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Exhibit 10.24  

        Dated
as of MAY 24, 2004 

 
 

SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT    
    

	Dtech Investments LLC

555 S. Cole Road

P.O. Box 7608

Boise, ID 83707	 	Robert Mackie

12 Midwood Road

Glen Rock, NJ 07452
	

Fleming US Discovery Fund III, L.P.

c/o JP Morgan Partners

1221 Avenue of the Americas, 40th Floor

New York, NY 10020	
 	

Fleming US Discovery Offshore Fund III, L.P.

c/o JP Morgan Partners

1221 Avenue of the Americas, 40th Floor

New York, NY 10020
	

Joseph Sheehan

J.E. Sheehan & Company

711 Fifth Avenue

New York, NY 10022	
 	

 

Each
of the entities and individuals listed above is hereinafter referred to as a "Lender" and, collectively, as the "Lenders." 

Ladies
and Gentlemen: 

        The
undersigned, DISPLAYTECH, INC., a Colorado corporation (the "Company"), hereby agrees with the Lenders with respect to this Subordinated Convertible Note Purchase
Agreement (this "Agreement") as follows: 

        1.     Authorization. The Company has authorized the issuance and sale to the Lenders of (a) subordinated convertible
promissory notes in the aggregate principal amount of $3,500,000 in the forms attached hereto as Exhibit A (the "Note" and, collectively, the
"Notes") which Notes are convertible into Common Stock (as hereinafter defined) as set forth in the Notes (the "Note Securities"). The Notes and the Note Securities are sometimes
collectively referred to herein as the "Securities." 

        2.     Sale and Purchase of the Notes. Upon the terms and conditions contained herein, the Company agrees to sell to each of the
Lenders, and each of the Lenders severally agrees to purchase from the Company, at the Closing (as hereinafter defined) a Note for up to that amount specified on  Schedule A hereto at a
purchase price equal to the full principal amount of such Note. 

        3.     Closing; Failure to Fund. The closing of the sale to, and purchase by, the Lenders of the Notes (the "Closing") shall
occur on the date on which the Escrow Agent (as hereinafter defined) has received Notes in the aggregate principal amount of $3,500,000 (the "Closing Date"). At the Closing, the Company shall deliver
to each of the Lenders or its representative a Note, issued in the name of such Lender in the amount specified in Schedule A hereto opposite such
Lender's name, against delivery of payment, by check or by wire transfer to a non-interest bearing escrow account (the "Escrow Account") established, maintained and controlled by
Faegre & Benson, LLP, as escrow agent on behalf of the Company and the Lenders. The funds deposited in the Escrow Account shall be released to the Company upon receipt by the Escrow Agent of
instructions from the Company and each of the Lenders instructing the Escrow Agent to release the funds in such Escrow Account to the Company. 

        4.     Company Representations and Warranties. The Company represents and warrants to the Lenders, severally and not jointly, on
the date hereof as follows: 

        (a)   Organization and Standing; Certificate of Incorporation and Bylaws. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of 

 

Colorado,
and has full power and authority and all material licenses and approvals to own and operate its properties and assets and to carry on its business as presently conducted. The Company is duly
qualified and authorized to do business, and is in good standing as a foreign corporation, in each jurisdiction where the nature of its activities and of its properties (both owned and leased) makes
such qualification necessary, except where the failure to so qualify would not have a material adverse effect upon the business and operations of the Company. 

        (b)   Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for
the authorization, execution and delivery of this Agreement, the Notes, the Subordination Agreement (as hereinafter defined) and related documents (collectively, the "Transaction Documents"), the
performance of all the Company's obligations hereunder and thereunder, and for the authorization, issuance, sale and delivery of the Securities has been taken or will be taken prior to the Closing.
The Transaction Documents, when executed and delivered, shall constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 

        (c)   Capitalization; Validity of Securities. The authorized capital stock of the Company consists of (i) 25,000,000
shares of Common Stock, par value $.001 per share (the "Common Stock"), of which, as of the date hereof and as of immediately prior to the Closing, there are 7,058,900 shares of Common Stock
outstanding, and (ii) 5,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred Stock") of which (1) 750,000 shares are designated as Series B Convertible
Preferred Stock, none of which are issued and outstanding, (2) 510,000 shares are designated as Series D Convertible Preferred Stock, none of which are issued and outstanding,
(3) 500,000 shares are designated as Series E-B Convertible Preferred Stock, none of which are issued and outstanding, (4) 510,000 shares are designated as
Series E-D Convertible Preferred Stock, none of which are issued and outstanding, (5) 600,000 shares are designated as Series E-1 Senior Preferred Stock,
none of which are issued and outstanding, (6) 400,000 shares are designated as Series E-2 Senior Preferred Stock, none of which are issued and outstanding, (7) 200,000
shares are designated as Series F Convertible Preferred Stock, none of which are issued and outstanding and (8) 200,000 shares are designated as Series G Convertible Preferred
Stock, none of which are issued and outstanding. The sale of the Securities is not and will not be subject to any preemptive rights or rights of first refusal that have not been waived; provided,
however, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or therein or as otherwise required by such laws at the time a
transfer is proposed. The Common Stock issuable upon conversion of the Notes at the time of issuance will be duly authorized and when issued and delivered and upon payment therefor in accordance with
the terms of the Notes will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances. 

        (d)   Reports of the Company; No Material Adverse Changes. The Company has furnished the Lenders with copies of its
(i) unaudited balance sheet as of December 31, 2003 and the related statements of operations, shareholders equity and cash flows for the year then ended (collectively, the "Unaudited
Financial Statements") and (ii) audited balance sheet as of December 31, 2002 and the related statements of operations, shareholders equity and cash flows for the year then ended
(collectively, the "Audited Financial Statements" and, together with the Unaudited Financial Statements, the "Financial Statements"). Said Financial Statements, as of their respective dates, were
accurate and complete in all material respects and did not omit any material information required to be set forth therein. Since December 31, 2003, there has not been any change in the assets,
liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except for changes in the ordinary course of business that have not been, in the
aggregate, materially adverse. 

2

 

        (e)   Intellectual Property Rights. 

        (i)    To
the best of its knowledge, the Company has sufficient title and ownership of all patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights, and processes (collectively, "Intellectual Property") necessary for its business as now conducted and as proposed to be conducted to the Company's knowledge, without
any conflict with or infringement of the rights of others; 

        (ii)   Except
as listed on Schedule 4(e) attached hereto, there are not outstanding options, licenses, or agreements of
any kind relating to the matters listed in subsection (a) above or that grant rights to any other person to manufacture, license, produce, assemble, market or sell the Company's
products, nor is the Company bound by or a party to any options, licenses, or agreements of any kind with respect to the Intellectual Property of any other person or entity; 

        (iii)  Except
as listed on Schedule 4(e) attached hereto, the Company has not received any communications alleging that
the Company or its employees has violated or infringed or, by conducting its business as proposed, would violate or infringe any of the Intellectual Property of any other person or entity; and 

        (iv)  The
Company is not aware that any of its employees is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interests of the Company with respect
to the Intellectual Property of the Company or otherwise or that would conflict with the Company's business as proposed to be conducted. 

        (f)    Compliance With Other Instruments and Laws. Except as listed on  Schedule 4(f) attached hereto, the Company is not in violation or default in any material respect
of any provision of its articles of
incorporation or bylaws or in any material respect of any provision of any material mortgage, indenture, agreement, instrument, or contract to which it is a party of by which it is bound, or of any
federal or state judgment, order, writ, decree, or any federal or state statute, rule, regulation or restriction applicable to the Company. Except as listed on  Schedule 4(f) attached hereto, the
execution, delivery, and performance by the Company of the Transaction Documents, and the consummation of the
transactions contemplated hereby and thereby, will not result in any such violation or be in material conflict with or constitute, with or without the passage of time or giving of notice, either a
material default under any such provision or an event that results in the creation of any material lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment,
forfeiture or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations, or any of its assets or properties. 

        (g)   Litigation. Except as listed on Schedule 4(g) attached hereto,
there is no action, suit, proceeding, or investigation pending or, to the best knowledge of the Company, threatened against the Company that questions the validity of the Transaction Documents, or the
right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material
adverse change in the assets, business properties, prospects or financial condition of the Company. 

        (h)   Taxes. The Company has no material liability for any federal, state or local taxes, except for taxes which have accrued
and are not yet payable or are being contested by the Company in good faith. The Company has paid all payroll taxes required to be paid by it. 

        (i)    Offering. The Company has not offered the Securities in a public offering within the meaning of the Securities Act of
1933, as amended (the "1933 Act"). 

3

 

        5.     Representations and Warranties of Lenders. Each of the Lenders, severally and not jointly, hereby represents and warrants
to the Company as follows: 

        (a)   Legal Power. It has the requisite legal power to enter into this Agreement, to purchase the Securities hereunder, to
convert its Note, and to carry out and perform its obligations under the terms of this Agreement. 

        (b)   Due Execution. This Agreement has been duly authorized, executed and delivered by it, and, upon due execution and
delivery by the Company, this Agreement will be a valid and binding agreement of it. 

        (c)   Investment Representations. 

        (i)    It
is acquiring the Securities and will acquire any security issued upon exercise thereof for its own account in a manner which is not in violation of the 1933 Act. 

        (ii)   It
understands that (A) the Securities have not been registered under the 1933 Act by reason of a specific exemption therefrom, that the Securities must be held
by it indefinitely, and that it must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the 1933 Act or is exempt form such
registration; (B) the Securities will be endorsed with the following legend: 

Neither
this Note nor the shares issuable upon conversion of this Note have been registered under the 1933 Act. The Holder may not transfer this Note or any shares issued pursuant
to its conversion provisions unless either (i) there is an effective registration covering such note or such shares under the 1933 Act and applicable state securities laws or (ii) the
Company receives an opinion of an attorney acceptable to the board of directors or its agents, that the proposed transfer is exempt from registration under the 1933 Act and under all applicable state
securities law or (iii) unless the transfer is made pursuant to Rule 144 under the 1933 Act or (iv) unless the transfer is made to an affiliate (as defined in
Rule 12-b2 under the Securities and Exchange Act of 1934 or (iv) in the case of the Notes held by Robert Mackie and Joseph Sheehan, the purchase of such Notes by Century
America, LLC pursuant to that certain Letter Agreement by and among Century America, LLC, Robert Mackie and Joseph Sheehan. 

and
(C) the Company will instruct any transfer agent not to register the transfer of any of the Securities unless the conditions specified in the foregoing legend are satisfied; provided,
however, that no such opinion of counsel shall be necessary if the sale, transfer or assignment is made pursuant to Securities and Exchange Commission ("SEC") Rule 144 and such transferring
Lender provides the Company with evidence reasonably satisfactory to the Company and its counsel that the proposed transaction satisfies the requirements of Rule 144. The Company agrees to
remove the foregoing legend from any securities if the requirements of SEC Rule 144(k) (or any successor rule or regulation) apply with respect to such securities and the Company and its
counsel are provided with reasonably satisfactory evidence that the requirements of Rule 144(k) apply. 

        (iii)  It
acknowledges that it can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Securities. 

        (iv)  It
is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 

        (v)   It
understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired
from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the 1933 Act, only in
certain limited circumstances, and it represents that it is familiar with SEC Rule 144, 

4

 

as
presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. 

        (vi)  Its
principal business address is as set forth above on the first page hereof and it does not reside in any state of the United States other than the state so
specified. 

        6.     Conditions to Closing. The Closing shall be subject to the following conditions: 

        (a)   The
following documents, each executed by a duly authorized officer of the Company and such other applicable parties, and each dated as of the date of this Agreement and
in form and substance satisfactory to the applicable Lender shall have been delivered as specified below and each of the items specified shall have occurred: 

        (i)    This
Agreement shall have been executed and delivered by each of the parties hereto; 

        (ii)   The
Note applicable to each Lender as set forth in Section 2 above; and 

        (iii)  The
Subordination Agreement with Silicon Valley Bank ("SVB") in the form attached hereto as Exhibit B (the
"Subordination Agreement"). 

        (b)   The
Company shall have received the consents of Hewlett-Packard Company and SVB to the transactions contemplated by this Agreement. 

        (c)   The
Escrow Agent shall have received (i) the purchase price for the Notes upon the terms and conditions set forth in this Agreement and (ii) instructions
from the Company and each of the Lenders to release the funds in the Escrow Account to the Company. 

        (d)   The
representations and warranties made by the Company in this Agreement shall be true and correct when made, and shall be true and correct in all material respects
(without giving effect to any limitations as to materiality or material adverse effect set forth therein) on the Closing Date. 

        (e)   All
covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing shall have been performed or complied
with. 

        7.     Covenants. 

        (a)   Prior
to the Initial Public Offering (as defined in the Notes), the Company shall furnish the following reports to each Holder (i) within forty-five
(45) days after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, a consolidated balance sheet of the Company and its subsidiaries, if any,
as of the end of each such quarterly period, and consolidated statements of income and cash flows of the Company and it subsidiaries, if any, for such period and (ii) within one hundred twenty
(120) days after the end of each fiscal year of the Company, an audited consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal year, and
consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied,
certified by the Company's independent public accountants. 

        (b)   The
Company covenants and agrees to use a portion of the proceeds of a Qualified Public Offering (as defined in the Notes) to pay and satisfy in full the HP Senior
Indebtedness (as defined in the Notes), such payment to be made on or before the sixty-first (61st) calendar day after the consummation of such Qualified Public Offering. 

5

 

        8.     Miscellaneous. 

        (a)   This
Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 

        (b)   This
Agreement, together with the Transaction Documents, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes
all prior and contemporaneous agreements, whether written or oral, and shall not be modified except by a writing signed by the Company and each of the Lenders. 

        (c)   This
Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its conflict of laws principles. With respect to
any disputes arising out of or related to this Agreement, the parties consent to the exclusive jurisdiction of, and venue in, the state courts in New York County in the State of New York (or in the
event of exclusive federal jurisdictions, the courts of the Southern District of New York). 

        (d)   The
headings in this Agreement are for convenience only and shall not alter or otherwise affect the meaning hereof. 

        (e)   No
waiver of any of the provisions contained in this Agreement shall be valid unless made in writing and executed by the waiving party, it is expressly understood that
in the event any party shall on any occasion fail to perform any term of this Agreement and the other party shall not enforce that term, the failure to enforce on that occasion shall not prevent
enforcement of that or any other term hereof on any other occasion. 

        (f)    If
any section of this Agreement is held invalid by any law, rule, order, regulation, or promulgation of any jurisdiction, such invalidity shall not affect the
enforceability of any other sections not held to be invalid. 

        (g)   This
Agreement and any amendment thereof may be executed in two or more counterparts, each of which shall be deemed an original for all purposes. 

        (h)   All
notices and other written communications delivered in connection with this Agreement shall be delivered in accordance with the notice provisions set forth in the
Notes. 

        (i)    Each
of the parties hereto agrees to execute and deliver such further acts and documents as any other party from time to time reasonably requires for the assuring and
confirming of its rights hereby created or intended now or hereafter to be created. 

6

 

        If
you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this Agreement and return the same to the undersigned, whereupon this
Agreement shall become a valid and binding contract between you and the undersigned. 

