LATTICE INCORPORATED
 
Statement of Designations
 
Section 1. Definitions. For the purposes hereof, the following terms shall have
the following meanings:
 
“Affiliate” means a Person or Persons directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with the
Person(s) in question. The term “control,” as used in the immediately preceding
sentence, means, with respect to a Person that is a corporation, the right to
the exercise, directly or indirectly, of more than 50% of the voting rights
attributable to the shares of such controlled corporation and, with respect to a
Person that is not a corporation, the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
controlled Person.
 
“4.9% Limitation” shall mean that no Holder of Series C Preferred Stock shall be
entitled to convert the Series C Preferred Stock into shares of Common Stock to
the extent that such conversion would result in beneficial ownership by the
Holder and its Affiliates of more than 4.9% of the then outstanding number of
share of Common Stock on such date. For purposes of this Statement of
Designation beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3
thereunder.
 
“Bankruptcy Event” means any of the following events: (a) the Company or any
Significant Subsidiary (as such term is defined in Rule 1.02(s) of Regulation
S-X) thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to the
Company or any Significant Subsidiary thereof; (b) there is commenced against
the Company or any Significant Subsidiary thereof any such case or proceeding
that is not stayed or dismissed within 90 days after commencement; (c) the
Company or any Significant Subsidiary thereof is adjudicated insolvent or
bankrupt or any order of relief or other order approving any such case or
proceeding is entered; (d) the Company or any Significant Subsidiary thereof
suffers any appointment of any custodian or the like for it or any substantial
part of its property that is not discharged or stayed within 90 days; (e) the
Company or any Significant Subsidiary thereof makes a general assignment for the
benefit of creditors; (f) the Company or any Significant Subsidiary thereof
calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (g) the Company or any Significant
Subsidiary thereof, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.
 
“Commission” means the Securities and Exchange Commission.
 
“Common Stock” means the Company’s common stock, par value $.01 per share, and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
 
“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.
 
 
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“Conversion Date” shall have the meaning set forth in Section 6(a).
 
“Conversion Ratio” shall mean the number of shares of Common Stock issuable upon
conversion of one share of Series C Preferred Stock. Each share of Series C
Preferred Stock shall be convertible into ten (10) shares of Common Stock (the
“Conversion Ratio”), subject to adjustment as provided in this Statement of
Designations.
 
“Conversion Price” shall mean sixteen and one tenth cents ($.161), subject to
adjustment as provided in this Statement of Designations.
 
“Conversion Shares” means, collectively, the shares of Common Stock into which
the shares of Series C Preferred Stock are convertible in accordance with the
terms hereof.
 
“Dilutive Issuance” shall have the meaning set forth in Section 7(b) hereof.
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Exchange Agreement” means the Exhange Agreement by and between the Company and
Barron Partners LP.
 
“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers, directors of and consultants (other than consultants whose
services relate to the raising of funds) of the Company pursuant to the any
stock or option plan that was or may be adopted by a majority of the independent
members of the Board of Directors of the Company or a majority of the members of
a committee of independent directors established for such purpose, (b)
securities upon the exercise of or conversion of any securities issued hereunder
and (c) securities issued pursuant to acquisitions, licensing agreements, or
other strategic transactions, provided any such issuance shall only be to a
Person which is, itself or through its subsidiaries, an operating company in a
business which the Company’s board of directors believes is beneficial to the
Company and in which the Company receives benefits in addition to the investment
of funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity whose
primary business is investing in securities.
 
“Fundamental Transaction” shall have the meaning set forth in Section 7(f)(iv)
hereof.
 
“Holder” shall have the meaning given such term in Section 2 hereof.
 
“Junior Securities” means the Common Stock and all other equity or equity
equivalent securities of the Company other than those securities that are
explicitly senior in rights or liquidation preference to the Series C Preferred
Stock.
 
“MFN Transaction” means a transaction in which the Company issues or sells any
securities in a capital raising transaction or series of related transactions
which grants to an investor the right to receive additional shares based upon
future transactions of the Company on terms which are more favorable to the
Holder than the terms initially provided to the Holder in its initial Exchange
Agreement with the Company. The Holder shall be entitled to obtain injunctive
relief against the Company to preclude any such issuance, which remedy shall be
in addition to any right to collect damages.
 
