Document:

ex1046.htm

    Exhibit 10.46

     

     

    
 

    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).

    
      
         

        
        

      

      
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    “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.

    
      
         

        
        

      

      
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    “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:

    
      
         

        
        

      

      
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    (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.

    
      
         

        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    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.

    
      
         

        
        

      

      
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      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).

    
      
         

        
        

      

      
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    (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.

    
      
         

        
        

      

      
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    (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

    
      
         

        
        

      

      
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    (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

    
      
         

        
        

      

      
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    (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:

    
      
         

        
        

      

      
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    (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 

     

    
      
         

        
        

      

      
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    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.

    
      
         

        
        

      

      
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    (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),

    
      
         

        
        

      

      
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    (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.

    

     

    
      
         

        
        

      

      
        42

        
          

        

      

      
        
        

      

    

     

    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-1ex1047.htm

    Exhibit 10.47

     

    
 

    NEITHER THIS WARRANT NOR THE
SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORS OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION 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 1933 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,
IN FORM AND 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 WARRANT MAY NOT BE TRANSFERRED
EXCEPT AS PROVIDED IN SECTION 24.

    

    

    
      	
              No.
      W-

            	
                              Right
      to Purchase __________ Shares of Common Stock of eMagin
      Corporation

            

    

    

    

    EMAGIN
CORPORATION

    

    Common Stock Purchase
Warrant

    

    

    EMAGIN CORPORATION,
a Delaware
corporation, hereby certifies that, for value received, ______________________ or
registered assigns (the “Holder”), is entitled, subject to the terms set forth
below, to purchase from the Company at any time or from time to time before 5:00
p.m., New York City time, on the Expiration Date (such capitalized term and all
other capitalized terms used herein having the respective meanings provided
herein), [BEFORE ISSUANCE INSERT AMOUNT OF
SHARES EQUAL TO 70% OF THE NUMBER OF SHARES INITIALLY ISSUABLE UPON CONVERSION
OF THE NOTE BEING ISSUED TO THE HOLDER OF THIS WARRANT, DETERMINED WITHOUT
REGARD TO ANY LIMITATION ON CONVERSION] paid and
nonassessable shares of Common Stock at a purchase price per share equal to the
Purchase Price. The number of such shares of Common Stock and the Purchase Price
are subject to adjustment as provided in this Warrant.

    

    1. Definitions.

    

    (a) As used
in this Warrant, the term “Holder” shall have the meaning assigned to such term
in the first paragraph of this Warrant.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    (b) 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 Warrant.

    

    (c) 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):

    

    “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.

    

    “Aggregate
Purchase Price” means at any time an amount equal to the product obtained by
multiplying (x) the Purchase Price times (y) the
number of shares of Common Stock for which this Warrant may be exercised at such
time, determined without regard to any limitations on exercise of this Warrant
contained in Section 2(c).

    

    “Aggregation
Parties” shall have the meaning provided in Section 2(c).

    

    “AMEX”
means the American Stock Exchange, Inc.

    

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

    

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

    

    “Common
Stock” includes the Company's Common Stock, par value $0.001 per share, (and any
purchase rights issued with respect to the Common Stock in the future) as
authorized on the date hereof, and any other securities into which or for which
the Common Stock (and any such rights issued with respect to the Common Stock)
may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise and any stock (other than
Common Stock) and other securities of the Company or any other Person which the
Holder at any time shall be entitled to receive, or shall have received, on the
exercise of this Warrant, in lieu of or in addition to Common
Stock.

    

    “Common
Stock Equivalents” 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.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    “Company”
shall include eMagin Corporation, a Delaware corporation, and any corporation
that shall succeed to or assume the obligations of eMagin Corporation hereunder
in accordance with the terms hereof.

    

    “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).

    

    “Current
Fair Market Value” means when used with respect to the Common Stock as of a
specified date 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 on 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., 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 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 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) in an arms'-length transaction for shares of Common Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
the Board of Directors.

