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                                   Exhibit 4.5

                               SECURITY AGREEMENT

                                      among

                               EMAGIN CORPORATION,

                      the SECURED CREDITORS set out herein

                                       and

                          VERUS SUPPORT SERVICES INC.,

                               as COLLATERAL AGENT

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

                          Dated as of November 20, 2001

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

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                               SECURITY AGREEMENT

          SECURITY  AGREEMENT,  dated as of November 20, 2001, made by and among
each of the  undersigned  assignor (the  "Assignor") in favor of the undersigned
Verus Support  Services Inc., as Collateral  Agent,  together with any successor
collateral agent appointed hereunder pursuant to Section 8.10 (collectively, the
"Collateral  Agent"),  for the benefit of the undersigned Secured Creditors (the
"Secured  Creditors")  and as such Secured  Creditors may become a party to this
Agreement from time to time.  Except as otherwise  defined  herein,  capitalized
terms used herein and defined in the Note Purchase  Agreement (as defined below)
shall be used herein as so defined.

                              W I T N E S S E T H:

          WHEREAS,   the  Assignor  proposes  to  enter  into  a  Note  Purchase
Agreement,  dated as of November 27, 2001,  together  with each of the investors
from time to time a party  thereto  (and each such  investor a Secured  Creditor
under this Agreement),  providing for the issuance of secured  convertible notes
(the  "Notes")  by the  Assignor as  contemplated  therein  (the "Note  Purchase
Agreement");

          WHEREAS,  the  obligations  accruing  under the Notes to the  Assignor
shall be secured by the Collateral upon the terms and conditions set out in this
Agreement;

          WHEREAS,  it is a condition  precedent to execution on delivery of the
Note Purchase  Agreement  that the Assignor shall have executed and delivered to
the Collateral Agent this Agreement; and

          WHEREAS, it is a condition precedent to the delivery of this Agreement
that the Assignor provide to the Collateral Agent completed copies of UCC form 1
documentation  suitable  for  filing and  applicable  federal  assignment  forms
required to perfect the security interests granted by the Assignors herein, and

          NOW,  THEREFORE,  in  consideration  of the  benefits  accruing to the
Assignor,  the receipt and  sufficiency  of which are hereby  acknowledged,  the
Assignor  hereby  makes the  following  representations  and  warranties  to the
Collateral  Agent for the benefit of the Secured  Creditors and hereby covenants
and agrees with the Collateral Agent for the benefit of the Secured Creditors as
follows:

                                   ARTICLE I

                               SECURITY INTERESTS

          1.1 Grant of Security  Interests.  (a) As security for the prompt and
complete  payment  and  performance  when due  (whether at stated  maturity,  by
acceleration  or  otherwise) of all of its  Obligations,  in order to induce the
Secured  Creditors to enter into the Note  Purchase

<PAGE>

Agreement  the  Assignor  does hereby  assign and transfer  unto the  Collateral
Agent, and does hereby pledge and grant to the Collateral Agent, for the benefit
of the Secured  Creditors,  a continuing  security interest in all of the right,
title and  interest of the Assignor  in, to and under all of the  following  (in
each case whether now existing or hereafter from time to time acquired):

          (i)       each and every Account;

          (ii)      all cash;

          (iii)     the Cash  Collateral  Account  and all  monies,  securities,
                    Instruments and other  investments  deposited or required to
                    be  deposited  in the  Cash  Collateral  Account;

          (iv)      all   computer  programs  of the  Assignor  and  all  intel-
                    lectual  property rights  therein and  all other proprietary
                    information of the Assignor, including  but  not  limited to
                    Trade Secret Rights;

          (v)       all  Contracts,  together with all Contract  Rights  arising
                    thereunder,  including,  without  limitation,  joint venture
                    agreements,  partnership  agreements,  and limited liability
                    company agreements);

          (vi)      all Copyrights;

          (vii)     all Equipment;

          (viii)    all Documents;

          (ix)      all Equipment;

          (x)       all General Intangibles;

          (xi)      all Goods;

          (xii)     all Instruments;

          (xiii)    all Inventory;

          (xiv)     all Investment Property;

          (xv)      all Marks,  together with the registrations and right to all
                    renewals  thereof,  and the  goodwill of the business of the
                    Assignor symbolized by the Marks;

          (xvi)     all Patents;

          (xvii)    all Permits;

          (xviii)   all  Software  and  all  Software   licensing  rights,   all
                    writings,   plans,   specifications   and  schematics,   all
                    engineering drawings, customer lists, goodwill

                                      -2-
<PAGE>

                    and  licenses,  and all recorded data of any kind or nature,
                    regardless of the medium of recording;

          (xix)     all Supporting Obligations;

          (xx)      all manuals, training material, diagrams, know how and other
                    necessary or  useful materials to utilize the Compan's trade
                    secrets and other business intangibles; and

          (xxi)     all Proceeds  and  products of any and all of the  foregoing
                    (all of the above, the "Collateral").

          (b) The security interest of the Collateral Agent under this Agreement
extends to all  Collateral  which the Assignor  may acquire,  or with respect to
which the  Assignor  may  obtain  rights,  at any time  during  the term of this
Agreement.

          1.2 Power of Attorney.  The Assignor  hereby  constitutes and appoints
the Collateral Agent its true and lawful attorney,  irrevocably, with full power
after the  occurrence of and during the  continuance  of an Event of Default (in
the  name of the  Assignor  or  otherwise)  to act,  require,  demand,  receive,
compound and give  acquaintance for any and all moneys and claims for moneys due
or to become due to the  Assignor  under or arising  out of the  Collateral,  to
endorse any checks or other instruments or orders in connection therewith and to
file any  claims  or take any  action or  institute  any  proceedings  which the
Collateral  Agent may deem to be necessary or advisable to protect the interests
of the Secured  Creditors,  which  appointment  as  attorney is coupled  with an
interest.

                                   ARTICLE II

                GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS

The  Assignor  represents,   warrants  and  covenants,   which  representations,
warranties and covenants shall survive execution and delivery of this Agreement,
as follows:

          2.1 Necessary  Filings.  All filings,  registrations,  recordings  and
other  actions  necessary  or  appropriate  to create,  preserve and perfect the
security  interest  granted by the  Assignor to the  Collateral  Agent hereby in
respect of the  Collateral  have been  accomplished  and the  security  interest
granted  to the  Collateral  Agent  pursuant  to  this  Agreement  in and to the
Collateral  creates a valid and, together with all such filings,  registrations,
recordings and other actions, a perfected security interest therein prior to the
rights of all other  Persons  therein and subject to no other Liens  (other than
Permitted  Liens) and is  entitled to all the rights,  priorities  and  benefits
afforded by the Uniform  Commercial Code or other relevant law as enacted in any
relevant  jurisdiction  to  perfected  security  interests,  in each case to the
extent that the Collateral  consists of the type of property in which a security
interest may be perfected by  possession  or control  (within the meaning of the
UCC as in effect  on the date  hereof  in the  State of New  York),  by filing a
financing statement under the Uniform Commercial Code as enacted in any relevant
jurisdiction  or by a filing of a Grant of Security  Interest in the  respective
form attached hereto in the United States Patent and Trademark  Office or in the
United States Copyright Office.

                                      -3-

<PAGE>

          2.2 No Liens. The Assignor is, and as to all Collateral acquired by it
from time to time after the date hereof the  Assignor  will be, the owner of all
Collateral free from any Lien,  security  interest,  encumbrance or other right,
title or interest of any Person (other than Permitted  Liens),  and the Assignor
shall defend the Collateral against all claims and demands of all Persons at any
time claiming the same or any interest therein adverse to the Collateral Agent.

          2.3 Other  Financing  Statements.  As of the date hereof,  there is no
financing  statement (or similar  statement or instrument of registration  under
the law of any jurisdiction) covering or purporting to cover any interest of any
kind in the  Collateral  (other than  financing  statements  filed in respect of
Permitted  Liens),  and so long as the  Termination  Date has not occurred,  the
Assignor  will not  execute or  authorize  to be filed in any public  office any
financing  statement (or similar  statement or instrument of registration  under
the law of any  jurisdiction) or statements  relating to the Collateral,  except
financing  statements  filed or to be  filed  in  respect  of and  covering  the
security  interests  granted  hereby  by  the  Assignor  or in  connection  with
Permitted Liens.

          2.4 Chief  Executive  Office,  Record  Locations.  The chief executive
office of the Assignor is, on the date of this Agreement, located at the address
indicated  on Annex A hereto  for the  Assignor.  During  the period of the four
calendar month preceding the date of this Agreement,  the chief executive office
of the Assignor has not been located at any address other than that indicated on
Annex A in accordance  with the  immediately  preceding  sentence,  in each case
unless  each such  other  address  is also  indicated  on Annex A hereto for the
Assignor.

          2.5 Location of Inventory and  Equipment.  All Inventory and Equipment
held on the date  hereof,  or held at any time during the four  calendar  months
prior to the date  hereof,  by the  Assignor is located at one of the  locations
shown on Annex B hereto for the Assignor.

          2.6 Legal Names;  Type of Organization;  Jurisdiction of Organization;
Location; Organizational Identification Numbers; Changes Thereto; etc. The exact
legal  name of the  Assignor,  the type of  organization  of the  Assignor,  the
jurisdiction of organization of the Assignor,  and the Assignor's  Location,  is
listed on Annex C hereto for the  Assignor.  The  Assignor  shall not change its
legal name, its type of  organization,  its  jurisdiction of  organization,  its
Location or its organizational  identification  number (if any) from that listed
on Annex C hereto for the Assignor or those that may have been established after
the  date of this  Agreement  in  accordance  with  the  immediately  succeeding
sentence of this Section 2.6. The Assignor  shall not change its legal name, its
type of organization,  its jurisdiction of  organization,  its Location,  or its
organizational  identification  number (if any),  except  that any such  changes
shall be permitted if (i) it shall have given to the  Collateral  Agent not less
than 15 days' prior written notice of each change to the  information  listed on
Annex C (as adjusted  for any  subsequent  changes  thereto  previously  made in
accordance  with this  sentence),  together  with a supplement  to Annex C which
shall correct all information  contained  therein for the Assignor,  and (ii) in
connection with the respective  such change or changes,  it shall have taken all
action  reasonably  requested by the  Collateral  Agent to maintain the security
interests  of the  Collateral  Agent in the  Collateral  intended  to be granted
hereby at all times fully  perfected and in full force and effect.  In addition,
to the extent that the Assignor does not have an  organizational  identification
number on the date hereof and later  obtains one, the  Assignor  shall  promptly
thereafter  notify the Collateral  Agent of such  organizational  identification
number and shall take all  actions

                                      -4-
<PAGE>

reasonably  satisfactory  to the  Collateral  Agent to the extent  necessary  to
maintain  the  security  interest  of the  Collateral  Agent  in the  Collateral
intended to be granted hereby fully perfected and in full force and effect.

          2.7  Trade  Names;  Etc.  The  Assignor  has not nor  operates  in any
jurisdiction  under,  or in the preceding  five years has had or has operated in
any jurisdiction under, any trade names,  fictitious names or other names except
its legal name as specified in Annex C and such other trade or fictitious  names
as are listed on Annex D hereto for the Assignor.  The Assignor shall not assume
or operate in any  jurisdiction  under any new trade,  fictitious  or other name
until (i) it shall  have  given to the  Collateral  Agent not less than 15 days'
written notice of its intention so to do, clearly  describing  such new name and
the  jurisdictions  in which such new name will be used and providing such other
information  in  connection  therewith as the  Collateral  Agent may  reasonably
request and (ii) with  respect to such new name,  it shall have taken all action
reasonably  requested by the Collateral Agent to maintain the security  interest
of the Collateral  Agent in the Collateral  intended to be granted hereby at all
times fully perfected and in full force and effect.

          2.8  Certain  Significant  Transactions.  During  the one year  period
preceding  the  date  of  this  Agreement,   no  Person  shall  have  merged  or
consolidated  with or into the  Assignor,  and no Person  shall have  liquidated
into, or transferred all or substantially all of its assets to, the Assignor, in
each  case  except  as  described  in  Annex  E  hereto.  With  respect  to  any
transactions  so described in Annex E hereto,  the Assignor shall have furnished
such  information  with  respect to the Person (and the assets of the Person and
locations  thereof) which merged with or into or consolidated with the Assignor,
or was liquidated into or transferred all or substantially  all of its assets to
the Assignor,  and shall have  furnished to the  Collateral  Agent such UCC lien
searches as may have been  requested with respect to such Person and its assets,
to establish that no security  interest  (excluding  Permitted  Liens) continues
perfected on the date hereof with respect to any Person  described above (or the
assets transferred to the Assignor by such Person), including without limitation
pursuant to Section 9-316(a)(3) of the UCC.

          2.9  Recourse.  This  Agreement  is made  with  full  recourse  to the
Assignor and pursuant to and upon all the warranties, representations, covenants
and  agreements  on the part of the Assignor  contained  herein and otherwise in
writing in connection herewith.

                                  ARTICLE III

            SPECIAL PROVISIONS CONCERNING ACCOUNTS; CONTRACT RIGHTS;
                   INSTRUMENTS; AND CERTAIN OTHER COLLATERAL

          3.1 Additional  Representations  and  Warranties.  As of the time when
each of its Accounts  arises,  the Assignor shall be deemed to have  represented
and  warranted  that each such  Account,  and all records,  papers and documents
relating  thereto (if any) are genuine and what they purport to be, and that all
papers and documents (if any) relating thereto (i) will, to the knowledge of the
Assignor,  represent  the genuine,  legal,  valid and binding  obligation of the
account debtor evidencing indebtedness unpaid and owed by the respective account
debtor arising out of the  performance of labor or services or the sale or lease
and delivery of the merchandise  listed therein,  or both, (ii) will be the only
original writings evidencing and

                                      -5-
<PAGE>

embodying such obligation of the account debtor named therein (other than copies
created for general  accounting  purposes),  (iii) will, to the knowledge of the
Assignor,  evidence true and valid  obligations,  enforceable in accordance with
their  respective  terms, and (iv) will be in compliance and will conform in all
material  respects  with  all  applicable  federal,  state  and  local  laws and
applicable laws of any relevant foreign jurisdiction.

          3.2 Maintenance of Records. The Assignor will keep and maintain at its
own cost and expense accurate records of its Accounts and Contracts,  including,
but not limited to,  originals of all  documentation  (including  each Contract)
with respect  thereto,  records of all payments  received,  all credits  granted
thereon,  all  merchandise  returned and all other dealings  therewith,  and the
Assignor  will  make  the  same  available  on the  Assignor's  premises  to the
Collateral Agent for inspection,  at the Assignor's own cost and expense, at any
and all reasonable times upon prior notice to the Assignor.  Upon the occurrence
and during the  continuance  of an Event of  Default  and at the  request of the
Collateral  Agent, the Assignor shall, at its own cost and expense,  deliver all
tangible  evidence of its  Accounts  and  Contract  Rights  (including,  without
limitation,  all documents  evidencing  the Accounts and all Contracts) and such
books and records to the Collateral Agent or to its  representatives  (copies of
which evidence and books and records may be retained by the Assignor).  Upon the
occurrence  and  during  the  continuance  of an  Event  of  Default  and if the
Collateral  Agent so directs,  the  Assignor  shall  legend,  in form and manner
satisfactory to the Collateral Agent, the Accounts and the Contracts, as well as
books,  records and documents (if any) of the Assignor  evidencing or pertaining
to such Accounts and Contracts  with an  appropriate  reference to the fact that
such Accounts and Contracts have been assigned to the Collateral  Agent and that
the Collateral Agent has a security interest therein.

          3.3 Direction to Account Debtors;  Contracting Parties;  etc. Upon the
occurrence and during the continuance of an Event of Default,  if the Collateral
Agent so directs the Assignor,  the Assignor agrees (x) to cause all payments on
account of the Accounts and Contracts to be made directly to the Cash Collateral
Account,  (y) that the Collateral Agent may, at its option,  directly notify the
obligors  with  respect  to any  Accounts  and/or  under any  Contracts  to make
payments with respect  thereto as provided in the preceding  clause (x), and (z)
that the  Collateral  Agent may  enforce  collection  of any such  Accounts  and
Contracts and may adjust, settle or compromise the amount of payment thereof, in
the same manner and to the same  extent as the  Assignor.  Without  notice to or
assent by the Assignor, the Collateral Agent may, upon the occurrence and during
the  continuance  of an Event of Default,  apply any or all amounts  then in, or
thereafter  deposited in, the Cash Collateral  Account toward the payment of the
Obligations  in the  manner  provided  in  Section  7.4 of this  Agreement.  The
reasonable  costs and expenses of collection  (including  reasonable  attorneys'
fees),  whether incurred by an Assignor or the Collateral Agent,  shall be borne
by the  Assignor.  The  Collateral  Agent  shall  deliver a copy of each  notice
referred  to in the  preceding  clause (y) to the  Assignor,  provided  that the
failure by the  Collateral  Agent to so notify the Assignor shall not affect the
effectiveness of such notice or the other rights of the Collateral Agent created
by this Section 3.3.

          3.4  Modification  of  Terms;  etc.  Except  in  accordance  with  the
Assignor's  ordinary course of business and consistent with reasonable  business
judgment,  the Assignor shall not rescind nor cancel any indebtedness  evidenced
by any Account or under any  Contract,  or modify any  material  term thereof or
make any material adjustment with respect thereto, nor extend or renew the same,
nor compromise or settle any material  dispute,  claim, suit or legal

                                      -6-

<PAGE>

proceeding  relating  thereto,  nor sell any  Account or  Contract,  or interest
therein, without the prior written consent of the Collateral Agent. The Assignor
will not do  anything  to  impair  the  rights  of the  Collateral  Agent in the
Accounts or Contracts.

