Document:

exh1042.htm

    Exhibit
10.42

 

    
      	
              
                NOTE PURCHASE
      AGREEMENT

                

                

                dated as of July 21,
      2006

                

                

                by and
      between

                

                

                EMAGIN
      CORPORATION

                

                

                and

                

                

                [NAME OF
      INVESTOR]

                

                

                

                                                               

                

                

                

                

                6% SENIOR SECURED
      CONVERTIBLE NOTES DUE 2007-2008

                

                AND

                

                COMMON STOCK PURCHASE
      WARRANTS
 

               

            

    

    

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        
        

      

    

    EMAGIN
CORPORATION

    

    NOTE PURCHASE
AGREEMENT

    

    6% SENIOR SECURED CONVERTIBLE NOTES
DUE 2007-2008

    

    AND

    

    COMMON STOCK PURCHASE
WARRANTS

    

    

    

    TABLE OF CONTENTS

    

    Page

     

    

      
        	
                1.     DEFINITIONS

              	 	
                1

              
	
                2.     PURCHASE
      AND SALE; PURCHASE PRICE.

              	 	
                10

              
	
                (a)

              	
                Purchase. 

              	 	
                10

              
	
                (b)

              	
                Form of Payment. 

              	 	
                10

              
	
                (c)

              	
                Closing. 

              	 	
                10

              
	
                3.     REPRESENTATIONS,
      WARRANTIES, COVENANTS, ETC. OF THE BUYER.

              	 	
                11

              
	
                (a)

              	
                Circumstances
      of Purchase.

              	 	
                11

              
	
                (b)

              	
                Accredited
      Investor; Residence.

              	 	
                11

              
	
                (c)

              	
                Reoffers
      and Resales.

              	 	
                11

              
	
                (d)

              	
                Company
      Reliance.

              	 	
                11

              
	
                (e)

              	
                Information
      Provided.

              	 	
                12

              
	
                (f)

              	
                Absence
      of Approvals.

              	 	
                12

              
	
                (g)

              	
                Note
      Purchase Agreement.

              	 	
                12

              
	
                (h)

              	
                Buyer
      Status.

              	 	
                13

              
	
                (i)

              	
                Experience
      of the Buyer.

              	 	
                13

              
	
                (j))

              	
                General
      Solicitation.

              	 	
                13

              
	
                (k)

              	
                Short
      Sales and Confidentiality Prior To The Date Hereof.

              	 	
                13

              
	
                4.     REPRESENTATIONS,
      WARRANTIES, COVENANTS, ETC. OF THE COMPANY.

              	 	
                13

              
	
                (a)

              	
                Organization
      and Authority.

              	 	
                13

              
	
                (b)

              	
                Qualifications.

              	 	
                14

              
	
                (c)

              	
                Concerning
      the Shares and the Common Stock.

              	 	
                14

              
	
                (d)

              	
                Corporate
      Authorization.

              	 	
                14

              
	
                (e)

              	
                Non-contravention.

              	 	
                15

              
	
                (f)

              	
                Approvals,
      Filings, Etc.

              	 	
                15

              
	
                (g)

              	
                Information
      Provided.

              	 	
                15

              
	
                (h)

              	
                Investment
      Company.

              	 	
                16

              

      

       

       

      
        
          
          

        

        
          i

          
            

          

        

        
          
          

        

      

       

       

      
        	
                (i)

              	
                Absence
      of Brokers, Finders, Etc.

              	 	
                16

              
	
                (j)

              	
                No
      Solicitation.

              	 	
                16

              
	
                (k)

              	
                No
      Integrated Offering.

              	 	
                16

              
	
                (l)

              	
                Dilutive
      Effect.

              	 	
                17

              
	
                (m)

              	
                Absence
      of Certain Changes.

              	 	
                17

              
	
                (n)

              	
                No
      Undisclosed Events, Liabilities, Developments or
      Circumstances.

              	 	
                17

              
	
                (o)

              	
                Conduct
      of Business; Regulatory Permits.

              	 	
                17

              
	
                (p)

              	
                Indebtedness
      and Other Contracts.

              	 	
                18

              
	
                (q)

              	
                Absence
      of Litigation.

              	 	
                18

              
	
                (r)

              	
                Insurance.

              	 	
                18

              
	
                (s)

              	
                Employee
      Relations

              	
                .

              	
                18

              
	
                (t)

              	
                Title.

              	 	
                19

              
	
                (u)

              	
                Intellectual
      Property.

              	 	
                19

              
	
                (v)

              	
                Environmental
      Laws.

              	 	
                20

              
	
                (w)

              	
                Subsidiary
      Rights.

              	 	
                20

              
	
                (x)

              	
                Tax
      Status.

              	 	
                20

              
	
                (y)

              	
                Internal
      Accounting Controls; Financial Statements.

              	 	
                20

              
	
                (z)

              	
                Sarbanes-Oxley
      Act.

              	 	
                21

              
	
                (aa)

              	
                S-3
      Eligibility.

              	 	
                21

              
	
                (bb)

              	
                Concerning
      the Collateral.

              	 	
                21

              
	
                (cc)

              	
                Disclosures.

              	 	
                21

              
	
                (dd)

              	
                Absence
      of Rights Agreement.

              	 	
                21

              
	
                5.     CERTAIN
      COVENANTS.

              	 	
                21

              
	
                (a)

              	
                Transfer
      Restrictions.

              	 	
                21

              
	
                (b)

              	
                Restrictive
      Legends.

              	 	
                22

              
	
                (c)

              	
                Reporting
      Status.

              	 	
                24

              
	
                (d)

              	
                Form
      D.

              	 	
                24

              
	
                (e)

              	
                State
      Securities Laws.

              	 	
                24

              
	
                (f)

              	
                Limitation
      on Certain Actions.

              	 	
                25

              
	
                (g)

              	
                Use
      of Proceeds.

              	 	
                25

              
	
                (h)

              	
                Best
      Efforts.

              	 	
                25

              
	
                (i)

              	
                Debt
      Obligation.

              	 	
                25

              
	
                (j)

              	
                Right
      of the Buyer to Participate in Future Transactions

              	
                .

              	
                25

              
	
                (k)

              	
                Press
      Releases.

              	 	
                27

              
	
                (l)

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

              	 	
                28

              
	
                (m)

              	
                Limitation
      on Certain Transactions.

              	 	
                28

              
	
                (n)

              	
                Debt
      Obligation.

              	 	
                29

              
	
                (o)

              	
                Security
      Agreement; Financing Statements, Etc.

              	 	
                29

              
	
                (p)

              	
                Stockholder
      Approval; Reverse Stock Split.

              	 	
                29

              
	
                (q)

              	
                Short
      Sales and Confidentiality After The Date Hereof.

              	 	
                30

              
	
                6.     CONDITIONS
      TO THE COMPANY’S OBLIGATION TO SELL.

              	 	
                31

              
	
                7.     CONDITIONS
      TO THE BUYER’S OBLIGATION TO PURCHASE.

              	 	
                31

              
	
                8.     REGISTRATION
      RIGHTS.

              	 	
                33

              
	
                (a)

              	
                Mandatory
      Registration.

              	 	
                33

              
	
                (b)

              	
                Obligations
      of the Company.

              	 	
                34

              

      

       

       

      
        
          
          

        

        
          ii

          
            

          

        

        
          
          

        

      

       

       

      
        	
                (c)

              	
                Obligations
      of the Buyer and other Investors.

              	 	
                38

              
	
                (d)

              	
                Rule
      144.

              	 	
                39

              
	
                9.     INDEMNIFICATION
      AND CONTRIBUTION.

              	 	
                39

              
	
                (a)

              	
                Indemnification.

              	 	
                39

              
	
                (b)

              	
                Contribution.

              	 	
                41

              
	
                (c)

              	
                Other
      Rights.

              	 	
                41

              
	
                10.     MISCELLANEOUS.

              	 	
                42

              
	
                (a)
      

              	
                Governing
      Law.

              	 	
                42

              
	
                (b)

              	
                Headings.

              	 	
                42

              
	
                (c)

              	
                Severability.

              	 	
                42

              
	
                (d)

              	
                Notices.

              	 	
                42

              
	
                (e)

              	
                Counterparts.

              	 	
                42

              
	
                (f)

              	
                Entire
      Agreement; Benefit.

              	 	
                42

              
	
                (g)

              	
                Waiver.

              	 	
                43

              
	
                (h)

              	
                Amendment.

              	 	
                43

              
	
                (i)

              	
                Further
      Assurances.

              	 	
                43

              
	
                (j)

              	
                Assignment
      of Certain Rights and Obligations

              	
                .

              	
                43

              
	
                (k)

              	
                Expenses.

              	 	
                44

              
	
                (l)

              	
                Termination.

              	 	
                44

              
	
                (m)

              	
                Survival.