    

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

    

    “DTC”
shall have the meaning provided in Section 2(c).

    

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

    

    “Excluded
Shares” shall have the meaning provided in Section 2(c).

    

    “Expiration
Date” means July 21, 2011.

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    “FAST”
shall have the meaning provided in Section 2(c).

    

    “Issuance
Date” means the date of original issuance of this Warrant or its predecessor
instrument.

    

    “Market
Price” means with respect to any security on any day the closing bid price of
such security on such day on the Nasdaq or the Nasdaq Capital Market or 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 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 the Pink Sheets, LLC, or a similar generally
accepted reporting service, or if not so available, in such manner as furnished
by any New York Stock Exchange 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.

    

    “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 any of the 6% Senior Secured Convertible Notes due 2007-2008 issued by the
Company pursuant to the Note Purchase Agreement and the Other Note Purchase
Agreements.

    

    “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
Warrant.

    

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

    

    “Other
Note Purchase Agreements” means the several Note Purchase Agreements by and
between the Company and the several buyers named therein in the form of the Note
Purchase Agreement pursuant to which certain of the Notes are being or will be
issued.

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    “Other
Securities” means any stock (other than Common Stock) and other securities of
the Company or any other Person which the Holder at any time shall be entitled
to receive, or shall have received, on the exercise of this Warrant, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5.

    

    “Other
Warrants” shall mean the Common Stock Purchase Warrants (other than this
Warrant) issued or issuable pursuant to the Other Note Purchase
Agreements.

    

    “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).

    

    “Person”
means an individual, corporation, partnership, limited liability company, trust,
business trust, association, joint stock company, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization, governmental
authority or any other form of entity not specifically listed
herein.

    

    “Purchase
Price” means $0.36, subject
to adjustment as provided in this Warrant.

    

    “Registration
Period” shall have the meaning provided in the Note Purchase
Agreement.

    

    “Registration
Statement” shall have the meaning provided in the Note Purchase
Agreement.

    

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

    

    (i) any
consolidation, merger or similar transaction of the Company or any Subsidiary
with or into another entity (other than a merger or consolidation or similar
transaction of a Subsidiary into the Company or a wholly-owned Subsidiary in
which there is no change in the outstanding Common Stock); or the sale or
transfer 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

    

    (ii) 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 securities of any other Person
(whether by means of a Tender Offer, liquidation, consolidation, merger, share
exchange, combination, reclassification, recapitalization, or otherwise);
or

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (iii) the
acquisition by a Person or group of Persons 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.

    

    “Restricted
Ownership Percentage” shall have the meaning provided in Section
2(c).

    

    “Restricted
Securities” means securities that are not eligible for resale pursuant to Rule
144(k) under the 1933 Act (or any successor provision).

    

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

    

    “SEC”
means the Securities and Exchange Commission.

    

    “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, exchange offer or other offer by the Company to
repurchase outstanding shares of its capital stock.

    

    “Trading
Day” means a day on whichever of the national securities exchange, the Nasdaq,
the Nasdaq Capital Market or other securities market which then constitutes the
principal securities market for the Common Stock is open for general trading of
securities.

    

    “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 of
the Note and otherwise reasonably acceptable to the Holder 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.

    

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

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    “Warrant
Shares” means the shares of Common Stock issuable upon exercise of this
Warrant.

    

    2. Exercise of
Warrant.

    

