Document:

NEONODE
INC.

    

    CERTIFICATE
OF DESIGNATIONS, PREFERENCES, AND RIGHTS

    OF
SERIES A AND SERIES B PREFERRED STOCK

    

    Pursuant
to Section 151 of the Delaware General Corporation Law, Neonode Inc., a Delaware
corporation (the "Corporation"), does hereby certify:

    

    WHEREAS, the Corporation does
here certify that no shares of the Preferred Stock of the Corporation have, as
of the date of this Certificate, been issued.

    

    WHEREAS, the Corporation does
here certify that pursuant to the authority conferred upon the Board of
Directors of the Corporation by the Certificate of Incorporation of the
Corporation (the "Charter"), the Board of Directors of the Corporation on
December 26, 2008 duly adopted the following resolutions establishing a series
of Preferred Stock designated as Series A Preferred Stock and a series of
Preferred Stock designated as Series B Preferred Stock, and that such
resolutions have not been modified and are in full force and effect on the date
hereof:

    

    RESOLVED, to establish a
series of the authorized preferred stock of the Corporation, par value $0.001
each share, which series will be designated as “Series A Preferred Stock,” and
which will consist of 899,081 shares, with the following rights preferences,
privileges, and restrictions:

    

    A.           Dividends and
Distributions. The holders of shares of Series A Preferred Stock
will be entitled to participate with the holders of the Common Stock of the
Corporation with respect to any dividends declared on the Common Stock in
proportion to the number of shares of Common Stock issuable upon conversion of
the shares of Series A Preferred Stock held by them.

    

    B.           Liquidation
Preference.  In the event of any liquidation, dissolution, or
winding up of the Corporation, either voluntary or involuntary, subject to the
rights of any other series of Preferred Stock to be established by the Board of
Directors of the Corporation (the “Senior Preferred Stock”), the holders of
Series A Preferred Stock shall be entitled to receive, after any distribution
with respect to the Senior Preferred Stock and prior to and in preference to any
distribution of any of the assets of the Corporation to the holders of Common
Stock by reason of the ownership thereof, $0.001 for each share of Series A
Preferred Stock then outstanding.

    

    C.           Voting.  The
holders of shares of Series A Preferred Stock shall have one vote for each share
of Series A Preferred Stock held by them.

    

    D.           Conversion.

    

    (i)           Subject
to the availability of a sufficient number of authorized but unissued shares of
Common Stock to effect the conversion of shares of Series A Preferred Stock,
each share of Series A Preferred Stock shall be convertible into the number of
shares of Common Stock that results from multiplying such share by the
conversion rate for the Series A Preferred Stock that is in effect at the time
of conversion (the “Conversion Rate”).

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (ii)           The
Conversion Rate for the Series A Preferred Stock initially shall be one
(1).

    

    (iii)           In
the event the stockholders of the Corporation (a) approve an increase in the
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient to modify the Conversion Rate, and (b) approve a Conversion Rate
of 480.63 shares of Common Stock for each share of Series A Preferred Stock,
then the Conversion Rate shall be 480.63.

    

    (iv)           Subject
to the availability of a sufficient number of authorized but unissued shares of
Common Stock to effect the conversion of shares of Series A Preferred Stock,
each share of Series A Preferred Stock may be converted into share(s) of Common
Stock at the option of the holder thereof.

    

    FURTHER RESOLVED, to establish
a series of the authorized preferred stock of the Corporation, par value $0.001
each share, which series will be designated as “Series B Preferred Stock,” and
which will consist of 100,934 shares, with the following rights preferences,
privileges, and restrictions:

    

    A.           Dividends and
Distributions. The holders of shares of Series B Preferred Stock
will be entitled to participate with the holders of the Common Stock of the
Corporation with respect to any dividends declared on the Common Stock in
proportion to the number of shares of Common Stock issuable upon conversion of
the shares of Series B Preferred Stock held by them.

    

    B.           Liquidation
Preference.  In the event of any liquidation, dissolution, or
winding up of the Corporation, either voluntary or involuntary, subject to the
rights of the Series A Preferred Stock and any other series of Preferred Stock
to be established by the Board of Directors of the Corporation (collectively,
the “Senior Preferred Stock”), the holders of Series B Preferred Stock shall be
entitled to receive, after any distribution with respect to the Senior Preferred
Stock and prior to and in preference to any distribution of any of the assets of
the Corporation to the holders of Common Stock by reason of the ownership
thereof, $0.001 for each share of Series B Preferred Stock then
outstanding.

    

    C.           Voting.  The
holders of shares of Series B Preferred Stock shall have one vote for each share
of Series B Preferred Stock held by them.

    

    D.           Conversion.

    

    (i)           Subject
to the availability of a sufficient number of authorized but unissued shares of
Common Stock to effect the conversion of shares of Series B Preferred Stock,
each share of Series B Preferred Stock shall be convertible into the number of
shares of Common Stock that results from multiplying such share by the
conversion rate for the Series B Preferred Stock that is in effect at the time
of conversion (the “Conversion Rate”).

    

    (ii)          The
Conversion Rate for the Series B Preferred Stock initially shall be one
(1).

    

    
      
         

      

      
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    (iii)         In
the event the stockholders of the Corporation (a) approve an increase in the
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient to modify the Conversion Rate, and (b) approve a Conversion Rate
of 132.07 shares of Common Stock for each share of Series B Preferred Stock,
then the Conversion Rate shall be 132.07.

    

    (iv)         Subject
to the availability of a sufficient number of authorized but unissued shares of
Common Stock to effect the conversion of shares of Series B Preferred Stock,
each share of Series B Preferred Stock may be converted into share(s) of Common
Stock at the option of the holder thereof.

    

    FURTHER RESOLVED, that the
directors and officers of the Corporation be, and each of them hereby is,
authorized and empowered on behalf of the Corporation to execute, verify, and
file a certificate of designations of preferences in accordance with Delaware
law.

    

    IN
WITNESS WHEREOF, the Corporation has caused this Certificate of Designations to
be executed by its duly authorized officer this 29th day of December,
2008.

    

    
      
        
          
            
              
                	
                        NEONODE INC.

                      
	 
      
	
                        By:   /s/    David
      Brunton                          
      

                      
	
                        Name: David Brunton

                      
	
                        Title:
      CFO

                      

              

            

          

        

      

    

    

    
      
         

      

      
        3NOTE CONVERSION
AGREEMENT

    

    THIS NOTE CONVERSION AGREEMENT
(the “Conversion
Agreement”), dated as of December ___, 2008, is entered into by and
between Neonode, Inc., a Delaware corporation (the “Corporation”), and
_____________________ (the “Holder”).

    

    WHEREAS, the Holder is the
holder and beneficial owner of secured notes, promissory notes, and/or other
debt instruments in the aggregate amount of [___________] (the
“Convertible Notes”);
and

    

    WHEREAS, to comply with the
relevant NASDAQ maintenance criteria and to raise capital to finance the
Corporation’s business going forward, the Corporation will be engaging in
certain refinancing and capital raising activities, including the conversion of
the Convertible Notes into shares of Preferred A Stock, as defined below;
and

    

    WHEREAS, subject to the terms
and conditions contained herein, the Holder is willing to convert all of the
Convertible Notes into shares of the Corporation’s Series A Preferred Stock, par
value US$0.001 each (the "Preferred A Stock"), all as
provided herein.

    

    NOW, THEREFORE, in
consideration of the premises and the mutual promises, representations and
warranties made herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

    

    1.           Conversion of Convertible
Notes.

    

    1.1           Pursuant
to the terms and conditions of this Conversion Agreement, the Holder hereby
surrenders, assigns, and transfers to the Corporation all right, title, and
interest in and to the Convertible Notes in exchange for [________] shares of
Preferred A Stock of the Corporation (the “Conversion
Shares”).