 
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“Original Issue Date” shall mean the date of the first issuance of any shares of
the Series C Preferred Stock regardless of the number of transfers of any
particular shares of Series C Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Series C Preferred Stock.
 
“Person” means a corporation, an association, a partnership, a limited liability
company, a business association, an individual, a trust, a government or
political subdivision thereof or a governmental agency.
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“Securities” means the shares of Series C Preferred Stock and the Shares..
 
“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
 
“Series C Preferred Stock” shall have the meaning set forth in Section 2.
 
“Shares” means the shares of common stock issuable upon conversion of the Series
C Preferred Stock.
 
“Subsidiary” shall mean a corporation, limited liability company, partnership,
joint venture or other business entity of which the Company owns beneficially or
of record more than a majority of the equity interest.
 
“Trading Day” means a day on which the Common Stock is traded on a Trading
Market.
 
“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq
SmallCap Market, the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market or the OTC Bulletin Board.
 
“Transaction Documents” means this Statement of Designations and the Exchange
Agreement.
 
“Transfer Agent” means Continental Stock Transfer and Trust Co., the current
transfer agent of the Company, with a mailing address of _17 Battery Place, New
York, NY 10004 and a facsimile number of (212) 616-7616, and any successor
transfer agent of the Company.
 
“Variable Rate Transaction” means a transaction in which the Company issues or
sells (i) any debt or equity securities that are convertible into, exchangeable
or exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock.
 
 
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“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the primary Trading Market on which
the Common Stock is then listed or quoted as reported by Bloomberg Financial
L.P. (based on a Trading Day from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using
the VAP function; (b) if the Common Stock is not then listed or quoted on the
Trading Market and if prices for the Common Stock are then reported in the “Pink
Sheets” published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (c) in all
other cases, the fair market value of a share of Common Stock as determined by a
nationally recognized-independent appraiser selected in good faith by Purchasers
holding a majority of the principal amount of Series C Preferred Stock then
outstanding.
 
Section 2. Designation, Amount and Par Value. The series of preferred stock, par
value $.01 per share (“Preferred Stock”) consisting of five hundred twenty
thousand (520,000 shares) shall be designated as the Company’s Series C
Convertible Preferred Stock (the “Series C Preferred Stock”) and the number of
shares so designated shall be (which shall not be subject to increase without
the consent of all of the holders of 75% of the then outstanding shares of
Series C Preferred Stock (each a “Holder” and collectively, the “Holders”)). In
the event of the conversion of shares of Series C Preferred Stock into this
Company’s Common Stock, pursuant to Section 6 hereof, or in the event that the
Company shall otherwise acquire and cancel any shares of Series C Preferred
Stock, the shares of Series C Preferred Stock so converted or otherwise acquired
and canceled shall have the status of authorized but unissued shares of
preferred stock, without designation as to series until such stock is once more
designated as part of a particular Series by the Company’s Board of Directors.
In addition, if the Company shall not issue the maximum number of shares of
Series C Preferred Stock, the Company may, from time to time, by resolution of
the Board of Directors and the approval of the holders of a majority of the
outstanding shares of Series C Preferred Stock, reduce the number of shares of
Series C Preferred Stock authorized, provided, that no such reduction shall
reduce the number of authorized shares to a number which is less than the number
of shares of Series C Preferred Stock then issued or reserved for issuance. The
number of shares by which the Series C Preferred Stock is reduced shall have the
status of authorized but unissued shares of Preferred Stock, without designation
as to series, until such stock is once more designated as part of a particular
Series by the Company’s Board of Directors. The Board of Directors shall cause
to be filed with the Secretary of State of the State of Delaware such
certificate as shall be necessary to reflect any reduction in the number of
shares constituting the Series C Preferred Stock. The Series C Preferred Stock
shall be pari passu to the Series A Preferred Stock upon voluntary or
involuntary liquidation, dissolution or winding up. The Series C Preferred Stock
shall be senior to the Series B Redeemable Preferred Stock (“Series B Preferred
Stock”) upon voluntary or involuntary liquidation, dissolution or winding up.
The Company may pay the dividends and redemption price to the holders of the
Series B Preferred Stock as provided in the statement of designations relating
to the Series B Preferred Stock, except that, in the event of a liquidation,
dissolution or winding up, the rights of the holders of the Series B Preferred
Stock shall be junior to the rights of the holders of the Series CPreferred
Stock.
 