    (a) Exercise. This
Warrant may be exercised by the Holder in whole at any time or in part from time
to time on or before the Expiration Date by (x) giving a subscription form in
the form of Exhibit 1 to this
Warrant (duly executed by the Holder) to the Company, (y) making payment, in
cash or by certified or official bank check payable to the order of the Company,
or by wire transfer of funds to the account of the Company, in any such case, in
the amount obtained by multiplying (a) the number of shares of Common Stock
designated by the Holder in the subscription form by (b) the Purchase Price then
in effect and (z) surrendering this Warrant to the Company within three Trading
Days after such submission of a subscription form. An exercise of this Warrant
shall be deemed to have occurred on the date when the Holder shall have so given
the subscription form and made such payment. On any partial exercise the Company
will forthwith issue and deliver to or upon the order of the Holder a new
Warrant or Warrants of like tenor, in the name of the Holder or as the Holder
(upon payment by the Holder of any applicable transfer taxes) may request,
providing in the aggregate on the face or faces thereof for the purchase of the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised. The subscription form may be surrendered by telephone line facsimile
transmission to such telephone number for the Company as shall have been
specified in writing to the Holder by the Company; provided, however, that if
the subscription form is given to the Company by telephone line facsimile
transmission the Holder shall send an original of such subscription form to the
Company within ten Business Days after such subscription form is so given to the
Company; provided further,
however, that
any failure or delay on the part of the Holder in giving such original of any
subscription form shall not affect the validity or the date on which such
subscription form is so given by telephone line facsimile
transmission.

    

    (b) Net
Exercise. Notwithstanding
anything to the contrary contained in Section 2(a), if the Holder shall exercise
this Warrant (1) during the period beginning one year after the Issuance Date
and at a time when a Registration Statement covering the resale by the Holder of
shares of Common Stock (or Other Securities) issuable upon exercise of this
Warrant is not effective or is not available for use by the Holder or (2) an
Event of Default shall have occurred and be continuing, then in either such case
in the preceding clause (1) or (2) the Holder may elect to exercise this
Warrant, in whole at any time or in part from time to time, by receiving upon
each such exercise a number of shares of Common Stock as determined below, upon
submission of the subscription form annexed hereto (duly executed by the Holder)
to the Company (followed by surrender of this Warrant to the Company within
three Trading Days after such submission of a subscription form), in which event
the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:

    

    X =
Y x (A -
B)

    A

    

     

    

    
      
        
        

      

      
        7

        
          

        

      

       

      where,

      
        
        

      

    

    
      	 	 	
              X
      =

            	
              the
      number of shares of Common Stock to be issued to the
  Holder

            

    

    

    
      	 	 	
              Y
      =

            	
              the
      number of shares of Common Stock as to which this Warrant is to be
      exercised

            

    

    

    
      	 	 	
              A
      =

            	
              the
      Current Fair Market Value of one share of Common Stock calculated as of
      the latest Trading Day immediately preceding the exercise of this
      Warrant

            

    

    

    
      	 	 	
              B
      =

            	
              the
      Purchase Price

            

    

    

    (c) 9.9%
Limitation. 

    

    (1) Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired by the Holder upon exercise pursuant to the terms hereof at
any time shall not exceed a number that, when added to the total number of
shares of Common Stock deemed beneficially owned by the Holder (other than by
virtue of the ownership of securities or rights to acquire securities 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 deemed beneficially owned at such time (other than by
virtue of the ownership of the 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
the 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 2(c) make this Warrant
unexercisable 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 but prior to the Expiration Date upon exercise of this
Warrant as and when shares of Common Stock may be issued in compliance with such
restrictions.

    

    (2) For
purposes of this Section 2(c), 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 conversion or exercise of Common Stock Equivalents by any Person, including
the Holder, which are not reflected in the preceding clauses (1) through (3).
Upon the written request of the Holder, the Company shall within three Business
Days confirm in writing to the Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of Common Stock
Equivalents, including 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.