              	 	
                45

              
	
                (n)

              	
                Construction;
      Buyer Status.

              	 	
                45

              

      

      

      

      ANNEXES

      

      
        	
                Annex
      I

              	
                Form
      of 6% Senior Secured Convertible Note due 2007-2008

              
	
                Annex
      II

              	
                Form
      of Common Stock Purchase Warrant

              
	
                Annex
      III

              	
                Form
      of Patent and Trademark Security Agreement

              
	
                Annex
      IV

              	
                Form
      of Pledge and Security Agreement

              
	
                Annex
      V

              	
                Form
      of Lockbox Agreement

              
	
                Annex
      VI

              	
                Form
      of Press Release

              
	
                Annex
      VII

              	
                Form
      of Legal Opinion of Company Counsel

              
	
                Annex
      VIII

              	
                Form
      of Legal Opinion of Intellectual Property Counsel

              
	
                Annex
      IX

              	
                Form
      of Lockup Agreement

              

      

       

    

    
      
        
        

      

      
        iii

        
          

        

      

      
        
           

        

      

    

    

    NOTE PURCHASE
AGREEMENT

    

    THIS NOTE PURCHASE
AGREEMENT, dated as
of July 21, 2006 (this “Agreement”), by and between eMagin Corporation, a
Delaware corporation (the “Company”), with headquarters located at 10500 N.E.
8th Street,
Suite 1400, Bellevue,
Washington 98004, and [NAME OF BUYER] (the
“Buyer”).

    

    W I T N E S S E T H:

    

    WHEREAS, upon
the terms and subject to the conditions of this Agreement, the Buyer wishes to
purchase from the Company and the Company wishes to sell to the Buyer, the Note
(such capitalized term and all other capitalized terms used in this Agreement
having the meanings provided in Section 1) of the Company to be issued by the
Company in the principal amount set forth on the signature page of this
Agreement, which Note will be convertible into shares of Common Stock, and in
connection with the sale and issuance of the Note the Company shall issue to the
Buyer a warrant to purchase shares of Common Stock; 

    

    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”, “Buyer” and “Company” shall have the
respective meanings assigned to such terms in the introductory paragraph of this
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):

    

    “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.

    

    “AMEX”
means the American Stock Exchange, Inc.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    “Blackout
Period” means the period of up to twenty Trading Days (whether or not
consecutive) during any period of 365 consecutive days after the date the
Company notifies the Investors that they are required, pursuant to Section
8(c)(4), to suspend offers and sales of Registrable Securities as a result of an
event or circumstance described in Section 8(b)(5)(A), during which period, by
reason of Section 8(b)(5)(B), the Company is not required to amend a particular
Registration Statement or supplement the related Prospectus.

    

    “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.

    

    “Claims”
means any losses, claims, damages, liabilities or expenses, including, without
limitation, reasonable fees and expenses of legal counsel (joint or several),
incurred by a Person.

    

    “Closing
Date” means 10:00 a.m., New York City time, on July 21, 2006, or such other
mutually agreed to time.

    

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

    

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

    

    “Common
Stock” means the Common Stock, par value $.001 per share, of the
Company.

    

    “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.

    

    “Conversion
Price” shall have the meaning to be provided or provided in the
Note.

    

    “Conversion
Shares” means the shares of Common Stock or other securities issuable upon
conversion of the Note.

    

    “Encumbrance”
means any mortgage, deed of trust, claim, security interest, lien, pledge,
lease, sublease, charge, escrow, option, proxy, right of occupancy, right of
first refusal, preemptive right, covenant, conditional limitation,
hypothecation, prior assignment, easement, title retention agreement, indenture,
security agreement or any other encumbrance of any kind.

    

    “Environmental
Law” means any federal, state, local or foreign law relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of Hazardous Materials into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    “ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and the
regulations thereunder and published interpretations thereof.

    

    “Exempt
Issuance” shall have the meaning set forth in Section 5(m) of this
Agreement.

    

    “Event of
Default” shall have the meaning to be provided or provided in the
Note.

    

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

    

    “Hazardous
Material” means any chemical, pollutant, contaminant, or toxic or hazardous
substance or waste.

    

    “Indebtedness”
shall have the meaning to be provided or provided in the Note.

    

    “Indemnified
Party” means the Company, each of its directors, each of its officers who signs
the Registration Statement, each Person, if any, who controls the Company within
the meaning of the 1933 Act or the 1934 Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any Person who controls such stockholder or
underwriter within the meaning of the 1933 Act or the 1934 Act.

    

    “Indemnified
Person” means the Buyer and any Investor and their respective investment
advisers and investment managers, the directors, officers, employees and agents
of the Buyer, any such Investor and any such investment adviser or investment
manager, each Person, if any, who controls the Buyer, any such Investor or any
such investment adviser or investment manager within the meaning of the 1933 Act
or the 1934 Act, any underwriter (as defined in the 1933 Act) acting on behalf
of an Investor who participates in the offering of Registrable Securities of
such Investor in accordance with the plan of distribution contained in the
Prospectus, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each Person, if any, who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act. 

    

    “Inspector”
means any attorney, accountant or other agent retained by an Investor for the
purposes provided in Section 8(b)(9).

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    “Insolvent”
means (i) the present fair saleable value of the Company's assets is less than
the amount required to pay the Company's total indebtedness, contingent or
otherwise, (ii) the Company is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured, (iii) the Company intends to incur debts beyond its
ability to pay as such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt) or (iv) the Company
has unreasonably small capital with which to conduct the business in which it is
engaged for the current fiscal year as such business is now conducted and is
proposed to be conducted.

    

    “Intellectual
Property” means all franchises, patents, trademarks, service marks, trade names
(whether registered or unregistered), copyrights, corporate names, licenses,
trade secrets, proprietary software or hardware, proprietary technology,
technical information, discoveries, designs and other proprietary rights,
whether or not patentable, and confidential information (including, without
limitation, know-how, processes and technology) used in the conduct of the
business of the Company or any Subsidiary.

    

    “Investor”
means the Buyer and any transferee or assignee who agrees to become bound by the
provisions of Sections 5(a), 5(b), 8, 9, and 10 of this Agreement.

    

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

    

    “Lockbox
Agreement” means the Lockbox Agreement by and between the Company and the
Lockbox Agent in the form attached as Annex V.

    

    “Liens”
shall have the meaning to be provided or provided in the Note.

    

    “Margin
Stock” shall have the meaning provided in Regulation U of the Board of Governors
of the Federal Reserve System (12 C.F.R. Part 221).

    

    “Material
Adverse Effect” means (i) a material adverse effect on (A) the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and the Subsidiaries, taken as a whole; (B) the
validity or enforceability of, or the ability of the Company to perform its
obligations under, the Transaction Documents; (C) the existence, validity or
priority of the Lien on and Security Interest in the Collateral granted pursuant
to any Security Agreement; or (D) the rights and remedies of the Buyer under or
in connection with the Transaction Documents or (ii) any event or circumstance
that would cause any Registration Statement or Prospectus to contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made not misleading except if such untrue statement of a
material fact in such Registration Statement or Prospectus or omission to state
a material fact required to be stated in such Registration Statement or
Prospectus in order to make the statements therein not misleading, results from
a misstatement or omission made by the Buyer in written information it furnished
to the Company specifically for inclusion in such Registration Statement or such
Prospectus or in any amendment or supplement thereto, unless the Company shall
have failed timely to amend or supplement such Registration Statement or
Prospectus after the Buyer shall have corrected such misstatement or
omission.

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    “Nasdaq”
means the Nasdaq Global Market.

    

    “Nasdaq
Capital Market” means the Nasdaq Capital Market.

    

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

    

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

    

    “Note”
means the 6% Senior Secured Convertible Note due 2007-2008 of the Company in the
form attached as Annex I.

    

    “Other
Note Purchase Agreements” means the several Note Purchase Agreements, dated of
even date herewith, by and between the Company and the buyers of the Other
Notes.

    

    “Other
Notes” shall have the meaning to be provided or provided in the
Note.

    

    “Other
Warrants” means the Common Stock Purchase Warrants issuable or issued pursuant
to the Other Note Purchase Agreements.

    

    “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.