    

    1.2           In
full consideration of the acceptance of the Convertible Notes, the Corporation
shall issue the Conversion Shares to the Holder.

    

    1.3           Subject
to the issuance of the Conversion Shares to the Holder, the Holder hereby
releases the Corporation and its officers, directors, employees, and affiliates
from any and all claims, rights, and causes of action, with respect to, in
connection with, or arising out of the Convertible Notes.

    

    1.4           The
Holder acknowledges the following:

    

      (a)           that
the Holder may lose his entire investment in the Corporation;

    

      (b)           that
upon surrender of the Convertible Notes to the Corporation, the Holder will lost
his status as a creditor of the corporation and instead assume the status of an
equity holder;

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (c)           that
the stockholders of the Corporation may vote to reject (i) an increase in the
authorized share capital of the Corporation to enable the issuance of shares of
common stock upon conversion of the Conversion Shares or (ii) a modification of
the initial conversion rate of the Preferred A Stock; and

    

    (d)           certain
members of the Board of Directors of the Corporation are personally involved in
the Corporation’s refinancing and capital raising activities and will be
investing their own funds in the Corporation, and that the personal interest of
these Directors in these transactions creates the potential for a conflict of
interest.

    

    A
complete discussion of the risks associated with this transaction and an
investment in the Corporation are set forth in the Corporation’s Form 10-K filed
with the SEC on April 15, 2008 for the fiscal year ended December 31, 2007, Form
S-3 filed with the SEC on September 23, 2008, and Form 10-Q filed with the SEC
on November 19, 2008 for the quarter ended September 30, 2008, and in Section 5
below.

    

    2.           The
Closing.

    

    2.1           The
consummation of the transactions contemplated hereby (the “Closing”) shall take place on
December ___, 2008, or on such other date as the parties mutually agree, (the
“Closing
Date”).  The Closing shall take place at the offices of the
Corporation, or at such other place as the parties mutually agree.

    

    2.2           At
the Closing, (a) the Holder shall deliver to the Company all of the Convertible
Notes to be converted into the Conversion Shares, and (b) the Corporation shall
issue and deliver to the Holder, a stock certificate or certificates registered
in the name of the Holder evidencing the Conversion Shares issued to the
Holder.

    

    3.           Series A Preferred
Stock.

    

    3.1           Certificate of
Designations. The rights, preferences, privileges, and restrictions of
the Preferred A Stock shall be as described in the Certificate of Designations,
of which a copy has been provided to each Holder.

    

    3.2           Conversion. Subject
to approval of the stockholders of the Corporation, each share of Preferred A
Stock shall be convertible into 480.63 shares of the Corporation’s common stock
(the “Conversion Rate”).

    

    3.3           Stockholder
Approval. The Corporation shall provide each stockholder entitled to
vote at either (a) the next annual meeting of stockholders of the Corporation or
(b) a special meeting of stockholders of the Corporation, which shall be
promptly called and held not later than March 30, 2009, (the “Stockholder
Meeting”), with a proxy statement soliciting each such stockholder’s affirmative
vote at the Stockholder Meeting for approval of resolutions (i) increasing the
authorized share capital of the Corporation so as to authorize a sufficient
amount of authorized share capital to enable the issuance of shares of common
stock upon conversion of the Conversion Shares, and (ii) approving the
Conversion Rate, (the “Stockholder Approvals”).

     

    
      
        
        

      

      
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    3.4           Acknowledgement. The
Holder acknowledges that its right to convert the Conversion Shares into shares
of common stock of the Corporation is subject to the Stockholder Approvals, and
that there can be no guarantee that the Stockholder Approvals will be
obtained.

    

    4.           Information on the
Corporation; Legal Proceedings

    

    4.1           Information on the
Corporation. Each Holder has been furnished with or has had access at the
EDGAR Website of the SEC to the Corporation's Form 10-K filed on April 15, 2008
for the fiscal year ended December 31, 2007 and the financial statements
included therein for the year ended December 31, 2007 together with all
subsequent filings made with the SEC available at the EDGAR website ("Reports").  In
addition, each Holder may have received in writing from the Corporation such
other information concerning its operations, financial condition and other
matters as such Holder has requested in writing, identified thereon as "Other
Written Information" and considered all factors such Holder deems material in
deciding on the advisability of investing in the Conversion
Shares.

    

    4.2           Legal
Proceedings.

    

     4.2.1           Alpha Capital
Anstalt. On September 4, 2008, Alpha Capital Anstalt (“Alpha”), an
investor in the Corporation from previous private placement transactions,
initiated a law suit against the Corporation in the United States District Court
for the Southern District of New York alleging that the Corporation failed to
issue certain stock certificates pursuant to the terms and conditions of certain
investment subscription agreements.  Alpha asked the court to award
them $734,650 in damages plus attorneys fees. Although the Corporation believes
the claim has no merit, the Corporation has reached an agreement in principal on
the terms for a negotiated settlement with Alpha, which agreement has not as of
yet been finalized.

    

     4.2.2           Empire Asset
Management. On December 9, 2008, Empire Asset Management (“Empire”), a
broker dealer that acted as the Corporation’s financial advisor and exclusive
placement agent and purchased stock for their own account in previous private
placement transactions, initiated a law suit against the Corporation in the
Supreme Court of the State of New York alleging that the Corporation
misrepresented the success of its business to induce Empire to invest in the
Corporation.  Empire is seeking compensatory damages in an unspecified
amount for the harm allegedly suffered.  The Corporation believes that
the action has no merit and intends to defend vigorously against the
action.

     

    
      
        
        

      

      
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    4.2.3           Nasdaq. On May 29,
2008, the Corporation received a NASDAQ Staff deficiency letter indicating that
the market value of our listed securities had been below the minimum $35 million
requirement for continued inclusion under its listing standards (the “Market
Capitalization Rule”), and provided until June 30, 2008 for the Corporation to
demonstrate compliance.  On July 1, 2008, the Corporation received a
NASDAQ Staff Determination letter stating that the Corporation had not regained
compliance with the Market Capitalization Rule and, unless the Corporation
requests an appeal of this determination, trading of the Corporation’s common
stock will be suspended at the opening of business on July 10, 2008 and NASDAQ
will remove the Corporation’s securities from listing and registration on the
NASDAQ Capital Market. The Corporation has appealed the determination with the
NASDAQ Listing Qualifications Panel (the “Panel”), which stays the suspension of
Neonode’s securities pending the Panel’s decision.  The Corporation
appeared before the Panel on August 28, 2008 and the Corporation is awaiting its
decision.

    

    In
addition, on July 3, 2008, the Corporation received a NASDAQ Staff deficiency
letter indicating that for the last 30 consecutive days, the bid price for the
Corporation’s common stock had closed below the $1.00 minimum requirement for
continued inclusion under its listing standards (the “Minimum Bid Price Rule”),
and provided the Corporation with 180 days (or until December 30, 2008) to
regain compliance. 

    

    Furthermore,
on December 11, 2008, the Corporation received a Nasdaq Staff deficiency letter
(the “Notice”) from The NASDAQ Stock Market Listing Qualifications Department
stating that the Corporation has not paid certain fees required by Marketplace
Rule 4310(c)(13) (the “Rule”). The Corporation’s past due balance currently
totals $43,615.08.  The Notice further stated that the Nasdaq Listing
Qualification Panel (“Panel”) will consider this matter in rendering a
determination regarding the Corporation’s continued listing on the NASDAQ
Capital Markets.

    

    5.           Risk
Factors

    

    An
investment in the Corporation’s preferred stock involves a high degree of risk.
Before surrendering your Convertible Notes for the Conversion Shares, you should
consider carefully the specific risks detailed in this “Risk Factors” section
together with all of the other information contained in this Agreement and any
other documents incorporated by reference herein. If any of these risks occur,
the Corporation’s business, results of operations and financial condition could
be harmed, the price of the Corporation’s preferred stock could decline, and you
may lose all or part of your investment in the Corporation.