 
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Section 3. Dividends and Other Distributions. No dividends shall be payable with
respect to the Series C Preferred Stock. No dividends shall be payable with
respect to the Common Stock while the Series C Preferred Stock is outstanding.
The Company shall not redeem or purchase any shares of Common Stock while the
Series C Preferred Stock is outstanding.
 
Section 4. Voting Rights. The Series C Preferred Stock shall have no voting
rights. However, so long as any shares of Series C Preferred Stock are
outstanding, the Company shall not, without the affirmative approval of the
Holders of 75% of the shares of the Series C Preferred Stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to the
Series C Preferred Stock or alter or amend this Statement of Designations or the
Statement of Designations relating to the Series A Preferred Stock or the Series
B Preferred Stock, (b) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a Liquidation (as defined in Section 5)
senior to or otherwise pari passu with the Series C Preferred Stock, or any of
preferred stock possessing greater voting rights or the right to convert at a
more favorable price than the Series C Preferred Stock, (c) amend its
certificate of incorporation or other charter documents in breach of any of the
provisions hereof, (d) increase the authorized number of shares of Series C
Preferred Stock, or (e) enter into any agreement with respect to the foregoing.
The holders of the Series C Preferred Stock will not be entitled to vote as a
class with respect to the increase or decrease in the number of authorized
shares of preferred stock. Notwithstanding any other provision of the Statement
of Designations; the provisions of Section 6(c) of this Statement of
Designations may not be amended or waived.
 
Section 5. Liquidation. Upon any liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary (a “Liquidation”), the Holders shall
be entitled to receive out of the assets of the Company, whether such assets are
capital or surplus, for each share of Series C Preferred Stock an amount equal
to fifty seven and one-half ($.575) per share of Series C Preferred Stock, which
amount is referred to as the “Liquidation Value,” before any distribution or
payment shall be made to the holders of any Junior Securities and after any
distributions or payments made to holders of any class or series of securities
which are senior to the Series C Preferred Stock upon voluntary or involuntary
liquidation, dissolution or winding up, and if the assets of the Company shall
be insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders shall be distributed among the Holders ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. In the event the assets of the
Company available for distribution to the holders of shares of Series C
Preferred Stock upon dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled pursuant to Section 5, no such
distribution shall be made on account of any shares of any other class or series
of capital stock of the Company ranking on a parity with the shares of Series C
Preferred Stock upon such dissolution, liquidation or winding up unless
proportionate distributive amounts shall be paid on account of the shares of
Series C Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up. At the election of a Holder
made by written notice delivered to the Company at least two (2) business days
prior to the effective date of the subject transaction, as to the shares of
Series C Preferred Stock held by such Holder, a Fundamental Transaction
(excluding for purposes of this Section 5 any Fundamental Transaction described
in Section 7(f)(iv)(A) or 7(f)(iv)(B)) or Change of Control shall be treated as
a Liquidation as to such Holder.
 
 
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Section 6. Conversion.
 