          3.5  Collection.  The  Assignor  shall  endeavor  in  accordance  with
reasonable  business  practices to cause to be collected from the account debtor
named in each of its  Accounts or obligor  under any  Contract,  as and when due
(including, without limitation, amounts which are delinquent, such amounts to be
collected in accordance with generally  accepted lawful  collection  procedures)
any and all amounts  owing under or on account of such Account or Contract,  and
apply forthwith upon receipt thereof all such amounts as are so collected to the
outstanding balance of such Account or under such Contract.  Except as otherwise
directed  by  the   Collateral   Agent  after  the  occurrence  and  during  the
continuation  of an Event of Default,  the  Assignor  may allow in the  ordinary
course of business  as  adjustments  to amounts  owing  under its  Accounts  and
Contracts  (i) an  extension  or  renewal  of the time or times of  payment,  or
settlement  for less than the total unpaid  balance,  which the  Assignor  finds
appropriate in accordance with reasonable business judgment and (ii) a refund or
credit  due as a  result  of  returned  or  damaged  merchandise  or  improperly
performed  services or for other reasons which the Assignor finds appropriate in
accordance with reasonable business judgment.  The reasonable costs and expenses
(including,  without  limitation,  reasonable  attorneys'  fees) of  collection,
whether incurred by an Assignor or the Collateral  Agent,  shall be borne by the
Assignor.

          3.6  Instruments.  If the Assignor owns or acquires any  Instrument in
excess of  $1,000,000  constituting  Collateral  (other  than  checks  and other
payment instruments  received and collected in the ordinary course of business),
the Assignor will within 10 Business Days notify the Collateral Agent thereof.

          3.7 Assignors  Remain Liable Under  Accounts.  Anything  herein to the
contrary  notwithstanding,  the Assignors  shall remain liable under each of the
Accounts  to observe and perform all of the  conditions  and  obligations  to be
observed and performed by it thereunder, all in accordance with the terms of any
agreement  giving rise to such Accounts.  Neither the  Collateral  Agent nor any
other Secured  Creditor shall have any obligation or liability under any Account
(or any  agreement  giving  rise  thereto)  by reason of or arising  out of this
Agreement or the receipt by the Collateral  Agent or any other Secured  Creditor
of any  payment  relating  to  such  Account  pursuant  hereto,  nor  shall  the
Collateral  Agent or any other  Secured  Creditor be  obligated in any manner to
perform any of the  obligations of the Assignor under or pursuant to any Account
(or any agreement giving rise thereto), to make any payment, to make any inquiry
as to the nature or the sufficiency of any payment received by them or as to the
sufficiency of any  performance by any party under any Account (or any agreement
giving  rise  thereto),  to  present  or file any  claim,  to take any action to
enforce any  performance or to collect the payment of any amounts which may have
been assigned to them or to which they may be entitled at any time or times.

          3.8 Assignors  Remain Liable Under  Contracts.  Anything herein to the
contrary  notwithstanding,  the Assignors  shall remain liable under each of the
Contracts to observe and perform all of the  conditions  and  obligations  to be
observed and performed by them  thereunder,  all in accordance with and pursuant
to the terms and provisions of each Contract.  Neither the Collateral  Agent nor
any other Secured  Creditor  shall have any  obligation  or liability  under any

                                      -7-

<PAGE>

Contract  by reason of or arising  out of this  Agreement  or the receipt by the
Collateral  Agent or any other Secured  Creditor of any payment relating to such
Contract  pursuant  hereto,  nor shall the Collateral Agent or any other Secured
Creditor be  obligated  in any manner to perform any of the  obligations  of the
Assignor  under or pursuant to any  Contract,  to make any payment,  to make any
inquiry  as to the nature or the  sufficiency  of any  performance  by any party
under any Contract,  to present or file any claim, to take any action to enforce
any  performance  or to collect the  payment of any amounts  which may have been
assigned to them or to which they may be entitled at any time or times.

          3.9 Further  Actions.  The Assignor  will,  at its own expense,  make,
execute, endorse,  acknowledge, file and/or deliver to the Collateral Agent from
time to time  such  vouchers,  invoices,  schedules,  confirmatory  assignments,
conveyances, financing statements, transfer endorsements,  certificates, reports
and other  assurances or instruments and take such further steps,  including any
and all actions as may be necessary or required under the Federal  Assignment of
Claims  Act,  relating  to its  Receivables,  Contracts,  Instruments  and other
property or rights  covered by the  security  interest  hereby  granted,  as the
Collateral Agent may reasonably require.

                                   ARTICLE IV

                    SPECIAL PROVISIONS CONCERNING TRADEMARKS

          4.1 Additional Representations and Warranties. The Assignor represents
and warrants  that it is the true and lawful owner of or otherwise has the right
to use the  registered  Marks listed in Annex F hereto for the Assignor and that
said listed Marks  include all United States marks and  applications  for United
States marks  registered in the United  States Patent and Trademark  Office that
the Assignor owns or uses in connection  with its business as of the date hereof
and that Assignor has not granted  security  interest in the listed Marks to any
other Person. The Assignor  represents and warrants that it owns, is licensed to
use or  otherwise  has the right to use,  all Marks that it uses.  The  Assignor
further  warrants that it has no knowledge of any third party claim  received by
it that any aspect of the Assignor's present or contemplated business operations
infringes  or will  infringe  any  trademark,  service mark or trade name of any
other Person other than as could not,  either  individually or in the aggregate,
reasonably  be  expected  to  have  a  Material  Adverse  Effect.  The  Assignor
represents and warrants that it is the true and lawful owner of or otherwise has
the right to use all U.S.  trademark  registrations  and applications  listed in
Annex F hereto and that said registrations are valid, subsisting,  have not been
canceled and that the Assignor is not aware of any third-party claim that any of
said  registrations is invalid or unenforceable,  and is not aware that there is
any reason  that any of said  registrations  is invalid  or  unenforceable.  The
Assignor hereby grants to the Collateral  Agent an absolute power of attorney to
sign, upon the occurrence and during the continuance of an Event of Default, any
document which may be required by the United States Patent and Trademark  Office
in order to effect an absolute  assignment  of all right,  title and interest in
each Mark, and record the same.

          4.2 Licenses and Assignments. The Assignor hereby agrees not to divest
itself  of any  right  under  any Mark  absent  prior  written  approval  of the
Collateral Agent.

                                      -8-

<PAGE>

          4.3  Infringements.   The  Assignor  agrees,  promptly  upon  learning
thereof,  to notify the Collateral  Agent in writing of the name and address of,
and to furnish such pertinent information that may be available with respect to,
any party who the  Assignor  believes is  infringing  or  diluting or  otherwise
violating  any of the  Assignor's  rights in and to any Mark in any manner  that
could reasonably be expected to have a Material Adverse Effect,  or with respect
to any  party  claiming  that the  Assignor's  use of any Mark  material  to the
Assignor's  business violates in any material respect any property right of that
party.  The Assignor  further agrees to prosecute in accordance  with reasonable
business  practices  any Person  infringing  any Mark in any  manner  that could
reasonably be expected to have a Material Adverse Effect.

          4.4  Preservation of Marks. The Assignor agrees to use its Marks which
are material to the Assignor's  business in interstate  commerce during the time
in which this  Agreement is in effect and to take all such other  actions as are
reasonably necessary to preserve such Marks as trademarks or service marks under
the laws of the United  States  (other  than any such Marks  which are no longer
used or useful in its business or operations).

          4.5  Maintenance  of  Registration.  The  Assignor  shall,  at its own
expense,  diligently  process  all  documents  reasonably  required  to maintain
trademark  registrations,  including  but not limited to  affidavits  of use and
applications  for  renewals  of  registration  in the United  States  Patent and
Trademark  Office for all of its material  registered  Marks,  and shall pay all
fees and  disbursements  in connection  therewith and shall not abandon any such
filing of  affidavit  of use or any such  application  of  renewal  prior to the
exhaustion of all  administrative  and judicial  remedies  without prior written
consent of the Collateral  Agent (other than with respect to  registrations  and
applications deemed by the Assignor to be no longer prudent to pursue).

          4.6  Future  Registered  Marks.  If any Mark  registration  is  issued
hereafter  to the  Assignor  as a result  of any  application  now or  hereafter
pending before the United States Patent and Trademark Office,  within 30 days of
receipt of such certificate,  the Assignor shall deliver to the Collateral Agent
a copy of such certificate,  and an assignment for security in such Mark, to the
Collateral  Agent and at the expense of the Assignor,  confirming the assignment
for security in such Mark to the Collateral  Agent  hereunder,  the form of such
security to be substantially in the form of Annex I hereto or in such other form
as may be reasonably satisfactory to the Collateral Agent.

          4.7 Remedies.  If an Event of Default  shall occur and be  continuing,
the Collateral Agent may, by written notice to the Assignor,  take any or all of
the following  actions:  (i) declare the entire right, title and interest of the
Assignor in and to each of the Marks,  together  with all  trademark  rights and
rights of protection to the same, vested in the Collateral Agent for the benefit
of the Secured Creditors,  in which event such rights,  title and interest shall
immediately  vest,  in the  Collateral  Agent  for the  benefit  of the  Secured
Creditors,  and the Collateral  Agent shall be entitled to exercise the power of
attorney referred to in Section 4.1 hereof to execute,  cause to be acknowledged
and notarized and record said absolute  assignment  with the applicable  agency;
(ii) take and use or sell the Marks and the goodwill of the Assignor's  business
symbolized  by the  Marks  and the  right to carry on the  business  and use the
assets of the Assignor in  connection  with which the Marks have been used;  and
(iii) direct the Assignor to refrain, in which event the Assignor shall refrain,
from using the Marks in any manner whatsoever,  directly or indirectly,  and the
Assignor  shall execute such further  documents  that the  Collateral  Agent

                                      -9-
<PAGE>

may reasonably  request to further confirm this and to transfer ownership of the
Marks and  registrations  and any pending  trademark  application  in the United
States Patent and Trademark Office to the Collateral Agent.

                                   ARTICLE V

                     SPECIAL PROVISIONS CONCERNING PATENTS,
                          COPYRIGHTS AND TRADE SECRETS

          5.1 Additional Representations and Warranties. The Assignor represents
and  warrants  that it is the true and  lawful  owner of all  rights  in (i) all
United States trade secrets and proprietary information necessary to operate the
business of the Assignor (the "Trade Secret Rights"), (ii) the Patents listed in
Annex G hereto for the  Assignor  and that said  Patents  include all the United
States patents and applications for United States patents that the Assignor owns
as of the date hereof and (iii) the Copyrights  listed in Annex H hereto for the
Assignor and that said  Copyrights  constitute all the United States  copyrights
registered with the United States  Copyright  Office and  applications to United
States  copyrights  that the Assignor  owns as of the date  hereof,  and has not
granted a security interest in the Trade Secret Rights, Patents or Copyrights to
any other Person.  The Assignor further warrants that it has no knowledge of any
third  party  claim that any aspect of the  Assignor's  present or  contemplated
business operations infringes or will infringe any patent of any other Person or
the Assignor has  misappropriated  any trade secret or  proprietary  information
which, either individually or in the aggregate,  could reasonably be expected to
have a Material  Adverse  Effect.  The Assignor  hereby grants to the Collateral
Agent an absolute power of attorney to sign,  upon the occurrence and during the
continuance  of any Event of Default,  any document which may be required by the
United  States  Patent  and  Trademark  Office in order to  effect  an  absolute
assignment  of all right,  title and interest in each Patent,  and to record the
same.

          5.2 Licenses and Assignments. The Assignor hereby agrees not to divest
itself of any right under any Patent or Copyright  absent prior written approval
of the Collateral Agent.

          5.3  Infringements.   The  Assignor  agrees,  promptly  upon  learning
thereof,  to  furnish  the  Collateral  Agent  in  writing  with  all  pertinent
information  available  to  the  Assignor  with  respect  to  any  infringement,
contributing  infringement  or active  inducement  to  infringe in any Patent or
Copyright  or to  any  claim  that  the  practice  of any  Patent  or use of any
Copyright  violates any property right of a third party,  or with respect to any
misappropriation  of any Trade  Secret  Right or any claim that  practice of any
Trade Secret Right violates any property  right of a third party,  in each case,
in any manner which, either  individually or in the aggregate,  could reasonably
be expected to have a Material  Adverse  Effect.  The Assignor  further  agrees,
absent  direction  of the  Collateral  Agent  to  the  contrary,  to  diligently
prosecute,  in accordance  with its  reasonable  business  judgment,  any Person
infringing  any Patent or  Copyright  or any Person  misappropriating  any Trade
Secret  Right,   in  each  case  to  the  extent  that  such   infringement   or
misappropriation,  either individually or in the aggregate,  could reasonably be
expected to have a Material Adverse Effect.

          5.4  Maintenance  of Patents or  Copyright.  At its own  expense,  the
Assignor shall make timely payment of all  post-issuance  fees required pursuant
to 35  U.S.C.  Section 41 to  maintain  in

                                      -10-

force its rights under each Patent or Copyright, absent prior written consent of
the  Collateral  Agent (other than any such Patents or  Copyrights  which are no
longer used or useful in its business or operations).

          5.5  Prosecution  of  Patent  Applications.  At its own  expense,  the
Assignor shall  diligently  prosecute all material  applications  for (i) United
States Patents listed in Annex G  hereto and (ii)  Copyrights  listed on Annex H
hereto, in each case for the Assignor and shall not abandon any such application
prior to  exhaustion of all  administrative  and judicial  remedies  (other than
applications  deemed by the Assignor to be no longer prudent to pursue),  absent
written consent of the Collateral Agent.

          5.6 Other Patents and Copyrights. Within 30 days of the acquisition or
issuance of a United States Patent,  registration of a Copyright, or acquisition
of a registered  Copyright,  or of filing of an application  for a United States
Patent or Copyright,  the Assignor shall deliver to the Collateral  Agent a copy
of said Copyright or Patent,  or certificate or registration  of, or application
therefor,  as the case may be, with an assignment for security as to such Patent
or Copyright,  as the case may be, to the Collateral Agent and at the expense of
the  Assignor,  confirming  the  assignment  for  security,  the  form  of  such
assignment for security to be  substantially in the form of Annex J or K hereto,
as appropriate,  or in such other form as may be reasonably  satisfactory to the
Collateral Agent.

          5.7 Remedies.  If an Event of Default  shall occur and be  continuing,
the Collateral Agent may, by written notice to the Assignor,  take any or all of
the following actions:  (i) declare the entire right, title, and interest of the
Assignor in each of the Patents and Copyrights  vested in the  Collateral  Agent
for the benefit of the Secured Creditors,  in which event such right, title, and
interest shall  immediately  vest in the Collateral Agent for the benefit of the
Secured  Creditors,  in which case the  Collateral  Agent  shall be  entitled to
exercise  the power of  attorney  referred  to in Section 5.1 hereof to execute,
cause to be  acknowledged  and notarized and to record said absolute  assignment
with the  applicable  agency;  (ii) take and  practice  or sell the  Patents and
Copyrights;  and (iii)  direct  the  Assignor  to  refrain,  in which  event the
Assignor  shall  refrain,  from  practicing the Patents and using the Copyrights
directly or indirectly, and the Assignor shall execute such further documents as
the  Collateral  Agent may  reasonably  request  further to confirm  this and to
transfer ownership of the Patents and Copyrights to the Collateral Agent for the
benefit of the Secured Creditors.

                                   ARTICLE VI

                      PROVISIONS CONCERNING ALL COLLATERAL

          6.1 Protection of Collateral  Agent's  Security.  The Assignor will do
nothing to impair  the rights of the  Collateral  Agent in the  Collateral.  The
Assignor will at all times maintain insurance, at the Assignor's own expense, to
the extent and in a manner  consistent  with  commercially  reasonable  business
practice.  Except  to the  extent  otherwise  permitted  to be  retained  by the
Assignor, the Collateral Agent shall, at the time any proceeds of such insurance
are distributed to the Secured Creditors, apply such proceeds in accordance with
Section 7.4 hereof.  The Assignor  assumes all liability and  responsibility  in
connection with the Collateral  acquired by it and the liability of the Assignor
to pay the  Obligations  shall in no way be affected

                                      -11-
<PAGE>

or diminished by reason of the fact that such Collateral may be lost, destroyed,
stolen, damaged or for any reason whatsoever unavailable to the Assignor.

          6.2 Warehouse Receipts Non-negotiable.  To the extent practicable, the
Assignor  agrees  that if any  warehouse  receipt  or receipt in the nature of a
warehouse  receipt is issued with respect to any of its Inventory,  the Assignor
shall request that such warehouse receipt or receipt in the nature thereof shall
not be  "negotiable"  (as such  term is used in  Section  7-104  of the  Uniform
Commercial  Code as in  effect  in any  relevant  jurisdiction  or  under  other
relevant law).

          6.3  Additional  Information.  The Assignor  will, at its own expense,
from time to time upon the reasonable request of the Collateral Agent,  promptly
(and in any event  within 10 days after its receipt of the  respective  request)
furnish to the Collateral  Agent such information with respect to the Collateral
(including the identity of the Collateral or such components thereof as may have
been  requested  by the  Collateral  Agent,  the  value  and  location  of  such
Collateral,  etc.) as may be requested by the Collateral Agent. Without limiting
the  forgoing,  the  Assignor  agrees that it shall  promptly  (and in any event
within 10 days  after its  receipt  of the  respective  request)  furnish to the
Collateral  Agent  such  updated  Annexes  hereto  as may  from  time to time be
reasonably requested by the Collateral Agent.

          6.4 Further  Actions.  The Assignor  will, at its own expense and upon
the  reasonable  request  of  the  Collateral  Agent,  make,  execute,  endorse,
acknowledge,  file and/or deliver to the Collateral Agent from time to time such
lists,  descriptions  and  designations of its Collateral,  warehouse  receipts,
receipts in the nature of  warehouse  receipts,  bills of lading,  documents  of
title, vouchers,  invoices,  schedules,  confirmatory assignments,  conveyances,
financing statements,  transfer  endorsements,  certificates,  reports and other
assurances or instruments and take such further steps relating to the Collateral
and other property or rights covered by the security  interest  hereby  granted,
which the Collateral Agent deems reasonably appropriate or advisable to perfect,
preserve or protect its security interest in the Collateral.

