Exhibit 10.2


    Exhibit
      10.2

     

     

    
 

    NEITHER
      THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), AND, ACCORDINGLY,
      MAY NOT BE, NOR MAY ANY INTEREST THEREIN BE, OFFERED OR SOLD EXCEPT PURSUANT
      TO
      AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
      AN
      AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
      REQUIREMENTS OF THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
      LAWS AS EVIDENCED BY, SUBJECT TO CERTAIN EXCEPTIONS, A LEGAL OPINION OF COUNSEL
      TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
      ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
      A
      BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

    


    THIS
      NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THIS NOTE IN THE EVENT OF A PARTIAL
      CONVERSION. AS A RESULT, FOLLOWING ANY CONVERSION OF ANY PORTION OF THIS NOTE,
      THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN
      THE
      PRINCIPAL AMOUNT SET FORTH BELOW.

    


    EMAGIN
      CORPORATION

    


    6%
      SENIOR SECURED CONVERTIBLE NOTE DUE 2007-2008

    


    No.                                                           $                                        

    New
      York,
      New York

    July
      21, 2006

    


    FOR
      VALUE RECEIVED,
      EMAGIN CORPORATION,
      a Delaware
      corporation (hereinafter called the “Company”), hereby promises to pay to
[NAME],
      [ADDRESS],
      or
      registered assigns (the “Holder”), or order, the sum of                  
      Dollars
      ($                                        ),
      in
      installments on the Installment Maturity Date and on the Final Maturity Date,
      and to pay interest on the unpaid principal balance hereof at the Applicable
      Rate from the date hereof, until the same becomes due and payable, whether
      at
      maturity or upon acceleration or by redemption or repurchase in accordance
      with
      the terms hereof or otherwise. Any amount, including, without limitation,
      principal of or interest on this Note, the Optional Redemption Price and the
      Repurchase Price, that is payable under this Note that is not paid when due
      shall bear interest at the Default Rate from the due date thereof until the
      same
      is paid (“Default Interest”). Regular interest shall be payable in arrears on
      each Interest Payment Date, commencing on September 1, 2006, on the principal
      amount outstanding on such date. Regular interest on this Note shall be computed
      on the basis of a 360-day year of 12 30-day months and actual days elapsed.
      No
      regular interest shall be payable on an Interest Payment Date on any portion
      of
      the principal amount of this Note which shall have been redeemed prior to such
      Interest Payment Date so long as the Company shall have complied in full with
      its obligations with respect to such redemption.

    



    
      
         

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    
      All
        payments of principal of and premium, if any, interest, and other amounts
        on
this Note shall be made in lawful money of the United States of America.
        All payments shall be made by wire transfer of immediately available funds
        to
        such account as the Holder may from time to time designate by written notice
        in
        accordance with the provisions of this Note. Whenever any amount expressed
        to be
        due by the terms of this Note is due on any day which is not a Business Day,
        the
        same shall instead be due on the next succeeding day which is a Business
        Day
        and, in the case of any Interest Payment Date which is not the date on which
        this Note is paid in full, the extension of the due date thereof shall not
        be
        taken into account for purposes of determining the amount of interest due
        on
        such date. Certain capitalized terms used in this Note are defined in Article
        I.

    

    


    The
      obligations of the Company under this Note shall rank in right of payment on
      a
      parity with all other unsubordinated obligations of the Company for indebtedness
      for borrowed money or the purchase price of property. This Note is issued
      pursuant to the Note Purchase Agreement and the Holder and this Note are subject
      to the terms and entitled to the benefits of the Note Purchase Agreement. This
      Note is entitled to the benefits of the Security Agreements and the Lockbox
      Agreement.

    


    This
      Note
      is one of a duly authorized issue of the Company’s 6% Senior Secured Convertible
      Notes due 2007-2008 limited to an aggregate principal amount of $7,000,000.00
      (excluding 6% Senior Secured Convertible Notes due 2007-2008 issued in
      replacement of lost, stolen, destroyed or mutilated notes or issued on transfer
      of such notes). 

    


    The
      following terms shall apply to this Note:

    


    


    ARTICLE
      I

    


    DEFINITIONS

    


    1.1 Certain
      Defined Terms. (a)
      All
      the agreements or instruments herein defined shall mean such agreements or
      instruments as the same may from time to time be supplemented or amended or
      the
      terms thereof waived or modified to the extent permitted by, and in accordance
      with, the terms thereof and of this Note.

    


    (b) The
      following terms shall have the following meanings (such meanings to be equally
      applicable to both the singular and plural forms of the terms
      defined):

    


    “Accredited
      Investor” means an “accredited investor” as that term is defined in Rule 501 of
      Regulation D under the 1933 Act.

    


    “Affiliate”
      means, with respect to any Person, any other Person that directly, or indirectly
      through one or more intermediaries, controls, is controlled by or is under
      common control with the subject Person. For purposes of this definition,
“control” (including, with correlative meaning, the terms “controlled by” and
“under common control with”), as used with respect to any Person, shall mean the
      possession, directly or indirectly, of the power to direct or cause the
      direction of the management and policies of such Person, whether through the
      ownership of voting securities or by contract or otherwise.


    
      
         

        
        

      

      
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    “Aggregation
      Parties” shall have the meaning provided in Section 6.7(a).

    


    “Alexandra”
      means Alexandra Global Master Fund Ltd., a British Virgin Islands international
      business company.

    


    “AMEX”
      means the American Stock Exchange, Inc.

    


    “Applicable
      Rate” means 6 percent per annum; provided, however,
      that if
      an Event of Default shall have occurred, then the Applicable Rate shall be
      increased to 12 percent per annum during the period from the date of such Event
      of Default until the date no Event of Default is continuing (or such lesser
      rate
      as shall be the highest rate permitted by applicable law).

    


    “Average
      Daily Trading Volume Threshold” means, with respect to any period, that the
      average daily trading volume of the Common Stock during such period as reported
      by Bloomberg, L.P. (or if such source ceases to be available, a comparable
      source selected by the Holder and acceptable to the Company in its reasonable
      judgment) shall be at least 500,000 shares (such amount to be subject to
      equitable adjustment for stock splits, stock dividends and similar events
      relating to the Common Stock that are reflected in the trading market for the
      Common Stock on or before the last Trading Day in such period).

    


    “Board
      of
      Directors” means the Board of Directors of the Company.

    


    “Board
      Resolution” means
      a
      copy of a resolution certified by the Secretary or an Assistant Secretary of
      the
      Company to have been duly adopted by the Board of Directors, or duly authorized
      committee thereof (to the extent permitted by applicable law), and to be in
      full
      force and effect on the date of such certification, and delivered to the
      Holder.

    


    “Business
      Day” means any day other than a Saturday, Sunday or a day on which commercial
      banks in The City of New York are authorized or required by law or executive
      order to remain closed.

    


    "Cash
      and
      Cash Equivalents Balances" of any Person on any date shall be determined on
      an
      unconsolidated basis from such Person's books maintained in accordance with
      Generally Accepted Accounting Principles, and means, without duplication, the
      sum of (1) the cash held by such Person on such date and available for use
      by
      such Person on such date, (2) all assets which would, on a balance sheet of
      such
      Person prepared as of such date in accordance with Generally Accepted Accounting
      Principles, be classified as cash equivalents; provided,
      however,
      that (x)
      for purposes of computing the Cash and Cash Equivalents Balances as of any
      date,
      no amount shall be included as cash or a cash equivalent if such amount is
      subject to any lien, charge, equity or encumbrance in favor of any other Person
      or is subject to any agreement, arrangement or understanding by the Company
      with
      any other Person to maintain the amount thereof or which restricts the use
      thereof by the Company (in any such case, other than as provided in Section
      3.9
      of this Note and the Other Notes and other than the lien and security interest
      in favor of the Collateral Agent arising under the Security Agreement) (y)
      cash
      and cash equivalents described in the preceding clauses (1) and (2) that are
      held at any time as Collateral under the Security Agreement and in which the
      Collateral Agent has a perfected first priority security interest and which
      are not subject to any lien, charge, equity or encumbrance in favor of any
      other
      Person shall be included in determining the amount of Cash and Cash Equivalents
      Balances at such time.


    
      
         

        
        

      

      
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    “Collateral”
      shall have the meaning provided in the Security Agreements or in either of
      them.

    


    “Collateral
      Agent” means Alexandra, as collateral agent under the Security Agreements, or
      its successors.

    


    “Common
      Stock” means the Common Stock, par value $.001 per share, or any shares of
      capital stock of the Company into which such shares shall be changed or
      reclassified after the Issuance Date.

    


    “Common
      Stock Equivalent” means any warrant, option, subscription or purchase right with
      respect to shares of Common Stock, any security convertible into, exchangeable
      for, or otherwise entitling the holder thereof to acquire, shares of Common
      Stock or any warrant, option, subscription or purchase right with respect to
      any
      such convertible, exchangeable or other security.

    


    “Company”
      shall have the meaning provided in the first paragraph of this
      Note.

    


    “Company
      Certificate” means a certificate of the Company signed by an
      Officer.

    


    “Company
      Notice” means a Company Notice in the form attached hereto as Exhibit
      A.

    


    “Computed
      Market Price” shall
      mean the arithmetic average of the daily VWAPs for each of the three Trading
      Days immediately preceding the applicable Measurement Date (such VWAPs being
      appropriately and equitably adjusted for any stock splits, stock dividends,
      recapitalizations and the like occurring or for which the record date occurs
      during such three Trading Days).

    


    “Conversion
      Date” means the date on which a Conversion Notice is given in accordance with
      Section 6.2(a).

    


    “Conversion
      Notice” means
      a
      duly executed Notice of Conversion of 6% Senior Secured Convertible Note Due
      2007-2008 substantially in the form of Exhibit
      C
      to this
      Note.

    


    “Conversion
      Price” means
      $0.26, subject to adjustment as provided in Section 6.3.

    


    “Current
      Fair Market Value” when used with respect to the Common Stock as of a specified
      date means with respect to each share of Common Stock the average of the closing
      prices of the Common Stock sold on all securities exchanges (including the
      NYSE,
      the AMEX, the Nasdaq and the Nasdaq Capital Market) on which the Common Stock
      may at the time be listed, or, if there have been no sales on any such exchange
      on such day, the average of the highest bid and lowest asked prices on all
      such
      exchanges at the end of regular trading such day, or,
      if on
      such day the  Common Stock is not so listed, the average of 
the representative bid and asked prices quoted in  the  NASDAQ
      System as  of  4:00 p.m., 

     

     


    
      
         

        
        

      

      
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    New
      York City time, or, if on such day the Common
      Stock is not quoted in the NASDAQ System, the average of the highest bid and
      lowest asked price on such day in the domestic over-the-counter market as
      reported by the Pink Sheets, LLC, or any similar successor organization, in
      each
      such case averaged over a period of five Trading Days consisting of the day
      as
      of which the Current Fair Market Value of Common Stock is being determined
      (or
      if such day is not a Trading Day, the Trading Day next preceding such day)
      and
      the four consecutive Trading Days prior to such day. If on the date for which
      Current Fair Market Value is to be determined the Common Stock is not listed
      on
      any securities exchange or quoted in the NASDAQ System or the over-the-counter
      market, the Current Fair Market Value of Common Stock shall be the greater
      of
      (i) the highest price per share of Common Stock at which the Company has sold
      shares of Common Stock or Common Stock Equivalents during the 365 days prior
      to
      the date of such determination and (ii) the highest price per share which the
      Company could then obtain from a willing buyer (not an employee or director
      of
      the Company at the time of determination) for shares of Common Stock sold by
      the
      Company, from authorized but unissued shares, as determined in good faith by
      the
      Board of Directors.

     

    “Current
      Market Price” shall
      mean the arithmetic average of the daily Market Prices per share of Common
      Stock
      for the five consecutive Trading Days immediately prior to the date in question;
      provided,
      however, that
      (1)
      if the “ex” date (as hereinafter defined) for any event (other than the issuance
      or distribution requiring such computation) that requires an adjustment to
      the
      Conversion Price pursuant to Section 6.3(a), (b), (c), (d) or (e), occurs during
      such five consecutive Trading Days, the Market Price for each Trading Day prior
      to the “ex” date for such other event shall be adjusted by multiplying such
      Market Price by the same fraction by which the Conversion Price is so required
      to be adjusted as a result of such other event, (2) if the “ex” date for any
      event (other than the issuance or distribution requiring such computation)
      that
      requires an adjustment to the Conversion Price pursuant to Section 6.3(a),
      (b),
      (c), (d) or (e), occurs on or after the “ex” date for the issuance or
      distribution requiring such computation and prior to the day in question, the
      Market Price for each Trading Day on and after the “ex” date for such other
      event shall be adjusted by multiplying such Market Price by the reciprocal
      of
      the fraction by which the Conversion Price is so required to be adjusted as
      a
      result of such other event, and (3) if the “ex” date for the issuance or
      distribution requiring such computation is prior to the day in question, after
      taking into account any adjustment required pursuant to clause (1) or (2) of
      this proviso, the Market Price for each Trading Day on or after such “ex” date
      shall be adjusted by adding thereto the amount of any cash and the fair market
      value (as determined by the Board of Directors in a manner consistent with
      any
      determination of such value for purposes of Section 6.3(d), whose determination
      shall be conclusive and described in a Board Resolution) of the evidences of
      indebtedness, shares of capital stock or assets being distributed applicable
      to
      one share of Common Stock as of the close of business on the day before such
      “ex” date. Notwithstanding the foregoing, whenever successive adjustments to the
      Conversion Price are called for pursuant to Section 6.3, such adjustments shall
      be made to the Current Market Price as may be necessary or appropriate to
      effectuate the intent of Section 6.3 and to avoid unjust or inequitable results
      as determined in good faith by the Board of Directors.

    


    “Default
      Interest” shall have the meaning provided in the first paragraph of this
      Note.


    
      
         

        
        

      

      
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    “Default
      Rate” means 12 percent per annum (or such lesser rate equal to the highest rate
      permitted by applicable law).

    


    “Designated
      Person” means any of Mr. John Atherly, Mr. Gary Jones and Ms. Susan
      Jones.

    


    “DTC”
      shall have the meaning provided in Section 6.2(b).

    


    “EBITDA”
      for any period shall mean the consolidated net income before taxes of the
      Company and its Subsidiaries, as shown on its consolidated financial statements
      filed with the SEC for such period and prepared in accordance with Generally
      Accepted Accounting Principles, on a basis consistent with the Company’s audited
      consolidated financial statements most recently filed with the SEC prior to
      the
      Issuance Date, increased by the amount of depreciation, amortization and
      interest expenses charged in computing such consolidated net income for such
      period.

    


    “EBITDA
      Positive Quarter” means a fiscal quarter of the Company during which its EBITDA
      is greater than zero, as shown in the Company’s Quarterly Report on Form 10-Q
      filed with the SEC, in the case of the first three fiscal quarters of any fiscal
      year, or as shown in the Company’s Annual Report on Form 10-K, in the case of
      the fourth fiscal quarter of any fiscal year. In the case of the fourth fiscal
      quarter of any year, an EBITDA Positive Quarter may be shown by the quarterly
      financial data shown in the notes to the Company’s audited financial statements
      included in the Company’s Annual Report on Form 10-K for such fiscal year, if
      such information is presented in sufficient detail to make such calculation,
      or
      by subtracting the EBITDA for the first three fiscal quarters of such fiscal
      year from the EBITDA for such fiscal year.

    


    “Eligible
      Bank” means a corporation organized or existing under the laws of the United
      States or any other state, having combined capital and surplus of at least
      $100
      million and subject to supervision by federal or state authority and which
      has a
      branch located in New York, New York.

    


    “Event
      of
      Default” shall have the meaning provided in Section 4.1.

    


    “Excluded
      Shares” shall have the meaning provided in Section 6.7.

    


    “Extended
      Optional Redemption Date” means with respect to any portion of this Note to
      which Section 2.1(e) applies, the date that is 30 Trading Days, after the latest
      date on which the Restricted Ownership Percentage no longer restricts the
      Holder’s right to convert the remaining Uncovered Portion, but in no event later
      than the Final Maturity Date.

    


    “FAST”
      shall have the meaning provided in Section 6.2(b)

    


    “Final
      Maturity Date” means January 21, 2008.

    


    “Fundamental
      Change” means


    
      
         

        
        

      

      
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    (a) Any
      consolidation or merger of the Company or any Subsidiary with or into another
      entity (other than a merger or consolidation of a Subsidiary into the Company
      or
      a wholly-owned Subsidiary in connection with which no change in outstanding
      Common Stock occurs) where the stockholders of the Company immediately prior
      to
      such transaction do not collectively own at least 51% of the outstanding voting
      securities of the surviving corporation of such consolidation or merger
      immediately following such transaction; or the sale of all or substantially
      all
      of the assets of the Company and the Subsidiaries in a single transaction or
      a
      series of related transactions; or

    


    (b) The
      occurrence of any transaction or event in connection with which all or
      substantially all the Common Stock shall be exchanged for, converted into,
      acquired for or constitute the right to receive consideration (whether by means
      of an exchange offer, liquidation, tender offer, consolidation, merger,
      combination, reclassification, recapitalization or otherwise) which is not
      all
      or substantially all common stock which is (or, upon consummation of or
      immediately following such transaction or event, will be) listed on a national
      securities exchange or approved for quotation on Nasdaq or any similar United
      States system of automated dissemination of transaction reporting of securities
      prices; or

    


    (c) The
      acquisition by a Person or entity or group of Persons or entities acting in
      concert as a partnership, limited partnership, syndicate or group, as a result
      of a tender or exchange offer, open market purchases, privately negotiated
      purchases or otherwise, of beneficial ownership of securities of the Company
      representing 50% or more of the combined voting power of the outstanding voting
      securities of the Company ordinarily (and apart from rights accruing in special
      circumstances) having the right to vote in the election of
      directors.