a) Conversions at Option of Holder. Each share of Series C Preferred Stock shall
be initially convertible (subject to the limitations set forth in Section 6(c)),
into such number of shares of Common Stock based on the Conversion Ratio at the
option of the Holders, at any time and from time to time from and after the
Original Issue Date. Holders shall effect conversions by providing the Company
with the form of conversion notice attached hereto as Annex A (a “Notice of
Conversion”) as fully and originally executed by the Holder, together with the
delivery by the Holder to the Company of the stock certificate(s) representing
the number of shares of Series C Preferred Stock so converted, with such stock
certificates being duly endorsed in full for transfer to the Company or with an
applicable stock power duly executed by the Holder in the manner and form as
deemed reasonable by the transfer agent of the Common Stock. Each Notice of
Conversion shall specify the number of shares of Series C Preferred Stock to be
converted, the number of shares of Series C Preferred Stock owned prior to the
conversion at issue, the number of shares of Series C Preferred Stock owned
subsequent to the conversion at issue, the stock certificate number and the
shares of Series C Preferred Stock represented thereby which are accompanying
the Notice of Conversion, and the date on which such conversion is to be
effected, which date may not be prior to the date the Holder delivers such
Notice of Conversion and the applicable stock certificates to the Company by
overnight delivery service (the “Conversion Date”). If no Conversion Date is
specified in a Notice of Conversion, the Conversion Date shall be the Trading
Day immediately following the date that such Notice of Conversion and applicable
stock certificates are received by the Company. The calculations and entries set
forth in the Notice of Conversion shall control in the absence of manifest or
mathematical error. Shares of Series C Preferred Stock converted into Common
Stock in accordance with the terms hereof shall be canceled and may not be
reissued. If the initial Conversion Price is adjusted pursuant to Section 7 or
as otherwise provided herein, the Conversion Ratio shall likewise be adjusted
and the new Conversion Ratio shall determined by multiplying the Conversion
Ratio in effect by a fraction, the numerator of which is the Conversion Price in
effect before the adjustment and the denominator of which is the new Conversion
Price. Thereafter, subject to any further adjustments in the Conversion Price,
each share of Series C Preferred Stock shall be initially convertible into
Common Stock based on the new Conversion Ratio.
 
b) Automatic Conversion Upon Change of Control. Subject to Section 5, all of the
outstanding shares of Series C Preferred Stock shall be automatically converted
into the Conversion Shares upon the close of business on the business day
immediately preceding the date fixed for consummation of any transaction
resulting in a Change of Control of the Company (an “Automatic Conversion
Event”). A “Change in Control” means a consolidation or merger of the Company
with or into another company or entity in which the Company is not the surviving
entity or the sale of all or substantially all of the assets of the Company to
another company or entity not controlled by the then existing stockholders of
the Company in a transaction or series of transactions. The Company shall not be
obligated to issue certificates evidencing the Conversion Shares unless
certificates evidencing the shares of Series C Preferred Stock so converted are
either delivered to the Company or its transfer agent or the holder notifies the
Company or its transfer agent in writing that such certificates have been lost,
stolen, or destroyed and executes an agreement satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith. Upon
the conversion of the Series C Preferred Stock pursuant to this Section 6(b),
the Company shall promptly send written notice thereof, by hand delivery or by
overnight delivery, to the holder of record of all of the Series C Preferred
Stock at its address then shown on the records of the Company, which notice
shall state that certificates evidencing shares of Series C Preferred Stock must
be surrendered at the office of the Company (or of its transfer agent for the
Common Stock, if applicable).
 
 
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c) Beneficial Ownership Limitation. Except as provided in Section 6(b) of this
Statement of Designation, which shall apply as stated therein if an Automatic
Conversion Event shall occur, the right of the Holder to convert the Series C
Preferred Stock shall be subject to the 4.9% Limitation, with the result that
Company shall not effect any conversion of the Series C Preferred Stock, and the
Holder shall not have the right to convert any portion of the Series C Preferred
Stock, to the extent that after giving effect to such conversion, the Holder
(together with the Holder’s affiliates), as set forth on the applicable Notice
of Conversion, would beneficially own in excess of 4.9% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion.  For the purposes of this Agreement beneficial ownership shall be
determined in accordance with Section 13(d) of the 1934 Act, and Regulation
13d-3 thereunder. For purposes of this Section 6(c), in determining the number
of outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in the most recent of the
following: (A) the Company’s most recent quarterly reports, Form 10-Q, Form
10-QSB, Annual Reports, Form 10-K, or Form 10-KSB, as the case may be, as filed
with the Commission under the Exchange Act (B) a more recent public announcement
by the Company or (C) any other written notice by the Company or the Company’s
transfer agent setting forth the number of shares of Common Stock outstanding. 
Upon the written or oral request of the Holder, the Company shall within two (2)
Trading Days confirm orally and in writing to the Holder the number of shares of
Common Stock then outstanding.  In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including the Series C Preferred Stock,
by the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was publicly reported by the Company. The
4.9% Limitation may be not be waived or amended.
 
