Exhibit 10.2
 
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.
 
Warrant to Purchase
   
___,000,000 shares
 
Warrant Number WA-____

 
Warrant to Purchase Common Stock
of
VirtualScopics, Inc.

THIS CERTIFIES that BRIDGEPOINTE MASTER FUND LTD., a Cayman Islands Exempted
Company or any subsequent holder hereof (“Holder”) has the right to purchase
from Virtualscopics, Inc. a Delaware corporation, (the “Company”), up to _____
Million (___,000,000) fully paid and nonassessable shares, of the Company’s
common stock, $0.001 par value per share (“Common Stock”), subject to adjustment
as provided herein, at a price equal to the Exercise Price as defined in Section
3 below, at any time during the Term (as defined below).

Holder agrees with the Company that this Warrant to Purchase Common Stock of the
Company (this “Warrant” or this “Agreement”) is issued and all rights hereunder
shall be held subject to all of the conditions, limitations and provisions set
forth herein.

1. Date of Issuance and Term.

This Warrant shall be deemed to be issued on September 13, 2007 (“Date of
Issuance”). The term of this Warrant begins on the Date of Issuance and ends at
5:00 p.m., New York City time, on the date that is seven (7) years after the
Date of Issuance (the “Term”). This Warrant was issued in conjunction with the
issuance of Series B Preferred Stock of the Company (“the “Preferred Stock”) to
the Holder pursuant to the terms of the Securities Purchase Agreement
(“Securities Purchase Agreement”) dated September ___, 2007, and the Certificate
of Designation of Rights and Preferences of the Company’s Series B Convertible
Preferred Stock (the “Certificate of Designation”) and the Registration Rights
Agreement (“Registration Rights Agreement”) by and between the Company and
Holder dated on or about September 12, 2007.
 

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Notwithstanding anything to the contrary herein, the applicable portion of this
Warrant shall not be exercisable during any time that, and only to the extent
that, the number of shares of Common Stock to be issued to Holder upon such
Exercise (as defined in Section 2(a)), when added to the number of shares of
Common Stock, if any, that the Holder otherwise beneficially owns (outside of
this Warrant, and not including any other warrants or securities of Holder’s
having a provision substantially similar to this paragraph) at the time of such
Exercise, would exceed 4.99% (the “Maximum Percentage”) of the number of shares
of Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock issuable upon Exercise of this Warrant held by the
Holder, as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934 (the “Beneficial Ownership Limitation”). The Beneficial
Ownership Limitation shall be conclusively satisfied if the applicable Notice of
Exercise includes a signed representation by the Holder that the issuance of the
shares in such Notice of Exercise will not violate the Limitation, and the
Company shall not be entitled to require additional documentation of such
satisfaction.

Notwithstanding the above, in the event that the Company receives any purchase,
tender or exchange offer or any offer to enter into a merger with another entity
whereby the Company shall not be the surviving entity (an “Offer”), then the
Maximum Percentage shall be increased (but not decreased) to 9.99%, and “4.99%”
shall be automatically revised immediately after such offer to read “9.99%” each
place it occurs in this Section 1. The Beneficial Ownership Limitation
provisions of this Section 1 may be waived by such Holder, at the election of
such Holder, upon not less than 61 days’ prior notice to the Company, to change
the Beneficial Ownership Limitation to any amount not in excess of 9.99% of the
number of shares of the Common Stock outstanding immediately after giving effect
to the issuance of shares of Common Stock upon Exercise of this Warrant held by
the Holder and the Beneficial Ownership Limitation shall continue to apply. Upon
such a change by a Holder of the Beneficial Ownership Limitation from such 4.99%
limitation to such 9.99% limitation, the Beneficial Ownership Limitation may not
be further waived by such Holder, provided that, if an Event of Default occurs,
thereafter the Beneficial Ownership Limitation provisions of this Section 1 may
be waived by such Holder, at the election of such Holder, upon not less than 61
days’ prior notice to the Company, to change the Maximum Percentage to any other
percentage (and not limited to 9.99%) of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock upon Exercise of the Warrants held by the Holder and the provisions
of this Section 1 shall continue to apply. The limitations on Exercise set forth
in this subsection are referred to as the “Beneficial Ownership Limitations.”
The provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 1 to correct
this paragraph (or any portion hereof) which may be defective or inconsistent
with the intended Beneficial Ownership Limitation herein contained or to make
changes or supplements necessary or desirable to properly give effect to such
limitation. 

Notwithstanding the above, Holder shall retain the option to either Exercise or
not Exercise its option(s) to acquire Common Stock pursuant to the terms hereof
after an Offer, and, in the event of a cash Exercise following a tender offer,
the Exercise Price per share that would otherwise be due shall instead be offset
against the tender price per share to be received by the Holder, provided,
however, that in the event a tender offer is not completed, Holder, at its
option may either (i) complete any Exercise that was initiated after the Offer
by promptly paying to the Company the Exercise Price that would have been due at
the time the Warrant was Exercised, or (ii) cancel such Exercise by providing
written notice to the Company, in which case such Exercise shall be deemed void
ad initio.

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Maximum Exercise of Rights. In the event the Holder notifies the Company that
the Exercise of the rights described herein would result in the issuance of an
amount of Common Stock of the Company that would exceed the maximum amount that
may be issued to a Holder calculated in the manner described above, then the
issuance of such additional shares of Common Stock of the Company to such Holder
will be deferred in whole or in part until such time as such Holder is able to
beneficially own such Common Stock without exceeding the maximum amount
calculated in the manner described herein. The determination of when such Common
Stock may be issued shall be made by each Holder as to only such Holder.

2. Exercise.

(a) Manner of Exercise. During the Term and at any time on or after the
Shareholder Issuance Vote (as defined in the Securities Purchase Agreement) and
the effective date of the written consents given therefor, but in any event at
any time after the Shareholder Issuance Approval Deadline (as defined in the
Securities Purchase Agreement) this Warrant may be Exercised as to all or any
lesser number of full shares of Common Stock covered hereby (the “Warrant
Shares” or the “Shares”) upon surrender of this Warrant, with the Notice of
Exercise Form attached hereto as Exhibit A (the “Notice of Exercise”) duly
completed and executed, together with the full Exercise Price (as defined below,
which may be satisfied by either a Cash Exercise or a Cashless Exercise, as each
is defined below) for each share of Common Stock as to which this Warrant is
Exercised, at the office of the Company, VirtualScopics, Inc.; 500 Linden Oaks,
Rochester, NY 14625; Phone: 585-249-6231, Fax: 585-218-7350, or at such other
location as the Company may then be located or such other office or agency as
the Company may designate in writing, by overnight mail, by facsimile (such
surrender and payment of the Exercise Price hereinafter called the “Exercise” of
this Warrant). In the case of a Cashless Exercise, the Exercise Price is deemed
to have been delivered upon the Holder’s deliver of a Notice of Exercise to the
Company.

(b) Date of Exercise. The “Date of Exercise” of the Warrant shall be defined as
the date that a copy of the Notice of Exercise Form attached hereto as Exhibit
A, completed and executed, is sent by facsimile to the Company, provided that
the original Warrant and Notice of Exercise Form are received by the Company and
the Exercise Price is satisfied within 1 Business Day thereafter or else the
Date of Exercise shall be deemed the Business Day that the Notice of Exercise
Form, Original Warrant and Exercise Price are received by the Company.
Alternatively, the Date of Exercise shall be defined as the date the original
Notice of Exercise Form, Original Warrant and Exercise Price are received by the
Company, if Holder has not sent advance notice by facsimile. Upon delivery of
the Date of Exercise, the Holder shall be deemed for all corporate purposes to
have become the holder of record of the Warrant Shares with respect to which
this Warrant has been exercised, irrespective of the date such Warrant Shares
are credited to the Holder’s DTC account or the date of delivery of the
certificates evidencing such Warrant Shares as the case may be.  The Company
shall deliver any objection to any Notice of Exercise within three (3) Business
Days of receipt of such notice. In the event of any dispute or discrepancy, the
records of the Company shall be controlling and determinative in the absence of
manifest error.
 