    


    “Generally
      Accepted Accounting Principles” for any Person means the generally accepted
      accounting principles and practices applied by such Person from time to time
      in
      the preparation of its audited financial statements.

    


    “Holder”
      shall have the meaning provided in the first paragraph of this
      Note.

    


    “Holder
      Notice” means a Holder Notice in the form attached hereto as Exhibit
      B.

    


    “Indebtedness”
      means, when used with respect to any Person, without duplication:

    


    (1) all
      indebtedness, obligations and other liabilities (contingent or otherwise) of
      such Person for borrowed money (including obligations of such Person in respect
      of overdrafts, foreign exchange contracts, currency exchange agreements,
      currency purchase or similar agreements, Interest Rate Protection Agreements,
      and any loans or advances from banks, whether or not evidenced by notes or
      similar instruments) or evidenced by bonds, debentures, notes or other
      instruments for the payment of money, or incurred in connection with the
      acquisition of any property, services or assets (whether or not the recourse
      of
      the lender is to the whole of the assets of such Person or to only a portion
      thereof), other than any account payable or other accrued current liability
      or
      obligation to trade creditors incurred in the ordinary course of business in
      connection with the obtaining of materials or services; 


    
      
         

        
        

      

      
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    (2) all
      reimbursement obligations and other liabilities (contingent or otherwise) of
      such Person with respect to letters of credit, bank guarantees, bankers’
acceptances, surety bonds, performance bonds or other guaranty of contractual
      performance; 

    


    (3) all
      obligations and liabilities (contingent or otherwise) in respect of (a) leases
      of such Person required, in conformity with Generally Accepted Accounting
      Principles, to be accounted for as capitalized lease obligations on the balance
      sheet of such Person and (b) any lease or related documents (including a
      purchase agreement) in connection with the lease of real property which provides
      that such Person is contractually obligated to purchase or cause a third party
      to purchase the leased property and thereby guarantee a minimum residual value
      of the leased property to the landlord and the obligations of such Person under
      such lease or related document to purchase or to cause a third party to purchase
      the leased property; 

    


    (4) all
      direct or indirect guaranties or similar agreements by such Person in respect
      of, and obligations or liabilities (contingent or otherwise) of such Person
      to
      purchase or otherwise acquire or otherwise assure a creditor against loss in
      respect of, indebtedness, obligations or liabilities of another Person of the
      kind described in clauses (1) through (3); 

    


    (5) any
      indebtedness or other obligations described in clauses (1) through (4) secured
      by any mortgage, pledge, lien or other encumbrance existing on property which
      is
      owned or held by such Person, regardless of whether the indebtedness or other
      obligation secured thereby shall be payable by or shall have been assumed by
      such Person; and 

    


    (6) any
      and
      all deferrals, renewals, extensions and refundings of, or amendments,
      modifications or supplements to, any indebtedness, obligation or liability
      of
      the kind described in clauses (1) through (5). 

    


    “Installment
      Maturity Date” means July 21, 2007.

    


    “Interest
      Payment Dates” means each March 1, June 1, September 1 and December 1 and the
      Final Maturity Date.

    


    “Interest
      Rate Protection Agreement” means, with respect to any Person, any interest rate
      swap agreement, interest rate cap or collar agreement or other financial
      agreement or arrangement designed to protect such Person against fluctuations
      in
      interest rates, as in effect from time to time.

    


    “Issuance
      Date” means July 21, 2006.

    


    “Lien”
      means any mortgage, lien, pledge, security interest or other charge or
      encumbrance, including, without limitation, the lien or retained security title
      of a conditional vendor.


    
      
         

        
        

      

      
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    “Lockbox
      Agent” means the Person serving from time to time as Lockbox Agent under the
      Lockbox Agreement.

    


    “Lockbox
      Agreement” means that certain Lockbox Agreement, dated as of July 21, 2006, by
      and between the Company, the Lockbox Agent and the Collateral
      Agent.

    


    “Majority
      Holders” means, at any time, the holders of a majority of
      the
      aggregate principal amount of this Note and the Other Notes outstanding at
      such
      time.

    


    “Market
      Price” with
      respect to any security on any day shall mean the closing bid price of such
      security on such day on the Nasdaq, the Nasdaq Capital Market, the NYSE or
      the
      AMEX, as applicable, or, if such security is not listed or admitted to trading
      on the Nasdaq, the Nasdaq Capital Market, the NYSE or the AMEX, on the principal
      national securities exchange or quotation system on which such security is
      quoted or listed or admitted to trading, in any such case as reported by
      Bloomberg, L.P. (or if such source ceases to be available, comparable source
      selected by the Holder and acceptable to the Company in its reasonable judgment)
      or, if not quoted or listed or admitted to trading on any national securities
      exchange or quotation system, the average of the closing bid and asked prices
      of
      such security on the over-the-counter market on the day in question, as reported
      by Pink Sheets, LLC, or a similar generally accepted reporting service, or
      if
      not so available, in such manner as furnished by any NYSE member firm selected
      from time to time by the Board of Directors for that purpose, or a price
      determined in good faith by the Board of Directors, whose determination shall
      be
      conclusive and described in a Board Resolution.

    


    “Measurement
      Date” for any sale, transfer or disposition (but not including the cancellation
      or expiration) of Common Stock or Common Stock Equivalents by a Designated
      Person means the date that is three Trading Days after the earlier of (i) the
      date such Designated Person files a Form 4 with the SEC with respect to such
      sale, transfer or disposition and (ii) the date such Designated Person is
      required to file a Form 4 with the SEC with respect to such sale, transfer
      or
      disposition; provided,
      however,
      that if
      such Designated Person is not required, or is no longer required, to file a
      Form
      4 with respect to such sale, transfer or disposition, the Measurement Date
      shall
      be the date that is five Trading Days after the date of such sale, transfer
      or
      disposition.

    


    “Nasdaq”
      means the Nasdaq Global Market.

    


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

    


    “1933
      Act” means the Securities Act of 1933, as amended.

    


    “Note”
      means this instrument as originally executed, or if later amended or
      supplemented in accordance with its terms, then as so amended or supplemented.
      

    


    “Note
      Purchase Agreement” means the Note Purchase Agreement, dated as of July 21,
      2006, by and between the Company and the original Holder of this Note or its
      predecessor instrument.


    
      
         

        
        

      

      
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    “NYSE”
      means the New York Stock Exchange, Inc.

    


    “Officer”
      means the Chairman of the Board, the Chief Executive Officer, the President
      or
      the Chief Financial Officer of the Company.

    


    “Optional
      Redemption Date” means the Business Day on which this Note is to be redeemed
      pursuant to Section 2.1.

    


    “Optional
      Redemption Notice” means an Optional Redemption Notice in the form attached
      hereto as Exhibit
      D.

    


    “Optional
      Redemption Period” means the period which commences on the date that is ten days
      after the SEC Effective Date and ends on the Final Maturity Date.

    


    “Optional
      Redemption Price” means an amount in cash equal to the sum of (1) 100% of the
      outstanding principal amount of this Note plus
      (2)
      accrued and unpaid interest on such principal amount to the Optional Redemption
      Date plus
      (3)
      accrued and unpaid Default Interest, if any, on the amount referred to in the
      immediately preceding clause (2) at the rate provided in this Note to the
      Optional Redemption Date plus
      (4) an
      amount equal to the interest that would have accrued on this Note from the
      Optional Redemption Date until the Final Maturity Date (assuming, in case the
      Optional Redemption Date is prior to the Installment Maturity Date, the Company
      paid when due the installment of principal due on the Installment Maturity
      Date)
      had this Note not been redeemed on the Optional Redemption Date.

    


    “Other
      Note Purchase Agreements” means the several Note Purchase Agreements, dated as
      of July 21, 2006, by and between the Company and the respective original holders
      of the Other Notes. 

    


    “Other
      Notes” means the several 6% Senior Secured Convertible Notes due 2007-2008,
      issued by the Company pursuant to the Other Note Purchase
      Agreements.

    


    “Other
      Warrants” means the Common Stock Purchase Warrants issued by the Company to the
      original holders of the Other Notes or their respective predecessor
      instruments.

    


    “Patent
      and Trademark Security Agreement” means the Patent and Trademark Security
      Agreement, dated as of July 21, 2006, by and between the Company and the
      Collateral Agent.

    


    “Pledge
      and Security Agreement” means the Pledge and Security Agreement, dated as of
      July 21, 2006, by and between the Company and the Collateral Agent.

    


    “Permitted
      Designated Person Sale” means a sale by John Atherly, occurring on or after
      January 1, 2007, of shares of Common Stock in an amount not to exceed 50,000
      shares in the aggregate in any fiscal quarter of the Company (such number of
      shares subject to equitable adjustments for stock splits, stock dividends,
      combinations, capital reorganizations and similar events relating to the Common
      Stock occurring after the Issuance Date).


    
      
         

        
        

      

      
        10

        
          

        

      

      
        
        

      

    


    


    “Permitted
      Indebtedness” means 

    


    (1) Indebtedness
      outstanding on the Issuance Date prior to issuance of this Note and reflected
      in
      the Company’s financial statements included in the SEC Reports;

    


    (2) Indebtedness
      evidenced by this Note and the Other Notes;

    


    (3) Indebtedness
      outstanding on, or incurred after, the Issuance Date in an aggregate amount
      not
      to exceed $2,500,000 at any one time outstanding so long as (A) such
      Indebtedness (x) is incurred for the purpose of acquiring equipment owned or
      used or to be owned or used by the Company or any Subsidiary (or for the purpose
      of acquiring the capital stock or similar equity interests of a Subsidiary
      that
      is formed for the limited purpose of owning same and does not own or hold any
      other material assets) and does not exceed the purchase price of the equipment,
      capital stock or other equity interest so acquired plus reasonable transaction
      expenses and (y) if secured, is secured solely by the interest of the Company
      or
      one of its Subsidiaries in the equipment so acquired and rights related thereto
      or (B) is the reimbursement obligations and other liabilities (contingent or
      otherwise) of the Company or any Subsidiary with respect to letters of credit
      issued in lieu of cash security deposits for leases of real property or
      equipment used by the Company or any Subsidiary, or commercial or standby
      letters of credit issued in the ordinary course of the business of the Company
      and its Subsidiaries (the amount of which shall for this purpose be deemed
      to be
      the maximum reimbursement obligations and other liabilities (contingent or
      otherwise) with respect to such letters of credit, whether or not a drawing
      thereunder has been made);

    


    (4) Indebtedness
      incurred after the Issuance Date not to exceed $2,500,000 at any one time
      outstanding that is secured solely by raw materials, works in progress and
      finished goods inventory and accounts receivable in a financing by a bank,
      finance company or other institutional lender providing receivables or inventory
      financing;

    


    (5) Indebtedness
      incurred after the Issuance Date which is unsecured, subordinated to the Note
      and the Other Notes as to payment on terms approved in advance of such
      incurrence by the Majority Holders as evidenced by the written approval of
      the
      Majority Holders, and for which no payment of principal of such Indebtedness
      is
      scheduled to be due prior to the date that is six months after the Final
      Maturity Date;

    


    (6) endorsements
      for collection or deposit in the ordinary course of business; 

    


    (7) in
      the
      case of any Subsidiary, Indebtedness owed by such Subsidiary to the Company;
      and

    


    (8) Permitted
      Refinancing Indebtedness;

    


    in
      each
      such case so long as at the time of incurrence of such Indebtedness no Event
      of
      Default has occurred and is continuing or would result from such incurrence
      and
      no event which, with notice or passage of time, or both, would become an Event
      of Default has occurred and is continuing or would result from such incurrence
      and so long as in the case of such Indebtedness referred to in the preceding
      clauses (3) through (5), inclusive, incurrence of such Indebtedness shall have
      been approved by the Board of Directors prior to the incurrence
      thereof.


    
      
         

        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    “Permitted
      Liens” means:

    


    (a) Liens
      upon any property of any Subsidiary or Subsidiaries as security for indebtedness
      owing by such Subsidiary to the Company;

    


    (b) purchase
      money Liens upon any property acquired by the Company or any Subsidiary or
      Liens
      existing on such property at the time of acquisition and in any such case
      securing Permitted Indebtedness described in clause (3) of the definition of
      the
      term Permitted Indebtedness; provided that (i) no such Lien shall extend to
      or
      cover any other property of the Company or any Subsidiary, (ii) the principal
      amount of Indebtedness secured by each such Lien on any such property shall
      not
      exceed the cost (including such principal amount of the Indebtedness secured
      thereby) to the Company or the Subsidiary of the property subject thereto,
      and
      (iii) the aggregate principal amount of all Indebtedness of the Company and
      all
      Subsidiaries secured by all Liens described in this subsection (b) and any
      extensions, renewals or replacements thereof, at any one time outstanding,
      shall
      not exceed $2,500,000 for the Company and the Subsidiaries; and any Lien
      securing Indebtedness that extends, renews or replaces any Indebtedness secured
      by any Lien permitted by this subsection (b); provided,
      however,
      that in
      any such case the Lien securing any Indebtedness so extended, renewed or
      replaced shall not extend to or cover any other property of the Company or
      any
      Subsidiary and the principal amount of such Indebtedness extended, renewed
      or
      replaced shall not be increased;

    


    (c) Liens
      securing Indebtedness permitted under clause (4) of the definition of the term
      Permitted Indebtedness so long as in each such case such Lien does not extend
      to
      any property of the Company or the Subsidiaries other than the accounts
      receivables or inventory of the Company and the Subsidiaries so
      financed;

    


    (d) Liens
      securing this Note and the Other Notes ratably and not securing any other
      Indebtedness;

    


    (e) Liens
      for
      taxes or assessments or governmental charges or levies on its property if such
      taxes or assessments or charges or levies shall not at the time be due and
      payable or if the amount, applicability, or validity of any such tax,
      assessment, charge or levy shall currently be contested in good faith by
      appropriate proceedings or necessary preliminary steps are being taken to
      contest, compromise or settle the amount thereof or to determine the
      applicability or validity thereof and if the Company or such Subsidiary, as
      the
      case may be, shall have set aside on its books reserves (segregated to the
      extent required by sound accounting practice) deemed by it adequate with respect
      thereto; deposits or pledges to secure payment of worker's compensation,
      unemployment insurance, old age pensions or other social security; deposits
      or
      pledges to secure performance of bids, tenders, contracts (other than contracts
      for the payment of money borrowed or credit extended), leases, public or
      statutory obligations, surety or appeal bonds, or other deposits or pledges
      for
      purposes of like general nature in the ordinary course
      of
      business; mechanics', carriers', workers', repairmen's or other  like Liens
      arising

     


    
      
         

        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

     in
      the ordinary course of business securing
      obligations which are not overdue for a period of 60 days, or which are in
      good
      faith being contested or litigated, or deposits to obtain the release of such
      Liens; Liens created by or resulting from any litigation or legal proceedings
      or
      proceedings being contested in good faith by appropriate proceedings, provided
      any execution levied thereon shall be stayed; leases made, or existing on
      property acquired, in the ordinary course of business; landlords' Liens under
      leases to which the Company or any Subsidiary is a party; and zoning
      restrictions, easements, licenses or restrictions on the use of real property
      or
      minor irregularities in title thereto; provided that all such Liens described
      in
      this subsection (d) do not, in the aggregate, materially impair the use of
      such
      property in the operations of the business of the Company or any Subsidiary
      or
      the value of such property for the purpose of such business;
      and


     

    (f) Liens
      existing on the Issuance Date and listed in Schedule 4(t) to the Note Purchase
      Agreement.

    


    “Permitted
      Refinancing Indebtedness” means any Indebtedness of the Company issued in
      exchange for, or the net proceeds of which are used to redeem Indebtedness
      represented by this Note and the Other Notes in accordance with Section 2.1;
      provided that so long as on or before the date of incurrence of such Permitted
      Refinancing Indebtedness the Company shall have (a) given the Optional
      Redemption Notice to the Holder and the holders of the Other Notes in accordance
      with Section 2.1 and (b) irrevocably deposited in trust with a trustee (other
      than the Company or any Subsidiary), for the exclusive benefit of the Holder
      and
      the holders of the Other Notes being redeemed, an amount at least equal to
      the
      aggregate amount that the Company will be obligated to pay in respect of such
      Indebtedness from such date to the date of payment in full of such
      Indebtedness.

    


    “Person”
      means any natural person, corporation, partnership, limited liability company,
      trust, incorporated organization, unincorporated association or similar entity
      or any government, governmental agency or political subdivision.

    


    “Principal
      Market” means, at any time, whichever of the Nasdaq, Nasdaq Capital Market,
      AMEX, NYSE or such other U.S. market or exchange is at the time the principal
      market on which the Common Stock is then listed for trading.

    


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

    


    “Registration
      Statement” means the Registration Statement required to be filed by the Company
      with the SEC pursuant to Section 8(a)(1) of the Note Purchase
      Agreement.