d) Mechanics of Conversion
 
i. Delivery of Certificate Upon Conversion. Except as otherwise set forth
herein, not later than three Trading Days after each Conversion Date (the “Share
Delivery Date”), the Company shall deliver to the Holder (A) a certificate or
certificates representing the number of shares of Common Stock being acquired
upon the conversion of shares of Series C Preferred Stock, and (B) a bank check
in the amount of accrued and unpaid dividends (if the Company has elected or is
required to pay accrued dividends in cash). If at the time of Conversion, the
Shares may be sold pursuant to Rule 144, the Company shall cause its counsel to
issue a legal opinion to the Transfer Agent if required by the Transfer Agent to
effect the removal of the legend on the Shares. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed
by the applicable Holder by the third Trading Day after the Conversion Date, the
Holder shall be entitled to elect by written notice to the Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return the
certificates representing the shares of Series C Preferred Stock tendered for
conversion.
 
 
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ii. Obligation Absolute; Partial Liquidated Damages. The Company’s obligations
to issue and deliver the Conversion Shares upon conversion of Series C Preferred
Stock in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of such
Conversion Shares. In the event a Holder shall elect to convert any or all of
its Series C Preferred Stock, the Company may not refuse conversion based on any
claim that such Holder or any one associated or affiliated with the Holder of
has been engaged in any violation of law, agreement or for any other reason
(other than the inability of the Company to issue shares of Common Stock as a
result of the limitation set forth in Section 6(c) hereof) unless, an injunction
from a court, on notice, restraining and or enjoining conversion of all or part
of this Series C Preferred Stock shall have been sought and obtained and the
Company posts a surety bond for the benefit of the Holder in the amount of 150%
of the Conversion Value of Series C Preferred Stock outstanding, which is
subject to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Holder to the extent it obtains judgment. In the
absence of an injunction precluding the same, the Company shall issue Conversion
Shares or, if applicable, cash, upon a properly noticed conversion. If the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 6(d)(i) within two Trading Days of the Share Delivery Date applicable
to such conversion, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $5,000 of Conversion Value of Series C
Preferred Stock being converted, $50 per Trading Day (increasing to $100 per
Trading Day after three (3) Trading Days and increasing to $200 per Trading Day
six (6) Trading Days after such damages begin to accrue) for each Trading Day
after the Share Delivery Date until such certificates are delivered. Nothing
herein shall limit a Holder’s right to pursue actual damages for the Company’s
failure to deliver certificates representing shares of Common Stock upon
conversion within the period specified herein and such Holder shall have the
right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.
 
iii. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 6(d)(i) by a Share Delivery Date, and if after
such Share Delivery Date the Holder purchases (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of
the Conversion Shares which the Holder was entitled to receive upon the
conversion relating to such Share Delivery Date (a “Buy-In”), then the Company
shall pay in cash to the Holder the amount by which (x) the Holder’s total
purchase price (including brokerage commissions, if any) for the Common Stock so
purchased exceeds (y) the product of (1) the aggregate number of shares of
Common Stock that such Holder was entitled to receive from the conversion at
issue multiplied by (2) the price at which the sell order giving rise to such
purchase obligation was executed. 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 conversion of shares of Series C Preferred Stock with respect to
which the aggregate sale price giving rise to such purchase obligation is
$10,000, under clause (A) 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 conversion of the shares of Series C
Preferred Stock as required pursuant to the terms hereof.
 
iv. Reservation of Shares Issuable Upon Conversion. The Company covenants that
it will at all times reserve and keep available out of its authorized and
unissued shares of Common Stock solely for the purpose of issuance upon
conversion of the Series C Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of the Common Stock
as shall be issuable (taking into account the adjustments and restrictions of
Section 7) upon the conversion of all outstanding shares of Series C Preferred
Stock. The Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable..
 
