Document:

ex1042.htm

     

     

    
      Exhibit
10.42

      

       

      

       

      

      AMENDMENT
AGREEMENT

      

      Dated as of July 23,
2007

      

      

       

      

      by and
between

      

      

      EMAGIN
CORPORATION

      

      and

      

      [NAME OF
INVESTOR]

      

      

      

       

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

      

      

      

       

      EMAGIN
CORPORATION

      

      AMENDMENT
AGREEMENT

      

      TABLE OF
CONTENTS

      

      

      

      
        	 
      	 
      	
                 Page

              
	
                1.

              	
                Definitions.

              	
                1

              
	 
      	
                2.

              	
                Amendments;
      Exchange.

              	
                1

              
	 
      	
                (a)

              	
                Amendments.

              	
                1

              
	 
      	
                (b)

              	
                Exchange.

              	
                1

              
	
                3.

              	
                Amendments
      to Note Purchase Agreement.

              	
                1

              
	
                4.

              	
                Representations
      and Warranties of the Company.

              	
                1

              
	 
      	
                (a)

              	
                Organization
      and Authority.

              	
                1

              
	 
      	
                (b)

              	
                Qualifications.

              	
                1

              
	 
      	
                (c)

              	
                Agreement,
      Amended Transaction Documents.

              	
                1

              
	 
      	
                (d)

              	
                Concerning
      the Shares and the Common Stock.

              	
                1

              
	 
      	
                (e)

              	
                Non-contravention.

              	
                1

              
	 
      	
                (f)

              	
                Approvals.

              	
                1

              
	 
      	
                (g)

              	
                Absence
      of Certain Proceedings.

              	
                1

              
	 
      	
                (h)

              	
                Information
      Provided.

              	
                1

              
	 
      	
                (i)

              	
                Absence
      of Certain Changes.

              	
                1

              
	 
      	
                (j)

              	
                Dilutive
      Effect.

              	
                1

              
	 
      	
                (k)

              	
                No
      Undisclosed Events, Liabilities, Developments or
      Circumstances.

              	
                1

              
	 
      	
                (l)

              	
                Absence
      of Rights Agreement.

              	
                1

              
	 
      	
                (m)

              	
                Absence
      of Brokers, Finders, Etc.

              	
                1

              
	 
      	
                (n)

              	
                SEC
      Filings.

              	
                1

              
	
                5.

              	
                Representations
      and Warranties of the Holder.

              	
                1

              
	 
      	
                (a)

              	
                Authorization.

              	
                1

              
	 
      	
                (b)

              	
                Acquisition
      Entirely for Own Account.

              	
                1

              
	 
      	
                (c)

              	
                Accredited
      Investor.

              	
                1

              
	
                6.

              	
                Certain
      Covenants.

              	
                1

              
	 
      	
                (a)

              	
                Press
      Releases.

              	
                1

              
	 
      	
                (b)

              	
                Form
      8-K; Limitation on Information and Holder Obligations.

              	
                1

              
	 
      	
                (c)

              	
                SEC
      Registration Matters.

              	
                1

              
	 
      	
                (d)

              	
                Certificate
      of Designations.

              	
                1

              
	 
      	
                (e)

              	
                Certain
      Waivers.

              	
                1

              
	 
      	
                (f)

              	
                Certain
      Acknowledgments.

              	
                1

              
	
                7.

              	
                Effectiveness.

              	
                1

              
	
                8.

              	
                Confirmation
      of Agreements; Entire Agreement.

              	
                1

              
	
                9.

              	
                Miscellaneous.

              	
                1

              
	 
      	
                (a)

              	
                Governing
      Law.

              	
                1

              
	 
      	
                (b)

              	
                Counterparts.

              	
                1

              
	 
      	
                (c)

              	
                Headings,
      etc.

              	
                1

              
	 
      	
                (d)

              	
                Severability.

              	
                1

              
	 
      	
                (e)

              	
                Amendments.

              	
                1

              
	 
      	
                (f)

              	
                Waivers.

              	
                1

              
	 
      	
                (g)

              	
                Notices.

              	
                1

              
	 
      	
                (h)

              	
                Certain
      Expenses and Fees.

              	
                1

              
	 
      	
                (i)

              	
                Survival.

              	
                1

              
	 
      	
                (j)

              	
                Further
      Assurances.

              	
                1

              
	 
      	
                (k)

              	
                Construction;
      Holder Status.

              	
                1

              

      

      

      

      
        	
                ANNEXES

              	 
      	 
      
	 
      	 
      	 
      
	
                Annex
      I

              	 
      	
                Form
      of Amended and Restated 8% Senior Secured Convertible Note due
      2008

              
	
                Annex
      II

              	 
      	
                Form
      of Amended and Restated Common Stock Purchase Warrant

              
	
                Annex
      III

              	 
      	
                Form
      of Amendment No. 1 to Patent and Trademark Security
    Agreement

              
	
                Annex
      IV

              	 
      	
                Form
      of Amendment No. 1 to Pledge and Security Agreement

              
	
                Annex
      V

              	 
      	
                Form
      of Amendment No. 1 to Lockbox Agreement

              
	
                Annex
      VI

              	 
      	
                Form
      of Certificate of Designation of Series A Senior Secured Convertible
      Preferred Stock

              
	
                Annex
      VII

              	 
      	
                Form
      of Press Release

              

      

      

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

       

      AMENDMENT
AGREEMENT

      

      THIS AMENDMENT AGREEMENT,
dated as of July 23, 2007 (this “Agreement”), by and between EMAGIN CORPORATION, INC., a Delaware corporation
with headquarters located at 10500 N.E. 8th Street, Suite 1400, Bellevue,
Washington 98004 (the “Company”), and [NAME OF HOLDER], a                                    
located at                  
(the “Holder”).

      

      W I T N E S S E T H:

      

      WHEREAS, the Holder is the
registered holder of one or more Notes (such capitalized term and all other
capitalized terms used herein have the respective meanings provided in this
Agreement) issued by the Company pursuant to the Note Purchase
Agreement;

      

      WHEREAS, the Holder and the
Company wish to amend and restate the Notes and the Warrants, upon the terms and
subject to the conditions of this Agreement; and

      

      WHEREAS, the Holder and the
Company wish to amend certain terms of the Note Purchase Agreement, Pledge and
Security Agreement, Patent and Trademark Agreement and Lockbox Agreement as
provided in this Agreement;

      

      NOW, THEREFORE, in
consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:

      

      1. Definitions.

      

      (a) As used in this Agreement, the terms
“Agreement”, “Company” and “Holder” shall have the respective meanings assigned
to such terms in the introductory paragraph of this Agreement. Capitalized terms
used in this Agreement and not defined in this Agreement shall have the
respective meanings provided in the Note Purchase Agreement.

      

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

      

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

      

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

       

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

      

      “Amended
Lockbox Agreement” means the Lockbox Agreement, as amended by Amendment No. 1 to
Lockbox Agreement.

      

      “Amended
Note” means the Amended and Restated 8% Senior Secured Convertible Note due 2008
of the Company in the form of Annex I to this
Agreement.

      

      “Amended
Patent and Trademark Security Agreement” means the Patent and Trademark Security
Agreement, as amended by Amendment No. 1 to Patent and Trademark Security
Agreement.

      

      “Amended
Pledge and Security Agreement” means the Pledge and Security Agreement, as
amended by Amendment No. 1 to Pledge and Security Agreement.

      

      “Amended
Security Agreements” means the Amended Pledge and Security Agreement, the
Amended Patent and Trademark Security Agreement and the Amended Lockbox
Agreement.

      

      “Amended
Warrant” means the Amended and Restated Common Stock Purchase Warrant in the
form of Annex II to this
Agreement.

      

      “Amendment
Effective Date” means 5 p.m., New York City time, on July 23, 2007, or such
other date as mutually agreed by the parties hereto.

      

      “Amendment
No. 1 to Lockbox Agreement” means the Amendment No. 1 to Lockbox Agreement by
and between the Company, the Lockbox Agent and the Collateral Agent in the form
of Annex V to this
Agreement.

      

       

      
        
          
          

        

        
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      “Amendment
No. 1 to Patent and Trademark Security Agreement” means the Amendment No. 1 to
Patent and Trademark Security Agreement by and between the Company and the
Collateral Agent in the form of Annex III to this
Agreement.

      

      “Amendment
No. 1 to Pledge and Security Agreement” means the Amendment No. 1 to Pledge and
Security Agreement by and between the Company and the Collateral Agent in the
form of Annex IV to this
Agreement.

      

      “Amendment
Transaction Documents” means the Note Purchase Agreement as amended by this
Agreement, this Agreement, the Amended Note, the Amended Warrant, the
Certificate Designations, the Amended Security Agreements and the other
agreements, instruments and documents contemplated hereby and
thereby.

      

      “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock in the form of Annex VI to this Agreement, as
the same is filed with the Secretary of State of the State of
Delaware.

      

      “Collateral
Agent” shall have the meaning provided or to be provided in each Amended
Security Agreement.

      

      “Effective
Time” shall have the meaning provided in Section 7.

      

      “Existing
Registration Statement” means the Company’s Registration Statement on Form S-3
(Registration No. 333-136748) ordered effective by the SEC on August 30,
2006.

      

      “Note
Purchase Agreement” means the Note Purchase Agreement (including the Annexes,
Schedules and Exhibits thereto), dated as of July 21, 2006, [as amended on March
28, 2007] [Add to
Stillwater Amendment Agreement only] (including the Annexes, Schedules
and Exhibits thereto) by and between the Company and the original holder of the
Note, including, without limitation, the Stillwater Note Purchase
Agreement.

      

      “OTCBB”
means the Over-The-Counter Bulletin Board.

      

      “Other
Amendment Agreements” shall have the meaning provided in Section
7(k).

      

      “Other
Amendment Transaction Documents” means the Other Note Purchase Agreement as
amended by the Other Amendment Agreements, the Other Amended Note, the Other
Amended Warrant, the Certificate Designations, the Amended Security
Agreements and the
other agreements, instruments and documents contemplated hereby and
thereby.

      

      “Other
Amended Notes” shall have the meaning provided in the Amended Note.

      

      “Other
Amended Warrants” shall have the meaning provided in the Amended
Note.

      

      “Preferred
Shares” means the shares of Series A Preferred Stock issued or issuable upon
conversion of up to 50% of the outstanding principal amount of the Amended
Notes.

      

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

       

      “SEC
Reports” means the
Company’s (1) Annual Report on Form 10-K for the fiscal year ended December 31,
2006 (2) Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 and
(3) Current Reports on Form 8-K filed with the SEC on May 16, 2007, May 23, 2007
and June 8, 2007.

      

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

      

      “Series A
Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock,
par value $0.001 per share, of the Company.

      

      “Transaction
Form 8-K” shall have the meaning provided in Section 6(b).

      

      “Underlying
Shares” means the shares of Common Stock issued or issuable upon conversion of
the Series A Preferred Stock.

      

      2. Amendments;
Exchange.

      

      (a) Amendments. 

      Upon the
terms and subject to the conditions of this Agreement, the Holder and the
Company hereby agree that:

      

      (1) At the Effective Time, the Note shall
be amended and restated to read in its entirety as set forth in the Amended Note
and have an outstanding principal amount equal to the principal amount of the
Note outstanding immediately prior to the Effective Time.

      

      
        	
                (2) At the Effective Time, the
      Warrant shall be amended to read in its entirety as set forth in the
      Amended Warrant.

              

      

      

      (3) At the Effective Time, the Pledge and
Security Agreement shall be amended to read in its entirety as set forth in the
Amended Pledge and Security Agreement.

      

      (4) At the Effective Time, the Patent and
Trademark Security Agreement shall be amended to read in its entirety as set
forth in the Amended Patent and Trademark Security
Agreement.

      

      (5) At the Effective Time, the Lockbox
Agreement shall be amended to read in its entirety as set forth in the Amended
Lockbox Agreement.

      

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

       

      (6) At and after the Effective Time, the
Amendment Effective Date, all references in the Transaction Documents to “Note”,
“Warrant”, “Pledge and Security Agreement”, “Patent and Trademark Agreement” and
“Lockbox Agreement”, as the case may be, shall be deemed references to the
Amended Note, the Amended Warrant, the Amended Pledge and Security Agreement,
the Amended Patent and Trademark Agreement and the Amended Lockbox Agreement, as
the case may be.

      

      (b) Exchange.

        At the Effective Time,
or as promptly as practicable thereafter, upon the terms and subject to the
conditions of this Agreement,

      

      (1) the Company shall issue and deliver to
the Holder (i) the Amended Note, duly executed by the Company, against surrender
of the Note to the Company; and (ii) the Amended Warrant, duly executed by the
Company, against surrender of the Warrant to the Company;
and

      

      (2) the Holder shall surrender to the
Company (i)the Note, against issuance and delivery by the Company to the Holder
of the Amended Note, duly executed by the Company; and (ii) the Warrant, against
issuance and delivery by the Company to the Holder of the Amended Warrant, duly
executed by the Company.

      

      3. Amendments
to Note Purchase Agreement.

       The Note Purchase
Agreement is hereby amended as follows:

      

      (a) Section 1(c) of the Note Purchase
Agreement is hereby amended by deleting the following terms “Lockbox Agreement”,
“Note”, “Patent and Trademark Security Agreement”, “Pledge and Security
Agreement”, “Shares”, “Trading Market” and “Warrant” and their
definitions.

      

      (b) Section 1(c) of the Note Purchase
Agreement is hereby amended by adding the following terms and definitions in
appropriate alphabetical order:

      

      “Amendment
Agreement” means the Amendment Agreement, dated as of July 23, 2007, by and
between the Company and the Buyer.

      

      “Amendment
Effective Date” shall have the meaning provided in the Amendment
Agreement.

      

      “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock as filed with the Secretary of State of the
State of Delaware.

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

       

       

      “Effective
Time” shall have the meaning provided in the Amendment Agreement.

      

      “Lockbox
Agreement” means the Lockbox Agreement by and between the Company and the
Lockbox Agent in the form attached as Annex V, and with respect to
any time at or after the Effective Time on the Amendment Effective Date, the
Lockbox Agreement as amended by Amendment No. 1 to the Lockbox Agreement by and
between the Company and the Lockbox Agent in the form attached as Annex V to the Amendment
Agreement.

      

      “Non-Registered
Shares” shall have the meaning provided in Section 8(a)(4).

      

      “Note”
means the 6% Senior Secured Convertible Note due 2007-2008 of the Company in the
form attached as Annex
I, and with respect to any time at or after the Effective Time on the
Amendment Effective Date, the Amended and Restated 8% Senior Secured Convertible
Note due 2008 as amended and restated pursuant to the Amendment Agreement in the
form attached as Annex I
to the Amendment Agreement.

      

      “Patent
and Trademark Security Agreement” means the Patent and Trademark Security
Agreement from the Company to the Collateral Agent in the form attached as Annex III, and with respect to
any time at or after the Effective Time on the Amendment Effective Date, the
Patent and Trademark Security Agreement as amended by Amendment No. 1 to the
Patent and Trademark Security Agreement from the Company to the Collateral Agent
in the form attached as Annex
III to the Amendment Agreement.

      

      “Pledge
and Security Agreement” means the Pledge and Security Agreement from the Company
to the Collateral Agent in the form attached as Annex IV, and with respect to
any time at or after the Effective Time on the Amendment Effective Date, the
Pledge and Security Agreement as amended by Amendment No. 1 to the Pledge and
Security Agreement from the Company to the Collateral Agent in the form attached
as Annex IV to the
Amendment Agreement.

      

      “Preferred
Shares” means the shares of Series A Preferred Stock issued or issuable pursuant
to the terms of the Notes.

      

      “Series A
Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock,
$0.001 par value, of the Company.

      

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

       

       

      “Shares”
means the Conversion Shares, the Warrant Shares, the Preferred Shares and the
Underlying Shares.

      

      “Trading
Market” means the AMEX, the Nasdaq, the Nasdaq Capital Market, the New York
Stock Exchange, Inc. or the Over-The-Counter Bulletin Board.

      

      “Underlying
Shares” means the shares of Common Stock issued or issuable upon conversion of
the Preferred Shares.

      

      “Warrant”
means the Common Stock Purchase Warrant in the form attached hereto as Annex II, and with respect to
any time after the Effective Time on the Amendment Effective Date, the Amended
and Restated Common Stock Purchase Warrant as amended and restated pursuant to
the Amendment Agreement in the form attached as Annex II to the Amendment
Agreement.

      

      (c) Section 8(a)(3) is hereby amended by
adding the following to the end thereof:

      

      Notwithstanding
anything contained herein to the contrary, in the event that the SEC limits the
amount of Registrable Securities that may be sold by selling security holders in
a particular Registration Statement, the Company may scale back from such
registration statement such number of Registrable Securities on behalf of all
the selling security holders on a pro-rata basis based on the total number of
Registrable Securities held by such selling security holders. In such event the
Company shall give the Holder prompt notice of the number of the Registrable
Securities excluded. Further, and in addition to the foregoing, the Company
will not be liable for payment of partial liquidated damages described in
Section 8(a)(4) of this Agreement for any delay in registration of the
Registrable Securities in the event that such delay is due to the fact that the
SEC has limited the amount of Registrable Securities that may be included and
sold by selling security holders in the Registration Statement pursuant to Rule
415 promulgated under the 1933 Act or any other basis. Finally, in the
event of any such delay, the Company shall use its best efforts to register such
excluded Registrable Securities as promptly as practicable, but in any event no
later than 30 days after the first opportunity that is permitted by the SEC to
register for resale the Registrable Securities that have been cut back from
being registered.

      

      (d) Section 8(a)(4) is hereby amended by
adding the following to the end thereof:

      

      Notwithstanding
anything to the contrary contained in this Section 8(a)(4), to the extent that
registration of any shares underlying the Notes, the Series A Preferred Stock or
the Warrants is prohibited (the “Non-Registered Shares”) as a result of rules,
regulations, positions or releases issued or actions taken by the SEC pursuant
to its authority with respect to Rule 415 and the Company has sought to register
at such time the maximum number of Registrable Securities permissible upon
consultation with the SEC, then the partial liquidated damages described in the
this Section 8(a)(4) shall not be applicable to such Non-Registered
Shares.

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

       

      4. Representations
and Warranties of the Company.

      The
Company hereby represents and warrants to, and covenants and agrees with, the
Holder that:

      

      (a) Organization
and Authority.

      The
Company and each of the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, and (i) each of the Company and the Subsidiaries has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as described in the SEC Reports and as currently
conducted, and (ii) the Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under the Amendment Transaction
Documents to be executed and delivered by the Company in connection herewith,
and to consummate the transactions contemplated hereby and thereby; and the
Company does not have any equity investment in any other Person other than (x)
the Subsidiaries listed in the SEC Reports and (y) Subsidiaries which do not,
individually or in the aggregate, have any material revenue, assets or
liabilities.

      

      (b) Qualifications.

      The
Company and each of the Subsidiaries are duly qualified to do business as
foreign corporations and are in good standing in all jurisdictions where such
qualification is necessary and where failure so to qualify could have a Material
Adverse Effect.

      

      (c) Amendment
Transaction Documents.

      The
Amendment Transaction Documents have been duly and validly authorized by the
Company; this Agreement has been duly executed and delivered by the Company and,
assuming due execution and delivery by the Holder, this Agreement is, and the
Amended Security Agreements will be, when duly executed and delivered by the
Company, and the Amended Note and Amended Warrant will be, when executed and
delivered by the Company, valid and binding obligations of the Company
enforceable in accordance with their respective terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws now or hereafter in
effect relating to or affecting creditors' rights generally and general
principles of equity, regardless of whether enforcement is considered in a
proceeding in equity or at law.

      

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

       

       

       (d) Concerning
the Shares and the Common Stock.

      The
Shares have been duly authorized and the Conversion Shares and the Preferred
Shares, if any, when issued upon conversion of the Amended Note, and the Warrant
Shares, when issued upon exercise of the Amended Warrant and the Underlying
Shares when issued upon conversion of the Preferred Shares, in each such case
will be duly and validly issued, fully paid and non-assessable and will not
subject the holder thereof to personal liability by reason of being such holder.
The Company has duly reserved 13,207,564 shares of Common Stock exclusively for
issuance upon conversion of the Amended Note and the Other Amended Notes or the
Preferred Shares, as the case may be, and exercise of the Amended Warrant and
the Other Amended Warrants, and such shares shall remain so reserved, and the
Company shall from time to time reserve such additional shares of Common Stock
as shall be required to be reserved pursuant to the Amended Note, the Other
Amended Notes, the Certificate of Designations, and the Amended Warrant, so long
as the Amended Note, the Other Amended Notes or the Amended Warrant are
outstanding. The Common Stock is trading on the OTCBB. The Company knows of no
reason that the Shares will not be eligible for quotation on the OTCBB. The
Company acknowledges that the Securities may be pledged in connection with a
bona fide margin account or other loan or financing arrangement secured by the
Securities and such pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and the Holder shall not be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to the Amendment Transaction Documents; provided, however, that in
order to make any sale, transfer or assignment of Securities in connection with
a foreclosure or realization on such pledge, the Holder or its pledgee shall
make such disposition in accordance with, or pursuant to a registration
statement or an exemption under, the 1933 Act.

      

      (e) Non-contravention.

      The
execution and delivery of the Amendment Transaction Documents by the Company and
the consummation by the Company of the issuance of the Securities and the other
transactions contemplated by the Amendment Transaction Documents do not and will
not, with or without the giving of notice or the lapse of time, or both, (i)
result in any violation of any provision of the certificate of incorporation or
by-laws of the Company or any subsidiary, (ii) conflict with or result in a
breach by the Company or any Subsidiary of any of the terms or provisions of, or
constitute a default under, or result in the modification of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
(other than pursuant to the Security Agreements) upon any of the properties or
assets of the Company or any Subsidiary pursuant to, any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any of their
respective properties or assets are bound or affected, in any such case which
would be reasonably likely to have a Material Adverse Effect, (iii) violate or
contravene any applicable law, rule or regulation or any applicable decree,
judgment or order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any Subsidiary or any of their respective properties or assets, in
any such case which could have a Material Adverse Effect, or (iv) have any
material adverse effect on any permit, certification, registration, approval,
consent, license or franchise necessary for the Company or any Subsidiary to own
or lease and operate any of its properties and to conduct any of its business or
the ability of the Company or any Subsidiary to make use thereof.

      

       

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

       

      (f) Approvals.

      No
authorization, approval or consent of, or filing with, any court, governmental
body, regulatory agency, self-regulatory organization, or stock exchange or
market or the stockholders of the Company is necessary to be obtained or made by
the Company in connection with the execution, delivery and performance of the
Amendment Transaction Documents and the consummation of the other transactions
contemplated by the Amendment Transaction Documents other than (1) such as have
been obtained and are in effect, (2) the requirement for the SEC to declare
effective any registration statement required to be filed pursuant to this
Agreement, (3) the filing of the Certificate of Designations with the Secretary
of State of the State of Delaware and (4) the filing of the Transaction
Form 8-K.

      

      (g) Absence
of Certain Proceedings.

      Except as
described in the SEC Reports, there is no action, suit, proceeding, inquiry or
investigation before or by the OTCBB, any court, public board or body pending
or, to the knowledge of the Company, threatened against or affecting the
Company, the Common Stock or any of the Subsidiary or any of the Company’s or
Subsidiary’s officers or directors in their capacity as such wherein an
unfavorable decision, ruling or finding would have a material adverse effect on
the business, properties, operations, financial condition or results of
operations of the Company or the transactions contemplated by the Amendment
Transaction Documents or which could adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of the other Amendment Transaction
Documents.

      

      (h) Information
Provided.

      The
information provided by or on behalf of the Company to the Holder in connection
with the transactions contemplated by this Agreement does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances in which
they were made, not misleading.

      

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

       

       

      (i) Absence
of Certain Changes.

      Except as
disclosed in the SEC Reports, since December 31, 2006, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company and the Subsidiaries taken as a whole.
Except as disclosed in the SEC Reports, since December 31, 2006, neither the
Company nor any Subsidiary has (i) declared or paid any dividends, (ii) sold any
assets, individually or in the aggregate, outside of the ordinary course of
business, (iii) had capital expenditures outside of the ordinary course of
business, (iv) engaged in any transaction with any Affiliate except as set forth
in the SEC Reports or (v) engaged in any other transaction outside of the
ordinary course of business. The Company has not taken any steps to seek
protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact that would reasonably
lead a creditor to do so. The Company is not as of the date hereof, after giving
effect to the transactions contemplated hereby to occur on the Amendment
Effective Date and the transactions contemplated by the Amendment Transaction
Documents and the Other Amendment Transaction Documents, Insolvent.

      

      (j) Dilutive
Effect.

        The Company
understands and acknowledges that the number of Shares issuable upon conversion
of the Note and the Other Notes and the Preferred Shares, as the case may be,
and upon exercise of the Warrant and the Other Warrants will be substantial and
may increase in certain circumstances. The Company further acknowledges that,
subject to the terms and conditions of the Amendment Transaction Documents, its
obligation to issue Shares upon conversion of the Note and the Preferred Shares,
as the case may be, and upon exercise of the Warrant in accordance with this
Agreement, the Note Purchase Agreement, the Note, the Certificate of
Designations and the Warrant is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

      

      (k) No
Undisclosed Events, Liabilities, Developments or
Circumstances.

      No event,
liability, development, circumstance or transaction has occurred or exists, with
respect to the Company or any Subsidiary or their respective business,
properties, operations, condition (financial or other), results of operations or
prospects, that would be required to be disclosed by the Company under
applicable securities laws (including pursuant to the anti-fraud provisions
thereof) on a registration statement on Form S-3 filed with the SEC relating to
an issuance and sale by the Company of its Common Stock and which has not been
publicly disclosed.

      

       

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

       

       

      (l) Absence
of Rights Agreement.

      The
Company has not adopted a shareholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change of
control in the Company.

      

      (m) Absence
of Brokers, Finders, Etc.

      No
broker, finder or similar Person is entitled to any commission, fee or other
compensation by reason of action taken by or on behalf of the Company in
connection with the transactions contemplated by this Agreement other than the
Placement Agent (whose commissions, fees and compensation shall be payable
solely by the Company in accordance with a written agreement between the Company
and the Placement Agent), and the Company shall pay, and indemnify and hold
harmless the Buyer from, any claim made against the Buyer by any Person for any
such commission, fee or other compensation.

      

      (n) SEC
Filings.

      The
Company has filed all required forms, reports and other documents with the SEC
since December 31, 2005. All of such forms, reports and other documents
complied, when filed, in all material respects, with all applicable requirements
of the 1933 Act and the 1934 Act.

      

      5. Representations
and Warranties of the Holder.

      The
Holder represents and warrants to, and covenants and agrees with, the Company as
follows:

      

      (a) Authorization.

      The
Holder has full power and authority to enter into this Agreement. This Agreement
constitutes such Investor’s legal, valid and binding obligation, enforceable
against such Investor in accordance with its terms except as the enforceability
hereof may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to or affecting creditors’ rights generally and general principles of equity,
regardless of whether enforcement is considered in a proceeding in equity or at
law.

      

      (b) Acquisition
Entirely for Own Account.

      The
Preferred Shares which may be acquired by the Holder upon conversion of the
Amended Notes, will be acquired for the Holder’s own account and not with a view
towards the public resale or distribution thereof within the meaning of the 1933
Act; and the Holder will acquire any Shares issued to the Holder prior to the
SEC Effective Date of a Registration Statement covering the resale of such
Shares by the Holder for its own account and not with a view towards the public
resale or distribution thereof within the meaning of the 1933 Act prior to such
SEC Effective Date; and the Holder has no intention of making any distribution,
within the meaning of the 1933 Act, of the Shares except in compliance with the
registration requirements of the 1933 Act or pursuant to an exemption
therefrom.

      

       

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

       

      (c) Accredited
Investor.

      The
Holder is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D under the 1933 Act.

      

      6. Certain
Covenants.

      

      (a) Press
Releases.

        Any press release or
other publicity concerning this Agreement or the transactions contemplated by
this Agreement shall be submitted to the Holder for comment at least one
Business Day prior to issuance, unless the release is required to be issued
within a shorter period of time pursuant to this Agreement or by law or pursuant
to the rules of the securities exchange or market which at the time constitutes
the principal market for the Common Stock.  The Company shall,
contemporaneously with the Effective Time on the Amendment Effective Date or as
promptly as possible thereafter on the Amendment Effective Date, issue a press
release, in the form of Annex
VII hereto, concerning the transactions contemplated hereby. The
Company's other press releases and other public information, to the extent
concerning the Amendment Transaction Documents, shall contain such information
as reasonably requested by the Holder and be reasonably approved by the Holder
prior to issuance.

      

      (b) Form
8-K; Limitation on Information and Holder Obligations.

      (1)
Within two Business Days after the Amendment Effective Date, the Company will
publicly report the transaction contemplated by this Agreement and the Other
Amendment Agreements entered into on or before the Amendment Effective Date by
filing with the SEC a Current Report on Form 8-K under the 1934 Act, which
report shall describe the material terms of the transactions contemplated hereby
and thereby and include copies of the forms of the Transaction Documents as
exhibits to such report (the “Transaction Form 8-K”). The Company acknowledges
and agrees that, upon the filing of the Transaction Form 8-K with the SEC, the
Holder shall not be in possession of any material nonpublic information received
from the Company, or, to its knowledge, from any Subsidiary or any of their
respective officers, directors, employees or agents.

      

      (2) The Company shall not provide, and
shall cause each Subsidiary and the respective officers, directors, employees
and agents of the Company and the Subsidiaries not to provide, the Holder any
material nonpublic information regarding the Company or any Subsidiary from and
after the date the Company files, or is required by this Agreement to file, the
Transaction Form 8-K with the SEC without the prior express written consent of
the Holder.

      

       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

       

      (c) SEC
Registration Matters.

      (1) The
Company shall, not later than August 31, 2007, file with the SEC a Registration
Statement covering the resale by the Holder of a number of shares of Common
Stock equal to 100% of the sum of (A) the number of Conversion Shares issuable
upon conversion of the Amended Notes and Underlying Shares issuable upon
conversion of the Preferred Shares, as the case may be, and one quarter-year of
accrued and unpaid interest and dividends thereon at the rate specified in the
Note or the Certificate of Designations, as the case may be, plus (B) the number of
Warrant Shares issuable upon exercise of the Amended Warrant (determined without
regard to any limitation on the number of shares of Common Stock issuable upon
such conversion or exercise) to the extent such number of shares are not
available for resale under the Existing Registration Statement (the “Additional
Registration Statement”). The Additional Registration Statement shall be
prepared, filed and otherwise treated for purposes of the Note Purchase
Agreement as a “Registration Statement” under and as defined in the Note
Purchase Agreement, as amended by this Agreement.

      

      (2) The Company shall, as promptly as
practicable, prepare and file with the SEC pursuant to Rule 424 under the 1933
Act a prospectus supplement or amended prospectus for the prospectus forming
part of the Existing Registration Statement that includes all information
relating to this Agreement and the transactions contemplated hereby that is
required to be disclosed in such prospectus.

      

      (d) Certificate
of Designations.

      The
Company shall, as promptly as practicable but in no event later than five
Business Days after the Amendment Effective Date, file the Certificate of
Designations with the Secretary of State of the State of Delaware and provide
confirmation of such filing to the Holder.

      

      (e) Certain
Waivers.

       The Holder and the
holders of the Other Notes have previously delivered to the Company certain
waivers with respect to certain Events of Default and Repurchase Events that may
otherwise have arisen by reason of the delisting of the Company’s Common Stock
from trading on the AMEX, the obligation to maintain certain Cash and Cash
Equivalent Balances under the Notes and the transfer of patent number 6,337,492
to Kodak Corporation. Although such previously granted waivers remain in full
force and effect, at the request of the Company, the Holder agrees to reconfirm
such waivers hereunder. In order to reconfirm such waivers, to the extent not
otherwise already waived, the Holder hereby waives:

      

      (1) any Event of Default or Repurchase
Event under the Notes or any of the other Transaction Documents that have arisen
or may arise by reason of the delisting of the Company’s Common Stock from
trading on the AMEX;

      

       

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

       

       

      (2) the accrual and payment of any partial
liquidated damages required to be paid by the Company to the Holder under
Section 8(a)(4) of the Note Purchase Agreement arising by reason of the
delisting of the Company’s Common Stock from trading on the
AMEX;

      

      (3) any Event of Default or Repurchase
Event under the Notes or any of the other Transaction Documents that have arisen
or may arise by reason of the Company’s failure to maintain Cash and Cash
Equivalents Balances of $600,000.00 under the Notes; and

      

      (4) any Event of Default or Repurchase
Event under the Notes or any of the other Transaction Documents that have arisen
or may arise by reason of the Company entering into that certain Royalty
Agreement with Kodak Corporation (“Kodak”), the transfer of patent number
6,337,492 related to Serially-connected organic light emitting diode stack
having conductors sandwiching each light emitting layer (the “Kodak Patent”),
the release of the Kodak Patent from the Collateral (as defined in the Security
Agreements) and the removal of the Lien (as defined in the Security Agreements)
on the Kodak Patent.

      

      (f) Certain
Acknowledgments.

       The Company acknowledges
that, for purposes of determining the holding period under Rule 144 under the
1933 Act (1) for the Amended Note, the holding period of the Amended Note shall
be tacked to the holding period of the Note, and (2) for the Amended Warrant,
the holding period of the Amended Warrant shall be tacked to the holding period
of the Warrant. The Company agrees not to take a position contrary thereto
unless the SEC or its staff by rule or interpretation changes its rules and
interpretations thereof in effect on the date of this Agreement or such rules or
interpretations are held invalid or incorrect by a court of competent
jurisdiction. Nothing in this Section 6(f) shall affect the requirement in
Section 5(a) of the Note Purchase Agreement for delivery of an opinion of
counsel as and when required thereby.

      

      7. Effectiveness.

      

      The
amendment of the Note and the Warrant pursuant to this Agreement shall only
become effective at the time (the “Effective Time”) on the Amendment Effective
Date when all of the following conditions are satisfied:

      

      (a) No legal action, suit or proceeding
shall be pending or threatened which seeks to restrain or prohibit the
transactions contemplated by this Agreement;

      

       

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

       

      (b) The representations and warranties of
the Company contained in this Agreement and the other Amendment Transaction
Documents shall be true and correct as of the date of this Agreement and as of
the Amendment Effective Date, as though made on and as of the Amendment
Effective Date (except for representations given as of a specific date, which
representations shall be true and correct as of such date), and on or before the
Amendment Effective Date the Company shall have performed all covenants and
agreements of the Company contained herein and in the other Amendment
Transaction Documents that are required to be performed by the Company on or
before the Amendment Effective Date;

      

      (c) No event which would constitute an
Event of Default under the Note or the Amended Note or which, with the giving of
notice or the passage of time, or both, would constitute such an Event of
Default, that has not been waived by the Holders in writing, shall have occurred
and be continuing; and no event which would constitute a Repurchase Event under
the Note or the Amended Note or which, with the giving of notice or passage of
time, or both, would constitute such a Repurchase Event, that has not been
waived by the Holders in writing, shall have occurred and be
continuing;

      

      (d) The Company shall have delivered to the
Holder a certificate, dated the Amendment Effective Date, duly executed by its
Chief Executive Officer to the effect set forth in subparagraphs (a), (b), and
(c) of this Section 7;

      

      (e) The Holder shall have received a
certificate, dated the Amendment Effective Date, of the Secretary of the Company
certifying (1) the Certificate of Incorporation and By-Laws of the Company as in
effect on such date, (2) all resolutions of the Board of Directors (and
committees thereof) of the Company relating to this Agreement and the
transactions contemplated hereby and (3) such other matters as reasonably
requested by the Holder;

      

      (f) All approvals of the Company’s Board of
Directors and Stockholders necessary for performance of the transactions
contemplated by this Agreement shall have been obtained;

      

      (g) The Collateral Agent shall have
received Acknowledgment and Consents, in the forms attached as Exhibit A to each
of Amendment No. 1 to Pledge and Security Agreement, Amendment No. 1 to Patent
and Trademark Security Agreement and Amendment No. 1 to Lockbox Agreement, from
each of the holders of Notes;

      

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

       

      (h) The Collateral Agent shall have
executed and delivered to the Company the Amended Pledge and Security Agreement
and a copy thereof duly executed and delivered by the Company, shall have been
furnished to the Holder;

      

      (i) The Collateral Agent shall have
executed and delivered to the Company the Amended Patent and Trademark Security
Agreement and a copy thereof duly executed and delivered by the Company, shall
have been furnished to the Holder;

      

      (j) The Lockbox Agent shall have executed
and delivered to the Company the Amended Lockbox Agreement and a copy thereof
duly executed and delivered by the Company shall have been furnished to the
Holder;

      

      (k) The Company and each holder of Notes
shall have executed and delivered, one to the other, an amendment agreement
substantially in the form of this Agreement (the “Other Amendment Agreements”);
and

      

      (l) The “Effective Time” under all of the
Other Amendment Agreements shall have occurred simultaneously with the Effective
Time under this Agreement.

      

      8. Confirmation
of Agreements; Entire Agreement.

      

      On and
after the Effective Time, each reference in the Note Purchase Agreement to “this
Agreement”, “hereof”, “herein”, “herewith”, “hereunder” and words of similar
import will, unless otherwise stated, be construed to refer to the Note Purchase
Agreement as amended by this Agreement. No reference to this Agreement need be
made in any instrument or document at any time referring to the Note Purchase
Agreement, a reference to the Note Purchase Agreement in any such instrument or
document to be deemed to be a reference to the Note Purchase Agreement as
amended by this Agreement. Additionally, except as amended by this Agreement,
the Amendment No. 1 to Pledge and Security Agreement, the Amendment No. 1 to
Patent and Trademark Security Agreement and the Amendment No. 1 to Lockbox
Agreement, the Transaction Documents shall remain in full force and effect in
accordance with their respective terms. This Agreement and the annexes attached
hereto set forth the entire agreement between the parties with respect to the
subject matter hereof. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Company or the Holders under the Transaction
Documents, nor constitute a waiver or amendment of any other provision of the
Transaction Documents or for any purpose except as expressly set forth
herein.

      

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

       

      9. Miscellaneous.

      

      (a) Governing
Law.

      This
Agreement shall be governed by and interpreted in accordance with the laws of
the State of New York.

      

      (b) Counterparts.

      This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument. An electronic or telephone line facsimile copy of this Agreement
bearing a signature on behalf of a party hereto shall be legal and binding on
such party.

      

      (c) Headings,
etc.

      The
headings, captions and footers of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.

      

      (d) Severability.

      If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.

      

      (e) Amendments.

        No
amendment, modification, waiver, discharge or termination of any provision of
this Agreement nor consent to any departure by the Holder or the Company
therefrom shall in any event be effective unless the same shall be in writing
and signed by the party to be charged with enforcement, and then shall be
effective only in the specific instance and for the purpose for which given. No
course of dealing between the parties hereto shall operate as an amendment of
this Agreement.

      

      (f) Waivers.

      Failure
of any party to exercise any right or remedy under this Agreement or otherwise,
or delay by a party in exercising such right or remedy, or any course of
dealings between the parties, shall not operate as a waiver thereof or an
amendment hereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or exercise of any other
right or power.

      

      (g) Notices.

      Any
notices required or permitted to be given under the terms of this Agreement
shall be delivered in accordance with the notice provisions of the Note Purchase
Agreement.

       

       

       

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

       

      (h) Certain
Expenses and Fees.

      The
Company shall be responsible for its expenses (including, without limitation,
the legal fees and expenses of its counsel), incurred by it in connection with
the negotiation and execution of, and closing under, and performance of, this
Agreement. Whether or not the Effective Time on the Amendment Effective Date
occurs, the Company shall be obligated to pay or reimburse the legal fees and
expenses and out-of-pocket due diligence expenses of AGMF, not in excess of
$40,000, in connection with the negotiation and execution of, and transactions
contemplated by, this Agreement.

      

      (i) Survival.

        The respective
representations, warranties, covenants, and agreements of the Holder and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the Amendment Effective
Date and the transactions contemplated hereby and shall remain in full force and
effect regardless of any investigation made by or on behalf of them or any
person controlling or advising any of them.

      

      (j) Further
Assurances.

      Each
party to this Agreement will perform any and all acts and execute any and all
documents as may be necessary and proper under the circumstances in order to
accomplish the intents and purposes of this Agreement and to carry out its
provisions.

      

      (k) Construction;
Holder Status.

        The language used in
this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent, and no rules of strict construction will be applied
against any party. The Holder is not acting as part of a “group” (as that term
is used in Section 13(d) of the 1934 Act) with any other Person who is a party
to any Note Purchase Agreement or Amendment Agreement, or who holds any Notes or
Warrants, in negotiating and entering into this Agreement or acquiring,
disposing of or voting any of the Shares. The Company hereby confirms that it
understands and agrees that the Holder is not acting as part of any such group.
If the Holder is other than AGMF, such Holder acknowledges and agrees that such
Holder is not relying on AGMF or AGMF’s legal counsel in making a decision to
enter into this Agreement or otherwise in connection with the Amendment
Transaction Documents, and such legal counsel are not acting as the Holder’s
legal counsel in connection therewith.