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(c) Delivery of Common Stock Upon Exercise. Within 3 Trading Days from the
delivery to the Company of the Notice of Exercise, surrender of this Warrant and
payment of the aggregate Exercise Price (which, in the case of a Cashless
Exercise, shall be deemed to have been paid upon the submission by the Holder of
a Notice of Exercise)(the “Warrant Shares Delivery Deadline”), the Company shall
issue and deliver (or cause its transfer agent so to issue and deliver) in
accordance with the terms hereof to or upon the order of the Holder that number
of shares of Common Stock (“Exercise Shares”) for the portion of this Warrant
converted as shall be determined in accordance herewith. Upon the Exercise of
this Warrant or any part thereof, the Company shall, at its own cost and
expense, take all necessary action, including obtaining and delivering, an
opinion of counsel to assure that the Company’s transfer agent shall issue stock
certificates in the name of Holder (or its nominee) or such other persons as
designated by Holder and in such denominations to be specified at Exercise
representing the number of shares of Common Stock issuable upon such Exercise.
The Company warrants that no instructions other than these instructions have
been or will be given to the transfer agent of the Company’s Common Stock. If
the Company fails for any reason to deliver to the Holder certificates
evidencing the Warrant Shares subject to a Notice of Exercise by the Warrant
Share Delivery Deadline (a “Warrant Share Delivery Failure”).

(d) (Omitted)

(e) (Omitted)

(f) Revocation of Exercise Upon Delivery Failure. In addition to any other
remedies which may be available to the Holder, in the event that the Company
fails for any reason to effect delivery of the Exercise Shares by the Warrant
Shares Delivery Deadline, the Holder will be entitled to revoke all or part of
the relevant Notice of Exercise by delivery of a notice to such effect to the
Company whereupon the Company and the Holder shall each be restored to their
respective positions immediately prior to the delivery of such notice, except
that the liquidated damages described above shall be payable through the date
notice of revocation or rescission is given to the Company.

(g) Legends. 

(i) Restrictive Legend. The Holder understands that the Warrant and, until such
time as Exercise Shares have been registered under the 1933 Act as contemplated
by the Registration Rights Agreement or otherwise may be sold pursuant to Rule
144 or Rule 144(k) under the 1933 Act without any restriction as to the number
of securities as of a particular date that can then be immediately sold, the
Exercise Shares may bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the
certificates for such securities):
 
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“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN
OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO
COUNSEL TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.”

(ii) Removal of Restrictive Legends. Certificates evidencing the Exercise Shares
shall not contain any legend restricting the transfer thereof (including the
legend set forth above in subsection 2(g)(i)): (i) following resale of such
shares while a registration statement (including the Registration Statement, as
defined in the Registration Rights Agreement) covering the resale of such
security is effective under the Securities Act, or (ii) following any sale of
such Exercise Shares pursuant to Rule 144, or (iii) if such Exercise Shares are
eligible for sale under Rule 144(k), or (iv) if such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission)
(collectively, the “Unrestricted Conditions”). The Company shall cause its
counsel to issue a legal opinion to the Company’s transfer agent promptly after
the Effective Date (as defined below) of the Registration Statement if required
by the Company’s transfer agent to effect the sale of Exercise Shares by Holder
without a restrictive legend or removal of the legend hereunder. If the
Unrestricted Conditions are met at the time of issuance or resale of Exercise
Shares, then such Exercise Shares shall be issued free of all legends and Holder
submits proof and proper documentation satisfactory to the Company and its
transfer agent to the conditions in this Section 2(g). The Company agrees that
following the Effective Date or at such time as the Unrestricted Conditions are
met or such legend is otherwise no longer required under this Section 2(g), it
will, no later than three (3) Trading Days following the delivery (the
“Unlegended Shares Delivery Deadline”) by the Holder to the Company or the
Company’s transfer agent of a certificate representing Exercise Shares, as
applicable, issued with a restrictive legend and proof and proper documentation
satisfactory to the Company and its transfer agent to the conditions in this
Section 2(g) (such third Trading Day, the “Legend Removal Date”), deliver or
cause to be delivered to such Holder a certificate (or electronic transfer)
representing such shares that is free from all restrictive and other legends.
For purposes hereof, “Effective Date” shall mean the date that the Registration
Statement that the Company is required to file pursuant to the Registration
Rights Agreement has been declared effective by the Securities and Exchange
Commission (the “Commission”).

(iii) Sale of Unlegended Shares. Holder agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 2(g)(i) above is predicated upon the Company’s reliance that the
Holder will sell any Exercise Shares pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Securities are sold
pursuant to a Registration Statement, they will be sold in compliance with the
plan of distribution set forth therein.
 
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(h) Cancellation of Warrant. This Warrant shall be canceled upon the full
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
Exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.

(i) Holder of Record. Each person in whose name any Warrant for shares of Common
Stock is issued shall, for all purposes, be deemed to be the Holder of record of
such shares on the Date of Exercise of this Warrant, irrespective of the date of
delivery of the Common Stock purchased upon the Exercise of this Warrant.
Nothing in this Warrant shall be construed as conferring upon Holder any rights
as a stockholder of the Company.

(j) Delivery of Electronic Shares. In lieu of delivering physical certificates
representing the unlegended shares of Common Stock issuable upon Exercise (the
“Unlegended Shares”), provided the Company’s transfer agent is participating in
the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”)
program, upon written request of the Holder, so long as the certificates
therefor do not bear a legend, are not required to bear a legend, and the Holder
is not obligated to return such certificate for the placement of a legend
thereon, the Company shall cause its transfer agent to electronically transmit
the Unlegended Shares to the Holder by crediting the account of the Holder’s
prime broker with DTC identified in the written request through its Deposit
Withdrawal Agent Commission (“DWAC”) system.

(k) Buy-In. In addition to any other rights available to the Holder, if the
Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Exercise Shares pursuant to an
Exercise on or before the fifth (5th) Business Day after the Warrant Share
Delivery Date (other than for circumstances related to an outbreak of
hostilities, terrorist activities or war, the effects of weather or
meteorological events, acts of God or other calamity or crisis), and if after
such date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) or the Holder’s brokerage firm otherwise purchases
shares of Common Stock to deliver in satisfaction of a sale by the Holder of the
Exercise Shares which the Holder anticipated receiving upon such Exercise (a
“Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by
which (x) the Holder’s total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased exceeds (y) the amount obtained
by multiplying (A) the number of Exercise Shares that the Company was required
to deliver to the Holder in connection with the Exercise at issue times (B) the
price at which the sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either reinstate the portion of
the Warrant and equivalent number of Exercise Shares for which such Exercise was
not honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its Exercise and
delivery obligations hereunder. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted Exercise of shares of Common Stock with an aggregate sale price
giving rise to such purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the Company. Nothing
herein shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
Exercise of the Warrant as required pursuant to the terms hereof.
 