 
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v. Fractional Shares. Upon a conversion hereunder, the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock. All fractional shares shall be carried forward and any fractional
shares which remain after a Holder converts all of his or her Series C Preferred
Stock shall be dropped and eliminated.
 
vi. Transfer Taxes. The issuance of certificates for shares of the Common Stock
on conversion of the Series C Preferred Stock shall be made without charge to
the Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate, provided that
the Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate
upon conversion in a name other than that of the Holder of such shares of Series
C Preferred Stock so converted and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
 
vii. Absolute Obligation. Except as expressly provided herein, no provision of
this Statement of Designations shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the liquidated damages (if
any) on, the shares of Series C Preferred Stock at the time, place, and rate,
and in the coin or currency, herein prescribed.
 
Section 7.  Certain Adjustments.
 
a) Stock Dividends and Stock Splits. If the Company, at any time while the
Series C Preferred Stock is outstanding: (A) shall pay a stock dividend or
otherwise make a distribution or distributions on shares of its Common Stock or
any other equity or equity equivalent securities payable in shares of Common
Stock (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company pursuant to this Series C Preferred Stock), (B)
subdivide outstanding shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split) outstanding shares of Common
Stock into a smaller number of shares, or (D) issue by reclassification of
shares of the Common Stock any shares of capital stock of the Company, then the
Conversion Value shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
 
b) Price Adjustment. Until such time as the Investors hold no Securities, except
for (i) Exempt Issuances, (ii) issuances covered by Sections 7(a), 7(c) and 7(d)
hereof or (iii) an issuance of Common Stock upon exercise or upon conversion of
warrants, options or other convertible securities for which an adjustment has
already been made pursuant to this Section 7, as to all of which this Section
7(b) does not apply, if the Company closes on the sale or issuance of Common
Stock at a price, or issues warrants, options, convertible debt or equity
securities with a exercise price per share or conversion price which is less
than the Conversion Price then in effect (such lower sales price, conversion or
exercise price, as the case may be, being referred to as the “Lower Price”), the
Conversion Price in effect from and after the date of such transaction shall be
reduced to the Lower Price. For purpose of determining the exercise price of
warrants issued by the Company, the price, if any, paid per share for the
warrants shall be added to the exercise price of the warrants.
 
 
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c) Pro Rata Distributions. If the Company, at any time while Series C Preferred
Stock is outstanding, shall distribute to all holders of Common Stock (and not
to Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion
Price shall be determined by multiplying such Conversion Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of which
the numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
 
d) Calculations. All calculations under this Section 7 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. The number
of shares of Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company or any of its subsidiaries.
For purposes of this Section 7, the number of shares of Common Stock deemed to
be issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares and shares owned by
subsidiaries, if any) actually issued and outstanding.
 
e) Notice to Holders.
 
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted
pursuant to any of this Section 7, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. If the
Company issues a variable rate security,, 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 in the case of a Variable Rate Transaction, or the lowest possible
adjustment price in the case of an MFN Transaction.
 
 
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ii. Notices of Other Events. If (A) the Company shall declare a dividend (or any
other distribution) on the Common Stock; (B) the Company shall declare 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 or any Fundamental Transaction, (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 filed at each office or agency maintained for the purpose of
conversion of the Series C Preferred Stock, and shall cause to be mailed to the
Holders at their last addresses as they shall appear upon the stock books of the
Company, at least 30 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 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 or Fundamental
Transaction; 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.
 
iii. Exempt Issuance. Notwithstanding the foregoing, no adjustment in the
Conversion Price will be made in respect of an Exempt Issuance.
 