    

    “Payment
Event” means any of the following events:

    

    (i) the
Company fails to file with the SEC any Registration Statement meeting the
requirements of this Agreement on or before the date by which the Company is
required to file such Registration Statement pursuant to Section
8(a),

    

    (ii) the SEC
Effective Date of the Registration Statement required by Section 8(a)(1)
covering Registrable Securities does not occur within 90 days following the
Closing Date or the SEC Effective Date of any Registration Statement required by
Section 8(a)(3) covering Registrable Securities does not occur within 90 days
following the date the Company shall become obligated to commence preparation of
such Registration Statement: provided, however, that if
any such Registration Statement shall be reviewed by the SEC staff a Payment
Event shall not occur until 120 days following (x) the Closing Date, in the case
of the Registration Statement required by Section 8(a)(1), or (y) such date as
the Company becomes obligated to commence preparation of such Registration
Statement, in the case of any Registration Statement required by Section
8(a)(3),

    

    (iii) The
Company fails to file with the SEC a request for acceleration of effectiveness
of a Registration Statement within three Trading Days after the date the Company
learns that no review of such Registration Statement will be made by the staff
of the SEC or that the staff of the SEC has no further comments on such
Registration Statement, as the case may be, or any such request for acceleration
fails to request acceleration of such Registration Statement to a time and date
not more than 48 hours after the submission of such request,

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (iv) after the
SEC Effective Date of any Registration Statement, sales cannot be made pursuant
to such Registration Statement for any reason (including, without limitation, by
reason of a stop order, any untrue statement of a material fact or omission of a
material fact in such Registration Statement, or the Company’s failure to update
such Registration Statement), except to the extent permitted pursuant to Section
8(b)(5), 

    

    (v) the
Common Stock generally or the Registrable Securities specifically are not listed
or included for quotation on a Trading Market, or

    

    (vi) the
Company fails, refuses or is otherwise unable timely to issue and deliver to or
upon the order of the Person entitled thereto Conversion Shares upon conversion
of the Note or shares of Common Stock issuable upon conversion of any Other
Note, Warrant Shares upon exercise of the Warrant or shares of Common Stock
issuable upon exercise of any Other Warrant in accordance with the terms of the
Warrant or any Other Warrant, as the case may be, as and when required under the
Transaction Documents, in any such case within five Trading Days after the due
date thereof in accordance with the Note, Other Note, Warrant or Other Warrant
or the Company fails, refuses or is otherwise unable timely to transfer any
Shares as and when required by the Transaction Documents.

    

    “Payment
Period” means any period following the Closing Date during which any Payment
Event occurs and is continuing.

    

    “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.

    

    “Placement
Agent” means Roth Capital Partners.

    

    “Pledge
and Security Agreement” means the Pledge and Security Agreement from the Company
to the Collateral Agent in the form attached as Annex IV.

    

    “Pro Rata
Share” means with respect to each capital raising transaction to which Section
5(j) applies an amount equal to the product obtained by multiplying (x) an
amount equal to one-half of the securities being issued in such capital raising
transaction times (y) a
fraction of which the numerator is the sum of (A) the total number of shares of
Common Stock which would then be issuable upon conversion of the Note and upon
exercise of the Warrant for cash plus (B) the
number of outstanding Shares beneficially owned by the Buyer at the time the Pro
Rata Share is being determined and the denominator is the sum of (C) the number
of shares issuable upon conversion of the Note and the Other Notes at the time
of original issuance thereof plus (D) the
total number of shares of Common Stock issuable upon exercise of the Warrant and
the Other Warrants for cash (in each case determined without regard to any
limitation on conversion of exercise thereof), subject to adjustment of the
amounts specified in the immediately preceding clauses (C) and (D) 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.

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    “Prospectus”
means the prospectus forming part of the Registration Statement at the time the
Registration Statement is declared effective and any amendment or supplement
thereto (including any information or documents incorporated therein by
reference).

    

    “PTO”
means the United States Patent and Trademark Office.

    

    “Purchase
Price” means the purchase price for the Note set forth on the signature page of
this Agreement.

    

    “QIB”
means a “qualified institutional buyer” as defined in Rule 144A.

    

    “Record”
means all pertinent financial and other records, pertinent corporate documents
and properties of the Company subject to inspection for the purposes provided in
Section 8(b)(9).

    

    “register,”
“registered,” and “registration” refer to a registration effected by preparing
and filing a Registration Statement or Statements in compliance with the 1933
Act and pursuant to Rule 415, and the declaration or ordering of effectiveness
of such Registration Statement by the SEC.

    

    “Registrable
Securities” means (1) the Shares, (2) if the Common Stock is changed, converted
or exchanged by the Company or its successor, as the case may be, into any other
stock or other securities on or after the date hereof, such other stock or other
securities which are issued or issuable in respect of or in lieu of the Shares
and (3) if any other securities are issued to holders of Common Stock (or such
other shares or other securities into which or for which the Common Stock is so
changed, converted or exchanged as described in the immediately preceding clause
(2)) upon any reclassification, share combination, share subdivision, share
dividend, merger, consolidation or similar transaction or event, such other
securities which are issued or issuable in respect of or in lieu of the
Shares.

    

    “Registration
Period” means, with respect to each Registration Statement, the period from the
SEC Effective Date for such Registration Statement, to the earlier of (A) the
date which is five years after the
Closing Date or such date after which each Investor may sell all of its
Registrable Securities without registration under the 1933 Act pursuant to Rule
144, free of any limitation on the volume of such securities which may be sold
in any period) and (B) the date on which the Investors no longer own any
Registrable Securities.

    

    “Registration
Statement” means a registration statement on Form S-3 or such other form as may
be available to the Company to be filed with the SEC under the 1933 Act relating
to the Registrable Securities and which names any Investor as a selling
stockholder.

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    “Regulation
D” means Regulation D under the 1933 Act.

    

    “Repurchase
Event” shall have the meaning to be provided or provided in the
Note.

    

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

    

    “Reverse
Stock Split” means a reverse split of the Common Stock of not less than one for
each ten shares of Common Stock outstanding prior thereto.

    

    “Rule
144” means Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time provide a “safe harbor” exemption
from registration under the 1933 Act so as to permit a holder to sell securities
of the Company to the public without registration under the 1933
Act.

    

    “Rule
144A” means Rule 144A under the 1933 Act or any successor rule
thereto.

    

    “SEC”
means the Securities and Exchange Commission.

    

    “SEC
Effective Date” means, with respect to any Registration Statement, the date such
Registration Statement is first declared effective by the SEC.

    

    “SEC
Filing Date” means the date the Registration Statement is first filed with the
SEC pursuant to Section 8.

    

    “SEC
Reports” means the Company’s (1) Annual Report on Form 10-K for the year ended
December 31, 2005, (2) Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006, and (3)
all other periodic and other reports filed by the Company with the SEC pursuant
to the 1934 Act subsequent to December 31, 2005, and prior to the date hereof,
in each case as filed with the SEC and including the information and documents
(other than exhibits) incorporated therein by reference.

    

    “Securities”
means, collectively, the Note, the Shares and the Warrant.

    

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

    

    “Security
Interest” shall have the meaning to be provided or provided in each Security
Agreement.

    

    “Shares”
means the Conversion Shares and the Warrant Shares.

    

    “Short
Sales” shall have the meaning provided in Rule 200 of Regulation SHO under the
1934 Act as in effect on the date of this Agreement (but shall not be deemed to
include the location and/or reservation of borrowable shares of Common
Stock).

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    “Stockholder
Approval” shall have the meaning provided in Section 5(p).

    

    “Stockholder
Meeting” shall have the meaning provided in Section 5(p).

    

    “Strategic
Issuance” means the issuance by the Company for cash of Common Stock or Common
Stock Equivalents 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.

    

    “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.

    

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

    

    “Trading
Market” means the AMEX, the Nasdaq, the Nasdaq
Capital Market or the
New York Stock Exchange, Inc.

    

    “Transaction
Documents” means, collectively, this Agreement, the Security Agreement, the
Securities, the Lockbox Agreement and the other agreements, instruments and
documents contemplated hereby and thereby.

    

    “Transaction
Form 8-K” shall have the meaning provided in Section 5(l).

    

    “Violation”
means 

    

    (i) any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement or any post-effective amendment thereof or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,

    

    (ii) any
untrue statement or alleged untrue statement of a material fact contained in any
Prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, 

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    (iii) any
violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any
state securities law or any rule or regulation under the 1933 Act, the 1934 Act
or any state securities law, or 

    

    (iv) any
breach or alleged breach by the Company of any representation, warranty,
covenant, agreement or other term of any of the Transaction Documents.

    

    “Warrant”
means the Common Stock Purchase Warrant in the form attached hereto as
Annex II.

    

    “Warrant
Shares” means the shares of Common Stock and any other securities issuable upon
exercise of the Warrant.

    

    2. PURCHASE AND SALE; PURCHASE
PRICE.

    

    (a) Purchase. 
Upon the
terms and subject to the conditions of this Agreement, the Buyer hereby agrees
to purchase from the Company, and the Company hereby agrees to sell to the
Buyer, on the Closing Date, the Note in the principal amount set forth on the
signature page of this Agreement and having the terms and conditions as set
forth in the form of the Note attached hereto as Annex I for the
Purchase Price. In connection with the purchase of the Note by the Buyer, the
Company shall issue to the Buyer at the closing on the Closing Date a Warrant
initially entitling the holder to purchase the number of shares of Common Stock
set forth on the signature page of this Agreement.