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(l) Surrender of Warrant Upon Exercise; Book-Entry. Notwithstanding anything to
the contrary set forth herein, upon Exercise of this Warrant in accordance with
the terms hereof, the Holder shall not be required to physically surrender the
original Warrant Certificate to the Company unless all of this Warrant is
Exercised, in which case such Holder shall deliver the original Warrant being
Exercised to the Company within one (1) Business Day following the Date of
Exercise at issue. Partial exercises of this Warrant resulting in purchases of a
portion of the total number of Warrant Shares available hereunder shall have the
effect of lowering the outstanding number of Warrant Shares purchasable
hereunder in an amount equal to the applicable number of Warrant Shares
purchased. The Holder and the Company shall maintain records showing the amount
of this Warrant that is so Exercised and the dates of such Exercises or shall
use such other method, reasonably satisfactory to the Holder and the Company, so
as not to require physical surrender of this original Warrant upon each such
Exercise. In the event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the absence of manifest error.
The Holder and any assignee, by acceptance of this Warrant, acknowledge and
agree that, by reason of the provisions of this paragraph, following the
purchase of a portion of the Warrant Shares hereunder, the number of Warrant
Shares available for purchase hereunder at any given time may be less than the
amount stated on the face hereof.

3. Payment of Warrant Exercise Price.

(a) Exercise Price. The Exercise Price (“Exercise Price”) shall initially equal
$____ per share (the “Initial Exercise Price”), subject to adjustment pursuant
to the terms hereof, including but not limited to Section 5 below.

Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:

(i) Cash Exercise: The Holder may exercise this Warrant in cash, bank or
cashiers check or wire transfer (a “Cash Exercise”); or

(ii) Cashless Exercise: The Holder, at its option, may exercise this Warrant in
a cashless exercise transaction. In order to effect a Cashless Exercise, the
Holder shall surrender of this Warrant at the principal office of the Company
together with notice of cashless election, in which event the Company shall
issue Holder a number of shares of Common Stock computed using the following
formula (a “Cashless Exercise”):
 
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X = Y (A-B)/A
 
where: X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock for which this Warrant is
being Exercised.

A = the Market Price of one (1) share of Common Stock (for purposes of this
Section 3(ii), where “Market Price,” as of any date, means the Volume Weighted
Average Price (as defined herein) of the Company’s Common Stock during the five
(5) consecutive trading day period immediately preceding the date of Exercise,
or other applicable date.

B = the Exercise Price.

As used herein, the “Volume Weighted Average Price” or “VWAP” for any security
as of any date means the volume weighted average sale price on the Over the
Counter Electronic Bulletin Board (the “OTC-BB”) as reported by, or based upon
data reported by, Bloomberg Financial Markets or an equivalent, reliable
reporting service mutually acceptable to and hereafter designated by holders of
a majority in interest of the Warrants and the Company (“Bloomberg”) or, if the
OTC-BB is not the principal trading market for such security, the volume
weighted average sale price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or, if no volume weighted average sale price is reported for such
security, then the last closing trade price of such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
that are listed in the “pink sheets” by the National Quotation Bureau, Inc. If
the Volume Weighted Average Price cannot be calculated for such security on such
date in the manner provided above, the volume weighted average price shall be
the fair market value as mutually determined by the Company and the holders of a
majority in interest of the Warrants being Exercised for which the calculation
of the volume weighted average price is required in order to determine the
Exercise Price of such Warrants. “Trading Day” shall mean any day on which the
Common Sock is traded for any period on the OTC-BB, or on the principal
securities exchange or other securities market on which the Common Stock is then
being traded.

For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon Exercise of this
Warrant in a cashless Exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon Exercise
of this Warrant in a cashless Exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.

(b) Dispute Resolution. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the number of Warrant Shares
issuable upon any exercise of this Warrant, the Company shall promptly issue to
the Holder the number of Warrant Shares that are not disputed and resolve such
dispute in accordance with this subsection. In the case of a dispute as to the
determination of the closing price or the Volume Weighted Average Price of the
Company’s Common Stock or the arithmetic calculation of the Exercise Price,
Market Price or any Redemption Price, or the determination of whether or not a
Dilutive Issuance or a Milestone Failure has occurred, the Company shall submit
the disputed determinations or arithmetic calculations via facsimile within five
(5) Business Days of receipt, or deemed receipt, of the Notice of Exercise or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation within five (5) Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within five (5) Business Days submit via facsimile (i) the
disputed determination of the closing price or the Volume Weighted Average Price
of the Company’s Common Stock to an independent, reputable investment bank
selected by the Company and approved by the Holder, which approval shall not be
unreasonably withheld, (ii) the disputed arithmetic calculation of the Exercise
Price, Market Price or any Redemption Price to the Company’s independent,
outside accountant or (iii) the disputed facts regarding the occurrence of a
Dilutive Issuance or Milestone Failure (or any other matter referred to above
that is not expressly designated to the independent investment bank or the
independent outside accountant pursuant to (i) or (ii) immediately above) to an
expert attorney from a nationally recognized outside law firm (having at least
100 attorneys and having with no prior relationship with the Company) selected
by the Company and approved by the Holder. The Company shall request that the
investment bank or the accountant, law firm, or other expert, as the case may
be, to perform the determinations or calculations and notify the Company and the
Holder of the results no later than ten (10) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s or law firm’s determination or calculation, as the case may be,
shall be binding upon all parties absent demonstrable error (collectively, the
“Dispute Resolution Procedures”).
 
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4. Transfer and Registration.

(a) Transfer Rights. Subject to the provisions of Section 8 of this Warrant,
this Warrant may be transferred on the books of the Company, in whole or in
part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.

(b) Registrable Securities. The Common Stock issuable upon the Exercise of this
Warrant has registration rights pursuant to that certain Registration Rights
Agreements between the Company and the Holder dated even herewith.

5. Anti-Dilution Adjustments; Additional Adjustments; Purchase Rights.

(a) (Omitted). 
 
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(b) Recapitalization or Reclassification. If the Company shall at any time
effect a recapitalization, reclassification or other similar transaction of such
character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which Holder shall be
entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).

(c) Exercise Price Adjusted. As used in this Warrant, the term “Exercise Price”
shall mean the purchase price per share specified in Section 3 of this Warrant,
until the occurrence of an event stated in this Section 5 or otherwise set forth
in this Warrant, and thereafter shall mean said price as adjusted from time to
time in accordance with the provisions of said subsection. No such adjustment
under this Section 5 shall be made unless such adjustment would change the
Exercise Price at the time by $.01 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the Exercise Price at the time by $.01 or more. No adjustment made
pursuant to any provision of this Section 5 shall have the net effect of
increasing the Exercise Price in relation to the split adjusted and distribution
adjusted price of the Common Stock.

(d) Adjustments: Additional Shares, Securities or Assets. In the event that at
any time, as a result of an adjustment made pursuant to this Section 5 or
otherwise, Holder shall, upon Exercise of this Warrant, become entitled to
receive shares and/or other securities or assets (other than Common Stock) then,
wherever appropriate, all references herein to shares of Common Stock shall be
deemed to refer to and include such shares and/or other securities or assets;
and thereafter the number of such shares and/or other securities or assets shall
be subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.