    


    “Repurchase
      Event” means the occurrence of any one or more of the following
      events:


    
      
         

        
        

      

      
        13

        
          

        

      

      
        
        

      

    


    


    (a) The
      Common Stock ceases to be traded on the AMEX and is not listed for trading
      on
      the Nasdaq, the Nasdaq Capital Market or the NYSE;

    


    (b) Any
      Fundamental Change; 

    


    (c) The
      adoption of any amendment to the Company's Certificate of Incorporation (other
      than any certificate designating a series of preferred stock of the Company)
      which materially and adversely affects the rights of the Holder or the taking
      of
      any other action by the Company which materially and adversely affects the
      rights of the Holder in respect of the Holder’s interest in the Common Stock in
      a different and more adverse manner than it affects the rights of holders of
      Common Stock generally; or

    


    (d) The
      inability of the Holder for 20 Trading Days (whether or not consecutive) during
      any period of 365 consecutive days occurring on or after the SEC Effective
      Date
      to sell shares of Common Stock issued or issuable upon conversion of this Note
      or exercise of the Warrants pursuant to the Registration Statement (1) by reason
      of the requirements of the 1933 Act, the 1934 Act or any of the rules or
      regulations under either thereof or (2) due to the Registration Statement
      containing any untrue statement of material fact or omitting to state a material
      fact required to be stated therein or necessary to make the statements therein
      not misleading or other failure of the Registration Statement to comply with
      the
      rules and regulations of the SEC other than by reason of a review by the SEC
      staff of the Registration Statement or a post effective amendment to the
      Registration Statement excluding any such inability to sell that results from
      an
      untrue statement of a material fact in such Registration Statement or omission
      to state a material fact required to be stated in such Registration Statement
      in
      order to make the statements therein not misleading, which misstatement or
      omission was made by the Holder in written information it furnished to the
      Company specifically for inclusion in such Registration Statement which such
      information was substantially relied upon by the Company in preparation of
      the
      Registration Statement or any amendment or supplement thereto, unless the
      Company shall have failed timely to amend or supplement such Registration
      Statement after the Holder shall have corrected such misstatement or omission;
      or

    


    (e) Any
      Event
      of Default specified in Article IV of this Note.

    


    “Repurchase
      Price” means with respect to any repurchase pursuant to Sections 5.1 and 5.2 an
      amount in cash equal to the sum of (1) 100% of the outstanding principal amount
      of this Note that the Holder has elected to be repurchased plus
      (2)
      accrued and unpaid interest on such principal amount to the date of such
      repurchase plus
      (3)
      accrued and unpaid Default Interest, if any, thereon at the rate provided in
      this Note to the date of such repurchase.

    


    “Restricted
      Ownership Percentage” shall have the meaning provided in Section
      6.7(a).

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    “Rule
      144A” means Rule 144A as promulgated under the 1933 Act.

    


    “SEC”
      means the Securities and Exchange Commission.

     

    “SEC
      Effective Date” means the date the Registration Statement is first declared
      effective by the SEC.

    


    “SEC
      Reports” shall have the meaning provided in the Note Purchase
      Agreement.

    


    “Security
      Agreement” means either or both of the Pledge and Security Agreement and the
      Patent and Trademark Security Agreement.

    


    “Stockholder
      Approval” shall have the meaning provided in the Note Purchase
      Agreement.

    


    “Subsidiary”
      means any corporation or other entity of which a majority of the capital stock
      or other ownership interests having ordinary voting power to elect a majority
      of
      the board of directors or other Persons performing similar functions are at
      the
      time directly or indirectly owned by the Company.

    


    “Tender
      Offer” means a tender offer or exchange offer.

    


    “Trading
      Day” means at any time a day on which the Principal Market is open for general
      trading of securities.

    


    “Transaction
      Documents” means this Note, the Note Purchase Agreement, the Security
      Agreements, the Lockbox Agreement, the Warrants and the other agreements,
      instruments and documents contemplated hereby and thereby.

    


    “Transfer
      Agent” means Continental Stock Transfer & Trust Company, or its successor as
      transfer agent and registrar for the Common Stock.

    


    “Trigger
      Event” shall have the meaning provided in Section 6.3(d).

    


    “Unconverted
      Portion” shall have the meaning provided in Section 2.1(d)(1).

    


    “VWAP”
of
      any security on any Trading Day means the volume-weighted average price of
      such
      security on such Trading Day on the Principal Market, as reported by Bloomberg
      Financial, L.P., based on a Trading Day from 9:30 a.m., Eastern Time, to 4:00
      p.m., Eastern Time, using the AQR Function, for such Trading Day; provided,
      however,
      that
      during any period the VWAP is being determined, the VWAP shall be subject to
      equitable adjustments from time to time on terms consistent with Section 6.3
      and
      otherwise reasonably acceptable to the Majority Holders for (i) stock splits,
      (ii) stock dividends, (iii) combinations, (iv) capital reorganizations, (v)
      issuance to all holders of Common Stock of rights or warrants to purchase shares
      of Common Stock, (vi) distribution by the Company to all holders of Common
      Stock
      of evidences of indebtedness of the Company or cash (other than regular
      quarterly cash dividends), and (vii) similar events relating to the Common
      Stock, in each case which occur, or with respect to which the “ex” date occurs,
      during such period.

    


    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    “Warrants”
      means Common Stock Purchase Warrants of the Company issued to the
      original Holder of this Note pursuant to the Note Purchase Agreement or any
      such
      instrument issued upon transfer or split up thereof.

    


    


    ARTICLE
      II

    


    OPTIONAL
      REDEMPTION; INSTALLMENT OF PRINCIPAL

    


    


    2.1 Optional
      Redemption. 
      (a) At
      any time during the Optional Redemption Period, the Company shall have the
      right
      to redeem at any one time all of the outstanding principal amount of this Note
      at the Optional Redemption Price pursuant to this Section 2.1 on any
      Optional Redemption Date, so long as the following conditions are
      met:

    


    (1) on
      the
      date the Company gives the Optional Redemption Notice and at all times to and
      including the Optional Redemption Date, no Event of Default and no event which,
      with notice or passage of time, or both, would become an Event of Default has
      occurred and is continuing (unless the requirements of this clause (1) will
      be
      satisfied immediately after the redemption of this Note and the Other Notes
      on
      the Optional Redemption Date and the Company shall furnish Company Certificates
      to the Holder to such effect on the date the Optional Redemption Notice is
      given
      to the Holder and on the Optional Redemption Date), 

    


    (2) on
      the
      date the Company gives the Optional Redemption Notice and at all times to and
      including the Optional Redemption Date, no Repurchase Event has occurred with
      respect to which the Holder has the right to exercise repurchase rights pursuant
      to Sections 5.1 and 5.2 or with respect to which the Holder has exercised such
      repurchase rights and the Repurchase Price has not been paid to the Holder
      and
      no event which, with notice or passage of time, or both, would become a
      Repurchase Event has occurred and is continuing,

    


    (3) on
      the
      date the Company gives the Optional Redemption Notice and at all times
      thereafter to and including the Optional Redemption Date, the Registration
      Statement shall be effective and available for use by the Holder, the holders
      of
      the Other Notes and the holders of the Warrants for the resale of the shares
      of
      Common Stock issued and issuable upon conversion of this Note and the Other
      Notes and issued or issuable upon exercise of the Warrants, as the case may
      be,
      and is reasonably expected to remain effective and available for such use for
      at
      least 30 Trading Days after the Optional Redemption Date; and

    


    (4) on
      the
      date the Company gives the Optional Redemption Notice, the Company (x) has
      funds
      available to pay the Optional Redemption Price of this Note and the redemption
      prices of the Other Notes, or (y) has funds which, together with the proceeds
      to
      be paid to the Company at the closing of a transaction in which the Company
      proposes to issue Permitted Refinancing Indebtedness, will be sufficient to
      pay
      the Optional Redemption Price of this Note and the redemption prices of the
      Other Notes.


    
      
         

        
        

      

      
        16

        
          

        

      

      
        
        

      

    


    In
      order
      to exercise its right of redemption under this Section 2.1, the Company
      shall give the Optional Redemption Notice to the Holder not less than ten
      Trading Days or more than 30 Trading Days prior to the Optional Redemption
      Date
      stating: (1) that the Company is exercising its right to redeem this Note in
      accordance with this Section 2.1, (2) the principal amount of this Note to
      be redeemed, (3) the Optional Redemption Price, (4) the Optional Redemption
      Date
      and (5) that all of the conditions of this Section 2.1 entitling the Company
      to
      call this Note for redemption have been met. On the Optional Redemption Date
      (or
      such later date as the Holder surrenders this Note to the Company) the Company
      shall pay to or upon the order of the Holder, by wire transfer of immediately
      available funds to such account as shall be specified for such purpose by the
      Holder at least one Business Day prior to the Optional Redemption Date, an
      amount equal to the Optional Redemption Price of the portion (which may be
      all)
      of this Note to be redeemed. 

    


    (b) In
      order
      that the Company shall not discriminate among the Holder and the holders of
      the
      Other Notes, the Company agrees that it shall not redeem any of the Other Notes
      pursuant to the provisions thereof similar to this Section 2.1 or
      repurchase or otherwise acquire any of the Other Notes (other than a mandatory
      redemption pursuant to provisions of the Other Notes comparable to Article
      V)
      unless the Company offers simultaneously to redeem, repurchase or otherwise
      acquire this Note for cash at the same unit price as the Other Note or Other
      Notes.

    


    (c) The
      Company shall not be entitled to give an Optional Redemption Notice or to redeem
      any portion of this Note with respect to which the Holder has given a Conversion
      Notice on or prior to the date the Company gives such Optional Redemption
      Notice. Notwithstanding the giving of the Optional Redemption Notice, the Holder
      shall be entitled to convert all or any portion of this Note, in accordance
      with
      the terms of this Note, by giving a Conversion Notice at any time on or prior
      to
      the later of (1) the date which is one Trading Day prior to the Optional
      Redemption Date and (2) if the Company fails to pay and deliver to the Holder,
      or deposit in accordance with Section 7.10, the Optional Redemption Price
      payable on the Optional Redemption Date on or before the Optional Redemption
      Date, the date on which the Company pays and delivers to the Holder, or deposits
      in accordance with Section 7.10, such Optional Redemption Price. If after giving
      effect to any such conversion of this Note that occurs after the date the
      Company gives the Optional Redemption Notice to the Holder, the principal amount
      of this Note remaining outstanding is less than the amount thereof to be
      redeemed as stated in the Optional Redemption Notice, then the Optional
      Redemption Price set forth in the Optional Redemption Notice shall be adjusted
      to reflect the reduced outstanding principal amount of this Note and related
      accrued interest (and Default Interest, if any, thereon at the Default Rate)
      on
      the Optional Redemption Date resulting from any such conversions of this Note
      after the Company gives the Optional Redemption Notice to the
      Holder.

    


    (d) (1) Notwithstanding
      any other provision of this Note or applicable law to the contrary, in case
      the
      Company shall give the Optional Redemption Notice to the Holder, and on the
      date
      the Company gives the Optional Redemption Notice or at any time thereafter
      to
      and including the Optional Redemption Date, the Holder shall be restricted
      from
      converting any portion of this Note by reason of the Restricted Ownership
      Percentage (the “Unconverted Portion”), then the Optional Redemption Date for
      the Unconverted Portion so called for redemption by the Company and which the
      Holder may not convert at any such time during such period from the date the
      Company gives the Optional Redemption Notice to the Optional Redemption Date
      may, at the election of the Holder exercised by notice to the Company given
      on
      or before the Optional Redemption Date, be extended to be  the 
Extended 

     


    
      
         

        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    
      Optional
        Redemption Date. On the applicable Extended Optional Redemption Date, the
        Company shall pay the Optional Redemption Price for any portion of this Note
        redeemed on such Extended Optional Redemption Date. Any portion of this Note
        for
        which there is an Extended Optional Redemption Date shall remain convertible
        by
        the Holder in accordance with Section 6 at any time to and including the
        close
        of business on the Business Day prior to the applicable Extended Optional
        Redemption Date.



    (2) Notwithstanding
      anything to the contrary contained in Section 6.7, solely for the purposes
      of
      calculating the Restricted Ownership Percentage for purposes of this Section
      2.1(d), the shares of Common Stock issuable upon exercise of the Warrants held
      by the Holder shall not be deemed to be Excluded Shares and shall be taken
      into
      account in calculating the Restricted Ownership Percentage to determine the
      amount of the Unconverted Portion.

    


    2.2 Installments
      of Principal. The
      principal of this Note shall become due in installments as follows:

     

    
 

    
      	 Principal
              Amount 	 Due
              Date
	 $[PRIOR
              TO ISSUANCE, INSERT 50%	 
	 OF PRINCIPAL AMOUNTOF
              NOTE]	 Installment Maturity Date
	 	 
	 $[PRIOR
              TO ISSUANCE, INSERT 50% 	 
	 OF PRINCIPAL AMOUNTOF
              NOTE]	 Final Maturity
              Date


    

     

    


     

    The
      amounts of such installments that are payable on each such date are subject
      to
      reduction as provided in Sections 5 and 6.

    


    2.3 No
      Other Prepayment.
      Except
      as specifically provided in Section 2.1, this Note may not be prepaid, redeemed
      or repurchased at the option of the Company prior to the applicable Installment
      Maturity Date or the Final Maturity Date, as the case may be. 

    


    


    ARTICLE
      III

    


    CERTAIN
      COVENANTS

    


    So
      long
      as the Company shall have any obligation under this Note, unless otherwise
      consented to in advance by the Majority Holders:

    


    3.1 Limitations
      on Certain Indebtedness.
      The
      Company will not itself, and will not permit any Subsidiary to, create, assume,
      incur or in any manner become liable in respect of, including, without
      limitation, by reason of any business combination transaction (all of which
      are
      referred to herein as “incurring”), any Indebtedness other than Permitted
      Indebtedness.

    


     


    
      
         

        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    3.2 Maintenance
      of Cash and Cash Equivalents Balances.
      The
      Company shall
      at
      all times maintain Cash and Cash Equivalents Balances at least equal to
      $600,000. The Company shall certify the amount of its Cash and Cash Equivalents
      Balances to the Holder as of the end of each calendar quarter, and from time
      to
      time upon request of the Majority Holders, as provided herein. Not later than
      the due date for filing with the SEC (determined without regard to any extension
      thereof permitted by the SEC) the Company’s Quarterly Report on Form 10-Q (in
      the case of the first three calendar quarters of each year) or the Company’s
      Annual Report on Form 10-K (in the case of the fourth calendar quarter of each
      year), and within five Business Days after a request therefor made by notice
      to
      the Company from the Majority Holders, the Company shall furnish to the Holder
      a
      Company Certificate, setting forth the amount of the Company's Cash and Cash
      Equivalents Balances as of the end of such calendar quarter or as of the date
      of
      such notice, as the case may be. Each Company Certificate delivered pursuant
      to
      this Section 3.2 shall state (1) the amount of the Company’s Cash and Cash
      Equivalents Balances and the date as of which such amount has been determined,
      (2) separately, the amount of cash and the amount of cash equivalents included
      in the amount of Cash and Cash Equivalents Balances shown in such Company
      Certificate and (3) that the amount of Cash and Cash Equivalents Balances stated
      in such Company Certificate has been determined in accordance with the terms
      of
      this Note. If necessary in order to avoid furnishing the Holder information
      that, for purposes of the 1934 Act, would be considered to be material
      non-public information if not publicly disclosed, at the time the Company
      furnishes each Company Certificate to the Holder the Company shall make an
      appropriate public announcement disclosing the information contained in such
      Company Certificate relating to the Cash and Cash Equivalents Balances;
provided,
      however,
      that in
      case the Company makes no such public disclosure the Holder expressly undertakes
      no agreement, obligation or duty to refrain from trading in the Company’s
      securities while in possession of such information.

    


    3.3 Payment
      of Obligations.
      The
      Company will pay and discharge, and will cause each Subsidiary to pay and
      discharge, all their respective material obligations and liabilities, including,
      without limitation, tax liabilities, except where the same may be contested
      in
      good faith by appropriate proceedings and the Company shall have established
      adequate reserves therefor on its books.

    


    3.4 Maintenance
      of Property; Insurance.
      (a) The
      Company will keep, and will cause each Subsidiary to keep, all property useful
      and necessary in its business in good working order and condition, ordinary
      wear
      and tear excepted.

    


    (b) The
      Company will maintain, and will cause each Subsidiary to maintain, with
      financially sound and responsible insurance companies, insurance, in at least
      such amounts and against such risks as is reasonably adequate for the conduct
      of
      their respective businesses and the value of their respective
      properties.

    


    3.5 Conduct
      of Business and Maintenance of Existence.
      The
      Company will continue, and will cause each Subsidiary to continue, to engage
      in
      business of the same general type as now conducted by the Company, and will
      preserve, renew and keep in full force and effect, and will cause each
      Subsidiary to preserve, renew and keep in full force and effect their respective
      corporate existence and their respective rights, privileges and franchises
      necessary or desirable in the normal conduct of business except where (other
      than the Company’s corporate existence) the failure to do so would not have a
      material adverse effect on (i) the business, properties, operations, condition
      (financial or other), results of operation or prospects of the Company and
      the
      Subsidiaries, taken as a whole, (ii) the ability of the Company to perform
      and
      comply with its obligations under the Transaction Documents or (iii) the rights
      and remedies of the Holder or the Collateral Agent under or in connection with
      the Transaction Documents.