	

 	
 	

Very truly yours,
	

 	
 	

DISPLAYTECH, INC. a Colorado corporation
	

 	
 	

By:	
 	

/s/  RICHARD D. BARTON      
 Richard D. Barton, Chief Executive Officer

        The
foregoing Agreement is hereby accepted as of the date first written above: 

	

 	
 	

DTECH INVESTMENTS LLC
	

 	
 	

By:	
 	

/s/  WM. C. GLYNN      
 Name: Wm. C. Glynn

Title: Manager
	

 	
 	

 Name:
	

 	
 	

FLEMING US DISCOVERY FUND III, L.P.
	

 	
 	

By:	
 	

/s/  ROBERT L. BURR      
 Name: Robert L. Burr

Title: Member
	

 	
 	

FLEMING US DISCOVERY OFFSHORE FUND III, L.P.
	

 	
 	

By:	
 	

/s/  ROBERT L. BURR      
 Name: Robert L. Burr

Title: Member

[Signature
Page to Subordinated Convertible Note Purchase Agreement] 

7

 

	 	 	/s/  ROBERT MACKIE      
 Robert Mackie	 	5/20/04
	

 	
 	

/s/  JOSEPH SHEEHAN      
 Joseph Sheehan	
 	

 

[Signature
Page to Subordinated Convertible Note Purchase Agreement] 

8

Schedule A  

 Purchase Schedule  

	NAME OF LENDER
 
	 	TOTAL PRINCIPAL NOTE AMOUNT

	Dtech Investments LLC	 	$	1,950,000
	Fleming US Discovery Fund III, L.P. 	 	$	474,000
	Fleming US Discovery Offshore Fund III, L.P. 	 	 	76,000
	Robert Mackie	 	$	500,000
	Joseph Sheehan	 	$	500,000
	TOTAL	 	$	3,500,000

Schedule 4(e)(ii)  

	1.
	Winding-Up
of Alliance, Production and Marketing Framework between the Company and Agilent Technologies, Inc., dated November 15, 1999, as amended.

	2.
	Manufacturing
Services Agreement between the Company and Anam U.S.A., Inc., dated September 11, 2000.

	3.
	Fixed
Term License Agreement between the Company and Cadence Design Systems, Inc., dated November 9, 2001.

	4.
	Agreement
between the Company and Noel A. Clark and ST Lagerwall AB, dated June 28, 1996.

	5.
	Services
Agreement between the Company and Displaytech Asia Pacific, KK, dated April 1, 2003.

	6.
	License
Agreement between the Company and Fujitsu General Limited, dated January 3, 2001.

	7.
	License
Agreement between the Company and Fujitsu Limited, dated February 20, 2003, as amended.

	8.
	Prototype
Development Agreement between the Company and Fujitsu Limited and Fujitsu Microelectronics America, Inc., dated May 15, 2003.

	9.
	License
Agreement between the Company and Georgia Tech Research Corporation, dated November 30, 1998.

	10.
	License
Agreement between the Company and Hewlett-Packard Company, dated January 26, 1998.

	11.
	Clark/Lagerwall
Sub-License Agreement between the Company and Hewlett-Packard Company, dated January 27, 1998.

	12.
	URC
Sub-License Agreement between the Company and Hewlett-Packard Company, dated January 27, 1998.

	13.
	Commercial
Relationship Agreement between the Company and Hewlett-Packard Company, dated January 27, 1998.

	14.
	Mutual
Cooperation Agreement between the Company and Hewlett-Packard Company, dated February 11, 2003.

	15.
	Correspondence
between the Company and Hoechst Aktiengesellschaft, dated January 24, 1992, February 6, 1992, February 7, 1992 and August 8, 1997.

	16.
	Joint
Venture Agreement between the Company and InPhase Technologies, Inc., dated July 14, 2003.

	17.
	Manufacturing
Agreement between the Company and Miyota Co., Ltd., dated December 10, 1998, as amended.

	18.
	Exclusive
Distributor Agreement between the Company and Nissho Electronics Corporation, dated April 1, 2004.

	19.
	Technology
License and Industrial Research Agreement between the Company and University Technology Corporation, dated June 1, 1994. 

Schedule 4(e)(iii)  

	1.
	The
Company received correspondence from the University of Colorado (the "University"), dated March 10, 1995, regarding possible infringement by the Company upon certain patents
held by the University. The Company responded by letter dated March 28, 1995, denying any infringement, and has received no further communications from the University regarding this matter. 

Schedule 4(f)  

        None. 

Schedule 4(g)  

	1.
	The
former General Counsel of the Company has threatened litigation against the Company in connection with its March 2004 recapitalization. 

EXHIBIT A  

 FORMS OF NOTES  

[See
attached.] 

        NEITHER THIS SUBORDINATED CONVERTIBLE NOTE NOR THE UNDERLYING SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE "1933 ACT"). THE HOLDER (AS DEFINED BELOW)
MAY NOT TRANSFER THIS SUBORDINATED CONVERTIBLE NOTE, OR ANY SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION, UNLESS EITHER (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE
AND SUCH SHARES UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) THE COMPANY FIRST RECEIVES A LETTER FROM AN ATTORNEY, STATING THAT THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE 1933 ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR (III) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE 1933 ACT OR (IV) THE TRANSFER IS MADE TO AN
AFFILIATE (AS DEFINED IN RULE 12B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED) OF THE HOLDER OR (V) THIS NOTE IS PURCHASED BY CENTURY AMERICA, LLC PURSUANT TO THAT
CERTAIN LETTER AGREEMENT AMONG CENTURY AMERICA, LLC, THE HOLDER AND JOSEPH SHEEHAN DATED AS OF EVEN DATE HEREWITH. PAYMENT OF THIS NOTE IS SUBJECT TO THE SUBORDINATION PROVISIONS CONTAINED IN SECTION
5 HEREOF. 

DISPLAYTECH, INC.

10%
SUBORDINATED CONVERTIBLE NOTE 

        FOR
VALUE RECEIVED, Displaytech, Inc., a Colorado corporation (the "Company"), which term includes any successor corporation, hereby promises to pay, subject to the conversion
provisions in Section 6 herein, to the order of Robert Mackie (the "Holder") the principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000), with interest thereon at the rate of ten percent
(10%) per annum, compounded annually, plus enforcement costs (including, but not limited to, reasonable attorney fees) thereon, default interest thereon at the rate of fifteen percent (15%) per annum,
compounded annually, from and after an Event of Default (as hereinafter defined) and any other amounts owed hereunder in accordance with the provisions hereof (collectively, the "Obligations") on the
earlier of (i) February 20, 2008 and (ii) the occurrence of a Liquidation Event (as hereinafter defined) (the "Maturity Date"), subject to prepayment in accordance with
Section 6.5 hereof. "Liquidation Event" shall mean any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or
not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company. 

Section 1. Interest.  

        Interest shall accrue from and after the date hereof and shall be paid on the Maturity Date; provided, however, that from and after payment and satisfaction in
full of the HP Senior Indebtedness (as hereinafter defined), interest shall be paid in cash on a quarterly basis on the first business day after the end of each fiscal quarter during the period
commencing on the date the HP Senior Indebtedness (as hereinafter defined) is paid and satisfied in full and ending on the Maturity Date. Interest shall be computed on the basis of a
360-day year consisting of twelve 30-day months. For purposes hereof, "Accreted Value" shall mean the principal face amount of this Note plus accrued and unpaid
interest thereon. 

Section 2. Series of Notes; Payment of Proceeds  

	2.1
	This
Note has been issued as one of a series of 10% Subordinated Convertible Notes which are substantially similar (the "Notes") aggregating up to $3,500,000 pursuant to a
Subordinated Convertible Note Purchase Agreement (the "Note Purchase Agreement") dated as of the date hereof by and among the Company and the Lenders (as defined therein). The Company
shall keep or cause to be kept at its principal office appropriate records for the recordation of the name and address of each of the Lenders, which address may be changed 

 

from
time to time effective ten (10) days after receipt of written notice of such change from any such Lender. 

	2.2
	Simultaneously
with the execution and delivery hereof the full proceeds of this Note shall be delivered by the Holder hereof to a non-interest bearing escrow
account maintained on behalf of the Company and the Lenders by the Escrow Agent (as defined in the Note Purchase Agreement) and shall be released by the Escrow Agent to the Company in
accordance with the procedures set forth in the Note Purchase Agreement. 

Section 3. Default.  

        The occurrence of one or more of the following events shall constitute an event of default hereunder ("Event of Default"): 

	3.1
	The
nonpayment of the Obligations on the Maturity Date.

	3.2
	The
occurrence of an event of default with respect to any indebtedness of the Company for borrowed money.

	3.3
	The
entry of a decree or order by a court having jurisdiction in the premises adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of the Company under the federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Company, or any substantial part if its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order.

	3.4
	The
institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it,
or the filing by it of a petition or answer or consent seeking reorganization or relief under the federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the
filing of any such petition or to the appointment of a receiver, liquidator, assignee, or trustee of the Company, or of any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such
action. 

Section 4. Acceleration.  

        Upon an Event of Default, the Accreted Value of this Note shall become immediately due and payable without presentment, demand, protest or other notice of
any kind, all of which are expressly waived by the Company. 

Section 5. Subordinated Indebtedness; Pro Rata Distribution  

	5.1
	The
indebtedness evidenced by this Note is hereby: (i) expressly subordinated, to the extent and in the manner hereinafter set forth in Sections 5.2 and 5.3
hereof, in right of payment to the prior payment in full of the HP Senior Indebtedness (as defined below) and (ii) expressly subordinated to the extent and in the manner set forth in the SVB
Subordination Agreement (as defined below), in right of payment to the prior payment in full of the SVB Senior Indebtedness (as defined below). "HP Senior Indebtedness" shall mean the indebtedness
owed by the Company to Hewlett-Packard Company ("HP") as evidenced by that certain Amended and Restated Convertible Note dated February 11, 2003 issued by the Company to HP in the
original principal amount of $10,000,000.00. "SVB Senior Indebtedness" shall mean the indebtedness owed by the Company to Silicon Valley Bank ("SVB"). "SVB Subordination 

2

 

Agreement"
shall mean that certain Subordination Agreement between the Holder and SVB dated as of even date herewith. 

	5.2
	Upon
any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, or in the event any indebtedness of
the Company to the Holder shall become due and payable whether at maturity, upon acceleration or otherwise: (i) no amount shall be paid by the Company or accepted or retained by the Holder,
whether in cash or property, in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of all principal and accrued interest under the HP
Senior Indebtedness shall have been paid in full, whether or not such principal or accrued interest under this Note is then due and payable; (ii) if any such amount is received by the
Holder on account of or with respect to this Note, the Holder shall forthwith pay over same to HP, and until so paid, any such amount shall be held by the Holder in property of the Holder; and
(iii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder which shall assert any right to receive any payments in respect of the principal of and interest
on this Note except subject to the payment in full of all principal and accrued interest under the HP Senior Indebtedness.

	5.3
	The
Holder agrees upon request to execute and deliver to HP such subordination agreements and other documents and instruments as may reasonably be requested by HP in order to
effectuate the subordination provisions of this Section 5.

	5.4
	In
the event that the assets of the Company are insufficient to satisfy amounts due under this Note and all other Notes, the assets of the Company shall be distributed on a pro
rata basis to all Holders of the Notes based on the Accreted Value due to the Holders on the Notes. 

Section 6. Conversion; Mandatory Prepayment.  

	6.1
	Voluntary Conversion. Subject to any stockholder vote as may be required by Nasdaq in the event that the common stock of the Company
("Common Stock") is quoted on Nasdaq, the Holder of this Note shall have the right, at the Holder's option, to convert this Note: (i) at any time after the ninetieth (90th) day
following the initial public offering of the Company's common stock (the "Initial Public Offering"), into that number of shares of Common Stock determined by dividing the Accreted Value of the
Note as of the date of such conversion by the per share offering price at which the Common Stock was sold in the Initial Public Offering; (ii) upon consummation of an equity financing by
the Company other than the Initial Public Offering (an "Equity Financing"), into that number of shares of equity securities of the Company issued in such Equity Financing determined by dividing the
Accreted Value of the Note as of the date of such conversion by the per share offering price at which such equity securities were sold in the Equity Financing; or (iii) upon consummation
of a Change of Control Event pursuant to which the stockholders of the Company receive (either directly or as a distribution from the Company) equity securities of another business entity, into that
number of such equity securities determined by dividing the Accreted Value of the Note as of the date of such conversion by eighty percent (80%) of the dollar value of the aggregate amount of
equity securities received by the stockholders of the Company in consideration of each share of stock of the Company. For purposes hereof, "Change of Control Event" shall mean (i) a sale of all
or substantially all of the assets or stock of the Company, (ii) a merger, consolidation or similar such transaction involving the Company (other than a merger of the Company for purposes of
changing the state of incorporation of the Company from Colorado to Delaware), or (iii) any sale of stock of the Company or similar such transaction pursuant to which any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities 

3

 

Exchange
Act of 1934, as amended (the "1934 Act")) who had not previously owned at least twenty percent (20%) of the total voting power represented by the Company's then outstanding voting securities
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting
power represented by the Company's then outstanding voting securities other than the Initial Public Offering. 

	6.2
	Involuntary Conversion. Any time after the ninetieth (90th) day following a Qualified Initial Public Offering (as
hereinafter defined), this Note shall be converted, with no action on the part of the Holder, into that number of shares of Common Stock determined in accordance with the next sentence of this
Section 6.2 if the following conditions are met: (i) the Company delivers a written notice to the Holder specifying the date on which this Note is to be converted (the
"Involuntary Conversion Date"); (ii) the average Trading Price (as hereinafter defined) of the Common Stock for the twenty (20) trading days immediately preceding the Involuntary
Conversion Date (the "Average Trading Price") shall be at least twenty percent (20%) above the per share offering price at which the Common Stock was sold in the Initial Public Offering; and
(iii) the shares of Common Stock deliverable to the Holder upon such conversion will be freely tradable as of the Involuntary Conversion Date. Upon any conversion of this Note in
accordance with the immediately preceding sentence, this Note shall convert into that number of shares of Common Stock determined by dividing the Accreted Value of this Note by the per
share offering price at which the Common Stock was sold in the Qualified Initial Public Offering. For purposes hereof, "Trading Price" shall mean (i) if the Common Stock is listed on a national
securities exchange, the closing sale price per share of Common Stock as published by the principal national securities exchange on which the Common Stock is traded on such date, or (ii) if the
Common Stock is traded in the over-the-counter market, the average of the bid and asked prices in the over-the-counter market at the close of trading on
such date. For purposes hereof, "Qualified Initial Public Offering" shall mean any Initial Public Offering having gross proceeds to the Company in excess of $20,000,000. For purposes hereof, shares of
Common Stock shall be deemed "freely tradable" even if such shares are subject to the limitations and restrictions (x) of Rule 144(e), (f) or (h) promulgated under the
Securities Act of 1933, as amended (the "1933 Act"), (y) imposed pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or (z) due to the fact that
the Holder has obtained material nonpublic information about the Company.

	6.3
	Conversion Procedures. In order to receive the Common Stock issuable upon conversion of this Note, the Holder must surrender this
Note to the Company at the Company's principal offices and the Company shall, as promptly as practicable after the surrender, deliver to the Holder a certificate or certificates representing
the number of fully paid and nonassessable Common Stock into which this Note has been converted. In the event of an involuntary conversion pursuant to Section 6.2 hereof, from and after
the Involuntary Conversion Date this Note shall only represent the right to receive the shares of Common Stock issuable pursuant to such involuntary conversion, and the Company shall have no
obligation under this Note other than to issue such Common Stock.