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    3. Delivery of Stock Certificates,
etc., on Exercise. (a) As
soon as practicable after the exercise of this Warrant and in any event within
three Trading Days thereafter, upon the terms and subject to the conditions of
this Warrant, the Company at its expense (including the payment by it of any
applicable issue or stamp taxes) will cause to be issued in the name of and
delivered to the Holder, or as the Holder (upon payment by the Holder of any
applicable transfer taxes) may direct, a certificate or certificates for the
number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, which certificate or
certificates shall be free of restrictive and trading legends (except to the
extent permitted under Section 5(b) of the Note Purchase Agreement), plus, in
lieu of any fractional share to which the Holder would otherwise be entitled,
cash equal to such fraction multiplied by the then Current Fair Market Value of
one full share of Common Stock, together with any other stock or Other
Securities or any property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 2 or otherwise.
 In lieu
of delivering physical certificates for the shares of Common Stock or (Other
Securities) issuable upon any exercise of this Warrant, 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 (or Other Securities)
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). The Company shall pay any taxes and
other governmental charges that may be imposed under the laws of the United
States of America or any political subdivision or taxing authority thereof or
therein in respect of the issue or delivery of shares of Common Stock (or Other
Securities) or payment of cash upon exercise of this Warrant (other than income
taxes imposed on the Holder). The Company shall not be required, however, to pay
any tax or other charge imposed in connection with any transfer involved in the
issue of any certificate for shares of Common Stock (or Other Securities)
issuable upon exercise of this Warrant or payment of cash to any Person other
than the Holder, and in case of such transfer or payment the Company shall not
be required to deliver any certificate for shares of Common Stock (or Other
Securities) upon such exercise or pay any cash until such tax or charge has been
paid or it has been established to the Company's reasonable satisfaction that no
such tax or charge is due.

    

    (b) If in any
case the Company shall fail to issue and deliver or cause to be delivered the
shares of Common Stock to the Holder within five Trading Days of a particular
exercise of this Warrant, in addition to any other liabilities the Company may
have hereunder, under the Note Purchase Agreement 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, in addition to any amounts payable pursuant to Section
3(a), the Company shall upon demand of the Holder pay to the Holder an amount
equal to the actual, direct, demonstrable out-of-pocket damages and liabilities
suffered by the Holder by reason thereof which the Holder documents, and (C) the
Holder may by written notice (which may be given by mail, courier, personal
service or telephone line facsimile transmission) or oral notice (promptly
confirmed in writing), 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
right, rescind such exercise and the subscription form relating thereto, in
which case the Holder shall thereafter be entitled to exercise that portion of
this Warrant 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 clauses (A) or
(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 Company's 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 such Transfer Agent or the bankruptcy, liquidation or
reorganization of such Transfer Agent under any bankruptcy, insolvency or other
similar law). 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 exercises this Warrant 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 Warrant or otherwise. 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 five Trading Days of a particular exercise of this Warrant,
the amount payable by the Company pursuant to clause (B) of this Section 3(b)
with respect to such exercise shall be reduced by the amount of payments
previously paid by the Company to the Holder pursuant to Section 8(a)(4) of the
Note Purchase Agreement with respect to such exercise.

    

    
      
        
        

      

      
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    4. Adjustment for Dividends in Other
Stock, Property, etc.; Reclassification, etc. In case
at any time or from time to time on or after the Issuance Date, all holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,

    

    (a) other or
additional stock, rights, warrants or other securities or property (other than
cash) by way of dividend, or

    

    (b) any cash
(excluding cash dividends payable solely out of earnings or earned surplus of
the Company), or

    

    (c) other or
additional stock, rights, warrants or other securities or property (including
cash) by way of spin-off, split-up, reclassification, recapitalization,
combination of shares or similar corporate rearrangement,

    

    other
than (i) additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 6) and (ii) rights or warrants to subscribe for Common Stock at
less than the Current Fair Market Value (adjustments in respect of which are
provided in Section 7), then and in each such case the Holder, on the exercise
hereof as provided in Section 2, shall be entitled to receive the amount of
stock, rights, warrants and Other Securities and property (including cash in the
cases referred to in subdivisions (b) and (c) of this Section 4) which the
Holder would hold on the date of such exercise if on the date of such action
specified in the preceding clauses (a) through (c) (or the record date therefor)
the Holder had been the holder of record of the number of shares of Common Stock
called for on the face of this Warrant and had thereafter, during the period
from the date thereof to and including the date of such exercise, retained such
shares and all such other or additional stock, rights, warrants and Other
Securities and property (including cash in the case referred to in subdivisions
(b) and (c) of this Section 4) receivable by the Holder as aforesaid during such
period, giving effect to all adjustments called for during such period by
Section 5.