    

    5.1           The Corporation’s
independent registered public accounting firm issued a going concern opinion on
the Corporation’s financial statements, questioning the Corporation’s ability to
continue as a going concern.

     

    Due to
the Corporation’s need to raise additional financing to fund the Corporation’s
operations and satisfy obligations as they become due, the Corporation’s
independent registered public accounting firm has included an explanatory
paragraph in its report on the Corporation’s December 31, 2007 consolidated
financial statements regarding its substantial doubt as to the Corporation’s
ability to continue as a going concern. This may have a negative impact on the
trading price of the Corporation’s common stock and adversely impact the
Corporation’s ability to obtain necessary financing.

     

    
      
        
        

      

      
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    5.2           The Refinancing
of the Corporation may be unsuccessful and the stockholders of the Corporation
may lose their entire investment in the Corporation.

    

    The
individuals and entities participating in the refinancing of the Corporation,
including the investors, note holders, warrant holders, and employees of the
Swedish subsidiary should be aware that if the Corporation is not successful in
its refinancing endeavors, their entire investment in the Company could become
worthless.  Even if the Corporation is successful, there can be no
assurance that the participants in the refinancing of the Corporation will
derive a profit from their investment.

    

    5.3           The Refinancing
of the Corporation may be unsuccessful and upon the execution of the Note
Conversion Agreement the note holders of the Corporation will lose their status
as creditors.

    

    Upon
conversion of the notes into shares of Preferred Stock, the holders of such
notes will lose their status as note holders and will have only the rights and
preferences of stockholders who hold the Corporation's Preferred Stock. The
proposed conversion to the Corporation’s Common Stock is subject to stockholder
approval to approve the proposed transactions and to increase the number of
authorized shares of the Corporation’s common stock to a number sufficient to
allow for the conversion of the Preferred Stock to be issued in the proposed
refinancing transactions. If the Corporation is not successful in its endeavors
or in obtaining the requisite stockholder approval, their entire investment in
the Company could become worthless.  Even if the Corporation is
successful, there can be no assurance that holders of the Preferred Stock will
derive a profit from their investment.

    

    5.4           The Corporation’s
current management and Directors are personally involved in the Corporation’s
refinancing and capital raising activities.

    

    The
Corporation’s board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders.  In addition, as part of the Corporation’s refinancing
efforts, the Corporation’s current directors, Per Bystedt, will be investing
additional funds in the Corporation in exchange for the issuance to them of
preferred stock, as well as participating in a share exchange transaction with
the Corporation as stockholders of a Swedish company to whom the Company will be
issuing preferred stock.  The fact that the current management and
Directors of the Corporation have a personal interest as investors in the
Corporation creates the potential for a conflict of interest.  While
the Corporation believes that the proposed refinancing and capital raising
transactions that the Corporation will be entering into with the Corporation’s
management and directors are fair and in the best interests of the Corporation,
there is a risk that the personal involvement of the management and directors
may have affected their judgment.

     

    
      
        
        

      

      
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    5.5           The tax
implications of this refinancing transaction are complex and should be reviewed
by the investor’s tax advisor.

    

    The tax
implications, including United States federal income tax consequences, of this
refinancing transaction are complex.  Each investor should consult its
own tax advisor regarding the particular United States Federal, state, local and
foreign tax consequences of purchasing, holding, and disposing of our Preferred
and Common Stock, including the consequences of any proposed change in
applicable laws.

    

    RISKS
RELATED TO THE CORPORATION’S BUSINESS

    

    5.6           The Corporation
will require additional capital to fund the Corporation’s operations, which
capital may not be available on commercially attractive terms or at
all.

    

    The
Corporation will require sources of capital in addition to cash on hand to
continue operations and to implement the Corporation’s strategy. The Corporation
does not have sufficient liquid assets to continue operating into the end of
December 2008. The Corporation estimates that the Corporation will need a
minimum of approximately $1.3 million of additional cash from additional
financings, to fund operating expenses through March 31, 2009. The Corporation
is currently evaluating different financing alternatives including but not
limited to selling shares of the Corporation’s common or preferred stock or
issuing notes that may be converted in shares of the Corporation’s common stock
which could result in the issuance of additional shares.  If the
Corporation’s operations do not become cash flow positive as projected the
Corporation will be forced to seek credit line facilities from financial
institutions, additional private equity investment or debt arrangements. No
assurances can be given that the Corporation will be successful in obtaining
such additional financing on reasonable terms, or at all. If adequate funds are
not available on acceptable terms, or at all, the Corporation may be unable to
adequately fund the Corporation’s business plans and it could have a negative
effect on the Corporation’s business, results of operations and financial
condition.  In addition, if funds are available, the issuance of
equity securities or securities convertible into equity could dilute the value
of shares of the Corporation’s stock and cause the market price to fall, and the
issuance of debt securities could impose restrictive covenants that could impair
the Corporation’s ability to engage in certain business
transactions.

    

    5.7           The Corporation’s
common stock is at risk for delisting from the NASDAQ Capital Market. If it is
delisted, the Corporation’s stock price and the liquidity of the Corporation’s
stock may be impacted.

     

    The
Corporation's common stock is quoted on The NASDAQ Capital Market under the
symbol “NEON”.  In order for the Corporation's common stock to
continue to be quoted on the NASDAQ Capital Market, the Corporation must satisfy
various listing maintenance standards established by NASDAQ.  Among
other things, as such requirements pertain to the Corporation, the Corporation
is required to have stockholders’ equity of at least $2.5 million or a market
capitalization of at least $35 million and the Corporation’s common stock must
have a minimum closing bid price of $1.00 per share.

     

    On May
29, 2008, the Corporation received a NASDAQ staff deficiency letter from The
NASDAQ Stock Market Listing Qualifications Department stating that for the last
10 consecutive business days, the market value of the Corporation's listed
securities has been below the minimum $35 million requirement for continued
inclusion under Marketplace Rule 4310 (c)(3)(B) (the "Rule"). The notice further
states that pursuant to Marketplace Rule 4310(c)(8)(C), the Corporation was
provided 30 calendar days (or until June 30, 2008) to regain
compliance.

     

    
      
        
        

      

      
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    On July
1, 2008, the Corporation received a notice from NASDAQ that it had not regained
compliance within the specified time period and that unless the Corporation
requested an appeal of the non-compliance determination the Corporation's
securities would be suspended from trading on the NASDAQ Capital Market on July
10, 2008. The Corporation has submitted a request to have a hearing to the
NASDAQ Listing Qualifications Panel (Panel).  The Corporation's
request stays the delisting of its securities pending the hearing and a
determination by the Panel.  The Corporation appeared before the Panel
on August 28, 2008. On November 18, 2008, the Corporation received a
determination letter from the Panel that the Panel granted the Corporation an
extension until December 29, 2008 to complete its proposed restructuring and
refinancing transactions and regain compliance with the Rule.

    

    Additionally,
on July 3, 2008, the Corporation received another staff deficiency letter from
NASDAQ stating that for the last 30 consecutive business days, the bid price of
our common stock closed below the $1.00 minimum required for continued inclusion
under Marketplace Rule 4310(c)(4). The notice further states that pursuant to
Marketplace Rule 4310(c)(8)(D), the Corporation will be provided 180 calendar
days (or until December 30, 2008) to regain compliance. If, at any time before
December 30, 2008, the bid price of the Corporation's common stock closes at
$1.00 per share or more for a minimum of 10 consecutive business days, the
Corporation may regain compliance with the Minimum Bid Price Rule. NASDAQ
subsequently modified its Marketplace Rules and notified the Corporation that it
has until April 6, 2009 to regain compliance with the bid price under
Marketplace Rule 4310(c)(4).