iv. Fundamental Transaction. If, at any time while this Series C Preferred Stock
is outstanding, (A) the Company effects any merger or consolidation of the
Company with or into another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
“Fundamental Transaction”), then upon any subsequent conversion of this Series C
Preferred Stock, the Holder shall have the right to receive, for each Conversion
Share that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the “Alternate Consideration”). For
purposes of any such conversion, the determination of the Conversion Price shall
be appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Series C Preferred Stock following such
Fundamental Transaction. To the extent necessary to effectuate the foregoing
provisions, any successor to the Company or surviving entity in such Fundamental
Transaction shall file a new Statement of Designations with the same terms and
conditions and issue to the Holder new preferred stock consistent with the
foregoing provisions and evidencing the Holder’s right to convert such preferred
stock into Alternate Consideration. The terms of any agreement pursuant to which
a Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this paragraph
(f)(iv) and insuring that this Series C Preferred Stock (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction. Notwithstanding the foregoing or any other
provisions of this Statement of Designations, in the event that the agreement
relating to a Fundamental Transaction provides for the conversion or exchange of
the Series C Preferred Stock into equity or debt securities, cash or other
consideration and the agreement is approved by the holders of a majority of the.
then-outstanding shares of Series C Preferred Stock, then the holders of the
Series C Preferred Stock shall have only the rights set forth in such agreement.
 
 
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Section 8.  Miscellaneous.
 
a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holders hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, sent by
a nationally recognized overnight courier service, addressed to the Company, at
its principal address as reflected in its most recent filing with the
Commission. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given when
received, and any notice by telecopier shall be effective if confirmation of
receipt is given by the party to whom the notice is transmitted. 
 
b) Lost or Mutilated Preferred Stock Certificate. If a Holder’s Series C
Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the
Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated certificate, or in lieu of or in substitution for a
lost, stolen or destroyed certificate, a new certificate for the shares of
Series C Preferred Stock so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such certificate, and
of the ownership thereof, and indemnity, if requested, all reasonably
satisfactory to the Company.
 
c) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.
 
d) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Statement of Designations and shall not be deemed to
limit or affect any of the provisions hereof.
 
e) Rank of Series. For purposes of this Statement of Designations, any stock of
any series or class of the Company shall be deemed to rank

(i) prior to the shares of Series C Preferred Stock, as to dividends or upon
liquidation, dissolution or winding up, as the case may be, if the holders of
such class or classes shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of the
Company, as the case may be, in preference or priority to the holders of shares
of Series C Preferred Stock;

 
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(ii) on a parity with shares of Series C Preferred Stock, as to dividends or
upon liquidation, dissolution or winding up, as the case may be, whether or not
the dividend rates, dividend payment dates or redemption or liquidation prices
per share or sinking fund provisions, if any, be different from those of Series
C Preferred Stock, if the holders of such stock shall be entitled to the receipt
of dividends or of amounts distributable upon dissolution, liquidation or
winding up of the Company, as the case may be, in proportion to their respective
dividend rates or liquidation prices, without preference or priority, one over
the other, as between the holders of such stock and the holders of shares of
Series C Preferred Stock; and

(iii) junior to shares of Series C Preferred Stock as to dividends or upon
liquidation, dissolution or winding up, as the case may be, if such class shall
be Common Stock or if the holders of shares of Series C Preferred Stock shall be
entitled to receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Company, as the case may be, in preference or
priority to the holders of shares of such class or classes.

f) Amendment. This Statement of Designations may be amended with the approval of
the Company’s board of directors and the consent of the holders of seventy-five
percent (75%) of the outstanding shares of Series C Preferred Stock, except that
the conversion limitation set forth in Section 6.2(b) shall not be amended.

 
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ANNEX A
 
NOTICE OF CONVERSION
 
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF SERIES C
PREFERRED STOCK)
 
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.01 per share (the “Common Stock”), of Science Dynamics Corporation, a
Delaware corporation (the “Company”), according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
 
Conversion calculations:
 
Date to Effect Conversion: __________________________________________________
 
Number of shares of Common Stock owned prior to Conversion:
______________________
 
Number of shares of Series C Preferred Stock to be Converted:
________________________
 
Value of shares of Series C Preferred Stock to be Converted:
_________________________
 
Number of shares of Common Stock to be Issued: _________________________________
 
Certificate Number of Series C Preferred Stock attached
hereto:________________________
 
Number of Shares of Series C Preferred Stock represented by attached
certificate:__________
     
Number of shares of Series C Preferred Stock subsequent to Conversion:
________________

 

 
[HOLDER]
 
By:___________________________________
Name: 
Title: 

 
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