          6.5 Financing  Statements.  The Assignor agrees to execute and deliver
to the Collateral Agent such financing statements, in form reasonably acceptable
to the  Collateral  Agent,  as the  Collateral  Agent  may  from  time  to  time
reasonably request or as are reasonably necessary or desirable in the opinion of
the Collateral Agent to establish and maintain a valid,  enforceable,  perfected
security  interest in the Collateral as provided herein and the other rights and
security  contemplated hereby. The Assignor will pay any applicable filing fees,
recordation taxes and related expenses relating to its Collateral.  The Assignor
hereby  authorizes  the Collateral  Agent to file any such financing  statements
without  the  signature  of  the  Assignor  where  permitted  by law  (and  such
authorization  includes  describing  the  Collateral  as  "all  assets"  of  the
Assignor).

                                  ARTICLE VII

                REMEDIES UPON OCCURRENCE OF AN EVENT OF DEFAULT

          7.1 Remedies;  Obtaining  the  Collateral  Upon Default.  The Assignor
agrees that, if any Event of Default shall have occurred and be continuing, then
and in every such case, the Collateral  Agent,  in addition to any rights now or
hereafter  existing under  applicable law and

                                      -12-

<PAGE>

under the other provisions of this Agreement, shall have all rights as a secured
creditor  under any UCC,  and such  additional  rights and  remedies  to which a
secured  creditor  is  entitled  under  the  laws  in  effect  in  all  relevant
jurisdictions and may:

          (i) personally, or by agents or attorneys, immediately take possession
     of the  Collateral  or any part  thereof,  from the  Assignor  or any other
     Person who then has  possession of any part thereof with or without  notice
     or  process of law,  and for that  purpose  may enter  upon the  Assignor's
     premises where any of the Collateral is located and remove the same and use
     in connection  with such removal any and all services,  supplies,  aids and
     other facilities of the Assignor;

          (ii) instruct the obligor or obligors on any agreement,  instrument or
     other  obligation  (including,  without  limitation,  the  Accounts and the
     Contracts)  constituting the Collateral to make any payment required by the
     terms of such  agreement,  instrument or other  obligation  directly to the
     Collateral  Agent and may  exercise any and all remedies of the Assignor in
     respect of such Collateral;

          (iii)  instruct all banks which have entered into a control  agreement
     with  the  Collateral   Agent  to  transfer  all  monies,   securities  and
     instruments held by such depositary bank to the Cash Collateral Account;

          (iv) sell, assign or otherwise  liquidate any or all of the Collateral
     or any part thereof in  accordance  with Section 7.2 hereof,  or direct the
     Assignor  to  sell,  assign  or  otherwise  liquidate  any  or  all  of the
     Collateral or any part thereof,  and, in each case,  take possession of the
     proceeds of any such sale or liquidation;

          (v)  take  possession  of the  Collateral  or  any  part  thereof,  by
     directing  the  Assignor in writing to deliver  the same to the  Collateral
     Agent at any reasonable place or places designated by the Collateral Agent,
     in which event the Assignor shall at its own expense:

               (x)  forthwith  cause the same to be moved to the place or places
          so  designated  by the  Collateral  Agent and there  delivered  to the
          Collateral  Agent;

               (y) store and keep any  Collateral so delivered to the Collateral
          Agent at such place or places pending further action by the Collateral
          Agent as provided in Section 7.2 hereof; and

               (z) while the  Collateral  shall be so stored  and kept,  provide
          such  security  and  maintenance   services  as  shall  be  reasonably
          necessary  to protect the same and to preserve and maintain it in good
          condition;

          (vi) license or  sublicense,  whether on an exclusive or  nonexclusive
     basis, any Marks, Patents or Copyrights included in the Collateral for such
     term and on such  conditions  and in such  manner as the  Collateral  Agent
     shall in its sole judgment determine;

          (vii) apply any monies constituting  Collateral or proceeds thereof in
     accordance with the provisions of Section 7.4; and

                                      -13-

<PAGE>

          (viii) take any other  action as specified in clauses (1) through (5),
     inclusive, of Section 9-607 of the UCC;

it being understood that the Assignor's  obligation so to deliver the Collateral
is of the essence of this Agreement and that, accordingly, upon application to a
court of equity having jurisdiction, the Collateral Agent shall be entitled to a
decree requiring  specific  performance by the Assignor of said  obligation.  By
accepting  the  benefits  of this  Agreement,  the Secured  Creditors  expressly
acknowledge  and agree that this Agreement may be enforced only by the action of
the Collateral Agent acting upon the written  instructions of all of the Secured
Creditors and that no Secured Creditor shall have any right individually to seek
to enforce this Agreement or to realize upon the security to be granted  hereby,
it being understood and agreed that such rights and remedies may be exercised by
the Collateral Agent for the benefit of the Secured  Creditors upon the terms of
this Agreement.

          7.2 Remedies;  Disposition of the Collateral.  If any Event of Default
shall have occurred and be continuing,  then any  Collateral  repossessed by the
Collateral  Agent  under  or  pursuant  to  Section  7.1  hereof  and any  other
Collateral  whether or not so repossessed by the Collateral  Agent, may be sold,
assigned,  leased or otherwise  disposed of under one or more contracts or as an
entirety,  and  without  the  necessity  of  gathering  at the place of sale the
property to be sold,  and in general in such manner,  at such time or times,  at
such  place  or  places  and on such  terms  as the  Collateral  Agent  may,  in
compliance with any mandatory  requirements  of applicable law,  determine to be
commercially reasonable.  Any of the Collateral may be sold, leased or otherwise
disposed  of, in the  condition  in which  the same  existed  when  taken by the
Collateral  Agent or after any overhaul or repair at the expense of the Assignor
which the Collateral  Agent shall determine to be commercially  reasonable.  Any
such  sale,  lease or other  disposition  may be  effected  by means of a public
disposition or private  disposition,  effected in accordance with the applicable
requirements  (in each case if and to the extent  applicable)  of Sections 9-610
through 9-613 of the UCC and/or such other mandatory  requirements of applicable
law as may  apply to the  respective  disposition.  The  Collateral  Agent  may,
without  notice or  publication,  adjourn any public or private  disposition  or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for the disposition, and such disposition may be made at any time or
place to which the disposition may be so adjourned.  To the extent  permitted by
any such  requirement  of law, the  Collateral  Agent may bid for and become the
purchaser  (and may pay all or any portion of the  purchase  price by  crediting
Obligations  against the purchase  price) of the Collateral or any item thereof,
offered  for   disposition   in   accordance   with  this  Section  7.2  without
accountability  to the Assignor.  If, under applicable law, the Collateral Agent
shall be permitted to make disposition of the Collateral within a period of time
which  does not  permit the  giving of notice to the  Assignor  as herein  above
specified,  the  Collateral  Agent need give the  Assignor  only such  notice of
disposition as shall be required by such  applicable law. The Assignor agrees to
do or cause  to be done all such  other  acts and  things  as may be  reasonably
necessary to make such  disposition or dispositions of all or any portion of the
Collateral valid and binding and in compliance with any and all applicable laws,
regulations,  orders,  writs,  injunctions,  decrees  or  awards  of any and all
courts,  arbitrators  or  governmental  instrumentalities,  domestic or foreign,
having jurisdiction over any such sale or sales, all at the Assignor's expense.

                                      -14-

<PAGE>

          7.3 Waiver of Claims.  Except as otherwise provided in this Agreement,
THE ASSIGNOR  HEREBY WAIVES,  TO THE EXTENT  PERMITTED BY APPLICABLE LAW, NOTICE
AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S TAKING POSSESSION
OR THE  COLLATERAL  AGENT'S  DISPOSITION  OF ANY OF THE  COLLATERAL,  INCLUDING,
WITHOUT  LIMITATION,  ANY AND ALL PRIOR  NOTICE AND HEARING FOR ANY  PREJUDGMENT
REMEDY OR  REMEDIES,  and the  Assignor  hereby  further  waives,  to the extent
permitted by law:

          (i) all damages  occasioned  by such taking of  possession or any such
     disposition  except  any  damages  which  are  the  direct  result  of  the
     Collateral Agent's gross negligence or willful misconduct (as determined by
     a court of competent jurisdiction in a final and non-appealable decision);

          (ii) all other requirements as to the time, place and terms of sale or
     other  requirements  with  respect  to the  enforcement  of the  Collateral
     Agent's rights hereunder; and

          (iii)  all  rights  of  redemption,  appraisement,   valuation,  stay,
     extension or moratorium  now or hereafter in force under any applicable law
     in order to  prevent  or delay the  enforcement  of this  Agreement  or the
     absolute sale of the Collateral or any portion  thereof,  and the Assignor,
     for  itself  and all who may claim  under it,  insofar as it or they now or
     hereafter lawfully may, hereby waives the benefit of all such laws.

Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral  shall operate to divest all right,  title,  interest,  claim and
demand,  either at law or in equity,  of the Assignor  therein and thereto,  and
shall be a  perpetual  bar both at law and in equity  against the  Assignor  and
against any and all Persons  claiming or attempting  to claim the  Collateral so
sold,  optioned or realized upon, or any part thereof,  from,  through and under
the Assignor.

          7.4  Application  of  Proceeds.   (a)  All  moneys  collected  by  the
Collateral Agent upon any sale or other disposition of the Collateral,  together
with all other  moneys  received by the  Collateral  Agent  hereunder,  shall be
applied as follows:

          (i) first, to the payment of all amounts owing the Collateral Agent of
     the  type  described  in  clauses  (iii)  and  (iv)  of the  definition  of
     "Obligations";

          (ii)  second,  to the extent  proceeds  remain  after the  application
     pursuant to the  preceding  clause (i), an amount equal to the  outstanding
     Obligations  shall be paid to the  Secured  Creditors,  with  each  Secured
     Creditor  receiving an amount equal to its  outstanding  Obligations or, if
     the proceeds are insufficient to pay in full all such Obligations,  its Pro
     Rata Share of the amount remaining to be distributed; and

          (iii)  third,  to the extent  proceeds  remain  after the  application
     pursuant  to the  preceding  clauses  (i)  through  (iii),  inclusive,  and
     following the  termination  of this Agreement  pursuant to Section  10.8(a)
     hereof,  to the Assignor or to whomever may be lawfully entitled to receive
     such surplus.

                                      -15-
<PAGE>

          (b) For purposes of this  Agreement,  (x) "Pro Rata Share" shall mean,
when  calculating a Secured  Creditor's  portion of any  distribution or amount,
that amount  (expressed  as a  percentage)  equal to a fraction the numerator of
which is the then unpaid amount of such Secured  Creditor's  Obligations and the
denominator of which is the then outstanding amount of all Obligations.

          (c)  This  Agreement  is  made  with  full  recourse  to the  Assignor
(including,  without  limitation,  with  full  recourse  to  all  assets  of the
Assignor)  and  pursuant  to  and  upon  all  the  warranties,  representations,
covenants  and  agreements  on the part of the Assignor  contained  herein,  and
otherwise in writing in connection herewith.

          7.5 Remedies Cumulative. Each and every right, power and remedy hereby
specifically  given to the Collateral  Agent shall be in addition to every other
right,  power and remedy  specifically  given to the Collateral Agent under this
Agreement, or now or hereafter existing at law, in equity or by statute and each
and every right, power and remedy whether specifically herein given or otherwise
existing may be exercised from time to time or  simultaneously  and as often and
in such  order as may be deemed  expedient  by the  Collateral  Agent.  All such
rights,  powers  and  remedies  shall  be  cumulative  and the  exercise  or the
beginning  of the  exercise  of one shall not be deemed a waiver of the right to
exercise any other or others.  No delay or omission of the  Collateral  Agent in
the  exercise of any such right,  power or remedy and no renewal or extension of
any of the Obligations shall impair any such right,  power or remedy or shall be
construed  to be a waiver of any Default or Event of Default or an  acquiescence
thereof.  No notice to or demand on the Assignor in any case shall entitle it to
any other or  further  notice or demand in  similar  or other  circumstances  or
constitute a waiver of any of the rights of the Collateral Agent to any other or
further action in any circumstances  without notice or demand. In the event that
the Collateral Agent shall bring any suit to enforce any of its rights hereunder
and shall be entitled to judgment,  then in such suit the  Collateral  Agent may
recover  reasonable  expenses,  including  reasonable  attorneys'  fees, and the
amounts thereof shall be included in such judgment.

          7.6 Discontinuance of Proceedings.  In case the Collateral Agent shall
have instituted any proceeding to enforce any right,  power or remedy under this
Agreement by foreclosure,  sale,  entry or otherwise,  and such proceeding shall
have been discontinued or abandoned for any reason or shall have been determined
adversely to the Collateral Agent, then and in every such case the Assignor, the
Collateral Agent and each holder of any of the Obligations  shall be restored to
their former  positions  and rights  hereunder  with  respect to the  Collateral
subject to the security  interest created under this Agreement,  and all rights,
remedies  and  powers  of the  Collateral  Agent  shall  continue  as if no such
proceeding had been instituted.

                                  ARTICLE VIII

          INDEMNITY; APPOINTMENT OF COLLATERAL AGENT BY SECURED PARTIES

          8.1  Indemnity.(a)  Indemnity  by  Assignor.  The  Assignor  agrees to
indemnify,  reimburse and hold the Collateral  Agent,  each Secured Creditor and
their  respective  successors,   assigns,   employees,   affiliates  and  agents
(hereinafter in this Section 8.1 referred to individually as  "Indemnitee,"  and
collectively  as   "Indemnitees")   harmless  from  any  and  all   liabilities,

                                      -16-

<PAGE>

obligations,  damages,  injuries,  penalties,  claims, demands,  actions, suits,
judgments and any and all costs, expenses or disbursements (including reasonable
attorneys'  fees and expenses) (for the purposes of this Section 8.1 and Section
8.5(b) the foregoing are collectively  called "expenses") of whatsoever kind and
nature imposed on, asserted against or incurred by any of the Indemnitees in any
way relating to or arising out of this Agreement or any other document  executed
in connection  herewith or in any other way connected with the administration of
the transactions contemplated hereby or thereby or the enforcement of any of the
terms of, or the  preservation  of any rights under any  thereof,  or in any way
relating to or arising out of the manufacture,  ownership,  ordering,  purchase,
delivery,  control,  acceptance,   lease,  financing,   possession,   operation,
condition,  sale,  return  or  other  disposition,  or  use  of  the  Collateral
(including,  without  limitation,  latent  or  other  defects,  whether  or  not
discoverable),  the  violation  of the  laws  of any  country,  state  or  other
governmental  body or unit,  any tort  (including,  without  limitation,  claims
arising or imposed under the doctrine of strict liability,  or for or on account
of injury to or the death of any Person (including any Indemnitee),  or property
damage),  or contract  claim;  provided that no Indemnitee  shall be indemnified
pursuant to this Section 8.1(a) for losses, damages or liabilities to the extent
caused by the gross  negligence  or willful  misconduct of such  Indemnitee  (as
determined by a court of competent  jurisdiction  in a final and  non-appealable
decision). The Assignor agrees that upon written notice by any Indemnitee of the
assertion of such a  liability,  obligation,  damage,  injury,  penalty,  claim,
demand,  action, suit or judgment, the Assignor shall assume full responsibility
for the  defense  thereof.  Each  Indemnitee  agrees to use its best  efforts to
promptly  notify the Assignor of any such assertion of which such Indemnitee has
knowledge.

          (b) Without  limiting the  application of Section  8.1(a) hereof,  the
Assignor  agrees  to pay or  reimburse  the  Collateral  Agent  for  any and all
reasonable  fees,  costs and expenses  incurred in connection with the creation,
preservation  or  protection  of the  Collateral  Agent's Liens on, and security
interest in, the Collateral,  including,  without limitation, all fees and taxes
in  connection  with the  recording or filing of  instruments  and  documents in
public offices, payment or discharge of any taxes or Liens upon or in respect of
the  Collateral,  premiums for insurance  with respect to the Collateral and all
other fees,  costs and expenses in connection  with  protecting,  maintaining or
preserving the Collateral and the Collateral  Agent's interest therein,  whether
through  judicial  proceedings or otherwise,  or in defending or prosecuting any
actions, suits or proceedings arising out of or relating to the Collateral.

          (c) If and to the extent that the  obligations  of the Assignor  under
this Section 8.1 are unenforceable for any reason, the Assignor hereby agrees to
make  the  maximum   contribution  to  the  payment  and  satisfaction  of  such
obligations which is permissible under applicable law.

          8.2 Indemnity Obligations Secured by Collateral; Survival. Any amounts
paid  by  any  Indemnitee  as  to  which  such   Indemnitee  has  the  right  to
reimbursement  shall  constitute  Obligations  secured  by the  Collateral.  The
indemnity  obligations  of the  Assignor  contained  in this Section 8.1 and 8.2
shall continue in full force and effect  notwithstanding the full payment of all
of the other Obligations and  notwithstanding  the full payment of all the Notes
issued under the Note Purchase Agreement.

          8.3 Appointment and Authorization of Collateral Agent.

                                      -17-
<PAGE>

          Each Secured  Creditor  hereby  irrevocably  (subject to Section 8.10)
appoints,  designates and authorizes the Collateral Agent to take such action on
its behalf under the  provisions of this Agreement and the Notes and to exercise
such powers and  perform  such duties as are  expressly  delegated  to it by the
terms  of  this  Agreement  or the  Notes,  together  with  such  powers  as are
reasonably  incidental  thereto.  Notwithstanding  any provision to the contrary
contained  elsewhere in this Agreement or the Notes,  the Collateral Agent shall
not have any duty or responsibility except those expressly set forth herein, nor
shall the Collateral Agent have or be deemed to have any fiduciary  relationship
with   any   Secured   Creditor,   and   no   implied   covenants,    functions,
responsibilities,  duties,  obligations or  liabilities  shall be read into this
Agreement or the Notes or otherwise exist against the Collateral Agent.

          8.4 Delegation of Duties.

          The  Collateral  Agent  may  execute  any of  its  duties  under  this
Agreement or the Notes by or through agents,  employees or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties.  The  Collateral  Agent shall not be  responsible  for the negligence or
misconduct  of any agent or  attorney-in-fact  that it selects  with  reasonable
care.