    

    (b) Form of Payment.
 Payment
by the Buyer of the Purchase Price to the Company on the Closing Date shall be
made by wire transfer of immediately available funds to:

     

    [INTENTIONALLY
OMITTED]

     

    For
credit to account No. 

    For
credit to the account of 

    Reference:
[Name of
Buyer]

    

    (c) Closing. 
The
issuance and sale of the Note and the issuance of the Warrant shall occur on the
Closing Date at Law Offices of Brian W Pusch, Penthouse Suite, 29 West
57th Street,
New York, New York 10019 or at such other location and time as the parties may
agree. At the closing, upon the terms and subject to the conditions of this
Agreement, (1) the Company shall issue and deliver to the Buyer the Note and the
Warrant against payment by the Buyer to the Company of an amount equal to the
Purchase Price, and (2) the Buyer shall pay to the Company an amount equal to
the Purchase Price against delivery by the Company to the Buyer of the Note and
the Warrant.

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    3. REPRESENTATIONS, WARRANTIES,
COVENANTS, ETC. OF THE BUYER.

    

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

    

    (a) Circumstances of Purchase. 
The Buyer
is purchasing the Note and acquiring the Warrant for its own account and not
with a view towards the public sale or distribution thereof within the meaning
of the 1933 Act; and the Buyer will acquire any Shares issued to the Buyer prior
to the SEC Effective Date of a Registration Statement covering the resale of
such Shares by the Buyer for its own account and not with a view towards the
public sale or distribution thereof within the meaning of the 1933 Act prior to
such SEC Effective Date; and the Buyer 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. The Buyer is acquiring the Securities hereunder in the
ordinary course of its business. 

    

    (b) Accredited Investor;
Residence.  At the
time the Buyer was offered the Securities, it was, and at the date hereof it is,
and on each date on which it exercises any Warrants for cash it will be, an
“accredited investor” as that term is defined in Rule 501 of Regulation D under
the 1933 Act by reason of Rule 501(a)(3) thereof. The office or offices of the
Buyer in which its investment decision was made is located at the address or
addresses of such Investor set forth on the signature page hereto.

    

    (c) Reoffers and Resales. 
The Buyer
will not offer, sell, pledge, transfer or otherwise dispose of (or solicit any
offers to buy, purchase or otherwise acquire or take a pledge of) any of the
Securities unless registered under the 1933 Act, pursuant to an exemption from
registration under the 1933 Act or in a transaction not requiring registration
under the 1933 Act; provided,
however, 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 prohibited hereby, and in effecting any pledge of Securities the
Buyer shall not be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document, including, without limitation, this Section 3(c);
provided,
further,
however, the
Buyer acknowledges that in connection with any sale, transfer or assignment by
the pledgee of such Securities, such pledgee may be required by applicable law
to make such sale, transfer or assignment in accordance with, or pursuant to a
registration statement or an exemption under, the 1933 Act.

    

    (d) Company Reliance. 
The Buyer
understands that (1) the Note is being offered and sold and the Warrant is being
issued to the Buyer, (2) upon conversion of the Note prior to two years after
the Closing Date, the Conversion Shares will be issued to the Buyer upon such
conversion and (3) upon exercise of the Warrant for cash, or upon cashless
exercise of the Warrant prior to two years after the Closing Date, the Warrant
Shares issued upon such exercise will be issued to the Buyer, in each such case
in reliance on one or more exemptions from the registration requirements of the
1933 Act, including, without limitation, Regulation D, and exemptions from state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire or receive an offer to acquire the Securities.

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    (e) Information Provided. 
The Buyer
and its advisors, if any, have requested, received and considered all
information relating to the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company and
information relating to the offer and sale of the Note and the offer of the
Warrant deemed relevant by them (assuming the accuracy and completeness of the
SEC Reports and of the Company’s responses to the Buyer’s requests); the Buyer
and its advisors, if any, have been afforded the opportunity to ask questions of
the Company concerning the terms of the offering of the Securities and the
business, properties, operations, condition (financial or other), results of
operations and prospects of the Company and the Subsidiaries; without limiting
the generality of the foregoing, the Buyer has had the opportunity to obtain and
to review the SEC Reports; in connection with its decision to purchase the Note
and to acquire the Warrant, the Buyer has relied solely upon the SEC Reports,
the representations, warranties, covenants and agreements of the Company set
forth in this Agreement and to be contained in the other Transaction Documents,
as well as any investigation of the Company completed by the Buyer or its
advisors; the Buyer understands that its investment in the Securities involves a
high degree of risk; and the Buyer understands that the offering of the Note is
being made to the Buyer as part of an offering without any minimum amount of the
offering but subject to a maximum amount of $7 million aggregate principal
amount of the Note and the Other Notes (subject, however, to the right of the
Company at any time prior to execution and delivery of this Agreement by the
Company, in its sole discretion, to accept or reject an offer by the Buyer to
purchase the Note and to acquire the Warrant).

    

    (f) Absence of Approvals. 
The Buyer
understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation or
endorsement of the Securities. 

    

    (g) Note Purchase Agreement. 
The Buyer
has all requisite power and authority, corporate or otherwise, to execute,
deliver and perform its obligations under this Agreement and the other
agreements executed by the Buyer in connection herewith and to consummate the
transactions on the Buyer’s part contemplated hereby and thereby; Buyer is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization; and this Agreement and the Transaction
Documents to which the Buyer is a party have been duly and validly authorized,
duly executed and delivered by the Buyer and, assuming due execution and
delivery by the Company, constitute valid and legally binding obligations of the
Buyer enforceable in accordance with their 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.

    

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    (h) Buyer Status. 
The Buyer
is not a “broker” or “dealer” as those terms are defined in the 1934 Act, which
is required to be registered with the SEC pursuant to Section 15 of the 1934
Act.

    

    (i) Experience of the Buyer. 
The Buyer,
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. The
Buyer 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. The
Buyer has had the opportunity to ask questions of management of the
Company.

    

    (j) General Solicitation.
The
Buyer did not
learn of the offering of the Securities through any public advertising or
general solicitation (as these terms are used in Regulation D).

    

    (k) Short Sales and Confidentiality Prior
To The Date Hereof.

    Other
than the transaction contemplated hereunder, the Buyer has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with the Buyer, executed any disposition, including Short Sales
(but not including the location and/or reservation of borrowable shares of
Common Stock), in the securities of the Company during the period
commencing from the time
that the Buyer
first
received a term sheet from the Company or any other Person setting forth the
material terms of the transactions contemplated hereunder until the date hereof
(the
“Discussion Time”).
Notwithstanding
the foregoing, in the case of a Buyer
that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Buyer's assets
and the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Buyer'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 and its professional advisors,
the Buyer
has
maintained the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this
transaction).

    

    4. REPRESENTATIONS, WARRANTIES,
COVENANTS, ETC. OF THE COMPANY.

    

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

    

    (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 this Agreement and the
other 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.

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    (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) Concerning the Shares and the Common
Stock.  The
Shares have been duly authorized and the Conversion Shares, when issued upon
conversion of the Note, and the Warrant Shares, when issued upon exercise of the
Warrant, 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. There are no unwaived preemptive or similar rights
of any stockholder of the Company or any other Person to acquire any of the
Securities issued or to be issued to the Buyer. The Company has duly reserved
40,000,000 shares of Common Stock exclusively for issuance upon conversion of
the Note and the Other Notes and exercise of the Warrant and the Other 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 Note, the Other Notes and the Warrant, so long as the
Note, the Other Notes or the Warrant are outstanding. The Common Stock is listed
for trading on the AMEX and, except as described on Schedule 4(c), (1) the
Company and the Common Stock meet the criteria for continued listing and trading
on the AMEX; (2) the Company has not been notified since December 31, 2004 by
the AMEX of any failure or potential failure to meet the criteria for continued
listing and trading on the AMEX and (3) no suspension of trading in the Common
Stock is in effect. Except as described on Schedule 4(c), the
Company knows of no reason that the Shares will not be eligible for listing on
the AMEX. 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
Buyer shall not be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document; 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 Buyer or its pledgee shall make
such disposition in accordance with, or pursuant to a registration statement or
an exemption under, the 1933 Act.

    

    (d) Corporate Authorization. 
This
Agreement and the other Transaction Documents to which the Company is or will be
a party 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 Buyer, this Agreement is, and the Note, and the 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 hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium 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.

    

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    (e) Non-contravention. 
The
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the issuance of the Securities as contemplated by
this Agreement and consummation by the Company of the other transactions
contemplated by the 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 term or provision of the Certificate of Incorporation or Bylaws 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 Agreement) 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.