(e) Adjustments to Conversion Price Due to Subsequent Equity Sales. If at any
time after the Date of Issuance for so long as any Warrants are outstanding, the
Company or any Subsidiary, as applicable, sells or grants any option to purchase
or sells or grants any right to reprice, or otherwise disposes of or issues (or
announces any sale, grant or any option to purchase or other disposition), any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock at an effective price per share that is lower than the then
Conversion Price (such lower price, the “Base Conversion Price” and such
issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common
Stock or Common Stock Equivalents so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
per share which are issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share that is lower
than the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price on such date of the Dilutive Issuance),
regardless of whether or not any such issuance or repricing of securities is
conditional upon circumstances or events that may occur in the future, then the
Conversion Price shall be reduced (each, a“Dilutive Issuance Adjustment”) to
equal the Base Conversion Price. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustment will be made under this Section 5(e) in respect of an
Exempt Issuance (as defined in the Securities Purchase Agreement) or in respect
of Adjustment Exceptions (as defined below). If the Company issues Prohibited
Equity Securities, despite the prohibition set forth in the Securities Purchase
Agreement, the Company shall be deemed to have issued Common Stock or Common
Stock Equivalents at the lowest possible conversion price at which such
securities may be converted or exercised. The Company shall notify the Holder in
writing, no later than 5 Business Days following the issuance of any Common
Stock or Common Stock Equivalents subject to this Section 5(e), indicating
therein the applicable issuance price, or applicable reset price, exchange
price, conversion price and other pricing terms (such notice, the “Dilutive
Issuance Notice”). For purposes of clarification, whether or not the Company
provides a Dilutive Issuance Notice pursuant to this Section 5(e), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number
of Conversion Shares based upon the Base Conversion Price on or after the date
of such Dilutive Issuance, regardless of whether the Holder accurately refers to
the Base Conversion Price in the Notice of Conversion. No adjustment shall be
made hereunder if such adjustment would result in an increase of the Conversion
Price then in effect.
 
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For purposes hereof:

“Adjustment Exceptions” shall mean all shares of Common Stock or Common Stock
Equivalents issued (A) pursuant to any Approved Stock Plan (as defined in the
Securities Purchase Agreement), (B) upon the exercise, exchange of, conversion
or redemption of, or payment of interest or liquidated or similar damages on,
any securities issued hereunder, or in connection with the Offering, or to a
Placement Agent in connection with the Offering (as defined in the Securities
Purchase Agreement), (C) upon the exercise, exchange, conversion, or redemption
of Common Stock Equivalents issued and outstanding on the Date of Issuance,
provided that the terms of such Common Stock Equivalents are not amended after
the Date of Issuance, (D) in connection with any acquisition by the Company or
any Subsidiary, whether through an acquisition of stock or a merger of any
business, assets or technologies the primary purpose of which is not to raise
equity capital, and (E) in connection with an adjustment previously made
pursuant to Section 5 (b), (f) or (i).

“Approved Stock Plan” shall have the meaning ascribed to it in the Securities
Purchase Agreement.

“Common Stock Equivalents,” “Exempt Issuance” and “Prohibited Equity Securities”
shall each have the meanings ascribed to them in the Securities Purchase
Agreement.

“Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.
 
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“Options” means any rights, warrants or options to subscribe for or purchase
Common Stock or Convertible Securities.

(f) Subsequent Rights Offerings. If the Company, at anytime prior to the date
that all of the Warrants have been Exercised, redeemed or otherwise satisfied in
accordance with their terms, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to subscribe for or
purchase shares of Common Stock at a price per share (the “Base Rights Offering
Price”) that is lower than the Exercise Price then in effect, then the Exercise
Price then in effect shall be reduced (but not increased) to the Base Rights
Offering Price (a “Subsequent Rights Offering Adjustment”). Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. No adjustment
shall be made hereunder if such adjustment would result in an increase of the
Exercise Price then in effect.

(g) Milestone Adjustments to Exercise Price. The Company has provided to the
Holder pro forma financial projections and a list of milestone events that are
evidenced on Schedule 5(g) attached hereto (the “Projections”). If the Company
shall have failed (each a “Milestone Failure”) to meet or exceed such
Projections for any one or more of the following periods (each a “Milestone
Period”) (i) the twelve (12) month period ending December 31, 2007 and (ii) the
twelve (12) month period ending December 31, 2008, respectively (each a
“Milestone Date”), in each case as reported in the Company’s Form 10-K for such
fiscal year, then the Exercise Price shall be reduced (but not increased) (a
“Milestone Adjustment”) to equal the lesser of (a) the Exercise Price then in
effect, (b) the Market Price as determined on the date that is five (5) Trading
Days after the applicable Milestone Date, or (c) the Market Price (as defined
below) as determined on the date that is five (5) Trading Days after the date
that Company files its next Form 10-K with the Commission following the end of
the applicable Milestone Period (the “Milestone Adjustment Price”).

Each such adjustment shall be effective as of the first day following each
Milestone Date (by way of example, if the Projections are not met for the
Milestone Period ending December 31, 2007, the reduction is effective
immediately on January 1, 2008). As to any Exercises by the Holder that occurred
following the end of a Milestone Period but prior to the date the Company’s
periodic report was filed (“Interim Period”), the Company shall retroactively
send the Holder additional Warrant Shares within 3 Trading Days of the date of
the applicable filing if an adjustment is required hereunder (provided that to
the extent any such shares would cause the Beneficial Ownership Limitation to be
exceeded, such excess shares shall not be issued and delivered until such time
as such shares may be so issued without exceeding the Beneficial Ownership
Limitation). The number of additional Warrant Shares issued shall be equal to
the number of Warrant Shares receivable from such Exercises based on the
adjusted Exercise Price less any Warrant Shares previously received on account
of such Exercises. Any subsequent restatements of the Company’s financials shall
require similar retroactive issuances if the aforementioned events are
subsequently deemed to have occurred. The Company shall provide written notice
to the Holder no later than 5 Business Day following the Company’s filing of the
applicable periodic report with the Commission, indicating therein the new
Exercise Price and the Revenue for the applicable quarter. In the event that
there is an adjustment to the Exercise Price pursuant to any other provision
under this Certificate of Designation during the Interim Period, the Exercise
Price shall be the lower of (i) the Exercise Price as adjusted pursuant to the
other provisions of this Certificate of Designation and (ii) the new Exercise
Price as determined hereunder. Notwithstanding anything herein to the contrary,
(i) the provision shall only have the effect of reducing the Exercise Price and
(ii) each adjustment shall be permanent notwithstanding future Revenue or the
achievement of any other milestones and cumulative with any other adjustments
hereunder.
 
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(h) Adjustments to Exercise Price During Major Announcements. Notwithstanding
anything contained in this Warrant to the contrary, in the event the Company
makes any public announcement (the date of such announcement is hereinafter
referred to as the “Announcement Date”) anytime during the period beginning five
(5) Business Days before any Milestone Adjustment Date and ending five (5)
Business Days after such Milestone Adjustment Date (the “Protected Period”),
then the “Milestone Adjustment Price” for such Milestone Adjustment shall equal
the lesser of (X) the Milestone Adjustment Price as determined pursuant to
Section 5(g) above, (Y) the Market Price as determined on the Trading Day
immediately preceding the Announcement Date and (Z) the Market Price as
determined on the date that is ten (10) Trading Days after the Announcement
Date.

(i) Subdivision or Combination of Common Stock. If the Company at any time
subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced and the number of
shares represented by this Warrant shall proportionally increase. If the Company
at any time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased and the number of shares
represented by this Warrant shall proportionally decrease.

(j) Voluntary Adjustment By Company. The Company may at any time during the term
of this Warrant reduce the then current Exercise Price to any amount and for any
period of time deemed appropriate by the Board of Directors of the Company (a
“Voluntary Adjustment”).

(k) Adjustment to Number of Shares. In the event of any adjustment to the
Exercise Price pursuant to the terms of this Warrant, including but not limited
to any Milestone Adjustment, any Dilutive Issuance Adjustment any Subsequent
Rights Offering Adjustment, or any Voluntary Adjustment, the number of Warrant
Shares issuable upon Exercise of this Warrant shall be increased (except as
otherwise provided in Section 5(b) or (i)) such that the aggregate Exercise
Price payable in a full Cash Exercise hereunder, after taking into account the
decrease in the Exercise Price, shall be equal to the aggregate Exercise Price
payable in a full Cash Exercise prior to such adjustment, and the number of
Warrant Shares issuable in a Cashless Exercise shall be increased accordingly.
 