          8.5 Liability of Collateral Agent.

          (a) None of the Collateral  Agent nor any of its directors,  officers,
employees  or agents  shall (i) be liable for any action  taken or omitted to be
taken by any of them under or in connection  with this Agreement or the Notes or
the  transactions  contemplated  hereby (except for its own gross  negligence or
willful misconduct),  or (ii) be responsible in any manner to any of the Secured
Creditors  for any recital,  statement,  representation  or warranty made by the
Assignor or any subsidiary or affiliate of the Assignor, or any officer thereof,
contained  in this  Agreement or in the Notes , or in any  certificate,  report,
statement or other  document  referred to or provided for in, or received by the
Collateral  Agent under or in connection  with,  this Agreement or the Notes, or
the validity, effectiveness,  genuineness, enforceability or sufficiency of this
Agreement or the Notes, or for any failure of the Assignor or any other party to
this Agreement or the Notes to perform its obligations  hereunder or thereunder.
The Collateral  Agent shall not be under any obligation to any Secured  Creditor
to ascertain or to inquire as to the  observance  or  performance  of any of the
agreements  contained in, or conditions of, this  Agreement or the Notes,  or to
inspect  the  properties,  books  or  records  of  the  Assignor  or  any of the
Assignor's subsidiaries or affiliates.

          (b) The Secured  Creditors  hereby agree to  indemnify,  reimburse and
hold the Collateral Agent and its respective  successors,  assigns and employees
(hereinafter  in this  Section  8.5(b)  referred  to  individually  as an "Agent
Indemnitee," and collectively as "Agent Indemnitees")  harmless from any and all
expenses of whatsoever kind and nature imposed on, asserted  against or incurred
by any of the Agent Indemnitees relating to or arising out of the performance by
the Collateral Agent of its obligations under this Agreement as collateral agent
or other document executed in connection  herewith or in any other way connected
with the  administration of the transactions  contemplated  hereby or thereby by
the Collateral  Agent as the collateral  agent or the  enforcement of any of the
terms of, or the  preservation  of any rights under

                                      -18-
<PAGE>

any  thereof,  or in any way  relating  to or  arising  out of the  manufacture,
ownership,  ordering, purchase, delivery, control, acceptance, lease, financing,
possession,  operation,  condition, sale, return or other disposition, or use of
the Collateral (including,  without limitation, latent or other defects, whether
or not discoverable),  the violation of the laws of any country,  state or other
governmental  body or unit,  any tort  (including,  without  limitation,  claims
arising or imposed under the doctrine of strict liability,  or for or on account
of injury to or the death of any Person  (including  any Agent  Indemnitee),  or
property damage), or contract claim;  provided that no Agent Indemnitee shall be
indemnified  pursuant to this Section 8.5(b) for losses,  damages or liabilities
to the extent caused by the gross negligence or willful misconduct of such Agent
Indemnitee  (as determined by a court of competent  jurisdiction  in a final and
non-appealable decision).

          8.6 Reliance by Collateral Agent.

          The  Collateral  Agent shall be  entitled to rely,  and shall be fully
protected  in  relying,   upon  any  writing,   resolution,   notice,   consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement  or other  document or  conversation  believed by it to be genuine and
correct and to have been signed,  sent or made by the proper  person or persons,
and upon  advice  and  statements  of legal  counsel  (including  counsel to the
Assignor),  independent accountants and other experts selected by the Collateral
Agent.  The Collateral  Agent shall be fully justified in failing or refusing to
take any action under this  Agreement or the Notes unless it shall first receive
such advice or concurrence of the Secured Creditors as it deems appropriate and,
if it so requests,  confirmation  from the Secured Creditors of their obligation
to indemnify  the  Collateral  Agent  against any and all  liability and expense
which may be incurred by it by reason of taking or  continuing  to take any such
action. The Collateral Agent shall in all cases be fully protected in acting, or
in refraining from acting,  under this Agreement or the Notes in accordance with
a request or consent of the Secured  Creditors  and such  request and any action
taken or  failure  to act  pursuant  thereto  shall be  binding  upon all of the
Secured Creditors.

          8.7 Notice of Default.

          The  Collateral  Agent shall not be deemed to have knowledge or notice
of the occurrence of any Default unless the Collateral Agent shall have received
written  notice  from a  Secured  Creditor  or the  Assignor  referring  to this
Agreement,  describing such Default and stating that such notice is a "notice of
default".  The Collateral Agent will notify the Secured Creditors of its receipt
of any such notice.  The Collateral Agent shall take such action with respect to
such Default as may be requested by the Secured Creditors;  provided that unless
and until the  Collateral  Agent has received any such request,  the  Collateral
Agent may (but shall not be  obligated  to) take such  action,  or refrain  from
taking such action, with respect to Default as it shall deem advisable or in the
best interest of the Secured Creditors.

          8.8 Credit Decision.

                                      -19-
<PAGE>

          Each Secured Creditor  acknowledges  that the Collateral Agent has not
made any  representation  or warranty  to it, and that no act by the  Collateral
Agent  hereafter  taken,  including  any review of the affairs of the  Assignor,
shall be deemed to constitute any  representation  or warranty by the Collateral
Agent  to  any  Secured  Creditor.  Each  Secured  Creditor  represents  to  the
Collateral  Agent  that it has,  independently  and  without  reliance  upon the
Collateral  Agent and based on such  documents and  information as it has deemed
appropriate,  made its own  appraisal of and  investigation  into the  business,
prospects,   operations,   property,   financial   and   other   condition   and
creditworthiness  of the Assignor,  and made its own decision to enter into this
Agreement and the Notes and to complete the transactions  contemplated hereunder
and   thereunder.   Each  Secured   Creditor  also   represents  that  it  will,
independently  and without  reliance upon the Collateral Agent and based on such
documents and information as it shall deem appropriate at the time,  continue to
make its own analysis,  appraisals  and decisions in taking or not taking action
under this Agreement, the Notes and the transactions  contemplated thereby , and
to make such  investigations  as it deems  necessary to inform  itself as to the
business,  prospects,  operations,  property,  financial and other condition and
creditworthiness  of the Assignor.  The Collateral Agent shall not have any duty
or  responsibility  to provide  any  Secured  Creditor  with any credit or other
information concerning the business, prospects,  operations, property, financial
or other condition or  creditworthiness  of the Assignor which may come into the
possession of the Collateral Agent.

          8.9 Reimbursement.

          To the extent the Assignor  does not reimburse  the  Collateral  Agent
within 60 days of billing,  each Secured Creditor shall reimburse the Collateral
Agent upon demand for its ratable share of any costs or  out-of-pocket  expenses
(including  attorneys fees and costs)  incurred by the  Collateral  Agent to the
extent  such  costs  or  out-of-pocket  expenses  arise in  connection  with the
administration,   modification,   amendment  or  enforcement   (whether  through
negotiations,  legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, , or any document contemplated
by or  referred  to  herein,  to the  extent  that the  Collateral  Agent is not
reimbursed for such expenses by or on behalf of the Assignor;  provided that the
Collateral  Agent will use its reasonable  efforts to obtain the approval of the
Secured Creditors before incurring any material  reimbursable costs or expenses.
The undertaking in this Section shall survive the cancellation and/or conversion
of the Notes, any foreclosure  under, or modification,  release or discharge of,
any or all of the  documents  contemplated  by the  Notes,  termination  of this
Agreement and the resignation or replacement of the Collateral Agent.

          8.10 Successor Agent.

          The Collateral  Agent may resign as Collateral  Agent at any time, and
shall resign as Collateral Agent if requested to do so by Secured  Creditors who
in aggregate hold 75% or more of the  outstanding  debt, upon 30 days' notice to
the Company and the Secured  Creditors.  If the  Collateral  Agent resigns under
this  Agreement,  the Note  holders  shall  agree by the  effective  date of the
resignation  notice  to  appoint  a new  Collateral  Agent by 75% or more of the
holders of the outstanding Notes. If such holders fail to elect a new collateral
agent by the requisite  majority by the effective date of the resignation Notice
then the party holding the

                                      -20-
<PAGE>

largest  proportion of the outstanding Note balances shall become the Collateral
Agent. Upon the acceptance of its appointment as successor agent hereunder, such
successor  agent  shall  succeed  to all the  rights,  powers  and duties of the
retiring  Collateral  Agent  and the term  "Collateral  Agent"  shall  mean such
successor agent, and the retiring  Collateral  Agent's  appointment,  powers and
duties as Collateral  Agent shall be terminated.  After any retiring  Collateral
Agent's  resignation  hereunder as  Collateral  Agent,  the  provisions  of this
Section 8 shall inure to its  benefit as to any  actions  taken or omitted to be
taken by it while it was Collateral Agent under this Agreement.  If no successor
agent has accepted  appointment as Collateral Agent by the date which is 30 days
following a retiring  Collateral  Agent's  notice of  resignation,  the retiring
Collateral Agent's resignation shall nevertheless thereupon become effective and
the Secured  Creditors  shall perform all of the duties of the Collateral  Agent
hereunder  until such time,  if any, as the Secured  Creditors  shall  appoint a
successor agent as provided for above.

          8.11 Collateral Matters.

          The Secured Creditors  irrevocably  authorize the Collateral Agent, at
its  option and in its  discretion,  to release  any Lien or  security  interest
granted to or held by the  Collateral  Agent under the Security  Agreements  (a)
upon  cancellation  of the Notes and payment in full of all  obligations  of the
Assignor thereunder; (b) constituting property sold or to be sold or disposed of
as part of or in connection with any disposition  permitted by this Agreement or
the Notes; or (c) if approved,  authorized or ratified in writing by the Secured
Creditors.  Upon  request  by the  Collateral  Agent at any  time,  the  Secured
Creditors will confirm in writing the Collateral  Agent's  authority to release,
or subordinate its interest in, particular types or items of collateral pursuant
to this Section 8.11.

                                   ARTICLE IX

                                   DEFINITIONS

          The following  terms shall have the meanings  herein  specified.  Such
definitions shall be equally  applicable to the singular and plural forms of the
terms defined.

          "Account"  shall  mean any  "account"  as such term is  defined in the
Uniform  Commercial  Code as in  effect  on the date  hereof in the State of New
York,  and in any event shall include but shall not be limited to, all rights to
payment of any monetary  obligation,  whether or not earned by performance,  (i)
for  property  that has been or is to be sold,  leased,  licensed,  assigned  or
otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a
policy of  insurance  issued or to be issued,  (iv) for a  secondary  obligation
incurred or to be incurred, (v) for energy provided or to be provided,  (vi) for
the use or hire of a vessel under a charter or other contract, (vii) arising out
of the use of a credit or charge  card or  information  contained  on or for use
with the card,  or  (viii) as  winnings  in a  lottery  or other  game of chance
operated  or  sponsored  by a State,  governmental  unit of a State,  or  person
licensed or authorized to operate the game by a State or governmental  unit of a
State.

                                      -21-
<PAGE>

          "Agreement"  shall  mean this  Security  Agreement  as the same may be
modified,  supplemented  or  amended  from time to time in  accordance  with its
terms.

          "Assignor"  shall have the meaning  provided in the first paragraph of
this Agreement.

          "Cash  Collateral  Account"  shall  mean  a  cash  collateral  account
maintained  with, and in the sole dominion and control of, the Collateral  Agent
for the benefit of the Secured Creditors.

          "Collateral" shall have the meaning provided in Section 1.1(a) of this
Agreement.

          "Collateral  Agent"  shall  have the  meaning  provided  in the  first
paragraph of this Agreement.

          "Contract  Rights"  shall mean all rights of the  Assignor  under each
Contract,  including,  without limitation, (i) any and all rights to receive and
demand  payments under any or all Contracts,  (ii) any and all rights to receive
and compel  performance  under any or all  Contracts and (iii) any and all other
rights, interests and claims now existing or in the future arising in connection
with any or all Contracts.

          "Contracts"  shall mean all contracts  between the Assignor and one or
more additional parties (including, without limitation, licensing agreements and
any  partnership  agreements,  joint venture  agreements  and limited  liability
company agreements).

          "Copyrights"  shall  mean any  United  States  copyright  owned by the
Assignor,  including any  registrations of any copyrights,  in the United States
Copyright Office or any foreign  equivalent  office,  as well as any application
for a  copyright  registration  now or  hereafter  made with the  United  States
Copyright Office or any foreign equivalent office by the Assignor.

          "Default"  shall mean any event which with notice or lapse of time, or
both, would constitute an Event of Default.

          "Documents"  shall  mean  "documents"  as such term is  defined in the
Uniform  Commercial  Code as in  effect  on the date  hereof in the State of New
York.

          "Equipment"  shall mean any "equipment" as such term is defined in the
Uniform  Commercial  Code as in  effect  on the date  hereof in the State of New
York,  and in any  event,  shall  include,  but shall  not be  limited  to,  all
machinery, equipment,  furnishings, fixtures and vehicles now or hereafter owned
by the Assignor and any and all additions, substitutions and replacements of any
of the foregoing and all accessions thereto, wherever located, together with all
attachments,  components,  parts, equipment and accessories installed thereon or
affixed thereto.

          "Event  of  Default"  shall  mean any  payment  default  on any of the
Obligations after the expiration of any applicable grace period.

                                      -22-
<PAGE>

          "General Intangibles" shall mean "general intangibles" as such term is
defined in the  Uniform  Commercial  Code as in effect on the date hereof in the
State of New York.

          "Goods"  shall mean  "goods"  as such term is  defined in the  Uniform
Commercial Code as in effect on the date hereof in the State of New York.

          "Indemnitee" shall have the meaning provided in Section 8.1(a) of this
Agreement.

          "Instrument"  shall mean  "instruments" as such term is defined in the
Uniform  Commercial  Code as in  effect  on the date  hereof in the State of New
York.

          "Inventory"  shall mean  merchandise,  inventory  and  goods,  and all
additions,  substitutions and replacements  thereof and all accessions  thereto,
wherever  located,  together with all goods,  supplies,  incidentals,  packaging
materials,   labels,   materials   and  any  other   items  used  or  usable  in
manufacturing,  processing,  packaging  or  shipping  same,  in  all  stages  of
production from raw materials through work in process to finished goods, and all
products and proceeds of whatever sort and wherever  located any portion thereof
which may be returned,  rejected,  reclaimed or  repossessed  by the  Collateral
Agent  from  the  Assignor's  customers,  and  shall  specifically  include  all
"inventory" as such term is defined in the Uniform  Commercial Code as in effect
on the date hereof in the State of New York.

          "Investment Property" shall mean "investment property" as such term is
defined in the  Uniform  Commercial  Code as in effect on the date hereof in the
State of New York.

          "Liens"  shall mean any security  interest,  deed of trust,  mortgage,
pledge, lien, claim, charge,  encumbrance,  title retention agreement,  lessor's
interest  in a  financing  lease or  analogous  instrument,  in,  of,  or on the
Assignor's property.

          "Location" of the Assignor,  shall mean the  Assignor's  "location" as
determined pursuant to Section 9-307 of the UCC.

          "Marks"  shall  mean  all  right,  title  and  interest  in and to any
trademarks,  service marks and trade names now held or hereafter acquired by the
Assignor,  including any registration of any trademarks and service marks in the
United States Patent and Trademark  Office or in any  equivalent  foreign office
and any trade dress including logos and/or designs used by the Assignor.

          "Material  Adverse Effect" shall mean a material adverse effect on the
business,  property, assets,  liabilities (actual or contingent),  operations or
condition (financial or otherwise) of the Assignor and its Subsidiaries taken as
a whole.

          "Obligations"  shall mean (i) the full and prompt  payment when due of
all obligations and indebtedness  (including,  without limitation,  indemnities,
fees and  interest  thereon)  of the  Assignor  to the  Investors,  whether  now
existing or hereafter incurred under,  arising out of, or in connection with the
Note Purchase  Agreement and the Notes issued thereunder and the due performance
and compliance by the Assignor with all of the terms,  conditions and agreements
contained in the Note Purchase Agreement and the Notes issued  thereunder;  (ii)
any and all sums advanced by the Assignee in order to preserve the Collateral or

                                      -23-
<PAGE>

preserve  its  security  interest in the  Collateral;  (iii) in the event of any
proceeding for the collection or enforcement of any  indebtedness,  obligations,
or liabilities of the Assignor after an Event of Default shall have occurred and
be continuing, the reasonable expenses of retaking,  holding, preparing for sale
or lease,  selling or otherwise disposing of or realizing on the Collateral,  or
of any  exercise  by  the  Assignee  of  its  rights  hereunder,  together  with
reasonable  attorneys'  fees and court  costs;  and (iv) all amounts paid by any
Indemnitee  as to which such  Indemnitee  has the right to  reimbursement  under
Section 8.1 of this Agreement.

          "Patents" shall mean any patent to which the Assignor now or hereafter
has any right,  title or  interest  therein,  and any  divisions,  continuations
(including,  but  not  limited  to,   continuations-in-parts)  and  improvements
thereof,  as well as any  application  for a patent now or hereafter made by the
Assignor.

          "Permits"  shall mean,  to the extent  permitted to be assigned by the
terms  thereof or by  applicable  law, all licenses,  permits,  rights,  orders,
variances, franchises or authorizations of or from any governmental authority or
agency.