    

    Additionally
on December 11, 2008, the Corporation received a Nasdaq Staff deficiency letter
from The NASDAQ Stock Market Listing Qualifications Department stating that it
has not paid certain fees required by Marketplace Rule 4310(c)(13) (the
“Rule”). The Corporation’s past due balance currently total $43,615.08. The
notice further states that the Nasdaq Listing Qualification Panel (“Panel”) will
consider this matter in rendering a determination regarding the Corporation’s
continued listing on the NASDAQ Capital Markets.

    

    5.8           The Corporation
has never been profitable and the Corporation anticipates significant additional
losses in the future.

    

    The
Corporation was formed in 2006 as a holding company owning and operating Neonode
AB, its Swedish subsidiary, which was formed in 2004 and has been primarily
engaged in the business of developing and selling mobile phones.  On
December 9, 2008, Neonode AB, filed a petition for bankruptcy in compliance with
the Swedish Bankruptcy Act (1987:672). Mr. Hans Ödén of the Stockholm-based
Ackordscentralen AB, a consultancy firm specializing in insolvency, was
appointed by the district court of Stockholm to administrate the process.
Although the Corporation has transferred the intellectual property (IP) related
to its touch screen technology from Neonode AB to the Corporation pursuant to an
intercompany borrowing asset pledge agreement, the Swedish bankruptcy court may
not allow the transfer and require the Corporation to return the IP to Neonode
AB.  The Corporation has a limited operating history on which to base
an evaluation of the Corporation’s business and prospects. The Corporation’s
prospects must be considered in light of the risks and uncertainties encountered
by companies in the early stages of development, particularly companies in new
and rapidly evolving markets.  After refinancing efforts have been
completed, the Corporation’s success will depend on many factors, including, but
not limited to:

     

    
      
        
        

      

      
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              ·

            	
              the
      growth of the worldwide market for touch screen mobile
      devices;

            
	 
      	
              ·

            	
              the
      Corporations ability to develop and sell or license its touchscreen
      technology to third party companies to embed in their products
      ;

            

    

    
      	 
      	
              ·

            	
              the
      level of competition from other touch screen technologies faced by the
      Corporation; and

            
	 
      	
              ·

            	
              the
      ability of future customers of the Corporation’s touchscreen technology to
      develop and sell products incorporating the Corporation’s touch screen
      technology.

            

    

    

    In
addition, the Corporation has experienced substantial net losses in each fiscal
period since the Corporation’s inception. These net losses resulted from a lack
of substantial revenues and the significant costs incurred in the development of
the Corporation’s products and infrastructure. The Corporation’s ability to
continue as a going concern is dependent on the Corporation’s ability to raise
additional funds and implement the Corporation’s business plan.

     

    The
Corporation’s limited operating history and the emerging nature of the
Corporation’s market, together with the other risk factors set forth in this
Section, make prediction of the Corporation’s future operating results
difficult. There can also be no assurance that the Corporation will ever achieve
significant revenues or profitability or, if significant revenues and
profitability are achieved, that they could be sustained.

    

    5.9           The Corporation’s
vendors may deny the Corporation’s requests to delay or reduce the payment of
amounts owed to them or to cancel shipments of materials and products purchased
from and to allow the Corporation to return unused materials and products
already received from them.

    

    The
Corporation is not generating cash from operations and has been incurring
significant losses. The Corporation has been funding the Corporation’s
operations primarily with cash proceeds raised through the sale of notes that
are convertible into the Corporation’s common stock, shares of the Corporation’s
common stock, and warrants. Unless the Corporation is able to increase the
Corporation’s revenues and decrease expenses substantially and secure an
external funding source, the Corporation may not be able to pay the
Corporation’s vendors the amount due them and the Corporation will not have
sufficient cash to support the Corporation’s operations for the next six
months.

    

    The
Corporation’s vendors may resort to legal action to try to enforce payment in
full pursuant to the terms or the original payment commitment.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    5.10           If the
Corporation fails to develop and introduce new products and services
successfully and in a cost effective and timely manner, the Corporation will not
be able to compete effectively and the Corporation’s ability to generate
revenues will suffer.

     

    The
Corporation operates in a highly competitive, rapidly evolving environment, and
the Corporation’s success depends on the Corporation’s ability to develop and
introduce new products and services that the Corporation’s customers and end
users choose to buy. If the Corporation is unsuccessful at developing and
introducing new products and services that are appealing to the Corporation’s
customers and end users with acceptable quality, prices and terms, the
Corporation will not be able to compete effectively and the Corporation’s
ability to generate revenues will suffer.

     

    The
development of new products and services is very difficult and requires high
levels of innovation. The development process is also lengthy and costly. If the
Corporation fails to anticipate the Corporation’s end users’ needs or
technological trends accurately, or the Corporation is unable to complete the
development of products and services in a cost effective and timely fashion, the
Corporation will be unable to introduce new products and services into the
market or successfully compete with other providers.

     

    As the
Corporation introduces new or enhanced products or integrates new technology
into new or existing products, the Corporation faces risks including, among
other things, disruption in customers’ ordering patterns, excessive levels of
older product inventories, inability to deliver sufficient supplies of new
products to meet customers’ demand, possible product and technology defects, and
a potentially different sales and support environment. Premature announcements
or leaks of new products, features, or technologies may exacerbate some of these
risks. The Corporation’s failure to manage the transition to newer products or
the integration of newer technology into new or existing products could
adversely affect the Corporation’s business, results of operations and financial
condition.

     

    5.11           The mobile device
industry is highly competitive and many of the Corporation’s competitors have
significantly greater resources to engage in product development, manufacturing,
distribution and marketing.

     

    The
mobile device industry, in which the Corporation is engaged, is a highly
competitive business with companies of all sizes engaged in business in all
areas of the world, including companies with far greater resources than the
Corporation has. There can be no assurance that other competitors, with greater
resources and business connections, will not compete successfully against the
Corporation in the future. The Corporation’s competitors may adopt new
technologies that reduce the demand for the Corporation’s products or render the
Corporation’s technologies obsolete, which may have a material adverse effect on
the cost structure and competitiveness of the Corporation’s products, possibly
resulting in a negative effect on the Corporation’s revenues, profitability or
liquidity.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    5.12           The Corporation’s
future results could be harmed by economic, political, regulatory and other
risks associated with international sales and operations.

     

    Because
the Corporation plans to sell the Corporation’s products worldwide and most of
the facilities where the Corporation’s future customers’ devices will be
manufactured, distributed and supported are located outside the United States,
the Corporation’s business is subject to risks associated with doing business
internationally, such as:

    

    
      	 
      	
              ·

            	
              changes
      in foreign currency exchange rates;

            
	 
      	
              ·

            	
              the
      impact of recessions in the global economy or in specific sub
      economies;

            

    

    
      	 
      	
              ·

            	
              changes
      in a specific country’s or region’s political or economic conditions,
      particularly in emerging markets;

            
	 
      	
              ·

            	
              changes
      in international relations;

            

    

    
      	 
      	
              ·

            	
              trade
      protection measures and import or export licensing
      requirements;

            
	 
      	
              ·

            	
              changes
      in tax laws;

            

    

    
      	 
      	
              ·

            	
              compliance
      with a wide variety of laws and regulations which may have civil and/or
      criminal consequences for them and the Corporation’s officers and
      directors who they indemnify;

            
	 
      	
              ·

            	
              difficulty
      in managing widespread sales operations;
and

            

    

    
      	 
      	
              ·

            	
              difficulty
      in managing a geographically dispersed workforce in compliance with
      diverse local laws and customs.

            

    

    

    In
addition, the Corporation is subject to changes in demand for the Corporation’s
products resulting from exchange rate fluctuations that make the Corporation’s
products relatively more or less expensive in international markets. If exchange
rate fluctuations occur, the Corporation’s business and results of operations
could be harmed by decreases in demand for the Corporation’s products or
reductions in margins.