    

    5. Exercise upon a Reorganization
Event. In case
of any Reorganization Event the Company shall, as a condition precedent to the
consummation of the transactions constituting, or announced as, such
Reorganization Event, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant (in lieu of the
shares of Common Stock of the Company and Other Securities or property
purchasable and receivable upon exercise of the rights represented hereby
immediately prior to such Reorganization Event) to purchase the kind and amount
of shares of stock and Other Securities and property (including cash) receivable
upon such Reorganization Event by a holder of the number of shares of Common
Stock that might have been received upon exercise of this Warrant immediately
prior to such Reorganization Event. Any such provision shall include provisions
for adjustments in respect of such shares of stock and Other Securities and
property that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The provisions of this Section 5 shall
apply to successive Reorganization Events.

    

    6. Adjustment for Certain Extraordinary
Events. If on or
after the Issuance Date the Company shall (i) issue additional shares of the
Common Stock as a dividend or other distribution on outstanding Common Stock,
(ii) subdivide or reclassify its outstanding shares of Common Stock, or (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, then, in each such event, the Purchase Price shall,
simultaneously with the happening of such event, be adjusted by multiplying the
Purchase Price in effect immediately prior to such event by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 6.
The Holder shall thereafter, on the exercise hereof as provided in Section 2, be
entitled to receive that number of shares of Common Stock determined by
multiplying the number of shares of Common Stock which would be issuable on such
exercise immediately prior to such issuance, subdivision or combination, as the
case may be, by a fraction of which (i) the numerator is the Purchase Price in
effect immediately prior to such issuance and (ii) the denominator is the
Purchase Price in effect on the date of such exercise.

    

    
      
        
        

      

      
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    7. Issuance of Rights or Warrants to
Common Stockholders at less than Current Fair Market
Value. If the
Company shall on or after the Issuance Date issue rights or warrants to all
holders of its outstanding shares of Common Stock entitling them to subscribe
for or purchase shares of Common Stock at a price per share less than the
Current Fair Market Value on the record date fixed for the determination of
stockholders entitled to receive such rights or warrants, then

    

    (a) the
Purchase Price shall be adjusted so that the same shall equal the price
determined by multiplying the Purchase Price in effect at the opening of
business on the day 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 such 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 Fair Market Value, and the denominator shall be the number of shares of
Common Stock outstanding on the close of business on such record date plus the
total number of additional shares of Common Stock so offered for subscription or
purchase; and

    

    (b) the
number of shares of Common Stock which the Holder may thereafter purchase upon
exercise of this Warrant at the opening of business on the day after such record
date shall be increased to a number equal to the quotient obtained by dividing
(x) the Aggregate Purchase Price in effect immediately prior to such adjustment
in the Purchase Price pursuant to clause (a) of this Section 7 by (y) the
Purchase Price in effect immediately after such adjustment in the Purchase Price
pursuant to clause (a) of this Section 7.

    

    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 Purchase Price shall be
readjusted to the Purchase 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 and the number of shares of Common Stock for which this Warrant may
thereafter be exercised shall be readjusted (subject to proportionate adjustment
for any intervening exercises of this Warrant) to the number 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 Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed and the number of
shares of Common Stock for which this Warrant may thereafter be exercised shall
again be adjusted (subject to proportionate adjustment for any intervening
exercises of this Warrant) to be the number which would then be in effect if
such record date 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 Fair Market Value, 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 to the Purchase Price
as set forth in this Section 7 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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    8. Adjustment in Connection Sales by a
Designated Person. So long
as any Note is outstanding, 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 Purchase 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 Purchase
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 Purchase 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 Purchase Price
shall be reduced to a price equal to the Conversion Price (as defined in the
Note) then in effect until such time as the Stockholder Approval is obtained at
which time the Purchase Price shall be reduced to such Computed Market Price.
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
23.