	6.4
	Fractional Shares. No fractional shares of stock or scrip shall be issued upon conversion of this Note. Instead of any fractional
shares of stock which would otherwise be issuable upon conversion of this Note, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then current
market price of such fractional interest.

	6.5
	Mandatory Prepayment. Notwithstanding anything to the contrary herein contained, the Holder of this Note at any time following
the payment in full of the HP Senior Indebtedness shall have the right on ten business days' notice to demand prepayment in full of the Accreted 

4

 

Value
of this Note as of the date of such prepayment, provided that no notice has been delivered by the Company to the Holder pursuant to Section 6.2. 

Section 7. Covenant Regarding Use Proceeds of a Qualified Public Offering.  

        The Company covenants and agrees that a portion of the proceeds of a Qualified Public Offering shall be used to pay and satisfy in full the HP Senior
Indebtedness, such payment to be made on or before the sixty-first (61st) calendar day after consummation of such Qualified Public Offering. 

Section 8. Assignment, Exchange, or Loss of Note.  

        Subject to the transfer restrictions herein, upon presentation and surrender of this Note to the Company at its principal office with a duly executed
request for assignment and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Note in the name of the assignee named in such instrument of
assignment and this Note shall promptly be canceled. 

Section 9. Rights of the Holder.  

        The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity. 

Section 10. Restrictions on Transfer.  

        This Note has not been registered under the 1933 Act. This Note, or any right hereunder, may not be enforced against the Company by any Holder, except the
original Holder herein, and may not be
transferred by any Holder unless either (i) there is an effective registration covering such Note and such shares under the 1933 Act and applicable state securities laws or
(ii) the Company first receives a letter from an attorney, stating that the proposed transfer is exempt from registration under the 1933 Act and all applicable state securities laws or
(iii) the transfer is made pursuant to Rule 144 under the 1933 Act or (iv) the transfer is made to an affiliate (as defined in Rule 12b-2 under the Securities
and Exchange Act of 1934, as amended) of the Holder or (v) this Note is purchased by Century America, LLC pursuant to that certain letter agreement among Century America, LLC, the Holder
and Joseph Sheehan dated as of even date herewith. 

Section 11. Notices. All notices and other communications required or permitted under this Note shall be validly given, made, or served if
in writing and delivered personally, via overnight courier or sent by registered mail, to the Company at the following address: 

2602
Clover Basin Drive

Longmont, CO 80503

Attention: Chief Executive Officer 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Holder at the following address: 

Robert
Mackie

12 Midwood Road

Glen Rock, NJ 07452 

5

 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Escrow Agent at the following address: 

Faegre &
Benson LLP

3200 Wells Fargo Center

1700 Lincoln Street

Denver, CO 80203

Attention: Nathaniel G. Ford, Esq. 

Section 12. Law Governing.  

        This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to its conflict of laws principles. 

Section 13. Titles and Captions.  

        All section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor effect the
interpretation of this Agreement. 

Section 14. Computation of Time.  

        In computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall be
included, unless it is a Saturday, Sunday, or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday, or legal holiday, in which event the period
shall run until the end of the next day thereafter which is not a Saturday, Sunday, or legal holiday. 

Section 15. Presumption.  

        This Agreement or any section thereof shall not be construed against any party due to the fact that said Agreement or any section thereof was
drafted by said party. 

[THE
REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK.] 

6

 

        IN
WITNESS WHEREOF, a duly authorized officer of Displaytech, Inc. has executed this Note to be effective as of the    day of May, 2004. 

	

 	
 	

DISPLAYTECH, INC.
	

 	
 	

By:	
 	

 Richard D. Barton, Chief Executive Officer

7

        NEITHER THIS SUBORDINATED CONVERTIBLE NOTE NOR THE UNDERLYING SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE "1933 ACT"). THE HOLDER (AS DEFINED BELOW)
MAY NOT TRANSFER THIS SUBORDINATED CONVERTIBLE NOTE, OR ANY SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION, UNLESS EITHER (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE
AND SUCH SHARES UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) THE COMPANY FIRST RECEIVES A LETTER FROM AN ATTORNEY, STATING THAT THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE 1933 ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR (III) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE 1933 ACT OR (IV) THE TRANSFER IS MADE TO AN
AFFILIATE (AS DEFINED IN RULE 12B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED) OF THE HOLDER OR (V) THIS NOTE IS PURCHASED BY CENTURY AMERICA, LLC PURSUANT TO THAT
CERTAIN LETTER AGREEMENT AMONG CENTURY AMERICA, LLC, THE HOLDER AND JOSEPH SHEEHAN DATED AS OF EVEN DATE HEREWITH. PAYMENT OF THIS NOTE IS SUBJECT TO THE SUBORDINATION PROVISIONS CONTAINED IN SECTION
5 HEREOF. 

DISPLAYTECH, INC.

10%
SUBORDINATED CONVERTIBLE NOTE 

        FOR
VALUE RECEIVED, Displaytech, Inc., a Colorado corporation (the "Company"), which term includes any successor corporation, hereby promises to pay, subject to the conversion
provisions in Section 6 herein, to the order of Joseph Sheehan (the "Holder") the principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000), with interest thereon at the rate of ten percent
(10%) per annum, compounded annually, plus enforcement costs (including, but not limited to, reasonable attorney fees) thereon, default interest thereon at the rate of fifteen percent (15%) per annum,
compounded annually, from and after an Event of Default (as hereinafter defined) and any other amounts owed hereunder in accordance with the provisions hereof (collectively, the "Obligations") on the
earlier of (i) February 20, 2008 and (ii) the occurrence of a Liquidation Event (as hereinafter defined) (the "Maturity Date"), subject to prepayment in accordance with
Section 6.5 hereof. "Liquidation Event" shall mean any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or
not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company. 

Section 1. Interest.  

        Interest shall accrue from and after the date hereof and shall be paid on the Maturity Date; provided, however, that from and after payment and satisfaction in
full of the HP Senior Indebtedness (as hereinafter defined), interest shall be paid in cash on a quarterly basis on the first business day after the end of each fiscal quarter during the period
commencing on the date the HP Senior Indebtedness (as hereinafter defined) is paid and satisfied in full and ending on the Maturity Date. Interest shall be computed on the basis of a
360-day year consisting of twelve 30-day months. For purposes hereof, "Accreted Value" shall mean the principal face amount of this Note plus accrued and unpaid
interest thereon. 

Section 2. Series of Notes; Payment of Proceeds

	2.1
	This
Note has been issued as one of a series of 10% Subordinated Convertible Notes which are substantially similar (the "Notes") aggregating up to $3,500,000 pursuant to a
Subordinated Convertible Note Purchase Agreement (the "Note Purchase Agreement") dated as of the date hereof by and among the Company and the Lenders (as defined therein). The Company
shall keep or cause to be kept at its principal office appropriate records for the recordation of the name and address of each of the Lenders, which address may be changed 

 

from
time to time effective ten (10) days after receipt of written notice of such change from any such Lender. 

	2.2
	Simultaneously
with the execution and delivery hereof the full proceeds of this Note shall be delivered by the Holder hereof to a non-interest bearing escrow
account maintained on behalf of the Company and the Lenders by the Escrow Agent (as defined in the Note Purchase Agreement) and shall be released by the Escrow Agent to the Company in
accordance with the procedures set forth in the Note Purchase Agreement. 

Section 3. Default. 

        The
occurrence of one or more of the following events shall constitute an event of default hereunder ("Event of Default"): 

	3.1
	The
nonpayment of the Obligations on the Maturity Date.

	3.2
	The
occurrence of an event of default with respect to any indebtedness of the Company for borrowed money.

	3.3
	The
entry of a decree or order by a court having jurisdiction in the premises adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of the Company under the federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Company, or any substantial part if its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order.

	3.4
	The
institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it,
or the filing by it of a petition or answer or consent seeking reorganization or relief under the federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the
filing of any such petition or to the appointment of a receiver, liquidator, assignee, or trustee of the Company, or of any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such
action. 

Section 4. Acceleration.

        Upon
an Event of Default, the Accreted Value of this Note shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which
are expressly waived by the Company. 

Section 5. Subordinated Indebtedness; Pro Rata Distribution

	5.1
	The
indebtedness evidenced by this Note is hereby: (i) expressly subordinated, to the extent and in the manner hereinafter set forth in Sections 5.2 and 5.3
hereof, in right of payment to the prior payment in full of the HP Senior Indebtedness (as defined below) and (ii) expressly subordinated to the extent and in the manner set forth in the SVB
Subordination Agreement (as defined below), in right of payment to the prior payment in full of the SVB Senior Indebtedness (as defined below). "HP Senior Indebtedness" shall mean the indebtedness
owed by the Company to Hewlett-Packard Company ("HP") as evidenced by that certain Amended and Restated Convertible Note dated February 11, 2003 issued by the Company to HP in the
original principal amount of $10,000,000.00. "SVB Senior Indebtedness" shall mean the indebtedness owed by the Company to Silicon Valley Bank ("SVB"). "SVB Subordination 

2

 

Agreement"
shall mean that certain Subordination Agreement between the Holder and SVB dated as of even date herewith. 

	5.2
	Upon
any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, or in the event any indebtedness of
the Company to the Holder shall become due and payable whether at maturity, upon acceleration or otherwise: (i) no amount shall be paid by the Company or accepted or retained by the Holder,
whether in cash or property, in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of all principal and accrued interest under the HP
Senior Indebtedness shall have been paid in full, whether or not such principal or accrued interest under this Note is then due and payable; (ii) if any such amount is received by the
Holder on account of or with respect to this Note, the Holder shall forthwith pay over same to HP, and until so paid, any such amount shall be held by the Holder in property of the Holder; and
(iii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder which shall assert any right to receive any payments in respect of the principal of and interest
on this Note except subject to the payment in full of all principal and accrued interest under the HP Senior Indebtedness.

	5.3
	The
Holder agrees upon request to execute and deliver to HP such subordination agreements and other documents and instruments as may reasonably be requested by HP in order to
effectuate the subordination provisions of this Section 5.

	5.4
	In
the event that the assets of the Company are insufficient to satisfy amounts due under this Note and all other Notes, the assets of the Company shall be distributed on a pro
rata basis to all Holders of the Notes based on the Accreted Value due to the Holders on the Notes. 

Section 6. Conversion; Mandatory Prepayment. 

	6.1
	Voluntary Conversion. Subject to any stockholder vote as may be required by Nasdaq in the event that the common stock of the Company
("Common Stock") is quoted on Nasdaq, the Holder of this Note shall have the right, at the Holder's option, to convert this Note: (i) at any time after the ninetieth (90th) day
following the initial public offering of the Company's common stock (the "Initial Public Offering"), into that number of shares of Common Stock determined by dividing the Accreted Value of the
Note as of the date of such conversion by the per share offering price at which the Common Stock was sold in the Initial Public Offering; (ii) upon consummation of an equity financing by
the Company other than the Initial Public Offering (an "Equity Financing"), into that number of shares of equity securities of the Company issued in such Equity Financing determined by dividing the
Accreted Value of the Note as of the date of such conversion by the per share offering price at which such equity securities were sold in the Equity Financing; or (iii) upon consummation
of a Change of Control Event pursuant to which the stockholders of the Company receive (either directly or as a distribution from the Company) equity securities of another business entity, into that
number of such equity securities determined by dividing the Accreted Value of the Note as of the date of such conversion by eighty percent (80%) of the dollar value of the aggregate amount of
equity securities received by the stockholders of the Company in consideration of each share of stock of the Company. For purposes hereof, "Change of Control Event" shall mean (i) a sale of all
or substantially all of the assets or stock of the Company, (ii) a merger, consolidation or similar such transaction involving the Company (other than a merger of the Company for purposes of
changing the state of incorporation of the Company from Colorado to Delaware), or (iii) any sale of stock of the Company or similar such transaction pursuant to which any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities 

3

 

Exchange
Act of 1934, as amended (the "1934 Act")) who had not previously owned at least twenty percent (20%) of the total voting power represented by the Company's then outstanding voting securities
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting
power represented by the Company's then outstanding voting securities other than the Initial Public Offering. 

	6.2
	Involuntary Conversion. Any time after the ninetieth (90th) day following a Qualified Initial Public Offering (as
hereinafter defined), this Note shall be converted, with no action on the part of the Holder, into that number of shares of Common Stock determined in accordance with the next sentence of this
Section 6.2 if the following conditions are met: (i) the Company delivers a written notice to the Holder specifying the date on which this Note is to be converted (the
"Involuntary Conversion Date"); (ii) the average Trading Price (as hereinafter defined) of the Common Stock for the twenty (20) trading days immediately preceding the Involuntary
Conversion Date (the "Average Trading Price") shall be at least twenty percent (20%) above the per share offering price at which the Common Stock was sold in the Initial Public Offering; and
(iii) the shares of Common Stock deliverable to the Holder upon such conversion will be freely tradable as of the Involuntary Conversion Date. Upon any conversion of this Note in
accordance with the immediately preceding sentence, this Note shall convert into that number of shares of Common Stock determined by dividing the Accreted Value of this Note by the per
share offering price at which the Common Stock was sold in the Qualified Initial Public Offering. For purposes hereof, "Trading Price" shall mean (i) if the Common Stock is listed on a national
securities exchange, the closing sale price per share of Common Stock as published by the principal national securities exchange on which the Common Stock is traded on such date, or (ii) if the
Common Stock is traded in the over-the-counter market, the average of the bid and asked prices in the over-the-counter market at the close of trading on
such date. For purposes hereof, "Qualified Initial Public Offering" shall mean any Initial Public Offering having gross proceeds to the Company in excess of $20,000,000. For purposes hereof, shares of
Common Stock shall be deemed "freely tradable" even if such shares are subject to the limitations and restrictions (x) of Rule 144(e), (f) or (h) promulgated under the
Securities Act of 1933, as amended (the "1933 Act"), (y) imposed pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or (z) due to the fact that
the Holder has obtained material nonpublic information about the Company.

	6.3
	Conversion Procedures. In order to receive the Common Stock issuable upon conversion of this Note, the Holder must surrender this
Note to the Company at the Company's principal offices and the Company shall, as promptly as practicable after the surrender, deliver to the Holder a certificate or certificates representing
the number of fully paid and nonassessable Common Stock into which this Note has been converted. In the event of an involuntary conversion pursuant to Section 6.2 hereof, from and after
the Involuntary Conversion Date this Note shall only represent the right to receive the shares of Common Stock issuable pursuant to such involuntary conversion, and the Company shall have no
obligation under this Note other than to issue such Common Stock.

	6.4
	Fractional Shares. No fractional shares of stock or scrip shall be issued upon conversion of this Note. Instead of any fractional
shares of stock which would otherwise be issuable upon conversion of this Note, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then current
market price of such fractional interest.

	6.5
	Mandatory Prepayment. Notwithstanding anything to the contrary herein contained, the Holder of this Note at any time following
the payment in full of the HP Senior Indebtedness shall have the right on ten business days' notice to demand prepayment in full of the Accreted 

4

 

Value
of this Note as of the date of such prepayment, provided that no notice has been delivered by the Company to the Holder pursuant to Section 6.2. 

Section 7. Covenant Regarding Use Proceeds of a Qualified Public Offering. 

        The
Company covenants and agrees that a portion of the proceeds of a Qualified Public Offering shall be used to pay and satisfy in full the HP Senior Indebtedness, such payment to be
made on or before the sixty-first (61st) calendar day after consummation of such Qualified Public Offering. 