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(l) Notice of Adjustments. Whenever the Exercise Price is adjusted pursuant to
the terms of this Warrant, the Company shall within Five (5) Business Days mail
to the Holder a notice (a “Exercise Price Adjustment Notice”) setting forth the
Exercise Price after such adjustment and setting forth a statement of the facts
requiring such adjustment. The Company shall, upon the written request at any
time of the Holder, furnish to such Holder a like Warrant setting forth (i) such
adjustment or readjustment, (ii) the Exercise Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon Exercise of the
Warrant, following delivery of the original Warrant to the Company for exchange.
For purposes of clarification, whether or not the Corporation provides an
Exercise Price Adjustment Notice pursuant to this Section 5(l), upon the
occurrence of any event that leads to an adjustment of the Exercise Price, the
Holders are entitled to receive a number of Exercise Shares based upon the new
Exercise Price, as adjusted, for exercises occurring on or after the date of
such adjustment, regardless of whether a Holder accurately refers to the
adjusted Exercise Price in the Notice of Exercise.

(m) Notice to Holder. 

(i) Adjustment to Exercise Price. Whenever the Exercise Price is adjusted
pursuant to any provision of this Section 5, the Company shall promptly mail to
the Holder a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. If the
Company issues Prohibited Equity Securities (as defined in the Purchase
Agreement), despite the prohibition thereon in the Purchase Agreement, the
Company shall be deemed to have issued Common Stock or Common Stock Equivalents
at the lowest possible conversion or exercise price at which such securities may
be converted or exercised.

(ii) Notice to Allow Exercise by Holder. If (A) the Company shall declare a
dividend (or any other distribution in whatever form) on the Common Stock; (B)
the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall authorize the granting to
all holders of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights; (D) the approval of
any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company; then, in each case, the Company shall cause to be
mailed to the Holder at its last address as it shall appear upon the Warrant
Register of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. The Holder is
entitled to exercise this Warrant during the period commencing on the date of
such notice to the effective date of the event triggering such notice.
 
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(n) (Omitted).

6. Fractional Interests.

No fractional shares or scrip representing fractional shares shall be issuable
upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may
purchase only a whole number of shares of Common Stock. If, on Exercise of this
Warrant, Holder would be entitled to a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares of Common Stock issuable upon Exercise
shall be the next closest number of whole shares.

7. Reservation of Shares.

From and after the date hereof, the Company shall at all times reserve for
issuance such number of authorized and unissued shares of Common Stock (or other
securities substituted therefor as herein above provided) as shall be sufficient
for the Exercise of this Warrant and payment of the Exercise Price in full
without regard to any Beneficial Ownership Limitation. If at any time the number
of shares of Common Stock authorized and reserved for issuance is below the
number of shares sufficient for the Exercise of this Warrant (a “Share
Authorization Failure”)(based on the Exercise Price in effect from time to
time), the Company will use commercially reasonable efforts to authorize and
reserve a sufficient number of shares, including, without limitation, calling a
special meeting of stockholders to authorize additional shares to meet the
Company’s obligations under this Section 7, in the case of an insufficient
number of authorized shares, and using its commercially reasonable efforts to
obtain stockholder approval of an increase in such authorized number of shares.
The Company covenants and agrees that upon the Exercise of this Warrant, all
shares of Common Stock issuable upon such Exercise shall be duly and validly
issued, fully paid, nonassessable and not subject to liens.

8. Restrictions on Transfer.

(a) Registration or Exemption Required. This Warrant has been issued in a
transaction exempt from the registration requirements of the Act by virtue of
Regulation D and exempt from state registration under applicable state laws. The
Warrant and the Common Stock issuable upon the Exercise of this Warrant may not
be transferred, sold or assigned except pursuant to an effective registration
statement or an exemption to the registration requirements of the Act and
applicable state laws.

(b) Assignment. If Holder can provide the Company with reasonably satisfactory
evidence that the conditions of (a) above regarding registration or exemption
have been satisfied, including an opinion of counsel satisfactory to the
Company, the Holder may sell, transfer, assign, pledge or otherwise dispose of
this Warrant, in whole or in part. Holder shall deliver a written notice to
Company, substantially in the form of the Assignment attached hereto as Exhibit
B, indicating the person or persons to whom the Warrant shall be assigned and
the respective number of warrants to be assigned to each assignee. The Company
shall effect the assignment within ten (10) days of receipt of the original
Warrant and other information required by this Section 8(b), and shall deliver
to the assignee(s) designated by Holder a Warrant or Warrants of like tenor and
terms for the appropriate number of shares.
 
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9. Noncircumvention. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation, Bylaws or through
any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, and will at all times in good faith carry out all the
provisions of this Warrant and take all action as may be required to protect the
rights of the Holder.  Without limiting the generality of the foregoing, the
Company (i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) shall take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.

10. Rights Upon Major Transaction or Change of Entity Transaction.  

(a) Definitions. For purposes hereof,

“Change of Entity Transaction” means (i) a consolidation, merger, exchange of
shares, recapitalization, reorganization, business combination or other similar
event, (A) following which the holders of Common Stock immediately preceding
such consolidation, merger, combination or event either (1) no longer hold a
majority of the shares of Common Stock of the Company or (2) no longer have the
ability to elect the board of directors of the Company or (B) as a result of
which shares of Common Stock shall be changed into (or the shares of Common
Stock become entitled to receive) the same or a different number of shares of
the same or another class or classes of stock or securities of another entity
which is not a “Reporting Issuer” under the 1934 Act.

“Sufficient Trading Characteristics” shall mean that the average daily dollar
trading volume of the common stock of such entity on its primary exchange or
market is equal to or in excess of $100,000 for the 90th through the 31st day
prior to the public announcement of such transaction.

“Permissible Change of Entity Transaction” shall mean a Change of Entity
Transaction where the Successor Entity (as defined below) (A) is a publicly
traded Company whose common stock is quoted on or listed for trading on an
Eligible Market, (B) has Sufficient Trading Characteristics (as defined below)
and (C) meets the Assumption Requirements (as required in Section 10(b) below).
 
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“Eligible Market” means the over the counter Bulletin Board (“OTC-BB”), the New
York Stock Exchange, Inc., the NASDAQ Capital Market, the NASDAQ Global Market,
the NASDAQ Global Select Market or the American Stock Exchange.

“Impermissible Change of Entity Transaction” shall mean a Change of Entity
Transaction which does not qualify as a Permissible Change of Entity
Transaction.

“Major Transaction” means

(i) an Impermissible Change of Entity Transaction; and

(ii) the sale or transfer of all or substantially all, of the assets of the
Company to another Person or Persons in one or a series of related transactions
(an “Asset Sale”); and

(iii) a purchase, tender or exchange offer made to and accepted by the holders
of more than the 50% of the outstanding shares of Common Stock.