    

    While the
Corporation sells the Corporation’s products worldwide, one component of the
Corporation’s strategy is to expand the Corporation’s sales efforts in countries
with large populations and propensities for adopting new technologies. The
Corporation has limited experience with sales and marketing in some of these
countries. There can be no assurance that the Corporation will be able to market
and sell the Corporation’s products in all of the Corporation’s targeted
international markets. If the Corporation’s international efforts are not
successful, the Corporation’s business growth and results of operations could be
harmed.

     

    5.13           The Corporation
must significantly enhance the Corporation’s sales and product development
organizations.

     

    The
Corporation will need to improve the effectiveness and breadth of the
Corporation’s sales operations in order to increase market awareness and sales
of the Corporation’s products, especially as the Corporation expands into new
markets. Competition for qualified sales personnel is intense, and the
Corporation may not be able to hire the kind and number of sales personnel the
Corporation is targeting. Likewise, the Corporation’s efforts to improve and
refine the Corporation’s products require skilled engineers and programmers.
Competition for professionals capable of expanding the Corporation’s research
and development organization is intense due to the limited number of people
available with the necessary technical skills. If the Corporation is unable to
identify, hire or retain qualified sales, marketing and technical personnel, the
Corporation’s ability to achieve future revenue may be adversely
affected.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    5.14           The Corporation
is dependent on the services of the Corporation’s key
personnel.

     

    The
Corporation is dependent on the Corporation’s current management for the
foreseeable future. The loss of the services of any member of management could
have a materially adverse effect on the Corporation’s operations and
prospects.

    

    5.15           If third parties
infringe the Corporation’s intellectual property or if the Corporation is unable
to secure and protect the Corporation’s intellectual property, the Corporation
may expend significant resources enforcing the Corporation’s rights or suffer
competitive injury.

     

    The
Corporation’s success depends in large part on the Corporation’s proprietary
technology and other intellectual property rights. The Corporation relies on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
the Corporation’s proprietary rights. The Corporation’s intellectual property,
particularly the Corporation’s patents, may not provide the Corporation with a
significant competitive advantage. If the Corporation fails to protect or to
enforce the Corporation’s intellectual property rights successfully, the
Corporation’s competitive position could suffer, which could harm the
Corporation’s results of operations.

     

    The
Corporation’s pending patent and trademark applications for registration may not
be allowed, or others may challenge the validity or scope of the Corporation’s
patents or trademarks, including patent or trademark applications or
registrations. Even if the Corporation’s patents or trademark registrations are
issued and maintained, these patents or trademarks may not be of adequate scope
or benefit to them or may be held invalid and unenforceable against third
parties.

     

    The
Corporation may be required to spend significant resources to monitor and police
the Corporation’s intellectual property rights. Effective policing of the
unauthorized use of the Corporation’s products or intellectual property is
difficult and litigation may be necessary in the future to enforce the
Corporation’s intellectual property rights. Intellectual property litigation is
not only expensive, but time consuming, regardless of the merits of any claim,
and could divert attention of the Corporation’s management from operating the
business. Despite the Corporation’s efforts, the Corporation may not be able to
detect infringement and may lose competitive position in the market before they
do so. In addition, competitors may design around the Corporation’s technology
or develop competing technologies. Intellectual property rights may also be
unavailable or limited in some foreign countries, which could make it easier for
competitors to capture market share.

     

    Despite
the Corporation’s efforts to protect the Corporation’s proprietary rights,
existing laws, contractual provisions and remedies afford only limited
protection. Intellectual property lawsuits are subject to inherent uncertainties
due to, among other things, the complexity of the technical issues involved, and
the Corporation cannot ensure that the Corporation will be successful in
asserting intellectual property claims. Attempts may be made to copy or reverse
engineer aspects of the Corporation’s products or to obtain and use information
that the Corporation regard as proprietary. Accordingly, the Corporation cannot
ensure that the Corporation will be able to protect the Corporation’s
proprietary rights against unauthorized third party copying or use. The
unauthorized use of the Corporation’s technology or of the Corporation’s
proprietary information by competitors could have an adverse effect on the
Corporation’s ability to sell the Corporation’s products.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    5.16           The Corporation
has an international presence in countries whose laws may not provide protection
of the Corporation’s intellectual property rights to the same extent as the laws
of the United States, which may make it more difficult for the Corporation to
protect the Corporation’s intellectual property.

     

    As part
of the Corporation’s business strategy, the Corporation targets customers and
relationships with suppliers and original distribution manufacturers in
countries with large populations and propensities for adopting new technologies.
However, many of these countries do not address misappropriation of intellectual
property or deter others from developing similar, competing technologies or
intellectual property. Effective protection of patents, copyrights, trademarks,
trade secrets and other intellectual property may be unavailable or limited in
some foreign countries. In particular, the laws of some foreign countries in
which the Corporation does business may not protect the Corporation’s
intellectual property rights to the same extent as the laws of the United
States. As a result, the Corporation may not be able to effectively prevent
competitors in these regions from infringing the Corporation’s intellectual
property rights, which would reduce the Corporation’s competitive advantage and
ability to compete in those regions and negatively impact the Corporation’s
business.

      

    5.17           If the
Corporation is unable to obtain key technologies from third parties on a timely
basis and free from errors or defects, the Corporation may have to delay or
cancel the release of certain products or features in the Corporation’s products
or incur increased costs.

     

    The
Corporation licenses third-party software for use in the Corporation’s products,
including the operating systems. The Corporation’s ability to release and sell
the Corporation’s products, as well as the Corporation’s reputation, could be
harmed if the third-party technologies are not delivered to customers in a
timely manner, on acceptable business terms or contain errors or defects that
are not discovered and fixed prior to release of the Corporation’s products and
the Corporation is unable to obtain alternative technologies on a timely and
cost effective basis to use in the Corporation’s products. As a result, the
Corporation’s product shipments could be delayed, the Corporation’s offering of
features could be reduced or the Corporation may need to divert the
Corporation’s development resources from other business objectives, any of which
could adversely affect the Corporation’s reputation, business and results of
operations.

     

    5.18           The Corporation’s
product strategy is to base the Corporation’s products on software operating
systems that are commercially available to competitors.

     

    The
Corporation’s multimedia phone is based on a commercially available version of
Microsoft’s Windows CE. The Corporation cannot ensure that the Corporation will
be able to maintain this licensing agreement with Microsoft and that Microsoft
will not grant similar rights to the Corporation’s competitors or that the
Corporation will be able to sufficiently differentiate the Corporation’s
multimedia phone from the multitude of other devices based on Windows
CE.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    In
addition, there is significant competition in the operating system software and
services market, including proprietary operating systems such as Symbian and
Palm OS, open source operating systems, such as Linux, other proprietary
operating systems and other software technologies, such as Java and RIM’s
licensed technology. This competition is being developed and promoted by
competitors and potential competitors, some of which have significantly greater
financial, technical and marketing resources than the Corporation has, such as
Access, Motorola, Nokia, Sony-Ericsson and RIM. These competitors could provide
additional or better functionality than the Corporation does or may be able to
respond more rapidly than the Corporation can to new or emerging technologies or
changes in customer requirements. Competitors in this market could devote
greater resources to the development, promotion and sale of their products and
services and the third-party developer community, which could attract the
attention of influential user segments.

    

    If the
Corporation is unable to continue to differentiate the operating systems that
the Corporation includes in the Corporation’s mobile computing devices, the
Corporation’s revenues and results of operations could be adversely
affected.

     

    5.19           The market for
touchscreen technologies is volatile, and changing market conditions, or failure
to adjust to changing market conditions, may adversely affect the Corporation’s
revenues, results of operations and financial condition, particularly given the
Corporation’s size, limited resources and lack of
diversification.