Section 8. Assignment, Exchange, or Loss of Note. 

        Subject
to the transfer restrictions herein, upon presentation and surrender of this Note to the Company at its principal office with a duly executed request for assignment and
funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Note in the name of the assignee named in such instrument of assignment and this
Note shall promptly be canceled. 

Section 9. Rights of the Holder. 

        The
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity. 

Section 10. Restrictions on Transfer. 

        This
Note has not been registered under the 1933 Act. This Note, or any right hereunder, may not be enforced against the Company by any Holder, except the original Holder herein,
and may not be
transferred by any Holder unless either (i) there is an effective registration covering such Note and such shares under the 1933 Act and applicable state securities laws or
(ii) the Company first receives a letter from an attorney, stating that the proposed transfer is exempt from registration under the 1933 Act and all applicable state securities laws or
(iii) the transfer is made pursuant to Rule 144 under the 1933 Act or (iv) the transfer is made to an affiliate (as defined in Rule 12b-2 under the Securities
and Exchange Act of 1934, as amended) of the Holder or (v) this Note is purchased by Century America, LLC pursuant to that certain letter agreement among Century America, LLC, the Holder
and Joseph Sheehan dated as of even date herewith. 

Section 11. Notices. All notices and other communications required or permitted under this Note shall be validly given, made, or served if
in writing and delivered personally, via overnight courier or sent by registered mail, to the Company at the following address: 

2602
Clover Basin Drive

Longmont, CO 80503

Attention: Chief Executive Officer 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Holder at the following address: 

Joseph
Sheehan

J. E. Sheehan & Company

711 Fifth Avenue

New York, NY 10022 

5

 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Escrow Agent at the following address: 

Faegre &
Benson LLP

3200 Wells Fargo Center

1700 Lincoln Street

Denver, CO 80203

Attention: Nathaniel G. Ford, Esq. 

Section 12. Law Governing. 

        This
Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to its conflict of laws principles. 

Section 13. Titles and Captions. 

        All
section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor effect the interpretation of this Agreement. 

Section 14. Computation of Time. 

        In
computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday, or legal holiday, in which event the period shall run until the end
of the next day thereafter which is not a Saturday, Sunday, or legal holiday. 

Section 15. Presumption. 

        This
Agreement or any section thereof shall not be construed against any party due to the fact that said Agreement or any section thereof was drafted by said party. 

[THE
REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK.] 

6

 

        IN
WITNESS WHEREOF, a duly authorized officer of Displaytech, Inc. has executed this Note to be effective as of the    day of May, 2004. 

	

 	
 	

DISPLAYTECH, INC.
	

 	
 	

By:	
 	

 Richard D. Barton, Chief Executive Officer

7

        NEITHER THIS SUBORDINATED CONVERTIBLE NOTE NOR THE UNDERLYING SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE "1933 ACT"). THE HOLDER (AS DEFINED BELOW)
MAY NOT TRANSFER THIS SUBORDINATED CONVERTIBLE NOTE, OR ANY SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION, UNLESS EITHER (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE
AND SUCH SHARES UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) THE COMPANY FIRST RECEIVES A LETTER FROM AN ATTORNEY, STATING THAT THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE 1933 ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR (III) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE 1933 ACT OR (IV) THE TRANSFER IS MADE TO AN
AFFILIATE (AS DEFINED IN RULE 12B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED) OF THE HOLDER. PAYMENT OF THIS NOTE IS SUBJECT TO THE SUBORDINATION PROVISIONS CONTAINED IN
SECTION 5 HEREOF. 

DISPLAYTECH, INC.

10%
SUBORDINATED CONVERTIBLE NOTE 

        FOR
VALUE RECEIVED, Displaytech, Inc., a Colorado corporation (the "Company"), which term includes any successor corporation, hereby promises to pay, subject to the conversion
provisions in Section 6 herein, to the order of DTech Investments LLC (the "Holder") the principal sum of ONE MILLION NINE HUNDRED FIFTY THOUSAND DOLLARS ($1,950,000), with interest thereon at
the rate of ten percent (10%) per annum, compounded annually, plus enforcement costs (including, but not limited to, reasonable attorney fees) thereon, default interest thereon at the rate of fifteen
percent (15%) per annum, compounded annually, from and after an Event of Default (as hereinafter defined) and any other amounts owed hereunder in accordance with the provisions hereof (collectively,
the "Obligations") on the earlier of (i) February 20, 2008 and (ii) the occurrence of a Liquidation Event (as hereinafter defined) (the "Maturity Date"). "Liquidation Event" shall
mean any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws),
sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company. 

Section 1. Interest. 

        Interest
shall accrue from and after the date hereof and shall be paid on the Maturity Date; provided, however, that from and after payment and satisfaction in full of the HP Senior
Indebtedness (as hereinafter defined), interest shall be paid in cash on a quarterly basis on the first business day after the end of each fiscal quarter during the period commencing on the date the
HP Senior Indebtedness (as hereinafter defined) is paid and satisfied in full and ending on the Maturity Date. Interest shall be computed on the basis of a 360-day year consisting of
twelve 30-day months. For purposes hereof, "Accreted Value" shall mean the principal face amount of this Note plus accrued and unpaid interest thereon. 

Section 2. Series of Notes; Payment of Proceeds

	2.1
	This
Note has been issued as one of a series of 10% Subordinated Convertible Notes which are substantially similar (the "Notes") aggregating up to $3,500,000 pursuant to a
Subordinated Convertible Note Purchase Agreement (the "Note Purchase Agreement") dated as of the date hereof by and among the Company and the Lenders (as defined therein). The Company
shall keep or cause to be kept at its principal office appropriate records for the recordation of the name and address of each of the Lenders, which address may be changed from time to time effective
ten (10) days after receipt of written notice of such change from any such Lender. 

 

	2.2
	Simultaneously
with the execution and delivery hereof the full proceeds of this Note shall be delivered by the Holder hereof to a non-interest bearing escrow
account maintained on behalf of the Company and the Lenders by the Escrow Agent (as defined in the Note Purchase Agreement) and shall be released by the Escrow Agent to the Company in
accordance with the procedures set forth in the Note Purchase Agreement. 

Section 3. Default. 

        The
occurrence of one or more of the following events shall constitute an event of default hereunder ("Event of Default"): 

	3.1
	The
nonpayment of the Obligations on the Maturity Date.

	3.2
	The
occurrence of an event of default with respect to any indebtedness of the Company for borrowed money.

	3.3
	The
entry of a decree or order by a court having jurisdiction in the premises adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of the Company under the federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Company, or any substantial part if its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order.

	3.4
	The
institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it,
or the filing by it of a petition or answer or consent seeking reorganization or relief under the federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the
filing of any such petition or to the appointment of a receiver, liquidator, assignee, or trustee of the Company, or of any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such
action. 

Section 4. Acceleration.

        Upon
an Event of Default, the Accreted Value of this Note shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which
are expressly waived by the Company. 

Section 5. Subordinated Indebtedness; Pro Rata Distribution

	5.1
	The
indebtedness evidenced by this Note is hereby: (i) expressly subordinated, to the extent and in the manner hereinafter set forth in Sections 5.2 and 5.3
hereof, in right of payment to the prior payment in full of the HP Senior Indebtedness (as defined below) and (ii) expressly subordinated to the extent and in the manner set forth in the SVB
Subordination Agreement (as defined below), in right of payment to the prior payment in full of the SVB Senior Indebtedness (as defined below). "HP Senior Indebtedness" shall mean the indebtedness
owed by the Company to Hewlett-Packard Company ("HP") as evidenced by that certain Amended and Restated Convertible Note dated February 11, 2003 issued by the Company to HP in the
original principal amount of $10,000,000.00. "SVB Senior Indebtedness" shall mean the indebtedness owed by the Company to Silicon Valley Bank ("SVB"). "SVB Subordination Agreement" shall mean that
certain Subordination Agreement between the Holder and SVB dated as of even date herewith. 

2

 

	5.2
	Upon
any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, or in the event any indebtedness of
the Company to the Holder shall become due and payable whether at maturity, upon acceleration or otherwise: (i) no amount shall be paid by the Company or accepted or retained by the Holder,
whether in cash or property, in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of all principal and accrued interest under the HP
Senior Indebtedness shall have been paid in full, whether or not such principal or accrued interest under this Note is then due and payable; (ii) if any such amount is received by the
Holder on account of or with respect to this Note, the Holder shall forthwith pay over same to HP, and until so paid, any such amount shall be held by the Holder in property of the Holder; and
(iii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder which shall assert any right to receive any payments in respect of the principal of and interest
on this Note except subject to the payment in full of all principal and accrued interest under the HP Senior Indebtedness.

	5.3
	The
Holder agrees upon request to execute and deliver to HP such subordination agreements and other documents and instruments as may reasonably be requested by HP in order to
effectuate the subordination provisions of this Section 5.

	5.4
	In
the event that the assets of the Company are insufficient to satisfy amounts due under this Note and all other Notes, the assets of the Company shall be distributed on a pro
rata basis to all Holders of the Notes based on the Accreted Value due to the Holders on the Notes. 

Section 6. Conversion; Mandatory Prepayment. 

	6.1
	Voluntary Conversion. Subject to any stockholder vote as may be required by Nasdaq in the event that the common stock of the Company
("Common Stock") is quoted on Nasdaq, the Holder of this Note shall have the right, at the Holder's option, to convert this Note: (i) at any time after the ninetieth (90th) day
following the initial public offering of the Company's common stock (the "Initial Public Offering"), into that number of shares of Common Stock determined by dividing the Accreted Value of the
Note as of the date of such conversion by the per share offering price at which the Common Stock was sold in the Initial Public Offering; (ii) upon consummation of an equity financing by
the Company other than the Initial Public Offering (an "Equity Financing"), into that number of shares of equity securities of the Company issued in such Equity Financing determined by dividing the
Accreted Value of the Note as of the date of such conversion by the per share offering price at which such equity securities were sold in the Equity Financing; or (iii) upon consummation
of a Change of Control Event pursuant to which the stockholders of the Company receive (either directly or as a distribution from the Company) equity securities of another business entity, into that
number of such equity securities determined by dividing the Accreted Value of the Note as of the date of such conversion by eighty percent (80%) of the dollar value of the aggregate amount of
equity securities received by the stockholders of the Company in consideration of each share of stock of the Company. For purposes hereof, "Change of Control Event" shall mean (i) a sale of all
or substantially all of the assets or stock of the Company, (ii) a merger, consolidation or similar such transaction involving the Company (other than a merger of the Company for purposes of
changing the state of incorporation of the Company from Colorado to Delaware), or (iii) any sale of stock of the Company or similar such transaction pursuant to which any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) who had not previously owned at least twenty percent (20%) of the total voting
power represented by the Company's then 

3

 

outstanding
voting securities is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing
50% or more of the total voting power represented by the Company's then outstanding voting securities other than the Initial Public Offering. 

	6.2
	Involuntary Conversion. Any time after the ninetieth (90th) day following a Qualified Initial Public Offering (as
hereinafter defined), this Note shall be converted, with no action on the part of the Holder, into that number of shares of Common Stock determined in accordance with the next sentence of this
Section 6.2 if the following conditions are met: (i) the Company delivers a written notice to the Holder specifying the date on which this Note is to be converted (the
"Involuntary Conversion Date"); (ii) the average Trading Price (as hereinafter defined) of the Common Stock for the twenty (20) trading days immediately preceding the Involuntary
Conversion Date (the "Average Trading Price") shall be at least twenty percent (20%) above the per share offering price at which the Common Stock was sold in the Initial Public Offering; and
(iii) the shares of Common Stock deliverable to the Holder upon such conversion will be freely tradable as of the Involuntary Conversion Date. Upon any conversion of this Note in
accordance with the immediately preceding sentence, this Note shall convert into that number of shares of Common Stock determined by dividing the Accreted Value of this Note by the per
share offering price at which the Common Stock was sold in the Qualified Initial Public Offering. For purposes hereof, "Trading Price" shall mean (i) if the Common Stock is listed on a national
securities exchange, the closing sale price per share of Common Stock as published by the principal national securities exchange on which the Common Stock is traded on such date, or (ii) if the
Common Stock is traded in the over-the-counter market, the average of the bid and asked prices in the over-the-counter market at the close of trading on
such date. For purposes hereof, "Qualified Initial Public Offering" shall mean any Initial Public Offering having gross proceeds to the Company in excess of $20,000,000. For purposes hereof, shares of
Common Stock shall be deemed "freely tradable" even if such shares are subject to the limitations and restrictions (x) of Rule 144(e), (f) or (h) promulgated under the
Securities Act of 1933, as amended (the "1933 Act"), (y) imposed pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or (z) due to the fact that
the Holder has obtained material nonpublic information about the Company.

	6.3
	Conversion Procedures. In order to receive the Common Stock issuable upon conversion of this Note, the Holder must surrender this
Note to the Company at the Company's principal offices and the Company shall, as promptly as practicable after the surrender, deliver to the Holder a certificate or certificates representing
the number of fully paid and nonassessable Common Stock into which this Note has been converted. In the event of an involuntary conversion pursuant to Section 6.2 hereof, from and after
the Involuntary Conversion Date this Note shall only represent the right to receive the shares of Common Stock issuable pursuant to such involuntary conversion, and the Company shall have no
obligation under this Note other than to issue such Common Stock.

	6.4
	Fractional Shares. No fractional shares of stock or scrip shall be issued upon conversion of this Note. Instead of any fractional
shares of stock which would otherwise be issuable upon conversion of this Note, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then current
market price of such fractional interest. 

Section 7. Covenant Regarding Use Proceeds of a Qualified Public Offering. 

        The
Company covenants and agrees that a portion of the proceeds of a Qualified Public Offering shall be used to pay and satisfy in full the HP Senior Indebtedness, such payment to be
made on or before the sixty-first (61st) calendar day after consummation of such Qualified Public Offering. 

4

 

Section 8. Assignment, Exchange, or Loss of Note. 

        Subject
to the transfer restrictions herein, upon presentation and surrender of this Note to the Company at its principal office with a duly executed request for assignment and
funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Note in the name of the assignee named in such instrument of assignment and this
Note shall promptly be canceled. 

Section 9. Rights of the Holder. 

        The
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity. 

Section 10. Restrictions on Transfer. 

        This
Note has not been registered under the 1933 Act. This Note, or any right hereunder, may not be enforced against the Company by any Holder, except the original Holder herein,
and may not be transferred by any Holder unless either (i) there is an effective registration covering such Note and such shares under the 1933 Act and applicable state securities laws
or (ii) the Company first receives a letter from an attorney, stating that the proposed transfer is exempt from registration under the 1933 Act and all applicable state securities laws or
(iii) the transfer is made pursuant to Rule 144 under the 1933 Act or (iv) the transfer is made to an affiliate (as defined in Rule 12b-2 under the Securities
and Exchange Act of 1934, as amended) of the Holder. 

Section 11. Notices. All notices and other communications required or permitted under this Note shall be validly given, made, or served if
in writing and delivered personally, via overnight courier or sent by registered mail, to the Company at the following address: 

2602
Clover Basin Drive

Longmont, CO 80503

Attention: Chief Executive Officer 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Holder at the following address: 

DTech
Investments LLC

555 S. Cole Road

P. O. Box 7608

Boise, ID 83707 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Escrow Agent at the following address: 

Faegre &
Benson LLP

3200 Wells Fargo Center

1700 Lincoln Street

Denver, CO 80203

Attention: Nathaniel G. Ford, Esq. 