(b)  Assumption Upon Change of Entity Transaction. The Company shall not, so
long as any portion of this Warrant remains outstanding, enter into or be party
to a Change of Entity Transaction unless any Person purchasing the Company’s
assets or Common Stock, or any successor entity resulting from such Change of
Entity Transaction (in each case, an “Successor Entity”), assumes (an
“Assumption”) in writing all of the obligations of the Company under this
Warrant in accordance with the provisions of this Section 10(b) pursuant to
written agreements in form and substance satisfactory to the Required Warrant
Holders (as defined below) and approved by the Required Warrant Holders prior to
such Change of Entity Transaction, including agreements to deliver to each
holder of Warrants in exchange for such Warrants a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to this Warrant, including, without limitation, having an exercise
price equal to the Exercise Price of this Warrant, having similar exercise
rights as this Warrant (including but not limited to similar exercise price
adjustment provisions), and satisfactory to the Required Warrant Holders.  Upon
the occurrence of any Change of Entity Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Change of Entity Transaction, the provisions of this Warrant referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every
right and power of the Company and shall assume all of the obligations of the
Company under the Warrant with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of a Change of Entity
Transaction, the Successor Entity shall deliver to the Holder confirmation that
there shall be issued upon exercise or redemption of the Warrant at any time
after the consummation of the Change of Entity Transaction, in lieu of the
shares of Common Stock (or other securities, cash, assets or other property)
issuable upon the exercise of this Warrant prior to such Change of Entity
Transaction, such shares of common stock (or their equivalent) of the Successor
Entity, as adjusted in accordance with the provisions of this Warrant. The
provisions of this Section shall apply similarly and equally to successive
Change of Entity Transactions and shall be applied without regard to any
limitations on the conversion of the Warrant. The requirements of this Section
10(b) are referred to herein as the “Assumption Requirements.”
 
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For purposes hereof, “Required Warrant Holders” shall mean the Holders of
two-thirds (2/3) of the then outstanding Warrants (determined by the number of
unexercised underlying shares).

(c) Notice of Major Transaction; Redemption Right Upon Major Transaction. At
least thirty (30) days prior to the consummation of a Major Transaction, but not
prior to the public announcement of such transaction, the Company shall deliver
written notice thereof via facsimile and overnight courier to the Holder (a
“Major Transaction Notice”), which notice shall specify the nature and terms of
the proposed transaction and nature of the Successor Entity (if any).

(d) Redemption Right Upon Major Transaction. At any time during the period
beginning after the Holder’s receipt of a Major Transaction Notice and ending on
the Trading Day immediately prior to the consummation of such Major Transaction,
the Holder may require the Company to redeem all or any portion of the Holder’s
Warrant by delivering written notice thereof (“Major Transaction Redemption
Notice”) to the Company, which Major Transaction Redemption Notice shall
indicate the number of Warrant Shares of its Warrant (the “Redemption Warrant
Amount”) that the Holder is electing to be redeemed.

The portion of this Warrant subject to redemption pursuant to this Section 10(d)
shall be redeemed by the Company in cash at a price equal to 110%, multiplied by
the number of warrant shares being redeemed, multiplied by the difference of (i)
the Market Price as of the date of such redemption, or as of the date that such
redemption price is paid, whichever yields the higher Market Price, minus (ii)
the Exercise Price in effect at the time of payment (the “Major Transaction
Redemption Price”).

(e) Escrow; Payment of Major Transaction Redemption Price. Following the receipt
of a Major Transaction Redemption Notice from the Holder, the Company shall not
effect a Major Transaction unless it shall first place, or shall cause the
Successor Entity to place, into an escrow account with an independent escrow
agent, at least three (3) Business Days prior to the closing date of the Major
Transaction (the “Major Transaction Escrow Deadline”), an amount equal to the
Major Transaction Redemption Price. Concurrently upon closing of any Major
Transaction, the Company shall pay or shall instruct the escrow agent to pay the
Major Transaction Redemption Price to the Holder, which payment shall constitute
a Redemption Upon Major Transaction of the Preferred Stock.

(f) Injunction. Following the receipt of a Major Transaction Redemption Notice
from the Holder, in the event that the Company attempts to consummate a Major
Transaction without placing the Major Transaction Redemption Price in escrow in
accordance with subsection (e) above or without payment of the Major Transaction
Redemption Price to the Holder upon consummation of such Major Transaction, the
Buyer shall have the right to apply for an injunction in any state or federal
courts sitting in the City of New York, borough of Manhattan to prevent the
closing of such Major Transaction until the Major Transaction Redemption Price
is paid to the Holder, in full.
 
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(g) Mechanics of Redemptions Upon Major Transactions.

Redemptions required by this Section 10 shall be made in accordance with the
provisions of Section 12. Notwithstanding anything to the contrary in this
Section 10, until the Major Transaction Redemption Price is paid in full, the
portion of the Warrant submitted for redemption under this Section may be
converted, in whole or in part, by the Holder into shares of Common Stock, or in
the event the Conversion Date is after the consummation of a Major Transaction,
into shares of common stock (or their equivalent) of the Successor Entity
pursuant to Section 10(b). Unless otherwise indicated by the Holder in the
applicable Notice of Exercise, any amount of this Warrant exercised during the
period from the date of the Major Transaction Redemption Notice until the date
the Major Transaction Redemption Price is paid in full shall be considered to be
an exercise (instead of a Redemption) of a portion of the Warrant that would
have been subject to such Redemption, and any amounts of this Warrant exercised
from time to time during such period shall exercised in full into Common Stock
at the Exercise Price then in effect, and the number of shares of this Warrant
so exercised into Common Stock shall be deducted from the number of Warrants
that are subject to redemption hereunder. The parties hereto agree that in the
event of the Company’s redemption of any portion of the Warrant under this
Section 10(d), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder.

11. Default and Redemption.
 
(a) Events Of Default. Each of the following events which occur between the Date
of Issuance and the fourth (4th) anniversary thereof, shall be considered to be
an “Event Of Default,” unless waived by the Holder:

(i) Failure To File and Maintain Registration.  An Event of Default occurs under
Section 13(c) with respect to any Warrant Shares (a “Registration Default”) of
the Certificate of Designation;

(ii) Failure To Authorize And Reserve Common Stock. An Event of Default occurs
under Section 13(i) with respect to any Warrant Shares (a “Share Reservation
Default”) of the Certificate of Designation;

(iii) Failure To Deliver Common Stock. A Warrant Share Delivery Failure (as
defined above) occurs and remains uncured for a period of more than twenty (20)
days.

(iv) Legend Removal Failure. A Legend Removal Failure occurs and remains uncured
for a period of twenty (20) days, where a “Legend Removal Failure” shall be
deemed to have occurred if the Company fails to issue Exercise Shares without a
restrictive legend, when and as required under Section 2(g)(ii) hereof.
 
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(v) (Omitted)

(vi) Corporate Existence; Major Transaction. The Company has effected a Major
Transaction without paying the Major Transaction Redemption Price to the Holder
pursuant to Section 10(d) or, if the Holder did not elect a Redemption Upon
Major Transaction, the Company has failed to meet the Assumption Requirements of
Section 10(b) prior to effecting a Major Transaction. 

(vii) Failure to Adjust Exercise Price; Failure to Comply With Dispute
Resolution Procedures. The Company shall have failed to use commercially
reasonable efforts to comply in good faith with the Dispute Resolution
Procedures (as defined herein) or shall have failed to adjust the Exercise Price
as required under Section 5(l) following a Dilutive Issuance, a Milestone Event,
or otherwise (after any applicable Dispute Resolution Procedure required
herein), and such failure continues for ten (10) Business Days after the Holder
provides written notice to the Company that such performance by the Company is
past due.

(b) Mandatory Redemption; Certain Adjustments on Default. 

(i) Mandatory Redemption Amount. If any Events of Default shall occur and any
such Event of Default continues for an additional ten (10) Business Days after
the Holder provides written notice to the Company that an Event of Default has
occurred and specifying the factual basis therefor then thereafter, unless
waived by the Holder, during the continuation of any Event of Default, at the
option of the Holder, such option exercisable through the delivery of written
notice to the Company by such Holder (the “Default Notice”), the outstanding
amount of this Warrant shall be immediately redeemed by the Company and the
Company shall pay to the Holder (a “Mandatory Redemption”) an amount (the
“Mandatory Redemption Amount” or the “Default Amount”) equal to 110%, multiplied
by the number of warrant shares being redeemed, multiplied by the difference of
(i) the Market Price as of the date of such redemption, or as of the date that
such redemption price is paid, whichever yields the higher Market Price, minus
(ii) the Exercise Price in effect at the time of payment The Mandatory
Redemption Amount shall be payable, in cash or cash equivalent, within five (5)
business days of the Date of the applicable Default Notice.