    

    (f) Approvals, Filings, Etc. 
No
authorization, approval or consent of, or filing with, any United States or
foreign court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained or made by the Company or any Subsidiary for (x) the
execution, delivery and performance by the Company of the Transaction Documents,
(y) the issuance and sale of the Securities as contemplated by this Agreement
and the terms of the Note and the Warrant and (z) the performance by the Company
of its obligations under the Transaction Documents, other than (1) registration
of the resale of the Shares under the 1933 Act as contemplated by Section 8, (2)
as may be required under applicable state securities or “blue sky” laws, (3)
filing of one or more Forms D with respect to the Securities as required under
Regulation D, (4) filing of financing statements as required under the
Pledge and Security Agreement, (5) the filings with the PTO as required by the
Patent and Trademark Security Agreement and (6) the filing of
the Transaction Form 8-K.

    

    (g) Information Provided. 
The SEC
Reports (together with the press release issued by the Company), the Transaction
Documents and the instruments delivered by the Company to the Buyer in
connection with the execution and delivery of this Agreement and in connection
with the closing on the Closing Date do not and will not on the date of
execution and delivery of this Agreement, the date of delivery thereof to the
Buyer and on the Closing Date 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 under which they are made, not
misleading, it being understood that for purposes of this Section 4(g), any
statement contained in such information shall be deemed to be modified or
superseded for purposes of this Section 4(g) to the extent that a statement in
any document included in such information which was prepared and furnished to
the Buyer on a later date (but on or before the date of this Agreement) or filed
with the SEC on a later date (but on or before the date of this Agreement)
modifies or replaces such statement, whether or not such later prepared or filed
statement so states.

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    (h) Investment Company. 
 Neither
the Company nor any Subsidiary is an “investment company” within the meaning of
such term under the Investment Company Act of 1940, as amended, and the rules
and regulations of the SEC thereunder.

    

    (i) 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.

    

    (j) No Solicitation. 
Neither
the Company nor, to the best of its knowledge, any other Person acting on behalf
of the Company, used any form of general solicitation or general advertising in
respect of the Securities or in connection with the offer and sale of the
Securities. Neither the Company nor, to its knowledge, any Person acting on
behalf of the Company has, either directly or indirectly, sold or offered for
sale to any Person any of the Securities or, within the six months prior to the
date hereof, any other similar security of the Company, except as contemplated
by this Agreement and the Other Note Purchase Agreements; and neither the
Company nor any Person authorized to act on its behalf will sell or offer for
sale any promissory notes, warrants, shares of Common Stock or other securities
to, or solicit any offers to buy any such security from, any Person so as
thereby to cause the issuance or sale of any of the Securities to be in
violation of any of the provisions of Section 5 of the 1933 Act.

    

    (k) No Integrated
Offering.  None of
the Company, any Subsidiary, any of their respective Affiliates, or any Person
acting on behalf of any of them has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under
circumstances that would require registration of any of the Securities under the
1933 Act or cause the offering of the Securities, the Other Notes and the Other
Warrants to be integrated with prior offerings by the Company for purposes of
the 1933 Act or any applicable stockholder approval provisions, including,
without limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed,
quoted or designated. None of the Company, any Subsidiary, their respective
Affiliates or any Person acting on behalf of any of them will take any action or
steps referred to in the preceding sentence that would require registration of
any of the Securities under the 1933 Act or cause the offering of the Securities
to be integrated with other offerings. 

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    (l) Dilutive Effect. 
The
Company understands and acknowledges that the number of Shares issuable upon
conversion of the Note and the Other Notes 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 Transaction Documents, its obligation to issue Shares upon
conversion of the Note and upon exercise of the Warrant in accordance with this
Agreement, the Note 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.

    

    (m) Absence of Certain
Changes.  Except as
disclosed in the SEC Reports, since December 31, 2005, 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, 2005, 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 Closing Date and
the transactions contemplated by the Other Note Purchase Agreements,
Insolvent.

    

    (n) 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.

    

    (o) Conduct of Business; Regulatory
Permits.  Neither
the Company nor any Subsidiary is in violation of any term of or in default
under its Certificate of Incorporation, or its Bylaws. Neither the Company nor
any Subsidiary is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or any Subsidiary which
violation could have a Material Adverse Effect, and neither the Company nor any
Subsidiary will conduct its business in violation of any of the foregoing,
except for possible violations which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Without
limiting the generality of the foregoing, the Company is not in violation of any
of the rules, regulations or requirements of the AMEX and has no knowledge of
any facts or circumstances that would be likely to lead to delisting or
suspension of the Common Stock by the AMEX in the future. Since December 31,
2005, (i) the Common Stock has been listed on the AMEX, (ii) trading in the
Common Stock has not been suspended by the SEC or the AMEX and (iii) the Company
has received no communication, written or oral, from the SEC or the AMEX
regarding the suspension or delisting of the Common Stock from the AMEX. The
Company and the Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, except where the
failure to possess such certificates, authorizations or permits could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect, and neither the Company nor any Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.

    

    
      
        
        

      

      
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    (p) Indebtedness and Other
Contracts.  Except as
set forth on the SEC Reports, neither the Company nor any Subsidiary (i) has any
outstanding Indebtedness, (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by any other party
to such contract, agreement or instrument could reasonably be expected to result
in a Material Adverse Effect, (iii) is in violation of any term of or in default
under any contract, agreement or instrument, except where such violations and
defaults could not reasonably be expected to result, individually or in the
aggregate, in a Material Adverse Effect, or (iv) is a party to any contract,
agreement or instrument, the performance of which, in the judgment of the
Company's officers, has or is expected to have a Material Adverse Effect. The
Company has filed all material contracts required to be filed in accordance with
the applicable requirements of the SEC Reports as exhibits to such reports.

    

    (q) Absence of
Litigation.  Except as
set forth in the SEC Reports, there is no action, suit, proceeding, inquiry or
investigation, whether criminal, civil or otherwise, before or by the AMEX, any
court, arbitrational body, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, the Common Stock or any of the Subsidiaries or
any of the Company's or any Subsidiary's officers or directors in their
capacities as such. To the knowledge of the Company, none of the directors or
officers of the Company has been a party to any securities related litigation
during the past ten years, other than as disclosed in the SEC
Reports.

    

    (r) Insurance. 
The
Company and each Subsidiary is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which
the Company and the Subsidiaries are engaged. Neither the Company nor any
Subsidiary has been refused any insurance coverage sought or applied for and
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 at a cost that could not have a Material Adverse
Effect.

    

    (s) Employee
Relations.  Neither
the Company nor any Subsidiary is a party to any collective bargaining agreement
or employs any member of a union. No executive officer of the Company (as
defined in Rule 405 under the 1933 Act) has notified the Company that such
officer intends to leave the Company or otherwise terminate such officer's
employment with the Company. No executive officer of the Company, to the
knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and, to the knowledge of the
Company, the continued employment of each such executive officer does not
subject the Company or any Subsidiary to any material liability with respect to
any of the foregoing matters. The Company and the Subsidiaries are in compliance
with all federal, state, local and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours, except where failure to be in compliance could not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

    

    
      
        
        

      

      
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    (t) Title. 
The
Company and the Subsidiaries have good and marketable title to all personal
property owned by them which is material to the business of the Company and the
Subsidiaries, in each case free and clear of all Liens except (i) immaterial
Liens for taxes not yet delinquent, (ii) immaterial carriers’, warehousemen’s,
mechanics', materialmen's, repairmen’s, landlord’s Liens (and other similar
Liens), and immaterial Liens under operating and similar agreements, to the
extent the same relate to expenses incurred in the ordinary course of business
consistent with past practice and that are not yet due, (iii) that are routine
governmental approvals, or (iv) such as do not materially affect the value of
such property and do not interfere with the use made and proposed to be made of
such property by the Company and any of its Subsidiaries. Neither the Company
nor any Subsidiary owns any real property. Any real property and facilities held
under lease by the Company or any Subsidiary are held by it under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and the Subsidiaries.