Section 12. Law Governing. 

        This
Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to its conflict of laws principles. 

5

 

Section 13. Titles and Captions. 

        All
section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor effect the interpretation of this Agreement. 

Section 14. Computation of Time. 

        In
computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday, or legal holiday, in which event the period shall run until the end
of the next day thereafter which is not a Saturday, Sunday, or legal holiday. 

Section 15. Presumption. 

        This
Agreement or any section thereof shall not be construed against any party due to the fact that said Agreement or any section thereof was drafted by said party. 

[THE
REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK.] 

6

 

        IN
WITNESS WHEREOF, a duly authorized officer of Displaytech, Inc. has executed this Note to be effective as of the    day of May, 2004. 

	

 	
 	

DISPLAYTECH, INC.
	

 	
 	

By:	
 	

 Richard D. Barton, Chief Executive Officer

7

        NEITHER THIS SUBORDINATED CONVERTIBLE NOTE NOR THE UNDERLYING SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE "1933 ACT"). THE HOLDER (AS DEFINED BELOW)
MAY NOT TRANSFER THIS SUBORDINATED CONVERTIBLE NOTE, OR ANY SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION, UNLESS EITHER (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE
AND SUCH SHARES UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) THE COMPANY FIRST RECEIVES A LETTER FROM AN ATTORNEY, STATING THAT THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE 1933 ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR (III) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE 1933 ACT OR (IV) THE TRANSFER IS MADE TO AN
AFFILIATE (AS DEFINED IN RULE 12B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED) OF THE HOLDER. PAYMENT OF THIS NOTE IS SUBJECT TO THE SUBORDINATION PROVISIONS CONTAINED IN
SECTION 5 HEREOF. 

DISPLAYTECH, INC.

10%
SUBORDINATED CONVERTIBLE NOTE 

        FOR
VALUE RECEIVED, Displaytech, Inc., a Colorado corporation (the "Company"), which term includes any successor corporation, hereby promises to pay, subject to the conversion
provisions in Section 6 herein, to the order of Fleming US Discovery Fund III, L.P. (the "Holder") the principal sum of FOUR HUNDRED SEVENTY-FOUR THOUSAND DOLLARS ($474,000), with
interest thereon at the rate of ten percent (10%) per annum, compounded annually, plus enforcement costs (including, but not limited to, reasonable attorney fees) thereon, default interest thereon at
the rate of fifteen percent (15%) per annum, compounded annually, from and after an Event of Default (as hereinafter defined) and any other amounts owed hereunder in accordance with the provisions
hereof (collectively, the "Obligations") on the earlier of (i) February 20, 2008 and (ii) the occurrence of a Liquidation Event (as hereinafter defined) (the "Maturity Date").
"Liquidation Event" shall mean any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy
or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company. 

Section 1. Interest. 

        Interest
shall accrue from and after the date hereof and shall be paid on the Maturity Date; provided, however, that from and after payment and satisfaction in full of the HP Senior
Indebtedness (as hereinafter defined), interest shall be paid in cash on a quarterly basis on the first business day after the end of each fiscal quarter during the period commencing on the date the
HP Senior Indebtedness (as hereinafter defined) is paid and satisfied in full and ending on the Maturity Date. Interest shall be computed on the basis of a 360-day year consisting of
twelve 30-day months. For purposes hereof, "Accreted Value" shall mean the principal face amount of this Note plus accrued and unpaid interest thereon. 

Section 2. Series of Notes; Payment of Proceeds

	2.1
	This
Note has been issued as one of a series of 10% Subordinated Convertible Notes which are substantially similar (the "Notes") aggregating up to $3,500,000 pursuant to a
Subordinated Convertible Note Purchase Agreement (the "Note Purchase Agreement") dated as of the date hereof by and among the Company and the Lenders (as defined therein). The Company
shall keep or cause to be kept at its principal office appropriate records for the recordation of the name and address of each of the Lenders, which address may be changed from time to time effective
ten (10) days after receipt of written notice of such change from any such Lender. 

 

	2.2
	Simultaneously
with the execution and delivery hereof the full proceeds of this Note shall be delivered by the Holder hereof to a non-interest bearing escrow
account maintained on behalf of the Company and the Lenders by the Escrow Agent (as defined in the Note Purchase Agreement) and shall be released by the Escrow Agent to the Company in
accordance with the procedures set forth in the Note Purchase Agreement. 

Section 3. Default. 

        The
occurrence of one or more of the following events shall constitute an event of default hereunder ("Event of Default"): 

	3.1
	The
nonpayment of the Obligations on the Maturity Date.

	3.2
	The
occurrence of an event of default with respect to any indebtedness of the Company for borrowed money.

	3.3
	The
entry of a decree or order by a court having jurisdiction in the premises adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of the Company under the federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Company, or any substantial part if its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order.

	3.4
	The
institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it,
or the filing by it of a petition or answer or consent seeking reorganization or relief under the federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the
filing of any such petition or to the appointment of a receiver, liquidator, assignee, or trustee of the Company, or of any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such
action. 

Section 4. Acceleration.

        Upon
an Event of Default, the Accreted Value of this Note shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which
are expressly waived by the Company. 

Section 5. Subordinated Indebtedness; Pro Rata Distribution

	5.1
	The
indebtedness evidenced by this Note is hereby: (i) expressly subordinated, to the extent and in the manner hereinafter set forth in Sections 5.2 and 5.3
hereof, in right of payment to the prior payment in full of the HP Senior Indebtedness (as defined below) and (ii) expressly subordinated to the extent and in the manner set forth in the SVB
Subordination Agreement (as defined below), in right of payment to the prior payment in full of the SVB Senior Indebtedness (as defined below). "HP Senior Indebtedness" shall mean the indebtedness
owed by the Company to Hewlett-Packard Company ("HP") as evidenced by that certain Amended and Restated Convertible Note dated February 11, 2003 issued by the Company to HP in the
original principal amount of $10,000,000.00. "SVB Senior Indebtedness" shall mean the indebtedness owed by the Company to Silicon Valley Bank ("SVB"). "SVB Subordination Agreement" shall mean that
certain Subordination Agreement between the Holder and SVB dated as of even date herewith. 

2

 

	5.2
	Upon
any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, or in the event any indebtedness of
the Company to the Holder shall become due and payable whether at maturity, upon acceleration or otherwise: (i) no amount shall be paid by the Company or accepted or retained by the Holder,
whether in cash or property, in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of all principal and accrued interest under the HP
Senior Indebtedness shall have been paid in full, whether or not such principal or accrued interest under this Note is then due and payable; (ii) if any such amount is received by the
Holder on account of or with respect to this Note, the Holder shall forthwith pay over same to HP, and until so paid, any such amount shall be held by the Holder in property of the Holder; and
(iii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder which shall assert any right to receive any payments in respect of the principal of and interest
on this Note except subject to the payment in full of all principal and accrued interest under the HP Senior Indebtedness.

	5.3
	The
Holder agrees upon request to execute and deliver to HP such subordination agreements and other documents and instruments as may reasonably be requested by HP in order to
effectuate the subordination provisions of this Section 5.

	5.4
	In
the event that the assets of the Company are insufficient to satisfy amounts due under this Note and all other Notes, the assets of the Company shall be distributed on a pro
rata basis to all Holders of the Notes based on the Accreted Value due to the Holders on the Notes. 

Section 6. Conversion; Mandatory Prepayment. 

	6.1
	Voluntary Conversion. Subject to any stockholder vote as may be required by Nasdaq in the event that the common stock of the Company
("Common Stock") is quoted on Nasdaq, the Holder of this Note shall have the right, at the Holder's option, to convert this Note: (i) at any time after the ninetieth (90th) day
following the initial public offering of the Company's common stock (the "Initial Public Offering"), into that number of shares of Common Stock determined by dividing the Accreted Value of the
Note as of the date of such conversion by the per share offering price at which the Common Stock was sold in the Initial Public Offering; (ii) upon consummation of an equity financing by
the Company other than the Initial Public Offering (an "Equity Financing"), into that number of shares of equity securities of the Company issued in such Equity Financing determined by dividing the
Accreted Value of the Note as of the date of such conversion by the per share offering price at which such equity securities were sold in the Equity Financing; or (iii) upon consummation
of a Change of Control Event pursuant to which the stockholders of the Company receive (either directly or as a distribution from the Company) equity securities of another business entity, into that
number of such equity securities determined by dividing the Accreted Value of the Note as of the date of such conversion by eighty percent (80%) of the dollar value of the aggregate amount of
equity securities received by the stockholders of the Company in consideration of each share of stock of the Company. For purposes hereof, "Change of Control Event" shall mean (i) a sale of all
or substantially all of the assets or stock of the Company, (ii) a merger, consolidation or similar such transaction involving the Company (other than a merger of the Company for purposes of
changing the state of incorporation of the Company from Colorado to Delaware), or (iii) any sale of stock of the Company or similar such transaction pursuant to which any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) who had not previously owned at least twenty percent (20%) of the total voting
power represented by the Company's then 

3

 

outstanding
voting securities is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing
50% or more of the total voting power represented by the Company's then outstanding voting securities other than the Initial Public Offering. 

	6.2
	Involuntary Conversion. Any time after the ninetieth (90th) day following a Qualified Initial Public Offering (as
hereinafter defined), this Note shall be converted, with no action on the part of the Holder, into that number of shares of Common Stock determined in accordance with the next sentence of this
Section 6.2 if the following conditions are met: (i) the Company delivers a written notice to the Holder specifying the date on which this Note is to be converted (the
"Involuntary Conversion Date"); (ii) the average Trading Price (as hereinafter defined) of the Common Stock for the twenty (20) trading days immediately preceding the Involuntary
Conversion Date (the "Average Trading Price") shall be at least twenty percent (20%) above the per share offering price at which the Common Stock was sold in the Initial Public Offering; and
(iii) the shares of Common Stock deliverable to the Holder upon such conversion will be freely tradable as of the Involuntary Conversion Date. Upon any conversion of this Note in
accordance with the immediately preceding sentence, this Note shall convert into that number of shares of Common Stock determined by dividing the Accreted Value of this Note by the per
share offering price at which the Common Stock was sold in the Qualified Initial Public Offering. For purposes hereof, "Trading Price" shall mean (i) if the Common Stock is listed on a national
securities exchange, the closing sale price per share of Common Stock as published by the principal national securities exchange on which the Common Stock is traded on such date, or (ii) if the
Common Stock is traded in the over-the-counter market, the average of the bid and asked prices in the over-the-counter market at the close of trading on
such date. For purposes hereof, "Qualified Initial Public Offering" shall mean any Initial Public Offering having gross proceeds to the Company in excess of $20,000,000. For purposes hereof, shares of
Common Stock shall be deemed "freely tradable" even if such shares are subject to the limitations and restrictions (x) of Rule 144(e), (f) or (h) promulgated under the
Securities Act of 1933, as amended (the "1933 Act"), (y) imposed pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or (z) due to the fact that
the Holder has obtained material nonpublic information about the Company.

	6.3
	Conversion Procedures. In order to receive the Common Stock issuable upon conversion of this Note, the Holder must surrender this
Note to the Company at the Company's principal offices and the Company shall, as promptly as practicable after the surrender, deliver to the Holder a certificate or certificates representing
the number of fully paid and nonassessable Common Stock into which this Note has been converted. In the event of an involuntary conversion pursuant to Section 6.2 hereof, from and after
the Involuntary Conversion Date this Note shall only represent the right to receive the shares of Common Stock issuable pursuant to such involuntary conversion, and the Company shall have no
obligation under this Note other than to issue such Common Stock.

	6.4
	Fractional Shares. No fractional shares of stock or scrip shall be issued upon conversion of this Note. Instead of any fractional
shares of stock which would otherwise be issuable upon conversion of this Note, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then current
market price of such fractional interest. 

Section 7. Covenant Regarding Use Proceeds of a Qualified Public Offering. 

        The
Company covenants and agrees that a portion of the proceeds of a Qualified Public Offering shall be used to pay and satisfy in full the HP Senior Indebtedness, such payment to be
made on or before the sixty-first (61st) calendar day after consummation of such Qualified Public Offering. 

4

 

Section 8. Assignment, Exchange, or Loss of Note. 

        Subject
to the transfer restrictions herein, upon presentation and surrender of this Note to the Company at its principal office with a duly executed request for assignment and
funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Note in the name of the assignee named in such instrument of assignment and this
Note shall promptly be canceled. 

Section 9. Rights of the Holder. 

        The
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity. 

Section 10. Restrictions on Transfer. 

        This
Note has not been registered under the 1933 Act. This Note, or any right hereunder, may not be enforced against the Company by any Holder, except the original Holder herein,
and may not be transferred by any Holder unless either (i) there is an effective registration covering such Note and such shares under the 1933 Act and applicable state securities laws
or (ii) the Company first receives a letter from an attorney, stating that the proposed transfer is exempt from registration under the 1933 Act and all applicable state securities laws or
(iii) the transfer is made pursuant to Rule 144 under the 1933 Act or (iv) the transfer is made to an affiliate (as defined in Rule 12b-2 under the Securities
and Exchange Act of 1934, as amended) of the Holder. 

Section 11. Notices. All notices and other communications required or permitted under this Note shall be validly given, made, or served if
in writing and delivered personally, via overnight courier or sent by registered mail, to the Company at the following address: 

2602
Clover Basin Drive

Longmont, CO 80503

Attention: Chief Executive Officer 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Holder at the following address: 

Fleming
US Discovery Fund III, L.P.

c/o JP Morgan Partners

1221 Avenue of the Americas, 40th Floor

New York, NY 10020 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Escrow Agent at the following address: 

Faegre &
Benson LLP

3200 Wells Fargo Center

1700 Lincoln Street

Denver, CO 80203

Attention: Nathaniel G. Ford, Esq. 

Section 12. Law Governing. 

        This
Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to its conflict of laws principles. 

5

 

Section 13. Titles and Captions. 

        All
section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor effect the interpretation of this Agreement. 

Section 14. Computation of Time. 

        In
computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday, or legal holiday, in which event the period shall run until the end
of the next day thereafter which is not a Saturday, Sunday, or legal holiday. 

Section 15. Presumption. 

        This
Agreement or any section thereof shall not be construed against any party due to the fact that said Agreement or any section thereof was drafted by said party. 

[THE
REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK.] 

6

 

        IN
WITNESS WHEREOF, a duly authorized officer of Displaytech, Inc. has executed this Note to be effective as of the    day of May, 2004. 

	

 	
 	

DISPLAYTECH, INC.
	

 	
 	

By:	
 	

 Richard D. Barton, Chief Executive Officer

7

        NEITHER THIS SUBORDINATED CONVERTIBLE NOTE NOR THE UNDERLYING SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE "1933 ACT"). THE HOLDER (AS DEFINED BELOW)
MAY NOT TRANSFER THIS SUBORDINATED CONVERTIBLE NOTE, OR ANY SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION, UNLESS EITHER (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE
AND SUCH SHARES UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) THE COMPANY FIRST RECEIVES A LETTER FROM AN ATTORNEY, STATING THAT THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE 1933 ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR (III) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE 1933 ACT OR (IV) THE TRANSFER IS MADE TO AN
AFFILIATE (AS DEFINED IN RULE 12B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED) OF THE HOLDER. PAYMENT OF THIS NOTE IS SUBJECT TO THE SUBORDINATION PROVISIONS CONTAINED IN
SECTION 5 HEREOF. 