     

    The
Corporation operates in the touchscreen technology market, which has seen
significant growth during the past years. The Corporation cannot ensure that
this significant growth in the sales of the touchscreen technology market will
continue. If the Corporation is unable to adequately respond to changes in
demand for the Corporation’s products, the Corporation’s revenues and results of
operations could be adversely affected. In addition, as the Corporation’s
products mature and face greater competition, the Corporation may experience
pressure on the Corporation’s product pricing to preserve demand for the
Corporation’s products, which would adversely affect the Corporation’s margins,
results of operations and financial condition.

     

    This
reliance on the success of and trends in the Corporation’s industry is
compounded by the size of the Corporation’s organization and the Corporation’s
focus on touchscreen technology. These factors also make the Corporation more
dependent on investments of the Corporation’s limited resources. For example,
the Corporation faces many resource allocation decisions, such as: where to
focus the Corporation’s research and development, geographic sales and marketing
and partnering efforts; which aspects of the Corporation’s business to
outsource; and which operating systems and email solutions to support. Given the
size and undiversified nature of the Corporation’s organization, any error in
investment strategy could harm the Corporation’s business, results of operations
and financial condition.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    5.20           Changes in
financial accounting standards or practices may cause unexpected fluctuations in
and may adversely affect the Corporation’s reported results of
operations.

     

    Any
change in financial accounting standards or practices that cause a change in the
methodology or procedures by which the Corporation tracks, calculates, records
and reports the Corporation’s results of operations or financial condition or
both could cause fluctuations in and adversely affect the Corporation’s reported
results of operations and cause the Corporation’s historical financial
information to not be reliable as an indicator of future results.

     

    5.21           Wars, terrorist
attacks or other threats beyond the Corporation’s control could negatively
impact consumer confidence, which could harm the Corporation’s operating
results.

     

    Wars,
terrorist attacks or other threats beyond the Corporation’s control could have
an adverse impact on the United States, Europe and world economy in general, and
consumer confidence and spending in particular, which could harm the
Corporation’s business, results of operations and financial
condition.

     

    RISKS
RELATED TO OWNING THE CORPORATION’S STOCK

     

    5.22           The Corporation
will issue additional shares of its common stock as a result of the proposed
refinancing activities and the Corporation’s stock price could be negatively
affected.

    

    The
proposed refinancing agreements will require the Corporation to seek shareholder
approval to amend the Corporations bylaws to increase the authorized shares of
common stock from 75,000,000 to an amount greater than 500,000,000. The
Corporation currently has approximately 30,600,000 shares of common stock
outstanding and after the proposed transactions it is estimated that the
Corporation will have greater than 400,000,000 shares of common stock
outstanding. As a result of the issuance of the additional shares of the common
stock the Corporation’s stock price could be negatively affected.

    

    5.23           If the
Corporation continues to experience losses, the Corporation could experience
difficulty meeting the Corporation’s business plan and the Corporation’s stock
price could be negatively affected.

     

    If the
Corporation is unable to gain market acceptance of the Corporation’s mobile
phone handsets, the Corporation will experience continuing operating losses and
negative cash flow from the Corporation’s operations. Any failure to achieve or
maintain profitability could negatively impact the market price of the
Corporation’s common stock. The Corporation anticipates that the Corporation
will continue to incur product development, sales and marketing and
administrative expenses. As a result, the Corporation will need to generate
significant quarterly revenues if the Corporation is to achieve and maintain
profitability. A substantial failure to achieve profitability could make it
difficult or impossible for the Corporation to grow the Corporation’s business.
The Corporation’s business strategy may not be successful, and the Corporation
may not generate significant revenues or achieve profitability. Any failure to
significantly increase revenues would also harm the Corporation’s ability to
achieve and maintain profitability. If the Corporation does achieve
profitability in the future, the Corporation may not be able to sustain or
increase profitability on a quarterly or annual basis.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    5.24           The Corporation’s
certificate of incorporation and bylaws and the Delaware General Corporation Law
contain provisions that could delay or prevent a change in
control.

     

    The
Corporation’s board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock and/or preferred stock
will be subject to, and may be materially adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of the Corporation’s outstanding voting
stock. Furthermore, certain other provisions of the Corporation’s certificate of
incorporation and bylaws may have the effect of delaying or preventing changes
in control or management, which could adversely affect the market price of the
Corporation’s common stock. In addition, the Corporation is subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law.

    

    5.25           The Corporation’s
stock price has been volatile, and an investment in the Corporation’s stock
could suffer a decline in value.

     

    There has
been significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies
issuing the securities. These broad market fluctuations may negatively affect
the market price of the Corporation’s common stock. One may not be able to
resell one’s shares at or above the price one’s pays for those shares due to
fluctuations in the market price of the Corporation’s common stock caused by
changes in the Corporation’s operating performance or prospects and other
factors.

    

    Some
specific factors that may have a significant effect on the Corporation’s common
stock market price include:

    

    
      	 
      	
              ·

            	
              actual
      or anticipated fluctuations in the Corporation’s operating results or
      future prospects;

            
	 
      	
              ·

            	
              the
      Corporation’s announcements or the Corporation’s competitors’
      announcements of new products;

            

    

    
      	 
      	
              ·

            	
              the
      public’s reaction to the Corporation’s press releases, the Corporation’s
      other public announcements and the Corporation’s filings with the
      SEC;

            
	 
      	
              ·

            	
              strategic
      actions by the Corporation or the Corporation’s competitors, such as
      acquisitions or restructurings;

            

    

    
      	 
      	
              ·

            	
              new
      laws or regulations or new interpretations of existing laws or regulations
      applicable to the Corporation’s business;

            

       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

       

      	 
      	
              ·

            	
              changes
      in accounting standards, policies, guidance, interpretations or
      principles;

            

    

    
      	 
      	
              ·

            	
              changes
      in the Corporation’s growth rates or the Corporation’s competitors’ growth
      rates;

            
	 
      	
              ·

            	
              developments
      regarding the Corporation’s patents or proprietary rights or those of the
      Corporation’s competitors;

            

    

    
      	 
      	
              ·

            	
              the
      Corporation’s inability to raise additional capital as
    needed;

            
	 
      	
              ·

            	
              concern
      as to the efficacy of the Corporation’s
  products;

            

    

    
      	 
      	
              ·

            	
              changes
      in financial markets or general economic conditions;

            
	 
      	
              ·

            	
              sales
      of common stock by the Corporation or members of the Corporation’s
      management team;

            

    

    
      	 
      	
              ·

            	
              certain
      anti-dilution features included in certain securities issued in prior
      financing transactions; and

            
	 
      	
              ·

            	
              changes
      in stock market analyst recommendations or earnings estimates regarding
      the Corporation’s common stock, other comparable companies or the
      Corporation’s industry generally.

            

    

     

    5.26           Future sales of
the Corporation’s common stock could adversely affect its price and the
Corporation’s future capital-raising activities could involve the issuance of
equity securities, which would dilute an investment in the Corporation and could
result in a decline in the trading price of the Corporation’s common
stock.

     

    The
Corporation may sell securities in the public or private equity markets if and
when conditions are favorable, even if the Corporation does not have an
immediate need for additional capital at that time. Sales of substantial amounts
of common stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Corporation’s common stock and the
Corporation’s ability to raise capital. The Corporation may issue additional
common stock in future financing transactions or as incentive compensation for
the Corporation’s executive management and other key personnel, consultants and
advisors. Issuing any equity securities would be dilutive to the equity
interests represented by the Corporation’s then-outstanding shares of common
stock. The market price for the Corporation’s common stock could decrease as the
market takes into account the dilutive effect of any of these issuances.
Furthermore, the Corporation may enter into financing transactions at prices
that represent a substantial discount to the market price of the Corporation’s
common stock or issue securities that have anti-dilution features. A negative
reaction by investors and securities analysts to any discounted sale of the
Corporation’s equity securities or sales of securities with anti-dilution
features could result in a decline in the trading price of the Corporation’s
common stock.