    
      
         

        
        

      

      
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    3.6 Compliance
      with Laws.
      The
      Company will comply, and will cause each Subsidiary to comply, in all material
      respects with all applicable laws, ordinances, rules, regulations, decisions,
      orders and requirements of governmental authorities and courts (including,
      without limitation, environmental laws) except (i) where compliance therewith
      is
      contested in good faith by appropriate proceedings or (ii) where non-compliance
      therewith could not reasonably be expected to have a material adverse effect
      on
      the business, condition (financial or otherwise), operations, performance,
      properties or prospects of the Company and the Subsidiaries, taken as a
      whole.

    


    3.7 Investment
      Company Act.
      The
      Company will not be or become an open-end investment trust, unit investment
      trust or face-amount certificate company that is or is required to be registered
      under Section 8 of the Investment Company Act of 1940, as
      amended.

    


    3.8 Limitations
      on Asset Sales, Liquidations, Etc.; Certain Matters.
      The
      Company shall not

    


    (a) sell,
      convey or otherwise dispose of all or substantially all of the assets of the
      Company as an entirety or substantially as an entirety in a single transaction
      or in a series of related transactions; or

    


    (b) sell
      one
      or more Subsidiaries, or permit any one or more Subsidiaries to sell their
      respective assets, if such sale individually or in the aggregate is material
      to
      the Company and the Subsidiaries taken as a whole, other than any such sale
      or
      sales which individually or in the aggregate could not reasonably be expected
      to
      have a material adverse effect on (i) the business, properties, operations,
      condition (financial or other), results of operation or financial prospects
      of
      the Company and the Subsidiaries, taken as a whole, (ii) the validity or
      enforceability of, or the ability of the Company to perform its obligations
      under, the Transaction Documents, or (iii) the rights and remedies of the Holder
      under the terms of the Transaction Documents; or

    


    (c) liquidate,
      dissolve or otherwise wind up the affairs of the Company.

    


    3.9 Limitations
      on Liens.
      The
      Company will not itself, and will not permit any Subsidiary to, create, assume
      or suffer to exist any Lien upon all or any part of its property of any
      character, whether owned at the date hereof or thereafter acquired, except
      Permitted Liens.

    


    3.10 Transactions
      with Affiliates. The
      Company will not, and will not permit any Subsidiary, directly or indirectly,
      to
      pay any funds to or for the account of, make any investment (whether by
      acquisition of stock or Indebtedness, by loan, advance, transfer of property,
      guarantee or other agreement to pay, purchase or service, directly or
      indirectly, any Indebtedness, or otherwise) in, lease, sell, transfer or
      otherwise dispose of any assets, tangible or intangible, to, or participate
      in,
      or effect any transaction in connection with, any joint enterprise or other
      joint arrangement with, any Affiliate of the Company, except, on terms to the
      Company or such Subsidiary no less favorable than terms that could be obtained
      by the Company or such Subsidiary from a Person that is not an Affiliate of
      the
      Company, as determined in good faith by the Board of Directors.

     


    
      
         

        
        

      

      
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    3.11 Rule
      144A Information Requirement. 
      Within
      the period prior to the expiration of the holding period applicable to sales
      hereof under Rule 144(k) under the 1933 Act (or any successor provision), the
      Company shall, during any period in which it is not subject to Section 13 or
      15(d) under the 1934 Act, make available to the Holder and any prospective
      purchaser of this Note from the Holder, the information required pursuant to
      Rule 144A(d)(4) under the 1933 Act upon the request of the Holder and it will
      take such further action as the Holder may reasonably request, all to the extent
      required from time to time to enable the Holder to sell this Note without
      registration under the 1933 Act within the limitation of the exemption provided
      by Rule 144A, as Rule 144A may be amended from time to time. Upon the request
      of
      the Holder, the Company will deliver to the Holder a written statement as to
      whether it has complied with such requirements.

    


    3.12 Limitation
      on Certain Issuances. 
      The
      Company shall not offer, sell or issue, or enter into any agreement, arrangement
      or understanding to offer, sell or issue, any Common Stock or Common Stock
      Equivalent (A) that is convertible into, exchangeable or exercisable for, or
      includes the right to receive additional shares of Common Stock either (x)
      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 Common Stock at any
      time
      after the initial issuance of such Common Stock or Common Stock Equivalent,
      or
      (y) with a fixed conversion, exercise, exchange or purchase price that is
      subject to being reset at some future date after the initial issuance of such
      Common Stock or Common Stock Equivalent 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 (but excluding customary stock split, reverse
      stock split, stock dividend and similar anti-dilution provisions substantially
      similar to those set forth in clauses (a) through (e) of Section 6.3), or (B)
      pursuant to an “equity line” structure in which one or more Persons commits to
      provide capital to the Company by the purchase of securities of the Company
      from
      time to time, whether at specified times, times determined by the Company or
      by
      such Person(s) or by mutual agreement between the Company and such Person(s),
      at
      prices based on the market prices of the Common Stock at or near the time of
      each purchase, which securities are registered for sale or resale pursuant
      to
      the 1933 Act; provided,
      however, that
      nothing in this Section 3.11 shall prohibit the Company from issuing shares
      of
      Common Stock for cash for the account of the Company in an offering that is
      underwritten on a firm commitment basis and registered with the SEC under the
      1933 Act.

    


    3.13 Certain
      Obligations.
      The
      Company shall not enter into any agreement which would adversely affect the
      Collateral Agent's Lien on and Security Interest in the Collateral. The Company
      shall perform, and comply in all material respects with each agreement it enters
      into relating to the Collateral, the failure to comply with which could affect
      the Collateral Agent's lien on and security interest in the
      Collateral.

    


    3.14 Notice
      of Defaults.
      The
      Company shall notify the Holder promptly, but in any event not later than five
      days after the Company becomes aware of the fact, of any failure by the Company
      to comply with this Article III.


    
      
         

        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    
      3.15 Listing
        Eligibility Reporting.
        The
        Company shall notify the Holder from time to time within five Business Days
        after the Company first learns that it does not meet any of the applicable
        requirements for the continued listing of the Common Stock on the Principal
        Market and shall make appropriate public announcement thereof so that the
        content of such notice shall not constitute material non-public information
        for
        purposes of the 1934 Act.

    

    


    3.16 Designation
      of Directors. (a) So
      long
      as any principal amount of this Note or the Other Notes remains outstanding,
      the
      Majority Holders shall be entitled, from time to time, to select a Person who
      shall not be an Affiliate of Alexandra and who shall have the right to designate
      by notice to the Company up to two persons (the first of whom, subject to his
      completion of the D&O Questionnaire and the prompt completion of background
      and other reasonable due diligence investigations to the Company’s reasonable
      satisfaction, shall initially be Radu Auf Der Hyde) to serve from time to time
      as members of the Board of Directors, provided, that each of such person(s)
      designated to serve as a member of the Board of Directors (1) so long as
      Alexandra holds all or any portion of this Note or any Other Note, is reasonably
      acceptable to Alexandra and at least one other holder of this Note or any Other
      Notes and (2) is not an Affiliate of Alexandra. Any person(s) so designated
      for
      election to the Board of Directors shall enter into an agreement with Alexandra
      on such terms as shall be acceptable to Alexandra pursuant to which such
      person(s) shall agree not to share or convey any non-public information such
      person(s) learns in its role as a director. The Company shall, from time to
      time, use its best efforts to cause the election of the person(s) so designated
      to serve as members of the Board of Directors as promptly as possible. If for
      any reason under applicable law or the Company’s By-laws any such designee
      cannot immediately be elected to the Board of Directors, then until such time
      as
      such person(s) is elected to the Board of Directors (i) the person(s) so
      designated shall have the right to be present at all meetings of the Board
      of
      Directors, but shall not be entitled to vote on any action taken at such
      meeting, (ii) the Company shall provide notice to such person(s) of the date,
      place and time of each such meeting at least the same period in advance as
      the
      shortest such notice provided to any member of the Board of Directors, (iii)
      the
      Company shall provide such person(s) all agendas and other information and
      materials provided to the Board of Directors contemporaneously with the time
      the
      Company provides the same to the Board of Directors and (iv) the Company shall
      provide to such person(s) copies of each proposed unanimous written consent
      of
      the Board of Directors which consent is given to all members of the Board of
      Directors for execution by the directors during such period, at the same time
      such written consent is given to all members of the Board of Directors. In
      case
      any person designated as a member of the Board of Directors pursuant to this
      Section 3.16 shall resign, die, be removed from office or otherwise be unable
      to
      serve, the Majority Holders shall be entitled to appoint a Person to designate
      a
      replacement pursuant to, and in accordance with, this Section 3.16.

    


    (b) In
      the
      event that approval of the stockholders of the Company shall be required to
      elect the person(s) designated to serve as a member of the Board of Directors
      pursuant to this Section 3.16, the Company shall call a meeting of stockholders
      to be held within 90 days after the date such person(s) is so designated, shall
      prepare and file with the SEC as promptly as practical, but in no event later
      than 30 days after such date, preliminary proxy materials which set forth a
      proposal to seek the approval of the election of such designee(s), and the
      Board
      of Directors shall recommend approval thereof by the Company’s stockholders. The
      Company shall mail and distribute its proxy materials for such stockholder
      meeting to its stockholders
      at least 30 days prior to the date of such stockholder meeting and shall
      actively solicit proxies to vote for the election of such
      designee(s).


    
      
         

        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    


    (c) Notwithstanding
      anything herein to the contrary, so long as Alexandra holds all or any portion
      of this Note or any Other Note, the rights and obligations under this Section
      3.16 may not be waived or amended without the consent of Alexandra.

    


    3.17 Management
      Covenants.  (a)
      Commencing on the Issuance Date, the Company shall withhold 10% of all cash
      compensation payable to each of its Chief Executive Officer, President and
      Chief
      Strategy Officer until such time as the Company shall have reported an EBITDA
      Positive Quarter. The Company shall give notice to the holder of the occurrence
      of the EBITDA Positive Quarter and once it shall have given such notice shall
      pay the amounts so withheld, without interest, to the respective officers in
      equal monthly installments during the 12-month period following such EBITDA
      Positive Quarter so long as such officer continues to be employed by the Company
      during such 12-month period. The Company shall not increase the compensation
      payable in any form to any of its Chief Executive Officer, President and Chief
      Strategy Officer from the Issuance Date until the EBITDA Positive Quarter has
      occurred. Notwithstanding anything to the contrary contained herein, if (1)
      at
      any time during any period of 45 consecutive Trading Days commencing after
      the
      Issuance Date on each such Trading Day (i) the Market Price of the Common Stock
      shall be at least 250% of the Conversion Price in effect on each such Trading
      Day, (ii) the Average Daily Trading Volume Threshold is met, (iii) no Event
      of
      Default shall have occurred or be continuing and no Repurchase Event shall
      have
      occurred with respect to which the Holder has the right to require repurchase
      of
      this Note pursuant to Article V or with respect to which the Holder has
      exercised such right and the Company shall not have paid or deposited in
      accordance with Section 7.10 the applicable Repurchase Price and (iv) the
      Registration Statement shall be effective and available for use by the Holder
      and the holders of the Warrants for the resale of shares of Common Stock issued
      or issuable upon conversion of this Note and upon exercise of the Warrants
      and
      is reasonably expected to remain effective and available for a reasonable period
      after such period of 45 Trading Days, and (2) the Company shall have furnished
      to the Holder a Company Certificate certifying the matters set forth in the
      immediately preceding clause (1), then thereafter the Company shall no longer
      be
      obligated to comply with this Section 3.17(a) and the Company shall pay the
      amounts withheld by reason of this Section 3.17(a), without interest, to the
      respective officers in equal monthly installments during the 12-month period
      following the date the Company Certificate described in the immediately
      preceding clause (2) was delivered to the Holder so long as such officer
      continues to serve in such position during such 12-month period.

    


    (b) The
      Company shall use its best efforts to successfully complete a search for a
      qualified additional member of senior management and, subject to approval by
      the
      Board of Directors, to hire such additional member of senior management.
 Until
      such time as such additional member of senior management has been hired the
      Board of Directors shall form a three person committee to supervise the
      management of the Company of which at least one person shall be a director
      designated as a member of the Board of Directors pursuant to Section 3.16,
      one
      person shall initially be John Atherly and the other person shall be Gary W.
      Jones.



    
      
         

        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    (c) The
      Company shall use its best efforts to design, develop, manufacture and market
      the display, subsystem and personal display systems, and focus on funded
      research business
      consistent with Company’s business plan in effect on the Issuance Date and shall
      limit new market business development until the EBITDA Positive Quarter has
      occurred.

    


    (d) Unless
      the Company’s “Statement of Company Policy Regarding Confidentiality and
      Securities Trades by Company Personnel” shall have been amended by the unanimous
      approval of the three person committee set forth in Section 3.17(b), all
      transactions in securities of the Company, including, without limitation,
      acquisitions, dispositions and transfers, by directors, officers, managers
      and
      all accounting and administrative personnel, must be pre-cleared by the office
      of the Chief Financial Officer of the Company and such persons shall be
      prohibited from making any trades in Company securities during the period
      commencing 15 days prior to the end of each fiscal quarter and ending on the
      third Business Day after the financial results of the Company for such fiscal
      quarter are publicly released.

    


    


    ARTICLE
      IV

    


    EVENTS
      OF DEFAULT

    


    4.1 If
      any of
      the following events of default (each, an “Event of Default”) shall
      occur:

    


    (a) Failure
      to Pay Principal, Interest, Etc.
      The
      Company fails (1) to pay the principal, the Optional Redemption Price or the
      Repurchase Price hereof when due, whether at maturity, upon acceleration or
      otherwise, as applicable, or (2) to pay any installment of interest hereon
      when
      due and, in the case of this clause (2) of this Section 4.1(a) only, such
      failure continues for a period of five Business Days after the due date thereof;
      or

    


    (b) Conversion
      and the Shares.
      The
      Company fails to issue or cause to be issued shares of Common Stock to the
      Holder or the holder of any Other Note upon exercise of the conversion rights
      of
      the Holder or such holder or to the holder of any Warrant or Other Warrant
      upon
      exercise of the purchase rights of the holder thereof, in any such case within
      five Trading Days after the due date therefor in accordance with the terms
      of
      this Note, any Other Note or any Warrant or Other Warrant or fails to transfer
      any certificate for any such shares of Common Stock or any shares of Common
      Stock issued in payment of interest on this Note or any Other Note as and when
      required by this Note and the Note Purchase Agreement or any Other Note or
      Other
      Note Purchase Agreement, as the case may be; or

    


    (c) Breach
      of Covenant.
      The
      Company (1) fails to comply with Sections 3.1, 3.2, 3.8, 3.9, 3.12, 3.13, 3.15,
      3.16 or 3.17(a) (2) fails to comply in any material respect with any provision
      of Article III of this Note (other than Sections 3.1, 3.2, 3.8, 3.9, 3.12,
      3.13,
      3.15, 3.16 or 3.17(a)) or breaches any other material covenant or other material
      term or condition of this Note or any of the other Transaction Documents (other
      than as specifically provided in clauses (a), (b) or (c)(1) of this Section
      4.1), and in the case of this clause (2) of this Section 4.1(c) only, such
      breach continues for a period of ten days after written notice thereof to the
      Company from the Holder; or


    
      
         

        
        

      

      
        24

        
          

        

      

      
        
        

      

    


    


    (d) Breach
      of Representations and Warranties.
      Any
      representation or warranty of the Company made herein or in any agreement,
      statement or certificate given in writing pursuant hereto or in connection
      herewith (including, without limitation, the Transaction Documents) shall be
      false or misleading in any material respect when made; or

    


    (e) Certain
      Voluntary Proceedings.
      The
      Company or any Subsidiary shall commence a voluntary case or other proceeding
      seeking liquidation, reorganization or other relief with respect to itself
      or
      its debts under any bankruptcy, insolvency or other similar law now or hereafter
      in effect or seeking the appointment of a trustee, receiver, liquidator,
      custodian or other similar official of it or any substantial part of its
      property, or shall consent to any such relief or to the appointment of or taking
      possession by any such official in an involuntary case or other proceeding
      commenced against it, or shall make a general assignment for the benefit of
      creditors, or shall fail generally to pay its debts as they become due or shall
      admit in writing its inability generally to pay its debts as they become due;
      or

    


    (f) Certain
      Involuntary Proceedings.
      An
      involuntary case or other proceeding shall be commenced against the Company
      or
      any Subsidiary seeking liquidation, reorganization or other relief with respect
      to it or its debts under any bankruptcy, insolvency or other similar law now
      or
      hereafter in effect or seeking the appointment of a trustee, receiver,
      liquidator, custodian or other similar official of it or any substantial part
      of
      its property, and such involuntary case or other proceeding shall remain
      undismissed and unstayed for a period of 60 consecutive days; or

    


    (g) Judgments.
      Any
      court of competent jurisdiction shall enter one or more final judgments against
      the Company or any Subsidiary or any of their respective properties or other
      assets in an aggregate amount in excess of $250,000, which is not vacated,
      bonded, stayed, discharged, satisfied or waived for a period of 30 consecutive
      days; or

    


    (h) Default
      Under Other Agreements and Instruments.
      (1) The
      Company or any Subsidiary shall (i) default in any payment with respect to
      any
      Indebtedness for borrowed money (other than this Note) which Indebtedness has
      an
      outstanding principal amount in excess of $250,000, individually or $500,000
      in
      the aggregate, for the Company and its Subsidiaries, beyond the period of grace,
      if any, provided in the instrument or agreement under which such Indebtedness
      was created or (ii) default in the observance or performance of any agreement,
      covenant or condition relating to any such Indebtedness or contained in any
      instrument or agreement evidencing, securing or relating thereto, or any other
      event shall occur or condition exist, the effect of which default or other
      event
      or condition is to cause, or to permit the holder or holders of such
      Indebtedness (or a trustee or agent on behalf of such holder or holders) to
      cause, any such Indebtedness to become due prior to its stated maturity and
      such
      default or event shall continue beyond the period of grace, if any, provided
      in
      the instrument or agreement under which such Indebtedness was created (after
      giving effect to any consent or waiver obtained and then in effect thereunder);
      or (2) any Indebtedness of the Company or any Subsidiary which has an
      outstanding principal amount in excess of $250,000, individually or $500,000
      in
      the aggregate, shall, in accordance with its terms, be declared to be due and
      payable, or required to be prepaid other than by a regularly scheduled or
      required payment prior to the stated maturity thereof; or


    
      
         

        
        

      

      
        25

        
          

        

      

      
        
        

      

    


     

    (i) Security
      Agreements.
      The
      occurrence of any “Event of Default” as defined in the Security Agreements or
      any breach or failure by the Company to perform its obligations under the
      Lockbox Agreement; or

    


    (j) Delisting
      of Common Stock.
      The
      Common Stock shall cease to be listed on any of Nasdaq Capital Market, Nasdaq,
      the NYSE or the AMEX; 

    


    then,
      (W)
      upon the occurrence and during the continuation of any Event of Default
      specified in clause (a), (b), (c), (d), (g), (h), (i) or (j) of this
      Section 4.1, at the option of the Holder the Company shall, and upon the
      occurrence of any Event of Default specified in clause (e) or (f) of this
      Section 4.1, the Company shall, in any such case, pay to the Holder an
      amount equal to the sum of (1) the outstanding principal amount of this Note
      plus
      (2)
      accrued and unpaid interest on such principal amount to the date of payment
      plus
      (3)
      accrued and unpaid Default Interest, if any, thereon at the rate provided in
      this Note to the date of payment, (X) all other amounts payable hereunder or
      under any of the other Transaction Documents shall immediately become due and
      payable, all without demand, presentment or notice, all of which hereby are
      expressly waived, together with all costs, including, without limitation,
      reasonable legal fees and expenses, of collection, (Y) the Collateral Agent
      shall be entitled to exercise all rights and remedies under the Security
      Agreement, and (Z) the Holder shall be entitled to exercise all other rights
      and
      remedies available at law or in equity.