DISPLAYTECH, INC.

10%
SUBORDINATED CONVERTIBLE NOTE 

        FOR
VALUE RECEIVED, Displaytech, Inc., a Colorado corporation (the "Company"), which term includes any successor corporation, hereby promises to pay, subject to the conversion
provisions in Section 6 herein, to the order of Fleming US Discovery Offshore Fund III, L.P. (the "Holder") the principal sum of SEVENTY-SIX THOUSAND DOLLARS ($76,000), with
interest thereon at the rate of ten percent (10%) per annum, compounded annually, plus enforcement costs (including, but not limited to, reasonable attorney fees) thereon, default interest thereon at
the rate of fifteen percent (15%) per annum, compounded annually, from and after an Event of Default (as hereinafter defined) and any other amounts owed hereunder in accordance with the provisions
hereof (collectively, the "Obligations") on the earlier of (i) February 20, 2008 and (ii) the occurrence of a Liquidation Event (as hereinafter defined) (the "Maturity Date").
"Liquidation Event" shall mean any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy
or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company. 

Section 1. Interest. 

        Interest
shall accrue from and after the date hereof and shall be paid on the Maturity Date; provided, however, that from and after payment and satisfaction in full of the HP Senior
Indebtedness (as hereinafter defined), interest shall be paid in cash on a quarterly basis on the first business day after the end of each fiscal quarter during the period commencing on the date the
HP Senior Indebtedness (as hereinafter defined) is paid and satisfied in full and ending on the Maturity Date. Interest shall be computed on the basis of a 360-day year consisting of
twelve 30-day months. For purposes hereof, "Accreted Value" shall mean the principal face amount of this Note plus accrued and unpaid interest thereon. 

Section 2. Series of Notes; Payment of Proceeds

	2.1
	This
Note has been issued as one of a series of 10% Subordinated Convertible Notes which are substantially similar (the "Notes") aggregating up to $3,500,000 pursuant to a
Subordinated Convertible Note Purchase Agreement (the "Note Purchase Agreement") dated as of the date hereof by and among the Company and the Lenders (as defined therein). The Company
shall keep or cause to be kept at its principal office appropriate records for the recordation of the name and address of each of the Lenders, which address may be changed from time to time effective
ten (10) days after receipt of written notice of such change from any such Lender. 

 

	2.2
	Simultaneously
with the execution and delivery hereof the full proceeds of this Note shall be delivered by the Holder hereof to a non-interest bearing escrow
account maintained on behalf of the Company and the Lenders by the Escrow Agent (as defined in the Note Purchase Agreement) and shall be released by the Escrow Agent to the Company in
accordance with the procedures set forth in the Note Purchase Agreement. 

Section 3. Default. 

        The
occurrence of one or more of the following events shall constitute an event of default hereunder ("Event of Default"): 

	3.1
	The
nonpayment of the Obligations on the Maturity Date.

	3.2
	The
occurrence of an event of default with respect to any indebtedness of the Company for borrowed money.

	3.3
	The
entry of a decree or order by a court having jurisdiction in the premises adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of the Company under the federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Company, or any substantial part if its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order.

	3.4
	The
institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it,
or the filing by it of a petition or answer or consent seeking reorganization or relief under the federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the
filing of any such petition or to the appointment of a receiver, liquidator, assignee, or trustee of the Company, or of any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such
action. 

Section 4. Acceleration.

        Upon
an Event of Default, the Accreted Value of this Note shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which
are expressly waived by the Company. 

Section 5. Subordinated Indebtedness; Pro Rata Distribution

	5.1
	The
indebtedness evidenced by this Note is hereby: (i) expressly subordinated, to the extent and in the manner hereinafter set forth in Sections 5.2 and 5.3
hereof, in right of payment to the prior payment in full of the HP Senior Indebtedness (as defined below) and (ii) expressly subordinated to the extent and in the manner set forth in the SVB
Subordination Agreement (as defined below), in right of payment to the prior payment in full of the SVB Senior Indebtedness (as defined below). "HP Senior Indebtedness" shall mean the indebtedness
owed by the Company to Hewlett-Packard Company ("HP") as evidenced by that certain Amended and Restated Convertible Note dated February 11, 2003 issued by the Company to HP in the
original principal amount of $10,000,000.00. "SVB Senior Indebtedness" shall mean the indebtedness owed by the Company to Silicon Valley Bank ("SVB"). "SVB Subordination Agreement" shall mean that
certain Subordination Agreement between the Holder and SVB dated as of even date herewith. 

2

 

	5.2
	Upon
any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, or in the event any indebtedness of
the Company to the Holder shall become due and payable whether at maturity, upon acceleration or otherwise: (i) no amount shall be paid by the Company or accepted or retained by the Holder,
whether in cash or property, in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of all principal and accrued interest under the HP
Senior Indebtedness shall have been paid in full, whether or not such principal or accrued interest under this Note is then due and payable; (ii) if any such amount is received by the
Holder on account of or with respect to this Note, the Holder shall forthwith pay over same to HP, and until so paid, any such amount shall be held by the Holder in property of the Holder; and
(iii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder which shall assert any right to receive any payments in respect of the principal of and interest
on this Note except subject to the payment in full of all principal and accrued interest under the HP Senior Indebtedness.

	5.3
	The
Holder agrees upon request to execute and deliver to HP such subordination agreements and other documents and instruments as may reasonably be requested by HP in order to
effectuate the subordination provisions of this Section 5.

	5.4
	In
the event that the assets of the Company are insufficient to satisfy amounts due under this Note and all other Notes, the assets of the Company shall be distributed on a pro
rata basis to all Holders of the Notes based on the Accreted Value due to the Holders on the Notes. 

Section 6. Conversion; Mandatory Prepayment. 

	6.1
	Voluntary Conversion. Subject to any stockholder vote as may be required by Nasdaq in the event that the common stock of the Company
("Common Stock") is quoted on Nasdaq, the Holder of this Note shall have the right, at the Holder's option, to convert this Note: (i) at any time after the ninetieth (90th) day
following the initial public offering of the Company's common stock (the "Initial Public Offering"), into that number of shares of Common Stock determined by dividing the Accreted Value of the
Note as of the date of such conversion by the per share offering price at which the Common Stock was sold in the Initial Public Offering; (ii) upon consummation of an equity financing by
the Company other than the Initial Public Offering (an "Equity Financing"), into that number of shares of equity securities of the Company issued in such Equity Financing determined by dividing the
Accreted Value of the Note as of the date of such conversion by the per share offering price at which such equity securities were sold in the Equity Financing; or (iii) upon consummation
of a Change of Control Event pursuant to which the stockholders of the Company receive (either directly or as a distribution from the Company) equity securities of another business entity, into that
number of such equity securities determined by dividing the Accreted Value of the Note as of the date of such conversion by eighty percent (80%) of the dollar value of the aggregate amount of
equity securities received by the stockholders of the Company in consideration of each share of stock of the Company. For purposes hereof, "Change of Control Event" shall mean (i) a sale of all
or substantially all of the assets or stock of the Company, (ii) a merger, consolidation or similar such transaction involving the Company (other than a merger of the Company for purposes of
changing the state of incorporation of the Company from Colorado to Delaware), or (iii) any sale of stock of the Company or similar such transaction pursuant to which any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) who had not previously owned at least twenty percent (20%) of the total voting
power represented by the Company's then 

3

 

outstanding
voting securities is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing
50% or more of the total voting power represented by the Company's then outstanding voting securities other than the Initial Public Offering. 

	6.2
	Involuntary Conversion. Any time after the ninetieth (90th) day following a Qualified Initial Public Offering (as
hereinafter defined), this Note shall be converted, with no action on the part of the Holder, into that number of shares of Common Stock determined in accordance with the next sentence of this
Section 6.2 if the following conditions are met: (i) the Company delivers a written notice to the Holder specifying the date on which this Note is to be converted (the
"Involuntary Conversion Date"); (ii) the average Trading Price (as hereinafter defined) of the Common Stock for the twenty (20) trading days immediately preceding the Involuntary
Conversion Date (the "Average Trading Price") shall be at least twenty percent (20%) above the per share offering price at which the Common Stock was sold in the Initial Public Offering; and
(iii) the shares of Common Stock deliverable to the Holder upon such conversion will be freely tradable as of the Involuntary Conversion Date. Upon any conversion of this Note in
accordance with the immediately preceding sentence, this Note shall convert into that number of shares of Common Stock determined by dividing the Accreted Value of this Note by the per
share offering price at which the Common Stock was sold in the Qualified Initial Public Offering. For purposes hereof, "Trading Price" shall mean (i) if the Common Stock is listed on a national
securities exchange, the closing sale price per share of Common Stock as published by the principal national securities exchange on which the Common Stock is traded on such date, or (ii) if the
Common Stock is traded in the over-the-counter market, the average of the bid and asked prices in the over-the-counter market at the close of trading on
such date. For purposes hereof, "Qualified Initial Public Offering" shall mean any Initial Public Offering having gross proceeds to the Company in excess of $20,000,000. For purposes hereof, shares of
Common Stock shall be deemed "freely tradable" even if such shares are subject to the limitations and restrictions (x) of Rule 144(e), (f) or (h) promulgated under the
Securities Act of 1933, as amended (the "1933 Act"), (y) imposed pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or (z) due to the fact that
the Holder has obtained material nonpublic information about the Company.

	6.3
	Conversion Procedures. In order to receive the Common Stock issuable upon conversion of this Note, the Holder must surrender this
Note to the Company at the Company's principal offices and the Company shall, as promptly as practicable after the surrender, deliver to the Holder a certificate or certificates representing
the number of fully paid and nonassessable Common Stock into which this Note has been converted. In the event of an involuntary conversion pursuant to Section 6.2 hereof, from and after
the Involuntary Conversion Date this Note shall only represent the right to receive the shares of Common Stock issuable pursuant to such involuntary conversion, and the Company shall have no
obligation under this Note other than to issue such Common Stock.

	6.4
	Fractional Shares. No fractional shares of stock or scrip shall be issued upon conversion of this Note. Instead of any fractional
shares of stock which would otherwise be issuable upon conversion of this Note, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then current
market price of such fractional interest. 

Section 7. Covenant Regarding Use Proceeds of a Qualified Public Offering. 

        The
Company covenants and agrees that a portion of the proceeds of a Qualified Public Offering shall be used to pay and satisfy in full the HP Senior Indebtedness, such payment to be
made on or before the sixty-first (61st) calendar day after consummation of such Qualified Public Offering. 

4

 

Section 8. Assignment, Exchange, or Loss of Note. 

        Subject
to the transfer restrictions herein, upon presentation and surrender of this Note to the Company at its principal office with a duly executed request for assignment and
funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Note in the name of the assignee named in such instrument of assignment and this
Note shall promptly be canceled. 

Section 9. Rights of the Holder. 

        The
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity. 

Section 10. Restrictions on Transfer. 

        This
Note has not been registered under the 1933 Act. This Note, or any right hereunder, may not be enforced against the Company by any Holder, except the original Holder herein,
and may not be transferred by any Holder unless either (i) there is an effective registration covering such Note and such shares under the 1933 Act and applicable state securities laws
or (ii) the Company first receives a letter from an attorney, stating that the proposed transfer is exempt from registration under the 1933 Act and all applicable state securities laws or
(iii) the transfer is made pursuant to Rule 144 under the 1933 Act or (iv) the transfer is made to an affiliate (as defined in Rule 12b-2 under the Securities
and Exchange Act of 1934, as amended) of the Holder. 

Section 11. Notices. All notices and other communications required or permitted under this Note shall be validly given, made, or served if
in writing and delivered personally, via overnight courier or sent by registered mail, to the Company at the following address: 

2602
Clover Basin Drive

Longmont, CO 80503

Attention: Chief Executive Officer 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Holder at the following address: 

Fleming
US Discovery Offshore Fund III, L.P.

c/o JP Morgan Partners

1221 Avenue of the Americas, 40th Floor

New York, NY 10020 

        All
notices and other communications required or permitted under this Note shall be validly given, made or served if in writing and delivered personally, via overnight courier or
sent by registered mail, to the Escrow Agent at the following address: 

Faegre &
Benson LLP

3200 Wells Fargo Center

1700 Lincoln Street

Denver, CO 80203

Attention: Nathaniel G. Ford, Esq. 

Section 12. Law Governing. 

        This
Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to its conflict of laws principles. 

5

 

Section 13. Titles and Captions. 

        All
section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor effect the interpretation of this Agreement. 

Section 14. Computation of Time. 

        In
computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday, or legal holiday, in which event the period shall run until the end
of the next day thereafter which is not a Saturday, Sunday, or legal holiday. 

Section 15. Presumption. 

        This
Agreement or any section thereof shall not be construed against any party due to the fact that said Agreement or any section thereof was drafted by said party. 

[THE
REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK.] 

6

 

        IN
WITNESS WHEREOF, a duly authorized officer of Displaytech, Inc. has executed this Note to be effective as of the    day of May, 2004. 

	

 	
 	

DISPLAYTECH, INC.
	

 	
 	

By:	
 	

 Richard D. Barton, Chief Executive Officer

7

EXHIBIT B  

SUBORDINATION AGREEMENT  

        This Subordination Agreement (this "Agreement")
dated                        , is between the undersigned ("Creditor"), and Silicon Valley Bank ("Bank"). 

Recitals  

        A.    Displaytech, Inc.
("Borrower") has requested and/or obtained credit from Bank which may be secured by its assets and property. 

        B.    Creditor
has extended credit to Borrower and/or may later extend other credit to Borrower. 

        C.    To
induce Bank to extend credit to Borrower and make further extensions of credit to or for Borrower, or to purchase or extend credit pursuant to any instrument or
writing on which Borrower is liable or to grant renewals or extensions of any loan, extension of credit, purchase, or other accommodation Creditor will subordinate: (i) all of Borrower's
indebtedness and obligations to Creditor, existing now or later (the "Subordinated Debt") to all of Borrower's indebtedness and Obligations to Bank to the extent set forth herein; and (ii) all
of Creditor's security interests, to all of Bank's security interests in the Borrower's property. 

THE PARTIES AGREE AS FOLLOWS:  

        1.     Creditor
subordinates to Bank any security interest or lien that it has in all property and assets of Borrower. Despite attachment or perfection dates of Creditor's
security interest and Bank's security interest, Bank's security interest in all assets and property of Borrower is prior to Creditor's security interest. 

        2.     All
Subordinated Debt payments are subordinated to all Borrower's Obligations to Bank existing now or later, together with collection costs of the Obligations (including
attorneys' fees), including, interest accruing after any bankruptcy, reorganization or similar proceeding and all Obligations owing to Bank (the "Senior Debt") subject to
Section 3(c) hereof. Defined terms used but not otherwise defined herein shall have the same meanings as set forth in the Senior Debt loan documents. 