    

    (u) Intellectual Property. 
Except as
provided in the Security Agreement, (1) the Company and each Subsidiary holds
all Intellectual Property that it owns free and clear of all Encumbrances and
restrictions on use or transfer, whether or not recorded, and has sole title to
and ownership of or has the full, exclusive (subject to the rights of its
licensees) right to use in its field of business such Intellectual Property; and
the Company and each Subsidiary holds all Intellectual Property that it uses but
does not own under valid licenses or sub-licenses from others; (2) the use of
the Intellectual Property by the Company or any Subsidiary does not, to the
knowledge of the Company, violate or infringe on the rights of any other Person;
(3) neither the Company nor any Subsidiary has received any notice of any
conflict between the asserted rights of others and the Company or any Subsidiary
with respect to any Intellectual Property; (4) the Company and each Subsidiary
has used its commercially reasonable best efforts to protect its rights in and
to all Intellectual Property; (5) the Company and each Subsidiary are in
compliance with all material terms and conditions of its agreements relating to
the Intellectual Property; (6) neither the Company nor any Subsidiary is, or
since December 31, 2005 has been, a defendant in any action, suit, investigation
or proceeding relating to infringement or misappropriation by the Company or any
Subsidiary of any Intellectual Property nor has the Company or any Subsidiary
been notified of any alleged claim of infringement or misappropriation by the
Company or any Subsidiary of any Intellectual Property; (7) to the knowledge of
the Company, none of the products or services the Company and the Subsidiaries
are researching, developing, propose to research and develop, make, have made,
use, or sell, infringes or misappropriates any Intellectual Property right of
any third party; (8) none of the trademarks and service marks used by the
Company or any Subsidiary, to the knowledge of the Company, infringes the
trademark or service mark rights of any third party; and (9) to the Company’s
knowledge none of the material processes and formulae, research and development
results and other know-how relating to the Company's or the Subsidiaries'
respective businesses, the value of which to the Company or any Subsidiary is
contingent upon maintenance of the confidentiality thereof, has been disclosed
to any Person other than Persons bound by written confidentiality
agreements.

    

    
      
        
        

      

      
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    (v) Environmental Laws.  To the
Company’s knowledge, the Company and the Subsidiaries (i) are in compliance with
all Environmental Laws, (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval where, in any such case in the foregoing
clauses (i), (ii) or (iii), the failure to so comply could be reasonably
expected to have, individually or in the aggregate, a Material Adverse
Effect.

    

    (w) Subsidiary
Rights.  The
Company or one of the Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by the applicable corporation or company law
under which each Subsidiary is formed) to receive dividends and distributions
on, all stock of the Subsidiaries that is owned by the Company or such other
Subsidiary as owns such stock.

    

    (x) Tax Status.  The
Company and each Subsidiary (i) has made or filed all federal and state income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject, (ii) has paid all taxes and other governmental
assessments and charges that are shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith and for
which it has set aside on its books a provision in the amount of such taxes
being contested in good faith and (iii) has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes claimed to be due by the taxing authority of any jurisdiction, and
the officers of the Company know of no basis for any such claim.

    

    (y) Internal Accounting Controls;
Financial Statements.  The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-15 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
1934 Act is accumulated and communicated to the Company's management, including
its principal executive officer or officers and its principal financial officer
or officers, as appropriate, to allow timely decisions regarding required
disclosure. The consolidated financial statements, if any, included in each SEC
Report present fairly and accurately in all material respects the consolidated
financial position of the Company and the Subsidiaries as of the dates reported
and the consolidated results of operations, changes in stockholders' equity and
cash flows for the periods reported, all in conformity with Generally Accepted
Accounting Principles applied on a consistent basis and in conformity with the
rules and regulations of the SEC under the 1934 Act applicable to the Company,
subject, in the case of unaudited financial statements, to (1) normal recurring
year-end adjustments, all of which that are necessary for a fair presentation of
such financial statements have been included, and (2) the absence of all
required notes thereto. Except as set forth in the consolidated financial
statements of the Company included in the SEC Reports, neither the Company nor
any Subsidiary has any liabilities, contingent or otherwise, except those which
individually or in the aggregate are not material to the financial condition or
operating results of the Company and the Subsidiaries, taken as a
whole.

    

    
      
        
        

      

      
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    (z) Sarbanes-Oxley
Act.  The
Company is in compliance with any and all applicable requirements of the
Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and
all applicable rules and regulations promulgated by the SEC thereunder that are
effective as of the date hereof.

    

    (aa) S-3 Eligibility. 
The
Company meets the requirements of Form S-3 for the registration of the resale of
the Registrable Securities.

    

    (bb) Concerning the Collateral. 
 Upon
execution and delivery of the Security Agreement by the Company and the
Collateral Agent and completion of the filings referred to in Schedule I to the
Pledge and Security Agreement and Exhibit C to the
Patent and Trademark Security Agreement, the Collateral Agent will have a first
priority perfected security interest in the Collateral for the ratable benefit
of the holders of the Note and the Other Notes.

    

    (cc) Disclosures. 
For
purposes of this Agreement and the transactions contemplated hereby, none of the
representations or warranties made by the Company under any of the Transaction
Documents and no written information furnished by the Company pursuant hereto,
or in any other document, certificate or written statement furnished by the
Company to the Buyer or any authorized representative of the Buyer, pursuant to
the Transaction Documents or in connection therewith, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein, in light of the
circumstances under which they were made, not misleading.

    

    (dd) 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.

    

    5. CERTAIN
COVENANTS.

    

    (a) Transfer Restrictions. 
The Buyer
acknowledges and agrees that (1) the Note and the Warrant have not been and are
not being registered under the provisions of the 1933 Act or any state
securities laws and, except as provided in Section 8, the Shares have not been
and are not being registered under the 1933 Act or any state securities laws,
and that the Note and the Warrant may not be transferred unless the Buyer shall
have delivered to the Company an opinion of counsel, reasonably satisfactory in
form, scope and substance to the Company, to the effect that the Note or the
Warrant to be transferred may be transferred without such registration; (2) no
sale, conveyance assignment or other transfer of the Note or the Warrant or any
interest therein may be made except in accordance with the terms hereof and
thereof; (3) the Shares may not be resold by the Buyer unless the resale has
been registered under the 1933 Act or is made pursuant to an applicable
exemption from such registration and the Company shall have received the opinion
of counsel provided for in the second to last sentence of this Section 5(a); (4)
any sale of Shares under a Registration Statement shall be made only in
compliance with the terms of this Section 5(a) 

     

     

    
      
        
        

      

      
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    and
Section 8 (including, without limitation, Section 8(c)(4)); (5) any sale of the
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of Rule 144 and further, if the exemption provided by Rule 144 is not
available, any resale of the Securities under circumstances in which the seller,
or the Person through whom the sale is made, may be deemed to be an underwriter,
as that term is used in the 1933 Act, may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC
thereunder;
and (6) the Company is under no obligation to register the Securities (other
than registration of the resale of the Registrable Securities in accordance with
Section 8) under the 1933 Act or, except as provided in Section 5(d) and Section
8, to comply with the terms and conditions of any exemption thereunder. Prior to
the time particular Shares are eligible for resale under Rule 144(k), the Buyer
may not sell the Shares in a transaction which does not constitute a sale
thereof pursuant to the applicable Registration Statement in accordance with the
plan of distribution set forth therein or in any supplement to the related
Prospectus unless the Buyer shall have delivered to the Company an opinion of
counsel, reasonably satisfactory in form, scope and substance to the Company,
that such Shares may be so sold without registration under the 1933 Act. Nothing
in any of the Transaction Documents shall limit the right of a holder of the
Securities to make a bona fide pledge thereof to an institutional lender and the
Company agrees to cooperate with any Investor who seeks to effect any such
pledge by providing such information and making such confirmations as reasonably
requested. The Buyer agrees that any sale by the Buyer of Shares pursuant to a
particular Registration Statement shall be sold in a manner described in the
plan of distribution set forth in the related Prospectus and, if the prospectus
delivery requirement cannot be satisfied by compliance with Rule 153 or 172
under the 1933 Act, (A) if such sale is made through a broker, the Buyer shall
instruct its broker to deliver the Prospectus to the purchaser or purchasers (or
the broker or brokers therefor) in connection with such sale, shall supply
copies of the Prospectus to its broker or brokers and shall instruct its broker
or brokers to deliver such Prospectus to the purchaser in such sale or such
purchaser’s broker, (B) if such sale is made in a transaction directly with a
purchaser and not through the facilities of any securities exchange or market,
the Buyer shall deliver, or cause to be delivered, the Prospectus to such
purchaser; and (C) if such sale is made by any means other than those described
in the immediately preceding clauses (A) and (B), the Buyer shall otherwise use
its best efforts to comply with the prospectus delivery requirements of the 1933
Act applicable to such sale.

    

    (b) Restrictive Legends. 
(1) The
Buyer acknowledges and agrees that the Note shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the Note):

    

    NEITHER
THE ISSUANCE OF THIS NOTE NOR THE ISSUANCE OF THE SECURITIES INTO WHICH THIS
NOTE IS CONVERTIBLE HAVE BEEN 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 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,
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.

    

    
      
        
        

      

      
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    (2) The Buyer
further acknowledges and agrees that the Warrant shall bear a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of the Warrant):

    

    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, 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.