      

      [Signature
Pages Follow]

       

       

      

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

      IN WITNESS WHEREOF, the
parties have caused this Agreement to be duly executed by their respective
officers or other representatives thereunto duly authorized as of the date first
set forth above.

      
        	 
      	 
      	 
      
	 
      	
                EMAGIN
      CORPORATION

              
	 
      	 
      	 
      
	 
      	
                By:  

              	
                /s/ 

              
	 
      	
                 

                  
      

                Name:

                Title:

              
	 
      	 
      

      

      

      
        	 
      	 
      	 
      
	 
      	
                HOLDER

              
	 
      	 
      	 
      
	 
      	
                By:  

              	
                /s/ 

              
	 
      	
                
                  
      Name:

              
	 
      	
                Title:

              
	 
      	
                Address:

              
	 
      	
                Facsimile
      No.:

              
	 
      	 
      

      

       

       

    

     

    

    
      
        
        

      

      
        
          22

        

        
          

        

      

      
        
        

      

    

     

     

    
      
        Annex
I

      

       

      
        
          

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

          

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

          

          EMAGIN
CORPORATION

          

          AMENDED
AND RESTATED

          8%
SENIOR SECURED CONVERTIBLE NOTE DUE 2008

          

          
            	
                     No. ARN -                

                  	
                     $                          

                  
	
                     New York, New
      York

                  	 
      
	
                     July23, 2007

                  	 
      

          

          

          FOR VALUE RECEIVED, EMAGIN CORPORATION, a Delaware corporation
(hereinafter called the “Company”), hereby promises to pay to [NAME OF HOLDER] [ADDRESS], or
registered assigns (the “Holder”), or order, the sum of                              
($                   ),
on the Maturity Date, and to pay interest on the unpaid principal balance hereof
at the Applicable Rate from the Issuance Date, until the same becomes due and
payable, whether at maturity or upon acceleration or by repurchase in accordance
with the terms hereof or otherwise. Any amount, including, without limitation,
principal of or interest on this Note and the Repurchase Price, that is payable
under this Note that is not paid when due shall bear interest at the Default
Rate from the due date thereof until the same is paid (“Default Interest”).
Regular interest shall be payable in arrears on each Interest Payment Date,
commencing on September 1, 2007, on the principal amount outstanding on such
date. Regular interest on this Note shall be computed on the basis of a 360-day
year of 12 30-day months and actual days elapsed. No regular interest shall be
payable on an Interest Payment Date on any portion of the principal amount of
this Note which shall have been redeemed prior to such Interest Payment Date so
long as the Company shall have complied in full with its obligations with
respect to such redemption.

          

          [Missing Graphic Reference]

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

          

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

          

          This Note
amends and restates on the date hereof a 6% Senior Secured Convertible Note due
2007-2008 issued on the Issuance Date pursuant to the Note Purchase Agreement.
This Note is one of a duly authorized issue of the Company’s Amended and
Restated 8% Senior Secured Convertible Notes due 2008 limited to an aggregate
principal amount of $6,500,000.00 (excluding Amended and Restated 8% Senior
Secured Convertible Notes due 2008 issued in replacement of lost, stolen,
destroyed or mutilated notes or issued on transfer of such notes).

          

          The
following terms shall apply to this Note:

          

          

          ARTICLE
I

          

          DEFINITIONS

          

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

          

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

          

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

          

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

          

           

          
            
              
              

            

            
              1

              
                

              

            

            
              
              

            

          

           

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

          

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

          

          “Amendment
Agreement” means the Amendment Agreement, dated as of July 23, 2007, by and
between the Company and the original holder of the 6% Senior Secured Convertible
Note due 2007-2008 that was amended and restated by this Note or the Note’s
predecessor instrument.

          

          “AMEX”
means the American Stock Exchange, Inc.

          

          “Applicable
Rate” means 6 percent per annum, from the Issuance Date until July 21, 2007 and
8 percent per annum thereafter; provided, however, that if an Event of
Default shall have occurred, then the Applicable Rate shall be increased to 12
percent per annum during the period from the date of such Event of Default until
the date no Event of Default is continuing (or such lesser rate as shall be the
highest rate permitted by applicable law).

          

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

          

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

          

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

          

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

          

          “Certificate
of Designations” means the Certificate of Designations of the Series A Senior
Secured Convertible Preferred Stock as filed by the Company with the Secretary
of State of the State of Delaware.

          

           

          
            
              
              

            

            
              2

              
                

              

            

            
              
              

            

          

           

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

          “Conversion
Notice” means a
duly executed Notice of Conversion of Amended and Restated 8% Senior Secured
Convertible Note Due 2008 substantially in the form of Exhibit C to this
Note.

          

          “Conversion
Price” means $0.75
[$0.35 for
Stillwater Amended Note], subject to adjustment as provided in Section
6.3.

          

           

          
            
              
              

            

            
              3

              
                

              

            

            
              
              

            

          

           

          “Current
Fair Market Value” when used with respect to the Common Stock as of a specified
date means with respect to each share of Common Stock the average of the closing
prices of the Common Stock sold on all securities exchanges (including the
OTCBB, the NYSE, the AMEX, the Nasdaq and the Nasdaq Capital Market) on which
the Common Stock may at the time be listed, or, if there have been no sales on
any such exchange on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of regular trading such day, or, if on
such day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City
time, or, if on such day the Common Stock is not quoted in the NASDAQ System,
the average of the highest bid and lowest asked price on such day in the
domestic over-the-counter market as reported by the Pink Sheets, LLC, or any
similar successor organization, in each such case averaged over a period of five
Trading Days consisting of the day as of which the Current Fair Market Value of
Common Stock is being determined (or if such day is not a Trading Day, the
Trading Day next preceding such day) and the four consecutive Trading Days prior
to such day. If on the date for which Current Fair Market Value is to be
determined the Common Stock is not listed on any securities exchange or quoted
in the NASDAQ System or the over-the-counter market, the Current Fair Market
Value of Common Stock shall be the greater of (i) the highest price per share of
Common Stock at which the Company has sold shares of Common Stock or Common
Stock Equivalents during the 365 days prior to the date of such determination
and (ii) the highest price per share which the Company could then obtain from a
willing buyer (not an employee or director of the Company at the time of
determination) for shares of Common Stock sold by the Company, from authorized
but unissued shares, as determined in good faith by the Board of
Directors.

          

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

          

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

          

           

          
            
              
              

            

            
              4

              
                

              

            

            
              
              

            

          

           

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

          

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

          

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

          

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

          

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

          

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

           

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

          

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

          

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

          

          “Fundamental
Change” means

          

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

           

          
            
              
              

            

            
              5

              
                

              

            

            
              
              

            

          

           

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

          

          (c) The acquisition by a Person or entity
or group of Persons or entities acting in concert as a partnership, limited
partnership, syndicate or group, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise, of beneficial
ownership of securities of the Company representing 50% or more of the combined
voting power of the outstanding voting securities of the Company ordinarily (and
apart from rights accruing in special circumstances) having the right to vote in
the election of directors ;provided, however,
that (1) an acquisition by
a group of unrelated and unaffiliated Persons comprised solely of newly issued
equity securities of the Company which issuance results in the pro rata dilution
of the equity interests of the Persons who are holders of Common Stock
immediately prior to such acquisition and for which no consideration is paid to
or for the benefit of any holders of Common Stock or the Affiliates of such
holders of Common Stock and (2) the issuance of shares of Common Stock upon
conversion, exercise or exchange of Common Stock Equivalents outstanding as of
the date hereof (including shares issuable upon conversion of this Note and the
Other Notes or exercise of the Warrants and the Other Warrants) in accordance
with the terms of such Common Stock Equivalents in effect on the date hereof,
shall not constitute a Fundamental Change.

          

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

          

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

          

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

          

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

          

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

           

          
            
              
              

            

            
              6

              
                

              

            

            
              
              

            

          

           

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

          

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

          

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

          

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

          

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

          

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

          

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

           

          
            
              
              

            

            
              7

              
                

              

            

            
              
              

            

          

           

          “Issuance
Date” means the date the predecessor instrument to this Note was first issued to
the original Holder of this Note.

          

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

          

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

          

          “Lockbox
Agreement” means that certain Lockbox Agreement, dated as of July 21, 2006, by
and between the Company, the Lockbox Agent and the Collateral Agent as amended
by Amendment No. 1 to Lockbox Agreement, dated as of July 23, 2007, by and
between the Company, the Lockbox Agent and the Collateral Agent.

          

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

          

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

          

          “Maturity
Date” means December 21, 2008.

          

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

          

          “Nasdaq”
means the Nasdaq Global Market.

          

          “Newly
Issued Shares” shall have the meaning provided in Section 6.3(f).

          

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

          

           

          
            
              
              

            

            
              8

              
                

              

            

            
              
              

            

          

           

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

          

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

          

          “Note
Purchase Agreement” means the Note Purchase Agreement (including the Annexes,
Schedules and Exhibits thereto), dated as of July 21, 2006, [as amended on March
28, 2007] [Added to
Stillwater Amended Note only] by and between the Company and the original
Holder of this Note or its predecessor instrument, as amended by the Amendment
Agreement.

          

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

          

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

          

          “OTCBB”
means the Over-The-Counter Bulletin Board.

          

          “Other
Note Purchase Agreements” means the several Note Purchase Agreements (including
the Annexes, Schedules and Exhibits thereto), dated as of July 21, 2006, as
amended, by and between the Company and the respective original holders of the
Other Notes or their predecessor instruments.

          

          “Other
Notes” means the several Amended and Restated 8% Senior Secured Convertible
Notes due 2008 issued by the Company upon amendment and restatement of the
Company’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued by
the Company pursuant to the Other Note Purchase Agreements and any or all such
instruments issued upon transfer or split-up thereof.

          

          “Other
Warrants” means the Amended and Restated Common Stock Purchase Warrants issued
by the Company upon amendment and restatement of the Common Stock Purchase
Warrants issued to the original holders of the Other Notes or their respective
predecessor instruments.

          

          “Patent
and Trademark Security Agreement” means the Patent and Trademark Security
Agreement, dated as of July 21, 2006, by and between the Company and the
Collateral Agent, as amended by Amendment No. 1 to Patent and Trademark Security
Agreement, dated as of July 23, 2007, by and between the Company and the
Collateral Agent.

          

          “Pledge
and Security Agreement” means the Pledge and Security Agreement, dated as of
July 21, 2006, by and between the Company and the Collateral Agent, as amended
by Amendment No. 1 to Pledge and Security Agreement, dated as of July 23, 2007,
by and between the Company and the Collateral Agent.

          

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

           

           

           

          
            
              
              

            

            
              9

              
                

              

            

            
              
              

            

          

          
“Permitted
Indebtedness” means

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

           

           

          
 

          
            
              
              

            

            
              10

              
                

              

            

            
              
              

            

          

           

          “Permitted
Liens” means:

          

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

          

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

          

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

          

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

          

          (e) Liens for taxes or assessments or
governmental charges or levies on its property if such taxes or assessments or
charges or levies shall not at the time be due and payable or if the amount,
applicability, or validity of any such tax, assessment, charge or levy shall
currently be contested in good faith by appropriate proceedings or necessary
preliminary steps are being taken to contest, compromise or settle the amount
thereof or to determine the applicability or validity thereof and if the Company
or such Subsidiary, as the case may be, shall have set aside on its books
reserves (segregated to the extent required by sound accounting practice) deemed
by it adequate with respect thereto; deposits or pledges to secure payment of
worker's compensation, unemployment insurance, old age pensions or other social
security; deposits or pledges to secure performance of bids, tenders, contracts
(other than contracts for the payment of money borrowed or credit extended),
leases, public or statutory obligations, surety or appeal bonds, or other
deposits or pledges for purposes of like general nature in the ordinary course
of business; mechanics', carriers', workers', repairmen's or other like Liens
arising in the ordinary course of business securing obligations which are not
overdue for a period of 60 days, or which are in good faith being contested or
litigated, or deposits to obtain the release of such Liens; Liens created by or
resulting from any litigation or legal proceedings or proceedings being
contested in good faith by appropriate proceedings, provided any execution
levied thereon shall be stayed; leases made, or existing on property acquired,
in the ordinary course of business; landlords' Liens under leases to which the
Company or any Subsidiary is a party; and zoning restrictions, easements,
licenses or restrictions on the use of real property or minor irregularities in
title thereto; provided that all such Liens described in this subsection (d) do
not, in the aggregate, materially impair the use of such property in the
operations of the business of the Company or any Subsidiary or the value of such
property for the purpose of such business; and

           

          
            
              
              

            

            
              11

              
                

              

            

            
              
              

            

          

           

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

          

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

          

          “Preferred
Share Conversion Notice” means a duly executed
Notice of Conversion into Shares of Series A Senior Secured Convertible
Preferred Stock under Section 6.8 of Amended and Restated 8% Senior Secured
Convertible Note Due 2008 substantially in the form of Exhibit D to this
Note.

          

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

          

          “Qualifying
Financing” means a single financing or series of related financings of Common
Stock or Common Stock Equivalents for which the aggregate cash proceeds received
by the Company are at least $2,500,000.00.

          

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

          

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

          

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

           

          
            
              
              

            

            
              12

              
                

              

            

            
              
              

            

          

           

           

           

          (a) The Common Stock ceases to be traded on
the OTCBB and is not listed for trading on the Nasdaq, the Nasdaq Capital
Market, the NYSE, the Pink Sheets, LLC or any similar
organization;

          

          (b) Any Fundamental
Change;

          

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

          

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

          

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

          

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

          

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

          

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

           

          
            
              
              

            

            
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          “SEC”
means the Securities and Exchange Commission.

          

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

          

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

          

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

          

          “Series A
Preferred Stock” means the shares of Series A Senior Secured Convertible
Preferred Stock, par value $0.001 per share, of the Company.

          

          “Series A
Conversion Price” means the Stated Value (as defined in the Certificate of
Designations) of a share of the Series A Preferred Stock, initially
$1,000.

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

           

          
            
              
              

            

            
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          “Warrants”
means the Amended and Restated Common Stock Purchase Warrants of the Company
issued to the original Holder of this Note or its predecessor instrument upon
amendment and restatement of the Common Stock Purchase Warrant originally issued
pursuant to the Note Purchase Agreement or any such instrument issued upon
transfer or split up thereof.

          

          

          ARTICLE
II

          

          NO
REDEMPTION AT THE OPTION

          OF
THE COMPANY

          

          

          2.1 No
Prepayment, Redemption.
This Note may not be prepaid, redeemed or repurchased at the option of the
Company prior to the Maturity Date without the consent of the Majority Holders.
Notwithstanding the foregoing, the Company shall not repurchase or otherwise
acquire any of the Other Notes unless the Company offers simultaneously to
redeem, repurchase or otherwise acquire a pro rata portion of this Note for cash
at the same price per unit of outstanding principal amount as the Other Note or
Other Notes.

          

          

          ARTICLE
III

          

          CERTAIN
COVENANTS

          

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

          

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

          

          3.2 No
Fundamental Change Without Consent. The Company shall not take any action
or engage in any transaction, or enter into any agreement, arrangement or
understanding to take any action or engage in any transaction, which would
constitute a Fundamental Change.

          

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

          

           

          
            
              
              

            

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

           

          
            
              
              

            

            
              16

              
                

              

            

            
              
              

            

          

           

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

          

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

          

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

           

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

          

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

          

           

          
            
              
              

            

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

          

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

          

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

          

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

          

           

          
            
              
              

            

            
              18

              
                

              

            

            
              
              

            

          

           

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

          

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

          

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

           

          
            
              
              

            

            
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          ARTICLE
IV

          

          EVENTS
OF DEFAULT

          

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

          

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

          

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

          

          (c) Breach
of Covenant. The Company
(1) fails to comply with Sections 3.1, 3.2, 3.8, 3.9, 3.12, 3.13, 3.15, 3.16 or
3.17(a) (2) fails to comply in any material respect with any provision of
Article III of this Note (other than Sections 3.1, 3.2, 3.8, 3.9, 3.12, 3.13,
3.15, 3.16 or 3.17(a)) or breaches any other material covenant or other material
term or condition of this Note or any of the other Transaction Documents (other
than as specifically provided in clauses (a), (b) or (c)(1) of this Section
4.1), and in the case of this clause (2) of this Section 4.1(c) only, such
breach continues for a period of ten days after written notice thereof to the
Company from the Holder, provided, however,
that, it shall not be
deemed an Event of Default pursuant to this Section 4.1(c) if the Company
breaches the covenants set forth in Sections 4(c) or 4(o) of the Note Purchase
Agreement or the Other Note Purchase Agreements in the event that the Common
Stock ceases to be listed on any of Nasdaq Capital Market, Nasdaq, the NYSE or
the AMEX; or

          

           

          
            
              
              

            

            
              20

              
                

              

            

            
              
              

            

          

           

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

          

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

          

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

          

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

          

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

          

           

          
            
              
              

            

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

          

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

          

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

          

          

          ARTICLE
V

          

          REPURCHASE
UPON A REPURCHASE EVENT

          

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

          

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

          

           

          
            
              
              

            

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

          

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

          

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

          

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

          

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

           

          
            
              
              

            

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

           

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

           

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

          

          ARTICLE
VI

          

          CONVERSION

          

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

           

          
            
              
              

            

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

          

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

          

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

          

          (d) A Conversion Notice shall be deemed for
all purposes to be in proper form absent timely notice from the Company to the
Holder of manifest error therein. The Company shall notify the Holder of any
claim by the Company of manifest error in a Conversion Notice within two Trading
Days after the Holder gives such Conversion Notice (which notice from the
Company shall specify all defects in the Conversion Notice) and no such claim of
error shall limit or delay performance of the Company's obligation to issue upon
such conversion the number of shares of Common Stock which are not in dispute.
Time shall be of the essence in the giving of any such notice by the Company.
Any Conversion Notice containing any such defect shall nonetheless be effective
on the date given if the Holder promptly undertakes to correct all such defects.
The Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of shares of Common Stock
or other securities or property on conversion of this Note in a name other than
that of the Holder, and the Company shall not be required to issue or deliver
any such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Company the full
amount of any such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for the
amount of any withholding tax payable in connection with any conversion of this
Note.

           

          
            
              
              

            

            
              25

              
                

              

            

            
              
              

            

          

           

           

          (e) (1) If the Holder shall have given a
Conversion Notice in accordance with the terms of this Note, the Company's
obligation to issue and deliver the shares of Common Stock upon such conversion
shall be absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any person or any action
to enforce the same, any failure or delay in the enforcement of any other
obligation of the Company to the Holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with such conversion; provided, however,
that nothing herein shall
limit or prejudice the right of the Company to pursue any such claim in any
other manner permitted by applicable law. The occurrence of an event which
requires an adjustment of the Conversion Price as contemplated by Section 6.3
shall in no way restrict or delay the right of the Holder to receive
certificates for Common Stock upon conversion of this Note and the Company shall
use its best efforts to implement such adjustment on terms reasonably acceptable
to the Holder within two Trading Days of such occurrence.

          

          (2) If in any case the Company shall fail
to issue and deliver the shares of Common Stock to the Holder in connection with
a particular conversion of this Note within five Trading Days after the Holder
gives the Conversion Notice for such conversion, in addition to any other
liabilities the Company may have hereunder and under applicable law (A) the
Company shall pay or reimburse the Holder on demand for all out-of-pocket
expenses, including, without limitation, reasonable fees and expenses of legal
counsel, incurred by the Holder as a result of such failure, (B) if as a result
of such failure the Holder shall suffer any direct damages or liabilities from
such failure (including, without limitation, margin interest and the cost of
purchasing securities to cover a sale (whether by the Holder or the Holder's
securities broker) or borrowing of shares of Common Stock by the Holder for
purposes of settling any trade involving a sale of shares of Common Stock made
by the Holder during the period beginning on the Issuance Date and ending on the
date the Company delivers or causes to be delivered to the Holder such shares of
Common Stock), then the Company shall upon demand of the Holder pay to the
Holder an amount equal to the actual direct, out-of-pocket damages and
liabilities suffered by the Holder by reason thereof which the Holder documents
to the reasonable satisfaction of the Company, and (C) the Holder may by written
notice (which may be given by mail, courier, personal service or telephone line
facsimile transmission), given at any time prior to delivery to the Holder of
the shares of Common Stock issuable in connection with such exercise of the
Holder's conversion right, rescind such exercise and the Conversion Notice
relating thereto, in which case the Holder shall thereafter be entitled to
convert that portion of this Note as to which such exercise is so rescinded and
to exercise its other rights and remedies with respect to such failure by the
Company. Notwithstanding the foregoing the Company shall not be liable to the
Holder under clause (B) of the immediately preceding sentence to the extent the
failure of the Company to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Company (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, or any
similar event outside the control of the Transfer Agent or the bankruptcy,
liquidation or reorganization of the Transfer Agent under any bankruptcy,
insolvency or other similar law). In the case of the Company’s failure to issue
and deliver or cause to be delivered the shares of Common Stock to the Holder
within three Trading Days of a particular conversion of the Note, the amount
payable by the Company pursuant to clause (B) of this Section 6.2(e)(2) with
respect to such conversion shall be reduced by the amount of payments previously
paid by the Company to the Holder pursuant to Section 8(a)(4) of the Purchase
Agreement with respect to such conversion. The Holder shall notify the Company
in writing (or by telephone conversation, confirmed in writing) as promptly as
practicable following the third Trading Day after the Holder gives a Conversion
Notice if the Holder becomes aware that such shares of Common Stock so issuable
have not been received as provided herein, but any failure so to give such
notice shall not affect the Holder's rights under this Note or otherwise. If the
Holder shall have exercised the conversion right in any particular instance and
either (1) the Company shall notify the Holder on or after the date the Holder
gives such Conversion Notice that the shares of Common Stock issuable upon such
conversion might not be delivered within three Trading Days after the date the
Holder gives such Conversion Notice or (2) the Holder learns after the date
which is three Trading Days after the date the Holder gives such Conversion
Notice that the Holder has not received such shares of Common Stock, then,
without releasing the Company of its obligations with respect thereto, from and
after the Trading Day next succeeding the earlier of the events described in the
preceding clauses (1) and (2) of this sentence the Holder shall make reasonable
efforts not to sell shares of Common Stock in anticipation of receipt of such
shares of Common Stock in a manner which is likely to increase materially the
liability of the Company under clause (B) of the first sentence of this Section
6.2(e)(2).

          

           

          
            
              
              

            

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

          

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

          

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

          

           

          
            
              
              

            

            
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          (b) Weighted
Adjustments for Certain Issuances of Rights or Warrants. In case the Company shall on or after
the Issuance Date issue rights or warrants (other than any rights or warrants
referred to in Section 6.3(d)) to all holders of its outstanding shares of
Common Stock entitling them (for a period expiring within 45 days after the date
fixed for the determination of stockholders entitled to receive such rights or
warrants) to subscribe for or purchase shares of Common Stock at a price per
share less than the Current Market Price on the Record Date fixed for the
determination of stockholders entitled to receive such rights or warrants, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect at the opening of
business on the date after such Record Date by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the Record Date plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at such
Current Market Price, and the denominator shall be the number of shares of
Common Stock outstanding on the close of business on the Record Date plus the
total number of additional shares of Common Stock so offered for subscription or
purchase. Such adjustment shall become effective immediately after the opening
of business on the day following the Record Date fixed for determination of
stockholders entitled to receive such rights or warrants. To the extent that
shares of Common Stock are not delivered pursuant to such rights or warrants,
upon the expiration or termination of such rights or warrants, the Conversion
Price shall be readjusted to the Conversion Price which would then be in effect
had the adjustments made upon the issuance of such rights or warrants been made
on the basis of delivery of only the number of shares of Common Stock actually
delivered. In the event that such rights or warrants are not so issued, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such date fixed for the determination of stockholders
entitled to receive such rights or warrants had not been fixed. In determining
whether any rights or warrants entitle the holder to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received for such rights or
warrants, the value of such consideration, if other than cash, to be determined
by the Board of Directors.

          

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

          

           

          
            
              
              

            

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

          

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

           

          
            
              
              

            

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

          

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

           

          
            
              
              

            

            
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          (f) Adjustments
for Certain Issuances of Newly Issued Shares. (1) In case at any time on or after
the Issuance Date the Company issues shares of Common Stock or Common Stock
Equivalents (collectively, the “Newly Issued Shares”) at a price per share at
which the Company sells such shares of Common Stock or the price per share at
which the holders of such Common Stock Equivalents are entitled to acquire
shares of Common Stock upon conversion or exercise thereof which is less than
the Conversion Price in effect at the time of such issuance, then following such
issuance the Conversion Price shall be reduced to the lowest price per share at
which such shares of Common Stock are issued or at which such Common Stock
Equivalents may be exercised, if the same is lower than the Conversion Price in
effect immediately prior to such issuance.

          

          (2) Notwithstanding the foregoing, no
adjustment shall be made under this Section 6.3(f) by reason
of:

          

          (A) the issuance by the Company of shares
of Common Stock pro rata to all holders of the Common Stock so long as (i) any
adjustment required by Section 6.3(a) is made and (ii) the Company shall have
given notice thereof to the Holder pursuant to Section 6.6;

          

          (B) the issuance by the Company of the
Notes, the Other Notes, the Warrants or the Other Warrants or the issuance by
the Company of shares of Common Stock upon conversion of this Note or the Other
Notes or upon exercise of the Warrants or the Other Warrants in accordance with
the terms hereof and thereof;

          

          (C) the issuance by the Company of shares
of Series A Preferred Stock upon conversion of the Notes or Other Notes or
shares of Common Stock upon conversion of the Series A Preferred Stock in
accordance with the terms thereof;

          

          (D) the issuance by the Company of Newly
Issued Shares upon grant or exercise of options for employees, directors and
consultants under the 2003 Stock Option Plan, 2004 Non-Employee Stock
Compensation Plan and the 2005 Employee Stock Purchase Plan or any other stock
compensation plan that has been duly adopted by the Board of Directors and duly
approved by the Company’s stockholders;

          

          (E) the issuance by the Company of Newly
Issued Shares upon conversion or exercise of Common Stock Equivalents that are
outstanding on the Issuance Date in accordance with the sum of such Common Stock
Equivalents in effect on the Issuance Date; or

           

          
            
              
              

            

            
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          (F) the issuance by the Company of Newly
Issued Shares in connection with a strategic alliance, collaboration, joint
venture, partnership or similar arrangement of the Company with another Person
which strategic alliance, collaboration, joint venture, partnership or similar
arrangement relates to the Company’s business as conducted immediately prior
thereto and which Person is engaged in a business similar or related to the
business of the Company so long as (x) the price per Newly Issued Share is not
less than 85 percent of the Current Fair Market Value of the Common Stock on the
date of issuance of such Newly Issued Shares and (y) the consideration other
than cash which the Company receives in connection with such strategic alliance,
collaboration, joint venture, partnership or similar arrangement has a value, as
determined by the Board of Directors in its reasonable judgment and set forth in
a Board Resolution, at least equal to the amount by which (i) the product of the
Newly Issued Shares so issued times the Current Fair Market Value of the
Common Stock on the date such Newly issued Shares are issued exceeds (ii) the
aggregate cash consideration received by the Company for such Newly Issued
Shares at the time of issuance thereof and (z) such issuance has been duly
approved by the Board of Directors as set forth in a Board
Resolution.

          

          (g) Adjustment
in Connection Sales by a Designated Person. (1) If at any time on or after the
Issuance Date any Designated Person, directly or indirectly, sells, transfers or
disposes of shares of Common Stock or Common Stock Equivalents other than a
Permitted Designated Person Sale and on the Measurement Date for such sale,
transfer or disposition the Conversion Price in effect on such Measurement Date
is greater than the Computed Market Price on such Measurement Date, then,
subject to the next succeeding sentence, the Conversion Price shall be reduced
to such Computed Market Price, such adjustment to become effective immediately
after the opening of business on the day following the Measurement
Date.

          

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

          

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

          

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

           

          
            
              
              

            

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

           

          
            
              
              

            

            
              33

              
                

              

            

            
              
              

            

          

           

           

          (x) the Conversion Price of this Note
shall, upon such consolidation, merger, statutory exchange, combination, sale or
conveyance, thereafter be the lower of (1) the Conversion Price then in effect
and (2) the price paid or deemed to have been paid for one share of Common Stock
in such consolidation, merger, statutory exchange, combination, sale or
conveyance (subject to further adjustments which shall be as nearly equivalent
as may be practicable to the adjustments provided for in this
Article),

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

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

          

           

          
            
              
              

            

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

          

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

          

           

          
            
              
              

            

            
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          6.8 Series
A Preferred Conversion Right. Notwithstanding anything to the
contrary contained herein, in addition to the conversion right provided in
Section 6.1, at any time prior to the earlier of (i) the close of business on
the Maturity Date or (ii) the consummation of a Qualifying Financing, up to 50%
of the outstanding principal amount of this Note together with any accrued and
unpaid interest on such portion of this Note unpaid up to the date of
conversion, may at the option of the Holder, be converted into shares of Series
A Preferred Stock at the Series A Conversion Price. The number of shares of
Series A Preferred Stock that the Holder shall be entitled to receive on any
such conversion of this Note shall be the quotient obtained by dividing (x) the
sum of (1) the principal amount of the portion of this Note being converted plus
(2) accrued and unpaid interest on such principal amount to the date of
conversion, computed at the Applicable Rate, to the date of such conversion by
(y) the Series A Conversion Price in effect on the date of such conversion. In
order for the Holder to convert such portion of this Note into shares of Series
A Preferred Stock and to thereby be entitled to shares of Series A Preferred
Stock the Holder shall give a Preferred Share Conversion Notice (or such other
notice which is acceptable to the Company) to the Company stating therein the
principal amount of this Note to be converted. A Preferred Share Conversion
Notice may be given by telephone line facsimile transmission to the numbers set
forth on the form of Preferred Share Conversion Notice. to the Company The
Company shall, promptly thereafter, but in no event later than three Trading
Days issue and deliver to the Holder at the address specified by the Holder, a
certificate for the shares of Series A Preferred Stock to which the Holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date the Company receives
notice of such conversion as provided above, and the Person entitled to receive
the shares of Series A Preferred Stock issuable upon such conversion shall be
treated for all purposes as the record holder of such shares of Series A
Preferred Stock as of such date. The Holder shall not be required to deliver the
original Note in order to effect a conversion hereunder. Execution and delivery
of the Preferred Share Conversion Notice shall have the same effect as
cancellation of the original Note and issuance of a new Note representing the
remaining outstanding principal amount. Upon surrender of this Note following
one or more partial conversions, the Company shall promptly deliver to the
Holder a new Note representing the remaining outstanding principal
amount.

          

          ARTICLE
VII

          

          MISCELLANEOUS

          

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

          

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

          

           

          
            
              
              

            

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

          

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

          

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

          

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

          

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

          

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

          

           

          
            
              
              

            

            
              37

              
                

              

            

            
              
              

            

          

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

          

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

          

          7.10 Payment
of Note on Repurchase; Deposit of Repurchase Price, Etc. (a) If this Note or any portion of this
Note is to be repurchased as provided in Sections 5.1 and 5.2 and any notice
required in connection therewith shall have been given as provided therein and
the Company shall have otherwise complied with the requirements of this Note
with respect thereto, then this Note or the portion of this Note to be so
repurchased and with respect to which any such notice has been given shall
become due and payable on the date stated in such notice at the Repurchase
Price. On and after the repurchase date so stated in such notice, provided that
the Company shall have deposited with an Eligible Bank on or prior to such
repurchase date, an amount in cash sufficient to pay the Repurchase Price,
interest on this Note or the portion of this Note to be so repurchased shall
cease to accrue, and this Note or such portion hereof shall be deemed not to be
outstanding and shall not be entitled to any benefit with respect to principal
of or interest on the portion to be so repurchased except to receive payment of
the Repurchase Price. On presentation and surrender of this Note or such portion
hereof, this Note or the specified portion hereof shall be paid and repurchased
at the Repurchase Price. If a portion of this Note is to be repurchased, upon
surrender of this Note to the Company in accordance with the terms hereof, the
Company shall execute and deliver to the Holder without service charge, a new
Note or Notes, having the same date hereof and containing identical terms and
conditions, in such denomination or denominations as requested by the Holder in
aggregate principal amount equal to, and in exchange for, the unrepurchased
portion of the principal amount of this Note so surrendered.

          

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

          

           

          
            
              
              

            

            
              38

              
                

              

            

            
              
              

            

          

           

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

          

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

          

          

          [Remainder
of Page Intentionally Left Blank]

          

          

          
            
              
              

            

            
              39

              
                

              

            

            
              
              

            

          

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

           

          
            	 
      	 
      	 
      
	 
      	
                    EMAGIN
      CORPORATION

                  
	 
      	 
      	 
      
	 
      	
                    By:  

                  	
                    /s/ 

                  
	 
      	
                    
                      
      

                    Name:

                    Title:

                  
	 
      	 
      

          

          

          
            
              
              

            

            
              40

              
                

              

            

            
              
              

            

          

           

          ASSIGNMENT

          

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

          

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

          

          
            	 
      	
                    [

                  	
                    ]

                  	
                    To
      the Company or a subsidiary thereof;
or

                  

          

          

          
            	 
      	
                    [

                  	
                    ]

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

                  

          

          

          
            	 
      	
                    [

                  	
                    ]

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

                  

          

          

          
            	 
      	
                    [

                  	
                    ]

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

                  

          

          

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

          

          
            	
                    [ ] The transferee is an Affiliate of
      the Company.

                  

          

          

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

          

          

          
            	
                    Dated:

                  	 
      	
                    NAME:

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                    Signature(s)

                  

          

           

          

          
            
              
              

            

            
              41

              
                

              

            

            
              
              

            

          

           

          Exhibit
A

          

          

          COMPANY
NOTICE

          (Section 5.2(a)
of Amended and Restated 8% Senior Secured Convertible Note due
2008)

          

          TO:                        
    

          (Name of
Holder)

          

          

          (1) A Repurchase Event described in the
Amended and Restated 8% Senior Secured Convertible Note due 2008 (the “Note”) of
eMagin Corporation, a Delaware corporation (the “Company”), occurred on
                    ,       . As a result of such Repurchase Event,
the Holder is entitled to exercise its repurchase rights pursuant to
Section 5.2 of the Note.

          

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

          

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

          

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

          

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

          

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

           

          
            	 
      	 
      	 
      
	 
      	
                    EMAGIN
      CORPORATION

                  
	 
      	 
      	 
      
	
                    Date: 

                  	
                    By:  

                  	
                    /s/ 

                  
	 
      	
                     

                      
      

                  
	 
      	
                    Title 

                  

          

           

           

          
            
              
              

            

            
              42

              
                

              

            

            
              
              

            

          

          
 

           

          Exhibit
B

          

          HOLDER
NOTICE

          (Section 5.2(b)
of Amended and Restated 8% Senior Secured Convertible Note due
2008)

          

          TO: EMAGIN CORPORATION

          

          (1) Pursuant to the terms of the Amended
and Restated 8% Senior Secured Convertible Note due 2008 (the “Note”), the
undersigned Holder hereby elects to exercise its right to require repurchase by
the Company pursuant to Sections 5.2(a) and 5.2(b) of $                          of the Note, equal to the sum of
$                     principal amount of the Note,
$                     of accrued and unpaid interest on such
principal amount and $                     of Default Interest on the Note at the
Repurchase Price provided in the Note.

          

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

           

          
            	 
      	 
      	 
      
	 
      	
                    NAME
      OF HOLDER:

                  
	 
      	 
      	 
      
	
                    Date: 

                  	
                    By:  

                  	
                    /s/ 

                  
	 
      	
                     

                      
      

                    Signature
      of Registered Holder

                  
	 
      	
                    (Must
      be signed exactly as name appears in the
Note.)

                  

          

          

          

           

          
            
              
              

            

            
              43

              
                

              

            

            
              
              

            

          

           

          

          

          

          Exhibit
C

          

          NOTICE
OF CONVERSION

          OF
AMENDED AND RESTATED 8% SENIOR SECURED

          CONVERTIBLE
NOTE DUE 2008

          OF
EMAGIN CORPORATION

           

          
            	
                    To:

                  	
                    eMagin
      Corporation

                  

          

          10500
N.E. 8th Street,
Suite 1400

          Bellevue,
Washington 98004

          Attention:
Chief Financial Officer

          Facsimile
No.: (425) 749-3601

          

          
            	 
      	 
      
	 
      	 
      

          

          

          1. Pursuant to the terms of the Amended
and Restated 8% Senior Secured Convertible Note Due 2008 (the “Note”), the
undersigned hereby elects to convert $_______________ of the Note, equal to the
sum of $_______________ principal amount of the Note, $_______________ of
accrued and unpaid interest on such principal amount and $_______________ of
Default Interest on such interest into shares of Common Stock of eMagin
Corporation, a Delaware corporation (the “Company”), at a Conversion Price per
share equal to $_______________. Capitalized terms used herein and not otherwise
defined herein have the respective meanings provided in the
Note.

          

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

          

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

          

          
            	 
      	 
      	 
      
	
                    Name

                  	 
      	
                    Name

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    Address 

                  	 
      	
                    Address

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    SS or Tax ID
      Number 

                  	 
      	
                    SS
      or Tax ID Number

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    Delivery Instructions for Common
      Stock: 

                  	 
      	 
      

          

           

          
            	 
      	 
      	 
      
	 
      	
                    NAME:  

                  
	 
      	 
      	 
      
	
                    Date: 

                  	
                    By:  

                  	
                    /s/ 

                  
	 
      	
                     

                      
      

                    Signature
      of Registered Holder

                  
	 
      	
                    (Must
      be signed exactly as name appears in the
Note.)

                  

          

           

          

          
            
              
              

            

            
              44

              
                

              

            

            
              
              

            

          

           

          Exhibit
D

          

          NOTICE
OF CONVERSION

          INTO
SERIES A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

          UNDER
SECTION 6.8

          OF
AMENDED AND RESTATED 8% SENIOR SECURED

          CONVERTIBLE
NOTE DUE 2008

          OF
EMAGIN CORPORATION

          

          
            	
                    To:  eMagin
      Corporation

                    10500
      N.E. 8th
      Street, Suite 1400

                    Bellevue,
      Washington 98004

                     

                    Attention:
      Chief Financial Officer

                     

                    Facsimile
      No.: (425) 749-3601

                     

                  	 
      
	 
      	 
      

          

          

          1. Pursuant to the terms of Section 6.8 of
the Amended and Restated 8% Senior Secured Convertible Note Due 2008 (the
“Note”), the undersigned hereby elects to convert $_______________ of the Note,
equal to the sum of $_______________ principal amount of the Note,
$_______________ of accrued and unpaid interest on such principal amount and
$_______________ of Default Interest on such interest into shares of Series A
Senior Secured Convertible Preferred Stock of eMagin Corporation, a Delaware
corporation (the “Company”), at a Conversion Price per share equal to $1,000.
Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.

          

          2. The number of shares of Series A Senior
Secured Convertible Preferred Stock issuable upon the conversion of the Note to
which this Notice relates is _______________ (the “Preferred
Shares”).

          

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

          
            	 
      	 
      	 
      
	
                    Name

                  	 
      	
                    Name

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    Address 

                  	 
      	
                    Address

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    SS or Tax ID
      Number 

                  	 
      	
                    SS
      or Tax ID Number

                  
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    Delivery Instructions for Common
      Stock: 

                  	 
      	 
      

          

           

          
            	 
      	 
      	 
      
	 
      	
                    NAME:  

                  
	 
      	 
      	 
      
	
                    Date: 

                  	
                    By:  

                  	
                    /s/ 

                  
	 
      	
                     

                      
      

                    Signature
      of Registered Holder

                  
	 
      	
                    (Must
      be signed exactly as name appears in the
Note.)

                  

          

           

           

          
            
              
              

            

            
              45

              
                

              

            

            
              
              

            

          

          

          

          Exhibit
E

          

          

          EMAGIN
CORPORATION

          

          CONVERSION
SCHEDULE

          

          This
Conversion Schedule shows reductions in the outstanding principal amount of the
Amended and Restated 8% Senior Secured Convertible Note due 2008 (the “Note”) of
eMagin Corporation, a Delaware corporation, upon conversions pursuant to Section
6 of the Note. Capitalized terms used in this Schedule and not otherwise defined
herein shall have the respective meanings provided in the Note.

          

          

          
            	 
      	
                    Date
      of Conversion

                    (or
      for first entry, the Issuance Date)

                  	
                    Principal

                    Amount
      of Conversion

                    (if
      applicable)

                  	
                    Principal
      Amount Remaining

                    Subsequent
      to Conversion

                    (or
      original Principal Amount)

                  
	
                    1.

                  	
                    7/_/06

                  	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      

          

          

          [continue
as necessary]

          

           

          
            
              
              

            

            
              46

              
                

              

            

            
              
              

            

             

          

        

      

      
        Annex
II

         

         

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

        

        THIS
WARRANT MAY NOT BE TRANSFERRED EXCEPT AS PROVIDED IN SECTION 24.

