof; nor shall any delay or omission of either Party to exercise any
right hereunder in any manner impair the exercise of any such right accruing to
it thereafter.

7.9      HEADING.

         The headings herein are for convenience only, do not constitute a part
of this Agreement and shall not be deemed to limit or affect any of the
provisions hereof.

7.10     SUCCESSORS AND ASSIGNS.

         This Agreement shall be binding upon and inure to the benefit of the
Parties and their successors and assigns. The Parties may amend this Agreement
without notice to or the consent of any other Person. Neither Party shall assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the other Party (which consent may be withheld for any reason in the
sole discretion of the Party from whom consent is given), except as otherwise
expressly provided herein. However, the Investor may assign any of its rights or
Common Stock to any of its wholly owned affiliates.

7.11     NO THIRD PARTY BENEFICIARIES.

         This Agreement is intended for the benefit of the Parties, the
indemnified parties under Section 4.7 and their respective permitted successors
and assigns, and are not for the benefit of, nor may any provision hereof be
enforced by, any other Person.

7.12     GOVERNING LAW.

         This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of California.

7.13     FURTHER ASSURANCES.

         Each Party agrees to take such further actions, including the execution
of such further documents, as may be necessary or desirable, or reasonably
requested by the other, in order to carry out the provisions of this Agreement
including all reasonable action required to be taken by the Company to enable
the consummation of the Closing including convening a meeting of the Company's
shareholders.

                                       34
<PAGE>

7.14     RELATIONSHIP OF THE PARTIES.

         For all purposes of this Agreement, the Investor, the Company and all
of their respective Affiliates shall be deemed to be independent entities, and
anything in this Agreement to the contrary notwithstanding, nothing herein shall
be deemed to constitute the Investor and the Company or any of their respective
Affiliates as partners, joint venturers, co-owners, an association or any entity
separate and apart from each Party itself, nor shall this Agreement make either
Party hereto an employee or agent, legal or otherwise, of the other Party for
any purposes whatsoever. Neither Party hereto is authorized to make any
statements or representations on behalf of the other Party or in any way
obligate the other Party, except as expressly authorized in writing by the other
Party. Anything in this Agreement to the contrary notwithstanding, neither Party
hereto shall assume nor shall be liable for any liabilities or obligations of
the other Party, whether past, present or future, except for indemnity
obligations expressly undertaken herein.

7.15     PUBLICITY.

         (a) Each Party agrees, and shall cause its Affiliates, not to issue any
press release disclosing the terms of, or relating to, this Agreement, without
the prior written consent of the other Party; provided, however, that neither
Party or its Affiliates shall be prevented from complying with any duty of
disclosure it may have pursuant to Applicable Laws. Such disclosing party shall
use its Best Efforts to consult with the other Party regarding the issuance of
any such press release, or with regard to any public statement disclosing the
terms of this Agreement (including but not limited to any required press release
or other public statement pursuant to Applicable Laws), and shall use its Best
Efforts to obtain confidential treatment for any Confidential Information where
such press release or other public statement is required to be made by
Applicable Law.

         (b) The Investor hereby acknowledges that it is aware and that its
representatives and Affiliates have been advised that applicable securities laws
restrict any Person who has material nonpublic information about a company from
purchasing or selling securities of such company, or from communicating such
material non-public information to any other Person under circumstances in which
it is reasonably foreseeable that such Person is likely to purchase or sell such
securities. The Parties agree that all information disclosed during the
negotiations of this Agreement shall be considered "Confidential Information"
and governed by the Confidentiality Agreement.

7.16     NUMBER AND GENDER OF WORDS.

         Whenever the singular number is used herein, the same shall include the
plural where appropriate, and shall apply to all of such number, and to each of
them, jointly and severally, and words of any gender shall include each other
gender where appropriate.

                                       35
<PAGE>

7.17     INTERPRETATION.

         When a reference is made in this Agreement or to a Section, Exhibit or
Schedule, such reference shall be to a Section of, Exhibit to or Schedule to
this Agreement, unless otherwise indicated. Any references to Applicable Laws or
a subset thereof shall be deemed to include any amendments or additions thereto
from time to time or any successor or similar Applicable Law.