    


    


    ARTICLE
      V

    


    REPURCHASE
      UPON A REPURCHASE EVENT 

    


    5.1 Repurchase
      Right Upon Repurchase Event.
      If a
      Repurchase Event occurs, in addition to any other right of the Holder, the
      Holder shall have the right, at the Holder’s option, to require the Company to
      repurchase all of this Note, or any portion hereof on the repurchase date that
      is five Business Days after the date of the Holder Notice delivered with respect
      to such Repurchase Event. The Holder shall have the right to require the Company
      to repurchase all or any such portion of this Note if a Repurchase Event occurs
      at any time while any portion of the principal amount of this Note is
      outstanding at a price equal to the Repurchase Price. If the Holder exercises
      its right to require the repurchase of less than all of the outstanding
      principal amount of this Note, the Holder may specify the manner in which the
      principal amount repurchased shall be allocated between the outstanding
      installments of principal.

    


    5.2 Notices;
      Method of Exercising Repurchase Rights, Etc.
      (a) On
      or before the fifth Business Day after the occurrence of a Repurchase Event,
      the
      Company shall give to the Holder a Company Notice of the occurrence of the
      Repurchase Event and of the repurchase right set forth herein arising as a
      result thereof. Such Company Notice shall set forth:


    
      
         

        
        

      

      
        26

        
          

        

      

      
        
        

      

    


    (i) the
      date
      by which the repurchase right must be exercised, and

    


    (ii) a
      description of the procedure (set forth in this Section 5.2) which the
      Holder must follow to exercise the repurchase right.

    


    No
      failure of the Company to give a Company Notice or defect therein shall limit
      the Holder’s right to exercise the repurchase right or affect the validity of
      the proceedings for the repurchase of this Note or portion hereof.

    


    (b) To
      exercise the repurchase right, the Holder shall deliver to the Company on or
      before the 30th day after a Company Notice (or if no such Company Notice has
      been given, within 40 days after the Holder first learns of the Repurchase
      Event) (i) a Holder Notice setting forth the name of the Holder and the
      principal amount of this Note to be repurchased, which amount may be allocated
      between the installments of principal outstanding at such time as determined
      by
      the Holder in its sole discretion, and (ii) this Note, duly endorsed for
      transfer to the Company of the portion of the outstanding principal amount
      of
      this Note to be repurchased. A Holder Notice may be revoked by the Holder at
      any
      time prior to the time the Company pays the applicable Repurchase Price to
      the
      Holder.

    


    (c) If
      the
      Holder shall have given a Holder Notice, then on the date which is five Business
      Days after the date such Holder Notice is given (or such later date as the
      Holder surrenders this Note) the Company shall make payment in immediately
      available funds of the applicable Repurchase Price to such account as specified
      by the Holder in writing to the Company at least one Business Day prior to
      the
      applicable repurchase date.

    


    5.3 Other. (a)
      If
      the Company fails to repurchase on the applicable repurchase date this Note
      (or
      portion hereof) as to which the repurchase right has been properly exercised
      pursuant to this Article V, then the Repurchase Price for the portion (which,
      if
      applicable, may be all) of this Note which is required to have been so
      repurchased shall bear interest to the extent not prohibited by applicable
      law
      from the applicable repurchase date until paid at the Default Rate.

     

    (b) If
      a
      portion of this Note is to be repurchased, upon surrender of this Note to the
      Company in accordance with the terms of this Article V, the Company shall
      execute and deliver to the Holder without service charge, a new Note or Notes,
      having the same date hereof and containing identical terms and conditions,
      in
      such denomination or denominations as requested by the Holder in aggregate
      principal amount equal to, and in exchange for, the unrepurchased portion of
      the
      principal amount of the Note so surrendered.

     

    (c) A
      Holder
      Notice given by the Holder shall be deemed for all purposes to be in proper
      form
      unless the Company notifies the Holder within three Business Days after such
      Holder Notice has been given (which notice shall specify all defects in such
      Holder Notice), and any Holder Notice containing any such defect shall
      nonetheless be effective on the date given if the Holder promptly undertakes
      to
      correct all such defects. No such claim of defect shall limit or delay
      performance of the Company's obligation to repurchase any portion of this Note,
      the repurchase of which is not in dispute.


    
      
         

        
        

      

      
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    ARTICLE
      VI

    


    CONVERSION

    


    6.1 Right
      to Convert.
      Subject
      to and upon compliance with the provisions of this Note, the Holder shall have
      the right, at the Holder's option, at any time prior to the close of business
      on
      the Final Maturity Date (except that, if the Holder shall have exercised
      repurchase rights under Sections 5.1 and 5.2 or the Company shall have exercised
      its redemption rights under Section 2.1, such conversion right shall terminate
      with respect to the portion of this Note to be repurchased or redeemed, as
      the
      case may be, at the close of business on the last Trading Day prior to the
      later
      of (x) the date the Company is required to make such repurchase or the Optional
      Redemption Date, as the case may be, and (y) the date the Company pays or
      deposits in accordance with Section 7.10 the applicable Repurchase Price or
      the
      Optional Redemption Price unless in any such case the Company shall default
      in
      payment due upon repurchase or redemption hereof) to convert the principal
      amount of this Note, or any portion of such principal amount which is at least
      $1,000 (or such lesser principal amount of this Note as shall be outstanding
      at
      such time), plus accrued and unpaid interest, into that number of fully paid
      and
      non-assessable shares of Common Stock (as such shares shall then be constituted)
      obtained by dividing (1) the sum of (x) the principal amount of this Note or
      portion thereof being converted plus
      (y)
      accrued and unpaid interest on the portion of the principal amount of this
      Note
      being converted to the applicable Conversion Date plus
      (z)
      accrued and unpaid Default Interest, if any, on the amount referred to in the
      immediately preceding clause (y) to the applicable Conversion Date by
      (2)
      the
      Conversion Price in effect on the applicable Conversion Date, by giving a
      Conversion Notice in the manner provided in Section 6.2; provided,
      however, that,
      if
      at any time this Note is converted in whole or in part pursuant to this Section
      6.1, the Company does not have available for issuance upon such conversion
      as
      authorized and unissued shares or in its treasury at least the number of shares
      of Common Stock required to be issued pursuant hereto, then, at the election
      of
      the Holder made by notice from the Holder to the Company, this Note (or portion
      hereof as to which conversion has been requested), to the extent that sufficient
      shares of Common Stock are not then available for issuance upon conversion,
      shall be converted into the right to receive from the Company, in lieu of the
      shares of Common Stock into which this Note or such portion hereof would
      otherwise be converted and which the Company is unable to issue, payment in
      an
      amount equal to the product obtained by multiplying (x) the number of shares
      of
      Common Stock which the Company is unable to issue times
      (y)
      the
      arithmetic average of the Market Price for the Common Stock during the five
      consecutive Trading Days immediately prior to the applicable Conversion Date.
      Any such payment shall, for all purposes of this Note, be deemed to be a payment
      of principal plus a premium equal to the total amount payable less the principal
      portion of this Note converted as to which such payment is required to be made
      because shares of Common Stock are not then available for issuance upon such
      conversion. The Holder is not entitled to any rights of a holder of Common
      Stock
      until the Holder has converted this Note to Common Stock, and only to the extent
      this Note is deemed to have been converted to Common Stock under this Article
      VI. For purposes of Sections 6.5 and 6.6, whenever a provision references the
      shares of Common Stock into which this Note (or a portion hereof) is convertible
      or the shares of Common Stock issuable upon conversion of this Note (or a
      portion hereof) or words of similar import, any determination required by such
      provision shall be made as if a sufficient number of shares of Common Stock
      were
      then available for issuance upon conversion in full of this
      Note.


    
      
         

        
        

      

      
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    6.2 Exercise
      of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment
      for Interest or Dividends.
      (a) In
      order to exercise the conversion privilege with respect to this Note, the Holder
      shall give a Conversion Notice (or such other notice which is acceptable to
      the
      Company) to the Company and the Transfer Agent or to the office or agency
      designated by the Company for such purpose by notice to the Holder. A Conversion
      Notice may be given by telephone line facsimile transmission to the numbers
      set
      forth on the form of Conversion Notice. In connection with any conversion of
      this Note, the Holder may allocate such conversion between the outstanding
      installments of principal as determined by the Holder in its sole discretion,
      as
      set forth in a particular Conversion Notice.

    


    (b) As
      promptly as practicable, but in no event later than three Trading Days, after
      a
      Conversion Notice is given, the Company shall issue and shall deliver to the
      Holder or the Holder's designee the number of full shares of Common Stock
      issuable upon such conversion of this Note or portion hereof in accordance
      with
      the provisions of this Article and deliver a check or cash in respect of any
      fractional interest in respect of a share of Common Stock arising upon such
      conversion, as provided in Section 6.2(f) and, if applicable, any cash payment
      required pursuant to the proviso to the first sentence of Section 6.1 (which
      payment, if any, shall be paid no later than three Trading Days after the
      applicable Conversion Date). In lieu of delivering physical certificates for
      the
      shares of Common Stock issuable upon any conversion of this Note, provided
      the
      Company's transfer agent is participating in the Depository Trust Company
      (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the
      Holder, the Company shall use commercially reasonable efforts to cause its
      transfer agent electronically to transmit such shares of Common Stock issuable
      upon conversion to the Holder (or its designee), by crediting the account of
      the
      Holder’s (or such designee’s) broker with DTC through its Deposit Withdrawal
      Agent Commission system (provided that the same time periods herein as for
      stock
      certificates shall apply).

    


    (c) Each
      conversion of this Note (or portion hereof) shall be deemed to have been
      effected on the applicable Conversion Date, and the person in whose name any
      certificate or certificates for shares of Common Stock shall be issuable upon
      such conversion shall be deemed to have become on such Conversion Date the
      holder of record of the shares represented thereby; provided,
      however, that
      if a
      Conversion Date is a date on which the stock transfer books of the Company
      shall
      be closed such conversion shall constitute the person in whose name the
      certificates are to be issued as the record holder thereof for all purposes
      on
      the next succeeding day on which such stock transfer books are open, but such
      conversion shall be at the Conversion Price in effect on the applicable
      Conversion Date.  Upon
      conversion of this Note or any portion hereof, the accrued and unpaid interest
      on this Note (or portion hereof) to (but excluding) the applicable Conversion
      Date shall be deemed to be paid to the Holder of this Note through receipt
      of
      such number of shares of Common Stock issued upon conversion of this Note or
      portion hereof as shall have an aggregate Current Fair Market Value on the
      Trading Day immediately preceding such Conversion Date equal to the amount
      of
      such accrued and unpaid interest.

    


    (d) A
      Conversion Notice shall be deemed for all purposes to be in proper form absent
      timely notice from the Company to the Holder of manifest error therein. The
      Company shall notify the Holder of any claim by the Company of manifest error
      in
      a Conversion Notice within two Trading Days after the Holder gives such
      Conversion Notice (which notice from the Company
      shall  specify all defects in  the Conversion Notice) and no such
      claim of  error shall limit or delay performance of the Company's
      obligation to issue upon such 

     


    
      
         

        
        

      

      
        29

        
          

        

      

      
        
        

      

    

    conversion
      the number of shares of Common Stock which are not in dispute. Time shall be
      of
      the essence in the giving of any such notice by the Company. Any Conversion
      Notice containing any such defect shall nonetheless be effective on the date
      given if the Holder promptly undertakes to correct all such defects. The Company
      shall not be required to pay any tax which may be payable in respect of any
      transfer involved in the issuance and delivery of shares of Common Stock or
      other securities or property on conversion of this Note in a name other than
      that of the Holder, and the Company shall not be required to issue or deliver
      any such shares or other securities or property unless and until the person
      or
      persons requesting the issuance thereof shall have paid to the Company the
      full
      amount of any such tax or shall have established to the satisfaction of the
      Company that such tax has been paid. The Holder shall be responsible for the
      amount of any withholding tax payable in connection with any conversion of
      this
      Note.


    


    (e) (1)
      If
      the Holder shall have given a Conversion Notice in accordance with the terms
      of
      this Note, the Company's obligation to issue and deliver the shares of Common
      Stock upon such conversion shall be 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, any failure or delay in the
      enforcement of any other obligation of the Company to the Holder, 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 such conversion;
      provided,
      however, that
      nothing herein shall limit or prejudice the right of the Company to pursue
      any
      such claim in any other manner permitted by applicable law. The occurrence
      of an
      event which requires an adjustment of the Conversion Price as contemplated
      by
      Section 6.3 shall in no way restrict or delay the right of the Holder to receive
      certificates for Common Stock upon conversion of this Note and the Company
      shall
      use its best efforts to implement such adjustment on terms reasonably acceptable
      to the Holder within two Trading Days of such occurrence.

    


    (2) If
      in any
      case the Company shall fail to issue and deliver the shares of Common Stock
      to
      the Holder in connection with a particular conversion of this Note within five
      Trading Days after the Holder gives the Conversion Notice for such conversion,
      in addition to any other liabilities the Company may have hereunder and under
      applicable law (A) the Company shall pay or reimburse the Holder on demand
      for
      all out-of-pocket expenses, including, without limitation, reasonable fees
      and
      expenses of legal counsel, incurred by the Holder as a result of such failure,
      (B) if as a result of such failure the Holder shall suffer any direct damages
      or
      liabilities from such failure (including, without limitation, margin interest
      and the cost of purchasing securities to cover a sale (whether by the Holder
      or
      the Holder's securities broker) or borrowing of shares of Common Stock by the
      Holder for purposes of settling any trade involving a sale of shares of Common
      Stock made by the Holder during the period beginning on the Issuance Date and
      ending on the date the Company delivers or causes to be delivered to the Holder
      such shares of Common Stock), then the Company shall upon demand of the Holder
      pay to the Holder an amount equal to the actual direct, out-of-pocket damages
      and liabilities suffered by the Holder by reason thereof which the Holder
      documents to the reasonable satisfaction of the Company, and (C) the Holder
      may
      by written notice (which may be given by mail, courier, personal
      service or telephone line facsimile transmission), given at any time prior
      to
      delivery to the Holder of the shares of Common Stock issuable in connection
      with
      such exercise of the Holder's conversion right, rescind such exercise and the
      Conversion Notice relating thereto, in which case the Holder shall thereafter
       be 

     

    
      
         

        
        

      

      
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      entitled
        to convert that portion of this Note as to which such exercise is so rescinded
        and to exercise its other rights and remedies with respect to such failure
        by
        the Company. Notwithstanding the foregoing the Company shall not be liable
        to
        the Holder under clause (B) of the immediately preceding sentence to the
        extent
        the failure of the Company to deliver or to cause to be delivered such shares
        of
        Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
        war, acts of terrorism, crash involving facilities of a common carrier, acts
        of
        God, or any similar event outside the control of the Company (it being
        understood that the action or failure to act of the Transfer Agent shall
        not be
        deemed an event outside the control of the Company except to the extent
        resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts
        of
        terrorism, crash involving facilities of a common carrier, acts of God, or
        any
        similar event outside the control of the Transfer Agent or the bankruptcy,
        liquidation or reorganization of the Transfer Agent under any bankruptcy,
        insolvency or other similar law). In the case of the Company’s failure to issue
        and deliver or cause to be delivered the shares of Common Stock to the Holder
        within three Trading Days of a particular conversion of the Note, the amount
        payable by the Company pursuant to clause (B) of this Section 6.2(e)(2) with
        respect to such conversion shall be reduced by the amount of payments previously
        paid by the Company to the Holder pursuant to Section 8(a)(4) of the Purchase
        Agreement with respect to such conversion. The Holder shall notify the Company
        in writing (or by telephone conversation, confirmed in writing) as promptly
        as
        practicable following the third Trading Day after the Holder gives a Conversion
        Notice if the Holder becomes aware that such shares of Common Stock so issuable
        have not been received as provided herein, but any failure so to give such
        notice shall not affect the Holder's rights under this Note or otherwise.
        If the
        Holder shall have exercised the conversion right in any particular instance
        and
        either (1) the Company shall notify the Holder on or after the date the Holder
        gives such Conversion Notice that the shares of Common Stock issuable upon
        such
        conversion might not be delivered within three Trading Days after the date
        the
        Holder gives such Conversion Notice or (2) the Holder learns after the date
        which is three Trading Days after the date the Holder gives such Conversion
        Notice that the Holder has not received such shares of Common Stock, then,
        without releasing the Company of its obligations with respect thereto, from
        and
        after the Trading Day next succeeding the earlier of the events described
        in the
        preceding clauses (1) and (2) of this sentence the Holder shall make reasonable
        efforts not to sell shares of Common Stock in anticipation of receipt of
        such
        shares of Common Stock in a manner which is likely to increase materially
        the
        liability of the Company under clause (B) of the first sentence of this Section
        6.2(e)(2).