        

        

        
          	
                  No.
      ARW-

                	
                  Right
      to Purchase __________ Shares
      of Common Stock of eMagin
  Corporation

                

        

        

        

        EMAGIN
CORPORATION

        

        Amended
and Restated

        Common
Stock Purchase Warrant

        

        

        EMAGIN CORPORATION, a Delaware corporation,
hereby certifies that, for value received, ______________________ or
registered assigns (the “Holder”), is entitled, subject to the terms set forth
below, to purchase from the Company at any time or from time to time before 5:00
p.m., New York City time, on the Expiration Date (such capitalized term and all
other capitalized terms used herein having the respective meanings provided
herein), paid and nonassessable shares of Common Stock at a purchase price
per share equal to the Purchase Price. The number of such shares of Common Stock
and the Purchase Price are subject to adjustment as provided in this Warrant.
This Warrant amends and restates Common Stock Warrant No. W-___ issued by the
Company pursuant to the Note Purchase Agreement, registered in the name of the
Holder or the registered holder of the predecessor instrument of this
Warrant.

        

        1. Definitions.

        

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

        

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

         

         

        
          
            
            

          

          
            1

            
              

            

          

          
            
            

          

        

        

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

        

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

        

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

        

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

        

        “Amendment
Agreement” means the Amendment Agreement, dated as of July 23, 2007, by and
between the Company and the original Holder of the Common Stock Purchase Warrant
that was amended and restated by this Warrant or its predecessor
instrument.

        

        “AMEX”
means the American Stock Exchange, Inc.

        

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

        

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

        

         

        
          
            
            

          

          
            2

            
              

            

          

          
            
            

          

        

         

         

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

        

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

        

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

        

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

        

        “Current
Fair Market Value” means when used with respect to the Common Stock as of a
specified date with respect to each share of Common Stock, the average of the
closing prices of the Common Stock sold on all securities exchanges (including
the OTCBB, the NYSE, the AMEX, the Nasdaq and the Nasdaq Capital Market) on
which the Common Stock may at the time be listed, or, if there have been no
sales on any such exchange on such day, the average of the highest bid and
lowest asked prices on all such exchanges at the end of regular trading on such
day, or, if on such day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq System as of 4:00 p.m.,
New York City time, or, if on such day the Common Stock is not quoted in the
Nasdaq System, the average of the highest bid and lowest asked price on such day
in the domestic over-the-counter market as reported by Pink Sheets, LLC, or any
similar successor organization, in each such case averaged over a period of five
Trading Days consisting of the day as of which the Current Fair Market Value of
Common Stock is being determined (or if such day is not a Trading Day, the
Trading Day next preceding such day) and the four consecutive Trading Days prior
to such day. If on the date for which Current Fair Market Value is to be
determined the Common Stock is not listed on any securities exchange or quoted
in the Nasdaq System or the over-the-counter market, the Current Fair Market
Value of Common Stock shall be the highest price per share which the Company
could then obtain from a willing buyer (not an employee or director of the
Company at the time of determination) in an arms'-length transaction for shares
of Common Stock sold by the Company, from authorized but unissued shares, as
determined in good faith by the Board of Directors.

         

        
          
            
            

          

          
            3

            
              

            

          

          
            
            

          

        

         

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

        

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

        

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

        

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

        

        “Expiration
Date” means July 21, 2011.

        

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

        

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

        

        “Market
Price” means with respect to any security on any day the closing price of such
security on such day on the Nasdaq or the Nasdaq Capital Market or the NYSE or
the AMEX or the OTCBB, as applicable, or, if such security is not listed or
admitted to trading on the Nasdaq, the Nasdaq Capital Market, the NYSE, the AMEX
or the OTCBB, on the principal national securities exchange or quotation system
on which such security is quoted or listed or admitted to trading, in any such
case as reported by Bloomberg, L.P. or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the average of
the closing bid and asked prices of such security on the over-the-counter market
on the day in question, as reported by the Pink Sheets, LLC, or a similar
generally accepted reporting service, or if not so available, in such manner as
furnished by any New York Stock Exchange member firm selected from time to time
by the Board of Directors for that purpose, or a price determined in good faith
by the Board of Directors.

        

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

        

        “Nasdaq”
means the Nasdaq Global Market.

        

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

         

         

         

        
 

        
          
            
            

          

          
            4

            
              

            

          

          
            
            

          

        

         

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

        

        “Newly
Issued Shares” shall have the meaning provided in Section 8(a).

        

        “Note”
means any of the Amended and Restated 8% Senior Secured Convertible Notes due
2008 issued by the Company upon amendment and restatement of the Company’s 6%
Senior Secured Convertible Notes due 2007-2008, as amended, originally issued by
the Company pursuant to the Note Purchase Agreement and the Other Note Purchase
Agreements.

        

        “Note
Purchase Agreement” means the Note Purchase Agreement (including the Annexes,
Schedules and Exhibits thereto), dated as of July 21, 2006, by and between
the Company and the original Holder of this Warrant, as amended by the Amendment
Agreement.

        

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

        

        “OTCBB”
means the Over-The-Counter Bulletin Board.

        

        “Other
Note Purchase Agreements” means the several Note Purchase Agreements, (including
the Annexes, Schedules and Exhibits thereto), dated as of July 21, 2006, as
amended, by and between the Company and the several buyers named therein in the
form of the Note Purchase Agreement pursuant to which certain of the Notes are
being or will be issued.

        

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

        

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

        

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

        

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

         

        
          
            
            

          

          
            5

            
              

            

          

          
            
            

          

        

         

         

        “Purchase
Price” means $1.03 [$0.48 for
Stillwater Amended Warrant], subject to adjustment as
provided in this Warrant.

        

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

        

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

        

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

        

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

        

        (ii) the occurrence of any transaction or
event in connection with which all or substantially all the Common Stock shall
be exchanged for, converted into, acquired for or constitute the right to
receive securities of any other Person (whether by means of a Tender Offer,
liquidation, consolidation, merger, share exchange, combination,
reclassification, recapitalization, or otherwise); or

        

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

        

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

        

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

        

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

        

        “SEC”
means the Securities and Exchange Commission.

        

        “Series A
Preferred Stock” means the shares of Series A Senior Secured Convertible
Preferred Stock, $0.001 par value, of the Company.

        

         

        
          
            
            

          

          
            6

            
              

            

          

          
            
            

          

        

         

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

        

        “Tender
Offer” means a tender offer, exchange offer or other offer by the Company to
repurchase outstanding shares of its capital stock.

        

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

        

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

        

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

        

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

        

        2. Exercise
of Warrant.

        

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

         

        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        

         

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

        

        X = Y x (A -
B)

        A

        

        where,

        

        
          	 
      	 
      	
                  X
      =

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

                

        

        

        
          	 
      	 
      	
                  Y
      =

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

                

        

        

        
          	 
      	 
      	
                  A
      =

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

                

        

        

        
          	 
      	 
      	
                  B
      =

                	
                  the
      Purchase Price

                

        

        

        (c) 9.9%
Limitation. 

        

        (1) Notwithstanding anything to the
contrary contained herein, the number of shares of Common Stock that may be
acquired by the Holder upon exercise pursuant to the terms hereof at any time
shall not exceed a number that, when added to the total number of shares of
Common Stock deemed beneficially owned by the Holder (other than by virtue of
the ownership of securities or rights to acquire securities that have
limitations on the Holder's right to convert, exercise or purchase similar to
the limitation set forth herein (the “Excluded Shares”), together with all
shares of Common Stock deemed beneficially owned at such time (other than by
virtue of the ownership of the Excluded Shares) by Persons whose beneficial
ownership of Common Stock would be aggregated with the beneficial ownership by
the Holder for purposes of determining whether a group exists or for purposes of
determining the Holder’s beneficial ownership (the “Aggregation Parties”), in
either such case for purposes of Section 13(d) of the 1934 Act and Regulation
13D-G thereunder (including, without limitation, as the same is made applicable
to Section 16 of the 1934 Act and the rules promulgated thereunder), would
result in beneficial ownership by the Holder or such group of more than 9.9% of
the shares of Common Stock for purposes of Section 13(d) or Section 16 of the
1934 Act and the rules promulgated thereunder (as the same may be modified by
the Holder as provided herein, the “Restricted Ownership Percentage”). The
Holder shall have the right (x) at any time and from time to time to reduce its
Restricted Ownership Percentage immediately upon notice to the Company in the
event and only to the extent that Section 16 of the 1934 Act or the rules
promulgated thereunder (or any successor statute or rules) is changed to reduce
the beneficial ownership percentage threshold thereunder to a percentage less
than 10% [FOR RAINBOW
GATE/STILLWATER /GINOLA WARRANTS ONLY: and (y) at any time and from time to
time, to increase its Restricted Ownership Percentage unless the Holder shall
have, by written instrument delivered to the Company, irrevocably waived its
rights to so increase its Restricted Ownership Percentage]. If at any time the limits in this
Section 2(c) make this Warrant unexercisable in whole or in part, the Company
shall not by reason thereof be relieved of its obligation to issue shares of
Common Stock at any time or from time to time thereafter but prior to the
Expiration Date upon exercise of this Warrant as and when shares of Common Stock
may be issued in compliance with such restrictions.

        

         

        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

         

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

        

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

        

         

        
          
            
            

          

          
            9

            
              

            

          

          
            
            

          

        

         

        (b) If in any case the Company shall fail
to issue and deliver or cause to be delivered the shares of Common Stock to the
Holder within five Trading Days of a particular exercise of this Warrant, in
addition to any other liabilities the Company may have hereunder, under the Note
Purchase Agreement and under applicable law, (A) the Company shall pay or
reimburse the Holder on demand for all out-of-pocket expenses, including,
without limitation, reasonable fees and expenses of legal counsel, incurred by
the Holder as a result of such failure; (B) if as a result of such failure the
Holder shall suffer any direct damages or liabilities from such failure
(including, without limitation, margin interest and the cost of purchasing
securities to cover a sale (whether by the Holder or the Holder's securities
broker) or borrowing of shares of Common Stock by the Holder for purposes of
settling any trade involving a sale of shares of Common Stock made by the Holder
during the period beginning on the Issuance Date and ending on the date the
Company delivers or causes to be delivered to the Holder such shares of Common
Stock), then, in addition to any amounts payable pursuant to Section 3(a), the
Company shall upon demand of the Holder pay to the Holder an amount equal to the
actual, direct, demonstrable out-of-pocket damages and liabilities suffered by
the Holder by reason thereof which the Holder documents, and (C) the Holder may
by written notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission) or oral notice (promptly confirmed in
writing), given at any time prior to delivery to the Holder of the shares of
Common Stock issuable in connection with such exercise of the Holder's right,
rescind such exercise and the subscription form relating thereto, in which case
the Holder shall thereafter be entitled to exercise that portion of this Warrant
as to which such exercise is so rescinded and to exercise its other rights and
remedies with respect to such failure by the Company. Notwithstanding the
foregoing the Company shall not be liable to the Holder under clauses (A) or (B)
of the immediately preceding sentence to the extent the failure of the Company
to deliver or to cause to be delivered such shares of Common Stock results from
fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash
involving facilities of a common carrier, acts of God, or any similar event
outside the control of the Company (it being understood that the action or
failure to act of the Company's Transfer Agent shall not be deemed an event
outside the control of the Company except to the extent resulting from fire,
flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash
involving facilities of a common carrier, acts of God, or any similar event
outside the control of such Transfer Agent or the bankruptcy, liquidation or
reorganization of such Transfer Agent under any bankruptcy, insolvency or other
similar law). The Holder shall notify the Company in writing (or by telephone
conversation, confirmed in writing) as promptly as practicable following the
third Trading Day after the Holder exercises this Warrant if the Holder becomes
aware that such shares of Common Stock so issuable have not been received as
provided herein, but any failure so to give such notice shall not affect the
Holder's rights under this Warrant or otherwise. In the case of the Company’s
failure to issue and deliver or cause to be delivered the shares of Common Stock
to the Holder within five Trading Days of a particular exercise of this Warrant,
the amount payable by the Company pursuant to clause (B) of this Section 3(b)
with respect to such exercise shall be reduced by the amount of payments
previously paid by the Company to the Holder pursuant to Section 8(a)(4) of the
Note Purchase Agreement with respect to such exercise.

        

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

         

        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

         

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

        

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

        

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

        

         

        
          
            
            

          

          
            11

            
              

            

          

          
            
            

          

        

         

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

        

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

        

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

         

        
          
            
            

          

          
            12

            
              

            

          

          
            
            

          

        

         

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

        

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

        

        Such
adjustment shall become effective immediately after the opening of business on
the day following the record date fixed for determination of stockholders
entitled to receive such rights or warrants. To the extent that shares of Common
Stock are not delivered pursuant to such rights or warrants, upon the expiration
or termination of such rights or warrants, the Purchase Price shall be
readjusted to the Purchase Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made on the
basis of delivery of only the number of shares of Common Stock actually
delivered and the number of shares of Common Stock for which this Warrant may
thereafter be exercised shall be readjusted (subject to proportionate adjustment
for any intervening exercises of this Warrant) to the number which would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made on the basis of delivery of only the number of shares of Common Stock
actually delivered. In the event that such rights or warrants are not so issued,
the Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed and the number of
shares of Common Stock for which this Warrant may thereafter be exercised shall
again be adjusted (subject to proportionate adjustment for any intervening
exercises of this Warrant) to be the number which would then be in effect if
such record date had not been fixed. In determining whether any rights or
warrants entitle the Holder to subscribe for or purchase shares of Common Stock
at less than such Current Fair Market Value, and in determining the aggregate
offering price of such shares of Common Stock, there shall be taken into account
any consideration received for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the Board of
Directors.

        

        8. Adjustments
for Certain Issuances of Newly Issued Shares.

        

        (a) In case at any time on or after the
Issuance Date the Company shall issue shares of Common Stock or Common Stock
Equivalents (collectively, the “Newly Issued Shares”) at a price below the
Purchase Price in effect at the time of such issuance, then following such
issuance of Newly Issued Shares the Purchase Price shall be reduced to the lower
of (x) 138% of the lowest price per share of Common Stock reflected in the price
at which such Newly Issued Shares are issued and (y) the exercise price of any
warrants to purchase Common Stock issued in connection with such transaction, in
either such case, if the same is lower than the Purchase Price in effect
immediately prior to such issuance.

         

        
          
            
            

          

          
            13

            
              

            

          

          
            
            

          

        

        (b) If the Purchase Price is reduced in
connection with the issuance of Newly Issued Shares as provided in Section 8(a),
then the number of shares of Common Stock for which this Warrant may thereafter
be exercised shall be increased at the time of such reduction in the Purchase
Price to a number equal to the quotient obtained by dividing (x) the Aggregate
Purchase Price in effect immediately prior to such issuance of Newly Issued
Shares by (y) the Purchase Price in effect
immediately after such issuance of Newly Issued Shares after such reduction in
the Purchase Price pursuant to Section 8(a).

        

        (c) If the Newly Issued Shares are Common
Stock Equivalents, then the price per share of Common Stock at which the Newly
Issued Shares shall be deemed issued shall be the price per share of Common
Stock at which the Newly Issued Shares are convertible into, exchangeable for,
or otherwise entitle the stockholder to acquire, Common
Stock.

        

        (d) Notwithstanding the foregoing, no
adjustment shall be made under this Section 8 by reason of:

        

        (i) the issuance by the Company of shares
of Common Stock pro rata to all holders of the Common Stock so long as (i) any
adjustment required by Section 6 is made and (ii) the Company shall have given
notice thereof to the Holder pursuant to Section 15;

        

        (ii) the issuance by the Company of the
Notes or the Other Warrants or shares of Common Stock upon conversion of the
Notes or upon exercise of this Warrant or the Other Warrants in accordance with
the terms hereof and thereof;

        

        (iii) the issuance by the Company of shares
of Series A Preferred Stock upon conversion of the Notes or Common Stock upon
conversion of the Series A Preferred Stock in accordance with the terms
thereof;

        

        (iv) the issuance by the Company of Newly
Issued Shares upon grant or exercise of options for employees, directors and
consultants under the 2003 Stock Option Plan, 2004 Non-Employee Stock
Compensation Plan and the 2005 Employee Stock Purchase Plan or any other stock
compensation plan that has been duly adopted by the Board of Directors and duly
approved by the Company’s stockholders;

        

        (v) the issuance by the Company of Newly
Issued Shares upon conversion of Common Stock Equivalents that are outstanding
on the Issuance Date in accordance with the terms of such Common Stock
Equivalents in effect on the Issuance Date;

        

        (vi) the issuance by the Company for cash of
Newly Issued Shares in connection with a strategic alliance, collaboration,
joint venture, partnership or similar arrangement of the Company with another
Person which strategic alliance, collaboration, joint venture, partnership or
similar arrangement relates to the Company’s business as conducted immediately
prior thereto and which Person is engaged in a business similar or related to
the business of the Company so long as (x) the price per Newly Issued Share is
not less than 85 percent of the Current Fair Market Value of the Common Stock on
the date of issuance of such Newly Issued Shares and (y) the consideration other
than cash which the Company receives in connection with such strategic alliance,
collaboration, joint venture, partnership or similar arrangement has a value, as
determined by the Board of Directors in its reasonable judgment, at least equal
to the amount by which (i) the product of the Newly Issued Shares so issued
times the Current Fair Market Value of the
Common Stock on the date such Newly Issued Shares are issued exceeds (ii) the
aggregate cash consideration received by the Company for such Newly Issued
Shares at the time of issuance thereof and (z) such issuance has been duly
approved by the Board of Directors.

        

        

        
          
            
            

          

          
            14

            
              

            

          

          
            
            

          

        

        9. Adjustment
in Connection with Sales by a Designated Person. So long as any Note is outstanding, if
at any time on or after the Issuance Date any Designated Person, directly or
indirectly, sells, transfers or disposes of shares of Common Stock or Common
Stock Equivalents other than a Permitted Designated Person Sale and on the
Measurement Date for such sale, transfer or disposition the Purchase Price in
effect on such Measurement Date is greater than the Computed Market Price on
such Measurement Date, then, subject to the next succeeding sentence, the
Purchase Price shall be reduced to such Computed Market Price, such adjustment
to become effective immediately after the opening of business on the day
following the Measurement Date. The Company shall inform the Holder immediately
by phone and electronic transmission upon becoming aware of any sale, transfer
or disposition of any shares of Common Stock or Common Stock Equivalents by any
Designated Person and will follow up with formal written notice to the Holder
pursuant to Section 24.

        

        
          	
                  10. Effect
      of Reclassification, Consolidation, Merger or Sale. 

                

        

        

        
          	
                  (a) If any of the following events
      occur, namely:

                

        

        

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

        

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

        

        (iii)  any sale or conveyance of the
properties and assets of the Company as, or substantially as, an entirety to any
other Person as a result of which holders of Common Stock shall be entitled to
receive stock, securities or other property or assets (including cash) with
respect to or in exchange for such Common Stock, then the Company or the
successor or purchasing Person, as the case may be, shall execute with the
Holder a written agreement providing that:

        

         

        
          
            
            

          

          
            15

            
              

            

          

          
            
            

          

        

         

        (x)  this Warrant shall thereafter entitle
the Holder to purchase the kind and amount of shares of stock and Other
Securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, statutory exchange,
combination, sale or conveyance by the holder of a number of shares of Common
Stock issuable upon exercise of this Warrant (assuming, for such purposes, a
sufficient number of authorized shares of Common Stock available to exercise
this Warrant) immediately prior to such reclassification, change, consolidation,
merger, statutory exchange, combination, sale or conveyance assuming such holder
of Common Stock did not exercise such holder's rights of election, if any, as to
the kind or amount of securities, cash or other property receivable upon such
consolidation, merger, statutory exchange, combination, sale or conveyance
(provided that, if the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, sale or conveyance is not the same for each share of Common
Stock in respect of which such rights of election shall not have been exercised
(“non-electing share”), then for the purposes of this Section 10 the kind and
amount of securities, cash or other property receivable upon such consolidation,
merger, statutory exchange, sale or conveyance for each non-electing share shall
be deemed to be the kind and amount so receivable per share by a plurality of
the non-electing shares),

        

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

        

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

        

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

        

        (b) The above provisions of this Section 10
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, combinations, sales and conveyances.

         

         

        
          
            
            

          

          
            16

            
              

            

          

          
            
            

          

        

         

        (c) If this Section 10 applies to any event
or occurrence, Section 5 shall not apply.

        

        11. Tax
Adjustments. The Company may make such reductions in
the Purchase Price, in addition to those required by Sections 4, 5, 6, 7, 8 and
9 as the Board of Directors considers to be advisable to avoid or diminish any
income tax to holders of Common Stock or rights to purchase Common Stock
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax
purposes.

        

        12. Minimum
Adjustment. (a) No
adjustment in the Purchase Price (and no related adjustment in the number of
shares of Common Stock which may thereafter be purchased upon exercise of this
Warrant) shall be required unless such adjustment would require an increase or
decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which
by reason of this Section 12 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All such
calculations under this Warrant shall be made by the Company and shall be made
to the nearest cent or to the nearest one hundredth of a share, as the case may
be.

        

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

        

        13. Notice
of Adjustments. Whenever
the Purchase Price is adjusted as herein provided, the Company shall promptly,
but in no event later than five Trading Days thereafter, give a notice to the
Holder setting forth the Purchase Price and number of shares of Common Stock
which may be purchased upon exercise of this Warrant after such adjustment and
setting forth a brief statement of the facts requiring such adjustment but which
such statement shall not include any information which would be material
non-public information for purposes of the 1934 Act. Failure to deliver such
notice shall not affect the legality or validity of any such
adjustment.

        

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

        

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

        

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

        

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

        

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

        

         

        
          
            
            

          

          
            17

            
              

            

          

          
            
            

          

        

         

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

        

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

        

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

        

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

        

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

        

         

        
          
            
            

          

          
            18

            
              

            

          

          
            
            

          

        

        19. Exchange
of Warrant. This Warrant
is exchangeable, upon the surrender hereof by the Holder at the office or agency
of the Company referred to in Section 17, for one or more new Warrants of like
tenor representing in the aggregate the right to subscribe for and purchase the
number of shares of Common Stock which may be subscribed for and purchased
hereunder, each of such new Warrants to represent the right to subscribe for and
purchase such number of shares as shall be designated by the Holder at the time
of such surrender.

        

        20. Replacement
of Warrant. On receipt by
the Company of evidence reasonably satisfactory to it of the ownership of and
the loss, theft, destruction or mutilation of this Warrant and (a) in the case
of loss, theft or destruction, of indemnity from the Holder reasonably
satisfactory in form to the Company (and without the requirement to post any
bond or other security), or (b) in the case of mutilation, upon surrender and
cancellation of this Warrant, the Company will execute and deliver to the Holder
a new Warrant of like tenor without charge to the Holder.

        

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

        

        22. Remedies.  The Company stipulates that the
remedies at law of the Holder in the event of any default or threatened default
by the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced (x) by a decree for the specific performance of any
agreement contained herein, including, without limitation, a decree for issuance
of the shares of Common Stock (or Other Securities) issuable upon exercise of
this Warrant or (y) by an injunction against a violation of any of the terms
hereof or (z) otherwise.

        

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

        

         

        
          
            
            

          

          
            19

            
              

            

          

          
            
            

          

        

        24. Notices,
etc. All notices and other
communications from the Company to the Holder shall be in writing and delivered
personally, by confirmed facsimile, by a nationally recognized overnight courier
service or mailed by first class certified mail, postage prepaid, at such
facsimile telephone number or address as may have been furnished to the Company
in writing by the Holder or at such facsimile telephone number or the address
shown for the Holder on the register of Warrants referred to in Section
18.

        

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

        

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

        

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

        

        28. Amendment;
Waiver. (a) This Warrant
and any terms hereof may be changed, modified or amended only by an instrument
in writing signed by the party against which enforcement of such change,
modification or amendment is sought. [TO BE DELETED IN
[RAINBOW GATE][STILLWATER][GINOLA] WARRANTS ONLY: Notwithstanding anything to the
contrary contained herein, no amendment or waiver shall increase or eliminate
the Restricted Ownership Percentage, whether permanently or temporarily, unless,
in addition to complying with the other requirements of this Warrant, such
amendment or waiver shall have been approved in accordance with the General
Corporation Law of the State of Delaware and the Company's By-laws by holders of
the outstanding shares of Common Stock entitled to vote at a meeting or by
written consent in lieu of such meeting.]

         

        
          
            
            

          

          
            20

            
              

            

          

          
            
            

          

        

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

        

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

        

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

        

        

        [Signature
Page Follows]

         

         

        
          
            
            

          

          
            21

            
              

            

          

          
            
            

          

        

        
 

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

         

        
          	 
      	 
      	 
      
	 
      	
                  EMAGIN
      CORPORATION

                
	 
      	 
      	 
      
	
                  Date: 

                	
                  By:  

                	
                  /s/ 

                
	 
      	
                   

                    
      

                
	 
      	
                  Title 

                

        

        

         

        
          
            
            

          

          
            22

            
              

            

          

          
            
            

          

        

         

        ASSIGNMENT

        

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

        

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

        

        [ ] To the Company or a Subsidiary;
or

        

        [ ] To an “accredited investor” (as defined
in Regulation D under the 1933 Act) pursuant to and in compliance with the 1933
Act; or

        

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

        

        and
unless the box below is checked, the undersigned confirms that, to the knowledge
of the undersigned, such Warrant is not being transferred to an “affiliate” (as
defined in Rule 144 under the 1933 Act) of the Company.

        

        [ ] The transferee is an affiliate of the
Company.

        

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

        

        

        
          	
                   Dated:

                	 
      	
                  NAME:  

                	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	
                   Signature(s)

                	 
      

        

         

         

        
          
            
            

          

          
            23

            
              

            

          

          
            
            

          

        

         

        Exhibit
1

        

        FORM
OF SUBSCRIPTION

        

        EMAGIN
CORPORATION

        

        (To be
signed only on exercise of Warrant)

        

        TO: eMagin Corporation

        10500
N.E. 8th Street,
Suite 1400

        Bellevue,
WA 98004

        

        Attention:
Chief Financial Officer

        

        Facsimile
No.: (425) 749-3601

        

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

        

        2. The undersigned Holder (check
one):

        

        
          	
                  q  

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

                

        

         

        or

         

        
          	
                  q  

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

                

        

         

        

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

        

        Name: 

        

        Address: 

         

        Social
Security or Tax Identification Number (if any):

        

         

        

        
          	
                  Dated:

                	 
      
	 
      	
                  (Signature
      must conform to name of Holder as specified on the face of the
      Warrant)

                
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	
                  (Address)

                

        

        

        

        
          
            
               

            

            
              24

              
                

              

            

            
               

            

          

        

         

        Annex
III

      

    

    
       

      
         

        

        AMENDMENT
NO. 1 TO PATENT AND TRADEMARK SECURITY AGREEMENT

        

        THIS AMENDMENT NO. 1 TO PATENT AND
TRADEMARK SECURITY AGREEMENT, dated as of July 23, 2007 (this
“Agreement”), by and between EMAGIN CORPORATION, a Delaware
corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND
LTD., a British Virgin Islands international business company, as
collateral agent (in such capacity, the “Collateral Agent”) on behalf of the
Holders (such capitalized term and all other capitalized terms used herein
having the respective meanings provided herein), amends the PATENT AND TRADEMARK SECURITY
AGREEMENT, dated as of July 21, 2006 (the “Patent and Trademark Security
Agreement”), made by the Grantor to the
Collateral Agent.

        

        W I T N E S S E T H:

        

        WHEREAS, the Grantor and the
Collateral Agent are parties to the Patent and Trademark Security
Agreement;

        

        WHEREAS, the Grantor and the
Collateral Agent wish to amend the Patent and Trademark Security Agreement as
provided in this Agreement; and

        

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

        

        1. Definitions. 

        

        1.1 As used in this Agreement, the terms
“Agreement”, “Grantor”, “Collateral Agent” and “Patent and Trademark Security
Agreement” shall have the respective meanings assigned to such terms in the
introductory paragraph of this Agreement.

        

        1.2 Capitalized terms used in this
Agreement and not defined in this Agreement shall have the respective meanings
provided in the Patent and Trademark Security Agreement.

        

        1.3 All the agreements or instruments
herein defined shall mean such agreements or instruments as the same may from
time to time be supplemented or amended or the terms thereof waived or modified
to the extent permitted by, and in accordance with, the terms thereof and of
this Agreement.

        

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

        

        “Amended
Lockbox Agreement” means the Lockbox Agreement, dated as of July 21, 2006, by
and between the Grantor, the Lockbox Agent and the Collateral Agent, as amended
by Amendment No. 1 to Lockbox Agreement, dated as of July 23, 2007, by and
between the Grantor and the Collateral Agent.

         

        

         

        
          
            
            

          

          
            1

            
              

            

          

          
            
            

          

        

         

         

         

        “Amended
Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due
2008 issued by the Grantor upon amendment and restatement of the
Notes.

        

        “Amended
Patent and Trademark Security Agreement” means the Patent and Trademark Security
Agreement as amended by this Agreement.

        

        “Amended
Pledge and Security Agreement” means the Pledge and Security Agreement, dated as
of July 21, 2006, by and between the Grantor and the Collateral Agent, as
amended by Amendment No. 1 to the Pledge and Security Agreement, dated as of
July 23, 2007 by and between the Grantor and the Collateral Agent.

        

        “Amendment
Agreements” means the several Amendment Agreements, dated as of July 23, 2007 by
and between the Company and the Holders.

        

        “Amendment
Transaction Documents” means the Amended Notes, the Amended Warrants, the
Certificate Designations, the Amended Patent and Trademark Security Agreement,
the Amended Pledge and Security Agreement, the Amended Lockbox Agreement and the other
agreements, instruments and documents contemplated hereby and
thereby.

        

        “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock of the Grantor as filed with the Secretary
of State of the State of Delaware.

        

        “Effective
Date” shall have the meaning provided in Section 4.

        

        “Effective
Time” shall have the meaning provided in the Amendment Agreements.

        

        “Holders”
means with respect to any time prior to the Effective Time on the Effective Date
the holders of Notes and with respect to any time after the Effective Time on
the Effective Date, the holders from time to time of any Amended Notes or shares
of Series A Preferred Stock.

        

        “Series A
Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock,
par value $0.001 per share, of the Grantor.

        

        2. Amendments.

         

        2.1 Amendments
to Patent and Trademark Security Agreement. Upon the terms and subject to the
conditions of this Agreement, the Patent and Trademark Security Agreement is
hereby amended as follows:

        

        (a) Amendment
of Certain Definitions.
Section 1(d) of the Patent and Trademark Security Agreement shall be amended by
deleting the terms “Additional Note Purchase Agreement”, “Event of Default”,
“Holder”, “Note Purchase Agreements”, “Majority Holders”, “Notes”, “Obligations”
and “Transaction Documents” and the accompanying definitions thereof and
substituting in lieu thereof in their respective alphabetical order the
following:

        

         

        
          
            
            

          

          
            2

            
              

            

          

          
            
            

          

        

         

         

         

        “Additional
Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21,
2006, as amended on March 28, 2007, by and between the Company and Stillwater
LLC, as amended by the Amendment Agreement, pursuant to which the Company issued
the Additional Note.

        

        “Event of
Default” means:

        

        (1) the failure by the Grantor to perform
in any material respect any obligation of the Grantor under this Agreement as
and when required by this Agreement; or

        

        (2) the failure by the Grantor to pay the
Optional Redemption Price or the Mandatory Redemption Price;
or

        

        (3) the breach by the Grantor of any other
material covenant or other term or condition of the Certificate of Designations;
or

        

        (4) any representation or warranty made by
the Grantor pursuant to this Agreement shall have been untrue in any material
respect when made or deemed to have been made; or

        

        (5) the failure by the Grantor to perform
in any material respect any obligation of the Grantor under the Patent and
Trademark Security Agreement as and when required by the Patent and Trademark
Security Agreement;

        

        (6) any representation or warranty made by
the Grantor pursuant to the Patent and Trademark Security Agreement shall have
been untrue in any material respect when made or deemed to have been
made;

        

        (7) the failure by the Grantor to perform
in any material respect any obligation of the Grantor under the Lockbox
Agreement as and when required by the Lockbox Agreement;

        

        (8) any representation or warranty made by
the Grantor pursuant to the Lockbox Agreement shall have been untrue in any
material respect when made or deemed to have been made; or

        

        (9) any Event of Default, as that term is
defined in any of the Notes.

        

        “Holder”
means any Buyer or any holder from time to time of any Note or any Preferred
Shares.

         

        
          
            
            

          

          
            3

            
              

            

          

          
            
            

          

        

         

        “Majority
Holders” means at any time (i) such of the holders of Notes who hold Notes
which, based on the outstanding principal amounts thereof, represent a majority
of the aggregate outstanding principal amount of the Notes at such time, and
(ii) such of the holders of Preferred Shares which shares constitute a majority
of the outstanding Preferred Shares at such time.

        

        “Note
Purchase Agreements” means the several Note Purchase Agreements, dated as of
July 21, 2006, by and between the Grantor and the respective Buyer party
thereto, as amended by the Amendment Agreement, pursuant to which the Grantor
issued the Notes, including, without limitation, the Additional Note Purchase
Agreement.

        

        “Notes”
means the Amended and Restated 8% Senior Secured Convertible Notes due 2008
issued by the Grantor upon amendment and restatement of the Grantor’s 6% Senior
Secured Convertible Notes due 2007-2008, as amended, originally issued pursuant
to the Note Purchase Agreements, including, without limitation, the Additional
Note.

        

        “Obligations”
means:

        

        (1) the full and prompt payment when due of
all obligations and liabilities to the Holders, whether now existing or
hereafter arising, under the Transaction Documents and the due performance and
compliance with the terms of the Transaction Documents;

        

        (2) the full and prompt payment when due of
all obligations and liabilities of the Grantor to pay the Optional Redemption
Price and Mandatory Redemption Price pursuant to the Preferred Shares and the
due performance and compliance with the terms of the Certificate of
Designations;

        

        (3) any and all sums advanced by the
Collateral Agent or any Holder in order to preserve the Collateral or to
preserve the Security Interest;

        

        (4) in the event of any proceeding for the
collection or enforcement of any obligations or liabilities of the Grantor
referred to in the immediately preceding clauses (1) and (2) in accordance with
the terms of the Transaction Documents, the reasonable expenses of re-taking,
holding, preparing for sale, selling or otherwise disposing of or realizing on
the Collateral, or of any other exercise by the Collateral Agent of its rights
hereunder, together with reasonable attorneys' fees and court costs;
and

        

        (5) any amounts for which the Collateral
Agent or any Holder is entitled to indemnification under Section
4(n).

         

        (b) Additional
Defined Terms. Section 1(d) of the Patent and
Trademark Security Agreement shall be amended by adding new defined terms and
definitions thereof, in the places constituting their respective alphabetical
orders, as follows:

        

         

        
          
            
            

          

          
            4

            
              

            

          

          
            
            

          

        

         

         

        “Amendment
Agreement” means the several Amendment Agreements, dated as of July 23, 2007, by
and between the Grantor and the Holders.

        

        “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock of the Grantor as filed with the Secretary
of State of the State of Delaware.

        

        “Mandatory
Redemption Price” shall have the meaning assigned to such term in the
Certificate of Designations.

        

        “Optional
Redemption Price” shall have the meaning assigned to such term in the
Certificate of Designations.

        

        “Preferred
Shares” means shares of Series A Senior Secured Convertible Preferred Stock
issued by the Grantor.

        

        3. Effect
of Amendment; Confirmation.

        

        (a) From and after the Effective Date, the
rights and obligations of the Grantor, the Collateral Agent and the Holders
under the Patent and Trademark Security Agreement and the Transaction Documents
and all other agreements, documents and instruments contemplated hereby and
thereby shall apply with full force and effect to the Patent and Trademark
Security Agreement, as amended by this Agreement, and each reference to the
Patent and Trademark Security Agreement in the Transaction Documents shall be
deemed to be a reference to the Patent and Trademark Security Agreement, as
amended by this Agreement and each reference in the Patent and Trademark
Security Agreement to “this Agreement,” “hereunder,” “hereof,” “herein,” or
words of like import shall mean and be a reference to the Patent and Trademark
Security Agreement as amended hereby, and this Agreement and the Patent and
Trademark Security Agreement shall be read together and construed as a single
instrument.

        

        (b) Except as amended by this Agreement,
the Patent and Trademark Security Agreement shall remain in full force and
effect in accordance with its respective terms.

        

        (c) The execution, delivery and
effectiveness of this Agreement shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of the Collateral Agent, the
Grantor or the Holders under the Patent and Trademark Security Agreement or any
of the Transaction Documents, nor constitute a waiver or amendment of any other
provision of the Patent and Trademark Security Agreement or any of the
Transaction Documents or for any purpose except as expressly set forth
herein.

        

        (d) Nothing in this Agreement or in
connection with the transactions contemplated by this Agreement or otherwise
shall be construed, directly or indirectly, by implication or otherwise to
impair the validity, enforceability, priority, perfection or other attributes of
the security interest granted pursuant to the Patent and Trademark Security
Agreement.

         

         

        
 

        
          
            
            

          

          
            5

            
              

            

          

          
            
            

          

        

         

         

        4. Effectiveness.

        

        The
amendment of the Patent and Trademark Security Agreement pursuant to this
Agreement shall become effective on the date (the “Effective Date”) when all of
the following conditions are satisfied:

        

        (a) The Collateral Agent shall have
received Acknowledgement and Consents, in the form attached hereto as
Exhibit
A, from the Majority
Holders; and

        

        (b) On the Effective Date the Effective
Time under all of the Amendment Agreements shall have
occurred.

        

        5. Miscellaneous. 

        

        5.1 Waiver and
Amendments; Successors and Assigns.

        The
provisions of Section 13 of the Patent and Trademark Security Agreement shall be
applicable to this Agreement as if this Agreement were the “Agreement” referred
to in Section 13 of the Patent and Trademark Security Agreement.

        

        5.2 Counterparts.

        This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

        

        5.3 Titles
and Subtitles.

        The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this
Agreement.

        

        5.4 Notices.

        Any
notice required or permitted under this Agreement shall be given as provided in
the Patent and Trademark Security Agreement.

        

        5.5 Severability.

        If one or
more provisions of this Agreement are held to be unenforceable under applicable
law, such provision shall be excluded from this Agreement and the balance of
this Agreement shall be interpreted as if such provision were so excluded and
shall be enforceable in accordance with its terms.

        

        5.6 Entire
Agreement.

        This
Agreement and the other Amendment Transaction Documents and other documents
contemplated hereby and thereby constitute the entire agreement among the
parties hereof with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter hereof and
thereof.

        

        5.7 Further
Assurances.

        The
parties shall execute and deliver all such further instruments and documents and
take all such other actions as may reasonably be required to carry out the
transactions contemplated hereby and to evidence the fulfillment of the
agreements herein contained.

         

         

        
          
            
            

          

          
            6

            
              

            

          

          
            
            

          

        

         

         

        5.8 Applicable
Law.

        This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York without regard to principles of conflicts of laws, except
to the extent that under the New York Uniform Commercial Code the laws of
another jurisdiction govern matters of perfection and the effect of perfection
or non-perfection of any security interest granted under the Patent and
Trademark Security Agreement, as amended by this Agreement.

        

        5.9 Counterparts;
Execution.

        This
Agreement may be executed in any number of counterparts and by the parties
hereto on separate counterparts, but all the counterparts taken together shall
be deemed to constitute one and the same instrument. This Agreement, once
executed by a party, may be delivered to the other party hereto by electronic or
telephone line facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.

        

        5.10 Construction.

        The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction will
be applied against any party.

        

        [Signature
Pages Follow]

        

         

        

        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        

        IN WITNESS WHEREOF, the
Grantor and the Collateral Agent have caused this Agreement to be duly executed
and delivered by their respective officers or other representatives thereunto
duly authorized as of the date first above written.

         

         

        
          	 
      	 
      	 
      
	 
      	
                  EMAGIN
      CORPORATION

                
	 
      	 
      	 
      
	 
      	
                  By:  

                	
                  /s/ 

                
	 
      	
                   

                    
      

                  Name:

                  Title:

                
	 
      	 
      
	 
      	 
      	 
      
	 
      	
                  ALEXANDRA
      GLOBAL MASTER FUND LTD., as Collateral Agent

                   

                  By: ALEXANDRA
      INVESTMENT MANAGEMENT, LLC,

                  as
      Investment Advisor

                
	 
      	 
      	 
      
	 
      	
                  By:  

                	
                  /s/ 

                
	 
      	
                   

                    
      

                  Name:

                  Title:

                
	 
      	 
      

        

        

         

        

        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

        EXHIBIT
A

        

        ACKNOWLEDGEMENT
AND CONSENT

        

        To:
ALEXANDRA GLOBAL MASTER FUND LTD.,

        As
Collateral Agent

         

        c/o
Alexandra Investment Management, LLC

        767 Third
Avenue, 39th
Floor

        New York,
New York 10017

        

        Re:
eMagin Corporation

        

        Reference
is made to the Patent and Trademark Security Agreement, dated as of July 21,
2006 (as amended, supplemented or otherwise modified from time to time, the
“Patent and Trademark Security Agreement”) by and between eMagin Corporation, a
Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a
British Virgin Islands international business company, as collateral agent (in
such capacity, the “Collateral Agent”) on behalf of the Holders. Capitalized
terms used herein and not otherwise defined herein are used herein as defined in
the Patent and Trademark Security Agreement.

        

        The
Grantor has requested that the Holders consent to an Amendment to the Patent and
Trademark Security Agreement on the terms described in that certain Amendment
No. 1 to the Patent and Trademark Security Agreement (“Amendment No. 1 to Patent
and Trademark Security Agreement”), the form of which is attached
hereto.