If the Company fails to pay the Default Amount within sixty (60) days of written
notice that such amount is due and payable (the “Default Amount Due Date”), then
the Holder shall have the right at any time, so long as the Company remains in
default (and so long and to the extent that there are sufficient authorized
shares), to require the Company, upon written notice (“Default Exercise Notice”)
(which may be given one or more times, from time to time anytime after the
Default Amount Due Date), to immediately issue (a “Default Exercise”), in lieu
of all or any specified portion (the “Specified Portion”) of the unpaid portion
(the “Unpaid Portion”) of the Default Amount, a number (the “Default Share
Amount”) of shares (the “Default Shares”) of Common Stock, subject to the
Beneficial Ownership Limitation, equal to the Specified Portion of the Default
Amount divided by the Exercise Price in effect on the date such shares are
issued to the Holder, PROVIDED THAT, the Holder may require that such payment of
shares be made in one or more installments at such time and in such amounts as
Holder chooses. The Default shares are due within five (5) Business Days of the
date that the Holder delivers a Default Exercise Notice to the Company with the
original Warrant (the “Default Share Delivery Deadline”). The parties expressly
agree and understand that, if an Event of Default results from the Company’s
failure to pay any amounts when due hereunder and such failure occurs because
funds are legally unavailable for such payment pursuant to a Payment Restriction
Law (as defined below), the Company shall not be required to pay the Default
Amount in cash, provided that in such event the Holder shall be entitled to all
other remedies which would be available upon an Event of Default, including but
not limited to the following: the Exercise Price shall be subject to Default
Adjustments as described above.
 
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Upon a Default Exercise occurring after the Shareholder Issuance Approval
Deadline (as defined in the Securities Purchase Agreement), the Company shall be
required deliver a number of Common Shares to the Holder equal to the applicable
Default Share Amount (as described above), up to any Exchange Cap Limitations
(as defined below).

For purposes hereof,

“Payment Restriction Law” shall mean any applicable state law that prohibits the
Company from paying all amounts due hereunder and under the Transaction
Documents, including but not limited to any state law that prohibits the Company
from paying certain dividends, redemption amounts, or other payments unless such
payments are made out surplus.

“Exchange Cap Limitations” shall mean any prohibitions under the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Company or any of its
securities on the Company’s ability to issue shares of Common Stock in excess of
the number of shares which may be issued without violating such rules and
regulations (such number of shares shall be referred to as the “Exchange Cap
Amount”).

If the Company is unable to redeem all of the Warrants submitted for redemption,
the Company shall redeem a pro rata amount from each Holder based on the number
of Warrants submitted for redemption by such Holder relative to the total number
of Warrants submitted for redemption by all Holders.

The Holder shall not be entitled to receive Default Shares on a given date if
and to the extent that such issuance would cause the Beneficial Ownership
Limitation then in effect to be exceeded. If and to the extent that the issuance
of Default Shares with respect to a given Specified Portion would result in the
a violation of the Beneficial Ownership Limitation, then that particular
Specified Portion shall be automatically reduced to a value that would cause the
number of Default Shares to be issued to equal the Maximum Percentage, and the
amount of such reduction shall be added back to the Unpaid Portion of the
Default Amount.

(ii) Adjustment Upon Certain Events of Default. If any Event of Default occurs
under Section 11(a)(i), (ii), (iii), (iv) or (vii), and any such Event of
Default continues for an additional ten (10) Business Days after the Holder
provides written notice to the Company that an Event of Default has occurred and
specifying the factual basis therefor, the Exercise Price shall be permanently
decreased (but not increased) on the first Trading Day of each calendar month
thereafter (each a “Default Adjustment Date”) until the Default Amount is paid
in full, to a price equal to the lesser of (i) the Exercise Price then in
effect, or (ii) the lowest Market Price that has occurred on any Default
Adjustment Date since the date that the Event of Default began.
 
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(c) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders for redemption or repayment of other Warrants that were issued
pursuant to the Securities Purchase Agreement (the “Other Warrants”) as a result
of an event or occurrence of an Event of Default or a Major Transaction (each,
an “Other Redemption Notice”), the Company shall immediately, but no later than
five (5) Business Days of its receipt thereof, forward to the Holder by
facsimile a copy of such notice. If the Company receives a Redemption Notice and
one or more Other Redemption Notices, during the seven (7) Business Day period
beginning on and including the date which is three (3) Business Days prior to
the Company’s receipt of the Holder’s Redemption Notice and ending on and
including the date which is three (3) Business Days after the Company’s receipt
of the Holder’s Redemption Notice and the Company is unable to redeem all
amounts designated in such Redemption Notice and such Other Redemption Notices
received during such seven (7) Business Day period, then the Company shall
redeem a pro rata amount from each holder of the Warrants (including the Holder)
based on the number of Warrants submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.

(d) Posting Of Bond. In the event that any Event of Default occurs hereunder or
any Event of Default occurs under any of the Transaction Documents, the Company
may not raise as a legal defense (in any Lawsuit, as defined below, or
otherwise) or justification to such Event of Default any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, unless the Company has posted a surety bond (a “Surety Bond”)
for the benefit of such Holder in the amount of 130% of the aggregate Surety
Bond Value (as defined below) of all of the Holder’s Preferred Stock and
Warrants (the “Bond Amount”), which Surety Bond shall remain in effect until the
completion of litigation of the dispute and the proceeds of which shall be
payable to such Holder to the extent Holder obtains judgment.

For purposes hereof, a “Lawsuit” shall mean any lawsuit, arbitration or other
dispute resolution filed by either party herein pertaining to any of the
Transaction Documents.

“Surety Bond Value,” for the Warrants shall mean 130% of the of the
Black-Scholes value of the remaining unexercised portion of this Warrant on the
Trading Day immediately preceding the date that such bond goes into effect) and
“Surety Bond Value” for the Preferred Stock shall have the meaning ascribed to
it in the Certificate of Designation. For purposes hereof, the “Black-Scholes”
value of a Warrant shall be determined by use of the Black Scholes Option
Pricing Model reflecting (A) a risk-free interest rate corresponding to the U.S.
Treasury rate for a period equal to the remaining term of this Warrant as of
such date of request and (B) an expected volatility equal to the greater of 100%
and the 100 day volatility obtained from the HVT function on Bloomberg.

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(e) Injunction And Posting Of Bond. In the event that the Event of Default
referred to in subsection (c) above pertains to the Company’s failure to deliver
unlegended shares of Common Stock to the Holder pursuant to a Warrant Exercise,
legend removal request, the Company may not refuse such unlegended share
delivery based on any claim that such Holder or any one associated or affiliated
with such Holder has been engaged in any violation of law, unless an injunction
from a court, on prior notice to Holder, restraining and or enjoining Exercise
of all or part of said Warrant shall have been sought and obtained by the
Company and the Company has posted a Surety Bond for the benefit of such Holder
in the amount of the Bond Amount (as described above), which Surety Bond shall
remain in effect until the completion of litigation of the dispute and the
proceeds of which shall be payable to such Holder to the extent Holder obtains
judgment.

(f) (Omitted).