    

    9. 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 statutory exchange 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 

    

    
      
        
        

      

      
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    (iii)
 any sale
or conveyance of the properties and assets of the Company as, or substantially
as, an entirety to any other Person 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
Warrant shall thereafter entitle the Holder to purchase 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 a number of shares of
Common Stock issuable upon exercise of this Warrant (assuming, for such
purposes, a sufficient number of authorized shares of Common Stock available to
exercise this Warrant) 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 8 the kind and amount of securities, cash or other property receivable
upon such consolidation, merger, statutory exchange, 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), 

    

    (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 Warrant 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 exercise of this Warrant, such registration or
qualification shall be completed prior to such reclassification, change,
consolidation, merger, statutory exchange, combination or sale. 

    

    Such
written agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. If, in the case of any such reclassification, change, consolidation,
merger, statutory exchange, combination, sale or conveyance, the stock or other
securities or other property or assets receivable thereupon by a holder of
shares of Common Stock includes shares of stock, other securities, other
property or assets of a Person other than the Company or any such successor or
purchasing Person, 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 Person 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.

    

    
      
        
        

      

      
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    (b) The above
provisions of this Section 9 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, combinations, sales and
conveyances.

    

    (c) If this
Section 9 applies to any event or occurrence, Section 5 shall not
apply.

    

    10. Tax
Adjustments. The
Company may make such reductions in the Purchase Price, in addition to those
required by Sections 4, 5, 6, 7 and 8 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.

    

    11. Minimum
Adjustment. (a) No
adjustment in the Purchase Price (and no related adjustment in the number of
shares of Common Stock which may thereafter be purchased upon exercise of this
Warrant) shall be required unless such adjustment would require an increase or
decrease of at least 1% in the Purchase Price; provided, however,
that any
adjustments which by reason of this Section 11 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All such
calculations under this Warrant 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.

    

    (b) 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.

    

    12. Notice of
Adjustments. Whenever
the Purchase Price is adjusted as herein provided, the Company shall promptly,
but in no event later than five Trading Days thereafter, give a notice to the
Holder setting forth the Purchase Price and number of shares of Common Stock
which may be purchased upon exercise of this Warrant after such adjustment and
setting forth a brief statement of the facts requiring such adjustment but which
such 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.

    

    13. Further
Assurances. The
Company will take all action that may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
stock, free from all taxes, liens and charges with respect to the issue thereof,
on the exercise of all or any portion of this Warrant from time to time
outstanding.

    

    14. 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

    

    
      
        
        

      

      
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    (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 (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;

    

    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 subscription form
to exercise this Warrant in whole or in part that is contingent on the
completion of such action.

    

    15. Reservation of Stock, etc., Issuable
on Exercise of Warrants. The
Company will at all times reserve and keep available out of its authorized but
unissued shares of capital stock, solely for issuance and delivery on the
exercise of this Warrant, a sufficient number of shares of Common Stock (or
Other Securities) to effect the full exercise of this Warrant and the exercise,
conversion or exchange of all other Common Stock Equivalents from time to time
outstanding (or Other Securities), and if at any time the number of authorized
but unissued shares of Common Stock (or Other Securities) shall not be
sufficient to effect such exercise, conversion or exchange, the Company shall
take such action as may be necessary to increase its authorized but unissued
shares of Common Stock (or Other Securities) to such number as shall be
sufficient for such purposes.

    

    16. Transfer of
Warrant. This
Warrant shall inure to the benefit of the successors to and assigns of the
Holder. This Warrant and all rights hereunder, in whole or in part, are
registrable at the office or agency of the Company referred to below by the
Holder in person or by his duly authorized attorney, upon surrender of this
Warrant properly endorsed accompanied by an assignment form in the form
attached to this
Warrant, or other customary form, duly executed by the transferring
Holder.