        

        Pursuant
to Section 13 of the Patent and Trademark Security Agreement, the undersigned
Holder hereby consents to the terms of Amendment No. 1 to Patent and Trademark
Security Agreement and authorizes the Collateral Agent to execute and deliver
Amendment No. 1 to Patent and Trademark Security Agreement on its
behalf.

         

         

        
          	 
      	 
      	 
      
	 
      	
                  Very
      truly yours,

                   

                  NAME
      OF HOLDER:

                  ______________________________

                
	 
      	 
      	 
      
	
                  Dated
      as of July 23, 2007

                	
                  By:  

                	
                  /s/ 

                
	 
      	
                   

                    
      

                  Name:

                  Title:

                
	 
      	 
      

        

        

         

        
          
             

          

          
            9

            
              

            

          

          
             

          

        
Annex IV

      
         

        
          
            

             

            AMENDMENT
NO. 1 TO PLEDGE AND SECURITY AGREEMENT

            

            THIS AMENDMENT NO. 1 TO PLEDGE AND
SECURITY AGREEMENT, dated as of July 23, 2007 (this “Agreement”), by and
between EMAGIN
CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND
LTD., a British Virgin Islands international business company, as
collateral agent (in such capacity, the “Collateral Agent”) on behalf of the
Holders (such capitalized term and all other capitalized terms used herein
having the respective meanings provided herein), amends the PLEDGE AND SECURITY AGREEMENT,
dated as of July 21, 2006 (the “Pledge and Security Agreement”), made by the Grantor to the
Collateral Agent.

            

            W I T N E S S E T H:

            

            WHEREAS, the Grantor and the
Collateral Agent are parties to the Pledge and Security Agreement;

            

            WHEREAS, the Grantor and the
Collateral Agent wish to amend the Pledge and Security Agreement as provided in
this Agreement; and

            

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

            

            1. Definitions. 

            

            1.1 As used in this Agreement, the terms
“Agreement”, “Grantor”, “Collateral Agent” and “Pledge and Security Agreement”
shall have the respective meanings assigned to such terms in the introductory
paragraph of this Agreement.

            

            1.2 Capitalized terms used in this
Agreement and not defined in this Agreement shall have the respective meanings
provided in the Pledge and Security Agreement.

            

            1.3 All the agreements or instruments
herein defined shall mean such agreements or instruments as the same may from
time to time be supplemented or amended or the terms thereof waived or modified
to the extent permitted by, and in accordance with, the terms thereof and of
this Agreement.

            

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

            

            “Amended
Lockbox Agreement” means the Lockbox Agreement, dated as of July 21, 2006, by
and between the Grantor, the Lockbox Agent and the Collateral Agent, as amended
by Amendment No. 1 to Lockbox Agreement, dated as of July 23, 2007, by and
between the Grantor and the Collateral Agent.

            

            “Amended
Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due
2008 issued by the Grantor upon amendment and restatement of the
Notes.

            

             

            
              
                
                

              

              
                1

                
                  

                

              

              
                
                

              

            

             

             

            “Amended
Patent and Trademark Security Agreement” means the Patent and Trademark Security
Agreement, dated as of July 21, 2006, by and between the Grantor and the
Collateral Agent, as amended by Amendment No. 1 to the Patent and Trademark
Security Agreement, dated as of July 23, 2007 by and between the Grantor and the
Collateral Agent.

            

            “Amended
Pledge and Security Agreement” means the Pledge and Security Agreement as
amended by this Agreement.

            

            “Amendment
Agreements” means the several Amendment Agreements, dated as of July 23, 2007 by
and between the Grantor and the Holders.

            

            “Amendment
Transaction Documents” means the Amended Notes, the Amended Warrants, the
Certificate Designations, the Amended Patent and Trademark Security Agreement,
the Amended Pledge and Security Agreement, the Amended Lockbox Agreement and the other
agreements, instruments and documents contemplated hereby and
thereby.

            

            “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock of the Grantor as filed with the Secretary
of State of the State of Delaware.

            

            “Effective
Date” shall have the meaning provided in Section 4.

            

            “Effective
Time” shall have the meaning provided in Amendment Agreements.

            

            “Holders”
means with respect to any time prior to the Effective Time on the Effective Date
the holders of Notes and with respect to any time after the Effective Time on
the Effective Date, the holders from time to time of any Amended Notes or shares
of Series A Preferred Stock.

            

            “Series A
Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock,
par value $0.001 per share, of the Grantor.

            

            2. Amendments.

             

            2.1 Amendments
to Pledge and Security Agreement. Upon the terms and subject to the
conditions of this Agreement, the Pledge and Security Agreement is hereby
amended as follows:

            

            (a) Amendment
of Certain Definitions.
Section 1(d) of the Pledge and Security Agreement shall be amended by deleting
the terms “Additional Note Purchase Agreement”, “Event of Default”, “Holder”,
“Note Purchase Agreements”, “Majority Holders”, “Notes”, “Obligations” and
“Transaction Documents” and the accompanying definitions thereof and
substituting in lieu thereof in their respective alphabetical order the
following:

            

             

            
              
                
                

              

              
                2

                
                  

                

              

              
                
                

              

            

             

             

            “Additional
Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21,
2006, as amended on March 28, 2007, by and between the Company and Stillwater
LLC, as amended by the Amendment Agreement, pursuant to which the Company issued
the Additional Note.

            

            

            “Event of
Default” means:

            

            (1) the failure by the Grantor to perform
in any material respect any obligation of the Grantor under this Agreement as
and when required by this Agreement; or

            

            (2) the failure by the Grantor to pay the
Optional Redemption Price or the Mandatory Redemption Price;
or

            

            (3) the breach by the Grantor of any other
material covenant or other term or condition of the Certificate of Designations;
or

            

            (4) any representation or warranty made by
the Grantor pursuant to this Agreement shall have been untrue in any material
respect when made or deemed to have been made; or

            

            (5) the failure by the Grantor to perform
in any material respect any obligation of the Grantor under the Patent and
Trademark Security Agreement as and when required by the Patent and Trademark
Security Agreement;

            

            (6) any representation or warranty made by
the Grantor pursuant to the Patent and Trademark Security Agreement shall have
been untrue in any material respect when made or deemed to have been
made;

            

            (7) the failure by the Grantor to perform
in any material respect any obligation of the Grantor under the Lockbox
Agreement as and when required by the Lockbox Agreement;

            

            (8) any representation or warranty made by
the Grantor pursuant to the Lockbox Agreement shall have been untrue in any
material respect when made or deemed to have been made; or

            

            (9) any Event of Default, as that term is
defined in any of the Notes.

            

            “Holder”
means any Buyer or any holder from time to time of any Note or any Preferred
Shares.

            

            “Majority
Holders” means at any time (i) such of the holders of Notes who hold Notes
which, based on the outstanding principal amounts thereof, represent a majority
of the aggregate outstanding principal amount of the Notes at such time, and
(ii) such of the holders of Preferred Shares which shares constitute a majority
of the outstanding Preferred Shares at such time.

            

             

            
              
                
                

              

              
                3

                
                  

                

              

              
                
                

              

            

             

             

             

            “Note
Purchase Agreements” means the several Note Purchase Agreements, dated as of
July 21, 2006, by and between the Grantor and the respective Buyer party
thereto, as amended by the Amendment Agreement, pursuant to which the Grantor
issued the Notes, including, without limitation, the Additional Note Purchase
Agreement.

            

            “Notes”
means the Amended and Restated 8% Senior Secured Convertible Notes due 2008
issued by the Grantor upon amendment and restatement of the Grantor’s 6% Senior
Secured Convertible Notes due 2007-2008, as amended, originally issued pursuant
to the Note Purchase Agreements, including, without limitation, the Additional
Note.

            

            “Obligations”
means:

            

            (1) the full and prompt payment when due of
all obligations and liabilities to the Holders, whether now existing or
hereafter arising, under the Transaction Documents and the due performance and
compliance with the terms of the Transaction Documents;

            

            (2) the full and prompt payment when due of
all obligations and liabilities of the Grantor to pay the Optional Redemption
Price and Mandatory Redemption Price pursuant to the Preferred Shares and the
due performance and compliance with the terms of the Certificate of
Designations;

            

            (3) any and all sums advanced by the
Collateral Agent or any Holder in order to preserve the Collateral or to
preserve the Security Interest;

            

            (4) in the event of any proceeding for the
collection or enforcement of any obligations or liabilities of the Grantor
referred to in the immediately preceding clauses (1) and (2) in accordance with
the terms of the Transaction Documents, the reasonable expenses of re-taking,
holding, preparing for sale, selling or otherwise disposing of or realizing on
the Collateral, or of any other exercise by the Collateral Agent of its rights
hereunder, together with reasonable attorneys' fees and court costs;
and

            

            (5) any amounts for which the Collateral
Agent or any Holder is entitled to indemnification under Section
5(j).

            

            

            (b) Additional
Defined Terms. Section 1(d) of the Pledge and Security
Agreement shall be amended by adding new defined terms and definitions thereof,
in the places constituting their respective alphabetical orders, as
follows:

             

             

            
              
                
                

              

              
                4

                
                  

                

              

              
                
                

              

            

             

             

            “Amendment
Agreement” means the several Amendment Agreements, dated as of July 23, 2007, by
and between the Grantor and the Holders.

            

            “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock of the Grantor as filed with the Secretary
of State of the State of Delaware.

            

            “Mandatory
Redemption Price” shall have the meaning assigned to such term in the
Certificate of Designations.

            

            “Optional
Redemption Price” shall have the meaning assigned to such term in the
Certificate of Designations.

            

            “Preferred
Shares” means shares of Series A Senior Secured Convertible Preferred Stock
issued by the Grantor.

            

            (c) 
Amendment of Section 15(b). Section 15(b) of the Pledge and
Security Agreement shall be amended by deleting Section 15(b) of the Pledge and
Security in its entirety and substituting in lieu thereof the
following:

            

            (b) If an Event of Default shall have
occurred and be continuing, the Collateral Agent shall disburse the funds held
by it pursuant to this Agreement as follows:

            

            (i) First, to pay any amounts payable to
the Collateral Agent pursuant to Section 17 that have not been paid by the
Grantor; and then

            

            (ii) Second, to pay each Holder on a pro
rata basis the amount of all accrued and unpaid interest (and interest, if any,
thereon at the Default Rate) then due each Holder in accordance with the terms
of their respective Notes through the most recent Interest Payment Date; and
then

            

            (iii)  Third, to pay each Holder on a pro rata
basis the amount, if any, of unpaid principal then due on the Maturity Date of
any installment of principal of such Holder’s Notes and the unpaid Mandatory
Redemption Price for the Preferred Shares required to be redeemed on the
Mandatory Redemption Date; and then

            

            (iv) Fourth, to pay each Holder, on a pro
rata basis, the amount then due upon acceleration, if any, pursuant to Section 5
of such Holder’s Note(s); and then

            

            (v) Fifth, to pay each Holder who has
exercised its repurchase rights under Section 5 of the Notes or its optional
redemption rights under Section 11 of the Certificate of Designations, on a pro
rata basis, all of the applicable unpaid Repurchase Price for each of the Notes
or portions thereof required to be repurchased and all of the applicable and
unpaid Optional Redemption Price for the Preferred Shares required to be
redeemed; and then

            

            (vi) Sixth, to pay each Holder any other
amount due and payable to such Holder under the Transaction Documents; and
then

            

             

            
              
                
                

              

              
                5

                
                  

                

              

              
                
                

              

            

             

             

            (vii) Seventh, the remaining amount, if any,
to the Grantor.

            

            provided, however, that if
the amount of funds held by the Collateral Agent is insufficient to pay all
amounts due to the Holders pursuant to clauses (ii) and (iv) above, then the
amount paid to the Holders pursuant to this Section 15(b) shall be prorated
among the Holders in proportion to the respective amounts due each Holder
pursuant to the particular such clause or clauses for which such funds are
insufficient.

            

            3. Effect
of Amendment; Confirmation.

            

            (a) From and after the Effective Date, the
rights and obligations of the Grantor, the Collateral Agent and the Holders
under the Pledge and Security Agreement and the Transaction Documents and all
other agreements, documents and instruments contemplated hereby and thereby
shall apply with full force and effect to the Pledge and Security Agreement, as
amended by this Agreement, and each reference to the Pledge and Security
Agreement in the Transaction Documents shall be deemed to be a reference to the
Pledge and Security Agreement, as amended by this Agreement and each reference
in the Pledge and Security Agreement to “this Agreement,” “hereunder,” “hereof,”
“herein,” or words of like import shall mean and be a reference to the Pledge
and Security Agreement as amended hereby, and this Agreement and the Pledge and
Security Agreement shall be read together and construed as a single
instrument.

            

            (b) Except as amended by this Agreement,
the Pledge and Security Agreement shall remain in full force and effect in
accordance with its respective terms.

            

            (c) The execution, delivery and
effectiveness of this Agreement shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of the Collateral Agent, the
Grantor or the Holders under the Pledge and Security Agreement or any of the
Transaction Documents, nor constitute a waiver or amendment of any other
provision of the Pledge and Security Agreement or any of the Transaction
Documents or for any purpose except as expressly set forth
herein.

            

            (d) Nothing in this Agreement or in
connection with the transactions contemplated by this Agreement or otherwise
shall be construed, directly or indirectly, by implication or otherwise to
impair the validity, enforceability, priority, perfection or other attributes of
the security interest granted pursuant to the Pledge and Security
Agreement.

            

            4. Effectiveness.

            

             

            
              
                
                

              

              
                6

                
                  

                

              

              
                
                

              

            

             

             

            The
amendment of the Pledge and Security Agreement pursuant to this Agreement shall
become effective on the date (the “Effective Date”) when all of the following
conditions are satisfied:

            

            (a) The Collateral Agent shall have
received Acknowledgement and Consents, in the form attached hereto as
Exhibit
A, from the Majority
Holders; and

            

            (b) On the Effective Date the Effective
Time under all of the Amendment Agreements shall have
occurred.

            

            5. Miscellaneous. 

            

            5.1 Waiver and
Amendments; Successors and Assigns.

            The
provisions of Section 14 of the Pledge and Security Agreement shall be
applicable to this Agreement as if this Agreement were the “Agreement” referred
to in Section 14 of the Pledge and Security Agreement.

            

            5.2 Counterparts.

            This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

            

            5.3 Titles
and Subtitles.

            The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this
Agreement.

            

            5.4 Notices.

            Any
notice required or permitted under this Agreement shall be given as provided in
the Pledge and Security Agreement.

            

            5.5 Severability.

            If one or
more provisions of this Agreement are held to be unenforceable under applicable
law, such provision shall be excluded from this Agreement and the balance of
this Agreement shall be interpreted as if such provision were so excluded and
shall be enforceable in accordance with its terms.

            

            5.6 Entire
Agreement.

            This
Agreement and the other Amendment Transaction Documents and other documents
contemplated hereby and thereby constitute the entire agreement among the
parties hereof with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter hereof and
thereof.

            

            5.7 Further
Assurances.

            The
parties shall execute and deliver all such further instruments and documents and
take all such other actions as may reasonably be required to carry out the
transactions contemplated hereby and to evidence the fulfillment of the
agreements herein contained.

            

            5.8 Applicable
Law.

            This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York without regard to principles of conflicts of laws, except
to the extent that under the New York Uniform Commercial Code the laws of
another jurisdiction govern matters of perfection and the effect of perfection
or non-perfection of any security interest granted under the Pledge and Security
Agreement, as amended by this Agreement.

            

             

            
              
                
                

              

              
                7

                
                  

                

              

              
                
                

              

            

             

             

             

            5.9 Counterparts;
Execution.

            This
Agreement may be executed in any number of counterparts and by the parties
hereto on separate counterparts, but all the counterparts taken together shall
be deemed to constitute one and the same instrument. This Agreement, once
executed by a party, may be delivered to the other party hereto by electronic or
telephone line facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.

            

            5.10 Construction.

            The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction will
be applied against any party.

            

            [Signature
Pages Follow]

             

             

             

             

             

            

            
              
                
                

              

              
                8

                
                  

                

              

              
                
                

              

            

             

            IN WITNESS WHEREOF, the
Grantor and Collateral Agent have caused this Agreement to be duly executed and
delivered by their respective officers or other representatives thereunto duly
authorized as of the date first above written.

            
              	 
      	 
      	 
      
	 
      	
                      EMAGIN
      CORPORATION

                    
	 
      	 
      	 
      
	 
      	
                      By:  

                    	
                      /s/ 

                    
	 
      	
                       

                        
      

                      Name:

                    
	 
      	
                      Title:

                    

            

            

            
              	 
      	 
      	 
      
	 
      	
                      ALEXANDRA
      GLOBAL MASTER

                      FUND
      LTD., as Collateral Agent

                    
	 
      	 
      	
                       

                       

                      ALEXANDRA
      INVESTMENT MANAGEMENT, LLC, 

                      as
      Investment Advisor

                       

                       

                    
	 
      	
                      By:  

                    	
                      /s/ 

                    
	 
      	
                       

                        
      

                    
	 
      	 
      

            

            

            

            
              
                
                

              

              
                9

                
                  

                

              

              
                
                

              

            

            EXHIBIT
A

            

            ACKNOWLEDGEMENT
AND CONSENT

            

            To:
ALEXANDRA GLOBAL MASTER FUND LTD.,

            As
Collateral Agent

            c/o
Alexandra Investment Management, LLC

            767 Third
Avenue, 39th
Floor

            New York,
New York 10017

            

            Re:
eMagin Corporation

            

            Reference
is made to the Pledge and Security Agreement, dated as of July 21, 2006 (as
amended, supplemented or otherwise modified from time to time, the “Pledge and
Security Agreement”) by and between eMagin Corporation, a Delaware corporation
(the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands
international business company, as collateral agent (in such capacity, the
“Collateral Agent”) on behalf of the Holders. Capitalized terms used herein and
not otherwise defined herein are used herein as defined in the Pledge and
Security Agreement.

            

            The
Grantor has requested that the Holders consent to an Amendment to the Pledge and
Security Agreement on the terms described in that certain Amendment No. 1 to the
Pledge and Security Agreement (“Amendment No. 1 to Pledge and Security
Agreement”), the form of which is attached hereto.

            

            Pursuant
to Section 14 of the Pledge and Security Agreement, the undersigned Holder
hereby consents to the terms of Amendment No. 1 to Pledge and Security Agreement
and authorizes the Collateral Agent to execute and deliver Amendment No. 1 to
Pledge and Security Agreement on its behalf.

             

            
              	 
      	 
      	
                      Very
      truly yours,

                    
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                       Dated as of July 23,
      2007

                    	
                      NAME
      OF HOLDER:

                    
	 
      	 
      	 
      
	 
      	
                      By:  

                    	
                      /s/ 

                    
	 
      	
                       

                        
      

                      Name:

                    
	 
      	
                      Title: 

                    

            

            

             

          

           

          
            
               

            

            
              10

              
                

              

            

            
               

            

          

        Annex
V

         

         

        
          
             

            AMENDMENT
NO. 1 TO LOCKBOX AGREEMENT

            

            THIS AMENDMENT NO. 1 TO LOCKBOX
AGREEMENT, dated as of July 23, 2007 (this “Agreement”), by and between
EMAGIN CORPORATION, a
Delaware corporation (the “Company”), and ALEXANDRA GLOBAL MASTER FUND
LTD., a British Virgin Islands international business company, as
collateral agent (in such capacity, the “Collateral Agent”) on behalf of the
Holders (such capitalized term and all other capitalized terms used herein
having the respective meanings provided herein), amends the LOCKBOX AGREEMENT, dated as of
July 21, 2006 (the “Lockbox Agreement”), made by the Company to the
Collateral Agent.

            

            W I T N E S S E T H:

            

            WHEREAS, the Company and the
Collateral Agent are parties to the Lockbox Agreement;

            

            WHEREAS, the Company and the
Collateral Agent wish to amend the Lockbox Agreement as provided in this
Agreement; and

            

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

            

            1. Definitions. 

            

            1.1 As used in this Agreement, the terms
“Agreement”, “Company”, “Collateral Agent” and “Lockbox Agreement” shall have
the respective meanings assigned to such terms in the introductory paragraph of
this Agreement.

            

            1.2 Capitalized terms used in this
Agreement and not defined in this Agreement shall have the respective meanings
provided in the Lockbox Agreement.

            

            1.3 All the agreements or instruments
herein defined shall mean such agreements or instruments as the same may from
time to time be supplemented or amended or the terms thereof waived or modified
to the extent permitted by, and in accordance with, the terms thereof and of
this Agreement.

            

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

            

            “Amended
Lockbox Agreement” means the Lockbox Agreement, as amended by this
Agreement.

            

            “Amended
Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due
2008 issued by the Company upon amendment and restatement of the
Notes.

            

            

            
              
                
                

              

              
                1

                
                  

                

              

              
                
                

              

            

            

            “Amended
Patent and Trademark Security Agreement” means the Patent and Trademark Security
Agreement dated as of July 21, 2006, by and between the Company and the
Collateral Agent, as amended by Amendment No. 1 to Patent and Trademark Security
Agreement, dated as of July 23, 2007, by and between the Company and the
Collateral Agent.

            

            “Amended
Pledge and Security Agreement” means the Pledge and Security Agreement, dated as
of July 21, 2006, by and between the Company and the Collateral Agent, as
amended by Amendment No. 1 to the Pledge and Security Agreement, dated as of
July 23, 2007 by and between the Company and the Collateral Agent.

            

            “Amendment
Agreements” means the several Amendment Agreements, dated as of July 23, 2007 by
and between the Company and the Holders.

            

            “Amendment
Transaction Documents” means the Amended Notes, the Amended Warrants, the
Certificate Designations, the Amended Patent and Trademark Security Agreement,
the Amended Pledge and Security Agreement, the Amended Lockbox Agreement and the other
agreements, instruments and documents contemplated hereby and
thereby.

            

            “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock of the Company as filed with the Secretary
of State of the State of Delaware.

            

            “Effective
Date” shall have the meaning provided in Section 4.

            

            “Effective
Time” shall have the meaning provided in the Amendment Agreements.

            

            “Holders”
means with respect to any time prior to the Effective Time on the Effective Date
the holders of Notes and with respect to any time after the Effective Time on
the Effective Date, the holders from time to time of any Amended Notes or shares
of Series A Preferred Stock.

            

            “Series A
Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock,
par value $0.001 per share, of the Company.

            

            2. Amendments.

             

            2.1 Amendments
to Lockbox Agreement. Upon the terms and subject to the
conditions of this Agreement, the Lockbox Agreement is hereby amended as
follows:

            

            (a) Amendment
of Certain Definitions.
Section 1(a) of the Lockbox Agreement shall be amended by deleting the terms
“Additional Note Purchase Agreement”, “Event of Default”, “Holder”, “Note
Purchase Agreements”, “Majority Holders”, “Notes” and “Transaction Documents”
and the accompanying definitions thereof and substituting in lieu thereof in
their respective alphabetical order the following:

            

            

            
              
                
                

              

              
                2

                
                  

                

              

              
                
                

              

            

            

            “Additional
Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21,
2006, as amended on March 28, 2007, by and between the Company and Stillwater
LLC, as amended by the Amendment Agreement, pursuant to which the Company issued
the Additional Note.

            

            “Event of
Default” means:

            

            (1) the failure by the Company to perform
in any material respect any obligation of the Company under this Agreement as
and when required by this Agreement; or

            

            (2) the failure by the Company to pay the
Optional Redemption Price or the Mandatory Redemption Price;
or

            

            (3) the breach by the Company of any other
material covenant or other term or condition of the Certificate of Designations;
or

            

            (4) any representation or warranty made by
the Company pursuant to this Agreement shall have been untrue in any material
respect when made or deemed to have been made; or

            

            (5) the failure by the Company to perform
in any material respect any obligation of the Company under the Lockbox
Agreement as and when required by the Lockbox Agreement;

            

            (6) any representation or warranty made by
the Company pursuant to the Lockbox Agreement shall have been untrue in any
material respect when made or deemed to have been made;

            

            (7) any Event of Default, as that term is
defined in any of the Notes.

            

            “Holder”
means any Buyer or any holder from time to time of any Note or any Preferred
Shares.

            

            “Majority
Holders” means at any time (i) such of the holders of Notes who hold Notes
which, based on the outstanding principal amounts thereof, represent a majority
of the aggregate outstanding principal amount of the Notes at such time, and
(ii) such of the holders of Preferred Shares which shares constitute a majority
of the outstanding Preferred Shares at such time.

            

            “Note
Purchase Agreements” means the several Note Purchase Agreements, dated as of
July 21, 2006, by and between the Company and the respective Buyer party
thereto, as amended by the Amendment Agreement, pursuant to which the Company
issued the Notes, including, without limitation, the Additional Note Purchase
Agreement.

            

            

            
              
                
                

              

              
                3

                
                  

                

              

              
                
                

              

            

             

            “Notes”
means the Amended and Restated 8% Senior Secured Convertible Notes due 2008
issued by the Company upon amendment and restatement of the Company’s 6% Senior
Secured Convertible Notes due 2007-2008, as amended, originally issued pursuant
to the Note Purchase Agreements, including, without limitation, the Additional
Note.

            

            (b) Additional
Defined Terms. Section 1(a) of the Lockbox Agreement
shall be amended by adding new defined terms and definitions thereof, in the
places constituting their respective alphabetical orders, as
follows:

            

            “Amendment
Agreement” means the several Amendment Agreements, dated as of July 23, 2007, by
and between the Company and the Holders.

            

            “Certificate
of Designations” means the Certificate of Designations of Series A Senior
Secured Convertible Preferred Stock of the Company as filed with the Secretary
of State of the State of Delaware.

            

            “Mandatory
Redemption Price” shall have the meaning assigned to such term in the
Certificate of Designations.

            

            “Optional
Redemption Price” shall have the meaning assigned to such term in the
Certificate of Designations.

            

            “Preferred
Shares” means shares of Series A Senior Secured Convertible Preferred Stock
issued by the Company.

            

            3. Effect
of Amendment; Confirmation.

            

            (a) From and after the Effective Date, the
rights and obligations of the Company, the Collateral Agent and the Holders
under the Lockbox Agreement and the Transaction Documents and all other
agreements, documents and instruments contemplated hereby and thereby shall
apply with full force and effect to the Lockbox Agreement, as amended by this
Agreement, and each reference to the Lockbox Agreement in the Transaction
Documents shall be deemed to be a reference to the Lockbox Agreement, as amended
by this Agreement and each reference in the Lockbox Agreement to “this
Agreement,” “hereunder,” “hereof,” “herein,” or words of like import shall mean
and be a reference to the Lockbox Agreement as amended hereby, and this
Agreement and the Lockbox Agreement shall be read together and construed as a
single instrument.

            

            (b) Except as amended by this Agreement,
the Lockbox Agreement shall remain in full force and effect in accordance with
its respective terms.

            

            (c) The execution, delivery and
effectiveness of this Agreement shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of the Collateral Agent, the
Company or the Holders under the Lockbox Agreement or any of the Transaction
Documents, nor constitute a waiver or amendment of any other provision of the
Lockbox Agreement or any of the Transaction Documents or for any purpose except
as expressly set forth herein.

            

            

            
              
                
                

              

              
                4

                
                  

                

              

              
                
                

              

            

             

            (d) Nothing in this Agreement or in
connection with the transactions contemplated by this Agreement or otherwise
shall be construed, directly or indirectly, by implication or otherwise to
impair the validity, enforceability, priority, perfection or other attributes of
the security interest granted pursuant to the Lockbox
Agreement.

            

            4. Effectiveness.

            

            The
amendment of the Lockbox Agreement pursuant to this Agreement shall become
effective on the date (the “Effective Date”) when all of the following
conditions are satisfied:

            

            (a) The Collateral Agent shall have
received Acknowledgement and Consents, in the form attached hereto as
Exhibit
A, from the Majority
Holders; and

            

            (b) On the Effective Date the Effective
Time under all of the Amendment Agreements shall have
occurred.

            

            5. Miscellaneous. 

            

            5.1 Waiver and
Amendments; Successors and Assigns.

            The
provisions of Section 15 of the Lockbox Agreement shall be applicable to this
Agreement as if this Agreement were the “Agreement” referred to in Section 15 of
the Lockbox Agreement.

            

            5.2 Counterparts.

            This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

            

            5.3 Titles
and Subtitles.

            The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this
Agreement.

            

            5.4 Notices.

            Any
notice required or permitted under this Agreement shall be given as provided in
the Lockbox Agreement.

            

            5.5 Severability.

            If one or
more provisions of this Agreement are held to be unenforceable under applicable
law, such provision shall be excluded from this Agreement and the balance of
this Agreement shall be interpreted as if such provision were so excluded and
shall be enforceable in accordance with its terms.

            

            5.6 Entire
Agreement.

            This
Agreement and the other Amendment Transaction Documents and other documents
contemplated hereby and thereby constitute the entire agreement among the
parties hereof with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter hereof and
thereof.

            

            

            
              
                
                

              

              
                5

                
                  

                

              

              
                
                

              

            

            

            5.7 Further
Assurances.

            The
parties shall execute and deliver all such further instruments and documents and
take all such other actions as may reasonably be required to carry out the
transactions contemplated hereby and to evidence the fulfillment of the
agreements herein contained.

            

            5.8 Applicable
Law.

            This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York without regard to principles of conflicts of laws, except
to the extent that under the New York Uniform Commercial Code the laws of
another jurisdiction govern matters of perfection and the effect of perfection
or non-perfection of any security interest granted under the Lockbox Agreement,
as amended by this Agreement.

            

            5.9 Counterparts;
Execution.

            This
Agreement may be executed in any number of counterparts and by the parties
hereto on separate counterparts, but all the counterparts taken together shall
be deemed to constitute one and the same instrument. This Agreement, once
executed by a party, may be delivered to the other party hereto by electronic or
telephone line facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.

            

            5.10 Construction.

            The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction will
be applied against any party.

            

            [Signature
Pages Follow]

            

            

            
              
                
                

              

              
                6

                
                  

                

              

              
                
                

              

            

             

            IN WITNESS WHEREOF, the
Company and the Collateral Agent have caused this Agreement to be duly executed
and delivered by their respective officers or other representatives thereunto
duly authorized as of the date first above written.

             

             

            
              	 
      	 
      	 
      
	 
      	
                      EMAGIN
      CORPORATION

                    
	 
      	 
      	 
      
	 
      	
                      By:  

                    	
                      /s/ 

                    
	 
      	
                       

                        
      

                      Name:

                      Title:

                    
	 
      	 
      

            

            

            
              	 
      	 
      	 
      
	 
      	
                      ALEXANDRA
      GLOBAL MASTER FUND LTD., as Collateral Agent

                       

                      By: ALEXANDRA
      INVESTMENT MANAGEMENT, LLC,

                      as
      Investment Advisor

                    
	 
      	 
      	 
      
	 
      	
                      By:  

                    	
                      /s/ 

                    
	 
      	
                       

                        
      

                      Name:

                      Title:

                    
	 
      	 
      

            

             

             

            

            
              
                
                

              

              
                7

                
                  

                

              

              
                
                

              

            

            EXHIBIT
A

            

            ACKNOWLEDGEMENT
AND CONSENT

            

            To:
ALEXANDRA GLOBAL MASTER FUND LTD.,

            As
Collateral Agent

            c/o
Alexandra Investment Management, LLC

            767 Third
Avenue, 39th
Floor

            New York,
New York 10017

            

            Re:
eMagin Corporation

            

            Reference
is made to the Lockbox Agreement, dated as of July 21, 2006 (as amended,
supplemented or otherwise modified from time to time, the “Lockbox Agreement”)
by and between eMagin Corporation, a Delaware corporation (the “Company”), to
Alexandra Global Master Fund Ltd., a British Virgin Islands international
business company, as collateral agent (in such capacity, the “Collateral Agent”)
on behalf of the Holders. Capitalized terms used herein and not otherwise
defined herein are used herein as defined in the Lockbox Agreement.

            

            The
Company has requested that the Holders consent to an Amendment to the Lockbox
Agreement on the terms described in that certain Amendment No. 1 to the Lockbox
Agreement (“Amendment No. 1 to Lockbox Agreement”), the form of which is
attached hereto.

            

            Pursuant
to Section 15 of the Lockbox Agreement, the undersigned Holder hereby consents
to the terms of Amendment No. 1 to Lockbox Agreement and authorizes the
Collateral Agent to execute and deliver Amendment No. 1 to Lockbox Agreement on
its behalf.

             

             

            
              	 
      	 
      	 
      
	 
      	
                      Very
      truly yours,

                       

                      NAME
      OF HOLDER:

                      ______________________________

                    
	 
      	 
      	 
      
	
                      Dated
      as of July 23, 2007

                    	
                      By:  

                    	
                      /s/ 

                    
	 
      	
                       

                        
      

                      Name:

                      Title:

                    
	 
      	 
      

            

            

            

             

            
              
                 

              

              
                8

                
                  

                

              

              
                 

              

            

          

          
            
            

          

           

          Annex
VI

          
            

               

              EMAGIN
CORPORATION

              

              CERTIFICATE
OF DESIGNATIONS OF

              SERIES
A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

              

              (Pursuant
to Section 151 of the General Corporation

              Law of
the State of Delaware)

              

                                                               

              

              eMagin Corporation, a Delaware
corporation (the “Corporation”), in accordance with the provisions of Section
103 of the General Corporation Law of the State of Delaware (the “DGCL”), DOES
HEREBY CERTIFY: 

              

              That
pursuant to authority vested in the Board of Directors of the Corporation by the
Certificate of Incorporation, as amended, of the Corporation, the Board of
Directors of the Corporation, [at a meeting duly called and
held on] [by unanimous
written consent dated]
July __, 2007 adopted a resolution providing for the creation of a series
of the Corporation's Preferred Stock, $.001 par value, which series is
designated as “Series A Convertible Preferred Stock,” which resolution is as
follows:

              

              RESOLVED, that pursuant to
authority vested in the Board of Directors by the Certificate of Incorporation,
as amended, of the Corporation, the Board of Directors does hereby provide for
the creation of a series of Preferred Stock, $.001 par value (hereinafter called
the “Preferred Stock”), of the Corporation, and to the extent that the voting
powers and the designations, preferences and relative, participating, optional
or other special rights thereof and the qualifications, limitations or
restrictions of such rights have not been set forth in the Certificate of
Incorporation, as amended, of the Corporation, does hereby fix the same as
follows:

              

              SERIES
A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

              

              Section
1. Definitions. (a) All the agreements or instruments
defined in this Certificate of Designations shall mean such agreements or
instruments as the same may from time to time be supplemented or amended or the
terms thereof waived or modified to the extent permitted by, and in accordance
with, the terms thereof and of this Certificate of
Designations.

              

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

              

              “Accrual
Amount” means with respect to any share of Series A Convertible Preferred Stock
on any date the amount of all accrued but unpaid dividends on such share from
the Issuance Date to the date of determination.

              

               

              
                
                  
                  

                

                
                  1

                  
                    

                  

                

                
                  
                  

                

              

               

               

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

              

              “Aggregation
Parties” shall have the meaning set forth in Section 10(g).

              

              “Amendment
Agreements” means the several Amendment Agreements, dated as of July 23, 2007,
by and between the Corporation and the holders of Notes.

              

              “AMEX”
means the American Stock Exchange, Inc.

              

              “Average
Market Price” for any date means the arithmetic average of the Market Price for
each of the Trading Days during the applicable Measurement Period.

              

              “Board of
Directors” or “Board” means the Board of Directors of the
Corporation.

              

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

              

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

              

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

              

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

              

              “Common
Stock” includes the Common Stock, $.001 par value, of the Corporation as
authorized on the date hereof, and any other securities into which or for which
the Common Stock may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise and any
stock (other than Common Stock) and other securities of the Corporation or any
other Person which any Holder at any time shall be entitled to receive, or shall
have received, on the exercise of conversion rights of the Series A Convertible
Preferred Stock, in lieu of or in addition to Common Stock.

              

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

              

               

              
                
                  
                  

                

                
                  2

                  
                    

                  

                

                
                  
                  

                

              

               

               

               

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

              

              “Conversion
Date” means the date on which a Conversion Notice is given by a Holder, whether
by mail, courier, personal service, telephone line facsimile transmission or
other means, as provided in Section 10(b).

              

              “Conversion
Notice” means a written notice, duly signed by or on behalf of a Holder
substantially in the form set forth in Section 14(a).

              

              “Conversion
Price” means the “Conversion Price” of the Notes in effect on the Issuance Date;
provided,
however, that the Conversion Price
shall be subject to further adjustment as provided in Section 10.

              

              “Converted
Market Price” means, for any share of Series A Convertible Preferred Stock as of
any date of determination, an amount equal to the product obtained by
multiplying (x) the number of shares of Common Stock which would, at the time of
such determination, be issuable on conversion in accordance with Section 10(a)
of one share of Series A Convertible Preferred Stock if a Conversion Notice were
given by the holder of such share of Series A Convertible Preferred Stock on the
date of such determination (determined without regard to any limitation on
conversion based on beneficial ownership contained in Section 10(g)) times (y) the Average Market
Price of the Common Stock during the Measurement Period for the date of such
determination.

              

              “Corporation
Notice” means a Corporation Notice substantially in the form set forth in
Section 14(c).

              

              “Current
Fair Market Value” when used with respect to the Common Stock as of a specified
date means with respect to each share of Common Stock the average of the closing
prices of the Common Stock sold on all securities exchanges (including the
OTCBB, the NYSE, the AMEX, the Nasdaq and the Nasdaq Capital Market) on which
the Common Stock may at the time be listed, or, if there have been no sales on
any such exchange on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of regular trading such day, or, if on
such day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City
time, or, if on such day the Common Stock is not quoted in the NASDAQ System,
the average of the highest bid and lowest asked price on such day in the
domestic over-the-counter market as reported by the Pink Sheets, LLC, or any
similar successor organization, in each such case averaged over a period of five
Trading Days consisting of the day as of which the Current Fair Market Value of
Common Stock is being determined (or if such day is not a Trading Day, the
Trading Day next preceding such day) and the four consecutive Trading Days prior
to such day. If on the date for which Current Fair Market Value is to be
determined the Common Stock is not listed on any securities exchange or quoted
in the NASDAQ System or the over-the-counter market, the Current Fair Market
Value of Common Stock shall be the greater of (i) the highest price per share of
Common Stock at which the Corporation has sold shares of Common Stock or Common
Stock Equivalents during the 365 days prior to the date of such determination
and (ii) the highest price per share which the Corporation could then obtain
from a willing buyer (not an employee or director of the Corporation at the time
of determination) for shares of Common Stock sold by the Corporation, from
authorized but unissued shares, as determined in good faith by the Board of
Directors.

               

               

              
                
                  
                  

                

                
                  3

                  
                    

                  

                

                
                  
                  

                

              

               

              “Current
Market Price” shall
mean the arithmetic average of the daily Market Prices per share of Common Stock
for the five consecutive Trading Days immediately prior to the date in question;
provided, however, that
(1) if the “ex” date (as hereinafter defined) for any event (other than
the issuance or distribution requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 10(c)(1), (2), (3), (4),
(5), (6) or (7), occurs during such five consecutive Trading Days, the Market
Price for each Trading Day prior to the “ex” date for such other event shall be
adjusted by multiplying such Market Price by the same fraction by which the
Conversion Price is so required to be adjusted as a result of such other event,
(2) if the “ex” date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion Price
pursuant to Section 10(c)(1), (2), (3), (4), (5), (6) or (7), occurs on or after
the “ex” date for the issuance or distribution requiring such computation and
prior to the day in question, the Market Price for each Trading Day on and after
the “ex” date for such other event shall be adjusted by multiplying such Market
Price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event, and (3) if the “ex”
date for the issuance or distribution requiring such computation is prior to the
day in question, after taking into account any adjustment required pursuant to
clause (1) or (2) of this proviso, the Market Price for each Trading Day on or
after such “ex” date shall be adjusted by adding thereto the amount of any cash
and the fair market value (as determined by the Board of Directors in a manner
consistent with any determination of such value for purposes of Section 10(c)(4)
or (6), whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close of
business on the day before such “ex” date. Notwithstanding the foregoing,
whenever successive adjustments to the Conversion Price are called for pursuant
to Section 10(c), such adjustments shall be made to the Current Market Price as
may be necessary or appropriate to effectuate the intent of Section 10(c) and to
avoid unjust or inequitable results as determined in good faith by the Board of
Directors.

              

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

              

              “DTC”
shall have the meaning provided in Section 10(b)(2).

              

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

              

               

              
                
                  
                  

                

                
                  4

                  
                    

                  

                

                
                  
                  

                

              

               

               

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

              

              “Excluded
Shares” shall have the meaning provided in Section 10(g).

              

              “Expiration
Time” shall have the meaning provided in Section 10(c)(6).

              

              “FAST”
shall have the meaning provided in Section 10(b)(2).