12. Holder’s Redemptions.

(a) Mechanics of Holder’s Redemptions. In the event that the Holder has sent a
Major Transaction Redemption Notice to the Company pursuant to Section 10(d) or
a Default Notice pursuant to Section 11(b)(i), respectively (each, a “Redemption
Notice”), the Holder shall promptly submit this Warrant to the Company. In the
event of a redemption of less than all of the outstanding portion of this
Warrant, the Company shall promptly cause to be issued and delivered to the
Holder a new Warrant representing the outstanding number of underlying Warrant
Shares which have not been redeemed. In the event that the Company does not pay
the applicable Redemption Price to the Holder within the time period required,
at any time thereafter and until the Company pays such unpaid Redemption Price
in full, the Holder shall have the option, in lieu of redemption, to require the
Company to promptly return to the Holder all or any portion of this Warrant that
was submitted for redemption and for which the applicable Major Transaction
Redemption Price (together with any late charges thereon) has not been paid.
Upon the Company’s receipt of such notice, (x) the applicable Redemption Notice
shall be null and void with respect to such Redemption Share Amount, (y) the
Company shall immediately return this Warrant, or issue a new Warrant to the
Holder representing the portion of this Warrant that was submitted for
redemption The Holder’s delivery of a notice voiding a Redemption Notice and
exercise of its rights following such notice shall not affect the Company’s
obligations to make any payments of Failure Payments which have accrued prior to
the date of such notice with respect to the Warrant subject to such notice.

(b) Warrants Detachable. The Warrants constitute a separate, detachable security
from the Preferred Stock. In the event of any redemption of the Preferred Stock,
in whole or in part, by the Company, the Holder shall retain any of its Warrants
that have not been exercised or redeemed in accordance with their terms and in
the event of any redemption of the Warrants, in whole or in part, by the
Company, the Holder shall retain any of its Warrants that have not been
exercised or redeemed in accordance with their terms.

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13. Partial Return of Warrants Upon Approval Failure Redemption. In the event
that the initial Approval Failure Redemption (as defined in the Certificate of
Designation) of the Preferred Stock is completed within ten (10) Business Days
after the Shareholder Issuance Approval Deadline (as defined in the Securities
Purchase Agreement), the Holder shall return to the Company for cancellation a
pro-rata number of its Warrants (equally distributed between the two Warrant
Exercise Prices) based upon the Warrant Amount (as defined in the Securities
Purchase Agreement) corresponding to the number of shares of Preferred Stock
being redeemed in such Approval Failure Redemption. It is expressly agreed and
understood that the Holder shall not be required to tender or return any
Warrants in connection with an Exchange Cap Redemption (as defined in the
Certificate of Designation) of the Preferred Stock, other than the initial
Approval Failure Redemption, and the Company shall not be entitled to redeem any
of the Warrants in connection with any Exchange Cap Redemption of the Preferred
Stock.

14. Remedies, Other Obligations, Breaches And Injunctive Relief. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant and the other Transaction Documents, at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder right
to pursue actual damages for any failure by the Company to comply with the terms
of this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
 
15. Benefits of this Warrant.

Nothing in this Warrant shall be construed to confer upon any person other than
the Company and Holder any legal or equitable right, remedy or claim under this
Warrant and this Warrant shall be for the sole and exclusive benefit of the
Company and Holder.

16. Governing Law. 

All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement (whether brought against a party
hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in the state and federal
courts sitting in the City of New York. Each party hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, that such suit, action or proceeding is
improper or is an inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any other manner permitted by law. The
parties hereby waive all rights to a trial by jury. If either party shall
commence an action or proceeding to enforce any provisions of this Agreement,
then the prevailing party in such action or proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such action or
proceeding.
 
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17. Loss of Warrant.

Upon receipt by the Company of evidence of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.

18. Notice or Demands.

Notices or demands pursuant to this Warrant to be given or made by Holder to or
on the Company shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, until
another address is designated in writing by the Company, to the address set
forth in Section 2(a) above. Notices or demands pursuant to this Warrant to be
given or made by the Company to or on Holder shall be sufficiently given or made
if sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, to the address of Holder set forth in the Company’s
records, until another address is designated in writing by Holder.

19. Warrant Holder Not a Stockholder.

The Holder of this Warrant, as such, shall not be entitled by reason of this
Warrant to any rights whatsoever as a stockholder of the Company, including but
not limited to voting rights.

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IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the 13th day
of September, 2007.
 

        VirtualScopics, Inc.  
   
   
  By:    

--------------------------------------------------------------------------------

Print Name: Molly Henderson
 
Title: Chief Financial Officer
 

 
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EXHIBIT A

NOTICE OF EXERCISE FORM FOR WARRANT

TO: VIRTUALSCOPICS, INC.

The undersigned hereby irrevocably Exercises the right to purchase ____________
of the shares of Common Stock (the “Common Stock”) of VIRTUALSCOPICS, INC., a
Delaware corporation (the “Company”), evidenced by the attached warrant (the
“Warrant”), and herewith makes payment of the Exercise price with respect to
such shares in full, all in accordance with the conditions and provisions of
said Warrant.

1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on Exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.

2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:

Dated:________

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Signature
 

--------------------------------------------------------------------------------

 Print Name
 

--------------------------------------------------------------------------------

 Address
 
 

--------------------------------------------------------------------------------

 
NOTICE

The signature to the foregoing Notice of Exercise Form must correspond to the
name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
 

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EXHIBIT B

ASSIGNMENT

(To be executed by the registered holder
desiring to transfer the Warrant)

FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
“Warrant”) hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of
VIRTUALSCOPICS, INC., a Delaware corporation, evidenced by the attached Warrant
and does hereby irrevocably constitute and appoint _______________________
attorney to transfer the said Warrant on the books of the Company, with full
power of substitution in the premises.
 

 Dated: _________  
 
   

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Signature

    
Fill in for new registration of Warrant:

___________________________________
Name

___________________________________
Address

___________________________________
Please print name and address of assignee
(including zip code number)

--------------------------------------------------------------------------------

NOTICE

The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.
 

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SCHEDULE 5(g)

MILESTONES

Milestone Date
 
Milestone Goals
 
December 31, 2007
 
 
$5,000,000 in Revenues for the 12 month period ending on the Milestone Date
 
December 31, 2008
 
 
$7,000,000 in Revenues for the 12 month period ending on the Milestone Date and
negative (loss) Consolidated EBITDA of not greater than $3,800,000

 
For purposes of the above, the following definitions shall apply:

“Consolidated EBITDA” means, with respect to any Person for any period, the
Consolidated Net Income of such Person and its Subsidiaries for such period,
plus (i) without duplication, the sum of the following amounts of such Person
and its Subsidiaries for such period and to the extent deducted in determining
Consolidated Net Income of such Person for such period: (A) Consolidated Net
Interest Expense, (B) income tax expense, (C) depreciation expense, (D)
amortization expense, (E) stock compensation expense, (F) all rental expense
determined on a consolidated basis in accordance with GAAP, less cash rents due
under operating lease obligations, minus (ii) the aggregate amount of cash lease
payments paid or payable during such period in respect of the capitalized
leases.

“Consolidated Net Income” means, with respect to any Person for any period, the
net income (loss) of such Person and its Subsidiaries for such period,
determined on a consolidated basis and in accordance with GAAP, but excluding
from the determination of Consolidated Net Income (without duplication) (a) any
extraordinary or non recurring gains or losses or gains or losses from
dispositions, (b) restructuring charges, (c) any tax refunds, net operating
losses or other net tax benefits and (d) effects of discontinued operations.

“Consolidated Net Interest Expense” means, with respect to any Person, for any
period, gross interest expense of such Person and its Subsidiaries for such
period determined on a consolidated basis and in accordance with GAAP (excluding
the interest component of any capitalized lease obligations), less interest
income determined on a consolidated basis and in accordance with GAAP.

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