        3.     Until
the Senior Debt is paid in full, Creditor will not: 

	a)
	demand
or receive from Borrower (and Borrower will not pay) any part of the Subordinated Debt, by payment, prepayment, or otherwise,

	b)
	exercise
any remedy against any assets of Borrower, or

	c)
	accelerate
the Subordinated Debt, or begin to or participate in any action against Borrower, until all the Senior Debt is paid. However, Creditor may receive
regularly scheduled payments of interest that constitute Subordinated Debt (or may receive a payoff of the entire Subordinated Debt if Borrower completes an initial public offering for at least
$20,000,000), if an Event of Default (defined in the Senior Debt loan documents) has not occurred, is not continuing and would not exist immediately after payment. Nothing
contained herein shall prohibit Creditor from converting any Subordinated Debt into equity securities of Borrower. 

        4.     Until
the Senior Debt is paid in full, Creditor must deliver to Bank in the form received (except for endorsement or assignment by Creditor) any payment, distribution,
security or proceeds it receives on the Subordinated Debt other than according to this Agreement. 

        5.     These
provisions remain in full force and effect, despite Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law, and
Bank's claims against Borrower and Borrower's estate will be fully paid before any payment is made to Creditor, subject to Section 3(c) hereof. 

 

        6.     Until
the Senior Debt is paid, Creditor irrevocably appoints Bank as its attorney-in-fact, with power of attorney with power of substitution, in
Creditor's name or in Bank's name, for Bank's use and benefit without notice to Creditor, to do the following in any bankruptcy, insolvency or similar proceeding involving Borrower: 

        (i)    File
any claims for the Subordinated Debt for Creditor if Creditor does not do so at least 30 days before the time to file claims expires, and 

        (ii)   Accept
or reject any plan of reorganization or arrangement for Creditor and vote Creditor's claims in respect of the Subordinated Debt in any way it chooses. 

        7.     Creditor
will immediately put a legend on the Subordinated Debt instruments that the instruments are subject to this Agreement. No amendment of the Subordinated Debt
documents will modify this Agreement in any way that terminates or impairs the subordination of the Subordinated Debt or the subordination of the security interest or lien that Creditor has in
Borrower's property. For example, instruments cannot be amended to (i) increase the interest rate of the Subordinated Debt, or (ii) accelerate payment of principal or interest or any
other portion of the Subordinated Debt. 

        8.     This
Agreement is effective while Borrower owes any amounts to Bank. If after full payment of the Senior Debt, Bank must disgorge any payments made on the Senior Debt,
this Agreement and the relative rights and priorities provided in it, will be reinstated as to all disgorged payments as though the payments had not been made, and Creditor will immediately pay Bank
all payments received under the Subordinated Debt to the extent the payments would have been prohibited under this Agreement. At any time without notice to Creditor, Bank may take actions it considers
appropriate on the Senior Debt such as terminating advances, increasing the principal, extending the time of payment, increasing interest rates, renewing, compromising or otherwise amending any
documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No action or inaction will impair
or otherwise affect Bank's rights under this Agreement. Creditor waives the benefits, if any, of any statutory or common law rule that may permit a subordinating creditor to assert any defenses of a
surety or guarantor, or that may give the subordinating creditor the right to require a senior creditor to marshal assets, and Creditor agrees that it shall not assert any such defenses or rights. 

        9.     This
Agreement binds Creditor, its successors or assigns, and benefits Bank's successors or assigns. This Agreement is for Creditor's and Bank's benefit and not for the
benefit of Borrower or any other party. If Borrower is refinancing any of the Senior Debt with a new lender, upon Bank's request of Creditor, Creditor will enter into a new subordination agreement
with the new lender on substantially the terms of this Agreement. 

        10.   This
Agreement may be executed in two or more counterparts, each of which is an original and all of which together constitute one instrument. 

        11.   Colorado
law governs this agreement without giving effect to conflicts of laws principles. Creditor and Bank submit to the exclusive jurisdiction of the courts in
Boulder County State of Colorado. CREDITOR AND BANK EACH WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION FROM THIS AGREEEMNT. 

        12.   This
Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. Creditor is not relying on any representations
by Bank in entering into this Agreement. Creditor will keep itself reasonably informed of Borrower's financial and other conditions. This Agreement may be amended only by written instrument signed by
Creditor and Bank. 

2

 

        13.   If
there is an action to enforce the rights of a party under this Agreement, the party prevailing will be entitled, in addition to other relief, all reasonable costs and
expenses, including reasonable attorney's fees, incurred in the action. 

	

"Creditor"	
 	

"Bank"
	

 	
 	

SILICON VALLEY BANK
	

By:	
 	

	
 	

By:	
 	

	Title:	 	 	 	Title:	 	 
	 	 	
	 	 	 	

3

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EXHIBIT 10.27  

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

OF DRESSER INDUSTRIES, INC.  

Restatement Effective January 1, 2004 

 
 

TABLE OF CONTENTS    
    

	 
	 	 
	 	Page

	ARTICLE I	 	DEFINITIONS	 	1
	

ARTICLE II	
 	

PURPOSE OF PLAN	
 	

4
	

ARTICLE III	
 	

ELIGIBILITY	
 	

5
	

ARTICLE IV	
 	

BENEFITS	
 	

6
	

ARTICLE V	
 	

VESTING AND FORFEITURE	
 	

8
	

ARTICLE VI	
 	

ADMINISTRATION	
 	

9
	

ARTICLE VII	
 	

CLAIMS AND APPEAL PROCEDURES	
 	

10
	

ARTICLE VIII	
 	

AMENDMENT AND TERMINATION	
 	

12
	

ARTICLE IX	
 	

MISCELLANEOUS	
 	

13
	

APPENDIX A	
 	

SPECIAL PROVISIONS	
 	

15

  

 
 

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
  OF DRESSER INDUSTRIES, INC.    
    

        Dresser Industries, Inc. hereby amends by restatement the Supplemental Executive Retirement Plan of Dresser Industries, Inc., effective
January 1, 2004, upon the following terms and conditions: 

 
 

ARTICLE I
  Definitions    
    

        The words and phrases defined hereinafter shall have the following meaning: 

        Section 1.1.    Actuarial Equivalent.    An amount of equal value determined on the basis of the 1983 Group
Mortality Table (blended—50% male and 50% female) and using whichever of the following sets of interest rate factors (as more completely set forth in the Pension Plan) yields the greatest
lump sum amount: 1) "Old" PBGC immediate rate, or 2) "New" PBGC graded rate provided, however, that for purposes of Sections A.2 and A.3, the term "Actuarial Equivalent" shall mean an
amount of equal value determined on the basis of the "Applicable Interest Rate" and the "Applicable Mortality Table" that are used to calculate lump sum distributions under the Dresser, Inc.
Consolidated Salaried Retirement Plan, as it shall be amended from time to time. 

        Section 1.2.    Benefits Committee.    The Employee Benefits Committee of Dresser Industries, Inc. 

        Section 1.3.    Board.    The Board of Directors of Dresser Industries, Inc. 

        Section 1.4.    Cause.    Means gross, willful or intentional misconduct which causes harm to the Company. 

        Section 1.5.    Change of Control.    Means: 

        (1)   The
sale of all or a majority of Dresser's assets; 

        (2)   Dresser's
liquidation or dissolution; 

        (3)   The
purchase of beneficial ownership of at least 30% of Dresser's common stock by any persons or entities acting in concert (or 30% of the combined voting power of
Dresser's then outstanding voting securities entitled to vote generally in the election of directors); or 

        (4)   The
approval by Dresser's stockholders of a reorganization, merger, or consolidation, the result of which is that the persons or entities which were stockholders
immediately before the transaction do not own more than 50% of the combined voting power of the surviving entity's then outstanding voting securities entitled to vote generally in the election of
directors. 

        Section 1.6.    Company.    Dresser Industries, Inc., or an entity partially or wholly owned by Dresser
Industries, Inc. if so designated by the Compensation Committee. 

        Section 1.7.    Compensation Committee.    The Executive Compensation Committee of the Board of Dresser
Industries, Inc. 

        Section 1.8.    DB Plans.    The Pension Plan as defined in Section 1.14 and the Related Plans as
defined in Section 1.16, and corresponding non-qualified DB plan accruals in the Dresser Industries, Inc. ERISA Excess Benefit and Excess Compensation Plans. 

        Section 1.9.    DC Plan.    The Dresser Industries, Inc. Retirement Savings Plan-A and
corresponding non-qualified DC plan balances in the Dresser Industries, Inc. ERISA Excess Benefit and Excess Compensation Plans. 

        Section 1.10.    Earned Bonus.    The amount of bonus awarded to an Executive pursuant to the Company's annual
bonus program/s regardless of whether that bonus is paid, "carried over" or deferred. 

2

 

        Section 1 11.    Executive.    An individual designated by the Benefits Committee who is employed by the
Company and has attained the position of Corporate Vice President or any higher position, Division President or equivalent title as approved by the Benefits Committee. The term "Executive" also shall
include any individual found by the Compensation Committee to have been employed by the Company or an entity partially or wholly owned by the Company in an equivalent position and declared eligible
for this Plan, as well as those individuals who are listed in the Appendix. 

        Section 1.12.    ERISA.    The Employee Retirement Income Security Act of 1974, as amended. 

        Section 1.13.    Final Average Salary.    The average of the five highest consecutive bonus payments made
during the ten most recent calendar years including the year during which the Employee's retirement, death, or disability occurs, plus the Employee's annualized base rate of pay in effect immediately
prior to the date of determination. 

        Section 1.14.    Pension Plan.    The Dresser Industries, Inc. Consolidated Salaried Retirement Plan, as
frozen May 31, 1995. 

        Section 1.15.    Plan.    The "Supplemental Executive Retirement Plan of Dresser, Industries, Inc.", as
set forth herein. 

        Section 1.16.    Related Plan.    Any Company sponsored qualified or non-qualified defined benefit
or defined contribution pension plan (which may or may not be terminated) for nonunion salaried employees, other than the Pension Plan or the DC Plan. 

        Section 1.17.    Years of Service.    For the purposes of this Plan, Years of Service shall begin on the date
of first employment by Dresser Industries, Inc. and shall end upon severance from service, or such other dates as determined by the Benefits Committee. 

3

 
 
 

ARTICLE II
  Purpose of Plan    
    

        Section 2.1.    Purpose.    The purpose of the Plan is to provide a consistent benefit structure for eligible
Executives which assures that eligible Executives do not suffer a diminution of retirement benefits as a consequence of having diverse. and divergent participation in related Company, joint venture or
predecessor employer retirement plans. This is an unfunded plan described in sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. 

4

 
 
 

ARTICLE III
  Eligibility    
    

        Section 3.1.    General Eligibility.    Except as otherwise included in Appendix A, an Executive shall
be covered by this Plan if he/she is an Executive and meets the requirements of Section 3.2 below. 

        Section 3.2.    Eligibility For Benefit.    An Executive or former Executive (or his spouse or beneficiary)
shall be eligible for a benefit determined under Section 4.1, under the following circumstances: 

        (a)   The
Executive dies while employed, or becomes disabled under circumstances that would entitle him to Disability Benefits under the qualified Pension Plan (or similar
disability provisions of a qualified Related Plan or the qualified DC Plan that are applicable to him/her); or 

        (b)   The
Executive or former Executive voluntarily terminates and the Executive has earned five (5) years of service as an Executive during the ten (10) year
period ending on his/her termination date, and terminates after Age Fifty Five (55) with ten (10) years of service; or 

        (c)   The
Executive or former Executive is involuntarily terminated and has earned five (5) years of service as an Executive during the ten (10) year period
ending on his/her termination date; or 

        (d)   If
the Executive's eligibility has been established and approved by the Compensation Committee. 

        Section 3.3.    Spouses and Beneficiaries.    The extent of a surviving spouse's or beneficiary's eligibility
to receive benefits after an Executive's death is determined by the eligibility of the Executive for Plan coverage under Section 3.1 and Section 3.2(a). Where eligibility is established,
the surviving spouse or beneficiary shall be entitled to the Executive's entire benefit consistent with the terms of this Plan. Priority, as between a spouse or named beneficiary, shall be as
established under the qualified DC Plan. 

5

 
 
 

ARTICLE IV
  Benefits    
    

        Section 4.1.    Amount of Benefits.    Except to the extent provided in Appendix A, the amount of the
benefit payable under this Section 4.1, if any, determined as of the Executive's termination date, shall be determined as follows: 

        Step (1) Determination of target income amount.    At age 65, an Executive shall be entitled to receive an annual benefit
equal to 2% of his/her Final Average Salary, multiplied by the Executive's Years of Service (up to a maximum of Thirty (30) Years of Service). 

If
termination occurs prior to age 65, a reduction of .2% from the above formula will be assumed for each month necessary after termination that is necessary to attain age 65. 

        Step (2) Determination of retirement income amount.    Determined as of the Executive's termination date, with respect to
the Executive, determine the sum of: 

        (a)   the
Executive's monthly pension computed under the Pension Plan any Related Plan, and/or any predecessor DB plan, or joint venture employer DB plans, 

        (b)   The
Actuarial Equivalent of the Executive's employer contribution accounts under the DC Plan, any similar DC plan, and/or any predecessor DC plan, or joint venture
employer DC plans, (except that, should an executive not contribute at a rate which yields the maximum employer contribution, a minimum employee contribution rate which yields the maximum employer
contribution will be assumed and hypothetically calculated), 

        (c)   The
Actuarial Equivalent of the Executive's "pension equivalent annuity credits" (for both DB and DC Plan components, as determined and recorded under the Dresser
Industries, Inc. Deferred Compensation Plan); and 

To
the extent that balances or amounts reflected in (a), (b). and/or (c) above are distributed prior to the Executive's termination date, the Company will recognize these amounts for offset
purposes and will assume an appropriate rate of return from the date of distribution until the calculation of the benefit provided by this Plan. 

        Step (3) Determination of the Benefit if any payable under this Section 4.1.    If the amount determined in Step
(1) exceeds the amount determined in Step (2), the annual difference will be paid under this Plan. The Actuarial Equivalent of such annual benefit shall be converted to, and paid in, a lump sum
in accordance with 4.3 below. If the amount determined in Step (1) does not exceed the amount determined in Step (2), no benefit is payable under this Plan. 

Notwithstanding
the provisions of this Section, for Executives participating in the Plan on December 31, 1997, it is explicitly understood that, if the Executive's projected benefit due under
the Plan prior to this Restatement provides a target retirement income under its Step (1) of Section 4.1 which exceeds the maximum benefit provided in Step (1} of Section 4.1 of
this Restatement, then the greater of the two actual target retirement incomes will be paid to the Executive. 

        Section 4.2.    Funding of Benefits Upon Change of Control.    Upon a Change of Control, the Company shall, as
soon as possible, but in no event longer than ninety (90) days following such Change of Control, make an irrevocable contribution of additional cash to the Trust in an amount sufficient to pay
each Executive's and Executive's beneficiary 120% of the value of accrued benefits which may become payable thereafter pursuant to the terms of the Plan as in effect on the date of the Change of
Control. Upon a Change of Control, all funded amounts will be immediately vested irrespective of the terms of Section 5.1 below. 

6

 

        Section 4.3.    Form of Benefit.    Benefits under this Plan shall be payable in a lump sum to the Executive,
or to the Executive's DC Plan Beneficiary in the event of the Executive's death as soon as practicable following the Executive's termination. 

        Section 4.4.    Time of Benefit Payments.    Benefits due under this Plan shall be determined by the Benefits
Committee at the time of the Executive's termination of employment. In the case of a lump-sum payment, such payment shall be made as closely as practicable to the time such payment would
be made if it were paid from the Pension Plan. Such payments shall be made by the Company out of its general assets and shall not be funded in any manner except as provided in Section 4.2
above. 