7.18     COUNTERPARTS.

         This Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same Agreement, and shall become effective
when counterparts have been signed by each Party and delivered to the other
Party, it being understood that all Parties need not sign the same counterpart.

                            [SIGNATURE PAGE FOLLOWS]

                                       36
<PAGE>

         IN WITNESS WHEREOF, the Parties hereto have caused this Strategic
Investment Agreement to be duly executed by their respective authorized officers
as of the date hereof.

                              DIGIMARC CORPORATION

                              By: /s/ E.K. Ranjit
                                 ---------------------------------
                                 Name:        E.K. Ranjit
                                 Title:       Chief Financial Officer &
                                              Secretary

                             MACROVISION CORPORATION

                             By: /s/ Ian R. Halifax
                                -----------------------------------
                                 Name:        Ian R. Halifax
                                 Title:       Chief Financial Officer

                                       37

<PAGE>

                                    EXHIBIT A
                                    ---------

                                   DEFINITIONS

         Any reference in this Agreement to "writing" or cognate expressions
includes a reference to electronic or facsimile transmission or comparable means
of communications. As used in this Agreement, the following terms shall be
defined as follows:

         "AAA" shall have the meaning set forth in Section 7.4(b).

         "ACCREDITED INVESTOR" shall have the meaning set forth in
Section 2.2(e).

         "ADDITIONAL SHARES" shall have the meaning set forth in the recitals to
this Agreement, which includes all shares of the Common Stock acquired by the
Investor pursuant to this Agreement and all shares of Common Stock issued to the
Investor upon any stock split, stock dividend, recapitalization or similar
event.

         "AFFILIATE(S)" shall mean any corporation, association or other entity
which directly or indirectly controls, is controlled by or is under common
control with the party in question, but only for so long as such relationship
exists. As used herein, the term "control" shall mean the ability to direct the
business of a company and shall be presumed in the case of ownership, directly
or indirectly, of shares of stock having at least fifty percent (50%) of the
voting power entitled to vote for the election of directors in the case of a
corporation, and at least fifty percent (50%) of the voting power and interest
in profits in the case of a business entity other than a corporation, or only if
less than fifty percent (50%) of the voting power and interest in profits is
permitted by Applicable Law, the maximum amount allowed in the country in
question (so long as the holder otherwise retains the ability to direct the
business of the entity).

         "AGREEMENT" shall have the meaning set forth in the preamble hereto.

         "APPLICABLE LAW(S)" shall mean all foreign, federal, state and local
laws, statutes, rules and regulations which have been enacted by a Governmental
Authority and are in force as of the date hereof or which are enacted by a
Governmental Authority and come into force during the term of this Agreement,
(including any successor provisions as amended, re-enacted or extended by such
Governmental Authority) in each case to the extent that the same are applicable
to the performance by the Parties of their respective obligations under this
Agreement.

         "AUDIT DATE" shall have the meaning set forth in Section 2.1(l).

         "BENEFICIALLY OWNS" or any derivation of such term shall have the same
meaning as set forth in Rule 13d-3 under the Exchange Act.

                                       1
<PAGE>

         "BEST EFFORTS" shall be determined under California law and shall mean
such reasonable efforts as are consistent with efforts made by businesses of
similar size and resources in a similar circumstance and context, to achieve a
particular result in a timely manner, but shall not require a Party to take
actions that would be commercially unreasonable to such Party in the
circumstances.

         "BY-LAWS" shall have the meaning set forth in Section 2.1(c).

         "CERTIFICATE OF INCORPORATION" shall have the meaning set forth in
Section 2.1(c).

         "CLOSING" shall have the meaning set forth in Section 1.2.

         "COMMON STOCK" shall have the meaning set forth in the recitals to
this Agreement.

         "COMPANY" shall have the meaning set forth in the preamble of this
Agreement.

         "COMPANY SECURITIES" shall mean the Original Shares, the Additional
Shares acquired hereunder or any of the Company's Common Stock or securities
(including options, warrants or rights) convertible into, exchangeable for or
exercisable for shares of Common Stock.