 


    (f) No
      fractional shares of Common Stock shall be issued upon conversion of this Note
      but, in lieu of any fraction of a share of Common Stock which would otherwise
      be
      issuable in respect of such conversion, the Company may round the number of
      shares of Common Stock issued on such conversion up to the next highest whole
      share or may pay lawfulmoney of the United States of America for such fractional
      share, based on a value of one share of Common Stock being equal to the Market
      Price of the Common Stock on the applicable Conversion Date.

    


    6.3 Adjustment
      of Conversion Price.
      The
      Conversion Price shall be adjusted from time to time by the Company as
      follows:


    
      
         

        
        

      

      
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    (a) Adjustments
      for Certain Dividends and Distributions in Common
      Stock.
      In case
      the Company shall on or after the Issuance Date pay a dividend or make a
      distribution to all holders of the outstanding Common Stock in shares of Common
      Stock, the Conversion Price in effect at the opening of business on the date
      following the date fixed for the determination of stockholders entitled to
      receive such dividend or other distribution shall be reduced by multiplying
      such
      Conversion Price by a fraction of which the numerator shall be the number of
      shares of Common Stock outstanding at the close of business on the Record Date
      fixed for such determination and the denominator shall be the sum of such number
      of shares and the total number of shares constituting such dividend or other
      distribution, such reduction to become effective immediately after the opening
      of business on the day following the Record Date. If any dividend or
      distribution of the type described in this Section 6.3(a) is declared but not
      so
      paid or made, the Conversion Price shall again be adjusted to the Conversion
      Price which would then be in effect if such dividend or distribution had not
      been declared.

    


    (b) Weighted
      Adjustments for Certain Issuances of Rights or
      Warrants.
      In case
      the Company shall on or after the Issuance Date issue rights or warrants (other
      than any rights or warrants referred to in Section 6.3(d)) to all holders of
      its
      outstanding shares of Common Stock entitling them (for a period expiring within
      45 days after the date fixed for the determination of stockholders entitled
      to
      receive such rights or warrants) to subscribe for or purchase shares of Common
      Stock at a price per share less than the Current Market Price on the Record
      Date
      fixed for the determination of stockholders entitled to receive such rights
      or
      warrants, the Conversion Price shall be adjusted so that the same shall equal
      the price determined by multiplying the Conversion Price in effect at the
      opening of business on the date after such Record Date by a fraction of which
      the numerator shall be the number of shares of Common Stock outstanding at
      the
      close of business on the Record Date plus the number of shares which the
      aggregate offering price of the total number of shares so offered would purchase
      at such Current Market Price, and the denominator shall be the number of shares
      of Common Stock outstanding on the close of business on the Record Date plus
      the
      total number of additional shares of Common Stock so offered for subscription
      or
      purchase. Such adjustment shall become effective immediately after the opening
      of business on the day following the Record Date fixed for determination of
      stockholders entitled to receive such rights or warrants. To the extent that
      shares of Common Stock are not delivered pursuant to such rights or warrants,
      upon the expiration or termination of such rights or warrants, the Conversion
      Price shall be readjusted to the Conversion Price which would then be in effect
      had the adjustments made upon the issuance of such rights or warrants been
      made
      on the basis of delivery of only the number of shares of Common Stock actually
      delivered. In the event that such rights or warrants are not so issued, the
      Conversion Price shall again be adjusted to be the Conversion Price which would
      then be in effect if such date fixed for the determination of stockholders
      entitled to receive such rights or warrants had not been fixed. In determining
      whether any rights or warrants entitle the holder to subscribe for or purchase
      shares of Common Stock at less than such Current Market Price, and in
      determining the aggregate offering price of such shares of Common Stock, there
      shall be taken into account any consideration received for such rights or
      warrants, the value of such consideration, if other than cash, to be determined
      by the Board of Directors. Notwithstanding the foregoing, if any of the
      adjustments as set forth in this Section 6.3(b) will require the Company to
      seek
      stockholder approval pursuant to Rule 713 of the AMEX and such stockholder
      approval has not yet been obtained, then the adjustment shall not take effect
      until such stockholder approval is obtained. The Company shall use its
      commercially reasonable best efforts to obtain, as promptly as practicable,
      but
      in no event later than 90 days thereafter, the stockholder approval that is
      necessary under the rules of the AMEX.


    
      
         

        
        

      

      
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    (c) Adjustments
      for Certain Subdivisions of the Common Stock. In
      case
      the outstanding shares of Common Stock shall on or after the Issuance Date
      be
      subdivided into a greater number of shares of Common Stock, the Conversion
      Price
      in effect at the opening of business on the earlier of the day following the
      day
      upon which such subdivision becomes effective and the day on which “ex-” trading
      of the Common Stock begins with respect to such subdivision shall be
      proportionately reduced, and conversely, in case outstanding shares of Common
      Stock shall be combined into a smaller number of shares of Common Stock, the
      Conversion Price in effect at the opening of business on the earlier of the
      day
      following the day upon which such combination becomes effective and the day
      on
      which “ex-” trading of the Common Stock with respect to such combination begins
      shall be proportionately increased, such reduction or increase, as the case
      may
      be, to become effective immediately after the opening of business on the earlier
      of the day following the day upon which such subdivision or combination becomes
      effective and the day on which “ex-” trading of the Common Stock begins with
      respect to such subdivision or combination.

    


    (d) Adjustments
      for Certain Dividends and Distributions.
      In case
      the Company shall on or after the Issuance Date, by dividend or otherwise,
      distribute to all holders of its Common Stock shares of any class of capital
      stock of the Company (other than any dividends or distributions to which Section
      6.3(a) applies) or evidences of its indebtedness, cash or other assets
      (including securities, but excluding any rights or warrants referred to in
      Section 6.3(b) and dividends and distributions paid exclusively in cash and
      excluding any capital stock, evidences of indebtedness, cash or assets
      distributed upon a merger or consolidation to which Section 6.6 applies) (the
      foregoing hereinafter in this Section 6.3(d) called the “Securities”)), then, in
      each such case, subject to the second paragraph of this Section 6.3(d), the
      Conversion Price shall be reduced so that the same shall be equal to the price
      determined by multiplying the Conversion Price in effect immediately prior
      to
      the close of business on the Record Date with respect to such distribution
      by a
      fraction of which the numerator shall be the Current Market Price on such date
      less the fair market value (as determined by the Board of Directors, whose
      determination shall be conclusive and described in a Board Resolution) on such
      date of the portion of the Securities so distributed applicable to one share
      of
      Common Stock and the denominator shall be such Current Market Price, such
      reduction to become effective immediately prior to the opening of business
      on
      the day following the Record Date; provided,
      however, that
      in
      the event the then fair market value (as so determined) of the portion of the
      Securities so distributed applicable to one share of Common Stock is equal
      to or
      greater than the Current Market Price on the Record Date, in lieu of the
      foregoing adjustment, adequate provision shall be made so that the Holder shall
      have the right to receive upon conversion of this Note (or any portion hereof)
      the amount of Securities such holder would have received had such holder
      converted this Note (or portion hereof) immediately prior to such Record Date.
      In the event that such dividend or distribution is not so paid or made, the
      Conversion Price shall again be adjusted to be the Conversion Price which would
      then be in effect if such dividend or distribution had not been declared. If
      the
      Board of Directors determines the fair market value of any distribution for
      purposes of this Section 6.3(d) by reference to the actual or when issued
      trading market for any Securities comprising all or part of such distribution,
      it must in doing so consider the prices in such market over the same period
      used
      in computing the Current Market Price, to the extent possible.


    
      
         

        
        

      

      
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    Rights
      or
      warrants distributed by the Company to all holders of Common Stock entitling
      the
      holders thereof to subscribe for or purchase shares of the Company's capital
      stock (either initially or under certain circumstances), which rights or
      warrants, until the occurrence of a specified event or events (a “Trigger
      Event”): (i) are deemed to be transferred with such shares of Common Stock; (ii)
      are not exercisable; and (iii) are also issued in respect of future issuances
      of
      Common Stock, shall not be deemed to have been distributed for purposes of
      this
      Section 6.3 (and no adjustment to the Conversion Price under this Section 6.3
      will be required) until the occurrence of the earliest Trigger Event. If any
      such rights or warrants, including any such existing rights or warrants
      distributed prior to the Issuance Date, are subject to Trigger Events, upon
      the
      satisfaction of each of which such rights or warrants shall become exercisable
      to purchase different securities, evidences of indebtedness or other assets,
      then the occurrence of each such Trigger Event shall be deemed to be such date
      of issuance and record date with respect to new rights or warrants (and a
      termination or expiration of the existing rights or warrants without exercise
      by
      the holder thereof) (so that, by way of illustration and not limitation, the
      dates of issuance of any such rights shall be deemed to be the dates on which
      such rights become exercisable to purchase capital stock of the Company, and
      not
      the date on which such rights may be issued, or may become evidenced by separate
      certificates, if such rights are not then so exercisable). In addition, in
      the
      event of any distribution of rights or warrants, or any Trigger Event with
      respect thereto, that was counted for purposes of calculating a distribution
      amount for which an adjustment to the Conversion Price under this Section 6.3
      was made (1) in the case of any such rights or warrants which shall all have
      been redeemed or repurchased without exercise by any holders thereof, the
      Conversion Price shall be readjusted upon such final redemption or repurchase
      to
      give effect to such distribution or Trigger Event, as the case may be, as though
      it were a cash distribution, equal to the per share redemption or repurchase
      price received by a holder or holders of Common Stock with respect to such
      rights or warrants (assuming such holder had retained such rights or warrants),
      made to all holders of Common Stock as of the date of such redemption or
      repurchase, and (2) in the case of such rights or warrants which shall have
      expired or been terminated without exercise by any holders thereof, the
      Conversion Price shall be readjusted as if such rights and warrants had not
      been
      issued.

    


    For
      purposes of this Section 6.3(d) and Sections 6.3(a) and (b), any dividend or
      distribution to which this Section 6.3(d) is applicable that also includes
      shares of Common Stock, or rights or warrants to subscribe for or purchase
      shares of Common Stock to which Section 6.3(b) applies (or both), shall be
      deemed instead to be (1) a dividend or distribution of the evidences of
      indebtedness, assets, shares of capital stock, rights or warrants other than
      such shares of Common Stock or rights or warrants to which Section 6.3(b)
      applies (and any Conversion Price reduction required by this Section 6.3(d)
      with
      respect to such dividend or distribution shall then be made) immediately
      followed by (2) a dividend or distribution of such shares of Common Stock or
      such rights or warrants (and any further Conversion Price reduction required
      by
      Sections 6.3(a) and (b) with respect to such dividend or distribution shall
      then
      be made), except (A) the Record Date of such dividend or distribution shall
      be
      substituted as “the date fixed for the determination of stockholders entitled to
      receive such dividend or other distribution”, “Record Date fixed for such
      determination” and “Record Date” within the meaning of Section 6.3(a) and as
“the date fixed for the determination of stockholders entitled to receive such
      rights or warrants”, “the Record Date fixed for the determination of the
      stockholders entitled to receive such rights or warrants” and “such Record Date”
within the meaning of Section 6.3(b) and
      (B)
      any shares of Common Stock included in such dividend or distribution shall
      not
      be deemed “outstanding at the close of business on the Record Date fixed for
      such determination” within the meaning of Section
      6.3(a).


    
      
        
        

      

      
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    (e) Adjustments
      for Certain Cash Dividends.
      In case
      the Company shall on or after the Issuance Date, by dividend or otherwise,
      distribute to all holders of its Common Stock cash (excluding any cash that
      is
      distributed upon a merger or consolidation to which Section 6.5 applies or
      as
      part of a distribution referred to in Section 6.3(d)) in an aggregate amount
      that, combined with (1) the aggregate amount of any other such distributions
      to
      all holders of its Common Stock made exclusively in cash within the 12 months
      preceding the date of payment of such distribution, and in respect of which
      no
      adjustment pursuant to this Section 6.3(e) has been made, and (2) the aggregate
      of any cash plus the fair market value (as determined by the Board of Directors,
      whose determination shall be conclusive and set forth in a Board Resolution)
      of
      consideration payable in respect of any Tender Offer by the Company or any
      Subsidiary for all or any portion of the Common Stock concluded within the
      12
      months preceding the date of payment of such distribution, exceeds 1% of the
      product of (x) the Current Market Price on the Record Date with respect to
      such
      distribution times
      (y)
      the
      number of shares of Common Stock outstanding on such date, then, and in each
      such case, immediately after the close of business on such date, unless the
      Company elects to reserve such cash for distribution to the Holder upon the
      conversion of this Note (and shall have made adequate provision) so that the
      Holder will receive upon such conversion, in addition to the shares of Common
      Stock to which the Holder is entitled, the amount of cash which the Holder
      would
      have received if the Holder had, immediately prior to the Record Date for such
      distribution of cash, converted this Note into Common Stock, the Conversion
      Price shall be reduced so that the same shall equal the price determined by
      multiplying the Conversion Price in effect immediately prior to the close of
      business on such Record Date by a fraction (i) the numerator of which shall
      be
      equal to the Current Market Price on the Record Date less an amount equal to
      the
      quotient of (x) the excess of such combined amount over such 1% and (y) the
      number of shares of Common Stock outstanding on the Record Date and (ii) the
      denominator of which shall be equal to the Current Market Price on the Record
      Date; provided,
      however, that
      in
      the event the portion of the cash so distributed applicable to one share of
      Common Stock is equal to or greater than the Current Market Price of the Common
      Stock on the Record Date, in lieu of the foregoing adjustment, adequate
      provision shall be made so that the Holder shall have the right to receive
      upon
      conversion of this Note (or any portion hereof) the amount of cash the Holder
      would have received had the Holder converted this Note (or portion hereof)
      immediately prior to such Record Date. In the event that such dividend or
      distribution is not so paid or made, the Conversion Price shall again be
      adjusted to be the Conversion Price which would then be in effect if such
      dividend or distribution had not been declared.

    


    (f) Adjustment
      in Connection Sales by a Designated Person. (1)
      If at
      any time on or after the Issuance Date any Designated Person, directly or
      indirectly, sells, transfers or disposes of shares of Common Stock or Common
      Stock Equivalents other than a Permitted Designated Person Sale and on the
      Measurement Date for such sale, transfer or disposition the Conversion Price
      in
      effect on such Measurement Date is greater than the Computed Market Price on
      such Measurement Date, then, subject to the next succeeding sentence, the
Conversion
      Price shall be reduced to such Computed Market Price,
      such
      adjustment to become effective immediately after the opening of business on
      the
      day following the Measurement Date. If a reduction of the Conversion Price
      to
      such Computed Market Price pursuant to the immediately preceding sentence would
      require the Company to seek stockholder approval of the transactions
      contemplated by the Note Purchase Agreement pursuant to Rule 713 of the AMEX
      and
      the Stockholder Approval has not yet been obtained, then the adjustment provided
      in this Section 6.3(f) shall not take effect until such time as the Stockholder
      Approval is obtained at which time the Conversion Price shall be reduced to
      such
      Computed Market Price.


    
      
         

        
        

      

      
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    (2) The
      Company shall enter into an agreement with each Designated Person, on or before
      the date that is 30 days after the Issuance Date, pursuant to which each
      Designated Person shall agree that upon the written request of the Company
      or
      any Holder, the Designated Person shall provide the Company and such Holder,
      a
      written statement setting forth the dates, if any, upon which the Designated
      Person has sold, transferred or disposed of any shares of Common Stock or Common
      Stock Equivalents during such period as shall be reasonably requested by the
      Company or such Holder to determine whether or not a sale, transfer or
      disposition that requires an adjustment pursuant to Section 6.3(f)(1) has
      occurred. The Company shall instruct the Transfer Agent to inform the Company
      immediately upon the sale, transfer or disposition of any shares of Common
      Stock
      or Common Stock Equivalents by any Designated Person. The Company shall inform
      the Holder immediately by phone and electronic transmission upon becoming aware
      of any sale, transfer or disposition of any shares of Common Stock or Common
      Stock Equivalents by any Designated Person and will follow up with formal
      written notice to the Holder pursuant to Section 7.2.