          "Permitted Liens" shall mean

          (i) inchoate Liens for taxes,  assessments or governmental  charges or
     levies not yet due or Liens for taxes,  assessments or governmental charges
     or levies being contested in good faith and by appropriate  proceedings for
     which adequate  reserves have been established in accordance with generally
     accepted accounting principles;

          (ii) Liens in respect of property or assets of the  Assignor or any of
     its subsidiaries imposed by law, which were incurred in the ordinary course
     of business  and do not secure  indebtedness  for borrowed  money,  such as
     carriers',  warehousemen's,  materialmen's  and mechanics'  liens and other
     similar Liens arising in the ordinary course of business,  and (x) which do
     not in the  aggregate  materially  detract from the value of  Assignor's or
     such  subsidiary's  property or assets or materially impair the use thereof
     in the  operation  of the  business  of  Assignor  or  such  Subsidiary  or
     (y) which  are being  contested in good faith by  appropriate  proceedings,
     which  proceedings  have the effect of preventing the forfeiture or sale of
     the property or assets subject to any such Lien;

          (iii)  leases or  subleases  granted to other  Persons not  materially
     interfering with the conduct or value of the business of Assignor or any of
     its   subsidiaries   and   non-assignable,   non-exclusive   licenses   and
     sub-licenses to third parties;

          (iv)  Liens upon  assets of the  Assignor  or any of its  subsidiaries
     subject to capitalized lease obligations, provided that (x) such Liens only
     serve to secure the payment of indebtedness  arising under such capitalized
     lease  obligation and (y) the Lien encumbering the asset giving rise to the
     capitalized lease obligation does not encumber any asset of Assignor or any
     subsidiary of the Assignor;

          (v) Liens placed upon  equipment or machinery and used in the ordinary
     course of business of the Assignor or any of its subsidiaries and placed at
     the time of the  acquisition  thereof by the Assignor or such subsidiary or

                                      -24-
<PAGE>

     within 90 days thereafter to secure  indebtedness  incurred to pay all or a
     portion of the purchase  price thereof or to secure  indebtedness  incurred
     solely for the purpose of financing the  acquisition  of any such equipment
     or  machinery  or  extensions,  renewals  or  replacements  of  any  of the
     foregoing for the same or a lesser amount;

          (vi) easements, rights-of-way,  restrictions,  encroachments and other
     similar charges or encumbrances, and minor title deficiencies, in each case
     not securing  indebtedness and not materially  interfering with the conduct
     or value of the business of Assignor or any of its subsidiaries;

          (vii) Liens arising from precautionary UCC financing statement filings
     regarding  operating  leases or  bailee  arrangements  entered  into in the
     ordinary course of business;

          (viii)  Liens  arising out of the  existence of judgments or awards in
     respect of which Assignor or any of its subsidiaries shall in good faith be
     prosecuting  an appeal or  proceedings  for  review and in respect of which
     there shall have been secured a subsisting  stay of execution  pending such
     appeal or proceedings,  provided that the aggregate  amount of all cash and
     the fair market value of all other property  subject to such Liens does not
     exceed $125,000 at any time outstanding;

          (ix) statutory and common law  landlords'  liens under leases to which
     the Assignor or any of its subsidiaries is a party;

          (x) Liens  incurred in the ordinary  course of business in  connection
     with  workers  compensation  claims,   unemployment  insurance  and  social
     security  benefits and Liens  securing the  performance  of bids,  tenders,
     leases  and  contracts  in  the  ordinary  course  of  business,  statutory
     obligations,  surety bonds,  performance  bonds and other  obligations of a
     like nature incurred in the ordinary course of business and consistent with
     past  practice  (exclusive  of  obligations  in respect of the  payment for
     borrowed  money),  provided that the  aggregate  amount of all cash and the
     fair market value of all other property  subject to all Liens  permitted by
     this clause (xii) shall not at any time exceed $125,000; and

          (xi) other  Liens  incidental  to the  conduct of the  business of the
     Assignor  or any  of  its  subsidiaries  that  (i)  were  not  incurred  in
     connection with indebtedness, (ii) do not materially detract from the value
     of the assets subject to such Liens or materially impair the use thereof in
     the operation of such business  (provided to the extent that any such Liens
     attach to any Collateral such Liens shall be junior to the Liens created in
     favor of the  Collateral  Agent)  and (iii) do not at any time for all such
     Liens encumber cash and other property  having an aggregate value in excess
     of,  or secure  outstanding  obligations  in the  aggregate  in excess  of,
     $100,000.

          "Pro Rata Share" shall have the meaning  provided in Section 7.4(b) of
this Agreement.

          "Proceeds"  shall mean all  "proceeds"  as such term is defined in the
Uniform Commercial Code as in effect in the State of New York on the date hereof
and, in any event,  shall also  include,  but not be limited to, (i) any and all
proceeds  of any  insurance,  indemnity,  warranty  or  guaranty  payable to the
Collateral  Agent or the  Assignor  from time to time with respect to any of the

                                      -25-
<PAGE>

Collateral,  (ii) any and all payments (in any form  whatsoever) made or due and
payable to the Assignor  from time to time in connection  with any  requisition,
confiscation,  condemnation,  seizure  or  forfeiture  of all or any part of the
Collateral  by any  governmental  authority (or any person acting under color of
governmental  authority)  and (iii) any and all other  amounts from time to time
paid or payable under or in connection with any of the Collateral.

          "Software"  shall  mean  "software"  as such  term is  defined  in the
Uniform  Commercial  Code as in  effect  on the date  hereof in the State of New
York.

          "Supporting  Obligations"  shall mean any  "supporting  obligation" as
such term is defined  in the  Uniform  Commercial  Code as in effect on the date
hereof in the State of New York,  now or hereafter owned by the Assignor,  or in
which the Assignor has any rights,  and, in any event, shall include,  but shall
not be limited to all of the Assignor's rights in any letter-of-credit  right or
secondary  obligation  that  supports  the  payment or  performance  of, and all
security  for,  any  Account,  Document,   General  Intangible,   Instrument  or
Investment Property.

          "Termination  Date" shall have the meaning provided in Section 10.9(a)
of this Agreement.

          "Trade Secret  Rights" shall have the meaning  provided in Section 5.1
of this Agreement.

          "UCC" shall mean the Uniform Commercial Code as in effect from time to
time in the relevant jurisdiction.

                                   ARTICLE X

                                  MISCELLANEOUS

          10.1  Notices.  Except as  otherwise  specified  herein,  all notices,
requests,  demands or other  communications  to or upon the  respective  parties
hereto shall be sent or delivered by hand, overnight mail or courier service and
all such notices and  communications  shall,  when mailed,  delivered or sent by
courier,  be  effective  when  deposited  in the mails,  delivered  or overnight
courier,  as the case may be,  except  that  notices and  communications  to the
Collateral  Agent or the Assignor  shall not be effective  until received by the
Collateral  Agent or the  Assignor,  as the case may be. All  notices  and other
communications shall be in writing and addressed as follows:

                                      -26-
<PAGE>

          (a)      if to the Assignor,:

                   eMagin Corporation
                   2070 Route 52
                   Hopewell Junction, NY  12533
                   Attention:  Chief Financial Officer
                   Telephone No.:  (845) 892-1900
                   Telecopier No.:  (845) 892-1901

          (b)      if to the Collateral Agent, at:

                   Verus Support Services Inc.
                   520 Madison Avenue, 38th Floor
                   New York, New York  10016

                   Attention:  Chief Operating Officer
                   Telephone No.:  (212) 588-0865
                   Fax. No. (212) 588-0869; and

          (c)      if  to  any  Secured  Creditor,  at  such  address  as  such
     Secured Creditor shall have specified in the Note Purchase Agreement;

or at such other  address or  addressed to such other  individual  as shall have
been furnished in writing by any Person described above to the party required to
give notice hereunder.

          10.2 Waiver; Amendment. Except as provided in Sections 10.8 and 10.13,
none of the terms and  conditions  of this  Agreement  may be  changed,  waived,
modified or varied in any manner whatsoever unless in writing duly signed by the
Assignor  and the  Collateral  Agent  (with the  written  consent of the Secured
Creditors.

          10.3 Obligations  Absolute.  The obligations of the Assignor hereunder
shall  remain in full  force and  effect  without  regard  to,  and shall not be
impaired  by,  (a)  any  bankruptcy,  insolvency,  reorganization,  arrangement,
readjustment,  composition,  liquidation  or the like of the  Assignor;  (b) any
exercise  or  non-exercise,  or any  waiver  of,  any  right,  remedy,  power or
privilege  under or in respect of this  Agreement;  or (c) any  amendment  to or
modification  of any  security  for any of the  Obligations;  whether or not the
Assignor shall have notice or knowledge of any of the foregoing.

          10.4 Unequal Payment:.  Each Secured Creditor agrees that if it shall,
through the exercise of any right  granted to the Secured  Creditors  under this
Agreement,  under the Note Purchase  Agreement,  the Notes or by applicable law,
including,  but not  limited to any right of set-off,  any  secured  claim under
Section 506 of the  Bankruptcy  Code or any other  security or interest  arising
from, or in lieu of such secured  claim,  and received by such Secured  Creditor
under any applicable bankruptcy, insolvency, or other similar law, or otherwise,
obtain payment in respect of its Note as a result of which the unpaid portion of
its Note is  proportionately  less than the  unpaid  portion of the Notes of the
other Secured  Creditors,  then (a) it shall promptly purchase at par (and shall
be deemed to have  thereupon  purchased)  from such other  Secured  Creditors  a
participation  in the Notes of each such  other  Secured  Creditor,  so that the

                                      -27-
<PAGE>

amount of such Secured  Creditor's Note in the total  participation in the Notes
of the other Secured Creditors shall be in the same proportion to all Notes then
outstanding as the amount of its Note prior to the obtaining of such payment was
to the amount all Notes  outstanding prior to the obtaining such payment and (b)
such other  adjustments shall be made from time to time as shall be equitable to
ensure that Secured  Creditors  share the benefits of such payment pro rata. The
term "Note" as used in this paragraph shall include accrued interest thereon.

          10.5 Successors and Assigns.  This Agreement shall be binding upon the
Assignor  and its  successors  and assigns and shall inure to the benefit of the
Collateral Agent and the other Secured Creditors and their respective successors
and assigns. All agreements, statements,  representations and warranties made by
the Assignor herein or in any certificate or other  instrument  delivered by the
Assignor or on its behalf under this Agreement  shall be considered to have been
relied  upon by the  Secured  Creditors  and shall  survive  the  execution  and
delivery of this Agreement  regardless of any investigation  made by the Secured
Creditors or on their behalf.

          10.6  Headings  Descriptive.  The headings of the several  sections of
this Agreement are inserted for convenience only and shall not in any way affect
the meaning or construction of any provision of this Agreement.

          10.7 GOVERNING LAW; SUBMISSION TO JURISDICTION;  VENUE; WAIVER OF JURY
TRIAL.(a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.  ANY LEGAL ACTION OR PROCEEDING  WITH RESPECT TO THIS AGREEMENT MAY BE
BROUGHT IN THE  COURTS OF THE STATE OF NEW YORK OR OF THE UNITED  STATES FOR THE
SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT,
THE  ASSIGNOR  HEREBY  IRREVOCABLY  ACCEPTS  FOR  ITSELF  AND IN  RESPECT OF ITS
PROPERTY,  GENERALLY AND UNCONDITIONALLY,  THE NON-EXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS. THE ASSIGNOR HEREBY FURTHER  IRREVOCABLY WAIVES ANY CLAIM THAT
ANY SUCH COURTS LACK JURISDICTION OVER THE ASSIGNOR,  AND AGREES NOT TO PLEAD OR
CLAIM IN ANY LEGAL ACTION OR PROCEEDING  WITH RESPECT TO THIS AGREEMENT  BROUGHT
IN ANY OF THE AFORESAID COURTS THAT ANY SUCH COURT LACKS  JURISDICTION  OVER THE
ASSIGNOR.  THE ASSIGNOR FURTHER  IRREVOCABLY  CONSENTS TO THE SERVICE OF PROCESS
OUT OF ANY OF THE AFOREMENTIONED  COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,  POSTAGE PREPAID,  TO
ANY THE  ASSIGNOR AT ITS ADDRESS FOR NOTICES AS PROVIDED IN SECTION  10.1 ABOVE,
SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. THE ASSIGNOR HEREBY
IRREVOCABLY  WAIVES  ANY  OBJECTION  TO SUCH  SERVICE  OF  PROCESS  AND  FURTHER
IRREVOCABLY  WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING
COMMENCED  HEREUNDER  THAT SUCH  SERVICE  OF PROCESS  WAS IN ANY WAY  INVALID OR
INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE COLLATERAL AGENT UNDER
THIS AGREEMENT,  OR ANY SECURED  CREDITOR,  TO SERVE PROCESS IN ANY OTHER MANNER

                                      -28-
<PAGE>

PERMITTED BY LAW OR TO COMMENCE LEGAL  PROCEEDINGS OR OTHERWISE  PROCEED AGAINST
THE ASSIGNOR IN ANY OTHER JURISDICTION.

          (b) THE ASSIGNOR HEREBY  IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID  ACTIONS OR
PROCEEDINGS  ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT  BROUGHT IN THE
COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND
AGREES  NOT TO  PLEAD  OR CLAIM IN ANY  SUCH  COURT  THAT  ANY  SUCH  ACTION  OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

          (c) EACH OF THE PARTIES TO THIS AGREEMENT  HEREBY  IRREVOCABLY  WAIVES
ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,  PROCEEDING OR COUNTERCLAIM  ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

          10.8  Assignor's  Duties.  It is  expressly  agreed,  anything  herein
contained to the contrary notwithstanding, that the Assignor shall remain liable
to perform all of the  obligations,  if any,  assumed by it with  respect to the
Collateral  and  the  Collateral   Agent  shall  not  have  any  obligations  or
liabilities  with respect to any  Collateral by reason of or arising out of this
Agreement, nor shall the Collateral Agent be required or obligated in any manner
to perform or  fulfill  any of the  obligations  of the  Assignor  under or with
respect to any Collateral.

          10.9  Termination;  Release.  (a)  After the  Termination  Date,  this
Agreement  shall  terminate  (provided  that all  indemnities  set forth  herein
including,  without  limitation  in  Section  8.1  hereof,  shall  survive  such
termination)  and the  Collateral  Agent,  at the  request  and  expense  of the
Assignor,  will promptly execute and deliver to the Assignor a proper instrument
or instruments (including Uniform Commercial Code termination statements on form
UCC-3)  acknowledging  the satisfaction  and termination of this Agreement,  and
will duly assign,  transfer and deliver to the  Assignor  (without  recourse and
without any  representation or warranty) such of the Collateral as may be in the
possession  of the  Collateral  Agent  and as has not  theretofore  been sold or
otherwise  applied  or  released  pursuant  to this  Agreement.  As used in this
Agreement,  "Termination  Date"  shall mean the date upon  which no Note  issued
under the Note Purchase Agreement is outstanding  (including the cancellation of
such Notes by way of the  conversion of the Notes to common  shares  pursuant to
the terms of such Notes) and all Obligations then due and payable have been paid
in full.

          (b) At any time that the Assignor  desires that the  Collateral  Agent
take any action to  acknowledge  or give  effect to any  release  of  Collateral
pursuant to the foregoing  Section  10.9(a),  the Assignor  shall deliver to the
Collateral  Agent a  certificate  signed  by a senior  officer  of the  Assignor
stating that the release of the respective  Collateral is permitted  pursuant to
such Section 10.9(a).

          10.10  Counterparts.  This  Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts,  each
of which when so executed and delivered  shall be an original,  but all of which

                                      -29-
<PAGE>

shall together  constitute one and the same  instrument.  A set of  counterparts
executed by all the parties  hereto  shall be lodged with the  Assignor  and the
Collateral Agent.

          10.11   Severability.   Any  provision  of  this  Agreement  which  is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof,  and any such  prohibition  or
unenforceability   in  any   jurisdiction   shall  not   invalidate   or  render
unenforceable such provision in any other jurisdiction.

          10.12  The  Collateral  Agent  and the other  Secured  Creditors.  The
Collateral  Agent will hold in accordance  with this  Agreement all items of the
Collateral at any time received under this Agreement. It is expressly understood
and  agreed  that the  obligations  of the  Collateral  Agent as  holder  of the
Collateral and interests  therein and with respect to the  disposition  thereof,
and otherwise under this  Agreement,  are only those expressly set forth in this
Agreement.  The Collateral Agent shall act hereunder on the terms and conditions
set forth herein.

          10.13 Benefit of Agreement.  This Agreement  shall be binding upon the
parties  hereto and their  respective  successors and assigns and shall inure to
the  benefit  of and be  enforceable  by  each  of the  parties  hereto  and its
successors and assigns.

          10.14 Joinder by Additional Secured Creditors Notwithstanding anything
to the  contrary in this  Agreement,  the parties  hereto  expressly  agree that
additional  parties may join this Agreement as Secured  Creditors,  from time to
time (and prior to January 30, 2002) and become a party hereto  provided,  that,
each such  additional  party shall agree to be bound by the terms and conditions
of this  Agreement  and shall  agree to assume the rights and  obligations  of a
Secured Creditor hereunder as if such additional party was an original signatory
hereto  as of the date of this  Agreement,  and,  provided,  further,  that such
additional  party shall be permitted  under  Section  1(e) of the Note  Purchase
Agreement to join the Note Purchase Agreement as an additional Investor (as such
term is defined in the Note Purchase Agreement).

          [Remainder  of this page  intentionally  left  blank;  signature  page
follows]

                                      -30-
<PAGE>

          IN WITNESS  WHEREOF,  the parties hereto have caused this Agreement to
be executed and delivered by their duly authorized officers as of the date first
above written.

          ASSIGNOR:

                                           EMAGIN CORPORATION, as Assignor

                                           By: /s/
                                              ----------------------------------
                                              Name:
                                              Title:

          SECURED PARTIES:

                                           RAINBOW GATE CORPORATION

                                           By /s/
                                              ----------------------------------
                                              Name:
                                              Title:

                                           MORTIMER D. A. SACKLER

                                           By
                                              ----------------------------------
                                                 Mortimer D. A. Sackler

                                                Address:

<PAGE>
                                   MARTIN SOLOMON

                                   ------------------------------------------
                                      Mr. Martin Solomon

                                      Address:

                                   SOVEREIGN BANCORP LTD.