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    17. Register of
Warrants. The
Company shall maintain, at the principal office of the Company (or such other
office as it may designate by notice to the Holder), a register in which the
Company shall record the name and address of the Person in whose name this
Warrant has been issued, as well as the name and address of each successor and
prior owner of such Warrant. The Company shall be entitled to treat the Person
in whose name this Warrant is so registered as the sole and absolute owner of
this Warrant for all purposes.

    

    18. Exchange of
Warrant. This
Warrant is exchangeable, upon the surrender hereof by the Holder at the office
or agency of the Company referred to in Section 16, for one or more new Warrants
of like tenor representing in the aggregate the right to subscribe for and
purchase the number of shares of Common Stock which may be subscribed for and
purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by the
Holder at the time of such surrender.

    

    19. Replacement of
Warrant. On
receipt by the Company of evidence reasonably satisfactory to it of the
ownership of and the loss, theft, destruction or mutilation of this Warrant 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 Warrant, the Company will execute and deliver
to the Holder a new Warrant of like tenor without charge to the
Holder.

    

    20. Warrant
Agent. The
Company may, by written notice to the Holder, appoint the transfer agent and
registrar for the Common Stock as the Company's agent for the purpose of issuing
Common Stock (or Other Securities) on the exercise of this Warrant pursuant to
Section 2, and the Company may, by written notice to the Holder, appoint an
agent having an office in the United States of America for the purpose of
exchanging this Warrant pursuant to Section 18, and replacing this Warrant
pursuant to Section 19, or any of the foregoing, and thereafter any such
exchange or replacement, as the case may be, shall be made at such office by
such agent.

    

    21. Remedies.  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 Warrant 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 exercise of this Warrant or (y) by an injunction against a violation of any
of the terms hereof or (z) otherwise.

    

    22. No Rights or Liabilities as a
Stockholder. This
Warrant shall not entitle the Holder to any voting rights or other rights as a
stockholder of the Company. Nothing contained in this Warrant shall be construed
as conferring upon the Holder the right to vote or to consent or to receive
notice as a stockholder of the Company on any matters or with respect to any
rights whatsoever as a stockholder of the Company. No dividends or interest
shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the Common Stock (or Other Securities) purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised in accordance with its terms.

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    23. Notices,
etc. All
notices and other communications from the Company to the Holder shall be in
writing and delivered personally, by confirmed facsimile, by a nationally
recognized overnight courier service or mailed by first class certified mail,
postage prepaid, at such facsimile telephone number or address as may have been
furnished to the Company in writing by the Holder or at such facsimile telephone
number or the address shown for the Holder on the register of Warrants referred
to in Section 17.

    

    24. Transfer
Restrictions. This
Warrant has not been and is not being registered under the provisions of the
1933 Act or any state securities laws and this Warrant 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 Warrant 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 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 Registration Statement and the prospectus related thereto, each as
amended or supplemented to the date of transfer to such transferee, and 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
and which are incorporated by reference in such prospectus as of the date of
such transfer. If such transfer is intended to assign the rights and obligations
of the Holder under Section 5,8,9 and 10 of the Note Purchase Agreement, such
transfer shall otherwise be made in compliance with the applicable provisions of
the Note Purchase Agreement. 

    

    25. 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 covenants and agrees that it 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 the holder of any shares of Common Stock issued upon exercise of this
Warrant which continue to be Restricted Securities in connection with any sale
thereof and any prospective purchaser of this Warrant 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 Warrant 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. 

    

    
      
        
        

      

      
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    26. Legend. The
provisions of Section 5(b) of the Note Purchase Agreement and the related
definitions of capitalized terms used therein and defined in the Note Purchase
Agreement are by this reference incorporated herein as if set forth in full at
this place.

    

    27. Amendment;
Waiver. (a) This
Warrant and any terms hereof may be changed, modified or amended only by an
instrument in writing signed by the party against which enforcement of such
change, modification or amendment is sought. 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 Warrant, 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 Warrant may be waived by the Holder or Company at any time
if the waiving party is entitled to the benefit thereof, but no such waiver will
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 Warrant, 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 Warrant on any future occasion.