              

              “Fundamental
Change” means

               

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

               

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

               

              (c) The acquisition by a Person or entity
or group of Persons or entities acting in concert as a partnership, limited
partnership, syndicate or group, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise, of beneficial
ownership of securities of the Corporation representing 50% or more of the
combined voting power of the outstanding voting securities of the Corporation
ordinarily (and apart from rights accruing in special circumstances) having the
right to vote in the election of directors, provided, however,
that (1) an acquisition by
a group of unrelated and unaffiliated Persons comprised solely of newly issued
equity securities of the Corporation which issuance results in the pro rata
dilution of the equity interests of the Persons who are holders of Common Stock
immediately prior to such acquisition and for which no consideration is paid to
or for the benefit of any holders of Common Stock or the Affiliates of such
holders of Common Stock and (2) the issuance of shares of Common Stock upon
conversion, exercise or exchange of Common Stock Equivalents outstanding as of
the date hereof (including shares issuable upon conversion of the Notes or
exercise of the Warrants) in accordance with the terms of such Common Stock
Equivalents in effect on the date hereof, shall not constitute a Fundamental
Change.

              

               

              
                
                  
                  

                

                
                  5

                  
                    

                  

                

                
                  
                  

                

              

               

               

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

              

              “Holder”
means at any time with respect to any share of Series A Convertible Preferred
Stock the Person shown as the holder of record of such share of Series A
Convertible Preferred Stock on the records of the Corporation relating to the
Series A Convertible Preferred Stock which records are maintained in accordance
with applicable law.

              

              “Holder
Notice” means a Holder Notice substantially in the form set forth in Section
14(d).

              

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

              

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

              

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

              

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

              

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

              

               

              
                
                  
                  

                

                
                  6

                  
                    

                  

                

                
                  
                  

                

              

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

              

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

              

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

               

              

              “Issuance
Date” means the first date of original issuance of any shares of Series A
Convertible Preferred Stock.

              

              “Junior
Dividend Stock” means, collectively, the Common Stock and any other class or
series of capital stock of the Corporation ranking junior as to dividends to the
Series A Convertible Preferred Stock.

              

              “Junior
Liquidation Stock” means the Common Stock or any other class or series of the
Corporation's capital stock ranking junior as to liquidation rights to the
Series A Convertible Preferred Stock.

              

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

              

              “Liquidation
Preference” means, for each share of Series A Convertible Preferred Stock, the
sum of (i) an amount equal to the Accrual Amount thereon to the date of final
distribution to such holders and (ii) $1,000.00.

              

              “Majority
Holders” means with respect to any time prior to the Issuance Date, the Majority
Noteholders, and with respect to any time on or after the Issuance Date, the
holders of shares of Series A Convertible Preferred Stock which shares
constitute a majority of the outstanding shares of Series A Convertible
Preferred Stock.

              

              
                	
                        “Majority
      Noteholders” means at any time such of the holders of the Notes who hold
      Notes which, based on the outstanding principal amounts thereof, represent
      a majority of the aggregate outstanding principal amount of the Notes at
      such time.

                      

              

              

              “Mandatory
Redemption Date” means December 21, 2008.

               

              
                
                  
                  

                

                
                  7

                  
                    

                  

                

                
                  
                  

                

              

               

               

              “Mandatory
Redemption Notice” means a Mandatory Redemption Notice substantially in the form
set forth in Section 14(b).

              

              “Mandatory
Redemption Price” means an amount in cash equal to the sum of (A) the Stated
Value plus (B) an
amount equal to the Accrual Amount plus (C) an amount equal to
accrued and unpaid interest, if any, on cash dividends in arrears on such share
of Series A Convertible Preferred Stock to the Mandatory Redemption
Date.

               

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

              

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

              

              “Measurement
Period” means, with respect to any date, the period of ten consecutive Trading
Days ending on the Trading Day prior to such date.

              

              “Nasdaq”
means the Nasdaq Global Market.

              

              “Newly
Issued Shares” shall have the meaning provided in Section 10(c)(6).

              

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

              

              “Notes”
means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 of
the Corporation.

              

              “Note
Purchase Agreement” means the Note Purchase Agreement, dated as of July 21,
2006, by and between the Corporation and the original holders of the Notes, as
amended by the Amendment Agreement.

              

               

              
                
                  
                  

                

                
                  8

                  
                    

                  

                

                
                  
                  

                

              

               

               

               

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

              

              “Optional
Redemption Event” means any one of the following events:

              

              (1) The Common Stock ceases to be traded on
the OTCBB and is not listed for trading on any of the Nasdaq, the Nasdaq Capital
Market, the NYSE, the Pink Sheets, LLC or any similar
organization;

              

              (2) The Corporation shall (A) default in
the timely performance of the obligation to issue shares of Common Stock upon
conversion of shares of Series A Convertible Preferred Stock as and when
required by Section 10 or (B) fail or default in the timely performance of any
material obligation (other than as specifically set forth elsewhere in this
definition) to a holder of shares of Series A Convertible Preferred Stock under
the terms of this Certificate of Designations or under any other agreement or
document entered into in connection with the issuance of shares of Series A
Convertible Preferred Stock, as such instruments may be amended from time to
time;
provided, however, that
(i) with respect to the first two occurrences of an event described in clause
(A) above, each of such events shall be an Optional Redemption Event only if
such default shall have continued for a period of five Trading Days after notice
thereof is given to the Corporation by any holder of shares of Series A
Convertible Preferred Stock and (ii) an event described in clause (B) above
shall be an Optional Redemption Event only if such failure or default shall have
continued for a period of 10 days after notice thereof is given to the
Corporation by any holder of shares of Series A Convertible Preferred
Stock;

              

              (2) Any Fundamental
Change;

              

              (3) Any material representation or warranty
of the Corporation made herein or in any other Transaction Document shall be
false or misleading in any material respect when made or deemed
made;

              

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

              

               

              
                
                  
                  

                

                
                  9

                  
                    

                  

                

                
                  
                  

                

              

               

               

              (9) An Event of Default (as defined in the
Notes) shall have occurred.

              

              “Optional
Redemption Price” for each share of Series A Convertible Preferred Stock means
an amount in cash equal to the greater of (x) the sum of (A) the Stated Value
plus (B) an amount
equal to the Accrual Amount plus (C) an amount equal to
accrued and unpaid interest, if any, on cash dividends in arrears on such share
of Series A Convertible Preferred Stock to the applicable Optional Redemption
Date and (y) the Converted Market Price.

              

              “OTCBB”
means the Over-The-Counter Bulletin Board.

              

              “Parity
Dividend Stock” means any class or series of the Corporation's capital stock
ranking, as to dividends, on a parity with the Series A Convertible Preferred
Stock.

              

              “Parity
Liquidation Stock” means any class or series of the Corporation's capital stock
having parity as to liquidation rights with the Series A Convertible Preferred
Stock.

              

              “Patent
and Trademark Security Agreement” means the Patent and Trademark Security
Agreement, dated as of July 21, 2006, by and between the Corporation and the
Collateral Agent, as amended by Amendment No. 1 to Patent and Trademark Security
Agreement, dated as of July 23, 2007, by and between the Corporation and the
Collateral Agent.

              

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

              

              “Permitted
Indebtedness” shall have the meaning provided in the Notes.

              

              “Permitted
Liens” shall have the meaning provided in the Notes.

              

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

              

              “Pledge
and Security Agreement” means the Pledge and Security Agreement, dated as of
July 21, 2006, by and between the Corporation and the Collateral Agent, as
amended by Amendment No. 1 to Pledge and Security Agreement, dated as of July
23, 2007, by and between the Corporation and the Collateral Agent.

              

               

              
                
                  
                  

                

                
                  10

                  
                    

                  

                

                
                  
                  

                

              

               

               

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

               

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

              

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

              

              “Restricted
Ownership Percentage” shall have the meaning provided in Section
10(g).

              

              “SEC”
means the United States Securities and Exchange Commission.

              

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

              

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

               

              “Senior
Dividend Stock” means any class or series of capital stock of the Corporation
ranking senior as to dividends to the Series A Convertible Preferred
Stock.

              

              “Senior
Liquidation Stock” means any class or series of capital stock of the Corporation
ranking senior as to liquidation rights to the Series A Convertible Preferred
Stock.

              

              “Series A
Convertible Preferred Stock” means the Series A Senior Secured Convertible
Preferred Stock, $.001 par value, of the Corporation.

              

              “Stated
Value” means $1,000 per share of Series A Convertible Preferred
Stock.

              

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

              

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

              

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

              

              “Transaction
Documents” shall have the meaning provided in the Amendment
Agreements.

               

              
                
                  
                  

                

                
                  11

                  
                    

                  

                

                
                  
                  

                

              

               

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

              

              “Trigger
Event” shall have the meaning provided in Section 10(c)(4).

              

              “VWAP” of
any security on any Trading Day means the volume-weighted average price of such
security on such Trading Day on the Principal Market, as reported by Bloomberg
Financial, L.P., based on a Trading Day from 9:30 a.m., Eastern Time, to 4:00
p.m., Eastern Time, using the AQR Function, for such Trading Day; provided, however, that during any period the
VWAP is being determined, the VWAP shall be subject to equitable adjustments
from time to time on terms consistent with Section 10(c) and otherwise
reasonably acceptable to the Majority Holders for (i) stock splits, (ii) stock
dividends, (iii) combinations, (iv) capital reorganizations, (v) issuance to all
holders of Common Stock of rights or warrants to purchase shares of Common
Stock, (vi) distribution by the Corporation to all holders of Common Stock of
evidences of indebtedness of the Corporation or cash (other than regular
quarterly cash dividends), and (vii) similar events relating to the Common
Stock, in each case which occur, or with respect to which the “ex” date occurs,
during such period.

              

              “Warrants”
means the Common Stock Purchase Warrants issued by the Corporation in connection
with the issuance of the Notes.

              

              Section
2. Designation
and Amount. The shares of such series shall be
designated as “Series A Senior Secured Convertible Preferred Stock”, par value
$.001 per share, and the maximum number of shares constituting the Series A
Convertible Preferred Stock shall be 3,000, and shall not be subject to
increase. The Corporation shall not issue any shares of Series A Convertible
Preferred Stock other than pursuant to the Notes, unless such issuance shall
have been approved by the Majority Holders. Any shares of Series A Convertible
Preferred Stock which are redeemed by the Corporation and retired and any shares
of Series A Convertible Preferred Stock which are converted in accordance with
Section 10 shall be restored to the status of authorized, unissued and
undesignated shares of the Corporation's class of Preferred Stock and shall not
be subject to issuance, and may not thereafter be outstanding, as shares of
Series A Convertible Preferred Stock.

              

              Section
3. Series
A Convertible Preferred Stock Capital. The amount to be represented in stated
capital at all times for each share of Series A Convertible Preferred Stock
shall be an amount equal to the sum of $1,000.

              

              Section
4. Rank. Subject to Section 12(b), all Series A
Convertible Preferred Stock shall rank (i) senior to the Common Stock, now or
hereafter issued, as to payment of dividends and distribution of assets upon
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary, (ii) senior to any additional series of the class of Preferred
Stock which series the Board of Directors may from time to time authorize, both
as to payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
and (iii) senior to any additional class of preferred stock (or series of
preferred stock of such class) which the Board of Directors or the stockholders
may from time to time authorize in accordance herewith.

              

               

              
                
                  
                  

                

                
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              Section
5. Distributions. (a) The holders of shares of Series A
Convertible Preferred Stock shall be entitled to receive, when, as, and if
declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $80.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series A Convertible Preferred Stock and shall be payable in
cash on the Mandatory Redemption Date. The amount of such dividends shall be
included in the Accrual Amount for each share. The amount of dividends payable
for the initial dividend period and any period shorter than a full yearly
dividend period shall be computed on the basis of a 360-day year of twelve
30-day months. No dividends or other distributions, other than the dividends
payable solely in shares of any Junior Dividend Stock, shall be paid or set
apart for payment on any shares of Junior Dividend Stock, and no purchase,
redemption, or other acquisition shall be made by the Corporation of any shares
of Junior Dividend Stock, unless and until all accrued and unpaid cash dividends
on the Series A Convertible Preferred Stock and interest on dividends in arrears
at the rate specified herein shall have been paid or declared and set apart for
payment.

              

              Any
references to “distribution” contained in this Section 5 shall not be deemed to
include any stock dividend or distributions made in connection with any
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary.

              

              (b) Neither the Corporation nor any
Subsidiary shall redeem, repurchase or otherwise acquire in any one transaction
or series of related transactions any shares of Common Stock, Junior Dividend
Stock or Junior Liquidation Stock if the number of shares so repurchased,
redeemed or otherwise acquired in such transaction or series of related
transactions is more than either (x) 5% of the number of shares of Common Stock,
Junior Dividend Stock or Junior Liquidation Stock, as the case may be,
outstanding immediately prior to such transaction or series of related
transactions or (y) 1% of the number of shares of Common Stock, Junior Dividend
Stock or Junior Liquidation Stock, as the case may be, outstanding immediately
prior to such transaction or series of related transactions if such transaction
or series of related transactions is with any one Person or group of affiliated
Persons, unless (x) at the time of such redemption, repurchase or acquisition
the Registration Statement is effective and available for use by the holders of
shares of Series A Preferred Stock named as selling stockholders in the
Registration Statement, (y) no Optional Redemption Event shall have occurred and
(z) the Corporation or such subsidiary offers to purchase for cash from each
holder of shares of Series A Convertible Preferred Stock at the time of such
redemption, repurchase or acquisition the same percentage of such holder's
shares of Series A Convertible Preferred Stock as the percentage of the number
of outstanding shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock, as the case may be, to be so redeemed, repurchased or
acquired at a purchase price per share of Series A Convertible Preferred Stock
equal to the greater of (i) (A) the Stated Value plus (B) an amount equal to the Accrual
Amount plus (C) an amount equal to any accrued and
unpaid interest on cash dividends in arrears and (ii) the Converted Market Price on
the date of purchase pursuant to this Section 5(b).

              

              (c) Neither the Corporation nor any
Subsidiary shall (1) make any Tender Offer for outstanding shares of Common
Stock, unless the Corporation contemporaneously therewith makes an offer, or (2)
enter into an agreement regarding such a Tender Offer for outstanding shares of
Common Stock by any person other than the Corporation or any Subsidiary, unless
such person agrees with the Corporation to make an offer, in either such case to
each holder of outstanding shares of Series A Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares of Series A Convertible Preferred Stock held by such holder
as the percentage of outstanding shares of Common Stock actually purchased in
such Tender Offer at a price per share of Series A Convertible Preferred Stock
equal to the greater of (i) (A) the Stated Value plus (B) an amount equal to the Accrual
Amount plus (C) an amount equal to any accrued and
unpaid interest on cash dividends in arrears and (ii) the Converted Market Price
on the date of purchase pursuant to this Section 5(c).

              

               

              
                
                  
                  

                

                
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              Section
6. Liquidation
Preference. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series A Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series A Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; provided,
however, that such rights shall accrue to the
holders of Series A Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series A Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series A Convertible Preferred Stock and
the Parity Liquidation Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property in and of itself will be considered a liquidation,
dissolution or winding up of the Corporation.

              

              Section
7. Mandatory
Redemption. (a) On the Mandatory Redemption Date,
the Corporation shall redeem all outstanding shares of Series A Convertible
Preferred Stock. The Corporation shall give a Mandatory Redemption Notice to the
Holders not less than 30 or more than 35 Business Days prior to the Mandatory
Redemption Date. Any failure or defect in the giving of the Mandatory Redemption
Notice shall not affect the Corporation's obligation to redeem the shares of
Series A Convertible Preferred Stock pursuant to this Section
7.

              

              (b) On the Mandatory Redemption Date (or
such later date as a particular Holder shall surrender to the Corporation the
certificate(s) for the shares of Series A Convertible Preferred Stock redeemed),
the Corporation shall pay to or upon the order of each Holder by wire transfer
of immediately available funds to such account as shall be specified for such
purpose by such Holder an amount equal to the Mandatory Redemption Price of all
of such Holder's shares of Series A Convertible Preferred Stock to be redeemed
that are outstanding on the Mandatory Redemption Date. A Holder of such shares
of Series A Convertible Preferred Stock shall not be entitled to payment of the
Mandatory Redemption Price of such shares of Series A Convertible Preferred
Stock until such Holder shall have surrendered the certificate(s) for such
shares of Series A Convertible Preferred Stock to the Corporation or, in the
case of the loss, theft or destruction of any such certificate, given indemnity
in accordance with Section 15(b).

              

               

              
                
                  
                  

                

                
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              (c) The Corporation shall not be entitled
to give the Mandatory Redemption Notice with respect to, or to redeem, any
shares of Series A Convertible Preferred Stock with respect to which a
Conversion Notice has been given on a Conversion Date which is on or prior to
the date on which the Mandatory Redemption Notice is given. If a Mandatory
Redemption Notice has been given, thereafter the proceedings for such redemption
shall not affect the rights of the Holders to convert in accordance with Section
10 any shares of Series A Convertible Preferred Stock called for redemption at
any time prior to the Mandatory Redemption Date. If on the applicable Mandatory
Redemption Date the Corporation fails to pay the Mandatory Redemption Price of
any outstanding shares of Series A Convertible Preferred Stock to be redeemed in
full to such Holder or to deposit the same with an Eligible Bank in accordance
with Section 15(c), such Holder shall be entitled to convert in accordance with
Section 10 the shares of Series A Convertible Preferred Stock of such Holder so
called for redemption at any time after the Mandatory Redemption Date and prior
to the date on which the Corporation pays the Mandatory Redemption Price in full
to such Holder for all shares of Series A Convertible Preferred Stock to be
redeemed from such Holder (together with any amount due to such Holder pursuant
to Section 15(d)) or so deposits the same (together with any amount due to such
Holder pursuant to Section 15(d)) and gives notice to such Holder of such
deposit and in the case of any such conversion of any share of Series A
Convertible Preferred Stock, upon delivery to the converting Holder of the
shares of Common Stock issuable upon such conversion the Corporation shall have
no further liability in respect of the Mandatory Redemption Price of such share
of Series A Convertible Preferred Stock other than payment of the amount payable
pursuant to Section 15(d) in respect of the period from the Mandatory Redemption
Date to the Conversion Date for such conversion.

              

              Section
8. No
Sinking Fund. The shares of Series A Convertible
Preferred Stock shall not be entitled to the benefits of any sinking fund for
the redemption or repurchase of shares of Series A Convertible Preferred
Stock.

              

              Section
9. No
Redemption at the Option of the Corporation. The Corporation shall not have any
right to redeem any shares of Series A Convertible Preferred Stock at the option
of the Corporation.

              

              Section
10. Conversion. 

              

              (a) Conversion
at Option of Holder.
Subject to and upon compliance with the provisions of this Section 10, each
Holder shall have the right, at such Holder's option, at any time (except that
if such Holder shall have exercised redemption rights under Section 11, such
conversion right shall terminate with respect to the shares of Series A
Convertible Preferred Stock to be redeemed at the close of business on the last
Trading Day prior to the date the Corporation pays or deposits in accordance
with Section 15(c) the applicable Optional Redemption Price, unless the
Corporation shall default in payment due upon redemption of any share of Series
A Convertible Preferred Stock) to convert the outstanding shares of Series A
Convertible Preferred Stock held by such Holder, or from time to time any
portion of such shares, plus an amount equal to accrued and unpaid dividends on
such shares, into that number of fully paid and non-assessable shares of Common
Stock (as such shares shall then be constituted) obtained by dividing (1) the
sum of (x) the aggregate Stated Value of all shares of Series A Convertible
Preferred Stock being converted by such Holder on the same Conversion Date
plus
(y) accrued and unpaid
dividends on the shares of Series A Convertible Preferred Stock being converted
to the applicable Conversion Date by (2) the Conversion Price in effect on
the applicable Conversion Date, by giving a Conversion Notice in the manner
provided in Section 10(b); provided, however,
that, if at any time any
share of Series A Convertible Preferred Stock is converted in whole or in part
pursuant to this Section 10(a), the Corporation does not have available for
issuance upon such conversion as authorized and unissued shares or in its
treasury at least the number of shares of Common Stock required to be issued
pursuant hereto, then, at the election of such Holder made by notice from such
Holder to the Corporation, such share of Series A Convertible Preferred Stock,
to the extent that sufficient shares of Common Stock are not then available for
issuance upon conversion, shall be converted into the right to receive from the
Corporation, in lieu of the shares of Common Stock into which such share of
Series A Convertible Preferred Stock would otherwise be converted and which the
Corporation is unable to issue, payment in an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which the
Corporation is unable to issue times (y) the arithmetic average of the
Market Price of the Common Stock during the five consecutive Trading Days
immediately prior to the applicable Conversion Date. Any such payment shall, for
all purposes of this Certificate of Designations, be deemed to be satisfaction
in full of the Corporation's obligation to issue upon such conversion shares of
Common Stock that are not then available for issuance upon such conversion. A
Holder is not entitled to any rights of a holder of Common Stock until such
Holder has converted one or more shares of Series A Convertible Preferred Stock
to Common Stock, and only to the extent any such shares of Series A Convertible
Preferred Stock are deemed to have been converted to Common Stock under this
Section 10. For purposes of Sections 10(e) and 10(f), whenever a provision
references the shares of Common Stock into which any share of Series A
Convertible Preferred Stock is convertible or the shares of Common Stock
issuable upon conversion of any share of Series A Convertible Preferred Stock or
words of similar import, any determination required by such provision shall be
made as if a sufficient number of shares of Common Stock were then available for
issuance upon conversion in full of all outstanding shares of Series A
Convertible Preferred Stock.

               

              
                
                  
                  

                

                
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              (b) Exercise
of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment
for Interest or Dividends. (1) In order to exercise the
conversion privilege with respect to the Series A Convertible Preferred Stock, a
Holder shall give a Conversion Notice (or such other notice which is acceptable
to the Corporation) to the Corporation and the Transfer Agent or to the office
or agency designated by the Corporation for such purpose by notice to the
Holders. A Conversion Notice may be given by telephone line facsimile
transmission to the numbers set forth on the form of Conversion
Notice.

              

              (2) As promptly as practicable, but in no
event later than three Trading Days, after a Conversion Notice is given, the
Corporation shall issue and shall deliver to the Holder giving such Conversion
Notice or such Holder's designee the number of full shares of Common Stock
issuable upon such conversion of shares of Series A Convertible Preferred Stock
in accordance with the provisions of this Section 10 and make payment by wire
transfer of immediately available funds to such account as shall be specified
from time to time by such Holder or deliver a check or cash in respect of any
fractional interest in respect of a share of Common Stock arising upon such
conversion, as provided in Section 10(b)(6) and, if applicable, any cash payment
required pursuant to the proviso to the first sentence of Section 10(a) (which
payment, if any, shall be paid no later than three Trading Days after the
applicable Conversion Date). In lieu of delivering physical certificates for the
shares of Common Stock issuable upon any conversion of shares of Series A
Convertible Preferred Stock, provided the Corporation 's transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer (“FAST”) program, upon request of the Holder, the Corporation shall use
commercially reasonable efforts to cause its transfer agent electronically to
transmit such shares of Common Stock issuable upon conversion to the Holder (or
its designee), by crediting the account of the Holder’s (or such designee’s)
broker with DTC through its Deposit Withdrawal Agent Commission system (provided
that the same time periods herein as for stock certificates shall
apply).

               

               

              
                
                  
                  

                

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

              

              (4) A Conversion Notice shall be deemed for
all purposes to be in proper form absent timely notice from the Corporation to
the Holder of manifest error therein. The Corporation shall notify the Holder of
any claim by the Corporation of manifest error in a Conversion Notice within two
Trading Days after the Holder gives such Conversion Notice (which notice from
the Corporation shall specify all defects in the Conversion Notice) and no such
claim of error shall limit or delay performance of the Corporation 's obligation
to issue upon such conversion the number of shares of Common Stock which are not
in dispute. Time shall be of the essence in the giving of any such notice by the
Corporation. Any Conversion Notice containing any such defect shall nonetheless
be effective on the date given if the Holder promptly undertakes to correct all
such defects. The Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
shares of Common Stock or other securities or property on conversion of shares
of Series A Convertible Preferred Stock in a name other than that of such
Holder, and the Corporation shall not be required to issue or deliver any such
shares or other securities or property unless and until the person or persons
requesting the issuance thereof shall have paid to the Corporation the amount of
any such tax or shall have established to the satisfaction of the Corporation
that such tax has been paid. The converting Holder shall be responsible for the
amount of any withholding tax payable in connection with any conversion of
shares of Series A Convertible Preferred Stock.

              

               

              
                
                  
                  

                

                
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              (5) (A) If a Holder shall have given a
Conversion Notice in accordance with the terms of this Certificate of
Designations, the Corporation's obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective of any action
or inaction by such Holder to enforce the same, any waiver or consent with
respect to any provision hereof, the recovery of any judgment against any person
or any action to enforce the same, any failure or delay in the enforcement of
any other obligation of the Corporation to any Holder, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by any Holder or any other person of any obligation to the Corporation or
any violation or alleged violation of law by any Holder or any other person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Corporation to such Holder in connection with such conversion;
provided, however,
that nothing herein shall
limit or prejudice the right of the Corporation to pursue any such claim in any
other manner permitted by applicable law. The occurrence of an event which
requires an adjustment of the Conversion Price as contemplated by Section 10(c)
shall in no way restrict or delay the right of any Holder to receive
certificates for Common Stock upon conversion of shares of Series A Convertible
Preferred Stock and the Corporation shall use its best efforts to implement such
adjustment on terms reasonably acceptable to the Holder within two Trading Days
after such occurrence.

              

              (B) If the Corporation fails to issue and
deliver the shares of Common Stock to a converting Holder in connection with a
particular conversion of shares of Series A Convertible Preferred Stock within
five Trading Days after such Holder gives the Conversion Notice for such
conversion, in addition to any other liabilities the Corporation may have
hereunder and under applicable law (i) the Corporation shall pay or reimburse
such Holder on demand for all out-of-pocket expenses, including, without
limitation, reasonable fees and expenses of legal counsel, incurred by the
Holder as a result of such failure, (ii) if as a result of such failure such
Holder shall suffer any direct damages or liabilities from such failure
(including, without limitation, margin interest and the cost of purchasing
securities to cover a sale (whether by such Holder or such Holder's securities
broker) or borrowing of shares of Common Stock by such Holder for purposes of
settling any trade involving a sale of shares of Common Stock made by such
Holder during the period beginning on the Issuance Date and ending on the date
the Corporation delivers or causes to be delivered to such Holder such shares of
Common Stock, then the Corporation shall upon demand of such Holder pay to the
Holder an amount equal to the actual direct, out-of-pocket damages and
liabilities suffered by such Holder by reason thereof which such Holder
documents to the reasonable satisfaction of the Corporation, and (iii) the
Holder may by written notice (which may be given by mail, courier, personal
service or telephone line facsimile transmission) or oral notice (promptly
confirmed in writing), given at any time prior to delivery to such Holder of the
shares of Common Stock issuable in connection with such exercise of the Holder's
conversion right, rescind such exercise and the Conversion Notice relating
thereto, in which case such Holder shall thereafter be entitled to convert, in
accordance with this Section 10 that portion of such shares of Series A
Convertible Preferred Stock as to which such exercise is so rescinded.
Notwithstanding the foregoing, the Corporation shall not be liable to such
Holder under clause (ii) of the immediately preceding sentence to the extent the
failure of the Corporation to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Corporation (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Corporation except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, the
bankruptcy, liquidation or reorganization of the Transfer Agent under any
bankruptcy, insolvency or other similar law or any similar event outside the
control of the Transfer Agent). A converting Holder shall notify the Corporation
in writing (or by telephone conversation, confirmed in writing) as promptly as
practicable following the third Trading Day after such Holder gives a Conversion
Notice if such Holder becomes aware that such shares of Common Stock so issuable
have not been received as provided herein, but any failure so to give such
notice shall not affect the Holder's rights under this Certificate of
Designations or otherwise. If the Holder shall have exercised the conversion
right in any particular instance and either (1) the Corporation shall notify the
Holder on or after the date the Holder gives such Conversion Notice that the
shares of Common Stock issuable upon such conversion might not be delivered
within three Trading Days after the date the Holder gives such Conversion Notice
or (2) the Holder learns after the date which is three Trading Days after the
date the Holder gives such Conversion Notice that the Holder has not received
such shares of Common Stock, then, without releasing the Corporation of its
obligations with respect thereto, from and after the Trading Day next succeeding
the earlier of the events described in the preceding clauses (1) and (2) of this
sentence the Holder shall make reasonable efforts not to sell shares of Common
Stock in anticipation of receipt of such shares of Common Stock in a manner
which is likely to increase materially the liability of the Corporation under
clause (B) of the first sentence of this Section 10(b)(5).

              

               

              
                
                  
                  

                

                
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              (6) No fractional shares of Common Stock
shall be issued upon conversion of any shares of Series A Convertible Preferred
Stock but, in lieu of any fraction of a share of Common Stock which would
otherwise be issuable in respect of such conversion, the Corporation shall pay
lawful money of the United States of America for such fractional share, based on
a value of one share of Common Stock being equal to the Market Price of the
Common Stock on the applicable Conversion Date.

              

              (c) Adjustment
of Conversion Price. The Conversion Price shall be adjusted
from time to time by the Corporation as follows:

              

              (1) Adjustments
for Certain Dividends and Distributions in Common Stock. In case the Corporation shall on or
after the Issuance Date pay a dividend or make a distribution to all holders of
the outstanding Common Stock in shares of Common Stock, the Conversion Price in
effect at the opening of business on the date following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such Conversion Price by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
at the close of business on the Record Date fixed for such determination and the
denominator shall be the sum of such number of shares and the total number of
shares constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day following
such Record Date. If any dividend or distribution of the type described in this
Section 10(c)(1) is declared but not so paid or made, the Conversion Price shall
again be adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.

              

               

              
                
                  
                  

                

                
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              (2) Weighted
Adjustments for Certain Issuances of Rights or Warrants. In case the Corporation shall on or
after the Issuance Date issue rights or warrants (other than any rights or
warrants referred to in Section 10(c)(4)) to all holders of its outstanding
shares of Common Stock entitling them (for a period expiring within 45 days
after the date fixed for the determination of stockholders entitled to receive
such rights or warrants) to subscribe for or purchase shares of Common Stock at
a price per share less than the Current Market Price on the Record Date fixed
for the determination of stockholders entitled to receive such rights or
warrants, the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in effect at the
opening of business on the date after such Record Date by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding at the
close of business on the applicable Record Date plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at such Current Market Price, and the denominator shall be the number
of shares of Common Stock outstanding on the close of business on such Record
Date plus the total number of additional shares of Common Stock so offered for
subscription or purchase. Such adjustment shall become effective immediately
after the opening of business on the day following the Record Date fixed for
determination of stockholders entitled to receive such rights or warrants. To
the extent that shares of Common Stock are not delivered pursuant to such rights
or warrants, upon the expiration or termination of such rights or warrants, the
Conversion Price shall be readjusted to the Conversion Price which would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made on the basis of delivery of only the number of shares of Common Stock
actually delivered. In the event that such rights or warrants are not so issued,
the Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such Record Date had not been fixed. In determining
whether any rights or warrants entitle the holder to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received for such rights or
warrants, the value of such consideration, if other than cash, to be determined
by the Board of Directors.

              

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

              

               

              
                
                  
                  

                

                
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              (4) Adjustments
for Certain Dividends and Distributions. In case the Corporation shall on or
after the Issuance Date, by dividend or otherwise, distribute to all holders of
its Common Stock shares of any class of capital stock of the Corporation (other
than any dividends or distributions to which Section 10(c)(1) applies) or
evidences of its indebtedness, cash or other assets (including securities, but
excluding any rights or warrants referred to in Section 10(c)(2) and dividends
and distributions paid exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a merger or
consolidation to which Section 10(d) applies) (the foregoing hereinafter in this
Section 10(c)(4) called the “Securities”)), then, in each such case, subject to
the second paragraph of this Section 10(c)(4), the Conversion Price shall be
reduced so that the same shall be equal to the price determined by multiplying
the Conversion Price in effect immediately prior to the close of business on the
Record Date with respect to such distribution by a fraction of which the
numerator shall be the Current Market Price on such date less the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) on such date of the portion of
the Securities so distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following such
Record Date; provided, however,
that in the event the then
fair market value (as so determined) of the portion of the Securities so
distributed applicable to one share of Common Stock is equal to or greater than
the Current Market Price on the Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that the Holders shall have the
right to receive upon conversion of shares of Series A Convertible Preferred
Stock the amount of Securities such Holder would have received had such Holder
converted such Holder's shares of Series A Convertible Preferred Stock
immediately prior to such Record Date. In the event that such dividend or
distribution is not so paid or made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared. If the Board of Directors
determines the fair market value of any distribution for purposes of this
Section 10(c)(4) by reference to the actual or when issued trading market for
any Securities comprising all or part of such distribution, it must in doing so
consider the prices in such market over the same period used in computing the
Current Market Price to the extent possible.

              

              Rights or
warrants distributed by the Corporation to all holders of Common Stock entitling
the holders thereof to subscribe for or purchase shares of the Corporation's
capital stock (either initially or under certain circumstances), which rights or
warrants, until the occurrence of a specified event or events (a “Trigger
Event”): (i) are deemed to be transferred with such shares of Common Stock; (ii)
are not exercisable; and (iii) are also issued in respect of future issuances of
Common Stock, shall not be deemed to have been distributed for purposes of this
Section 10(c) (and no adjustment to the Conversion Price under this Section
10(c) will be required) until the occurrence of the earliest Trigger Event. If
any such rights or warrants, including any such existing rights or warrants
distributed prior to the Issuance Date are subject to Trigger Events, upon the
satisfaction of each of which such rights or warrants shall become exercisable
to purchase different securities, evidences of indebtedness or other assets,
then the occurrence of each such Trigger Event shall be deemed to be such date
of issuance and record date with respect to new rights or warrants (and a
termination or expiration of the existing rights or warrants without exercise by
the holder thereof) (so that, by way of illustration and not limitation, the
dates of issuance of any such rights shall be deemed to be the dates on which
such rights become exercisable to purchase capital stock of the Corporation, and
not the date on which such rights may be issued, or may become evidenced by
separate certificates, if such rights are not then so exercisable). In addition,
in the event of any distribution of rights or warrants, or any Trigger Event
with respect thereto that was counted for purposes of calculating a distribution
amount for which an adjustment to the Conversion Price under this Section 10(c)
was made (1) in the case of any such rights or warrants which shall all have
been redeemed or repurchased without exercise by any holders thereof, the
Conversion Price shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be, as though
it were a cash distribution, equal to the per share redemption or repurchase
price received by a holder or holders of Common Stock with respect to such
rights or warrants (assuming such holder had retained such rights or warrants),
made to all holders of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.

              

               

              
                
                  
                  

                

                
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              For
purposes of this Section 10(c)(4) and Sections 10(c)(1) and (2), any dividend or
distribution to which this Section 10(c)(4) is applicable that also includes
shares of Common Stock, or rights or warrants to subscribe for or purchase
shares of Common Stock to which Section 10(c)(2) applies (or both), shall be
deemed instead to be (1) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or warrants other than
such shares of Common Stock or rights or warrants to which Section 10(c)(2)
applies (and any Conversion Price reduction required by this Section 10(c)(4)
with respect to such dividend or distribution shall then be made) immediately
followed by (2) a dividend or distribution of such shares of Common Stock or
such rights or warrants (and any further Conversion Price reduction required by
Sections 10(c)(1) and (2) with respect to such dividend or distribution shall
then be made), except (A) the Record Date of such dividend or distribution shall
be substituted as “the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution”, “Record Date fixed for such
determination” and “Record Date” within the meaning of Section 10(c)(1) and as
“the date fixed for the determination of stockholders entitled to receive such
rights or warrants”, “the Record Date fixed for the determination of the
stockholders entitled to receive such rights or warrants” and “such Record Date”
within the meaning of Section 10(c)(2) and (B) any shares of Common Stock
included in such dividend or distribution shall not be deemed “outstanding at
the close of business on the Record Date fixed for such determination” within
the meaning of Section 10(c)(1).

              

              (5) Adjustments
for Certain Cash Dividends. In case the Corporation shall on or
after the Issuance Date, by dividend or otherwise, distribute to all holders of
its Common Stock cash (excluding any cash that is distributed upon a merger or
consolidation to which Section 10(d) applies or as part of a distribution
referred to in Section 10(c)(4)) in an aggregate amount that, combined with (1)
the aggregate amount of any other such distributions to all holders of its
Common Stock made exclusively in cash within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment pursuant to
this Section 10(c)(5) has been made, and (2) the aggregate of any cash plus the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and set forth in a Board Resolution) of consideration
payable in respect of any Tender Offer by the Corporation or any Subsidiary for
all or any portion of the Common Stock concluded within the 12 months preceding
the date of payment of such distribution, exceeds 1% of the product of (x) the
Current Market Price on the Record Date with respect to such distribution
times
(y) the number of shares
of Common Stock outstanding on such date, then, and in each such case,
immediately after the close of business on such date, unless the Corporation
elects to reserve such cash for distribution to the Holders upon the conversion
of shares of Series A Convertible Preferred Stock (and shall have made adequate
provision) so that the Holders will receive upon such conversion, in addition to
the shares of Common Stock to which the Holders are entitled, the amount of cash
which the Holders would have received if the Holders had, immediately prior to
the Record Date for such distribution of cash, converted their shares of Series
A Convertible Preferred Stock into Common Stock, the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on such
Record Date by a fraction (i) the numerator of which shall be equal to the
Current Market Price on such Record Date less an amount equal to the quotient of
(x) the excess of such combined amount over such 1% and (y) the number of shares
of Common Stock outstanding on such Record Date and (ii) the denominator of
which shall be equal to the Current Market Price on such Record Date;
provided, however,
that in the event the
portion of the cash so distributed applicable to one share of Common Stock is
equal to or greater than the Current Market Price of the Common Stock on such
Record Date, in lieu of the foregoing adjustment, adequate provision shall be
made so that the Holders shall have the right to receive upon conversion of
shares of Series A Convertible Preferred Stock the amount of cash the Holders
would have received had the Holders converted all of their shares of Series A
Convertible Preferred Stock immediately prior to such Record Date. In the event
that such dividend or distribution is not so paid or made, the Conversion Price
shall again be adjusted to be the Conversion Price which would then be in effect
if such dividend or distribution had not been declared.

               

              
                
                  
                  

                

                
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              (6) Adjustments
for Certain Issuances of Newly Issued Shares. (A) In case at any time on or before
after the Issuance Date the Corporation issues shares of Common Stock or Common
Stock Equivalents (collectively, the “Newly Issued Shares”) at a price per share
at which the Corporation sells such shares of Common Stock or the price per
share at which the holders of such Common Stock Equivalents are entitled to
acquire shares of Common Stock upon conversion or exercise thereof which is less
than the Conversion Price in effect at the time of such issuance, then following
such issuance the Conversion Price shall be reduced to the lowest price per
share at which such shares of Common Stock are issued or at which such Common
Stock Equivalents may be exercised, if the same is lower than the Conversion
Price in effect immediately prior to such issuance.

              

              (B) Notwithstanding the foregoing, no
adjustment shall be made under this Section 10(c)(6) by reason
of:

              

              (i) the issuance by the Corporation of
shares of Common Stock pro rata to all holders of the Common Stock so long as
(i) any adjustment to the Conversion Price that is required by Section 10(c)(1)
is made and (ii) the Corporation shall have given notice of such issuance
thereof to the Holders pursuant to Section 10(f);

              

              (ii) the issuance by the Corporation of the
Notes or the Warrants or the issuance by the Corporation of shares of Common
Stock upon conversion of the Notes or upon exercise of the Warrants in
accordance with the terms thereof;

               

              (iii) the issuance by the Corporation of
shares of Series A Preferred Stock upon conversion of the Notes or Other Notes
or shares of Common Stock upon conversion of the Series A Preferred Stock in
accordance with the terms hereof and thereof;

               

               

              
                
                  
                  

                

                
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              (iv) the issuance by the Corporation of
Newly Issued Shares upon grant or exercise of options for employees, directors
and consultants under the 2003 Stock Option Plan, 2004 Non-Employee Stock
Compensation Plan and the 2005 Employee Stock Purchase Plan or any other stock
compensation plan that has been duly adopted by the Board of Directors and duly
approved by the Corporation’s stockholders;

               

              (v) the issuance by the Corporation of
Newly Issued Shares upon conversion of Common Stock Equivalents that are
outstanding on the Issuance Date in accordance with the terms of such Common
Stock Equivalents in effect on the Issuance Date; or

               

              (vi) the issuance by the Corporation for
cash of Newly Issued Shares in connection with a strategic alliance,
collaboration, joint venture, partnership or similar arrangement of the
Corporation with another Person which strategic alliance, collaboration, joint
venture, partnership or similar arrangement relates to the Corporation’s
business as conducted immediately prior thereto and which Person is engaged in a
business similar or related to the business of the Corporation so long as (x)
the price per Newly Issued Share is not less than 85 percent of the Current Fair
Market Value of the Common Stock on the date of issuance of such Newly Issued
Shares and (y) the consideration other than cash which the Corporation receives
in connection with such strategic alliance, collaboration, joint venture,
partnership or similar arrangement has a value, as determined by the Board of
Directors in its reasonable judgment and set forth in a Board Resolution, at
least equal to the amount by which (i) the product of the Newly Issued Shares so
issued times the Current Fair Market Value of the
Common Stock on the date such Newly issued Shares are issued exceeds (ii) the
aggregate cash consideration received by the Corporation for such Newly Issued
Shares at the time of issuance thereof and (z) such issuance has been duly
approved by the Board of Directors as set forth in a Board
Resolution.