                                   By
                                       -----------------------------------------
                                       Name:
                                       Title:

                                   JAMES M. ARKOOSH

                                   ---------------------------------------------
                                      Mr. James M. Arkoosh

                                      Address:

<PAGE>

                                   JACK RIVKIN

                                   ---------------------------------------------
                                     Mr. Jack Rivkin

                                     Address:

<PAGE>

Accepted and Agreed to:

VERUS SUPPORT SERVICES INC.,
  as Collateral Agent

By:
   --------------------------------------
   Name:  Mr. James M. Arkoosh
   Title: Chief Operating Officer

<PAGE>

                                                                         ANNEX A
                                                                              to
                                                              SECURITY AGREEMENT

                       SCHEDULE OF CHIEF EXECUTIVE OFFICES

             Name                          Address(es) of Chief Executive Office

          eMagin Corporation                 2070 Route 52, Hopewell Junction
                                                   New York, NY 12533

<PAGE>

                                                                         ANNEX B
                                                                              to
                                                              SECURITY AGREEMENT

                  SCHEDULE OF INVENTORY AND EQUIPMENT LOCATIONS

             Assignor                      Location

          eMagin Corporation                 2070 Route 52, Hopewell Junction
                                                   New York, NY 12533

<PAGE>

                                                                         ANNEX C
                                                                              to
                                                              SECURITY AGREEMENT

                  SCHEDULE OF LEGAL NAMES, TYPE OF ORGANIZATION
                  (AND WHETHER A REGISTERED ORGANIZATION AND/OR
             A TRANSMITTING UTILITY), JURISDICTION OF ORGANIZATION,
               LOCATION AND ORGANIZATIONAL IDENTIFICATION NUMBERS

<TABLE>

<S>                   <C>                   <C>             <C>                <C>                                    <C>

                                                                                                  Assignor's
                      Type of                                                  Assignor's         Organization
                      Organization (or                                         Location (for      Identification
Exact Legal           if the Assignor is    Registered                         Purposes of NY     Number (or, if it   Transmitting
Name of               an Individual, so     Organization?   Jurisidiction of   UCC                has none, so        Utility?
Assignor              indicate)             (Yes/No)        Organization       Section 9-307)     indicate)           (Yes/No)
------------------------------------------------------------------------------------------------------------------------------------
eMagin Corporation    A Delaware            No              Delaware           Delaware           None                No
                      corporation

</TABLE>

<PAGE>

                                                                         ANNEX D
                                                                              to
                                                              SECURITY AGREEMENT

                     SCHEDULE OF TRADE AND FICTITIOUS NAMES

               Name of                                         Trade and/or
               Assignor                                      Fictitious Names
              ---------                                      ----------------

         eMagin Corporation                              f/k/a FED Corporation

<PAGE>

                                                                         ANNEX E
                                                                              to
                                                              SECURITY AGREEMENT

        DESCRIPTION OF CERTAIN SIGNIFICANT TRANSACTIONS OCCURRING WITHIN
              ONE YEAR PRIOR TO THE DATE OF THE SECURITY AGREEMENT

Name of Assigor                     Description of any Transactions as required
                                    by Section 2.8 of the Security Agreement

eMargin Corporation                 Merger of predecessor, eMargin Corporation
                                    a Nevada corporation, on July 16, 2001 with
                                    wholly owned subsidiary, FED Corporation
                                    (a Delaware corporation).  The Assignor has
                                    since continued business as eMagin
                                    Corporation, a Delaware corporation.

<PAGE>

                                                                         ANNEX F
                                                                              to
                                                              SECURITY AGREEMENT

                             SCHEDULE OF U.S. MARKS

MARK                               SERIAL NO.                        FILING DATE

EGLASS                             75/739,315                           6/99

LUMINATOR                          75/739,316                           6/99

POCKET MONITOR                     75/739,318                           6/99

SPECTRA                            75/739,317                           6/99

VISIONARY                          75/739,319                           6/99

EMAGIN                             75/856,770                           11/99

EVANTEC                            75/853,675                           11/99

EVANTIC                            75/853,676                           11/99

LUMIC                              75/853,894                           11/99

ELUMIC                             75/853,679                           11/99

<PAGE>

                                                                        ANNEX G
                                                                             to
                                                              SECURITY AGREEMENT

                               SCHEDULE OF PATENTS

<TABLE>

<CAPTION>

Title or Topic                                                               US Patent No.

<S>                                                                           <C>                 <C>

Self-Aligned Electron Emitter Fabrication & Devices Formed                     5,126,287

Horizontal Microelectronic Field Emission Devices & Method                     5,144,191

Vertical Microelectronic Field Emission Devices Including Elongate             5,371,431
Vertical Pillars Having Resistive Bottom Portions

Vertical microelectronic field emission devices                                5,475,280

Vertical Microelectronic Field Emission Devices & Method                       5,647,785

Method of Forming a Spacer in Display Panels                                   5,529,524

Field Emission Electron Beam Source and Isolation Structure                    5,534,743

Field Emission Device Comprising Dielectric Overlayer                          5,548,181

Field Emission Array Magnetic Field Sensor                                     5,561,339

Selectively Shaped Field Emission Source and Phosphor Array                    5,583,393

Field Emitter Structure and Method of Making (Divisional)                      5,587,623

Panel Display with Dielectric Spacer Structure                                 5,619,097

Field Emitter Display Using Photoformed Spacers                                5,629,583

Field Emission Electron Beam Source and Isolation Structure (Divisional)       5,663,608

Light emission device comprising light emitting organic material and           5,672,938
electron injection enhancement structure

Planarizing Process for Field Emitter Displays                                 5,688,158

Laser Interference Lithographic System with Automatic Fringe Spacing           5,771,098

Field Emitter Display Using Photoformed Spacers (Divisional)                   5,788,550

Field Emitter Device with a Current Limiter Structure                          5,828,163

Pedestal Edge Emitter and Non-Linear Current Limiters for Field Emitter        5,828,288
Displays and Other Electron Source Applications

Field Emitter Device, and Veil Process for the Fabrication Thereof             5,844,351

Matrix Getter for Use in Vacuum Panels                                         5,866,978

Microstructural Surgical Instruments                                           5,619,889

Field Emission Device Having Multiplicity of Through Conductive Vias and       5,903,098
a Backside Connector

Large Area Energy Beam Intensity Profiler                                      5,959,725

Emissive Display Using Organic Light Emitting Diodes                           5,920,080
</TABLE>

<PAGE>

<TABLE>

                                                                                                                             Annex G
                                                                                                                              Page 2

<S>                                                                           <C>                 <C>
Passive Matrix OLED Display                                                    6,069,443

An Electrode Structure for High Resolution Organic Light Emitting Diode        6,016,033
Displays and Method for Making Same

OLED Active Matrix Using a Single Transistor Current Mode Design               6,023,259

High Aspect Ratio Field Emitter Tips and Method of Making                      5,965,898

Field Emitter Device, and Veil Process for the Fabrication Thereof             5,886,460
(Divisional)

Multilayer Emitter Element And Display Comprising Same                         5,869,169

Compact, Body-Mountable Field Emission Display Device, And Display Panel       5,903,243
Having Utility For Use Therewith

Lithographic Structure & Method for Making Field Emitters                      6,027,388

Wand Optics Column And Associated Array Wand and Charged Particle Source       4,902,898

Portable interface unit for a head-up display system (VV)                      D359,729

Head-mounted display system (VV)                                               5,539,422

Head-mounted display system with aspheric optics (VV)                          5,543,816

Head-mounted display system with light blocking structure (VV)                 5,546,099

Head-mounted display system (VV)                                                D380,482

Binocular head mounted display system (VV)                                     5,708,449

Support for a Head Mounted Display System (VV)                                 5,796,374

Speech Recognition Manager (VV)                                                5,867,817

Reflective Micro-Display System (VV)                                           6,005,720

Gate Electrode Structure for Field emission Devices and Method of Making       6,010,918

Organic Light Emitting Device Structure and Process                            6,060,728

High Aspect Ratio Field Emitter Tips and Method of Making  (Divisional  of     6,136,621
Patent #5,965,898)

Miniature microscope                                                           6,101,028

Head-Mounted Display System (VV)                                               6,157,291

Laser  Interferometric  Lithographic  System Providing Automatic Change Of     6,166,820
Fringe Spacing

Flashover Control Structures for Field Emitter Displays                        6,169,358

High Performance Field Emitter & Method of Producing the Same                  6,144,145

Convertible Right Eye/Left Eye Monocular Head Mounted Display System (VV)      6,181,304

Reflective Micro-Display System (VV)                                           6,204,975 B1

Large Area Spacerless Field Emissive Display Package                           6,198,214 B1

Sealing Structure for OLEDs                                                    6,198,220 B1
</TABLE>

<PAGE>

<TABLE>

                                                                                                                             Annex G
                                                                                                                              Page 3

<S>                                                                           <C>                 <C>
Field Emission Display Spacer with Guard Electrode                             6,218,777 B1

Method and Apparatus for Sequential Memory Addressing                          6,215,840 B1

Binocular Head Mounted Display System (VV)                                     6,232,934 B1

Heat Removal System for HighBrightness OLEDs                                   6,265,820

Flashover Control Structure for Field Emitter Displays                         6,255,771

Laterally Structured, High Resolution Multicolor OLED Device                   6,278,237

Vertical Sidewall Current Limiter for Field Emission Displays                  08/958,925         10/28/97

High Brightness, High Efficiency Stacked Organic Light Emitting Diodes            NOA                 8/01

Gate Electrode Design for Coplanar Focusing in FEDs                            08/958,926          7/11/97

Organic Electroluminescent Device with Improved Anode Stability                09/313,285             5/99

Fabrication Method for High Resolution Full Color Organic LED Displays         09/384,201             9/99

Field Emitter Device, and Veil Process for the Fabrication Thereof             08/290,238             8/95

Flat Panel Display Assembly Comprising  Photoformed Spacer Structure,  And     08/280,355             3/96
Method Of Making The Same

Head-Mounted Video Display System with Portable Video Interface Unit (VV)      07/986,422             5/94

Head-Mounted Display System With Light Blocking Structure (VV)                 08/101,553             8/93

Improved  Color  Organic  Light  Emitting  Diode Cell Design for Miniature     09/335,852             6/99
Displays

Lithography Using Blue OLEDs to Expose Resist                                  09/403,282            10/99

Bonded Active Matrix OLED Display & Method of Making                           09/462,463             1/00

Current Limiter for High Resolution Field Emission Structure                   09/463,137             1999

Anhydrous Method of Packaging Organic Light Emitting Displays                  09/462,462             1/00

Laser Ablation Fabrication of Color OLED Displays                              09/462,646             1/00

Organic Electroluminescence  Devices  with  High  Efficiency  Reflecting       09/559,435             4/00
Element

Active  Matrix  Organic  Light  Emitting  Diode with Doped  Organic  Layer     09/555,016             5/00
Having Increased Thickness

Nanocrystal-based CCM for Color OLED Devices                                   09/530,604             5/00

Color Conversion Media (CCM) Integrated on Emitter Array                       09/530,563             5/00

Up-Emitting OLED Structure With Refractory Compound Anode                      09/554,066             5/00

Hermetic Metal-to-Silicon Seals Using a Parallel Seam Sealer                   09/619,617             7/00

Gray Scale Pixel Drivers                                                       09/600,813             7/00

Method of Packaging for Si-based OLEDs                                         09/582,878             7/00
</TABLE>

<PAGE>

<TABLE>

                                                                                                                             Annex G
                                                                                                                              Page 4

<S>                                                                           <C>                 <C>
Fabrication of Novel Structure for Performance Improvement of Color            60/225,403             8/00
Organic Light Emitting Devices

Organic Light Emitting Diode Device Having High Work Function Metal-Oxide      09/642,012             8/00
Anode Layer and Method of Making

An Improved Anode Structure for OLEDs Using Molybdenum                         09/700,173             2/99

Improved Pixel Driver for Accurate and Finer Gray Scale Resolution             09/647,429            11/00

Sputter Protection Layer for Up-Emitting OLED Structures                                              2/01

Thin Film Encapsulation of Organic Light Emitting Diode Devices                                       2/01

Display Method and System                                                                             2/01

Twin Capacitor Pixel Driver Circuit for Microdisplays                          09/784,020             2/01

Method of Solder-Sealing Active Matrix Organic Light Emitting Diode            09/778,797             2/01

Synthesis of Pyrazolinylnaphthalic Acid Derivatives                            6,288,232 B1           9/01

Gray Scale Pixel Driver for Active Matrix OLED Displays                        09/765,582             1/01

Light Extraction from Color Changing Medium Layers in Organic Light            09/814,853             3/01
Emitting Diodes

Green Organic Luminophor                                                       09/827,184             4/01

Portable Communication Device with Virtual Image Display Module                   TBD                 5/01

Virtual Imaging System for Small Font Text                                     09/805,712             3/01

Thin Film Encapsulation of Organic Light Emitting Diode Devices                09/860,155             5/01

Field Sequential Reflective Liquid Crystal Displays Without External           09/786,417             3/01
Frame Buffer

Improvement of Color OLED Fabrication Process                                     TBD                 4/01

Portable Communication Device w/Virtual Image Display Module                      TBD                 5/01

New Organic Aromatic Amines with High and Tunable Tg Values as                 09/894,744             6/01
Hole-Injection or Hole-Transport Materials in OLED Technology

Organic Light Emitting Diode Devices Using Thermostable Hole-Injection         09/894,502             6/01
and Hole-Transport Compounds

A Current-Type Driver for Organic Light Emitting Diode Displays                09/908,044             7/01

Grayscale Static Pixel Cell for OLED Active Matrix Display                     09/933,419             8/01

Organic Light Emitting Diode Devices With Improved Anode Stability             09/919,467             7/01

Means of Stabilizing Thin Film Transistor Amoleds                                 TBD                 9/01

Gate Electrode Structure for Field Emission Devices and Method of Making       09/436,215

Method of Patterning Color Changing Media for Organic Light  Emitting          60/222,325             8/00
Diode Display Devices

</TABLE>

<PAGE>
                                                                         ANNEX H
                                                                              to
                                                              SECURITY AGREEMENT

                             SCHEDULE OF COPYRIGHTS

          NUMBERS                         PUBLICATION                  COPYRIGHT
       REGISTRATION                          DATE                          TITLE
           NONE                              NONE                           NONE

<PAGE>

                                                                         ANNEX I
                                                                              to
                                                              SECURITY AGREEMENT

                           GRANT OF SECURITY INTEREST
                           IN UNITED STATES TRADEMARKS

          FOR GOOD AND VALUABLE CONSIDERATION,  receipt and sufficiency of which
are  hereby  acknowledged,  EMAGIN  CORPORATION,  a  Delaware  corporation  (the
"Grantor") with principal offices at 2070 Route 52, Hopewell Junction,  New York
12533,  hereby assigns and grants to [Name of Collateral  Agent],  as Collateral
Agent, with principal offices at [Address] (the "Grantee"),  a security interest
in (i) all of the  Grantor's  right,  title and  interest  in and to the  United
States  trademarks,  trademark  registrations  and trademark  applications  (the
"Marks")  set forth on Schedule A attached  hereto,  (ii) all  Proceeds (as such
term is defined in the Security Agreement referred to below) and products of the
Marks,  (iii) the goodwill of the businesses with which the Marks are associated
and (iv) all  causes of action  arising  prior to or after the date  hereof  for
infringement of any of the Marks or unfair competition regarding the same.

          THIS GRANT is made to secure the satisfactory  performance and payment
of all the  Obligations of the Grantor,  as such term is defined in the Security
Agreement among the Grantor, the other assignors from time to time party thereto
and the Grantee, dated as of _________, 200__ (as amended from time to time, the
"Security  Agreement").  Upon the occurrence of the Termination Date (as defined
in the Security Agreement), the Grantee shall execute,  acknowledge, and deliver
to the Grantor an instrument in writing  releasing the security  interest in the
Marks acquired under this Grant.

          This Grant has been granted in conjunction with the security  interest
granted to the Grantee under the Security Agreement.  The rights and remedies of
the Grantee  with  respect to the security  interest  granted  herein are as set
forth  in the  Security  Agreement,  all  terms  and  provisions  of  which  are
incorporated herein by reference. In the event that any provisions of this Grant

<PAGE>
                                                                         Annex I
                                                                          Page 2

are deemed to  conflict  with the  Security  Agreement,  the  provisions  of the
Security Agreement shall govern.

    [Remainder of this page intentionally left blank; signature page follows]

<PAGE>
                                                                         Annex I
                                                                          Page 3

          IN WITNESS WHEREOF, the undersigned have executed this Grant as of the
____ day of November, 2001.

                                         EMAGIN CORPORATION, Grantor

                                         By
                                            ------------------------------------
                                            Name:
                                            Title:

                                         [NAME OF COLLATERAL AGENT],
                                          as Collateral Agent and Grantee

                                         By
                                            ------------------------------------
                                            Name:
                                            Title:

<PAGE>

STATE OF ______________ )
                        )  ss.:
COUNTY OF ____________  )

          On this  ____  day of  _________,  ____,  before  me  personally  came
________  _____________ who, being by me duly sworn, did state as follows:  that
[s]he is ____________ of [Name of Grantor],  that [s]he is authorized to execute
the  foregoing  Grant on behalf of said  ____________  and that  [s]he did so by
authority of the [Board of Directors] of said ____________.

                                                    ----------------------------
                                                            Notary Public

<PAGE>

STATE OF ______________ )
                        )  ss.:
COUNTY OF ____________  )

          On this  ____  day of  _________,  ____,  before  me  personally  came
________  ________________  who,  being by me duly sworn,  did state as follows:
that [s]he is _______________ of [Name of Collateral Agent], N.A., that [s]he is
authorized to execute the foregoing Grant on behalf of said corporation and that
[s]he did so by authority of the Board of Directors of said corporation.

                                                    ----------------------------
                                                            Notary Public

<PAGE>

                                                                     SCHEDULE A

MARK                             REG. NO.                              REG. DATE

<PAGE>

                                                                         ANNEX J
                                                                              to
                                                              SECURITY AGREEMENT

                           GRANT OF SECURITY INTEREST
                            IN UNITED STATES PATENTS

          FOR GOOD AND VALUABLE CONSIDERATION,  receipt and sufficiency of which
are  hereby  acknowledged,  eMagin  Corporation,  a  Delaware  corporation  (the
"Grantor") with principal offices at 2070 Route 52, Hopewell Junction,  New York
12533,  hereby assigns and grants to [Name of Collateral  Agent],  as Collateral
Agent, with principal offices at [address], (the "Grantee"), a security interest
in (i) all of the  Grantor's  rights,  title and  interest  in and to the United
States patents (the "Patents") set forth on Schedule A attached hereto,  in each
case  together  with (ii) all  Proceeds (as such term is defined in the Security
Agreement  referred to below) and products of the Patents,  and (iii) all causes
of action arising prior to or after the date hereof for  infringement  of any of
the Patents or unfair competition regarding the same.