    

    (3) The Buyer
further acknowledges and agrees that until such time as the Shares have been
registered for resale under the 1933 Act as contemplated by Section 8 or are
eligible for resale under Rule 144(k) under the 1933 Act, the certificates for
the Shares may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for the Shares):

    

    The
securities represented by this certificate have not been registered under the
Securities Act of 1933, as amended (the “1933 Act”). The securities have been
acquired for investment and may not be resold, transferred or assigned in the
absence of an effective registration statement for the securities under the 1933
Act or an opinion of counsel that registration is not required under the 1933
Act.

    

    (4) Certificates
evidencing the Shares shall not contain any legend (including the legend set
forth in Section 5(b)(3) hereof): (i) while a registration statement (including
the Registration Statement) covering the resale of such Security is effective
under the 1933 Act, or (ii) following any sale of such Shares pursuant to Rule
144, or (iii) if such Shares are eligible for sale under Rule 144(k), or (iv) if
such legend is not required under applicable requirements of the 1933Act
(including judicial interpretations and pronouncements issued by the SEC). The
Company shall cause its counsel to issue a legal opinion to the Company’s
transfer agent promptly after the SEC 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 Securities are converted or exercised (as applicable) at a
time when there is an effective registration 

     

     

    
      
        
        

      

      
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    statement
to cover the resale of the Shares, or if such Shares may be sold under Rule
144(k) or if such legend is not otherwise required under applicable requirements
of the 1933 Act (including judicial interpretations thereof) then such Shares
shall be issued free of all legends. The Company agrees that following the SEC
Effective Date or at such time as such legend is no longer required under this
Section 5(b)(4), it will, no later than five Trading Days following the delivery
by a Buyer to the Company or the Company’s transfer agent of a certificate
representing Shares, as applicable, deliver or cause to be delivered to such
Buyer 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 Buyers by crediting the account of the Buyer’s prime broker with
the Depository Trust Company System.

    

    (c) Reporting
Status.   During
the Registration Period, the Company shall timely file all reports required to
be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination.

    

    (d) Form D. 
The
Company agrees to file with the SEC on a timely basis one or more Forms D with
respect to the Securities as required under Regulation D to claim the exemption
provided by Rule 506 of Regulation D and to provide a copy thereof to the Buyer
within five Business Days after Buyer requests in writing a copy of such
filing.

    

    (e) State Securities Laws.  
On or
before the Closing Date, the Company shall take such action as shall be
necessary to qualify, or to obtain an exemption for, the offer and sale of the
Securities to the Buyer as contemplated by the Transaction Documents under such
of the securities laws of jurisdictions in the United States as shall be
applicable thereto. Notwithstanding the foregoing obligations of the Company in
this Section 5(e), the Company shall not be required (1) to qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 5(e), (2) to subject itself to general taxation in any such
jurisdiction, (3) to file a general consent to service of process in any such
jurisdiction, (4) to provide any undertakings that cause more than nominal
expense or burden to the Company or (5) to make any change in its certificate or
articles of incorporation or by-laws which the Company determines to be contrary
to the best interests of the Company and its stockholders. The Company shall
furnish the Buyer with copies of all filings, applications, orders and grants or
confirmations of exemptions relating to such securities laws on or before the
Closing Date.

    

    
      
        
        

      

      
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    (f) Limitation on Certain Actions. 
From the
date of execution and delivery of this Agreement by the parties hereto to the
date of issuance of the Note, the Company (1) shall comply with Article III of
the Note as if the Note were outstanding, (2) shall not take any action which,
if the Note were outstanding, (A) would constitute an Event of Default or, with
the giving of notice or the passage of time or both, would constitute an Event
of Default or (B) would constitute a Repurchase Event or, with the giving of
notice or the passage of time or both, would constitute a Repurchase
Event.

    

    (g) Use of Proceeds. 
The
Company represents and warrants to the Buyer, and covenants and agrees with the
Buyer, that: (1) it does not own or have any present intention of acquiring any
Margin Stock; (2) the proceeds of sale of the Note and the Warrant Shares will
be used for general working capital purposes and in the operation of the
Company’s business; provided,
however, that up
to $100,000 of the proceeds of this Note and the Other Notes may be used in
connection with the search for an additional member of senior management
described in Section 3.17(b) of the Note; (3) none of such proceeds will be
used, directly or indirectly (A) to pay any existing debt obligations (other
than normal payables), (B) to make any loan to or investment in any other Person
or (C) for the purpose, whether immediate, incidental or ultimate, of purchasing
or carrying any margin stock or for the purpose of maintaining, reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
stock that is currently a Margin Stock or for any other purpose which might
constitute the transactions contemplated by this Agreement a “purpose credit”
within the meaning of such Regulation U of the Board of Governors of the Federal
Reserve System; and (4) neither the Company nor any agent acting on its behalf
has taken or will take any action which might cause this Agreement or the
transactions contemplated hereby to violate Regulation T, Regulation U or any
other regulation of the Board of Governors of the Federal Reserve System or to
violate the 1934 Act, in each case as in effect now or as the same may hereafter
be in effect.

    

    (h) Best Efforts. 
Each of
the Company, on the one hand, and the Buyer, on the other hand, agree to use
their best efforts timely to satisfy each of the conditions to the other’s
obligations to sell and purchase the Note set forth in Section 6 or 7, as the
case may be, of this Agreement on or before the Closing Date.

    

    (i) Debt Obligation. 
So long
as any portion of the Note is outstanding, the Company shall cause its books and
records to reflect the Note as a debt of the Company in its unpaid principal
amount, shall cause its financial statements to reflect the Note as a debt of
the Company in such amount as shall be the greatest amount permitted in
accordance with Generally Accepted Accounting Principles and, whenever
appropriate, as a valid senior debt obligation of the Company for money
borrowed.

    

    (j) Right of the Buyer to Participate in
Future Transactions.

    

    (1) Right to
Participate. The
Buyer will have a right to participate, on the terms and conditions set forth in
this Section 5(j), in all sales by the Company of any of the Company’s equity
securities or other securities that are convertible into or exchangeable for any
of the Company’s equity securities in each capital raising transaction, if any,
that occurs at any time when the Note, 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 SEC under the 1933 Act and other than a Strategic 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,”
as defined in Regulation D, then the Buyer 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 

     

     

    
      
        
        

      

      
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    written
notice to the Buyer prior to any offer or sale of any of the Company's
securities in such transaction by providing to the Buyer a term sheet which (A)
contains all significant business terms of such proposed transaction, (B) is
sufficiently detailed so as to reasonably permit the Buyer the opportunity to
determine whether or not to exercise its rights under this Section 5(j) and (C)
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 Buyer
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 Buyer). If the Buyer 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 5(j), which notice from the Buyer
shall be conditional upon (A) the Buyer’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 Buyer at or before the
time the Company gives such notice of such transaction to the Buyer, and (B) the
satisfaction of the other conditions precedent to the obligations of buyers
generally in such transaction to complete such transaction. If, subsequent to
the Company giving notice to the Buyer hereunder but prior to any of (i) the
Buyer exercising its right to participate, (ii) the expiration of the four
Business Day period without response from the Buyer or (iii) the rejection of
such offer for such financing by the Buyer, 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 Buyer, the Company shall be required
to provide a new notice and term sheet meeting the requirements of this Section
5(j), reflecting such revised terms, to the Buyer hereunder and the Buyer shall
have the right, which must be exercised within four Business Days of the date
the Buyer 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 Buyer 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 Buyer (assuming the Buyer has
consented to the transaction, if required, pursuant to Section 5(n) 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 Buyer for such proposed transaction. The rights and obligations of this
Section 5(j) shall in no way limit or restrict the other rights of the Buyer
pursuant to this Section 5. Notwithstanding anything herein to the contrary,
failure of the Buyer to affirmatively elect in writing to participate in any
proposed transaction within the required time frames shall be deemed to be the
equivalent of Buyer’s decision not to participate in such proposed transaction.
Notwithstanding the foregoing, this Section 5(j)(1) shall not apply in respect
of an Exempt Issuance.