7

  

 
 

ARTICLE V
  Vesting and Forfeiture    
    

        Section 5.1.    Vesting.    An Executive shall vest in benefits under this Plan at the time such person
terminates and is eligible under Section 3.2. No Executive (nor the beneficiary of such person) whose employment is terminated For Cause, as determined by the Compensation Committee, shall vest
in any benefits under this Plan, even if such termination is deemed a retirement under provisions of the Pension Plan, a Related Plan or the DC Plan. 

        Section 5.2.    Forfeiture.    The Compensation Committee may declare forfeited any or all future benefits of
an Executive (and/or his/her beneficiary) if the Compensation Committee in its sole discretion determines that such person has taken or allowed any action that is a violation of the Dresser Code of
Conduct, has engaged in serious and willful misconduct in connection with his/her employment, or competes with or assists others to compete with the Company, without written consent of the Company. 

2

 
 
 

ARTICLE VI
  Administration    
    

        Section 6.1.    Duties of Benefits Committee.    This Plan shall be administered by the Benefits Committee in
accordance with its terms and purposes. The Benefits Committee shall have the sole discretionary duty and authority to interpret the provisions of this Plan (and any private letter agreement affecting
an
Executive's benefits under the Plan) and determine the amount and manner of payments of the benefit due to or on behalf of each Executive from this Plan and shall cause them to be paid accordingly. 

        Section 6.2.    Finality of Decisions.    The decisions made and the actions taken by the Benefits Committee in
the administration of this Plan shall be final and conclusive on all persons, and the members of the this Committee shall not be subject to individual liability with respect to this Plan. 

3

 
 
 

ARTICLE VII
  Claims and Appeal Procedures    
    

        Section 7.1.    Purpose.    The purpose of the claims and appeal provisions set forth in Sections 7.1 through
7.11 is to secure the speedy, inexpensive resolution of all disputes over Plan benefits and rights granted by the Plan. These provisions shall be liberally construed so as to avoid litigation and its
attendant expenses. 

        Section 7.2.    Claims Procedure.    Each Executive who claims entitlement to any right or benefit under the
Plan ("claimant") may submit a claim with respect to that benefit or right under the procedure set forth in the Dresser Industries, Inc. Retirement Savings Plan-A. 

        Section 7.3.    Appeal Procedure.    When a claim has been or is deemed denied, the claimant (hereinafter
referred to as appellant) shall have the right within 60 days after receipt of written notice thereof or the date the claim is deemed denied to file an appeal with the Benefits Committee and to
go through the appeal procedure herein set forth. All appeals shall be in writing, and shall set forth the reasons why the appellant believes the decision denying his/her claim is erroneous. The
Benefits Committee shall render a decision on the appeal in writing not later than 60 days after receipt of the written appeal. 

The
decision of the Benefits Committee shall be final and shall be binding upon the appellant, his/her beneficiaries, heirs, and assigns and all other persons claiming by, through or under him. 

A
failure to file a claim and an appeal in the manner and within the time limits set forth herein shall be deemed a failure by the aggrieved party to exhaust his/her administrative remedies and
shall constitute: a waiver of the rights or benefits sought to be established under the Plan. 

        Section 7.4.    Exhaustion of Administrative Remedies.    No legal action to recover Plan benefits or to
enforce or to clarify rights under the Plan shall be commenced under section 502(a)(1)(B) of ERISA, or under any other provisions of law, whether or not statutory, unless and until the claimant
first shall have exhausted the claims and appeal procedures available to him hereunder in Sections 7.1–7.3. A claimant must raise all issues and present all theories relating to the
Executive's claim to the Benefits Committee at one time. Otherwise, the claimant shall be deemed to have abandoned forever all issues and theories not raised and presented to the Benefits Committee. 

        Section 7.5.    Limitation on Actions.    Any suit brought to contest a decision of the Benefits Committee
shall be filed in a court of competent jurisdiction within 1 year from receipt of written notice of the Benefits Committee's final decision or from the date the appeal is deemed denied, and any
suit not filed within this 1-year limitation period shall be dismissed by the court. Service of legal process shall be made upon the Plan by service upon the Benefits Committee. 

        Section 7.6.    Federal Preemption.    All state law causes of action that arise out of or relate to this Plan
or to entitlement to rights or benefits under the Plan shall be deemed to have been preempted by section 514 of ERISA. 

        Section 7.7.    No Right to Jury Trial: Evidence.    In any suit contesting a decision of the Benefits
Committee, all issues of fact shall be tried by the court and not by a jury. No evidence may be introduced in court which was not previously presented to the Benefits Committee and no evidence may be
introduced to modify or contradict the terms of the Plan document. 

        Section 7.8.    Scope of Review.    The Benefits Committee shall have full discretionary authority to interpret
and apply the Terms of this Plan document and other relevant documents and relevant provisions of law, and deference shall be afforded the Benefits Committee's decisions. This grant of authority shall
be broadly construed and shall include the authority to find facts, to reach conclusions of law, to interpret and apply ambiguous terms, and to supply missing terms reasonably necessary to 

4

 

resolution
of claims and appeals. No finding of fact by the Benefits Committee shall be set aside by a court unless the party contesting the finding shall prove by clear and convincing evidence that
the finding is arbitrary and capricious. No conclusion of law reached by the Benefits Committee shall be: reversed by a court unless the party contesting the conclusion shall demonstrate that the
Benefits Committee is guilty of manifest disregard of law. 

        Section 7.9.    Limitation on Damages.    In any suit over Plan benefits or rights, recovery shall be limited
to the amount of benefits found due, without interest or to specific enforcement of rights established under the Plan, and shall not include any other damages whether denominated incidental, special,
consequential, collateral, compensatory, exemplary, punitive or whatever. 

        Section 7.10.    Plan Data.    The Benefits Committee may issue or cause to be issued from time to time
statements to Executives, retirees or beneficiaries indicating eligibility, service or other data regarding their Plan benefits. If any such person wishes to challenge the accuracy of such data, the
person shall do so in the manner and within the time limits set forth above in Sections 7.1–7.9. 

        Section 7.11.    Final Determination of Rights and Benefits.    After termination of the Plan, the Benefits
Committee may direct a final determination of the rights and benefits of some or all Executives having an interest in the Plan. The determination with respect to any person may be mailed to that
person at the Executive's last known address and that person may be given 90 days within which to challenge the determination through the claims and appeal procedures set forth in Sections
7.1–7.10. The mailing of a copy of a determination to a person at his/her last known address shall be deemed constructive receipt by that person of a copy of the determination. Any
determination not challenged through the claims and appeals procedures shall govern an Executive's rights under the Plan and the rights of any person claiming by, through or under him. 

5

 
 
 

ARTICLE VIII
  Amendment and Termination    
    

        Section 8.1.    Amendment and Termination.    The Company intends to maintain this Plan as long as it is
appropriate. However, the Company reserves the right to amend and/or terminate it at any time without the consent of any Executive, (a) by the Board of Directors of the Company, or
(b) in the case of amendments which do not materially modify the provisions hereof, the Benefits Committee, provided, however, that no such amendment or termination shall reduce any benefits
accrued under the terms of this Program prior to the date of termination or amendment. 

6

 
 
 

ARTICLE IX
  Miscellaneous    
    

        Section 9.1.    No Employment Rights.    Nothing contained in this Plan shall be construed as a contract of
employment between the Company or any subsidiary or joint venture company and any employee, or as a right of any employee to be continued in the employment of the Company, or as a limitation of the
right of the Company to discharge any of its employees with or without cause. 

        Section 9.2.    Entire Agreement: Successors.    This Plan, including any subsequently adopted amendments,
shall constitute the entire agreement or contract between the Company and any Executive regarding this Program. There are no covenants, promises, agreements, conditions or understandings, either oral
or written, between an Executive and the Company relating to the subject matter hereof, other than those set forth herein. This Plan and any amendments hereof shall be binding on the Company and the
Executives and their respective heirs, administrators, trustees, heirs and assigns, including but not limited to, any successors of the Company by merger, consolidation or otherwise by operation of
law, and on all designated beneficiaries of the Executive. 

        Section 9.3.    Governing Law.    The laws of the State of Texas shall govern this Plan. 

        Section 9.4.    Nonassignability.    To the extent permitted by law, the right of any Executive or any
beneficiary in any benefit hereunder shall not be subject to attachment or any other legal process for the debts of such Executive or beneficiary; nor shall any such benefit be subject to
anticipation, alienation, sale, transfer, assignment or encumbrance. 

	 
	 	 
	 	 

	Dated:	 	 	 	 
	 	 	
	 	 
	

DRESSER INDUSTRIES, INC.	
 	

 
	By:	 	 	 	 
	 	 	
	 	 
	Title:	 	 	 	 
	 	 	
	 	 

7

 
 

APPENDIX A
  
    SPECIAL PROVISIONS
  TO THE
  SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
  OF DRESSER INDUSTRIES, INC.    
    

        Section A.1.    Special Provisions for Ben Stuart.    On November 19, 1997, the Board of Directors of
Dresser Industries, Inc. approved a pension benefit enhancement for Ben Stuart which is to be provided through this Plan. Therefore, for benefit calculation purposes under the provisions of
this Plan, Ben Stuart will be deemed to have retired at age 65 regardless of his actual age on the date of his retirement. 

        Section A.2.    Special Provisions for Steven G. Lamb.    Notwithstanding the provisions of Sections 4.1, 4.3,
4.4 and 5.1, the benefit payable under this Plan to Steven G. Lamb shall be determined as follows: 

        (a)    Age 65 benefit.    The age 65 benefit expressed as an annual benefit shall be equal to: (1) 2.5% of his
"final average earnings," multiplied by Years of Service (up to a maximum of 20 years), where "final average earnings" are the average of his last five full years base pay plus earned annual
incentive pay, reduced by (2) the Actuarial Equivalent annual benefit of company funded benefits paid or payable under all qualified and nonqualified retirement plans maintained by the Company.
To the extent that the benefits or amounts reflected in (b) were distributed prior to Mr. Lamb's termination date, the Company will recognize these amounts for offset purposes and will
assume an appropriate rate of return from the date of distribution until the calculation of the benefit provided by this Plan. 

        (b)    Timing of commencement.    If Mr. Lamb's benefit is vested under paragraph (c) below upon
termination of employment, Mr. Lamb's benefit shall be paid in a lump sum as soon as practicable following termination of employment in the amount determined under paragraph (d) below. 

        (c)    Vesting.    Mr. Lamb shall vest in the benefits under this Plan upon completion of five Years of
Service, or upon his termination of employment with the Company by reason of death or Permanent Disability, Employer Termination Without Employer Cause, Employee Termination For Cause or upon a Change
in Control. For purposes of this section, the terms Permanent Disability, Employer Termination Without Employer Cause, Employee Termination For Cause and Change in Control shall have the same meanings
as those terms are defined under the Executive Employment Agreement dated October 2, 2002 between Dresser, Ltd., a Bermuda corporation, Dresser, Inc., a Delaware corporation, and
Steven G. Lamb. 

        (d)    Form and amount of benefit.    Benefits shall be paid to Mr. Lamb, or to his DC Plan
Beneficiary, in the event of his death, in lump sum form only. The amount of the lump sum benefit shall be equal to the Actuarial Equivalent of
Mr. Lamb's age 65 annuity described in paragraph (a) above; provided that if the date of payment is prior to the date Mr. Lamb attains (or would have attained) age 65, there shall
be no actuarial reduction on account of early commencement between age 60 and 65; and if the date of payment is prior to the date Mr. Lamb attains (or would have attained) age 60, the unreduced
amount Mr. Lamb could have received at age 60 shall be reduced on account of Mr. Lamb's age upon payment of the benefit for each year preceding age 60. In the event Mr. Lamb dies
before termination of employment, the death benefit payable to his surviving spouse or beneficiary shall be the amount that would have been paid to Mr. Lamb if he had terminated employment
immediately before his death. 

        Section A.3.    Special Provisions for Andrew E. Graves, James A. Nattier and John P. Ryan.    Notwithstanding
the provisions of sections 4.1, 4.3, 4.4 and 5.1, benefits shall be payable under this plan to Andrew E. Graves, James A. Nattier and John P. Ryan ("Executives") and shall be determined as follows: 

        (a)    Age 65 benefit.    The age 65 benefit expressed as an annual benefit shall be equal to: (1) 2.5% of
"final average earnings," multiplied by Years of Service that were accumulated after the Executive 

 

attained
age 40 (up to a maximum of 20 years), where "final average earnings" are the average of the last five full years base pay plus earned annual incentive pay, reduced by (2) the
Actuarial Equivalent annual benefit of company funded benefits paid or payable under all qualified and nonqualified retirement plans maintained by the Company. To the extent that the benefits or
amounts reflected in (b) were distributed prior to the Executive's termination date, the company will recognize these amounts for offset purposes and will assume an appropriate rate of return
from the date of distribution until the calculation of the benefit provided by this Plan. 

        (b)    Reduction for early commencement.    The benefit calculated in (a), above, shall commence upon the later of
(1) the Executive's termination of employment, and (2) the Executive's attainment of age 60. In the event the Executive dies before he attains age 60, the death benefit payable to his
surviving spouse or beneficiary shall not be payable until the date the Executive would have attained age 60. If benefits commence before age 65, the amount calculated in (a), above, shall be
determined in accordance with the following table: 

	Age at

Commencement of Benefits
	 	Benefit Percentage

	65	 	100
	64	 	90.69
	63	 	82.48
	62	 	75.22
	61	 	68.77
	60	 	63.02

Age
determined to completed years and months (with partial months omitted) at the Executive's benefit commencement date, with interpolation between reduction percentages on a straight line basis for
years and months. 

        (c)    Vesting.    The Executive shall vest in the benefits under this Plan upon completion of five Years of Service
(counting only Years of Service accumulated after January 1, 2004), or upon his termination of employment with the Company by reason of death or disability, termination by the Company without
Cause, termination for "good reason" or upon a Change in Control. For purposes of this section, termination for "good reason" with respect to Messers. Graves, Nattier and Ryan shall have the same
meaning as termination for "Employee Cause" under the employment agreements applicable to the Executive. For Andrew E. Graves, the applicable employment agreement is the Executive Employment Agreement
between Andrew Graves and Dresser, Inc., a Delaware corporation, dated April 15, 2003. For James A Nattier, the applicable employment agreement is the Executive Employment Agreement
between James Nattier and Dresser, Inc., a Delaware corporation, dated January 5, 2004. For John P. Ryan, the applicable employment agreement is the Executive Employment Agreement
between John P. Ryan and Dresser Equipment Group, Inc. dated January 29, 2001. 

        (d)    Form of benefit.    Benefits shall be paid to Executive, or to their DC Plan Beneficiary in the event of their
death, in lump sum form only. The lump sum benefit shall be the Actuarial Equivalent of the benefit set forth in (a), above. 

2

QuickLinks

TABLE OF CONTENTS

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF DRESSER INDUSTRIES, INC.

ARTICLE I Definitions

ARTICLE II Purpose of Plan

ARTICLE III Eligibility

ARTICLE IV Benefits

ARTICLE V Vesting and Forfeiture

ARTICLE VI Administration

ARTICLE VII Claims and Appeal Procedures

ARTICLE VIII Amendment and Termination

ARTICLE IX Miscellaneous

APPENDIX A SPECIAL PROVISIONS TO THE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF DRESSER INDUSTRIES, INC.

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