          THIS GRANT is made to secure the satisfactory  performance and payment
of all the  Obligations of the Grantor,  as such term is defined in the Security
Agreement among the Grantor, the other assignors from time to time party thereto
and the  Grantee,  dated as of November  __, 2001 (as amended from time to time,
the  "Security  Agreement").  Upon the  occurrence of the  Termination  Date (as
defined in the Security Agreement), the Grantee shall execute,  acknowledge, and
deliver to the Grantor an instrument in writing  releasing the security interest
in the Patents acquired under this Grant.

<PAGE>

                                                                         Annex J
                                                                          Page 2

          This Grant has been granted in conjunction with the security  interest
granted to the Grantee under the Security Agreement.  The rights and remedies of
the Grantee  with  respect to the security  interest  granted  herein are as set
forth  in the  Security  Agreement,  all  terms  and  provisions  of  which  are
incorporated herein by reference. In the event that any provisions of this Grant
are deemed to  conflict  with the  Security  Agreement,  the  provisions  of the
Security Agreement shall govern.

    [Remainder of this page intentionally left blank; signature page follows]

<PAGE>

                                                                         Annex J
                                                                          Page 3

          IN WITNESS WHEREOF, the undersigned have executed this Grant as of the
____ day of November, 2001.

                                             EMAGIN CORPORATION, Grantor

                                             By
                                               ---------------------------------
                                               Name:
                                               Title:

                                             [NAME OF COLLATERAL AGENT],
                                                as Collateral Agent and Grantee

                                             By
                                               ---------------------------------
                                               Name:
                                               Title:

<PAGE>

STATE OF             )
                     ) ss:
COUNTY OF            )

          On this  ____  day of  _________,  ____,  before  me  personally  came
________  _____________ who, being by me duly sworn, did state as follows:  that
[s]he is ____________ of [Name of Grantor],  that [s]he is authorized to execute
the  foregoing  Grant on behalf of said  ____________  and that  [s]he did so by
authority of the Board of Directors of said ____________.

                                                   -----------------------------
                                                            Notary Public

<PAGE>

STATE OF             )
                     ) ss:
COUNTY OF            )

          On this  ____  day of  _________,  ____,  before  me  personally  came
________  ________________  who,  being by me duly sworn,  did state as follows:
that [s]he is  ________________  of [Name of  Collateral  Agent],  that [s]he is
authorized to execute the foregoing Grant on behalf of said corporation and that
[s]he did so by authority of the Board of Directors of said corporation.

                                                   -----------------------------
                                                           Notary Public

<PAGE>

                                                                      SCHEDULE A

     PATENT                 PATENT NO.                  ISSUE DATE
     ------                 ----------                  ----------

<PAGE>

                                                                         ANNEX K
                                                                              to
                                                              SECURITY AGREEMENT

                           GRANT OF SECURITY INTEREST
                           IN UNITED STATES COPYRIGHTS

          WHEREAS,  eMagin Corporation,  a Delaware corporation (the "Grantor"),
having its chief executive office at 2070 Route 52, Hopewell Junction,  New York
12533, is the owner of all right, title and interest in and to the United States
copyrights and associated United States copyright registrations and applications
for registration set forth in Schedule A attached hereto;

          WHEREAS,  [NAME OF COLLATERAL AGENT], as Collateral Agent,  having its
principal  offices at [address] (the  "Grantee"),  desires to acquire a security
interest  in  said  copyrights  and  copyright  registrations  and  applications
therefor; and

          WHEREAS, the Grantor is willing to assign to the Grantee, and to grant
to the Grantee a security interest in and lien upon the copyrights and copyright
registrations and applications therefor described above.

          NOW, THEREFORE,  for good and valuable  consideration,  the receipt of
which is hereby  acknowledged,  and subject to the terms and  conditions  of the
Security  Agreement,  dated as of November  __, 2001,  made by the Grantor,  the
other assignors from time to time party thereto and the Grantee (as amended from
time to time,  the  "Security  Agreement"),  the Grantor  hereby  assigns to the
Grantee as collateral  security,  and grants to the Grantee a security  interest
in, the copyrights and copyright  registrations  and  applications  therefor set
forth in Schedule A attached hereto.

          This Grant has been granted in conjunction with the security  interest
granted to the Grantee under the Security Agreement.  The rights and remedies of
the Grantee  with  respect to the security  interest  granted  herein are as set
forth  in the  Security  Agreement,  all  terms  and  provisions  of  which  are
incorporated herein by reference. In the event that any provisions of this Grant
are deemed to  conflict  with the  Security  Agreement,  the  provisions  of the
Security Agreement shall govern.

    [Remainder of this page intentionally left blank; signature page follows]

<PAGE>

                                                                         Annex K
                                                                          Page 2

          IN WITNESS WHEREOF, the undersigned have executed this Grant as of the
20th day of November, 2001.

                                      EMAGIN CORPORATION, Grantor

                                      By
                                        ----------------------------------------
                                        Name:
                                        Title:

                                      [NAME OF COLLATERAL AGENT],
                                       as Collateral Agent and Grantee

                                        ----------------------------------------
                                        Name:
                                        Title:

<PAGE>

STATE OF             )
                     ) ss:
COUNTY OF            )

          On  this  __  day  of  _________,  ____,  before  me  personally  came
___________  _____________,  who being duly sworn, did depose and say that [s]he
is ___________________ of [Name of Grantor], that [s]he is authorized to execute
the  foregoing  Grant on behalf  of said  corporation  and that  [s]he did so by
authority of the Board of Directors of said corporation.

                                                   -----------------------------
                                                           Notary Public

<PAGE>

STATE OF             )
                     ) ss:
COUNTY OF            )

          On this  ____  day of  _________,  ____,  before  me  personally  came
________ _______________ who, being by me duly sworn, did state as follows: that
[s]he is _______________ of [Name of Collateral Agent], that [s]he is authorized
to execute the foregoing  Grant on behalf of said  __________ and that [s]he did
so by authority of the Board of Directors of said _____________.

                                                   -----------------------------
                                                           Notary Public
<PAGE>

<TABLE>

<S>                 <C>                                                                                          <C>

ARTICLE I           SECURITY INTERESTS............................................................................1

         1.1        Grant of Security Interests...................................................................1
         1.2        Power of Attorney.............................................................................3

ARTICLE II           GENERAL REPRESENTATIONS, WARRANTIES AND
                         COVENANTS................................................................................3

         2.1        Necessary Filings.............................................................................3
         2.2        No Liens......................................................................................4
         2.3        Other Financing Statements....................................................................4
         2.4        Chief Executive Office, Record Locations......................................................4
         2.5        Location of Inventory and Equipment...........................................................4
         2.6        Legal Names; Type of Organization; Jurisdiction of Organization;
                    Location; Organizational Identification Numbers; Changes Thereto; etc.........................4
         2.7        Trade Names; Etc..............................................................................5
         2.8        Certain Significant Transactions..............................................................5
         2.9        Recourse......................................................................................6

ARTICLE III         SPECIAL PROVISIONS CONCERNING ACCOUNTS; CONTRACT
                         RIGHTS; INSTRUMENTS; AND CERTAIN
                         OTHER COLLATERAL.........................................................................6

         3.1        Additional Representations and Warranties.....................................................6
         3.2        Maintenance of Records........................................................................6
         3.3        Direction to Account Debtors; Contracting Parties; etc........................................6
         3.4        Modification of Terms; etc....................................................................7
         3.5        Collection....................................................................................7
         3.6        Instruments...................................................................................8
         3.7        Assignors Remain Liable Under Accounts........................................................8
         3.8        Assignors Remain Liable Under Contracts.......................................................8
         3.9        Further Actions...............................................................................8

ARTICLE IV          SPECIAL PROVISIONS CONCERNING TRADEMARKS......................................................9

         4.1        Additional Representations and Warranties.....................................................9
         4.2        Licenses and Assignments......................................................................9
         4.3        Infringements.................................................................................9
         4.4        Preservation of Marks.........................................................................9
         4.5        Maintenance of Registration..................................................................10
         4.6        Future Registered Marks......................................................................10
         4.7        Remedies.....................................................................................10

ARTICLE V           SPECIAL PROVISIONS CONCERNING PATENTS,  COPYRIGHTS
                         AND TRADE SECRETS.......................................................................11

         5.1        Additional Representations and Warranties....................................................11
         5.2        Licenses and Assignments.....................................................................11
         5.3        Infringements................................................................................11

                                                                 (i)

<PAGE>

         5.4        Maintenance of Patents or Copyright..........................................................11
         5.5        Prosecution of Patent Applications...........................................................12
         5.6        Other Patents and Copyrights.................................................................12
         5.7        Remedies.....................................................................................12

ARTICLE VI          PROVISIONS CONCERNING ALL COLLATERAL.........................................................12

         6.1        Protection of Collateral Agent's Security....................................................12
         6.2        Warehouse Receipts Non-negotiable............................................................13
         6.3        Additional Information.......................................................................13
         6.4        Further Actions..............................................................................13
         6.5        Financing Statements.........................................................................13

ARTICLE VII         REMEDIES UPON OCCURRENCE OF AN EVENT OF DEFAULT..............................................14

         7.1        Remedies; Obtaining the Collateral Upon Default..............................................14
         7.2        Remedies; Disposition of the Collateral......................................................15
         7.3        Waiver of Claims.............................................................................16
         7.4        Application of Proceeds......................................................................16
         7.5        Remedies Cumulative..........................................................................17
         7.6        Discontinuance of Proceedings................................................................18

ARTICLE VIII        INDEMNITY....................................................................................18

         8.1        Indemnity....................................................................................18
         8.2        Indemnity Obligations Secured by Collateral; Survival........................................19

ARTICLE IX          DEFINITIONS..................................................................................23

ARTICLE X           MISCELLANEOUS................................................................................28

         10.1       Notices......................................................................................28
         10.2       Waiver; Amendment............................................................................28
         10.3       Obligations Absolute.........................................................................28
         [10.4      Unequal Payment by Collateral Agent..........................................................29
         10.5       Successors and Assigns.......................................................................29
         10.6       Headings Descriptive.........................................................................29
         10.7       GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL.......................29
         10.8       Assignor's Duties............................................................................30
         10.9       Termination; Release.........................................................................31
         10.10      Counterparts.................................................................................31
         10.11      Severability.................................................................................31
         10.12      The Collateral Agent and the other Secured Creditors.........................................31
         10.13      Benefit of Agreement.........................................................................31

ANNEX A           Schedule of Chief Executive Offices Address(es) of Chief Executive Office
ANNEX B           Schedule of Inventory and Equipment Locations

                                                                 (ii)

<PAGE>

ANNEX C           Schedule of Legal Names, Type of Organization (and Whether a Registered Organization and/or a
                  Transmitting Utility), Jurisdiction of Organization, Location and Organizational Identification
                  Numbers
ANNEX D           Schedule of Trade and Fictitious Names
ANNEX E           Description of Certain Significant Transactions Occurring Within One Year Prior to the
                  Date of the Security Agreement
ANNEX F           Schedule of Deposit Accounts
ANNEX G           Form of Control Agreement Regarding Deposit Accounts
ANNEX H           Schedule of Commercial Tort Claims
ANNEX I           Schedule of Marks
ANNEX J           Schedule of Patents
ANNEX K           Schedule of Copyrights
ANNEX L           Grant of Security Interest in United States Trademarks
ANNEX M           Grant of Security Interest in United States Patents
ANNEX N           Grant of Security Interest in United States Copyrights

                                 [Remainder of this page intentionally left blank]

                                                                 (iii)

</TABLE><PAGE>
                                                                    EXHIBIT 10.1

                           AMENDMENT NO. 1 dated as of December 14, 2001 to the
                           Credit, Security, Guaranty and Pledge Agreement dated
                           as of August 31, 2001 among Crown Media Holdings,
                           Inc. (the "Borrower"), the Guarantors named therein,
                           the Lenders referred to therein and JPMorgan Chase
                           Bank (formerly known as The Chase Manhattan Bank), as
                           Administrative Agent and as Issuing Bank for the
                           Lenders (the "Agent") (as the same may be amended,
                           supplemented or otherwise modified, the "Credit
                           Agreement").

                             INTRODUCTORY STATEMENT

         The Lenders have made available to the Borrower a credit facility
pursuant to the terms of the Credit Agreement.

         The Borrower is forming a subsidiary Delaware business trust solely for
the purpose of issuing certain common and preferred securities in exchange for
debentures of the Borrower and the Borrower is raising $265,000,000 in capital
from investors in exchange for the sale of preferred securities and certain
certificates sold to such investors.

         The Borrower has requested certain amendments to the Credit Agreement
to, among other things, permit it to enter into, and perform its obligations in
connection with the above-described transaction, and the Lenders and the Agent
have agreed to certain revisions to amend the Credit Agreement, all on the terms
and subject to the conditions hereinafter set forth.

         Therefore, the parties hereto hereby agree as follows:

         Section 1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meaning given them in the Credit
Agreement.

         Section 2. Amendments to the Credit Agreement. Subject to the
satisfaction of the conditions precedent set forth in Section 5 hereof, the
Credit Agreement is hereby amended as of the Effective Date (as hereinafter
defined) as follows:

                  (A) The second paragraph of the Introductory Statement to the
Credit Agreement shall be amended by (i) deleting the reference to
"$300,000,000" appearing therein and replacing it with "$320,000,000" and (ii)
deleting the reference to "$200,000,000" appearing therein and replacing it with
"$220,000,000".

                  (B) Article 1 of the Credit Agreement is hereby amended by
adding the following definitions in the appropriate alphabetic sequence:

                  " 'Amendment No. 1 Effective Date' shall mean the date on
         which all the conditions set forth in Section 5 of Amendment No. 1 to
         the Credit Agreement have been satisfied.

                                       1
<PAGE>

                  'Contingent Appreciation Certificate Agreement' shall mean the
         Contingent Appreciation Certificate Agreement dated as of the Trust
         Issue Date among the Borrower and the holders party thereto, as the
         same may be amended from time to time in accordance with the terms
         hereof.

                  'Contingent Appreciation Certificates' shall mean the
         certificates issued pursuant to the Contingent Appreciation Certificate
         Agreement.

                  'Crown Media Trust' shall mean Crown Media Trust, a Delaware
         business trust formed pursuant to a Declaration of Trust of Crown Media
         Trust, dated as of December 7, 2001 as amended and restated by an
         Amended and Restated Declaration of Trust of Crown Media Trust dated as
         of the Trust Issue Date among William J. Aliber, Mark Thompson and
         Brian Stewart, as Regular Trustees, Chase Manhattan Bank (USA), N.A.,
         as Delaware Trustee, JPMorgan Chase Bank, as Property Trustee and Crown
         Media Holdings, Inc., as Sponsor, as the same may be amended from time
         to time in accordance with the terms hereof (the "Amended and Restated
         Declaration of Trust").

                  'Payment Blockage Period' shall mean any period during which
         (i) there exists any payment default hereunder with respect to which
         the applicable grace period, if any, has expired, (ii) any other
         default exists hereunder for which the Agent has provided a Payment
         Blockage Notice pursuant to the terms of the Trust Indenture and the
         Contingent Appreciation Certificate Agreement or (iii) the Agent has
         declared the Loans to be due and payable pursuant to Article 7 hereof.

                  'Replacement Hallmark Cards Letter of Credit' shall mean the
         Letter of Credit issued by Credit Suisse First Boston or an Affiliate
         on behalf of HCC for the benefit of the Borrower in connection with the
         Replacement HCC Promissory Note.

                  'Replacement HCC Promissory Note' shall mean the Promissory
         Note dated as of the Trust Issue Date among the Borrower, as borrower,
         Crown Media International, Inc. and Crown Media United States, LLC, as
         guarantors, and HCC, as lender.

                  'Subsidiary Trust Documents' shall mean all documents entered
         into in connection with the Subsidiary Trust Transaction including, but
         not limited to, the Trust Indenture, the Amended and Restated
         Declaration of Trust, the Contingent Appreciation Certificate
         Agreement, the Trust Preferred Securities Guarantee and the Trust
         Common Securities Guarantee.

                  'Subsidiary Trust Transaction' shall mean the transaction
         pursuant to which Crown Media Trust will be issuing the Trust
         Securities to certain investors, the proceeds of which will be used by
         Crown Media Trust to purchase the Trust Indenture Debentures from the
         Borrower pursuant to the Trust Indenture and the Borrower will be
         issuing Contingent Appreciation Certificates to such investors.

                  'Trust Common Securities' shall mean the class of common
         securities issued by Crown Media Trust in connection with the
         Subsidiary Trust Transaction.

                                       2
<PAGE>

                  'Trust Common Securities Guarantee' shall mean the Guarantee
         provided by the Borrower pursuant to the Common Securities Guarantee
         Agreement dated as of the Trust Issue Date among the Borrower and
         JPMorgan Chase Bank, as trustee for the benefit of the holders of the
         Trust Common Securities, as amended from time to time in accordance
         with the terms hereof.

                  'Trust Indenture' shall mean the Indenture dated the Trust
         Issue Date, between the Borrower as Issuer and JPMorgan Chase Bank as
         Indenture Trustee."

                  'Trust Indenture Debentures' shall mean the debentures
         authenticated and delivered under the Trust Indenture to Crown Media
         Trust.

                  'Trust Issue Date' shall mean the Issue Date as defined in the
         Trust Indenture.

                  'Trust Preferred Securities' shall mean the class of preferred
         securities issued by Crown Media Trust in connection with the
         Subsidiary Trust Transaction.

                  'Trust Preferred Securities Guarantee' shall mean the
         Guarantee provided by the Borrower pursuant to the Preferred Securities
         Guarantee Agreement dated as of the Trust Issue Date among the Borrower
         and JPMorgan Chase Bank, as trustee for the benefit of the holders of
         the Trust Preferred Securities, as amended from time to time in
         accordance with the terms hereof.