               

              (7) Adjustment
in Connection Sales by a Designated Person. (A) If at any time on or after the
Issuance Date any Designated Person, directly or indirectly, sells, transfers or
disposes of shares of Common Stock or Common Stock Equivalents other than a
Permitted Designated Person Sale and on the Measurement Date for such sale,
transfer or disposition the Conversion Price in effect on such Measurement Date
is greater than the Computed Market Price on such Measurement Date, then,
subject to the next succeeding sentence, the Conversion Price shall be reduced
to such Computed Market Price, such adjustment to become effective immediately
after the opening of business on the day following the Measurement
Date.

              

              (B) The Corporation shall instruct the
Transfer Agent to inform the Corporation immediately upon the sale, transfer or
disposition of any shares of Common Stock or Common Stock Equivalents by any
Designated Person. The Corporation shall inform the Holders immediately by phone
and electronic transmission upon becoming aware of any sale, transfer or
disposition of any shares of Common Stock or Common Stock Equivalents by any
Designated Person and will follow up with formal written notice to the Holders
pursuant to Section 15(a).

              

              (8) Additional
Reductions in Conversion Price. The Corporation may make such
reductions in the Conversion Price, in addition to those required by Sections
10(c)(1), (2), (3), (4), (5), (6) or (7) as the Board of Directors considers to
be advisable to avoid or diminish any income tax to holders of Common Stock or
rights to purchase Common Stock resulting from any dividend or distribution of
stock (or rights to acquire stock) or from any event treated as such for income
tax purposes.

              

               

              
                
                  
                  

                

                
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              (9) De
Minimus Adjustments. No
adjustment in the Conversion Price shall be required unless such adjustment
would require an increase or decrease of at least 1% in such price; provided, however,
that any adjustments which
by reason of this Section 10(c)(9) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 10 shall be made by the Corporation and shall be made to the
nearest cent or to the nearest one hundredth of a share, as the case may be. No
adjustment need be made for a change in the par value of the Common Stock or
from par value to no par value or from no par value to par
value.

              

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

              

              (11) Effectiveness
of Certain Adjustments. In
any case in which this Section 10(c) provides that an adjustment shall become
effective immediately after a Record Date for an event, the Corporation may
defer until the occurrence of such event (i) issuing to the Holders in
connection with any conversion of shares of Series A Convertible Preferred Stock
after such Record Date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason of the adjustment
required by such event over and above the Common Stock issuable upon such
conversion before giving effect to such adjustment and (ii) paying to such
Holders any amount in cash in lieu of any fraction pursuant to Section
10(b)(6).

              

              (12) Outstanding
Shares. For purposes of
this Section 10(c), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Corporation but shall
include shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. The Corporation will not pay any dividend
or make any distribution on shares of Common Stock held in the treasury of the
Corporation other than dividends or distributions payable only in shares of
Common Stock.

              

              (d) Effect
of Reclassification, Consolidation, Merger or Sale. (1) If any of the following events
occur, namely:

              

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

              

               

              
                
                  
                  

                

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

              

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

              

              then the
Corporation or the successor or purchasing corporation or other entity, as the
case may be, shall prior to such transaction:

              

              (w) amend its certificate of incorporation
or comparable instrument to provide that the shares of Series A Convertible
Preferred Stock shall be convertible into the kind and amount of shares of stock
and other securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
by the holder of a number of shares of Common Stock issuable upon conversion of
shares of Series A Convertible Preferred Stock immediately prior to such
reclassification, change, consolidation, merger, combination, sale or conveyance
assuming such holder of Common Stock did not exercise such holder's rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, sale or
conveyance (provided that, if the kind or amount of securities,
cash or other property receivable upon such consolidation, merger, statutory
exchange, sale or conveyance is not the same for each share of Common Stock in
respect of which such rights of election shall not have been exercised
(“non-electing share”), then for the purposes of this Section 10(d) the kind and
amount of securities, cash or other property receivable upon such consolidation,
merger, statutory exchange, sale or conveyance for each non-electing share shall
be deemed to be the kind and amount so receivable per share by a plurality of
the non-electing shares);

              

              (x) the Conversion Price shall, upon such
consolidation, merger, statutory exchange, combination, sale or conveyance,
thereafter be the lower of (1) the Conversion Price then in effect and (2) the
price paid or deemed to have been paid for one share of Common Stock in such
consolidation, merger, statutory exchange, combination, sale or conveyance
(subject to further adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section
10),

              

              (y) in the case of any such successor or
purchasing Person, such Person shall execute with each Holder a written
agreement providing that upon such consolidation, merger, combination, sale or
conveyance such successor or purchasing Person shall be jointly and severally
liable with the Corporation for the performance of all of the Corporation's
obligations under this Certificate of Designations and the other Transaction
Documents; and

              

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

              

               

              
                
                  
                  

                

                
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              Such
amendment shall provide for, among other things, adjustments in the conversion
rights of the Holders which shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Section 10. If, in the case of any such
reclassification, change, consolidation, merger, combination, sale or
conveyance, the stock or other securities and assets receivable thereupon by a
holder of shares of Common Stock includes shares of stock or other securities
and assets of a corporation or other entity other than the successor or
purchasing corporation or other entity, as the case may be, in such
reclassification, change, consolidation, merger, combination, sale or
conveyance, then such other corporation or other entity shall also so amend its
certificate of incorporation or comparable instrument and enter into such
written agreement with each Holder. The certificate(s) of incorporation or
comparable instruments so amended and such written agreement(s) of each such
corporation or other entity shall also contain such additional provisions to
protect the interests of the Holders as the Board of Directors shall reasonably
consider necessary by reason of the foregoing, including the provisions
providing for the redemption rights set forth in Section 11.

              

              (2) The provisions of this Section 10(d)
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, combinations, sales and conveyances.

              

              (3) If this Section 10(d) applies to any
event or occurrence, Section 10(c) shall not apply.

              

              (e) Reservation
of Shares; Shares to Be Fully Paid; Listing of Common Stock.

              

              (1) The Corporation shall reserve and keep
available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock or shares of Common Stock held in treasury, solely for
issuance upon conversion of the Series A Convertible Preferred Stock, sufficient
shares to provide for the conversion of the Series A Convertible Preferred Stock
from time to time as shares of Series A Convertible Preferred Stock are
converted.

              

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

              

              (3) The Corporation covenants that all
shares of Common Stock issued upon conversion of the Series A Convertible
Preferred Stock will be fully paid and non-assessable by the Corporation and
free from all taxes, liens and charges with respect to the issue
thereof.

              

              (4) The Corporation covenants that if any
shares of Common Stock to be provided for the purpose of conversion of the
Series A Convertible Preferred Stock require registration with or approval of
any governmental authority under any federal or state law before such shares may
be validly issued upon conversion, the Corporation will in good faith and as
expeditiously as possible endeavor to secure such registration or approval, as
the case may be.

               

              
                
                  
                  

                

                
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              (5) The Corporation covenants that, so long
as the Common Stock shall be listed on the AMEX, the NYSE or any other national
securities exchange or Nasdaq or Nasdaq Capital Market or the OTCBB, the
Corporation shall obtain and, so long as the Common Stock shall be so listed on
such market or exchange, maintain approval for listing thereon of all Common
Stock issuable upon conversion of the Series A Convertible Preferred
Stock.

              

              (f) Notice
to Holders Prior to Certain Actions.  In case on or after the Issuance
Date:

              

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

               

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

               

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

               

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

               

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

              

               

              
                
                  
                  

                

                
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              (g) Restricted
Ownership Percentage Limitation. (1) Notwithstanding anything to the
contrary contained herein, the number of shares of Common Stock that may be
acquired at any time by a Holder upon conversion of shares of Series A
Convertible Preferred Stock shall not exceed a number that, when added to the
total number of shares of Common Stock deemed beneficially owned by such Holder
(other than by virtue of the ownership of securities or rights to acquire
securities (including the Notes and the Warrants) that have limitations on the
holder's right to convert, exercise or purchase similar to the limitation set
forth herein (the “Excluded Shares”)), together with all shares of Common Stock
beneficially owned at such time (other than by virtue of the ownership of
Excluded Shares) by Persons whose beneficial ownership of Common Stock would be
aggregated with the beneficial ownership by such Holder for purposes of
determining whether a group exists or for purposes of determining the Holder’s
beneficial ownership (the “Aggregation Parties”), in either such case for
purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder
(including, without limitation, as the same is made applicable to Section 16 of
the 1934 Act and the rules promulgated thereunder), would result in beneficial
ownership by such Holder or such group of more than 9.9% of the shares of Common
Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules
promulgated thereunder (as the same may be modified by a particular Holder as
provided herein, the “Restricted Ownership Percentage”). A Holder shall have the
right (x) at any time and from time to time to reduce its Restricted Ownership
Percentage immediately upon notice to the Corporation in the event and only to
the extent that Section 16 of the 1934 Act or the rules promulgated thereunder
(or any successor statute or rules) is changed to reduce the beneficial
ownership percentage threshold thereunder to a percentage less than 9.9% and (y)
at any time and from time to time, to increase its Restricted Ownership
Percentage unless such Holder shall have, by written instrument delivered to the
Corporation, irrevocably waived its rights to so increase its Restricted
Ownership Percentage. If at any time the limits in this Section 10(g) make the
shares of Series A Convertible Preferred Stock held by any Holder inconvertible
in whole or in part, the Corporation shall not by reason thereof be relieved of
its obligation to issue shares of Common Stock at any time or from time to time
thereafter upon conversion of such shares of Series A Convertible Preferred
Stock as and when shares of Common Stock may be issued in compliance with such
restrictions.

              

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

               

              
                
                  
                  

                

                
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              Section
11. Redemption
at Option of Holders. 

              

              (a) Redemption
Right. If an Optional Redemption Event
occurs, then, in addition to any other right or remedy of any holder of shares
of Series A Convertible Preferred Stock, each holder of shares of Series A
Convertible Preferred Stock shall have the right, at such holder's option, to
require the Corporation to redeem all of such holder's shares of Series A
Convertible Preferred Stock, or any portion thereof, on the date that is five
Business Days after the date such holder gives the Corporation a Holder Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series A Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.

              

              (b) Notices;
Method of Exercising Optional Redemption Rights, Etc. (1) On or before the fifth Business
Day after the occurrence of an Optional Redemption Event, the Corporation shall
give to each Holder a Corporation Notice of the occurrence of such Optional
Redemption Event and of the redemption right set forth herein arising as a
result thereof. The Corporation Notice shall set forth:

              

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

              

              (ii) a description of the procedure (set
forth in this Section 11) which each such Holder must follow to exercise such
Holder's optional redemption right,

              

              and shall
be accompanied by a Corporation Certificate with the information set forth
therein being provided as of a date not more than 5 Business Days prior to the
date the Corporation gives such Corporation Notice. No failure of the
Corporation to give such notice or defect therein shall limit the right of any
holder of shares of Series A Convertible Preferred Stock to exercise the
optional redemption right or affect the validity of the proceedings for the
redemption of such holder's shares of Series A Convertible Preferred
Stock.

              

              (2) To exercise its optional redemption
right, a Holder shall deliver to the Corporation on or before the 30th day after
the notice required by Section 11(b)(1) is given to such Holder (or if no such
notice has been given by the Corporation to such Holder, within 40 days after
such Holder first learns of such Optional Redemption Event) a Holder Notice to
the Corporation. At the Corporation's option, a Holder Notice may be revoked by
such Holder giving such Holder Notice by giving notice of such revocation to the
Corporation at any time prior to the time the Corporation pays the Optional
Redemption Price to such Holder.

              

              (3) If a Holder shall have given a Holder
Notice, on the date which is five Business Days after the date such Holder
Notice is given (or such later date as such Holder surrenders such Holder's
certificates for the shares of Series A Convertible Preferred Stock to be
redeemed) the Corporation shall make payment in immediately available funds of
the applicable Optional Redemption Price to such account as specified by such
Holder in writing to the Corporation at least one Business Day prior to the
applicable redemption date.

              

               

              
                
                  
                  

                

                
                  30

                  
                    

                  

                

                
                  
                  

                

              

               

              (c) Other. (1) In connection with a redemption
pursuant to this Section 11 of less than all of the shares of Series A
Convertible Preferred Stock evidenced by a particular certificate, promptly, but
in no event later than three Business Days after surrender of such certificate
to the Corporation, the Corporation shall issue and deliver to such Holder a
replacement certificate for the shares of Series A Convertible Preferred Stock
evidenced by such certificate which have not been redeemed.

              

              (2) A Holder Notice given by a holder of
shares of Series A Convertible Preferred Stock shall be deemed for all purposes
to be in proper form unless the Corporation notifies such holder in writing
within three Business Days after such Holder Notice has been given (which notice
shall specify all defects in such Holder Notice), and any Holder Notice
containing any such defect shall nonetheless be effective on the date given if
such Holder promptly undertakes to correct all such defects. No such claim of
error shall limit or delay performance of the Corporation's obligation to redeem
all shares of Series A Convertible Preferred Stock not in dispute whether or not
such Holder makes such undertaking.

              

              (3) If on or before a particular Optional
Redemption Date the Corporation shall have failed to pay in full the Optional
Redemption Price for all shares of Series A Convertible Preferred Stock to be
redeemed to the Holder entitled thereto or to deposit the same with an Eligible
Bank in accordance with Section 15(c), then without in any way relieving the
Corporation of its obligation to pay such amount in accordance herewith (except
to the extent expressly provided in this Section 11(d)(3)), the Holder of any
such share of Series A Convertible Preferred Stock shall continue to have the
right to convert such share of Series A Convertible Preferred Stock into Common
Stock in accordance with Section 10 at any time prior to the date on which the
Corporation pays the Optional Redemption Price of such share of Series A
Convertible Preferred Stock to such Holder (together with any amount due to such
holder pursuant to Section 15(d)) or so deposits the same (together with any
amount due to such Holder pursuant to Section 15(d)) and gives notice to such
Holder of such deposit; provided,
however, that the shares of Common Stock received by
such Holder upon any such conversion in certain circumstances may be subject to
restrictions on resale by such Holder arising under applicable securities laws
to the extent not registered for resale by such Holder pursuant to the
Registration Statement. If a Holder converts all or any portion of such Holder's
shares of Series A Convertible Preferred Stock as permitted by this Section
11(d)(3), the amount of the Optional Redemption Price due to such Holder with
respect to the number of shares of Series A Convertible Preferred Stock so
converted shall be reduced by $1,000 for each share of Series A Convertible
Preferred Stock so converted.

              

              Section
12. Voting
Rights; Certain Restrictions and Covenants.

              

              (a) Voting
Rights. The Holder of each
share of Series A Convertible Preferred Stock shall be entitled to a number of
votes per share at any time equal to (1) in any case in which the Series A
Convertible Preferred Stock votes together with the Common Stock or any other
class or series of stock of the Corporation, the number of shares of Common
Stock issuable upon conversion of such share of Series A Convertible Preferred
Stock at such time (determined without regard to the shares of Common Stock so
issuable upon such conversion in respect of accrued and unpaid dividends on such
share of Series A Convertible Preferred Stock) and (2) in any case not covered
by the immediately preceding clause (1), one vote per share of Series A
Convertible Preferred Stock. Each Holder shall be entitled to notice of any
shareholders’ meeting in accordance with the bylaws of the Corporation and shall
vote with holders of Common Stock upon the election of directors and upon any
other matter submitted to a vote of shareholders, except those matters required
by law to be submitted to a vote of holders of Preferred Stock or Series A
Convertible Preferred Stock voting separately as a class or series, and except
as provided in this Certificate of Designations. Fractional votes shall not,
however, be permitted.

              

               

              
                
                  
                  

                

                
                  31

                  
                    

                  

                

                
                  
                  

                

              

               

              (b) Certificate
of Incorporation; Certain Stock. The affirmative vote or consent of the
Majority Holders, voting separately as a class, will be required for (1) any
amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Certificate of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series A Convertible Preferred Stock, (2) the creation
and issuance of any Senior Dividend Stock or Senior Liquidation Stock, (3) the
redemption of or payment of dividends on, any class or series of capital stock
of the Corporation or (4) any sale, lease or conveyance of all or substantially
all of the assets of the Corporation, or any merger, consolidation, or business
combination with any other Person or any liquidation, dissolution or winding up
of the Corporation; provided,
however, that any increase
in the authorized Preferred Stock of the Corporation or the creation and
issuance of any stock which is both Junior Dividend Stock and Junior Liquidation
Stock shall not be deemed to affect materially and adversely such powers,
preferences, or special rights and any such increase or creation and issuance
may be made without any such vote by the holders of Series A Convertible
Preferred Stock except as otherwise required by law; and provided further,
however, that no such
amendment, alteration or repeal shall (i) reduce the Optional Redemption Price
or the amount payable to a Holder pursuant to Section 5, (ii) change the
definition of Majority Holders, (iii) change the method of calculating the
Conversion Price in a manner adverse to the Holders or reduce the number of
shares of Common Stock issuable upon any conversion of shares of Series A
Convertible Preferred Stock (other than any reduction in the number of shares of
Common Stock so issuable pursuant to an amendment of the Certificate of
Incorporation which effects a combination of the outstanding shares of Common
Stock and results in an adjustment in the Conversion Price pursuant to Section
10(c)(3)), or (iv) amend, modify or repeal any provision of this Section 12(b),
unless in each such case referred to in the preceding clauses (i) through (iv)
such amendment, modification or repeal has been approved by the affirmative vote
or written consent of all Holders, voting separately as a
class.

              

              (c) Repurchases
of Series A Convertible Preferred Stock. The Corporation shall not repurchase
or otherwise acquire any shares of Series A Convertible Preferred Stock (other
than pursuant to Sections 7 or 11) unless the Corporation offers to repurchase
or otherwise acquire simultaneously a pro rata portion of each holder's shares
of Series A Convertible Preferred Stock for cash at the same price per
share.

              

              (d) Other. So long as any shares of Series A
Convertible Preferred Stock are outstanding the Corporation shall comply with
the following unless otherwise agreed in writing by the Majority
Holders:

              

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

               

              
                
                  
                  

                

                
                  32

                  
                    

                  

                

                
                  
                  

                

              

               

               

              (2) Payment
of Obligations. The Corporation will pay and
discharge, and will cause each Subsidiary of the Corporation to pay and
discharge, when due all their respective obligations and liabilities which are
material to the Corporation and its subsidiaries taken as a whole, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings and the Corporation shall have established
adequate reserves therefor on its books.

              

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

              

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

              

              (4) Conduct
of Business and Maintenance of Existence. The Corporation will continue, and
will cause each Subsidiary to continue, to engage in business of the same
general type as conducted by the Corporation and its operating subsidiaries at
the time this Certificate of Designations is filed with the Secretary of State
of the State of Delaware, and will preserve, renew and keep in full force and
effect, and will cause each Subsidiary to preserve, renew and keep in full force
and effect, their respective corporate existence and their respective material
rights, privileges and franchises necessary or desirable in the normal conduct
of business except, in the case of any such matter other than maintenance of the
Corporation’s corporate existence, where the failure to do so would not have a
material adverse effect on (i) the business, properties, operations, condition
(financial or other), results of operation or prospects of the Corporation and
the Subsidiaries, taken as a whole, (ii) the ability of the Corporation to pay
and perform its obligations under the Transaction Documents or (iii) the rights
and remedies of the Holders or the Collateral Agent under or in connection with
the Transaction Documents.

              

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

              

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

               

              
                
                  
                  

                

                
                  33

                  
                    

                  

                

                
                  
                  

                

              

               

              (7) Limitations
on Asset Sales, Liquidations, Etc.; Certain Matters. The Corporation shall not, and shall
not permit any Subsidiary to:

              

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

              

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

               

              (c) liquidate, dissolve or otherwise wind
up its affairs.

              

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

              

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

              

              (10)  Rule
144A Information Requirement.
Within the period prior to
the expiration of the holding period applicable to sales of shares of Series A
Convertible Preferred Stock under Rule 144(k) under the 1933 Act (or any
successor provision), the Corporation shall, during any period in which it is
not subject to Section 13 or 15(d) under the 1934 Act, make available to the
Holders or any holder of shares of Common Stock issued upon conversion of shares
of Series A Convertible Preferred Stock which continue to be Restricted
Securities in connection with any sale thereof and any prospective purchaser of
Series A Convertible Preferred Stock from any Holder, the information required
pursuant to Rule 144A(d)(4) under the 1933 Act upon the request of such Holder
and it will take such further action as any Holder may reasonably request, all
to the extent required from time to time to enable such Holder to sell the
shares of Series A Convertible Preferred Stock held by it without registration
under the 1933 Act within the limitation of the exemption provided by Rule 144A,
as Rule 144A may be amended from time to time. Upon the request of any Holder,
the Corporation will deliver to such Holder a written statement as to whether it
has complied with such requirements.

              

               

              
                
                  
                  

                

                
                  34

                  
                    

                  

                

                
                  
                  

                

              

               

              (11) Limitation
on Certain Issuances. The Corporation shall not offer, sell
or issue, or enter into any agreement, arrangement or understanding to offer,
sell or issue, any Common Stock or Common Stock Equivalent (A) that is
convertible into, exchangeable or exercisable for, or includes the right to
receive additional shares of Common Stock either (x) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the Common Stock at any time after the
initial issuance of such Common Stock or Common Stock Equivalent, or (y) with a
fixed conversion, exercise, exchange or purchase price that is subject to being
reset at some future date after the initial issuance of such Common Stock or
Common Stock Equivalent or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Corporation or the market
for the Common Stock (but excluding customary stock split, reverse stock split,
stock dividend and similar anti-dilution provisions substantially similar to
those set forth in clauses (1) through (6) of Section 10(c)), or (B) pursuant to
an “equity line” structure in which one or more Persons commits to provide
capital to the Corporation by the purchase of securities of the Corporation from
time to time, whether at specified times, times determined by the Corporation or
by such Person(s) or by mutual agreement between the Corporation and such
Person(s), at prices based on the market prices of the Common Stock at or near
the time of each purchase, which securities are registered for sale or resale
pursuant to the 1933 Act; provided, however,
that nothing in this
Section 12(c)(11) shall prohibit the Corporation from issuing shares of Common
Stock for cash for the account of the Corporation in an offering that is
underwritten on a firm commitment basis and registered with the SEC under the
1933 Act.

              

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

              

              (13) Notice
of Defaults. The Corporation shall notify the
Holders promptly, but in any event not later than five days after the
Corporation becomes aware of the fact, of any failure by the Corporation to
comply with this Section 12 or Article III of the Notes.

              

               

              
                
                  
                  

                

                
                  35

                  
                    

                  

                

                
                  
                  

                

              

               

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

              

              (e) Concerning
the Noteholders. The Corporation shall not take any
action or engage in any transaction, or enter into any agreement, arrangement or
understanding to take any action or engage in any transaction, which would
constitute a Fundamental Change without the advance written consent of the
Majority Noteholders. So long as any Notes are outstanding, in addition to any
other consent required by the Certificate of Incorporation including this
Certificate of Designations or required by law, the Corporation shall not amend,
change, waive, discharge or terminate this Certificate of Designations if such
amendment would adversely affect the rights of the holders of Notes unless such
amendment, change, waiver, discharge or termination is consented to in writing
signed by the Corporation and the Majority Noteholders.

              

              Section
13. Outstanding
Shares. For purposes of this Certificate of
Designations, all authorized and issued shares of Series A Convertible Preferred
Stock shall be deemed outstanding except (i) from the applicable Conversion
Date, each share of Series A Convertible Preferred Stock converted into Common
Stock, unless the Corporation shall default in its obligation to issue and
deliver shares of Common Stock upon such conversion as and when required by
Section 10; (ii) from the date of registration of transfer, all shares of Series
A Convertible Preferred Stock held of record by the Corporation or any
subsidiary or Affiliate of the Corporation (other than an Affiliate of the
Corporation who is a natural person or any original holder of shares of Series A
Convertible Preferred Stock) and (iii) from the applicable Mandatory Redemption
Date or Optional Redemption Date, all shares of Series A Convertible Preferred
Stock which are redeemed or repurchased, so long as in each case the Mandatory
Redemption Price, the Optional Redemption Price or other repurchase price, as
the case may be, of such shares of Series A Convertible Preferred Stock shall
have been paid by the Corporation as and when due hereunder.

              

              Section 14.  Forms of
Notices. The
forms of certain of the notices required or permitted under this Certificate of
Designations shall be as provided in this Section 14 or as otherwise agreed by
the Corporation and Majority Holders.

              

              (a) Form
of Notice of Conversion of Series A Convertible Preferred Stock.

               

              
                
                  
                  

                

                
                  36

                  
                    

                  

                

                
                  
                  

                

              

               

               

              NOTICE
OF CONVERSION

              OF

              SERIES
A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

              OF

              EMAGIN
CORPORATION

              

              
                	
                        TO:

                      	
                        eMagin
      Corporation

                      

              

              10500
N.E. 8th
Street

              Suite
1400

              Seattle,
Washington 98004

               

              Attention:
Chief Executive Officer

               

              Facsimile
No.: (425) 749-3601

              

              (1) Pursuant to the terms of the Series A
Senior Secured Convertible Preferred Stock (the “Preferred Stock”), of eMagin
Corporation, a Delaware corporation (the “Corporation”), the undersigned (the
“Holder”) hereby elects to convert   
             
  shares of the
Preferred Stock into shares of Common Stock, $.001 par value (the “Common
Stock”), of the Corporation, at a Conversion Price per share of Common Stock of
$    
             , or such other securities into which
the Preferred Stock is currently convertible. Capitalized terms used in this
Notice and not otherwise defined herein have the respective meanings provided in
the Certificate of Designations of Series A Convertible Preferred
Stock.

               

              
                
                  
                  

                

                
                  37

                  
                    

                  

                

                
                  
                  

                

              

               

               

              (2) The number of shares of Common Stock
issuable upon the conversion of the shares of Preferred Stock to which this
Notice relates is                            .

              

              (3) Please issue certificates for the
number of shares of Common Stock or other securities into which such number of
shares of Preferred Stock is convertible in the name(s) specified immediately
below or, if additional space is necessary, on an attachment
hereto:

              

              

              
                	 
      	 
      	 
      	 
      
	
                        Name 

                      	 
      	
                        Name

                      	 
      
	 
      	 
      	 
      	 
      
	
                        Address  

                      	 
      	
                        Address

                      	 
      
	 
      	 
      	 
      	 
      
	
                        SS or Tax ID
      Number  

                      	 
      	
                        SS
      or Tax ID Number

                      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
                        Delivery
      Instructions for Common Stock:

                      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      

              

               

              

               

              (4) If the shares of Common Stock issuable
upon conversion of the Preferred Stock have not been registered for resale under
the 1933 Act and this Notice is given prior to the end of the Registration
Period under the Note Purchase Agreement by which the Holder is bound, the
Holder represents and warrants that (i) the shares of Common Stock not so
registered are being acquired for the account of the Holder for investment, and
not with a view to, or for resale in connection with, the public distribution
thereof other than pursuant to registration under the 1933 Act or an exemption
from registration under the 1933 Act, and that the Holder has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the 1933 Act or an
exemption from registration under the 1933 Act and (ii) the Holder is an
“accredited investor” as defined in Regulation D under the 1933 Act. If the
provisions of Rule 144(k) under the 1933 Act are inapplicable to the Holder with
respect to the Conversion Shares to which this Notice relates, the Holder
further agrees that (A) the shares of Common Stock not so registered shall not
be sold or transferred unless either (i) such shares first shall have been
registered under the 1933 Act or (ii) the Corporation first shall have been
furnished with an opinion of legal counsel reasonably satisfactory to the
Corporation to the effect that such sale or transfer is exempt from the
registration requirements of the 1933 Act and (B) until such shares are
registered for resale under the 1933 Act, the Corporation may place a legend on
the certificate(s) for the shares of Common Stock not so registered to that
effect and place a stop-transfer restriction in its records relating to the
shares of Common Stock not so registered, all in accordance with the Note
Purchase Agreement by which the Holder is bound.

              

              

              
                
                  
                  

                

                
                  38

                  
                    

                  

                

                
                  
                  

                

              

              

              
                	
                         Date

                      	 
      	 
      
	 
      	 
      	
                        Signature
      of Holder 

                        (Must
      be signed exactly as name  appears on the Preferred Stock
      Certificate.)

                      
	 
      	 
      	 
      

              

               _________________________ ____________________________________

              

              (b) Form
of Mandatory Redemption Notice.

              

              MANDATORY
REDEMPTION NOTICE

              (Section
7 of Certificate of Designations of

              Series
A Senior Secured Convertible Preferred Stock)

              

              TO:                                                     

              (Name of
Holder)

              

              (1) Pursuant to the terms of the Series A
Senior Secured Convertible Preferred Stock (the “Preferred Stock”), eMagin
Corporation, a Delaware corporation (the “Corporation”), hereby notifies the
above-named holder (the “Holder”) that the Corporation is redeeming                  shares of Preferred Stock held by the
Holder in accordance with Section 7 of the Certificate of Designations of the
Series A Senior Secured Convertible Preferred Stock (the “Certificate of
Designations”).

              

              (2) The Mandatory Redemption Date is
December 21, 2008.

              

              (3) The Mandatory Redemption Price per
share of Preferred Stock is $_________.

              

              (4) Upon surrender to the Corporation of
the certificate(s) for the shares of Preferred Stock to be redeemed (but in no
event earlier than the Mandatory Redemption Date), the Corporation will make
payment of the Mandatory Redemption Price in accordance with the Certificate of
Designations.

              

              (5) Capitalized terms used herein and not
otherwise defined herein have the respective meanings provided in the
Certificate of Designations.

              

              
                	 
      	 
      	 
      
	 
      	
                        EMAGIN
      CORPORATION

                      
	 
      	 
      	 
      
	
                        Date: 

                      	
                        By:  

                      	
                        /s/ 

                      
	 
      	
                         

                          
      

                      
	 
      	
                        Title 

                      

              

               

              

              
                
                  
                  

                

                
                  39

                  
                    

                  

                

                
                  
                  

                

              

              

              (c) Form
of Corporation Notice.

              

              CORPORATION
NOTICE

              (Section
11(b)(1) of Certificate of Designations of

              Series
A Senior Secured Convertible Preferred Stock)

              

              TO:                                                       

              (Name of
Holder)

              

              (1) An Optional Redemption Event described
in the Certificate of Designations (the “Certificate of Designations”) of Series
A Senior Secured Convertible Preferred Stock (the “Preferred Stock”) of eMagin
Corporation, a Delaware corporation (the “Corporation”), occurred on
                    . As a result of such Optional
Redemption Event, the above-named holder (the “Holder”) is entitled to exercise
its optional redemption rights pursuant to Section 11(b)(2) of the Certificate
of Designations.

              

              (2) The Holder's optional redemption rights
must be exercised on or before               ,        .

              

              (3) On or before the date set forth in the
preceding paragraph (2), the Holder must deliver to the Corporation a Holder
Notice, in the form set forth in Section 14(d) of the Certificate of
Designations.

              

              (4) In order to receive payment of the
Optional Redemption Price of the shares of Preferred Stock to be redeemed, the
Holder must deliver to the Corporation the certificates for the shares of
Preferred Stock to be redeemed, duly endorsed for transfer to the Corporation of
the shares to be redeemed.

              

              (5) Capitalized terms used herein and not
otherwise defined herein have the respective meanings provided in the
Certificate of Designations.

              

              
                	 
      	 
      	 
      
	 
      	
                        EMAGIN
      CORPORATION

                      
	 
      	 
      	 
      
	
                        Date: 

                      	
                        By:  

                      	
                        /s/ 

                      
	 
      	
                         

                          
      

                      
	 
      	
                        Title 

                      

              

              

              

               

              
                
                  
                  

                

                
                  40

                  
                    

                  

                

                
                  
                  

                

              

               

              (d) Form
of Holder Notice.

              

              HOLDER
NOTICE

              (Section
11(b)(2) of Certificate of Designations of

              Series
A Senior Secured Convertible Preferred Stock)

              

              TO: EMAGIN CORPORATION

              

              (1) Pursuant to the terms of the Series A
Senior Secured Convertible Preferred Stock (the “Preferred Stock”) of eMagin
Corporation, a Delaware corporation (the “Corporation”), the undersigned holder
(the “Holder”) hereby elects to exercise its right to require redemption by the
Corporation pursuant to Section 11 of the Certificate of Designations of Series
A Senior Secured Convertible Preferred Stock (the “Certificate of Designations”)
of              shares of Preferred Stock at an
Optional Redemption Price per share in cash equal to the sum of (a) the Stated
Value plus (b) an amount equal to $               of accrued and unpaid dividends (the
Accrual Amount) on each share of Series A Convertible Preferred Stock to be
redeemed to the Optional Redemption Date plus (c) an amount equal to accrued and
unpaid interest, if any, on dividends in arrears on such share of Series A
Convertible Preferred Stock to the Optional Redemption Date.

              

              (2) The aggregate Optional Redemption Price
of all shares of Preferred Stock to be redeemed from the Holder pursuant to this
Notice is $                   .

              

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

               

              
                	 
      	 
      	 
      
	 
      	
                        NAME
      OF HOLDER:

                      
	 
      	 
      	 
      
	
                        Date: 

                      	
                        By:  

                      	
                        /s/ 

                      
	 
      	
                        
                          
      

                        Signature
      of Registered Holder

                      
	 
      	
                        (Must
      be signed exactly as name appears on the stock
    certificate.)

                      

              

              

              

               

               

              
                
                  
                  

                

                
                  41

                  
                    

                  

                

                
                  
                  

                

              

               

              Section
15. Miscellaneous.

              

              (a) Notices. Any notices required or permitted to
be given under the terms of this Certificate of Designations shall be in writing
and shall be delivered personally (which shall include telephone line facsimile
transmission) or by courier and shall be deemed given upon receipt, if delivered
personally or by courier (a) in the case of the Corporation, addressed to the
Corporation at 10500 N.E. 8th Street, Suite 1400, Bellevue,
Washington 98004, Attention: Chief Executive Officer (telephone line facsimile
transmission number (425) 749-3601), or (b) in the case of any holder of shares
of Series A Convertible Preferred Stock, at such holder's address or telephone
line facsimile transmission number shown on the stock books maintained by the
Corporation with respect to the Series A Convertible Preferred Stock or such
other address as the Corporation shall have provided by notice to the holders of
shares of Series A Convertible Preferred Stock in accordance with this Section
or any holder of shares of Series A Convertible Preferred Stock shall have
provided to the Corporation in accordance with this Section.

              

              (b) Replacement
of Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series A
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
A Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security if such holder
has and agrees to maintain reasonably sufficient assets to support the
indemnity) or (2) in the case of mutilation, upon surrender and cancellation of
the certificate for such shares of Series A Convertible Preferred Stock, the
Corporation will execute and deliver to such holder a new certificate for such
shares of Series A Convertible Preferred Stock without charge to such
holder.

              

              (c) Payment
on Redemption; Deposit of Redemption Price. If any share of Series A Convertible
Preferred Stock is to be redeemed as provided in Section 7 or 11 and any notice
required in connection therewith shall have been timely given as provided
therein, the applicable redemption price of such share of Series A Convertible
Preferred Stock to be so redeemed and with respect to which any such notice has
been given shall become due and payable on the applicable redemption date. On
and after such redemption date, provided
that the Corporation shall
have paid such redemption price to the respective Holders who are entitled
thereto on or prior to the applicable redemption date or shall have deposited
with an Eligible Bank on or prior to such redemption date, to be held in trust
for the respective Holders entitled thereto, an amount sufficient to pay the
applicable redemption price, then on such redemption date the dividends on such
share of Series A Convertible Preferred Stock shall cease to accrue, and such
share of Series A Convertible Preferred Stock shall be deemed not to be
outstanding and the Holder thereof shall not be entitled to any rights of a
Holder except to receive payment of the applicable redemption price and all
other rights hereunder with respect to such share of Series A Convertible
Preferred Stock shall cease. So long as the Corporation shall have so paid or
deposited the full amount of the applicable redemption price on a timely basis,
no Holder shall be entitled to interest on the amount so held by such Eligible
Bank and, so long as the Corporation shall be in compliance in all material
respects with its obligations to the Holders (including, without limitation, its
obligations under the Transaction Documents), the Corporation shall be entitled
to any interest paid by such Eligible Bank on the funds so deposited, subject to
applicable abandoned property and escheat laws. On presentation and surrender of
the certificate for such share of Series A Convertible Preferred Stock, such
share shall be redeemed at the applicable redemption price.

              

              (d) Overdue
Amounts. Except as otherwise specifically
provided in Section 5 with respect to dividends in arrears on the Series A
Convertible Preferred Stock, whenever any amount which is due to any holder of
shares of Series A Convertible Preferred Stock is not paid to such holder when
due, such amount shall bear interest at the rate of 12% per annum (or such other
rate as shall be the maximum rate allowable by applicable law) until paid in
full.

              

              Section
16. Collateral
Security. The obligations of the Corporation
under this Certificate of Designations, including, without limitation, the
obligations under Sections 7 and 11 to redeem shares of Series A Convertible
Preferred Stock, are secured pursuant to the Security
Agreements.

              

              [Signature
Page Follows]

               

              

              
                
                  
                  

                

                
                  42

                  
                    

                  

                

                
                  
                  

                

              

              IN WITNESS WHEREOF, eMagin
Corporation has caused this Certificate of Designations to be signed by     
                 
 , its     
            , and     
                 
   , its     
            , as of the     
day of July __, 2007.

               

              
                	 
      	 
      	 
      
	 
      	
                        EMAGIN
      CORPORATION

                      
	 
      	 
      	 
      
	 
      	
                        By:  

                      	
                        /s/ 

                      
	 
      	
                         

                          
      

                        Name:

                      
	 
      	
                        Title 

                      

              

              

               

               

              
                
                   

                

                
                  43

                  
                    

                  

                

                
                   

                

              
 

            
              Annex
VII

              Press
Release

              

              As
previously reported in the Current Report on Form 8-K of eMagin Corporation (the
“Company”) dated as of July 25, 2006, the Company entered into several
Note Purchase Agreements (the “Original Purchase Agreements”) to sell to certain
qualified institutional buyers and accredited investors $5,990,000 in principal
amount 6% Senior Secured Convertible Notes convertible into common stock at
$2.60 per share Due July 21, 2007 and January 21, 2008 (the “Notes’), together
with warrants (the “Warrants”) to purchase 1,612,700 shares of the Company’s
common stock, par value $0.001 per share (the “Common Stock”) at $3.60 per
share.

               

              As
previously reported in the Current Report on Form 8-K dated April 13, 2007, the
Company amended its Original Purchase Agreement with a certain qualified
accredited investors to sell such investor $500,000 in Notes convertible into
common stock at $.35 per share, together with Warrants to purchase 1,000,000
shares of the Company’s Common Stock at $.48 per share (the “Other Purchase
Agreement”).

               

              By way of
Amendment Agreements dated July 23, 2007 (the “Amendment Agreements”) between
the Company and each of the holders of the Notes (each a “Holder” and
collectively, the “Holders”), the Company agreed to issue each Holder an amended
and restated Note (the “Amended Notes”) in the principal amount equal to the
principal amount outstanding as of July 23, 2007. The changes to the Amended
Notes include the following:

              

              
                	
                        ·

                      	
                        The maturity
      date for the outstanding Notes (totaling after conversions an aggregate of
      $6,020,000) has been extended to December 21, 2008;

                      
	
                        ·

                      	
                        Liquidated
      damages of 1% per month related to the Company’s delisting from the
      American Stock Exchange will no longer accrue and the deferred interest
      balance of approximately $230,000 has been
  forgiven;

                      

              

              

              
                	
                        ·

                      	
                        The
      Company no longer has to maintain a minimum cash or cash equivalents
      balances of $600,000;

                      
	
                        ·

                      	
                        The
      Amended Notes may not be prepaid without consent of The
      Holders;

                      

              

              

              
                	
                        ·

                      	
                        As
      of July 23, 2007 the annual interest rate was raised from 6% per
      annum to 8% per annum;

                      

              

              

              
                	
                        ·

                      	
                        The
      Amended Notes are convertible into (i) 8,407,612 shares of the Company’s
      common stock. The conversion price for $5,770,000 of principal was revised
      from $2.60 to $.75 per share and was unchanged for the remaining $250,000
      of principal from the Other Purchase
Agreement;

                      

              

              

              
                	
                        ·

                      	
                        In
      addition to the right to convert the Amended Notes into the Company's
      common stock, up to $3,010,000 of the Amended Notes can be
      converted into (ii) 3,010 shares of the Company’s newly formed Series
      A Convertible Preferred Stock (the “Preferred” or the “Preferred
      Stock”) at a stated value of $1,000 per share. The Preferred is
      convertible into common stock at the same rate as their Note, subject to
      adjustment as provided for in the Certificate of Designations (discussed
      below);

                      
	
                        ·

                      	
                        Except
      for the Amended Note associated with the Other Purchase Agreement, the
      Amendment Agreements adjusts the exercise price of the amended Warrants
      from $3.60 to $1.03 per share for 1,553,468 shares of Common Stock and
      requires the issuance of Warrants exercisable for an additional 3,831,859
      shares of Common Stock at $1.03 per share with an expiration date of July
      21, 2011;

                      

              

              

              
                	
                        ·

                      	
                        The
      Amended Notes eliminate the requirement that the Company comply with
      certain covenants of management contained in Note. Specifically, among
      other things, the requirements to defer management compensation and to
      maintain a management committee were removed; and

                      
	
                        ·

                      	
                        The
      Amended Notes and/or the Series A Convertible Preferred stock are subject
      to certain anti-dilution adjustment rights in the event the Company issues
      shares of its Common Stock or securities convertible into its Common Stock
      at a price per share that is less than the Conversion Price, in which case
      the Conversation Price shall be adjusted to such lower
    price.