     

    5.27           If registration
rights that the Corporation has previously granted are exercised, then the price
of the Corporation’s common stock may be adversely affected.

     

    The
Corporation has agreed to register with the SEC the shares of common stock
issued to former stockholders in connection with the merger and to participants
in private placement financings the Corporation completed in March 2008 and May
2008. In the event these securities are registered with the SEC, they may be
freely sold in the open market, subject to trading restrictions to which the
Corporation’s insiders holding the shares may be subject from time to time. In
the event that the Corporation fails to register such shares in a timely basis,
the Corporation may have liabilities to such stockholders. The Corporation
expects that the Corporation also will be required to register any securities
sold in future private financings. The sale of a significant amount of shares in
the open market, or the perception that these sales may occur, could cause the
trading price of the Corporation’s common stock to decline or become highly
volatile.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    
 

    RISKS
RELATED TO OWNING OUR PREFERRED STOCK

    

    5.28           There is no
public market for the Preferred Stock.

    

    There is no public for the Preferred
Stock to be issued pursuant to this Agreement and the Company does not intend to
apply for listing of the Preferred Stock on any securities
exchange.  No assurance can be given that the stockholders of the
Corporation will agree to the conversion ratio for Common Stock set forth in the
Certificate of Designations of Preferred Stock or that an active trading market
for the Preferred Stock will develop.  If an active market does not
develop and/or the Preferred Stock is not converted to Common Stock pursuant to
the conversion ratio set forth in the Certificate of Designations of Preferred
Stock, the market price and liquidity of the Preferred Stock may be adversely
affected and you may lose your total investment. 

    

    5.29           We expect
volatility in the price of our common stock, which may subject us to securities
litigation.

    

    If we
complete the refinancing transactions, the market for our common stock may be
characterized by significant price volatility when compared to seasoned issuers,
and we expect that our share price will be more volatile than a seasoned issuer
for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management’s attention and
resources.

    

    5.30           The current
worldwide financial and credit markets are difficult to
access.

    

    The
recent collapse of the worldwide financial and credit markets make it extremely
difficult to access source of capital or borrowings, Credit line facilities from
financial institutions, additional private equity investments, or debt
arrangements may not be available to us for some time in the future. No
assurances can be given that the Corporation will be successful in obtaining
such additional financing on reasonable terms, or at all. If adequate funds are
not available on acceptable terms, or at all, the Corporation may be unable to
adequately fund the Corporation’s business plans and it could have a negative
effect on the Corporation’s business, results of operations and financial
condition.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    THE
SECURITIES TO BE ISSUED INVOLVE A HIGH DEGREE OF RISK AND MAY RESULT IN THE LOSS
OF ONE’S ENTIRE INVESTMENT. ANY PERSON CONSIDERING THE PURCHASE OF THESE
SECURITIES SHOULD BE AWARE OF THESE AND OTHER FACTORS AND SHOULD CONSULT WITH
HIS LEGAL, TAX AND FINANCIAL ADVISORS PRIOR TO EXECUTING THIS AGREEMENT. THE
SECURITIES SHOULD ONLY BE PURCHASED BY PERSONS WHO CAN AFFORD TO LOSE ALL OF
THEIR INVESTMENT.

     

    6.           Representations, Warranties,
and Agreements of the Holder

    

    The
Holder hereby represents, warrants, acknowledges, understands and agrees (as the
case may be) to the following and acknowledges the Corporation's reliance on
exemption from registration pursuant to a registration statement under the
Securities Act of 1933, as amended (the “Securities Act”) is predicated
upon the representations of the Holder set forth herein:

    

    6.1           Authorization. The
Holder has full power and authority to enter into this Conversion Agreement, and
the Conversion Agreement has been duly executed by the Holder, and such
authorization constitutes a valid and legally binding obligation of the Holder,
enforceable in accordance with its terms.

    

    6.2           Title. The Holder
holds all right, title, and interest in and to the Convertible Notes to be
converted by it at the Closing, and has not placed or permitted to be placed on
such Convertible Notes any liens, encumbrances, or adverse claims of any kind
whatsoever as of the Closing.

    

    6.3           Shares of Preferred A Stock
Not Registered. The Holder hereby acknowledges that the Conversion Shares
will not be issued by the Corporation pursuant to a registration statement under
the Securities Act, and therefore the Holder may be required to hold the
Conversion Shares for an indeterminate period.  The Conversion Shares
are issued pursuant hereto in reliance upon a specific exemption from the
registration requirement of the Securities Act which depends, in part, upon the
accuracy of the representations, warranties and agreements of the Holder set
forth in this Conversion Agreement.

    

    6.4           Investment
Intent.  The Holder is acquiring the Conversion Shares for the
Holder’s own account as principal, not as a nominee or agent, for investment
purposes only, and not with a view to, or for, resale, distribution, or
fractionalization thereof, in whole or in part, which resale, distribution, or
fractionalization would violate the Securities Act.  The Holder agrees
that a legend to the foregoing effect may be placed upon any and all
certificates issued representing the Conversion Shares.  Further, the
Holder does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to the Conversion Shares being issued to the
Holder.  The Holder acknowledges that he has been afforded the
opportunity to ask questions of, and to obtain any information from, the
Corporation and the Board of Directors as he or she deems necessary to determine
the suitability and advisability of, and the merits and risk of, an investment
in the Preferred A Stock.

    

    6.5           Risk. The Holder is
aware that: (i) investment in the Corporation involves a high degree of risk,
may result in a lack liquidity, and places substantial restrictions on
transferability of interest; and (ii) no Federal or state agency has made any
finding or determination as to the fairness for investment by the public, nor
has made any recommendation or endorsement, of the Conversion
Shares.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    6.6           Financial Ability.
The Holder has sufficient financial resources available to support the loss of
all or a portion of the Holder’s investment in the Corporation, has no need for
liquidity in the investment in the Corporation, and is able to bear the economic
risk of the investment.  The Holder is sophisticated and experienced
in investment matters, and, as a result, is in a position to evaluate an
investment in the Corporation.

    

    6.7           Receipt of
Information. The Holder has been furnished with any and all materials
that he has requested relating to the Corporation and to the Conversion Shares,
and the Holder has been afforded the opportunity to ask questions of the senior
management and directors of the Corporation concerning the terms and conditions
of this transaction and to obtain any additional information necessary to verify
the accuracy of the information provided to the Holder.  The Holder
understands that such material is current information about the Corporation and
does not in any way guarantee future performance or the completion of future
proposed events discussed in such material.  The Holder, either alone
or with his professional advisors, has the capacity to protect his own interests
in connection with this transaction.

    

    6.8           Accredited Investor.
If the Holder is a U.S. person, (i) such Holder qualifies as an “accredited
investor” as such term is defined in Regulation D promulgated under the
Securities Act, and (ii) such Holder, if it is a corporation, partnership,
limited liability company, trust, or other business entity, has not been
organized for the purpose of purchasing the Conversion
Shares.   In this regard, the Holder represents, warrants, and
agrees that:

    

     
6.8.1           The
Holder is experienced in investment and business matters.

    

     
6.8.2           The
Holder has made investments of a speculative nature and has purchased
non-registered securities of United States publicly-owned companies in the
past.

    

     
6.8.3           The
Holder, with its representatives, has such knowledge and experience in
financial, tax, and other business matters as to enable the Holder to utilize
the information made available by the Corporation to evaluate the merits and
risks of and to make an informed investment decision with respect to the
purchase of the Conversion Shares.

    

     
6.8.4           The
Holder is able to bear the risk of such investment for an indefinite period and
to afford a complete loss thereof.