                  'Trust Securities' shall mean the Trust Preferred Securities
         and the Trust Common Securities."

                  (C) The definition of "GAAP" appearing in Article 1 of the
Credit Agreement is hereby amended by adding the following sentence to the end
thereof:

                  "Notwithstanding the foregoing, GAAP as it is applied to the
         Subsidiary Trust Transaction shall not be modified for any reason and
         shall be applied consistent with its application at the time of the
         closing of the Subsidiary Trust Transaction."

                  (D) The definition of "Guarantors" appearing in Article 1 of
the Credit Agreement is hereby amended by adding the words ", Crown Media Trust"
after the words "Kermit (L) Ltd." appearing in the parenthesis therein.

                  (E) The definition of "Change in Control" appearing in Article
1 of the Credit Agreement is hereby amended by adding the following clauses (c)
and (d) to the end thereof:

                  "(c) individuals who on the Issue Date (as defined in the
         Trust Indenture) constituted the Board of Directors (together with any
         new directors whose election by such Board of Directors or whose
         nomination for election by the stockholders of the Borrower was
         approved by a vote of at least 66-2/3% of the Board of Directors then
         still in office who were either directors on Issue Date (as defined in
         the Trust Indenture) or whose election or nomination for election was
         previously so approved) cease for any reason to constitute a majority
         of the Board of Directors still in office or (d) the

                                       3
<PAGE>

         consummation by the Borrower of any transaction that would constitute a
         "Rule 13e-3 transaction" as defined in the Exchange Act."

                  (F) The definition of "Restricted Payments" is hereby amended
by adding the following clause (vi) at the end thereof:

                  "(vi) payments by the Borrower made in connection with the
         Subsidiary Trust Documents (other than fees or other expenses subject
         to Section 14.01(a), (b) and (c) of the Trust Indenture) including but
         not limited to (x) all payments of principal, interest and other
         amounts on or with respect to the Trust Indenture Debentures, the Trust
         Securities, any Contingent Appreciation Certificates, the Trust
         Securities Guarantee, or any other instrument issued or document
         entered into in connection therewith and (y) any fees and expenses
         payable in connection thereto."

                  (G) The definition of "Subsidiary" is hereby amended by adding
the following to the end thereof:

                  ", and Crown Media Trust shall not be considered a
         "Subsidiary" for any purpose hereof."

                  (H) Section 3.23 of the Credit Agreement is hereby amended by
adding the phrase "except the Contingent Appreciation Certificates" at the end
of clause (d) thereof.

                  (I) Section 5.1 of the Credit Agreement is hereby amended by
adding the following clause (l) at the end thereof:

                  "(l) Deliver to the Agent, or otherwise ensure that the Agent
         receives, a copy of (i) any notice provided by the Borrower in
         connection with the Subsidiary Trust Transaction contemporaneously with
         the delivery of such notices in accordance with the provisions of the
         Subsidiary Trust Documents, (ii) all notices received by the Borrower
         pursuant to the Subsidiary Trust Documents, promptly upon receipt
         thereof, (iii) a current list of the names and record addresses of all
         holders of the Trust Preferred Securities and (iv) any proposed
         amendment of the Subsidiary Trust Documents."

                  (J) Section 6.1 of the Credit Agreement is hereby amended by
adding the following clauses (x) and (xi) at the end thereof:

                  "(x) Indebtedness of the Borrower arising from the issuance of
         the Trust Indenture Debentures and the Contingent Appreciation
         Certificates; and

                  (xi) Indebtedness of the Borrower to HCC under the Replacement
         HCC Promissory Note."

                  (K) Section 6.3 of the Credit Agreement is hereby amended by
adding the following clause (v) at the end thereof:

                  "(v) the Trust Preferred Securities Guarantee and the Trust
         Common Securities Guarantee."

                                       4
<PAGE>

                  (L) Section 6.4 of the Credit Agreement is hereby amended by
adding the following clause (vii) at the end thereof:

                  "(vii) Investments by the Borrower in Crown Media Trust
         represented by the Trust Common Securities in an amount not to exceed
         $8,196,000."

                  (M) Section 6.5 of the Credit Agreement is hereby amended by
deleting subclauses (x) and (y) appearing in clause (vii) thereof and replacing
the same with the following:

                  "(vii) payments by the Borrower to HCC of a commitment fee of
         1.5% of the commitment under the Replacement HCC Promissory Note in the
         form of shares of common stock of the Borrower."

                  (N) Section 6.5 of the Credit Agreement is hereby amended by
adding the following clause (ix) at the end thereof:

                  "(ix) scheduled payments of interest on the Trust Indenture
         Debentures; provided, however, that no such payments may be made during
         any Payment Blockage Period."

                  (O) Section 6.12 of the Credit Agreement is hereby amended by
(i) deleting the words "HCC Promissory Note" appearing therein and inserting in
lieu thereof the words "Replacement HCC Promissory Note", (ii) deleting the
words "Hallmark Cards Letter of Credit" appearing therein and inserting in lieu
thereof the words "Replacement Hallmark Cards Letter of Credit" and (iii) adding
the following sentence at the end thereof:

                  "In addition, no Credit Party shall be entitled to amend,
         alter, modify, waive or consent to any amendment, alteration,
         modification or waiver to any of the Subsidiary Trust Documents if such
         amendment, alteration, modification or waiver materially and adversely
         changes any material term thereof or is reasonably likely to materially
         and adversely affect the interests of the Lenders."

                  (P) Section 6.23 of the Credit Agreement is hereby amended by
deleting the chart in clause (ii) in its entirety and replacing the same with
the following:

<Table>
<Caption>
       "FISCAL QUARTER/YEAR ENDING                      AMOUNT
       ---------------------------                      ------
<S>                                               <C>
            December 31, 2001                        - 56,000,000
             March 31, 2002                          - 42,000,000
              June 30, 2002                          - 43,000,000
           September 30, 2002                        - 43,000,000
            December 31, 2002                        - 38,000,000
             March 31, 2003                          - 15,000,000
              June 30, 2003                          - 15,000,000
           September 30, 2003                        - 14,000,000
            December 31, 2003                        - 14,000,000
            December 31, 2004                          66,000,000
            December 31, 2005                         129,000,000
            December 31, 2006                         142,000,000"
</Table>

                                       5
<PAGE>

                  (Q) Section 6.25 of the Credit Agreement is hereby amended in
its entirety by replacing the same with the following:

                  "Net Worth. Permit Net Worth to be less than the sum of (x)
         the base amount for each fiscal quarter set forth in the table below,
         plus (y) the sum of the Consolidated Net Income of the Borrower
         (subsequent to the Amendment No. 1 Effective Date) during which the
         Borrower achieves positive Consolidated Net Income, plus (z) 50% of net
         equity invested in the Borrower after the Amendment No. 1 Effective
         Date.

<Table>
<Caption>
          FISCAL QUARTER ENDING                       BASE AMOUNT
          ---------------------                       -----------
<S>                                                <C>
            December 31, 2001                         775,000,000
             March 31, 2002                           731,000,000
              June 30, 2002                           688,000,000
           September 30, 2002                         645,000,000
            December 31, 2002                         602,000,000
             March 31, 2003                           578,000,000
              June 30, 2003                           553,000,000
           September 30, 2003                         529,000,000
            December 31, 2003                         505,000,000
               Thereafter                             505,000,000"
</Table>

                  (R) Article 7 of the Credit Agreement is hereby amended by
adding the following clauses (q), (r) and (s) at the end thereof:

                  "(q) an Event of Default (as defined in the Trust Indenture)
         shall have occurred under the Trust Indenture;

                  (r) an Event of Default (as defined in the Trust Preferred
         Securities Guarantee) shall have occurred under the Trust Preferred
         Securities Guarantee; or

                  (s) any Restricted Payments not permitted by Section 6.5(ix)
         hereof become due and payable in connection with the Subsidiary Trust
         Transaction, including but not limited to, as a result of (x) an
         Optional Redemption, a Special Event Redemption, a Change of Control
         Redemption or a Change of Control Offer as all such terms are defined
         in, and pursuant to the terms of, Sections 3.01 and 3.02 of the Trust
         Indenture, (y)

                                       6
<PAGE>

         a voluntary or involuntary liquidation, winding up or termination of
         Crown Media Trust or (z) an Event of Default (as defined in the Trust
         Indenture) under the Trust Indenture; provided however, that any such
         payments made (A) after the expiry of any Payment Blockage Period for
         which no new Payment Blockage Period has begun and (B) in connection
         with a distribution of Trust Indenture Debentures to holders of the
         Trust Securities pursuant to Section 8.01(v) of the Amended and
         Restated Declaration of Trust shall not constitute an Event of Default
         hereunder."

                  (S) Section 12.1(b) of the Credit Agreement is hereby amended
by adding the following clauses (x) and (xi) at the end thereof:

                  "(x) to provide a Payment Blockage Notice to the Borrower
         pursuant to the terms of the Trust Indenture and the Contingent
         Appreciation Certificate Agreement in order to effectuate the
         subordination provisions appearing therein, and

                  (xi) to amend the provisions of the Limited Guarantee and the
         Hallmark Cards Subordination and Support Agreement in connection with
         the issuance of the Replacement HCC Promissory Note."

                  (T) As of the Commitment Increase Effective Date (as defined
in Section 6 below), Schedule 1 (Schedule of Commitments) to the Credit
Agreement is hereby amended in its entirety by a new Schedule 1 as set forth as
Appendix A hereto.

         Section 3. Consent. The Borrower has requested that the Agent and the
Lenders consent to a waiver of compliance with (i) Section 6.5(vii) to allow the
Borrower to use an additional $40,000,000 in Net Cash Proceeds in excess of the
amount permitted thereunder to pay down intercompany Indebtedness; (ii) Section
6.5 to allow the Borrower to transfer to Hallmark India Private Limited ("HIPL")
the funds necessary for HIPL to pay in full the principal and accrued interest
on HIPL's overdraft/working capital loan facility with The Chase Manhattan Bank;
(iii) Section 6.6 to allow (x) HIPL to dispose of decoding equipment with a fair
market value of approximately $200,000, and (y) Crown Media US to sell its
wholly-owned Subsidiary, Odyssey Productions Limited, to National Interfaith
Cable Coalition ("NICC") pursuant to a stock purchase agreement between Crown
Media US and NICC dated as of August 4, 2001, on terms and conditions described
in memo to be provided by Agent.

         Section 4. Increase in Commitments. As of the Commitment Increase
Effective Date (as defined in Section 6 below), the Total Commitment shall be
increased by $35,000,000 by the addition of WestLB Bank ("WestLB") as a party to
the Credit Agreement, with a Term Loan Commitment of $10,937,500 and a Revolving
Credit Commitment of $24,062,500. On or prior to the Commitment Increase
Effective Date, WestLB shall execute and deliver to the Agent, for its
acceptance and recording in the Register, an Assumption Agreement in the form of
Appendix B hereto. Upon such execution, delivery, acceptance and recording, from
and after the Commitment Increase Effective Date, WestLB shall be a party to the
Credit Agreement and shall have all the rights and obligations of a Lender
thereunder.

         Section 5. Conditions to Effectiveness. The effectiveness of this
Amendment (other than the increase in the Total Commitment) is subject to the
satisfaction in full of each of the

                                       7
<PAGE>

conditions precedent set forth in this Section 5 (the date on which all such
conditions have been satisfied being herein call the "Effective Date"):

                  (A) the Agent shall have received counterparts of this
Amendment which, when taken together, bear the signatures of the Borrower, each
Guarantor, the Agent and the Required Lenders;

                  (B) the Agent shall have received and be satisfied with final
versions of all documentation to be executed in connection with the Subsidiary
Trust Transaction; and

                  (C) all legal matters incident to this Amendment shall be
satisfactory to Morgan, Lewis & Bockius LLP, counsel for the Agent.

         Section 6. Conditions to Effectiveness of the Commitments. The
effectiveness of Section 4 of this Amendment shall be subject to the
satisfaction in full of each of the conditions precedent set forth in this
Section 6 (the date on which all such conditions have been satisfied being
herein called the "Commitment Increase Effective Date"):

                  (A) on or before January 7, 2002, the Agent shall have
received an Assumption Agreement (in form of Appendix B hereto), duly executed
by WestLB; and

                  (B) on or before January 7, 2002, the Agent shall have
received a new Revolving Credit Note and Term Note executed by the Borrower for
WestLB in the face amount of $24,062,500 and $10,937,500, respectively.

         Section 7. Representations and Warranties. Each Credit Party represents
and warrants that:

                  (A) after giving effect to this Amendment, the representations
and warranties contained in the Credit Agreement are true and correct in all
material respects on and as of the date hereof as if such representations and
warranties had been made on and as of the date hereof (except to the extent that
any such representations and warranties specifically relate to an earlier date);
and

                  (B) after giving effect to this Amendment, no Event of Default
or Default will have occurred and be continuing on and as of the date hereof.

         Section 8. Fees. In consideration for the Lenders and the Agent
entering into the Amendment, on the Covenant Effective Date, the Borrowers agree
to pay the Agent for the account of each of the Lenders who executes this
Amendment prior to the consummation of the Subsidiary Trust Transaction a fee
equal to 0.025% of the aggregate Commitment of each Lender under the Credit
Agreement.

         Section 9. Covenants of the Borrower. The Borrower hereby covenants
that (i) it shall use the proceeds of the Subsidiary Trust Transaction as set
forth in Schedule 2.3 of the Securities Purchase Agreement dated as of the Trust
Issue Date among the Borrower, Crown Media Trust and the Investors set forth
therein, (ii) it shall promptly following execution of all documentation
executed in connection with the Subsidiary Trust Transaction, deliver execution

                                       8
<PAGE>

copies thereof certified by and officer of the Borrower and (iii) it shall pay
the Agent the fees set forth in Section 8 hereof on January 7, 2002.

         Section 10. Consummation of Subsidiary Trust Transaction. In the event
that the Subsidiary Trust Transaction has not been consummated by December 31,
2001, Section 2 and clause (i) of Section 3 of this Amendment shall be deemed to
be void ab initio and shall be of no further force or effect.

         Section 11. Further Assurances. At any time and from time to time, upon
the Agent's request and at the sole expense of the Credit Parties, each Credit
Party will promptly and duly execute and deliver any and all further instruments
and documents and take such further action as the Agent reasonably deems
necessary to effect the purposes of this Amendment.

         Section 12. Fundamental Documents. This Amendment is designated a
Fundamental Document by the Agent.

         Section 13. Full Force and Effect. Except as expressly amended hereby,
the Credit Agreement and the other Fundamental Documents shall continue in full
force and effect in accordance with the provisions thereof on the date hereof.
As used in the Credit Agreement, the terms "Agreement", "this Agreement",
"herein", "hereafter", "hereto", "hereof", and words of similar import, shall,
unless the context otherwise requires, mean the Credit Agreement as amended by
this Amendment.

         Section 14. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

         Section 15. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one instrument.

         Section 16. Expenses. The Borrowers agree to pay all out-of-pocket
expenses incurred by the Agent in connection with the preparation, execution and
delivery of this Amendment, including, but not limited to, the reasonable fees
and disbursements of counsel for the Agent.

         Section 17. Headings. The headings of this Amendment are for the
purposes of reference only and shall not affect the construction of or be taken
into consideration in interpreting this Amendment.

                                       9
<PAGE>

                  IN WITNESS WHEREOF, the parties hereby have caused this
Amendment to be duly executed as of the date first written above.

                                BORROWER:

                                CROWN MEDIA HOLDINGS, INC.

                                By /s/ William J. Aliber
                                   --------------------------------------------
                                Name: William J. Aliber
                                Title: Chief Financial Officer

                                GUARANTORS:

                                CROWN MEDIA INTERNATIONAL, INC.
                                CROWN MEDIA INTERNATIONAL (SINGAPORE) INC.
                                CROWN ENTERTAINMENT LIMITED
                                CROWN MEDIA DISTRIBUTION, LLC
                                CROWN MEDIA INTERNATIONAL (HK) LIMITED
                                HEN LLC
                                HEN (L) LTD.
                                HM HOLDINGS OF DELAWARE LLC
                                CROWN MEDIA UNITED STATES LLC
                                HM INTERMEDIARY LLC
                                CITI TEEVEE LLC
                                DOONE CITY PICTURES LLC
                                HALLMARK INDIA PRIVATE LIMITED

                                By /s/ William J. Aliber
                                   --------------------------------------------
                                Name: William J. Aliber
                                Title:

                                LENDERS:

                                JPMORGAN CHASE BANK (f/k/a
                                The Chase Manhattan Bank),
                                individually and as Issuing
                                Bank and Agent

                                By  /s/ Garrett J. Verdone
                                   --------------------------------------------
                                Name: Garrett J. Verdone
                                Title: Senior Vice President

                                       10
<PAGE>

                                BANK OF AMERICA, N. A.

                                By
                                   --------------------------------------------
                                Name:
                                Title:

                                CREDIT SUISSE FIRST BOSTON

                                By /s/ David L. Sawyer
                                   --------------------------------------------
                                Name: David L. Sawyer
                                Title: Vice President

                                By /s/ Bill O'Daly
                                   --------------------------------------------
                                Name: Bill O'Daly
                                Title: Vice President

                                CITICORP USA, INC.

                                By /s/ Robert Park
                                   --------------------------------------------
                                Name: Robert Park
                                Title: MD

                                DEUTSCHE BANK AG NEW YORK BRANCH

                                By
                                   --------------------------------------------
                                Name:
                                Title:

                                ROYAL BANK OF CANADA

                                By /s/ Barbara Meijer
                                Name: Barbara Meijer
                                Title: Managing Director

                                ABN AMRO

                                By
                                   --------------------------------------------
                                Name:
                                Title:

                                       11
<PAGE>

                                BANK ONE, N.A. (Main Office Chicago)

                                By /s/ Suzanne Ergastolo
                                   ---------------------
                                Name: Suzanne Ergastolo
                                Title: Vice President

                                       12

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