                      

              

               

               

               

              
                
                  
                  

                

                
                  1

                  
                    

                  

                

                
                  
                  

                

              

               

              Pursuant
to the Amended Notes, the Company cannot enter into a transaction that
constitutes a Fundamental Change without the consent of the Note Holders. A
Fundamental Change includes the following:

              

              
                	
                        ·

                      	
                        The
      consolidation or merger of the Company or any of its
      subsidiaries;

                      
	
                        ·

                      	
                        The
      acquisition by a person or group of entities acting in concert of 50% or
      more of the combined voting power of the outstanding securities of the
      Company; and

                      

              

              

              
                	
                        ·

                      	
                        the
      occurrence of any transaction or event in which all or substantially all
      of the shares of the Company’s common stock is exchanged for converted
      into acquired for or constitutes the right to receive consideration which
      is not all or substantially all common stock which is listed on a national
      securities exchange or approved for quotation on Nasdaq or any similar
      United States system of automated dissemination of transaction reporting
      securities prices.

                      

              

              

              Pursuant
to the Amendment Agreements, the Company is required to file a Certificate of
Designations of Series A Senior Secured Convertible Preferred Stock (the
“Certificate of Designations”). The Certificate of Designations designates 3,198
shares of the Company’s preferred stock as Series A Senior Secured Convertible
Preferred Stock. The Preferred Stock has a stated value of $1,000. The Preferred
Stock is entitled to cumulative dividends which accrue at a rate of 8% per
annum, payable on the December 21, 2008. Each share of Preferred Stock has
voting rights equal to (1) in any case in which the Preferred Stock votes
together with the Company’s Common Stock or any other class or series of stock
of the Company, the number of shares of Common Stock issuable upon conversion of
such shares of Preferred Stock at such time (determined without regard to the
shares of Common Stock so issuable upon such conversion in respect of accrued
and unpaid dividends on such share of Preferred Stock) and (2) in any case not
covered by the immediately preceding clause one vote per share of Preferred
Stock. The Certificate of Designations prohibits the Company from entering into
a Fundamental Change without the consent of the Holders and contains
antidilution adjustments rights that are comparable to the antidilution
adjustments contained in the Amended Notes.

               

              The
amended Warrants are subject to certain anti-dilution adjustment rights in the
event the Company issues shares of its Common Stock or securities convertible
into its Common Stock at a price per share that is less than the Strike Price,
in which case the Strike Price shall be adjusted to the lower of (1) 138% of the
price at which such common stock is issued or issuable and (2) the exercise
price of warrants, issued in such transaction."

               

              Pursuant
to the Amendment Agreements, the Company is required to file a registration
statement with the Securities and Exchange Commission by August 31, 2007
covering the resale of 100% of the sum of (a) the number of shares issuable upon
conversion of the Amended Notes and Preferred Stock, and (b) the number of
shares issuable upon exercise of the Warrants.

              

              Pursuant
to the Amendment Agreement, the Company and the Collateral Agent, on behalf of
the note holders, executed Amendment No. 1 to the Pledge and Security Agreement;
Amendment No. 1 to Patent and Trademark Security Agreement; Amendment No. 1 to
Lockbox Agreement. The Pledge and Security Agreement, Trademark Security
Agreement and Lockbox Agreement were previously entered into on July 21,
2006 (collectively, the “Ancillary Agreements”). The Ancillary Agreements were
amended to cover obligations that may become payable to the holders of the
preferred stock and to delete certain definitions used in the Ancillary
Agreements and substitute definitions of terms used in the Ancillary
Agreeements.

               

              The
summary of amendment terms contained herein does not include all information
included in the Amendment Agreement, the Amended Notes, the amended Warrants,
the Certificate of Designations or the Ancillary Agreements and, consequently,
is qualified in its entirety by reference to the entire text of the Amendment
Agreements and the forms of the Amended Notes, amended Warrants, Certificate of
Designations, Amendment No. 1 to Pledge and Security Agreement, Amendment No. 1
to Patent and Trademark Security Agreement and Amendment No. 1 to Lockbox
Agreement, each of which is attached as an Exhibit to this Current Report on
Form 8-K.

               

              Two of
the Company’s employees and one current board member purchased Notes pursuant to
the Original Purchase Agreement. Their Notes and Warrants are as follows after
the completion of the Amended Note agreement; Olivier Prache, Senior VP of
Display Operations, $10,000 Note may be converted into 13,333 shares and he has
5,385 warrants exercisable at $3.60 per share and 6,641 exercisable at $1.03 per
share. John Atherly, CFO’s, $40,000 Note may be converted into 53,333 shares and
37,333 warrants are exercisable at $1.03 per share. Paul Cronson, board member,
through Navacorp III, LLC has a $200,000 Note which may be converted into
266,666 shares and 186,666 warrants exercisable at $1.03 per share.

               

              Stillwater
LLC, a beneficial owner of more than 5% of the Company’s common stock, purchased
a Note pursuant to the Other Note Purchase Agreement. Ginola Limited and Rainbow
Gate Corporation, a corporation in which its investment manager is the sole
member of Stillwater LLC and its controlling shareholder is the same as Ginola
Limited, both purchased Notes pursuant to the Original Note Purchase Agreement.
Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate
Corporation.

               

               

               

              2ex1053.htm

    Exhibit 10.53

     

     

    SECURITIES
PURCHASE AGREEMENT

     

    This
Securities Purchase Agreement (this “Agreement”)
is dated as of April 2, 2008, among eMagin Corporation, a Delaware
corporation (the “Company”),
and each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser”
and collectively the “Purchasers”).

     

    WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act (as defined below) and Rule 506 promulgated
thereunder, the Company desires to issue and sell to each Purchaser, and each
Purchaser, severally and not jointly, desires to purchase from the Company,
securities of the Company as more fully described in this
Agreement.

     

    NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, the Company and each Purchaser agree as
follows:

      

    ARTICLE
I

    DEFINITIONS

     

    Section 1.1 Definitions.  In
addition to the terms defined elsewhere in this Agreement, for all purposes of
this Agreement, the following terms have the meanings indicated in this Section
1.1:

     

    “Action”
shall have the meaning ascribed to such term in Section 3.1(j).

     

    “Affiliate”
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person as such terms are used in and construed under Rule 144 under the
Securities Act. With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such
Purchaser.

     

    “Business
Day” means
any day except Saturday, Sunday and any day which is a federal legal holiday or
a day on which banking institutions in the State of New York or State of
Washington are authorized or required by law or other governmental action to
close.

     

    “Closing”
means the closing of the purchase and sale of the Securities pursuant to Section
2.1.

     

    “Closing
Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto, and all
conditions set forth in Sections 2.3 hereof are satisfied, or such other date as
the parties may agree.

     

    “Closing
Price” means on any particular date (a) the last reported closing
bid price per share of Common Stock on such date on the Trading Market (as
reported by Bloomberg L.P. at 4:15 PM (Eastern Time)), or (b) if there is no
such price on such date, then the closing bid price on the Trading Market on the
date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM
(Eastern Time)), or (c) if the Common Stock is not then listed or quoted on
the Trading Market and if prices for the Common Stock are then reported in the
“pink sheets” published by the National Quotation Bureau Incorporated (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported, or
(d) if the shares of Common Stock are not then publicly traded the fair
market value of a share of Common Stock as determined by an appraiser selected
in good faith by the Purchasers of a majority in interest of the Shares then
outstanding.

     

    “Commission”
means the United States Securities and Exchange Commission.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    “Common
Stock” means the common stock of the Company, par value $0.001 per share,
and any other class of securities into which such securities may hereafter have
been reclassified or changed into.

     

    “Common Stock
Equivalents” means any securities of the Company or the Subsidiaries
which entitle the holder thereof to acquire Common Stock at any time, including,
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument that is at any time convertible into or exercisable or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

     

    “Company
Counsel” means Sichenzia Ross Friedman Ference LLP.

     

    “Disclosure
Schedules” means the Disclosure Schedules of the Company delivered
concurrently herewith.

     

    “Effective
Date” means the date that the initial Registration Statement filed by the
Company pursuant to the Registration Rights Agreement is first declared
effective by the Commission.

     

    “Evaluation
Date” shall have the meaning ascribed to such term in Section
3.1(r).

     

    “Exchange
Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.

     

    “Exempt
Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers, directors or consultants of the Company pursuant to (i) any
existing stock or option plan, or (ii) any stock or option plan duly adopted by
a majority of the non-employee members of the Board of Directors of the Company
or a majority of the members of a committee of non-employee directors
established for such purpose, (b) the issuance of shares of Common Stock
under the Company’s existing Non-Employee Stock Compensation Plan, (c) options
issued to new employees, (d) securities upon the exercise or exchange of or
conversion of any Securities issued hereunder and/or securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise, exchange or
conversion price of any such securities, and (e) securities issued pursuant
to acquisitions or strategic transactions or in connection with a strategic
alliance collaboration, joint venture, partnership, manufacturing, marketing,
distributing or similar arrangement of the Company with another Person which
strategic alliance, collaboration, joint venture, partnership manufacturing,
marketing, distributing or similar arrangement relates to the Company’s business
as conducted immediately prior thereto and which Person is engaged in a business
similar or related to the business of the Company, provided any such
issuance shall only be to a Person which is, itself or through its subsidiaries,
an operating company in a business synergistic with the business of the Company
and in which the Company receives benefits in addition to the investment of
funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity whose
primary business is investing in securities.

     

    “GAAP”
shall have the meaning ascribed to such term in Section 3.1(h).

     

    “Intellectual
Property Rights” shall have the meaning ascribed to such term in Section
3.1(o).

     

    “Investor”
shall have the meaning ascribed to such term in Section 3.1(v).

     

    “Legend Removal
Date” shall have the meaning ascribed to such term in Section
4.1(c).

     

    “Liens”
means a lien, charge, security interest, encumbrance, right of first refusal,
preemptive right or other restriction.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “Material Adverse
Effect” shall have the meaning assigned to such term in Section
3.1(b).

      

    “Material
Permits” shall have the meaning ascribed to such term in Section
3.1(m).

     

    “Per Share
Purchase Price” equals $1.04.

     

    “Person”
means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

     

    “Pro Rata
Share” means with respect to each capital raising transaction to which
Section 4.16 applies an amount equal to the product obtained by multiplying (a)
an amount equal to one-half of the securities being issued in such capital
raising transaction times (b) a fraction
of which the numerator is the sum of (i) the Purchaser’s Warrant Shares plus (ii) the number
of outstanding Shares beneficially owned by the Purchaser at the time the Pro
Rata Share is being determined, and the denominator is the sum of (iii) the
number of Warrant Shares at the time of original issuance thereof plus (iv) all of the
Shares issued under this Agreement, subject to adjustment of the amounts
specified in the immediately preceding clauses (iii) and (iv) for stock splits,
stock dividends and similar capital changes affecting the Common Stock that
occur on or after the Closing Date and on or prior to the date Pro Rata Share is
being determined.

     

    “Proceeding”
means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.

     

    “Purchaser
Party” shall have the meaning ascribed to such term in Section
4.9.

     

    “Registration
Rights Agreement” means the Registration Rights Agreement, dated the date
hereof, among the Company and the Purchasers, in the form of Exhibit A attached
hereto.

     

    “Registration
Statement” means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale by the
Purchasers of the Shares and the Warrant Shares.

     

    “Required
Approvals” shall have the meaning ascribed to such term in
Section 3.1(e).

     

    “Rule 144”
means Rule 144 promulgated by the Commission pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as such
Rule.

     

    “SEC
Reports” shall have the meaning ascribed to such term in Section
3.1(h).

     

    “Securities”
means the Shares, the Warrants and the Warrant Shares.

     

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

     

    “Shares”
means the shares of Common Stock issued or issuable to each Purchaser pursuant
to this Agreement.

     

    “Short
Sales” shall include, without limitation, all “short sales” as defined in
Rule 200 promulgated under Regulation SHO under the Exchange Act and all types
of direct and indirect stock pledges, forward sale contracts, options, puts,
calls, swaps and similar arrangements (including on a total return basis), and
sales and other transactions through non-US broker dealers or foreign regulated
brokers. 

     

    “Subscription
Amount” means, as to each Purchaser, the aggregate amount to be paid for
Shares and Warrants purchased hereunder as specified below such Purchaser’s name
on the signature page of this Agreement and next to the heading “Subscription
Amount”, in United States Dollars and in immediately available
funds.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Subsidiary”
means any subsidiary of the Company as set forth on Schedule
3.1(a).

     

    “Trading
Day” means (i) a day on which the Common Stock is traded on a Trading
Market, or (ii) if the Common Stock is not quoted on any Trading Market, a day
on which the Common Stock is quoted in the over-the-counter market as reported
by the Pink Sheets, LLC (or any similar organization or agency succeeding to its
functions of reporting prices); provided, that in the
event that the Common Stock is not listed or quoted as set forth in (i) and (ii)
hereof, then Trading Day shall mean a Business Day.

     

    “Trading
Market” means whichever of the New York Stock Exchange, the American
Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market or OTC
Bulletin Board on which the Common Stock is listed or quoted for trading on the
date in question.

     

    “Transaction
Documents” means this Agreement, the Warrants, the Registration Rights
Agreement, and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

     

    “Warrants”
means collectively the Common Stock purchase warrants, in the form of Exhibit C delivered
to the Purchasers at the Closing in accordance with Section 2.2(a)
hereof.

     

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

     

     

    ARTICLE
II

    PURCHASE
AND SALE

     

    Section 2.1 Closing.  On
the Closing Date, upon the terms and subject to the conditions set forth herein,
concurrent with the execution and delivery of this Agreement by the parties
hereto, the Company agrees to sell, and each Purchaser agrees to purchase in the
aggregate, severally and not jointly, up to $2,500,000 of Shares and Warrants.
Subject to the terms and conditions set forth in this Agreement, each Purchaser
shall deliver to the Company via wire transfer or a certified check immediately
available funds equal to their Subscription Amount, subject to adjustment
pursuant to Section 5.2, and the Company shall deliver to each Purchaser their
respective Shares and Warrants as determined pursuant to Section 2.2(a) and the
other items set forth in Section 2.2 issuable at the Closing.  Upon
satisfaction of the conditions set forth in Sections 2.2 and 2.3, the Closing
shall occur at the offices of Sichenzia Ross Friedman Ference LLP, or such other
location as the parties shall mutually agree.

     

    Section 2.2 Deliveries.

     

    (a) On
the Closing Date, the Company shall deliver or cause to be delivered to each
Purchaser the following:

     

    (i) this
Agreement duly executed by the Company;

     

    (ii) a
legal opinion of Company Counsel, in the form of Exhibit B attached
hereto;

     

    (iii) a
copy of the irrevocable instructions to the Company’s transfer agent instructing
the transfer agent to deliver, on an expedited basis, a certificate evidencing a
number of Shares equal to such Purchaser’s Subscription Amount divided by the
Per Share Purchase Price, registered in the name of such Purchaser;

     

    
      
        
        

      

      
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    (iv) a
Warrant registered in the name of such Purchaser to purchase up to a number of
shares of Common Stock equal to 50% of the number of Shares purchased, with an
exercise price equal to $1.29 per share subject to
adjustment therein;

     

    (v) the
Lockup Agreement in the form of Exhibit D hereto
executed by each director and each of the senior executive officers named as
such on Schedule
2.2(a) attached hereto;

     

    (vi) the
Registration Rights Agreement duly executed by the Company; and

     

    (vii) the
executed waivers from all of the outstanding Holders of the Amended and Restated
8% Senior Secured Convertible Notes Due 2008 waiving Section 3.12 of the Notes,
Section 12(d)(11) of the Certificate of the Designations, and Sections 5(m) and
8(a)(2) from the Note Purchase Agreement, dated July 21, 2006, as amended by the
Amendment Agreement, dated July 23, 2007.

     

    (b) On
the Closing Date, each Purchaser shall deliver or cause to be delivered to the
Company the following:

     

    (i) this
Agreement duly executed by such Purchaser;

     

    (ii) such
Purchaser’s Subscription Amount, subject to adjustment pursuant to Section 5.2,
by wire transfer to the account as specified in writing by the Company;
and

     

    (iii) the
Registration Rights Agreement duly executed by such Purchaser.

     

    Section 2.3 Closing
Conditions.

     

    (a) The
obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being met:

     

    (i) the
accuracy in all material respects when made and on the Closing Date of the
representations and warranties of the Purchasers contained herein;

     

    (ii) all
obligations, covenants and agreements of the Purchasers required to be performed
at or prior to the Closing Date shall have been performed; and

     

    (iii) the
delivery by the Purchasers of the items set forth in Section 2.2(b) of this
Agreement.

     

    (b) The
respective obligations of the Purchasers hereunder in connection with the
Closing are subject to the following conditions being met:

     

    (i) the
accuracy in all material respects when made and on the Closing Date of the
representations and warranties of the Company contained herein;

     

    (ii) all
obligations, covenants and agreements of the Company required to be performed at
or prior to the Closing Date shall have been performed;

     

    (iii) the
delivery by the Company of the items set forth in Section 2.2(a) of this
Agreement;

     

    (iv) there
shall have been no Material Adverse Effect with respect to the Company since the
date hereof; and

     

    
      
        
        

      

      
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    (v) from
the date hereof to the Closing Date, trading in the Common Stock shall not have
been suspended by the Commission (except for any suspension of trading of
limited duration agreed to by the Company, which suspension shall be terminated
prior to the Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg Financial Markets shall not have
been suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported by such service, or on any Trading Market,
nor shall a banking moratorium have been declared either by the United States or
New York State authorities nor shall there have occurred any material outbreak
or escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Shares at the
Closing.

     

    ARTICLE
III

    REPRESENTATIONS
AND WARRANTIES

     

    Section 3.1 Representations
and Warranties of the Company.  Except as set forth under the
corresponding section of the Disclosure Schedules which Disclosure Schedules
shall be deemed a part hereof, the Company hereby makes the representations and
warranties set forth below to each Purchaser:

     

    (a) Subsidiaries.  All
direct and indirect subsidiaries of the Company are set forth on Schedule
3.1(a).  Except as set forth on Schedule 3.1(a), the
Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights to
subscribe for or purchase securities.

      

    (b) Organization and
Qualification.  The Company and each of the Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation or
default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter
documents.  Each of the Company and the Subsidiaries is duly qualified
to conduct its respective business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
except where the failure to be so qualified or in good standing, as the case may
be, could not have or reasonably be expected to result in (i) a material and
adverse effect on the legality, validity or enforceability of any Transaction
Document, (ii) a material and adverse effect on the results of operations,
assets, business, prospects or condition (financial or otherwise) of the Company
and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on
the Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.

     

    (c) Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals. Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company and,
when delivered in accordance with the terms hereof and thereof, will constitute
the valid and binding obligation of the Company enforceable against the Company
in accordance with its terms except (i) as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws of general application affecting enforcement of creditors’
rights generally and (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable
remedies.

     

    
      
        
        

      

      
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    (d) No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company, the issuance and sale of the Securities
and the consummation by the Company of the other transactions contemplated
hereby and thereby do not and will not (i) conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, result in the creation of any Lien
upon any of the properties or assets of the Company or any Subsidiary, or give
to others any rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any agreement, credit
facility, debt or other instrument (evidencing a Company or Subsidiary debt or
otherwise) or other understanding to which the Company or any Subsidiary is a
party or by which any property or asset of the Company or any Subsidiary is
bound or affected, or (iii) subject to the Required Approvals, conflict with or
result in a violation of any law, rule, regulation, order, judgment, injunction,
decree or other restriction of any court or governmental authority to which the
Company or a Subsidiary is subject (including federal and state securities laws
and regulations), or by which any property or asset of the Company or a
Subsidiary is bound or affected; except in the case of each of clauses (ii) and
(iii), such as could not have or reasonably be expected to result in a Material
Adverse Effect.

     

    (e) Filings, Consents and
Approvals.  The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.4 of this Agreement, (ii) the filing
with the Commission of the Registration Statement, (iii) application(s) to each
applicable Trading Market for the listing of the Shares and Warrant Shares for
trading thereon in the time and manner required thereby, and (iv) the filing of
Form D with the Commission and such filings as are required to be made under
applicable state securities laws (collectively, the “Required
Approvals”).

     

    (f) Issuance of the
Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company other than restrictions on transfer provided
for in the Transaction Documents.  The Warrant Shares, when issued in
accordance with the terms of the Transaction Documents, will be validly issued,
fully paid and nonassessable, free and clear of all Liens imposed by the
Company. As of the Closing, the Company will have reserved from its duly
authorized capital stock the maximum number of shares of Common Stock issuable
pursuant to this Agreement and the Warrants.

     

    (g) Capitalization.  The
capitalization of the Company is as set forth on Schedule
3.1(g).  The Company has not issued any capital stock since its
most recently filed periodic report under the Exchange Act, other than pursuant
to the exercise of employee stock options under the Company’s stock option
plans, the issuance of shares of Common Stock to employees pursuant to the
Company’s employee stock purchase plan, the issuance of shares of Common Stock
pursuant to the Company’s existing Non-Employee Stock Compensation Plan, and
pursuant to the conversion or exercise of outstanding Common Stock
Equivalents.  Other than as set forth on Schedule 3.1(g), no
Person has any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by the
Transaction Documents.  Other than as disclosed on Schedule 3.1(g),
except as a result of the purchase and sale of the Securities, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common Stock
or Common Stock Equivalents.  Except as set forth on Schedule 3.1(g), the
issuance and sale of the Securities will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price under such
securities.  All of the outstanding shares of capital stock of the
Company are validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities.  There
are no stockholders agreements, voting agreements or other similar agreements
with respect to the Company’s capital stock to which the Company is a party or,
to the knowledge of the Company, between or among any of the Company’s
stockholders.

     

    
      
        
        

      

      
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    (h) SEC Reports; Financial
Statements.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it under the
Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the two years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the foregoing
materials, including the exhibits thereto and documents incorporated by
reference therein, being collectively referred to herein as the “SEC
Reports”) on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the expiration of any
such extension other than Current Reports on Form 8-K.  As of their
respective dates, the SEC Reports complied in all material respects with the
requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles (“GAAP”)
applied on a consistent basis during the periods involved, except as may be
otherwise specified in such financial statements or the notes thereto and except
that unaudited financial statements may not contain all footnotes required by
GAAP, and fairly present in all material respects the financial position of the
Company and its consolidated Subsidiaries as of and for the dates thereof and
the results of operations and cash flows for the periods then ended, subject, in
the case of unaudited statements, to normal, immaterial, year-end audit
adjustments.

     

    (i) Material
Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports, (i) there has been no event, occurrence or development that has
had or that could reasonably be expected to result in a Material Adverse Effect,
(ii) the Company has not incurred any liabilities (contingent or otherwise)
other than (A) trade payables and accrued expenses incurred in the ordinary
course of business consistent with past practice and (B) liabilities not
required to be reflected in the Company’s financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (iii) the
Company has not altered its method of accounting, (iv) the Company has not
declared or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or redeem
any shares of its capital stock and (v) the Company has not issued any equity
securities to any officer, director or Affiliate, except pursuant to existing
Company stock option or stock plans. The Company does not have pending before
the Commission any request for confidential treatment of
information.

     

    (j) Litigation.  There
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened in writing against or
affecting the Company, any Subsidiary or any of their respective properties
before or by any court, arbitrator, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) (collectively,
an “Action”)
which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii)
could, if there were an unfavorable decision, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse
Effect.  Neither the Company nor any Subsidiary, nor any director or
officer thereof, is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty.  There has not been and, to the knowledge of
the Company, is not pending or contemplated, any investigation by the Commission
involving the Company or any current or former director or officer of the
Company.  The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
or any Subsidiary under the Exchange Act or the Securities Act.

     

    
      
        
        

      

      
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    (k) Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.

     

    (l) Compliance.  Neither
the Company nor any Subsidiary (i) is in default under or in violation of (and
no event has occurred that has not been waived that, with notice or lapse of
time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its business
except in each case as could not have a Material Adverse Effect.

     

    (m) Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not have or reasonably be expected to result in a
Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any
notice of proceedings relating to the revocation or modification of any Material
Permit.

     

    (n) Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries and Liens for the payment of
federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties. Any real property and facilities held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in compliance,
except as could not have or reasonably be expected to result in a Material
Adverse Effect.

     

    (o) Patents and
Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could have or reasonably be expected to result in a Material Adverse
Effect (collectively, the “Intellectual
Property Rights”). Neither the Company nor any Subsidiary has received a
written notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person.  All
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights of
others.

     

    (p) Insurance.  The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged, including, but not limited to, directors and officers insurance
coverage at least equal to the aggregate Subscription Amount.  Such
insurance contracts and policies are accurate and complete.  Neither
the Company nor any Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business on terms consistent with market for the Company’s and such
Subsidiaries respective lines of business.

     

    
      
        
        

      

      
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    (q) Transactions With Affiliates
and Employees.  Except as set forth in the SEC Reports, none of
the officers, directors or employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
officers, directors and employees), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or any entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner, in each case in excess of $60,000 other
than (i) for payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company, and
(iii) for other employee benefits, including stock option agreements under any
stock option plan of the Company.

     

    (r) Sarbanes-Oxley; Internal
Accounting Controls.  Except as set forth on Schedule 3.1(r), the
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are applicable to it as of the Closing Date.  The
Company is actively taking steps to ensure that it cures all of the items set
forth on Schedule
3.1(r) and the Company agrees that such items shall be cured by no later
than December
31, 2008.  The
Company shall thereafter comply in all material respects with all applicable
provisions of the Sarbanes-Oxley Act. The Company and the Subsidiaries maintain
a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is
permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.  The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and procedures
to ensure that material information relating to the Company, including its
Subsidiaries, is made known to the certifying officers by others within those
entities, particularly during the period in which the Company’s most recently
filed periodic report under the Exchange Act, as the case may be, is being
prepared.  The Company’s certifying officers have evaluated the
effectiveness of the Company’s controls and procedures as of the date prior to
the filing date of the most recently filed periodic report under the Exchange
Act (such date, the “Evaluation
Date”).  The Company presented in its most recently filed
periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date.  Since the Evaluation
Date, there have been no significant changes in the Company’s internal controls
(as such term is defined in Item 307(b) of Regulation S-K under the Exchange
Act) or, to the knowledge of the Company, in other factors that could
significantly affect the Company’s internal controls.

     

    (s) Certain
Fees.  No brokerage or finder’s fees or commissions are or will
be payable by the Company to any broker, financial advisor or consultant,
finder, placement agent, investment banker, bank or other Person with respect to
the transactions contemplated by the Transaction Documents.  The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims (other than such fees or commissions owed by an Purchaser pursuant to
written agreements executed by such Purchaser which fees or commissions shall be
the sole responsibility of such Purchaser) made by or on behalf of other Persons
for fees of a type contemplated in this Section that may be due in connection
with the transactions contemplated by the Transaction Documents.

     

    (t) Private
Placement.  Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby.  The issuance and
sale of the Securities hereunder does not contravene the rules and regulations
of the Trading Market.

     

    
      
        
        

      

      
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    (u) Investment
Company.  The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.  The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act.

     

    (v) Registration Rights.
Other than as set forth on Schedule 3.1(v)
and  each of the Purchasers, no Person has any right to cause the
Company to effect the registration under the Securities Act of any securities of
the Company.  The Company has received valid waivers from all of the
outstanding Holders of the Amended and Restated 8% Senior Secured Convertible
Notes Due 2008 waiving their rights to allow for the filling of the
Registration Statement before the effectiveness of their registration
statement. The Company is not in default under any agreement or other
arrangement related to registration rights of any investor (the “Investor”)
who was a party to the Note Purchase Agreement dated as of July 21, 2006 as
amended by the Amendment  Agreement dated as of July 23, 2007 and the
Company does not owe any liquidated damages to any Investor related to any
registration obligation.

     

    (w) Listing and Maintenance
Requirements.  The Company’s Common Stock is registered
pursuant to Section 12(g) of the Exchange Act, and the Company has taken no
action designed to, or which to its knowledge is likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act nor has
the Company received any notification that the Commission is contemplating
terminating such registration.  The Company has not, in the 12 months
preceding the date hereof, received notice from any Trading Market on which the
Common Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such Trading
Market.  The Company is, and has no reason to believe that it will not
in the foreseeable future continue to be, in compliance with all such listing
and maintenance requirements.

     

    (x) Application of Takeover
Protections.  The Company and its Board of Directors have taken
all necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under the Company’s
Certificate of Incorporation (or similar charter documents) or the laws of its
state of incorporation that is or could become applicable to the Purchasers as a
result of the Purchasers and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including without
limitation as a result of the Company’s issuance of the Securities and the
Purchasers’ ownership of the Securities.

     

    (y) Disclosure.  The
Company confirms that, neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that the Company believes constitutes or might constitute material, non-public
information, except insofar as the existence and terms of the proposed
transactions hereunder may constitute such information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the Purchasers regarding the
Company, its business and the transactions contemplated hereby, including the
Disclosure Schedules to this Agreement, furnished by or on behalf of the Company
with respect to the representations and warranties made herein are true and
correct with respect to such representations and warranties and do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.  The Company
acknowledges and agrees that no Purchaser makes or has made any representations
or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in Section 3.2 hereof.

     

    
      
        
        

      

      
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    (z) No Integrated
Offering.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act, which would require the registration of any
such securities under the Securities Act or under the rules and regulations of
any Trading Market on which any of the securities of the Company are listed or
designated, if such integration would cause this Agreement or the transactions
contemplated herein to require shareholder approval.

     

    (aa) Solvency.  Based
on the financial condition of the Company as of the Closing Date after giving
effect to the receipt by the Company of the proceeds from the sale of the
Securities hereunder, (i) the Company’s fair saleable value of its assets
exceeds the amount that will be required to be paid on or in respect of the
Company’s existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company’s assets do not constitute
unreasonably small capital to carry on its business for the current fiscal year
as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company, together
with the proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt when such amounts are
required to be paid.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its
debt).  The Company has no knowledge of any facts or circumstances
which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one year
from the Closing Date.  The SEC Reports set forth as of the dates
thereof all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has
commitments.  For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$50,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP.  Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.

     

    (bb) Form S-1
Eligibility.  The Company is eligible to register the resale of
the Securities for resale by the Purchaser on Form S-1 promulgated under the
Securities Act.

     

    (cc) Tax
Status.  Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any
Subsidiary.

     

    (dd) No General
Solicitation.  Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising.  The Company has offered
the Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

     

    (ee) Foreign Corrupt
Practices.  Neither the Company, nor to the knowledge of the
Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law, or (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of 1977,
as amended.

     

    
      
        
        

      

      
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    (ff) Accountants.  The
Company’s accountants are set forth in the SEC Reports.  To the
knowledge of the Company, such accountants, who the Company expects will express
their opinion with respect to the financial statements to be included in the
Company’s Annual Report on Form 10-K for the year ending December 31, 2007, are
a registered public accounting firm as required by the Securities
Act.

     

    (gg) Acknowledgment Regarding
Purchasers’ Purchase of Securities.  The Company acknowledges
and agrees that each of the Purchasers is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Securities.  The Company further represents to each
Purchaser that the Company’s decision to enter into this Agreement has been
based solely on the independent evaluation of the transactions contemplated
hereby by the Company and its representatives.

     

    (hh) Acknowledgement Regarding
Purchasers’ Trading Activity.  Anything in this Agreement or
elsewhere herein to the contrary notwithstanding (except for Section 4.14
hereof), it is understood and agreed by the Company (i) that none of the
Purchasers have been asked to agree, nor has any Purchaser agreed, to desist
from purchasing or selling, long and/or short, securities of the Company, or
derivative securities based on securities issued by the Company or to hold the
Securities for any specified term; (ii) that past or future open market or other
transactions by any Purchaser, including Short Sales, and specifically
including, without limitation, Short Sales or derivative transactions, before or
after the closing of this or future private placement transactions, may
negatively impact the market price of the Company’s publicly-traded securities;
(iii) that any Purchaser, and counter parties in derivative transactions to
which any such Purchaser is a party, directly or indirectly, presently may have
a short position in the Common Stock, and (iv) that each Purchaser shall not be
deemed to have any affiliation with or control over any arm’s length
counter-party in any derivative transaction.  The Company further
understands and acknowledges that (a) one or more Purchasers may engage in
hedging activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value of
the Warrant Shares deliverable with respect to Securities are being determined
and (b) such hedging activities (if any) could reduce the value of the
existing stockholders’ equity interests in the Company at and after the time
that the hedging activities are being conducted.  The Company acknowledges
that such aforementioned hedging activities do not constitute a breach of any of
the Transaction Documents.

     

    (ii) Manipulation of
Price.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities (other than for the placement
agent’s placement of the Securities), or (iii) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.

     

    Section 3.2 Representations
and Warranties of the Purchasers.  Each Purchaser hereby, for
itself and for no other Purchaser, represents and warrants as of the date hereof
and as of the Closing Date to the Company as follows:

     

    (a) Organization;
Authority.  Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and
thereunder.  The execution, delivery and performance by such Purchaser
of the transactions contemplated by this Agreement have been duly authorized by
all necessary corporate or similar action on the part of such
Purchaser.  Each Transaction Document to which it is a party has been
duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except (i) as such enforceability may be limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws of general application affecting enforcement
of creditors’ rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions
may be limited by applicable law.

     

    
      
        
        

      

      
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    (b) Own
Account.  Such Purchaser understands that the Securities are
restricted securities and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no arrangement or understanding with any other persons
regarding the distribution of such Securities (this representation and warranty
not limiting such Purchaser’s right to sell the Securities pursuant to the
Registration Statement or otherwise in compliance with applicable federal and
state securities laws) in violation of the Securities Act or any applicable
state securities law. Such Purchaser is acquiring the Securities hereunder in
the ordinary course of its business.  Such Purchaser does not have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.

     

    (c) Purchaser
Status.  At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is, and on each date on which it exercises any
Warrants, it will be either: (i) an “accredited investor” as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
“qualified institutional buyer” as defined in Rule 144A(a) under the Securities
Act. Such Purchaser is not required to be registered as a broker-dealer under
Section 15 of the Exchange Act.

     

    (d) Experience of Such
Purchaser.  Such Purchaser, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.  Such Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time, is
able to afford a complete loss of such investment.

     

    (e) General
Solicitation.  Such Purchaser is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement.

     

    (f) Access to
Information.  Such Purchaser acknowledges that it has reviewed
the Disclosure Schedules and has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Shares and the merits and risks of investing in the Securities;
(ii) access to information about the Company and the Subsidiaries and their
respective financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment; and
(iii) the opportunity to obtain such additional information that the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser’s right to rely on the truth, accuracy and
completeness of the Disclosure Schedules and the Company’s representations and
warranties contained in the Transaction Documents.

     

    
      
        
        

      

      
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    (g) Certain Trading
Activities.  Such Purchaser has not directly or indirectly, nor
has any Person acting on behalf of or pursuant to any understanding with such
Purchaser, engaged in any transactions in the securities of the Company
(including, without limitations, any Short Sales involving the Company’s
securities) since it was contacted by the Company in February 2008 regarding
this transaction.  Such Purchaser covenants that neither it nor any Person
acting on its behalf or pursuant to any understanding with it will engage in any
transactions in the securities of the Company (including Short Sales) prior to
the time that the transactions contemplated by this Agreement are publicly
disclosed by the Company.  Such Purchaser has maintained, and covenants
that until such time as the transactions contemplated by this Agreement are
publicly disclosed by the Company such Purchaser will maintain, the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this
transaction).  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser’s assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to
other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this
transaction).

     

    (h) Independent Investment
Decision.  Such Purchaser has independently evaluated the
merits of its decision to purchase Securities pursuant to the Transaction
Documents, and such Purchaser confirms that it has not relied on the advice of
any other Purchaser’s business and/or legal counsel in making such
decision.

     

    The
Company acknowledges and agrees that each Purchaser does not make or has not
made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section
3.2.

     

     

    ARTICLE
IV

    OTHER
AGREEMENTS OF THE PARTIES

     

    Section 4.1 Transfer
Restrictions.

     

    (a) The
Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of the Securities other than
pursuant to an effective registration statement or Rule 144, to the Company or
to an affiliate of a Purchaser or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act.  As a condition of such transfer, any such transferee shall agree
in writing to be bound by the terms of this Agreement and shall have the rights
of a Purchaser under this Agreement and the Registration Rights
Agreement.

     

    (b) The
Purchasers agree to the imprinting, so long as is required by this Section
4.1(b), of a legend on any of the Securities in the following form:

     

    THESE
SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL
INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE
SECURITIES ACT.

     

    
      
        
        

      

      
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    The
Company acknowledges and agrees that a Purchaser may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties.  Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of legal counsel of the
pledgee, secured party or pledgor shall be required in connection
therewith.  Further, no notice shall be required of such
pledge.  At the appropriate Purchaser’s expense, the Company will
execute and deliver such reasonable documentation as a pledgee or secured party
of Securities may reasonably request in connection with a pledge or transfer of
the Securities, including, if the Securities are subject to registration
pursuant to the Registration Rights Agreement, the preparation and filing of any
required prospectus supplement under Rule 424(b)(3) under the Securities Act or
other applicable provision of the Securities Act to appropriately amend the list
of Selling Stockholders thereunder.

     

    (c) Certificates
evidencing the Shares and Warrant Shares shall not contain any legend (including
the legend set forth in Section 4.1(b)), (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such Shares or
Warrant Shares pursuant to a registration statement or Rule 144 (assuming the
transferor is not an Affiliate of the Company), or (iii) if such Shares or
Warrant Shares are eligible for sale under Rule 144 without volume restrictions,
or (iv) if such legend is not required under applicable requirements of the
Securities Act and the rules and regulations promulgated thereunder (including
judicial interpretations and pronouncements issued by the staff of the
Commission).  The Company shall cause its counsel to issue a legal
opinion to the Company’s transfer agent promptly after the Effective Date if
required by the Company’s transfer agent to effect the removal of the legend
hereunder.  If all or any portion of a Warrant is exercised at a time
when there is an effective registration statement to cover the resale of the
Warrant Shares, such Warrant Shares shall be issued free of all
legends.  The Company agrees that following the Effective Date or at
such time as such legend is no longer required under this Section 4.1(c), it
will, no later than three Trading Days following the delivery by a Purchaser to
the Company or the Company’s transfer agent of a certificate representing Shares
or Warrant Shares, as the case may be, issued with a restrictive legend (such
third Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Purchaser a certificate
representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section.  Certificates for Securities
subject to legend removal hereunder shall be transmitted by the transfer agent
of the Company to the Purchasers by crediting the account of the Purchaser’s
prime broker with the Depository Trust Company System.

     

    (d) In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Shares or Warrant Shares (based on the Closing Price of the
Common Stock on the date such Securities are submitted to the Company’s transfer
agent) delivered for removal of the restrictive legend and subject to Section
4.1(c), $10 per Trading Day (increasing to $20 per Trading Day five (5) Trading
Days after such damages have begun to accrue) for each Trading Day after the
Legend Removal Date until such certificate is delivered without a
legend.  Nothing herein shall limit such Purchaser’s right to pursue
actual damages for the Company’s failure to deliver certificates representing
any Securities as required by the Transaction Documents, and such Purchaser
shall have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.

     

    
      
        
        

      

      
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    (e) Each
Purchaser, severally and not jointly with the other Purchasers, agrees, and
represent and covenants to the Company, that the removal of the restrictive
legend from certificates representing Securities as set forth in this Section
4.1 is predicated upon the Company’s reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the Securities
Act, including any applicable prospectus delivery requirements, or an exemption
therefrom.

     

    (f) Until
the six month anniversary of the date hereof, the Company shall not undertake a
reverse or forward stock split or reclassification of the Common Stock without
the prior written consent of the Purchasers holding a then majority in interest
of the Shares.

     

    Section 4.2 Furnishing
of Information.  As long as any Purchaser owns Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act.  As long
as any Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule
144.  The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.

     

    Section 4.3 Integration.  The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of the sale
of the Securities to the Purchasers or that would be integrated with the offer
or sale of the Securities for purposes of the rules and regulations of any
Trading Market such that it would require stockholder approval of the sale of
the Securities to the Purchasers unless stockholder approval is obtained before
the closing of such subsequent transaction.

     

     

    Section 4.4 Securities
Laws Disclosure; Publicity.  The Company shall, by 8:30 a.m.
Eastern time on the second Trading Day following the date hereof, issue a
Current Report on Form 8-K, disclosing the material terms of the transactions
contemplated hereby, and shall attach the Transaction Documents
thereto.  In addition, the Company will make such other filings and
notices in the manner and time required by the Commission and the Trading Market
on which the Common Stock is listed. Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission (other than the Registration
Statement and any exhibits to filings made in respect of this transaction in
accordance with periodic filing requirements under the Exchange Act) or any
regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except to the extent such disclosure is required by law or Trading
Market regulations.