    


    (g) Additional
      Reductions in Conversion Price.
      The
      Company may make such reductions in the Conversion Price, in addition to those
      required by Sections 6.3(a), (b), (c), (d), (e) and (f), as the Board of
      Directors considers to be advisable to avoid or diminish any income tax to
      holders of Common Stock or rights to purchase Common Stock resulting from any
      dividend or distribution of stock (or rights to acquire stock) or from any
      event
      treated as such for income tax purposes.

    


    (h) De
      Minimus Adjustments.
      No
      adjustment in the Conversion Price shall be required unless such adjustment
      would require an increase or decrease of at least 1% in such price; provided,
      however, that
      any
      adjustments which by reason of this Section 6.3(h) are not required to be made
      shall be carried forward and taken into account in any subsequent adjustment.
      All calculations under this Article VI shall be made by the Company and shall
      be
      made to the nearest cent or to the nearest one hundredth of a share, as the
      case
      may be.

    


    No
      adjustment need be made for a change in the par value of the Common Stock or
      from par value to no par value or from no par value to par value.

    


    (i)  Company
      Notice of Adjustments.
      Whenever
      the Conversion Price is adjusted as herein provided, the Company shall promptly,
      but in no event later than five days thereafter, give a notice to the Holder
      setting forth the Conversion Price after such adjustment and setting forth
      a
      brief statement of the facts requiring such adjustment, but which statement
      shall not include any information which would be material non-public information
      for purposes of the 1934 Act. Failure to deliver such notice shall not affect
      the legality or validity of any such adjustment.


    
      
         

        
        

      

      
        36

        
          

        

      

      
        
        

      

    


    (j) Effectiveness
      of Certain Adjustments.
      In any
      case in which this Section 6.3 provides that an adjustment shall become
      effective immediately after a Record Date for an event, the Company may defer
      until the occurrence of such event (i) issuing to the Holder in connection
      with
      any conversion of this Note after such Record Date and before the occurrence
      of
      such event the additional shares of Common Stock issuable upon such conversion
      by reason of the adjustment required by such event over and above the Common
      Stock issuable upon such conversion before giving effect to such adjustment
      and
      (ii) paying to such holder any amount in cash in lieu of any fraction pursuant
      to Section 6.2(f).

    


    (k) Outstanding
      Shares.
      For
      purposes of this Section 6.3, the number of shares of Common Stock at any time
      outstanding shall not include shares held in the treasury of the Company but
      shall include shares issuable in respect of scrip certificates issued in lieu
      of
      fractions of shares of Common Stock. The Company will not pay any dividend
      or
      make any distribution on shares of Common Stock held in the treasury of the
      Company other than dividends or distributions payable only in shares of Common
      Stock.

    


    6.4 Effect
      of Reclassification, Consolidation, Merger or Sale.  (a)
      If
      any of the following events occur, namely:

    


    (i) any
      reclassification or change of the outstanding shares of Common Stock (other
      than
      a change in par value, or from par value to no par value, or from no par value
      to par value, or as a result of a subdivision or combination),

    


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

    


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

    


    then
      the
      Company or the successor or purchasing Person, as the case may be, shall execute
      with the Holder a written agreement providing that:

    


    (x) this
      Note
      shall be convertible into the kind and amount of shares of stock and other
      securities or property or assets (including cash) receivable upon such
      reclassification, change, consolidation, merger, statutory exchange,
      combination, sale or conveyance by the holder of the number of shares of Common
      Stock issuable upon conversion of this Note in full (assuming, for such
      purposes, a sufficient number of authorized shares of Common Stock available
      to
      convert this Note) immediately prior to such reclassification, change,
      consolidation, merger, statutory exchange, combination, sale or conveyance
      assuming such holder of Common Stock did not exercise such holder's rights
      of
      election, if any, as to the kind or amount of securities, cash or other property
      receivable upon such consolidation, merger, statutory exchange, combination,
      sale or conveyance (provided
      that, if
      the kind or amount of securities, cash or other property receivable upon such
      consolidation, merger, statutory exchange, sale or conveyance is not the same
      for each share of Common Stock in respect of which such rights of election
      shall
      not have been exercised (“non-electing share”), then for the purposes of this
      Section 6.4 the kind and amount of securities, cash or other property receivable
      upon such consolidation, merger, statutory exchange, combination, sale or
      conveyance for each non-electing share shall be deemed to be the kind and amount
      so receivable per share by a plurality of the non-electing
      shares),


    
      
         

        
        

      

      
        37

        
          

        

      

      
        
        

      

    

     

    


    (y) in
      the
      case of any such successor or purchasing Person, upon such consolidation,
      merger, statutory exchange, combination, sale or conveyance such successor
      or
      purchasing Person shall be jointly and severally liable with the Company for the
      performance of all of the Company's obligations under this Note and the Note
      Purchase Agreement and

    


    (z) if
      registration or qualification is required under the 1933 Act or applicable
      state
      law for the public resale by the Holder of such shares of stock and other
      securities so issuable upon conversion of this Note, such registration or
      qualification shall be completed prior to such reclassification, change,
      consolidation, merger, statutory exchange, combination, sale or
      conveyance.

    


    Such
      written agreement shall provide for adjustments which shall be as nearly
      equivalent as may be practicable to the adjustments provided for in this
      Article. If, in the case of any such reclassification, change, consolidation,
      merger, statutory exchange, combination, sale or conveyance, the stock or other
      securities and assets receivable thereupon by a holder of shares of Common
      Stock
      includes shares of stock or other securities and assets of a corporation other
      than the successor or purchasing corporation, as the case may be, in such
      reclassification, change, consolidation, merger, statutory exchange,
      combination, sale or conveyance, then such written agreement shall also be
      executed by such other corporation and shall contain such additional provisions
      to protect the interests of the Holder as the Board of Directors shall
      reasonably consider necessary by reason of the foregoing, including, to the
      extent practicable, the provisions providing for the repurchase rights set
      forth
      in Article V herein.

    


    (b) The
      above
      provisions of this Section shall similarly apply to successive
      reclassifications, changes, consolidations, mergers, statutory exchanges,
      combinations, sales and conveyances.

    


    (c) If
      this
      Section 6.4 applies to any event or occurrence, Section 6.3 shall not
      apply.

    


    6.5 Reservation
      of Shares; Shares to Be Fully Paid; Listing of Common
      Stock.

    


    (a) The
      Company shall reserve and keep available, free from preemptive rights, out
      of
      its authorized but unissued shares of Common Stock or shares of Common Stock
      held in treasury, solely for issuance upon conversion of this Note, and in
      addition to the shares of Common Stock required to be reserved by the terms
      of
      the Other Notes, Warrants and the Other Warrants,
      sufficient shares to provide for the conversion of this Note from time to time
      as this Note is converted.


    
      
         

        
        

      

      
        38

        
          

        

      

      
        
        

      

    


    


    (b) Before
      taking any action which would cause an adjustment reducing the Conversion Price
      below the then par value, if any, of the shares of Common Stock issuable upon
      conversion of this Note, the Company will take all corporate action which may,
      in the opinion of its counsel, be necessary in order that the Company may
      validly and legally issue shares of such Common Stock at such adjusted
      Conversion Price.

    


    (c) The
      Company covenants that all shares of Common Stock issued upon conversion of
      this
      Note will be fully paid and non-assessable by the Company and free from all
      taxes, liens and charges with respect to the issue thereof.

    


    (d) The
      Company covenants that if any shares of Common Stock to be provided for the
      purpose of conversion of, or payment of interest on, this Note hereunder require
      registration with or approval of any governmental authority under any federal
      or
      state law before such shares may be validly issued upon conversion or in payment
      of interest, the Company will in good faith and as expeditiously as possible
      endeavor to secure such registration or approval, as the case may
      be.

    


    (e) The
      Company covenants that, in the event the Common Stock shall be listed on the
      Nasdaq, the Nasdaq Capital Market, the NYSE, the AMEX or any other national
      securities exchange, the Company shall obtain and, so long as the Common Stock
      shall be so listed on such market or exchange, maintain approval for listing
      thereon of all Common Stock issuable upon conversion of or in payment of
      interest on this Note.

    


    6.6 Notice
      to Holder Prior to Certain Actions.
      In
      case
      on or after the Issuance Date:

    


    (a) the
      Company shall declare a dividend (or any other distribution) on its Common
      Stock
      (other than in cash out of retained earnings); or

    


    (b) the
      Company shall authorize the granting to the holders of its Common Stock of
      rights or warrants to subscribe for or purchase any share of any class or any
      other rights or warrants; or

    


    (c) the
      Board
      of Directors shall authorize any reclassification of the Common Stock of the
      Company (other than a subdivision or combination of its outstanding Common
      Stock, or a change in par value, or from par value to no par value, or from
      no
      par value to par value), or any consolidation or merger or other business
      combination transaction to which the Company is a party and for which approval
      of any stockholders of the Company is required, or the sale or transfer of
      all
      or substantially all of the assets of the Company; or

    


    (d) there
      shall be pending the voluntary or involuntary dissolution, liquidation or
      winding-up of the Company;


    
      
         

        
        

      

      
        39

        
          

        

      

      
        
        

      

    


    the
      Company shall give the Holder, as promptly as possible but in any event at
      least
      ten Trading Days prior to the applicable date hereinafter specified, a notice
      stating (x) the date on which a record is to be taken for the purpose of such
      dividend, distribution or rights or warrants, or, if a record is not to be
      taken, the date as of which the holders of Common Stock of record to be entitled
      to such dividend, distribution or rights are to be determined, or (y) the date
      on which such reclassification, consolidation, merger, other business
      combination transaction, sale, transfer, dissolution, liquidation or winding-up
      is expected to become effective or occur, and the date as of which it is
      expected that holders of Common Stock of record who shall be entitled to
      exchange their Common Stock for securities or other property deliverable upon
      such reclassification, consolidation, merger, other business combination
      transaction, sale, transfer, dissolution, liquidation or winding-up shall be
      determined. Such notice shall not include any information which would be
      material non-public information for purposes of the 1934 Act. Failure to give
      such notice, or any defect therein, shall not affect the legality or validity
      of
      such dividend, distribution, reclassification, consolidation, merger, sale,
      transfer, dissolution, liquidation or winding-up. In the case of any such action
      of which the Company gives such notice to the Holder or is required to give
      such
      notice to the Holder, the Holder shall be entitled to give a Conversion Notice
      which is contingent on the completion of such action.

    


    6.7 Restricted
      Ownership Percentage Limitation.
      (a)
      Notwithstanding anything to the contrary contained herein, the number of shares
      of Common Stock that may be acquired at any time by the Holder upon conversion
      of the Note shall not exceed a number that, when added to the total number
      of
      shares of Common Stock deemed beneficially owned by such Holder (other than
      by
      virtue of the ownership of securities or rights to acquire securities (including
      the Warrants) that have limitations on the holder's right to convert, exercise
      or purchase similar to the limitation set forth herein (the “Excluded Shares”)),
      together with all shares of Common Stock beneficially owned at such time (other
      than by virtue of the ownership of Excluded Shares) by Persons whose beneficial
      ownership of Common Stock would be aggregated with the beneficial ownership
      by
      the Holder for purposes of determining whether a group exists or for purposes
      of
      determining the Holder’s beneficial ownership (the “Aggregation Parties”), in
      either such case for purposes of Section 13(d) of the 1934 Act and Regulation
      13D-G thereunder (including, without limitation, as the same is made applicable
      to Section 16 of the 1934 Act and the rules promulgated thereunder), would
      result in beneficial ownership by the Holder or such group of more than 9.9%
      of
      the shares of Common Stock for purposes of Section 13(d) or Section 16 of the
      1934 Act and the rules promulgated thereunder (as the same may be modified
      by a
      particular Holder as provided herein, the “Restricted Ownership Percentage”).
      The Holder shall have the right at any time and from time to time to reduce
      its
      Restricted Ownership Percentage immediately upon notice to the Company in the
      event and only to the extent that Section 16 of the 1934 Act or the rules
      promulgated thereunder (or any successor statute or rules) is changed to reduce
      the beneficial ownership percentage threshold thereunder to a percentage less
      than 10%. If at any time the limits in this Section 6.7 make the Note
      inconvertible in whole or in part, the Company shall not by reason thereof
      be
      relieved of its obligation to issue shares of Common Stock at any time or from
      time to time thereafter upon conversion of the Note as and when shares of Common
      Stock may be issued in compliance with such restrictions.

    


     


    
      
         

        
        

      

      
        40

        
          

        

      

      
        
        

      

    

     

    (b) For
      purposes of this Section 6.7, in determining the number of outstanding shares
      of
      Common Stock at any time the Holder may rely on the number of outstanding shares
      of Common Stock as reflected in (1) the Company's then most recent Form 10-Q,
      Form 10-K or other
      public filing with the SEC, as the case may be, (2) a public announcement by
      the
      Company that is later than any such filing referred to in the preceding clause
      (1) or (3) any other notice by the Company or its transfer agent setting forth
      the number shares of Common Stock outstanding and knowledge the Holder may
      have
      about the number of shares of Common Stock issued upon conversions or exercises
      of this Note, the Other Notes, the Warrants, the Other Warrants or other Common
      Stock Equivalents by any Person, including the Holder, which are not reflected
      in the information referred to in the preceding clauses (1) through (3). Upon
      the written request of any Holder, the Company shall within three Business
      Days
      confirm in writing to such 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 Common Stock
      Equivalents, including the Notes and the Warrants, by the Holder or its
      Affiliates, in each such case subsequent to, the date as of which such number
      of
      outstanding shares of Common Stock was reported. 

    


    


    ARTICLE
      VII

    


    MISCELLANEOUS

    


    7.1 Failure
      or Indulgency Not Waiver.
      No
      failure or delay on the part of the Holder in the exercise of any power, right
      or privilege hereunder shall operate as a waiver thereof, nor shall any single
      or partial exercise of any such power, right or privilege preclude other or
      further exercise thereof or of any other right, power or privileges. All rights
      and remedies existing hereunder are cumulative to, and not exclusive of, any
      rights or remedies otherwise available. The Company stipulates that the remedies
      at law of the Holder in the event of any default or threatened default by the
      Company in the performance of or compliance with any of the terms of this Note
      are not and will not be adequate, and that such terms may be specifically
      enforced (x) by a decree for the specific performance of any agreement contained
      herein, including, without limitation, a decree for issuance of the shares
      of
      Common Stock (or other securities) issuable upon conversion of this Note or
      (y)
      by an injunction against a violation of any of the terms hereof or (z)
      otherwise.

    


    7.2 Notices.
      Except
      as otherwise specifically provided herein, any notice herein required or
      permitted to be given shall be in writing and may be personally served, sent
      by
      telephone line facsimile transmission or delivered by courier or sent by United
      States mail and shall be deemed to have been given upon receipt if personally
      served, sent by telephone line facsimile transmission or sent by courier or
      three days after being deposited in the facilities of the United States Postal
      Service, certified, with postage pre-paid and properly addressed, if sent by
      mail. For the purposes hereof, the address and facsimile line transmission
      number of the Holder shall be as furnished by the Holder for such purpose and
      shown on the records of the Company; and the address of the Company shall be
      eMagin Corporation, 10500 N.E. 8th
      Street,
      Suite 1400, Bellevue, Washington 98004, Attention: Chief Financial Officer
      (telephone line facsimile number (425) 749-3601. The Holder or the Company
      may
      change its address for notice by service of written notice to the other as
      herein provided.

    


    
      
         

        
        

      

      
        41

        
          

        

      

      
        
        

      

    

    
       

      7.3 Amendment,
        Waiver.
        (a)
        Neither this Note or any Other Note nor any terms hereof or thereof may be
        changed, amended, discharged or terminated unless such change,amendment,
        discharge or termination is in writing signed by the Company and the Majority
        Holders, provided that no such change, amendment, discharge or termination
        shall, without the consent of the Holder and the holders of the Other Notes
        affected thereby (i) extend the scheduled Installment Maturity Date or Final
        Maturity Date of this Note or any Other Note, or reduce the rate or extend
        the
        time of payment of interest (other than as a result of waiving the applicability
        of any post-default increase in interest rates) hereon or thereon or reduce
        the
        principal amount hereof or thereof or the Repurchase Price or the Optional
        Redemption Price hereof or thereof, (ii) increase or decrease the Conversion
        Price except as set forth in this Note, (iii) release the Collateral or reduce
        the amount of Collateral required to be deposited or maintained by the Company
        pursuant to the Security Agreement, except as expressly provided in the Security
        Agreement, (iv) amend, modify or waive any provision of this Section 7.3 or
        (v) reduce any percentage specified in, or otherwise modify, the definition
        of
        Majority Holders.  Notwithstanding
        anything to the contrary contained herein, no amendment or waiver shall increase
        or eliminate the Restricted Ownership Percentage, whether permanently or
        temporarily, unless, in addition to complying with the other requirements
        of
        this Note, such amendment or waiver shall have been approved in accordance
        with
        the General Corporation Law of the State of Delaware and the Company's By-laws
        by holders of the outstanding shares of Common Stock entitled to vote at
        a
        meeting or by written consent in lieu of such meeting.