    

    6.9           Regulation S
Exemption.  If the Holder is not a U.S. Person, the Holder
understands that that the Conversion Shares are being issued to him in reliance
on an exemption from the registration requirements of United States federal and
the state securities laws under Regulation S promulgated under the Securities
Act, and that the Corporation is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments, and understandings of
the Holder set forth herein order to determine the applicability of such
exemptions and the suitability of the Holder to acquire the Conversion
Shares.  In this regard, the Holder represents, warrants, and agrees
that:

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    6.9.1           The
Holder is not a U.S. Person and is not acquiring the Conversion Shares for the
account or benefit of a U.S. Person.

    

    6.9.2           At
the time of the origination of contact concerning this Agreement and the date of
the execution and delivery of this Agreement, the undersigned was outside of the
United States.

    

    6.9.3           The
Holder will not, during the period commencing on the date of issuance of the
Conversion Shares and ending on the first anniversary of such date, or such
shorter period as may be permitted by Regulation S or other applicable
securities law (the "Restricted Period"), offer, sell, pledge or otherwise
transfer the Conversion Shares in the United States, or to a U.S. Person for the
account or for the benefit of a U.S. Person, or otherwise in a manner that is
not in compliance with Regulation S.

    

    6.9.4           The
Holder will, after expiration of the Restricted Period, offer, sell pledge or
otherwise transfer the Conversion Shares only pursuant to registration under the
Securities Act or an available exemption therefrom, and, in accordance with all
applicable state foreign securities laws.

    

    6.9.5           The
Holder was not in the United States engaged in, and prior to the expiration of
the Restricted Period will not engage in, any short selling of or any hedging
transaction with respect to the Conversion Shares, including without limitation,
any put, call or other option transaction, option writing, or equity
swap.

    

    6.9.6           Neither
the Holder nor or any person acting on his behalf has engaged, nor will engage,
in any directed selling efforts to a U.S. Person with respect to the Conversion
Shares, and the Holder and any person acting on his behalf have complied and
will comply with the "offering restrictions" requirements of Regulation S under
the Securities Act.

    

    6.9.7           The
transactions contemplated by this Conversion Agreement have not been
pre-arranged with a buyer located in the United States or with a U.S. Person,
and are not part of a plan or scheme to evade the registration requirements of
the Securities Act.

    

    6.9.8           Neither
the Holder nor any person acting on his behalf has undertaken or carried out any
activity for the purpose of, or that could reasonably be expected to have the
effect of, conditioning the market in the United States, its territories or
possessions, for any of the Conversion Shares.  The Holder agrees not
to cause any advertisement of the Conversion Shares to be published in any
newspaper or periodical or posed in any public place and not to issue any
circular relating to the Conversion Shares, except such advertisements that
include the statements required by Regulation S under the Securities Act, and
only offshore and not in the U.S. or its territories, and only in compliance
with any local applicable securities laws.

    

    6.9.9           Compliance with Local
Laws. Any resale of the Conversion Shares during the “distribution
compliance period” as defined in Ruled 902(f) to Regulation S shall be made only
in compliance with exemptions from registration afforded by Regulation
S.  Further, any such sale of the Conversion Shares in any
jurisdiction outside of the United States will be made in compliance with the
securities laws of such jurisdiction.  The Holder will not offer to
sell or sell the Conversion Shares in any jurisdiction unless the Holder obtains
all required consents, if any.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    6.10           The
Holder consents to the Corporation making a notation on its records or giving
instructions to any transfer agent of the Corporation in order to implement the
restrictions on transfer of the Conversion Shares set forth in this Section
6.

    

    6.11           Legend.           The
Holder acknowledges that the certificates evidencing the Conversion Shares will
bear a legend substantially similar to the following, in addition to any other
legend required to be placed thereon by applicable federal or state securities
laws:

    

    “THE
SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH
RESPECT THERETO IS DECLARED EFFECTIVE UNDER SUCH ACT, OR NEONODE, INC. RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO COUNSEL FOR
NEONODE, INC. THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT
IS AVAILABLE.”

    

    7.           Representations, Warranties
and Agreements of the Corporation.

    

    The
Corporation hereby represents, warrants, and covenants as follows:

    

    7.1           Organization and
Qualification.  The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the requisite corporate power to own its properties and to
carry on its business as it is now being conducted.

    

    7.2           Authorization,
Enforceability.  (i) The Corporation has the requisite
corporate power and authority to enter into this Conversion Agreement and to
perform its obligations hereunder  in accordance with the terms
hereof, (ii) the execution and delivery of this Conversion Agreement by the
Corporation and the consummation by it of the transactions contemplated hereby
have been duly authorized by the Corporation’s Board of Directors and further
consent or authorization of the Corporation by its Board of Directors is not
required; and (iii) upon the execution and delivery of this Conversion Agreement
by the Corporation, this Conversion Agreement will constitute valid and binding
obligations of the Corporation enforceable against the Corporation in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors’ rights and
remedies or by other equitable principles of general application.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    7.3           Issuance of
Shares.  The Conversion Shares to be issued and delivered by
the Corporation hereunder, when so issued and delivered, will be duly and
validly issued, fully paid and nonassessable and will be issued in reliance upon
applicable exemptions from the registration and qualification provisions of all
applicable securities laws of the United States and each state whose securities
laws may be applicable thereto.  All Conversion Shares will be issued
free of any preemptive or similar right and free and clear of any claim, lien,
security interest or other encumbrance.  Assuming the accuracy of the
Holder’s representations and warranties hereunder, the issuance to the Holder of
the Conversion Shares will be exempt from the registration requirements of the
Securities Act and will be made in reliance upon applicable exemptions from the
registration and qualification provisions of all applicable state securities
laws.

    

    8.           Miscellaneous

    

    8.1           Definition of
Terms.  All pronouns and any variations thereof used herein
shall be deemed to refer to the masculine, feminine, neuter, singular or plural
as the identity of the person or persons may require.

    

    8.2           Entire
Agreement.  This Conversion Agreement, together with the
documents referenced herein, constitute the entire understanding among the
parties with respect to the subject matter hereof, and supersede any prior
understanding and/or written or oral agreements among them.  This
Conversion Agreement may not be changed or modified, except by an agreement in
writing signed by each of the parties hereto.

    

    8.3           Binding Effect; Successors
and Assigns.  Each Holder agrees not to transfer or assign this
Conversion Agreement, or any of the Holder’s interest herein, and further agrees
that the transfer or assignment of the Conversion Shares shall be made only in
accordance with applicable laws and the terms of this Conversion
Agreement.  Subject to the foregoing, this Conversion Agreement shall
be binding upon and inure to the benefits of the parties hereto, their
successors and assigns.

    

    8.4           Governing
Law.  This Conversion Agreement shall be governed by the laws
of the state of Delaware applicable to contracts made and wholly performed in
that jurisdiction.

    

    8.5           Notices.  All
notices or other communications hereunder shall be in writing and shall be
delivered by hand or mailed by registered or certified mail, return receipt
requested, to the Holder at the addresses provided in Exhibit A and to the
Corporation at its registered office.  The Corporation and the Holder
may change their addresses for notices by written notice to each of the Parties,
as required.

    

    8.6           Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.

    

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    

    IN WITNESS WHEREOF, the
Parties have executed this Conversion Agreement on the date set forth
above.

     

    
      
        
          
            
              
                	
                        THE
      CORPORATION

                      	 	
                        THE
      HOLDER

                      
	 
      	 	 
      
	
                        Neonode,
      Inc.

                      	 	
                        [insert
      name]

                      
	 	 	 
	 
      	 	 
      
	
                        Name:

                      	 	
                        Name:

                      
	
                        Title:

                      	 	
                        Title:

                      
	
                        Date:

                      	 	
                        Date:

                      

              

            

          

        

      

    

     

    
      
        
        

      

      
        23

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