     

    Section 4.5 Stockholder
Rights Plan.  No claim will be made or enforced by the Company
or, to the knowledge of the Company, any other Person that any Purchaser is an
“Acquiring
Person” under any stockholder rights plan or similar plan or arrangement
in effect or hereafter adopted by the Company, or that any Purchaser could be
deemed to trigger the provisions of any such plan or arrangement, by virtue of
receiving Securities under the Transaction Documents.  The Company
shall conduct its business in a manner so that it will not become subject to the
Investment Company Act.

     

    Section 4.6 Non-Public
Information.  The Company covenants and agrees that neither it
nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information.  The Company understands and confirms that each Purchaser
shall be relying on the foregoing representations in effecting transactions in
securities of the Company.

     

    
      
        
        

      

      
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    Section 4.7 Use of
Proceeds.  The Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company’s debt (other than payment of trade
payables in the ordinary course of the Company’s business and prior practices),
to redeem any Common Stock or Common Stock Equivalents or to settle any
outstanding litigation.

      

    Section 4.8 Reimbursement.  If
any Purchaser becomes involved in any capacity in any Proceeding by or against
any Person who is a stockholder of the Company (except as a result of sales,
pledges, margin sales and similar transactions by such Purchaser to or with any
current stockholder), solely as a result of such Purchaser’s acquisition of the
Securities under this Agreement, the Company will reimburse such Purchaser for
its reasonable legal and other expenses (including the cost of any investigation
preparation and travel in connection therewith) incurred in connection
therewith, as such expenses are incurred.  The reimbursement
obligations of the Company under this paragraph shall be in addition to any
liability which the Company may otherwise have, shall extend upon the same terms
and conditions to any Affiliates of the Purchasers who are actually named in
such action, proceeding or investigation, and partners, directors, agents,
employees and controlling persons (if any), as the case may be, of the
Purchasers and any such Affiliate, and shall be binding upon and inure to the
benefit of any successors, assigns, heirs and personal representatives of the
Company, the Purchasers and any such Affiliate and any such
Person.  The Company also agrees that neither the Purchasers nor any
such Affiliates, partners, directors, agents, employees or controlling persons
shall have any liability to the Company or any Person asserting claims on behalf
of or in right of the Company solely as a result of acquiring the Securities
under this Agreement, except to the extent that such claims are based on a
breach of any representations and warranties or covenants made by the Purchasers
in Transaction Documents.

     

    Section 4.9 Indemnification
of Purchasers.  Subject to the provisions of this Section 4.9,
the Company will indemnify and hold the Purchasers and their directors,
officers, stockholders, members, partners, employees and agents (each, a “Purchaser
Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser’s representations, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or
malfeasance).  If any action shall be brought against any Purchaser
Party in respect of which indemnity may be sought pursuant to this Agreement,
such Purchaser Party shall promptly notify the Company in writing, and the
Company shall have the right to assume the defense thereof with counsel of its
own choosing.  Any Purchaser Party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such Purchaser
Party except to the extent that (i) the employment thereof has been specifically
authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Company and
the position of such Purchaser Party.  The Company will not be liable
to any Purchaser Party under this Agreement (i) for any settlement by a
Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) to the extent, but only
to the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of any of the representations, warranties, covenants or
agreements made by the Purchasers in this Agreement or in the other Transaction
Documents.

     

    
      
        
        

      

      
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    Section 4.10 Reservation
of Common Stock.  As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, a sufficient number of shares of Common Stock
for the purpose of enabling the Company to issue Shares pursuant to this
Agreement and Warrant Shares pursuant to any exercise of the
Warrants.

     

    Section 4.11 Listing
of Common Stock.  The Company hereby agrees to use best efforts
to maintain the listing of the Common Stock on a Trading Market, and as soon as
reasonably practicable following the Closing (but not later than the earlier of
the Effective Date and the first anniversary of the Closing Date) to list all of
the Shares and Warrant Shares on such Trading Market.  The Company
further agrees, if the Company applies to have the Common Stock traded on any
other Trading Market, it will include in such application all of the Shares and
Warrant Shares, and will take such other action as is necessary to cause all of
the Shares and Warrant Shares to be listed on such other Trading Market as
promptly as possible.  The Company will take all action reasonably
necessary to continue the listing and trading of its Common Stock on a Trading
Market and will comply in all material respects with the Company’s reporting,
filing and other obligations under the bylaws or rules of the Trading
Market.

     

    Section 4.12 Equal
Treatment of Purchasers.  No consideration shall be offered or
paid to any person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents.  For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended to treat for the Company the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or
otherwise.

     

    Section 4.13 Subsequent
Equity Sales.

     

    (a) From
the date hereof until the earlier of one year from the date hereof or 90 days
after the Effective Date, neither the Company nor any Subsidiary shall issue
shares of Common Stock or Common Stock Equivalents; provided, however, the period
set forth in this Section 4.13 shall be extended for the number of Trading Days
during such period in which (i) trading in the Common Stock is suspended by any
Trading Market, or (ii) following the Effective Date, unless such Shares and
Warrant Shares may be sold pursuant to Rule 144 without volume restrictions, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Shares and Warrant Shares; provided, further, that such
issuance shares must be registered after the registration of the
Securities.

     

    (b) From
the date hereof until all the Securities become eligible for resale under the
Rule 144 without volume restrictions, the Company shall be prohibited from
effecting or entering into an agreement to effect any subsequent financing
involving a Variable Rate Transaction.  The term “Variable Rate
Transaction” shall mean a transaction in which the Company issues or
sells (i) any debt or equity securities that are convertible into, exchangeable
or exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may sell securities at a
future determined price.  Any Purchaser shall be entitled to obtain
injunctive relief against the Company to preclude any such issuance, which
remedy shall be in addition to any right to collect damages.

     

    (c) Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction shall be an Exempt
Issuance.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    Section 4.14 Short
Sales and Confidentiality After The Date Hereof.  Such Such
Purchaser has not directly or indirectly, nor has any Person acting on behalf of
or pursuant to any understanding with such Purchaser, engaged in any
transactions in the securities of the Company (including, without limitations,
any Short Sales involving the Company’s securities) since the time that such
Purchaser was contacted in February 2008 by the Company or any other Person
regarding an investment in the Company.  Such Purchaser has maintained, and
covenants that until such time as the transactions contemplated by this
Agreement are publicly disclosed by the Company such Purchaser will maintain,
the confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this
transaction).

      

    Section 4.15 Delivery
of Securities After Closing.  The Company shall deliver, or
cause to be delivered, the respective Securities purchased by each Purchaser to
such Purchaser within three (3) Trading Days of the Closing Date.

     

    Section 4.16 Right of
Purchaser to Participate in Future Transactions.  Purchaser
will have a right to participate, on the terms and conditions set forth in this
Section 4.16, in all sales by the Company of any of Common Stock or Common Stock
Equivalents in each capital raising transaction, if any, that occurs at any time
when the Warrant, or any instrument issued upon transfer or split up thereof,
remains outstanding (in whole or in part), other than any such sale that is a
public offering underwritten on a firm commitment basis and registered with the
Commission under the Securities Act and other than a Exempt Issuance; provided, however, that if
under legal requirements applicable to a particular transaction the only Persons
eligible to purchase securities in such transaction are “accredited investors,”
within the meaning of Rule 501 under the Securities Act, then the Purchaser must
be an accredited investor in order to purchase securities in such
transaction.  For any such transaction during such period, the Company
shall give at least four Business Days advance written notice to the Purchaser
prior to any offer or sale of any of the Company’s securities in such
transaction by providing to the Purchaser a term sheet which (i) contains
all significant business terms of such proposed transaction, (ii) is
sufficiently detailed so as to reasonably permit the Purchaser the opportunity
to determine whether or not to exercise its rights under this Section 4.16 and
(iii) is at least as detailed as the term sheet or summary of such transaction
as the Company shall furnish to any offeree or broker in such
transaction.  The Purchaser shall have the right to participate in
such proposed transaction and to purchase its Pro Rata Share of such securities which
are the subject of such proposed transaction for the same consideration and on
the same terms and conditions as contemplated for sales to third parties in such
transaction (or such lesser portion thereof as specified by the
Purchaser).  If the Purchaser elects to exercise its rights hereunder
for a particular transaction, it shall deliver written notice to the Company
within four Business Days following receipt from the Company of the notice and
term sheet meeting the requirements of this Section 4.16, which notice from the
Purchaser shall be conditional upon (i) the Purchaser’s receipt of satisfactory
definitive documents for such transaction from the Company if the Company has
not furnished final, definitive documents for such transaction to the Purchaser
at or before the time the Company gives such notice of such transaction to the
Purchaser, and (ii) the satisfaction of the other conditions precedent to the
obligations of purchasers generally in such transaction to complete such
transaction.  If, subsequent to the Company giving notice to the
Purchaser hereunder but prior to any of (i) the Purchaser exercising its right
to participate, (ii) the expiration of the four Business Day period without
response from the Purchaser or (iii) the rejection of such offer for such
financing by the Purchaser, the terms and conditions of the proposed sale to
third parties in such transaction are changed from those disclosed in the term
sheet provided to the Purchaser, the Company shall be required to provide a new
notice and term sheet meeting the requirements of this Section 4.16, reflecting
such revised terms, to the Purchaser hereunder and the Purchaser shall have the
right, which must be exercised within four Business Days of the date the
Purchaser receives such new notice and such revised term sheet, to exercise its
rights to purchase the securities on such changed terms and conditions and
otherwise as provided hereunder.  If the Purchaser does not exercise
its rights hereunder with respect to a proposed transaction within the period or
periods provided, or affirmatively declines to engage in such proposed
transaction with the Company, then the Company may proceed with such proposed
transaction on the same terms and conditions as noticed to the Purchaser
(assuming the Purchaser has consented to the transaction, if required, pursuant
to this Agreement and such transaction does not violate any other term or
provision of the Transaction Documents), provided that if such
proposed transaction is not consummated within 75 days following the Company’s
notice hereunder, then the rights hereunder shall again be afforded to the
Purchaser for such proposed transaction.  The rights and obligations
of this Section 4.16 shall in no way limit or restrict the other rights of the
Purchaser pursuant to this Agreement.  Notwithstanding anything herein
to the contrary, failure of the Purchaser to affirmatively elect in writing to
participate in any proposed transaction within the required time frames shall be
deemed to be the equivalent of Purchaser’s decision not to participate in such
proposed transaction.  Notwithstanding the foregoing, this Section
4.16 shall not apply in respect of an Exempt Issuance.  The rights of
the Purchaser under this Section 4.16 shall apply to all capital raising
transactions described in Section 4.16 that occur during the period specified in
this Section 4.16.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    

    Section 4.17 Limitation
on Certain Transactions.  From the date of this Agreement until
after the date all the Securities become eligible for resale under Rule 144
without volume restrictions or the Effective Date, without the prior written
consent of the Purchaser (which consent may be withheld in the Purchaser’s sole
discretion), the Company shall not issue or sell or agree to issue or sell any
securities in a capital raising transaction, unless such securities will not be,
and are not, registered for sale or resale under the Securities Act until on or
after such Effective Date; provided, however, that the
limitation of this Section 4.17 shall not apply to Exempt
Issuances.

      

    ARTICLE
V

    MISCELLANEOUS

     

    Section 5.1 Termination.  This
Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations
hereunder only and without any effect whatsoever on the obligations between the
Company and the other Purchasers, by written notice to the other parties, if the
Closing has not been consummated on or before April 7, 2008; provided, however, that no such
termination will affect the right of any party to sue for any breach by the
other party (or parties).

     

     

    Section 5.2 Fees and
Expenses.  At the Closing, the Company has agreed to reimburse
the following Purchasers the following amounts for the legal fees and expenses
of its counsel:  Stillwater LLC for $30,000; Kettle Hill Partners,
LP for $2,300; Kettle Hill Partners II, LP for $4,100; and Kettle Hill
Offshore, Ltd. for $3,600.  Accordingly, in lieu of the foregoing
payments, the Subscription Amount that each of the foregoing Purchasers is to
pay at the Closing shall be reduced by the amount of such reimbursement in lieu
thereof.  The Company shall deliver, prior to the Closing, a completed
and executed copy of the Closing Statement, attached hereto as Annex
A.  Except as expressly set forth in the Transaction Documents to the
contrary, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.  The Company shall pay all transfer
agent fees, stamp taxes and other taxes and duties levied in connection with the
delivery of any Securities.

     

    Section 5.3 Entire
Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and
schedules.

     

    Section 5.4 Notices.  Any
and all notices or other communications or deliveries required or permitted to
be provided hereunder shall be in writing and shall be deemed given and
effective on the earliest of (a) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto prior to 5:30 p.m. (Eastern Time) on a
Trading Day, (b) the next Trading Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto on a day that is not a Trading
Day or later than 5:30 p.m. (Eastern Time) on any Trading Day, (c) the 2nd Trading
Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service, or (d) upon actual receipt by the party to whom such
notice is required to be given.  The address for such notices and
communications shall be as set forth on the signature pages attached hereto
until changed by notice given in accordance with this Section.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    Section 5.5 Amendments;
Waivers.  No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and each Purchaser or, in the case of a waiver, by the party against
whom enforcement of any such waiver is sought.  No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such
right.

     

    Section 5.6 Headings.  The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.

     

    Section 5.7 Successors
and Assigns.  This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and permitted
assigns.  The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of each
Purchaser.  Any Purchaser may assign any or all of its rights under
this Agreement to any Person to whom such Purchaser assigns or transfers any
Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions hereof that apply to the
“Purchasers”.

     

    Section 5.8 No
Third-Party Beneficiaries.  This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.9.

     

    Section 5.9 Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of choice of law and conflicts of law
thereof.  Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement and any other Transaction Documents (whether brought against a
party hereto or its respective affiliates, directors, officers, stockholders,
employees or agents) shall be commenced exclusively in the state and federal
courts sitting in the City of New York.  Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding has been commenced in an improper or
inconvenient venue for such proceeding.  Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by
law.  Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.  If either party shall commence an
action or proceeding to enforce any provisions of the Transaction Documents,
then the prevailing party in such action or proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such action or
proceeding.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    

    Section 5.10 Survival.  The
representations, warranties, agreements and covenants contained herein shall
survive the Closing and the delivery of the Shares and Warrant
Shares.

     

    Section 5.11 Execution.  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.  In the event that any signature is delivered by
electronic or facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such signature page were an
original thereof.

     

    Section 5.12 Severability.  If
any provision of this Agreement is held to be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the
parties will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

     

    Section 5.13 Rescission
and Withdrawal Right.  Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, such demand or election in whole or in part without prejudice to its
future actions and rights.

     

    Section 5.14 Replacement
of Securities.  If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested.  The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement Securities.  If
a replacement certificate or instrument evidencing any Securities is requested
due to a mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.

     

    Section 5.15 Remedies.  In
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, each of the Purchasers and the Company will
be entitled to specific performance under the Transaction
Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

     

    Section 5.16 Payment
Set Aside.  To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    Section 5.17 Independent
Nature of Purchasers’ Obligations and Rights.  The obligations
of each Purchaser under any Transaction Document are several and not joint with
the obligations of any other Purchaser, and no Purchaser shall be responsible in
any way for the performance of the obligations of any other Purchaser under any
Transaction Document.  Nothing contained herein or in any Transaction
Document, and no action taken by any Purchaser pursuant thereto, shall be deemed
to constitute the Purchasers as a partnership, an association, a joint venture
or any other kind of entity, or create a presumption that the Purchasers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents.  Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation, the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose.  Each Purchaser has been represented by its own separate
legal counsel in their review and negotiation of the Transaction
Documents.  The Company has elected to provide all Purchasers with the
same terms and Transaction Documents for the convenience of the Company and not
because it was required or requested to do so by the Purchasers.

     

    Section 5.18 Liquidated
Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been
canceled.

     

    Section 5.19 Construction.  The
parties agree that each of them and/or their respective counsel has reviewed and
had an opportunity to revise the Transaction Documents and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.

     

    (Signature
Pages Follow)

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

     

    
      
        
          	 
      	
                  eMAGIN
      CORPORATION

                	 
      
	 
      	 
      	 
      	 
      
	 
      	
                  By:

                	
                  /s/ Michael D.
      Fowler 

                	 
      
	 
      	 
      	
                  Michael
      D. Fowler

                	 
      
	 
      	 
      	
                  Interim
      Chief Financial Officer

                	 
      

        

      

    

     

    Address
for Notice:

    2070
Route 52

    Hopewell
Junction, New York 12533

     

    With a
copy to:

     

    Richard
Friedman, Esq.  

    Sichenzia
Ross Friedman Ference LLP

    61
Broadway

    New York,
New York  10006

    (212)
930-9700 telephone

    (212)
930-9725 fax

    1065
Avenue of the Americas, 21st Floor

    New York,
New York 10018

    Attn:
Richard A. Friedman

     

     

     

    

     

     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

     

    SIGNATURE
PAGE FOR PURCHASER FOLLOWS]

     

    [PURCHASER
SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
to be duly executed by their respective authorized signatories as of the date
first indicated above.

     

    [Name of
Purchaser]

     

    

    ____________________________________

     

    [By:]

     

    [Title:]

     

    

     

    Address
for Notice of Purchaser:

     

    

     

    

     

    Address
for Delivery of Securities for Purchaser (if not same as above):

     

    

     

    Subscription
Amount:

     

    Shares:

     

    Warrant
Shares:

     

    EIN
Number:

     

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

    

     ANNEX
A

    CLOSING
STATEMENT

    Pursuant
to the attached Securities Purchase Agreement, dated as of the date hereto, the
purchasers shall purchase up to $___________ of Common Stock and Warrants from
eMagin Corporation, a Delaware corporation (the “Company”).
All funds will be wired into a trust account maintained by ____________, counsel
to the Company. All funds will be disbursed in accordance with this Closing
Statement.

    Disbursement
Date: ________ ___, 2008

    

    
      
        
          	
                  I.           PURCHASE
      PRICE

                	 
      
	
                  Gross
      Proceeds to be Received in Trust

                	
                  $

                
	 
      	 
      
	
                  II.         DISBURSEMENTS

                	 
      
	 
      	
                  $

                
	 
      	
                  $

                
	 
      	
                  $

                
	 
      	
                  $

                
	 
      	 
      
	
                  Total
      Amount Disbursed:

                	
                  $

                
	 
      	 
      
	 
      	 
      
	 
      	 
      
	
                  WIRE INSTRUCTIONS:

                	 
      
	
                  To:
      _____________________________________

                	 
      
	
                  To:
      _____________________________________

                	 
      

        

      

    

    

    

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

    Schedule
B

     

    April 2,
2008

     

    

    To the
Investors listed on

     

    Schedule
A attached hereto

     

    

     

    Re:           eMagin Corporation Legal
Opinion

     

    Ladies
and Gentlemen:

     

    We have
acted as counsel to eMagin Corporation, a Delaware corporation (the “Company”),
in connection with the Securities Purchase Agreement, dated as of April 2, 2008,
between you and the Company (the “Purchase
Agreement”) and the transactions contemplated
therein.  Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings assigned to such terms in the Purchase
Agreement.  The Purchase Agreement, the Registration Rights Agreement
and the Warrants are hereinafter referred to collectively as the “Transaction
Documents.” As to other questions of fact relevant to our opinion, we
have made no independent verification of the facts and we have relied upon
statements or certificates of public officials and officers of the
Company.

     

    In
connection with this opinion, we have examined originals or photostatic or
certified copies of (i) the Transaction Documents, (ii) the Company’s Articles
of Incorporation, as amended and restated, as in effect on the date hereof (the
“Articles
of Incorporation”), and (iii) the Company’s Bylaws, as in effect on the
date hereof (the “Bylaws”),
and we have examined and considered such corporate records, certificates and
matters of law as we have deemed appropriate as a basis for our opinions set
forth below.

     

    In
rendering the opinions set forth in this opinion letter, we assume the
following:

     

    (a) the legal
capacity of each natural person;

     

    (b) the legal
existence of all parties to the transactions referred to in the Transaction
Documents;

     

    (c) the power
and authority of each person other than the Company or person(s) acting on
behalf of the Company to execute, deliver and perform each document executed and
delivered and to do each other act done or to be done by such
person;

     

    (d) the
authorization, execution and delivery by each person other than the Company or
person(s) acting on behalf of the Company of each document executed and
delivered or to be executed and delivered by such person;

     

    (e) the
legality, validity, binding effect and enforceability as to each person other
than the Company or person(s) acting on behalf of the Company of each document
executed and delivered or to be executed or delivered and of each other act done
or to be done by such person;

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    (f) the
transactions referred to in the Transaction Documents have been
consummated;

     

    (g) the
payment of all the required documentary stamps taxes and fees imposed upon the
execution, filing or recording of the Transaction Documents;

     

    (h) that
there have been no undisclosed modifications of any provision of any document
reviewed by us in connection with the rendering of the opinions set forth in
this opinion letter and no undisclosed prior waiver of any right or remedy
contained in the Transaction Documents;

     

    (i) the
genuineness of each signature (other than the signatures of the officers of the
Company), the completeness of each document submitted to us other than the
Transaction Documents, the authenticity of each document reviewed by us as an
original, the conformity to the original of each document reviewed by us as a
copy and the authenticity of the original of each document received by us as a
copy;

     

    (j) the
truthfulness of each statement as to all factual matters otherwise not known to
us to be untruthful contained in any document encompassed within the due
diligence review undertaken by us;

     

    (k) the
accuracy on the date of this letter as well as on the date stated in all
governmental certifications of each statement as to each factual matter
contained in such governmental certifications;

     

    (l) that the
addressee has acted in good faith, without notice of adverse claims, and has
complied with all laws applicable to it that affect the transactions referred to
in the Transaction Documents;

     

    (m) that the
transactions referred to in the Transaction Documents comply with all tests of
good faith, fairness and conscionability required by law;

     

    (n) that
routine procedural matters such as service of process or qualification to do
business in the relevant jurisdictions will be satisfied by the parties seeking
to enforce the Transaction Documents;

     

    (o) that all
statutes, judicial and administrative decisions, and rules and regulations of
governmental agencies constituting the law for which we are assuming
responsibility are published (e.g., reported court decisions and the specialized
reporting services of bna, cch and prentice-hall) or otherwise generally
accessible (e.g., lexis or westlaw) in each case in a manner generally available
(i.e., in terms of access and distribution following publication) to lawyers
practicing in our judicial circuit;

     

    (p) that
agreements other than the Transaction Documents that are related to the
transactions referred to in the Transaction Documents will be enforced as
written;

     

    (q) that no
action, discretionary or otherwise will be taken by or on behalf of the Company
in the future that might result in a violation of law;

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

    (r) that
there are no other agreements or understandings among the parties that would
modify the terms of the Transaction Documents or the respective rights or
obligations of the parties to the Transaction Documents;

     

    (s) that with
respect to the Transaction Documents and to the transactions referred to
therein, there has been no mutual mistake of fact and there exists no fraud or
duress; and

     

    (t) the
constitutionality and validity of all relevant laws, regulations and agency
actions unless a reported case has otherwise held or widespread concern has been
expressed by commentators as reflected in materials which lawyers routinely
consult.

     

    Whenever
a statement herein is qualified by “to our knowledge” or similar phrase, it
means that, during the course of our representation of the Company for the
purposes of this opinion letter, (a) no information that would give those
lawyers who participated in the representation of the Company in connection with
the Transaction Documents (collectively, the “Transaction
Participants”) current actual knowledge of the inaccuracy of such
statement has come to their attention; (b) we have not undertaken any
independent investigation or inquiry to determine the accuracy of such
statement; (c) any limited investigation or inquiry otherwise undertaken by
the Transaction Participants during the preparation of this opinion letter
should not be regarded as such an investigation or inquiry; and (d) no inference
as to our knowledge of any matters bearing on the accuracy of any such statement
should be drawn from the fact of our representation of the
Company.  We also call to your attention to the fact that we are not
general counsel to the Company and we are not familiar with all aspects of
either the business affairs of the Company.  We have not conducted an
independent audit of the Company or its files.  As to certain
questions of fact material to this opinion, we have relied upon statements or
certificates from the Company or person(s) acting on behalf of the
Company.

     

    The
validity, binding effect and enforceability of the Transaction Documents may be
limited or otherwise affected by (a) bankruptcy, moratorium, fraudulent
conveyance or other similar statutes, rules, regulations or other laws affecting
the enforcement of creditors’ rights and remedies generally and (b) the
unavailability of, or limitation on the availability of, a particular right or
remedy (whether in a proceeding in equity or at law) because of an equitable
principle or a requirement as to commercial reasonableness, conscionability or
good faith.  In addition, certain remedies, waivers and other
provisions contained in the Transaction Documents might not be enforceable;
nevertheless, such unenforceability will not render such agreements invalid as a
whole or preclude the practical realization of the benefits to the Purchasers
thereunder.

     

    We are
counsel admitted to practice in the State of New York and we do not express any
opinion with respect to the effect or applicability of the laws of any
jurisdiction, other than the laws of the State of New York, the corporate laws
of the State of Delaware and the federal laws of the United States of
America.  In furnishing the opinion regarding the valid existence and
good standing of the Company, we have relied solely upon a good standing of the
Company from the Secretary of State of Delaware dated March 7,
2008.

     

    Based on
the foregoing, and subject to the assumptions, qualifications, limitations and
exceptions stated in this letter, we are of the opinion that as of the date
hereof:

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

     

    1. The
Company is a corporation duly authorized, validly existing, and in good standing
in Delaware, its state of incorporation.  The Company has all
requisite corporate power and authority to (i) conduct its business as presently
conducted as described in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006, as filed with the Securities and Exchange Commission on
April 2, 2007; (ii) own and operate its property; and (iii) lease the property
its leases.

     

    2. The
Company has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by each of the Transaction Documents
and otherwise to carry out its obligations thereunder.  The execution
and delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly
authorized by its Board of Directors and no further consent or authorization of
the Company’s Board of Directors or its stockholders are
required.  Each of the Transaction Documents has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.

     

    3. To our
knowledge, except as specifically disclosed in the Purchase Agreement or the SEC
Reports, no shares of Common Stock are entitled to preemptive or similar
rights.  To our knowledge, except as specifically disclosed in the
Purchase Agreement or the SEC Reports or as a result of the purchase and sale of
the Securities, there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating to,
securities, rights or obligations convertible into or exchangeable for, or
giving any person any right to subscribe for or acquire any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock.

     

    4. The
Shares have been duly authorized and, when paid for and issued in accordance
with the terms of the Purchase Agreement shall have been validly issued, fully
paid and nonassessable.  When issued by the Company in accordance with
the terms of the Purchase Agreement and the Warrants, the Warrant Shares will be
validly issued, fully paid and nonassessable.

     

    5. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated by such
agreements do not and will not (i) conflict with or violate any provision of its
Articles of Incorporation or Bylaws, (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or other written instrument of the
Company or a Subsidiary thereof or other written agreement or understanding to
which the Company or a Subsidiary thereof is a party, and which is attached as
an exhibit to the SEC Reports, (iii) result in a violation of any law, rule or
regulation of any governmental authority, regulatory body, stock market or
trading facility to which the Company is subject, or by which any property or
asset of the Company is bound or affected, or (iv) result in any violation of
any order, judgment, injunction, decree or other restriction of any court or
governmental authority of which we have knowledge.

     

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

     

    6. To the
best of our knowledge, other than the declaration of effectiveness by the
Securities and Exchange Commission of the registration statement to be filed
pursuant to the Transaction Documents, no authorization, approval or consent of
any court, governmental body, regulatory agency, self-regulatory organization or
stock exchange or market, or the stockholders of the Company or any third party
is required to be obtained by the Company other than as provided in Sections
5(m) and 8(a)(2) of the Note Purchase Agreement, dated July 21, 2006, as amended
by the Amendment Agreement, dated July 23, 2007; Section 12(d)(11) of the
Certificate of Designations; or Section 3.12 of the Amended and Restated 8%
Senior Secured Convertible Notes Due 2008, in connection with the execution,
delivery and performance by the Company of the Transaction Documents or the
consummation of the other transactions contemplated thereby.

     

    7. To the
best of our knowledge, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body or any governmental
agency or self-regulatory organization pending or threatened against or
affecting the Company, wherein an unfavorable decision, ruling or finding would
have a Material Adverse Effect or which would adversely affect the validity or
enforceability of or the authority or ability of the Company to perform its
respective obligations under the Transaction Documents.

     

    8. The
Company is not, and as a result of and immediately upon Closing will not be, an
“investment company” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as
amended.

    

    9. Assuming
the accuracy of the representations and warranties of the Company set forth in
Section 3.1 of the Purchase Agreement and of the Investors set forth in
Section 3.2(b)-(e) of the Purchase Agreement, the offer, issuance and sale
of the Shares and Warrants and the offer, sale and issuance of the Warrant
Shares to the Investors pursuant to the applicable Transaction Documents are
exempt from the registration requirements of the Securities Act.

     

    This
opinion is furnished pursuant to the request of the addressees hereof and is
rendered by us solely for the benefit of the addressees hereof in connection
with the Transaction Documents.  We are not hereby assuming any
professional responsibilities to any other person whatsoever.  This
opinion may be relied upon only in connection with the Transaction
Documents.  This opinion may not be used, disseminated, circulated,
quoted referred to or relied upon by any other person or for any other purpose
without our prior written consent.  This opinion is rendered as of the
date set forth above, and we express no opinion as to circumstances or events
that may occur subsequent to such date.  We assume no duty to update
or supplement this opinion to reflect any fact or circumstances that may
hereafter come to our attention or reflect any changes in any law that may
hereafter occur or become effective.

    

    
      
        
          	 	
                	 
	 	 	Sincerely,	 
	 	 	 	 
	 	 	 	 
	 	 	Sichenzia
      Ross Friedman Ference LLP	 

        

      

    

     

    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
A

     

    

     

    
      
        	
                INVESTOR

              
	
                Stillwater
      LLC

              
	
                Ginola
      Limited

              
	
                Crestflower
      Corporation

              
	
                Kettle
      Hill Partners, LP

              
	
                Kettle
      Hill Partners II, LP

              
	
                Kettle
      Hill Offshore, Ltd.

              
	
                Iroquois
      Master Fund Ltd.

              
	
                Total

              

      

    

    

     

    
      
         

      

      
        33

        
          

        

      

      
         

      

    

    Schedule
D

     

    April 2,
2008

     

     

    To the
Investors listed on

     

     

    Schedule
A attached hereto

     

    Re:           eMagin
Corporation Lockup Agreement

     

    Ladies
and Gentlemen:

     

    The
undersigned is an owner of record or a beneficial owner of shares of common
stock (the “Common
Stock”) of eMagin Corporation, a Delaware corporation (the “Company”)
or securities convertible into or exchangeable or exercisable for shares of
Common Stock.  The Company proposes to carry out a transaction
involving the sale of shares of Common Stock and/or securities convertible into
or exchangeable or exercisable for Common Stock (the “Transaction”).  The
undersigned recognizes that the Transaction will be of benefit to the
undersigned and will benefit the Company by, among other things, raising
additional capital for its operations.  The undersigned acknowledges
that the investors in the Transaction (the “Investors”)
are or will be relying on the representations and agreements of the undersigned
contained in this letter agreement (the “Letter
Agreement”) in carrying out the Transaction and in entering into
agreements with the Company.

     

    To induce
the Investors to continue their efforts in connection with the Transaction, the
undersigned hereby agrees that, without the prior written consent of the
majority of the Investors (as computed by the amount invested in this
Transaction, the “Majority
Investors”), which consent may be withheld in their sole discretion, the
undersigned will not (and will cause the undersigned’s spouse, and the immediate
family of such spouse or the undersigned living in the undersigned’s household,
not to), during the period commencing on the date hereof and ending 210 days
after the date hereof  (such period, the “Restricted
Period”), (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for any shares of Common Stock (whether such shares
or any such securities are now owned or are hereafter acquired by the
undersigned, or the undersigned’s spouse or family member), or (2) enter into
any swap or other arrangement that transfers to another, in whole or in part,
any of the economic consequences of ownership of the Common Stock, whether any
such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or
otherwise.  The undersigned further agrees not to announce an
intention to do any of the foregoing during the Restricted Period.  If
(i) during the last 17 days of the Restricted Period, the Company issues an
earnings release or discloses material news or a material event relating to the
Company occurs or (ii) prior to the expiration of the Restricted Period, the
Company announces that it will release earnings results during the 16-day period
beginning on the last day of the Restricted Period, the restrictions imposed by
this Letter Agreement shall continue to apply until the expiration of the 18-day
period beginning on the issuance of the earnings release or the occurrence of
the material news or material event. 

     

    
      
        
        

      

      
        34

        
          

        

      

      
        
        

      

    

     

    Notwithstanding
anything else herein, the restrictions contained in the foregoing paragraphs
shall not apply to any of the following: (a) transfers of shares of Common Stock
or any security convertible into or exchangeable or exercisable for Common Stock
as a bona fide gift or gifts, by will or intestacy or to any trust for the
direct or indirect benefit of the undersigned or the immediate family of the
undersigned, or (b) distributions by a trust to its beneficiaries of shares of
Common Stock or any security convertible into or exchangeable or exercisable for
Common Stock, or (c) the securities sold or issued in the Transaction; provided
that in the case of any transfer or distribution pursuant to clauses (a) or (b),
each donee, distributee, trustee or beneficiary shall sign and deliver a lock-up
agreement in favor of the Investors substantially in the form of this Letter
Agreement.

     

    In
addition, with respect to the Transaction only (and any registration statement
to be filed in connection therewith), the undersigned waives any rights,
including any and all notice rights and requirements, relating to registration
under the Securities Act of 1933, as amended (the “Securities
Act”), of any shares of Common Stock (or any security convertible into or
exchangeable or exercisable for Common Stock) owned either of record or
beneficially by the undersigned.  The undersigned further agrees that,
without the prior written consent of the Majority Investors, the undersigned
will not, during the Restricted Period, make any demand for or exercise any
right with respect to the registration under the Securities Act of any shares of
Common Stock or any security convertible into or exchangeable or exercisable for
Common Stock. Notwithstanding anything to the contrary herein, the undersigned
may be included as a selling shareholder in any registration statement filed by
the Company on Form S-8.

     

    During
the Restricted Period only, the undersigned agrees and consents to the entry of
stop transfer instructions with the Company’s transfer agent and registrar
against the transfer (except those in compliance with the restrictions set forth
in this Letter Agreement) of shares of Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock held by the undersigned,
provided such instructions specifically state that they are null and void after
210 days from the date hereof.  This Letter Agreement is irrevocable
and will be binding on the undersigned and the successors, heirs, personal
representatives and assigns of the undersigned.

     

    This
letter shall be null and void on the sooner of 210 days from the date hereof of
the date on which the  Investors no longer beneficially own any Shares
or Warrant Shares (as defined in the Securities Purchase Agreement between the
Company and the Investors dated the date hereof).

     

    
      
        
        

      

      
        35

        
          

        

      

      
        
        

      

    

     

    In
witness whereof, the undersigned has executed and delivered this Letter
Agreement to be effective as of the date first set forth above.

     

     

    
      
        	
                 

              	
                Very
      truly yours,

              	 
	 	 	 	 
	 	
                 

              	 	 
	 	 	
                (Printed Name
      of Holder)

              	 
	 	 	 	 
	 	 	 	 
	 	By: 	 	 
	 	 	
                (Signature)

              	 
	 	 	(If
      signing on behalf of an entity, print name of person signing and indicate
      title or capacity, including as a custodian or trustee.)	 
	 	 	 	 

      

    

     

    
      
         

      

      
        36

        
          

        

      

      
         

      

    

    SCHEDULE
A

     

    
      
        	
                INVESTOR

              
	
                Stillwater
      LLC

              
	
                Ginola
      Limited

              
	
                Crestflower
      Corporation

              
	
                Kettle
      Hill Partners, LP

              
	
                Kettle
      Hill Partners II, LP

              
	
                Kettle
      Hill Offshore, Ltd.   

              
	
                Iroquois
      Master Fund Ltd. 

              
	
                Total

              

      

    

    

     

    
      
         

      

      
        37

        
          

        

      

      
         

      

    

    
 

    SCHEDULE
2.2(a)

    List of Lockup Agreement
Signatories

    
 

    
      
        
          
            
              
                
                  
                    	
                            Name

                          	 
      	 
      	 
      	Capacity
	
                            Thomas
      Paulsen

                          	 
      	 
      	 
      	
                            Interim
      Chief Executive Officer, Director

                          
	
                            Michael
      D. Fowler

                          	 
      	 
      	 
      	
                            Interim
      Chief Financial Officer

                          
	
                            Claude
      Charles

                          	 
      	 
      	 
      	
                            Director

                          
	
                            Paul
      Cronson

                          	 
      	 
      	 
      	
                            Director

                          
	
                            Irwin
      Engelman

                          	 
      	 
      	 
      	
                            Director

                          
	
                            Jacob
      Goldman

                          	 
      	 
      	 
      	
                            Director

                          
	
                            Stephen
      Seay

                          	 
      	 
      	 
      	
                            Director

                          

                  

                

              

            

          

        

      

    

    

    
      
         

      

      
        38

        
          

        

      

      
         

      

    

    SCHEDULE
3.1(a)

    eMagin Corporation Direct
and Indirect Subsidiaries

    

    eMagin
Corporation has one direct subsidiary and no indirect subsidiaries as indicated
below:

    

    Direct
Subsidiaries

    Virtual
Vision,
Inc.                                                      A
dormant subsidiary incorporated in the State of Delaware

    

    Indirect
Subsidiaries

    None

    
      
         

      

      
        39

        
          

        

      

      
         

      

    

    SCHEDULE
3.1(g)

    Capitalization
Summary

     

    

      
        
          
            
              
                
                  
                    
                      
                        
                          	
                                  Common
      shares issued and outstanding

                                	 
      	
                                  12,620,900
      shares

                                
	
                                  Shares
      issuable upon option exercise

                                	 
      	    
      879,323
      shares   (1)
	
                                  Shares
      issuable upon warrant exercise

                                	 
      	
                                    9,340,509
      shares   (2), (4)

                                
	
                                  Shares
      issuable upon conversion of debt

                                	 
      	
                                    8,330,689 shares   (3), (5),
      (6)

                                
	
                                  Total
      shares outstanding and issuable

                                	 
      	31,171,421
      shares

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    Note:  Closing
price of eMagin’s common stock as of March 10, 2008 was $0.96 per
share.

    1. The
Company has a total of 879,323 options outstanding of which approximately
640,746 of these options have an exercise price of $2.60 per share or
greater.

    

    2. The
Company has a total of 9,340,509 warrants outstanding with an average strike
price of $2.65 per share.  Approximately 1,107,052 of these warrants
are in the money with a strike price of $0.48 per share or less.

    

    3. The
Company has convertible debt with an aggregate principal balance of $5,962,309
outstanding that is convertible into 8,330,689 shares of common
stock.

    

    4. Pursuant
to anti-dilution provisions contained in warrant agreements the Company has
previously issued, the purchase price associated with those warrants is be
adjusted when common stock or common stock equivalents are issued at a price per
share that is less than the purchase price contained in respective
warrants.

    

    5. Pursuant
to Section 6.3 of the Amended and Restated 8% Senior Secured Convertible Notes
Due 2008, anti-dilutive adjustments to the conversion price per share can occur
in the event the Company sells common shares or issues common stock equivalents
at a price per share that is less than the $0.75 per share note conversion price
that is currently available to such note holders.

    

    6. 8% Senior
Secured Convertible Note holders have a right of in financings of the
Company.  Notice of the proposed financing was provided to all such
note holders on February 29, 2008.  With the exception of one note
holder (in addition to Stillwater LLC) no notification of participation was
received by the Company or its counsel within the prescribed four trading day
period for such notification, which expired March 6, 2008.

    
      
         

      

      
        40

        
          

        

      

      
         

      

    

    SCHEDULE
3.1(r)

    Sarbanes-Oxley: Internal
Accounting Controls

    In
connection with Company management’s annual report on internal control over
financial reporting now in preparation, the Company anticipates that it will
disclose certain “material weaknesses” and/or “significant deficiencies”, as
such terms are defined under standards established by the Public Company
Accounting Oversight Board, with respect to its compliance with Section 404 of
the Sarbanes-Oxley Act.  Concurrently with identification of any items
of this nature, the Company expects to present detailed plans for remediating
any such weaknesses or deficiencies with a timetable for
completion.

     

     

     

     

     

     

     

    
      
         

      

      
        41

        
          

        

      

      
         

      

    

    SCHEDULE
3.1(v)

    Registration
Rights

    Pursuant
to Section 8 of the Note Purchase Agreement dated July 21, 2006 and amended July
23, 2007 with respect to the 8% Senior Secured Convertible Notes and related
warrants, the Company is obligated to file a registration statement with respect
to 6,908,864 note conversion shares and 4,831,859 warrant shares.

     

    Pursuant
to the Warrant Issuance Agreement dated January 30, 2008 as amended February 28,
2008 between the Company and Moriah Capital, L.P., the Company is obligated to
file a registration statement with respect to 1,000,000 warrant shares and
162,500 common shares no later than April 29, 2008.

     

    

     

     

     

     

     

    42

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