    

    


    (b) Any
      term
      or condition of this Note may be waived by the Holder or the Company at any
      time
      if the waiving party is entitled to the benefit thereof, but no such waiver
      shall be effective unless set forth in a written instrument duly executed by
      or
      on behalf of the party waiving such term or condition. No waiver by any party
      of
      any term or condition of this Note, in any one or more instances, will be deemed
      to be or construed as a waiver of the same or any other term or condition of
      this Note on any future occasion.

    


    7.4 Assignability.
      This
      Note shall be binding upon the Company and its successors, and shall inure
      to
      the benefit of and be binding upon the Holder and its successors and permitted
      assigns. The Company may not assign its rights or obligations under this
      Note.

    


    7.5 Certain
      Expenses.  The
      Company shall pay on demand all expenses incurred by the Holder, including
      reasonable attorneys' fees and expenses, as a consequence of, or in connection
      with (x) any amendment or waiver of this Note or any other Transaction Document,
      (y) any default or breach of any of the Company’s obligations set forth in the
      Transaction Documents and (z) the enforcement or restructuring of any right
      of,
      including the collection of any payments due, the Holder under the Transaction
      Documents, including any action or proceeding relating to such enforcement
      or
      any order, injunction or other process seeking to restrain the Company from
      paying any amount due the Holder.

    


    7.6 Governing
      Law.
      This
      Note shall be governed by the internal laws of the State of New York, without
      regard to the principles of conflict of laws.

    


     


    
      
         

        
        

      

      
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    7.7 Transfer
      of Note.
      This
      Note has not been and is not being registered under the provisions of the 1933
      Act or any state securities laws and this Note may not be transferred prior
      to
      the end of the holding period applicable to sales hereof under Rule 144(k)
      unless (1) the transferee is an “accredited investor” (as defined in Regulation
      D under the 1933 Act) and (2) the Holder shall have delivered to the Company
      an
      opinion of counsel, reasonably satisfactory
      in form, scope and substance to the Company, to the effect that this Note may
      be
      sold or transferred without registration under the 1933 Act. Prior to any such
      transfer, such transferee shall have represented in writing to the Company
      that
      such transferee has requested and received from the Company all information
      relating to the business, properties, operations, condition (financial or
      other), results of operations or prospects of the Company and the Subsidiaries
      deemed relevant by such transferee; that such transferee has been afforded
      the
      opportunity to ask questions of the Company concerning the foregoing and has
      had
      the opportunity to obtain and review the reports and other information
      concerning the Company which at the time of such transfer have been filed by
      the
      Company with the SEC pursuant to the 1934 Act. If such transfer is intended
      to
      assign the rights and obligations under Section 5, 8, 9 and 10 of the Note
      Purchase Agreement, such transfer shall otherwise be made in compliance with
      Section 10(j) of the Note Purchase Agreement.

    


    7.8 Enforceable
      Obligation.
      The
      Company represents and warrants that at the time of the original issuance of
      this Note it received the full purchase price payable pursuant to the Note
      Purchase Agreement in an amount at least equal to the original principal amount
      of this Note, and that this Note is an enforceable obligation of the Company
      which is not subject to any offset, reduction, counterclaim or disallowance
      of
      any sort.

    


    7.9 Note
      Register; Replacement of Notes.
      The
      Company shall maintain a register showing the names, addresses and telephone
      line facsimile numbers of the Holder and the registered holders of the Other
      Notes. The Company shall also maintain a facility for the registration of
      transfers of this Note and the Other Notes and at which this Note and the Other
      Notes may be surrendered for split up into instruments of smaller denominations
      or for combination into instruments of larger denominations. Upon receipt by
      the
      Company of evidence reasonably satisfactory to it of the ownership of and the
      loss, theft, destruction or mutilation of this Note and (a) in the case of
      loss,
      theft or destruction, of indemnity from the Holder reasonably satisfactory
      in
      form to the Company (and without the requirement to post any bond or other
      security) or (b) in the case of mutilation, upon surrender and cancellation
      of
      this Note, the Company will execute and deliver to the Holder a new Note of
      like
      tenor without charge to the Holder.

    


    7.10 Payment
      of Note on Redemption or Repurchase; Deposit of Optional Redemption Price or
      Repurchase Price, Etc.
      (a)
      If
      this Note or any portion of this Note is to be redeemed as provided in Section
      2.1 or repurchased as provided in Sections 5.1 and 5.2 and any notice required
      in connection therewith shall have been given as provided therein and the
      Company shall have otherwise complied with the requirements of this Note with
      respect thereto, then this Note or the portion of this Note to be so redeemed
      or
      repurchased and with respect to which any such notice has been given shall
      become due and payable on the date stated in such notice at the Optional
      Redemption Price or Repurchase Price. On and after the Optional Redemption
      Date
      or repurchase date so stated in such notice, provided that the Company shall
      have deposited with an Eligible Bank on or prior to such Optional Redemption
      Date or repurchase date, an amount in cash sufficient to pay the Optional
      Redemption Price or Repurchase Price, interest on this Note or the portion
      of
      this Note to be so redeemed or repurchased shall cease to accrue, and this
      Note
      or such portion hereof shall be deemed not to be outstanding and shall not
      be
      entitled to any benefit  with respect 

     


    
      
         

        
        

      

      
        43

        
          

        

      

      
        
        

      

    

    to
      principal of or interest on the portion to be so redeemed or repurchased except
      to receive payment of the Optional Redemption Price
      or
      Repurchase Price. On presentation and surrender
      of this Note or such portion hereof, this Note or the specified portion hereof
      shall be paid and repurchased at the Optional Redemption Price or Repurchase
      Price. If a portion of this Note is to be redeemed or repurchased, upon
      surrender of this Note to the Company in accordance with the terms hereof,
      the
      Company shall execute and deliver to the Holder without service charge, a new
      Note or Notes, having the same date hereof and containing identical terms and
      conditions, in such denomination or denominations as requested by the Holder
      in
      aggregate principal amount equal to, and in exchange for, the unredeemed or
      unrepurchased portion of the principal amount of this Note so
      surrendered.

    


    (b) Upon
      the
      payment in full of all amounts payable by the Company under this Note or the
      deposit thereof as provided in Section 7.10(a), thereafter the obligations
      of
      the Company under this Note shall be as set forth in this Article VII, and,
      in
      the case of such deposit, to pay the Repurchase Price, from the funds so
      deposited. Upon such payment or deposit, any Event of Default which occurred
      prior to such payment or deposit by reason of one or more provisions of this
      Note with which the Company thereafter is no longer obligated to comply, then
      shall no longer exist.

    


    7.11 Conversion
      Schedule.
      Promptly
      after each conversion of this Note pursuant to Section 6, the Holder shall
      record on a schedule, in substantially the form attached as Exhibit
      E,
      the
      amount by which the outstanding principal of this Note has been reduced by
      reason of such conversion. Such schedule shall be conclusive and binding on
      the
      Company and the Holder, in the absence of manifest error. The Holder shall
      from
      time to time, upon request made by notice from the Company, furnish a copy
      of
      such schedule to the Company. The Holder shall also furnish a copy of such
      schedule upon request to any proposed transferee of this Note.

    


    7.12 Construction.
      The
      language used in this Note will be deemed to be the language chosen by the
      Company and the original Holder of this Note (or its predecessor instrument)
      to
      express their mutual intent, and no rules of strict construction will be applied
      against the Company or the Holder.

    


    


    [Remainder
      of Page Intentionally Left Blank]

    



    
      
         

        
        

      

      
        44

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF,
      the
      Company has caused this Note to be signed in its name by its duly authorized
      officer on of the day and in the year first above written.

     

     

    
      	 	 	 
	 	EMAGIN
              CORPORATION
	 
 	 
 	 
 
	Date: July
              21, 2006	By:  	/s/ Gary
              W.
              Jones
	 	
              
Name:
              Gary W. Jones
	 	Title: Chief
              Executive Officer




    



    
      
        
           

        

        
        

      

      
        45

        
          

        

      

      
        
        

        
          


        

      

    



    ASSIGNMENT

    


    FOR
      VALUE RECEIVED,
      _________________________ hereby sell(s), assign(s) and transfer(s) unto
      _________________________ (Please insert social security or other Taxpayer
      Identification Number of assignee: ______________________________) the within
      Note, and hereby irrevocably constitutes and appoints _________________________
      attorney to transfer the said Note on the books of eMagin Corporation, a
      Delaware corporation (the “Company”), with full power of substitution in the
      premises.

    


    In
      connection with any transfer of the Note within the period prior to the
      expiration of the holding period applicable to sales thereof under Rule 144(k)
      under the 1933 Act (or any successor provision) (other than any transfer
      pursuant to a registration statement that has been declared effective under
      the
      1933 Act), the undersigned confirms that such Note is being
      transferred:

    


    
      	 	
              [

            	
              ]

            	
              To
                the Company or a subsidiary thereof;
                or

            


    

    


    
      	 	
              [

            	
              ]

            	
              To
                a “qualified institutional buyer” pursuant to and in compliance with Rule
                144A; or

            


    

    


    
      	 	
              [

            	
              ]

            	
              To
                an Accredited Investor pursuant to and in compliance with the 1933
                Act;
                or

            


    

    


    
      	 	
              [

            	
              ]

            	
              Pursuant
                to and in compliance with Rule 144 under the 1933
                Act;

            


    

    


    and
      unless the box below is checked, the undersigned confirms that, to the knowledge
      of the undersigned, such Note is not being transferred to an Affiliate of the
      Company.

     

    
      	 	
              [

            	
              ]

            	
              The
                transferee is an Affiliate of the
                Company.

            


    

    


    Capitalized
      terms used in this Assignment and not defined in this Assignment shall have
      the
      respective meanings provided in the Note.

    


     

    
 

    
      	 Dated:____________________________________	  NAME:__________________________________________
	 	 __________________________________________
	 	
               Signature(s)

            


    

    
 

     

    


     

    


    



    
      
        
           

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
          


        

      

    



    Exhibit
      A

    


    


    COMPANY
      NOTICE

    (Section 5.2(a)
      of 6% Senior Secured Convertible Note due 2007-2008)

    


    TO:  ______________________________

    (Name
      of
      Holder)

    


    


    (1) A
      Repurchase Event described in the 6% Senior Secured Convertible Note due
      2007-2008 (the “Note”) of eMagin Corporation, a Delaware corporation (the
“Company”), occurred on                     ,
            .
      As a
      result of such Repurchase Event, the Holder is entitled to exercise its
      repurchase rights pursuant to Section 5.2 of the Note.

    


    (2) The
      Holder’s repurchase right must be exercised on or before               ,
             .

    


    (3) At
      or
      before the date set forth in the preceding paragraph (2), the Holder
      must:

    


    (a) deliver
      to the Company a Holder Notice, in the form attached as Exhibit
      B
      to the
      Note; and

    


    (b) the
      Note,
      duly endorsed for transfer to the Company of the portion of the principal amount
      to be repurchased.

    


    (4) Capitalized
      terms used herein and not otherwise defined herein have the respective meanings
      provided in the Note.

    


     

    


    


    
      	 Date_________________________________	 EMAGIN
              CORPORATION
	 	 By:____________________________________
	 	 Title:


    

    


     

    

      
        
          
             

          

          
          

        

        
          A-1

          
            

          

        

        
          
          

          
            


          

        

      




    Exhibit
      B

    


    HOLDER
      NOTICE

    (Section 5.2(b)
      of 6% Senior Secured Convertible Note due 2007-2008)

    


    TO:   EMAGIN
      CORPORATION

    


    (1) Pursuant
      to the terms of the 6% Senior Secured Convertible Note due 2007-2008 (the
“Note”), the undersigned Holder hereby elects to exercise its right to require
      repurchase by the Company pursuant to Sections 5.2(a) and 5.2(b) of
      $                         
      of the
      Note, equal to the sum of $                    
      principal amount of the Note, $                    
      of
      accrued and unpaid interest on such principal amount and $                    
      of
      Default Interest on the Note at the Repurchase Price provided in the
      Note.

    


    (2) Capitalized
      terms used herein and not otherwise defined herein have the respective meanings
      provided in the Note.

    


     

    
 

    
      	 Date:_____________________	 NAME OF HOLDER:
	 	 ___________________________________
	 	 
	 	 By____________________________________________

	 	
               Signature
                of Registered Holder

              (Must
                be signed exactly as name

              appears
                in the Note.)

            


    

     

    


    
 


    
      
        
           

        

        
        

      

      
        B-1

        
          

        

      

      
        
        

        
          


        

      

    


     

    Exhibit
      C

    


    NOTICE
      OF CONVERSION

    OF
      6% SENIOR SECURED CONVERTIBLE NOTE DUE 2007-2008

    OF
      EMAGIN CORPORATION

    


    
      	
              To:  eMagin
                Corporation

                  10500
                N.E. 8th
                Street, Suite 1400 

                  Bellevue,
                Washington 98004

               

              Attention:
                Chief Financial Officer 

               

              Facsimile
                No.: (425) 749-3601

               

            	 
	 	 


    

    


    1. Pursuant
      to the terms of the 6% Senior Secured Convertible Note Due 2007-2008 (the
“Note”), the undersigned hereby elects to convert $_______________ of the Note,
      equal to the sum of $_______________ principal amount of the Note,
      $_______________ of accrued and unpaid interest on such principal amount and
      $_______________ of Default Interest on such interest into shares of Common
      Stock of eMagin Corporation, a Delaware corporation (the “Company”), at a
      Conversion Price per share equal to $_______________. Capitalized terms used
      herein and not otherwise defined herein have the respective meanings provided
      in
      the Note.

    


    2. The
      number of shares of Common Stock issuable upon the conversion of the Note to
      which this Notice relates is _______________ (the “Conversion Shares”).


    


    3. Please
      issue a certificate or certificates for _______________ shares of Common Stock
      in the name(s) specified immediately below or, if additional space is necessary,
      on an attachment hereto:

    


     

    
      	 ____________________________________________	____________________________________________ 
	 Name	 Name
	 	 
	____________________________________________	____________________________________________ 
	 Address	 Address
	____________________________________________ 	____________________________________________ 
	 SS or Tax ID Number 	
               SS
                or Tax ID Number

            
	 	 
	 	 
	
              Delivery
                Instructions

              for
                Common
                Stock:_____________________________________________________________________________________________________________________________

            


    

    
 


    
      
         

        
        

      

      
        C-1

        
          

        

      

      
        
        

      

    


    Portions
      of installments of principal to which this conversion is allocated:

     

    
      	 Due Initial Installment Date:	 $____________
	 Due Maturity Date:	 $____________
	 	 
	 	 
	 	 NAME: ___________________________________________
	 	 
	 	 
	 	 
	 Date: _____________________________	 ___________________________________________
	 	
               Signature
                of Registered Holder

              (Must
                be signed exactly as name

              appears
                in the Note.)

            


    

    :   

        

    


    


    


     

    


    


    


      

    


    


    


    



    
      
        
           

        

        
        

      

      
        C-2

        
          

        

      

      
        
        

        
          


        

      

    



    


    Exhibit
      D

    


    


    OPTIONAL
      REDEMPTION NOTICE

    (Section 2.1
      of 6% Senior Secured

    Convertible
      Note due 2007-2008)

    


    TO:_________________________________     

    (Name
      of
      Holder)

    


    (1) Pursuant
      to the terms of the 6% Senior Secured Convertible Note due 2007-2008 (the
“Note”), eMagin Corporation, a Delaware corporation (the “Company”), hereby
      notifies the above-named Holder that the Company is exercising its right to
      redeem the Note in accordance with Section 2.1 of the Note as set forth
      below:

    


    (i) The
      principal amount of the Note to be redeemed is $             .

    


    (ii) The
      Optional Redemption Price is $               .

    


    (iii) The
      Optional Redemption Date is               .

    


    (2) All
      of
      the conditions specified in Section 2.1 of the Note entitling the Company to
      call the Note for redemption have been satisfied.

    


    (3) Capitalized
      terms used herein and not otherwise defined herein have the respective meanings
      provided in the Note.

    


     

    
      	 Date 	 EMAGIN
              CORPORATION
	 	 
	 	 By:______________________________________
	 	 Name:
	 	 Title:


    

     

     

    



    
      
        
           

        

        
        

      

      
        D-1

        
          

        

      

      
        
        

        
          


        

      

    



    Exhibit
      E

    


    


    EMAGIN
      CORPORATION

    


    CONVERSION
      SCHEDULE

    


    This
      Conversion Schedule shows reductions in the outstanding principal amount of
      the
      6% Senior Secured Convertible Note due 2007-2008 (the “Note”) of eMagin
      Corporation, a Delaware corporation, upon conversions pursuant to Section 6
      of
      the Note. Capitalized terms used in this Schedule and not otherwise defined
      herein shall have the respective meanings provided in the Note.

    


    


    
      	 	
              Date
                of Conversion 

              (or
                for first entry, the Issuance Date)

            	
              Principal

              Amount
                of Conversion 

              (if
                applicable)

            	
              Principal
                Amount Remaining 

              Subsequent
                to Conversion 

              (or
                original Principal Amount)

            
	
              1.

            	
              7/_/06

            	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 


    

    


    [continue
      as necessary]

    


     

    E-1