         "CONFIDENTIAL INFORMATION" shall mean technical and business
information relating to a Party's Intellectual Property Rights, trade secret
processes or devices, techniques, data, formula, inventions (whether or not
patentable) or products, research and development (including research subjects,
methods and results), production, manufacturing and engineering processes,
computer software, costs, profit or margin information, pricing policies,
confidential market information, finances, customers, distribution, sales,
marketing, and production and future business plans and any other information of
a "confidential" nature, specifically including, without limitation, any
information that is identified orally or in writing by the disclosing party to
be confidential, or that the receiving party should reasonably understand under
the circumstances to be a trade secret of the disclosing party or information of
a similar nature that is not generally known to the public.

         "CONFIDENTIALITY AGREEMENT" shall have the meaning set forth in
Section 5.1.

         "DIRECTOR AGREEMENT" shall have the meaning set forth in
Section 6.1(i).

         "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.

         "GALAXY GROUP" [***].

         "GAAP" shall have the meaning set forth in Section 2.1(f).

                                       2
<PAGE>

         "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any
state, province or other political subdivision thereof or any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

         "GROUP" shall have the meaning set forth in Section 13(d)(3) of the
Exchange Act.

         "HSR ACT" shall have the meaning set forth in Section 2.2(c).

         "INTELLECTUAL PROPERTY" shall have the meaning set forth in
Section 2(m)(i).

         "INTERIM BALANCE SHEET" shall have the meaning set forth in
Section 2.1(g)(ii).

         "INVESTOR" shall have the meaning set forth in the preamble of this
Agreement.

         "JDA AMENDMENT" shall have the meaning set forth in Section 1.3.

         "LIABILITIES" shall have the meaning set forth in Section 2.1(g).

         "MACROVISION PERCENTAGE" shall have the meaning set forth in the
recitals to this Agreement.

         "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on the
assets, results of operations, properties, business or financial condition of
either Party hereto, as applicable, and such Party's subsidiaries taken as a
whole.

         "PARTY" or "PARTIES" shall mean the Investor, the Company or both, as
applicable.

         "PERSON" shall mean any individual, general partnership, limited
partnership, limited liability company, corporation, joint venture, trust,
business trust, cooperative or association, or any foreign trust or foreign
business organization or any Governmental Authority.

         "PHILIPS" shall mean Koninklijke Philips Electronics N.V., a
Netherlands corporation.

         "PHILIPS STRATEGIC INVESTMENT AGREEMENT" shall have the meaning set
forth in the recitals to this Agreement.

         "PIGGYBACK INVESTORS" shall have the meaning set forth in
Section 4.3(b).

         "REGISTER", "REGISTERED", and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with
the Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.

         "REGISTRABLE SECURITIES" means (i) Common Stock of the Company
issued or issuable under this Agreement; and (ii) any Common Stock of the
Company issued as (or

                                       3
<PAGE>

issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities (i) sold by a Person to the public either pursuant to a registration
statement or Rule 144 or (ii) sold in a private transaction in which the
transferor's rights under Article IV of this Agreement are not assigned.

         "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company
in complying with Section 4.2, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel for the
Company and the underwriters, blue sky fees and expenses and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).

         "RESTRICTED SECURITIES" shall have the meaning set forth in
Section 2.2(e).

         "SCHEDULE OF EXCEPTIONS" shall have the meaning set forth in
Section 2.1.

         "SEC" or "COMMISSION" means the Securities and Exchange Commission.

         "SEC DOCUMENTS" shall have the meaning set forth in Section 2.1(f).

         "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.

         "SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes, if any, applicable to the sale.

         "SHARE PRICE" shall have the meaning set forth in Section 1.1.

         "STANDSTILL PERCENTAGE" shall have the meaning set forth in
Section 3.2(a)(i).

         "STANDSTILL PERIOD" shall have the meaning set forth in Section 3.2(a).

         "SUBJECT SECURITIES" shall have the meaning set forth in
Section 4.4(a).

         "THIRD PARTY INTELLECTUAL PROPERTY LICENSE" shall have the meaning set
forth in Section 2.1(m)(i).

         "THIRD PARTY INTELLECTUAL PROPERTY RIGHTS" shall have the meaning set
forth in Section 2.1(m)(vii).

         "TOTAL PURCHASE PRICE" shall have the meaning set forth in Section 1.1.

         "VIOLATION" shall have the meaning set forth in Section 4.7(a)(i).

         "VOTING SECURITIES" shall mean any shares of any class of the Company's
capital stock with voting rights generally to elect directors of the Company.

                                       4

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