    

    28. Miscellaneous. This
Warrant shall be construed and enforced in accordance with and governed by the
internal laws of the State of New York. The headings, captions and footers in
this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof. The invalidity or unenforceability of
any provision hereof shall in no way affect the validity or enforceability of
any other provision.

    

    29. Attorneys'
Fees. In any
litigation, arbitration or court proceeding between the Company and Holder
relating hereto, the prevailing party shall be entitled to attorneys’ fees and
expenses and all costs of proceedings incurred in enforcing this
Warrant.

    

    

    [Signature Page
Follows]

    
      
         

        
        

      

      
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    IN WITNESS
WHEREOF, the
Company has caused this Warrant to be duly executed on its behalf by one of its
officers thereunto duly authorized.

     

     

     

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

    

    
      
        
           

        

        
        

      

      
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    ASSIGNMENT

    

    For value
                                hereby
sell(s), assign(s) and transfer(s) unto                                 (Please
insert social security or other Taxpayer Identification Number of assignee:
                               ) the
attached original, executed Warrant to purchase                           share of
Common Stock of eMagin Corporation, a Delaware corporation (the “Company”), and
hereby irrevocably constitutes and appoints                                 attorney
to transfer the Warrant on the books of the Company, with full power of
substitution in the premises.

    

    In
connection with any transfer of the Warrant 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 Warrant is being
transferred:

    

    [ ] To the
Company or a Subsidiary; or

    

    [ ] To an
“accredited investor” (as defined in Regulation D under the 1933 Act) 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 Warrant is not being transferred to an “affiliate” (as
defined in Rule 144 under the 1933 Act) 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 Warrant.

    

     

    
 

    
      	 Dated:
      ____________________________________	 NAME:____________________________________________
	 	 
	 	 ____________________________________________________________
	 	
               Signature(s)

            
	 	 

    

     

    
      
        
           

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

        

      

    

    Exhibit 1

    

    FORM OF
SUBSCRIPTION

    

    EMAGIN
CORPORATION

    

    (To be
signed only on exercise of Warrant)

    

    
      
        	 TO:	 eMagin Corporation
	
                 

              	 10500 N.E. 8th
      Street, Suite 1400 
	 	 Bellevue,
      WA 98004

      

    

     

        

    

    Attention:
Chief Financial Officer

    

    Facsimile
No.: (425) 749-3601

    

    1. The
undersigned Holder of the attached original, executed Warrant hereby elects to
exercise its purchase right under such Warrant with respect to                              shares
(the “Exercise Shares”) of Common Stock, as defined in the Warrant, of eMagin
Corporation, a Delaware corporation (the “Company”).

    

    2. The
undersigned Holder (check one):

    

    q    (a) elects to
pay the Aggregate Purchase Price for such shares of Common Stock (i) in lawful
money of the United States or by the enclosed certified or official bank check
payable in United States dollars to the order of the Company in the amount of
$                          , or (ii)
by wire transfer of United States funds to the account of the Company in the
amount of $                            , which
transfer has been made before or simultaneously with the delivery of this Form
of Subscription pursuant to the instructions of the Company;

     

    or

     

    q    (b) elects to
receive shares of Common Stock having a value equal to the value of the Warrant
calculated in accordance with Section 2(b) of the Warrant.

     

    

    3. Please
issue a stock certificate or certificates representing the appropriate number of
shares of Common Stock in the name of the undersigned or in such other name(s)
as is specified below:

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Name:_________________________________________________________________

    

    Address_______________________________________________________________

    

     

    

    Social
Security or Tax Identification Number (if any):

     

    ____________________________________________________________

     

    

    

    

    Dated:                                                        ________________________________________________________   

    (Signature
must conform to name of Holder as 

    specified
on the face of the Warrant)

    

    ________________________________________________________ 

    (Address)

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