    

    
      
        
        

      

      
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    (2) Limitation on Right of
Participation.
Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired directly or through acquisition of Common Stock Equivalents
by the Buyer pursuant to any transaction to which this Section 5(j) applies
shall not at any one time exceed a number that, when added to the total number
of shares of Common Stock deemed beneficially owned by the Buyer (other than by
virtue of the ownership of securities or rights to acquire securities (including
the Note and the Warrant) that have limitations on the Buyer’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 ownership of Excluded Shares) by Persons
whose beneficial ownership of Common Stock would be aggregated with the
beneficial ownership of the Buyer for purposes of determining whether a group
exists or for purposes of determining the Buyer’s beneficial ownership, in
either such case for purposes of Section 13(d) of the 1934 Act and Regulation
13D-G thereunder, would result in beneficial ownership by the Buyer or such
group of more than 9.9% of the shares of the Company's Common Stock (the
“Restricted Ownership Percentage”), computed in accordance with Regulation
13D-G. The Buyer shall have the right at any time and from time to time to
reduce its Restricted Ownership Percentage immediately upon notice to the
Company in the event and only to the extent that Section 16 of the 1934 Act or
the rules promulgated thereunder (or any successor statute or rules) is changed
to reduce the beneficial ownership percentage threshold thereunder to a
percentage less than 10%. If the Buyer would otherwise be unable by reason of
the Restricted Ownership Percentage to acquire the full amount of securities
which the Buyer would otherwise be entitled to acquire in a particular
transaction pursuant to this Section 5(j) then (A) the Company shall include in
the terms of the securities which the Buyer is entitled to purchase in such
transaction under this Section 5(j) a provision comparable to Section
6.7 of the
Note and (B) if, notwithstanding the inclusion of the provision required by the
immediately preceding clause (1), the Buyer remains unable to acquire the full
amount of securities which the Buyer would otherwise be entitled to acquire
under this Section 5(j), the Buyer’s right to acquire such securities shall be
deferred and if thereafter, at any time or from time to time the Buyer could
acquire all or any part of such securities without exceeding its Restricted
Ownership Percentage, then the Buyer shall be entitled to acquire such
securities at such time or form time to time. The Buyer will provide notice to
the Company when it becomes able to purchase all or any part of such securities
and the closing of each such purchase shall occur on the date that is five
Business Days after the Buyer gives such notice.

    

    (3) Right Applicable to Successive
Transactions. The
rights of the Buyer under this Section 5(j) shall apply to all capital raising
transactions described in Section 5(j)(1) that occur during the period specified
in Section 5(j)(1).

    

    (k) Press
Releases.

    Any press
release or other publicity concerning this Agreement or the transactions
contemplated by this Agreement shall be submitted to the Buyer 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 closing on the Closing Date or as
promptly as possible thereafter on the Closing Date, issue a press release, in
the form of Annex VI hereto,
concerning the transactions contemplated hereby. The Company's other press
releases and other public information, to the extent concerning the Transaction
Documents, shall contain such information as reasonably requested by the Buyer
and be reasonably approved by the Buyer prior to issuance. 

    

    
      
        
        

      

      
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    (l) Form 8-K; Limitation on Information
and Buyer Obligations.  (1)
Within two Business Days after the Closing Date, the Company will publicly
report the issue and sale of the Note and Warrant and the securities issued
pursuant to the Other Purchase Agreements entered into on or before the Closing
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 Buyer shall not be in possession of any material nonpublic
information received from the Company, 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 Buyer 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 Buyer.

    

    (m) Limitation on Certain
Transactions.  From the
date of this Agreement until after the SEC Effective Date of the Registration
Statement contemplated by Section 8(a)(1), without the prior written consent of
the Buyer (which consent may be withheld in the Buyer’s sole discretion), the
Company shall not issue or sell or agree to issue or sell any securities (aside
from the Other Notes and the Other Warrants) in a capital raising transaction,
unless such securities will not be, and are not, registered for sale or resale
under the 1933 Act until on or after such SEC Effective Date; provided, however,
that the limitation of this Section 5(m) shall not apply to (a) shares of Common
Stock or options to employees, officers, directors or consultants of the Company
pursuant to 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) 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 (c)
securities issued pursuant to acquisitions or strategic transactions, 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 (collectively, an “Exempt
Issuance”). The Company agrees that, except for the amounts of securities to be
purchased and the name of the buyer and the Restricted Ownership Percentage, the
terms and provisions of the Other Notes and the Other Warrants shall be
identical to the Note and the Warrant.

    

    
      
        
        

      

      
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    (n) Debt Obligation. 
 So long
as any portion of the Note is outstanding, the Company shall cause its books and
records to reflect the Note as a debt of the Company in its unpaid principal
amount, shall cause its financial statements to reflect the Note as a debt of
the Company in accordance with Generally Accepted Accounting Principles and as a
valid senior debt obligation of the Company for money borrowed that is secured
by the Collateral (unless all Collateral shall have been released pursuant to
the Security Agreement and the security interest thereunder shall have
terminated).

    

    (o) Security Agreement; Financing
Statements, Etc.  The
Company agrees to execute and deliver to the Collateral Agent at or before the
closing on the Closing Date the Patent and Trademark Security Agreement in the
form attached hereto as Annex III and the
Pledge and Security Agreement in the form attached hereto as Annex IV. The
Company shall prepare and at or before the closing on the Closing Date file with
the appropriate officials, Uniform Commercial Code financing statements on Form
UCC-1 relating to the Collateral in which the Company is granting a security
interest to the Collateral Agent for the benefit of the holders of the Note and
the Other Notes pursuant to the Pledge and Security Agreement and prepare and
file with the PTO appropriate documents relating to the Collateral in which the
Company is granting a security interest to the Collateral Agent for the benefit
of the holders of the Note and the Other Note pursuant to the Patent and
Trademark Security Agreement. Prior to the closing on the Closing Date, the
Company shall provide to the Buyer evidence of such filings and customary,
current search reports of the relevant Uniform Commercial Code filing offices
and the PTO.

    

    (p) Stockholder Approval;
Reverse Stock
Split.

    

    (1) Stockholder
Approval. The
Company shall seek, and use its best efforts to obtain, on or before the date
which is 90 days after the Closing Date, stockholder approval of the issuance of
the Shares in accordance with the terms of the Notes and the Warrants, which
approval shall meet the requirements of Rule 713 of the AMEX set forth in the
AMEX Company Guide (“Stockholder Approval”). The Company shall call a meeting of
stockholders (the “Stockholder Meeting”) to be held within 90 days after the
Closing Date, shall prepare and file with the SEC as promptly as practical, but
in no event later than 30 days after the Closing Date, preliminary proxy
materials which set forth a proposal to seek the Stockholder Approval, and the
Board of Directors shall recommend approval thereof by the Company’s
stockholders. The Company shall mail and distribute its proxy materials for the
Stockholder Meeting to its stockholders at least 30 days prior to the date of
the Stockholder Meeting, shall actively solicit proxies to vote for the
Stockholder Approval, and within 30 days after the Closing Date shall retain a
proxy solicitation firm of recognized national standing to assist in the
solicitation. The Company shall provide the Buyer an opportunity to review and
comment on such proxy materials by providing (which may be by e-mail) copies of
such proxy materials and any revised preliminary proxy materials to the Buyer a
reasonable period of time prior to their filing with the SEC. The Company shall
provide the Buyer (which may be by e-mail) copies of all correspondence from or
to the SEC or its staff concerning the proxy materials for the Stockholder
Meeting promptly after the same is sent or received by the Company and summaries
of any comments of the SEC staff which the Company receives orally promptly
after receiving such oral comments. The Company shall furnish to the Buyer and
its legal counsel (which may be by e-mail) a copy of its definitive proxy
materials for the Stockholder Meeting and any amendments or supplements thereto
promptly after the same are first used, mailed to stockholders or filed with the
SEC, shall inform the Buyer of the progress of solicitation of proxies for such
meeting and shall inform the Buyer of any adjournment of the Stockholder Meeting
and shall report the result of the vote of stockholders on such proposition at
the conclusion of the Stockholder Meeting. If the Company fails to obtain such
Stockholder Approval, the Company shall call a meeting of stockholders every 90
days thereafter until such Stockholder Approval is obtained, and the Company’s
seeking of such Stockholder Approval shall be conducted in accordance with the
requirements of this Section 5(p)(1).

    

    
      
        
        

      

      
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    (2) Reverse Stock
Split. In
connection with the Stockholder Meeting, the Company shall also seek, and use
its best efforts to obtain, on or before the date that is 90 days after the
Closing Date a reverse split of its Common Stock of not less than one for each
ten shares of Common Stock outstanding prior thereto (the “Reverse Stock
Split”). The Company shall include the Reverse Stock Split in the preliminary,
revised preliminary and definitive proxy materials prepared, filed with the SEC
and used for the Stockholder Approval, and the Company’s seeking of approval of
the Reverse Stock Split shall be conducted in accordance with the requirements
of Section 5(p)(1).

     

    (q) Short Sales and Confidentiality
After The Date Hereof.  The Buyer
covenants that neither it nor any affiliates acting on its behalf or pursuant to
any understanding with it will execute any Short Sales during the period
commencing
from the time
that the Buyer first received a term sheet from the Company or any other Person
setting forth the material terms of the transactions contemplated hereunder and
ending on the earlier of (i) the date that the transactions contemplated by this
Agreement are first publicly announced as described in Section 5(k) and (ii) the
date, if applicable, that this Agreement is terminated pursuant to Section
10(l). The Buyer covenants that until such time as the transactions contemplated
by this Agreement are publicly disclosed by the Company as described in Section
5(k) or the earlier termination of this Agreement, the Buyer will maintain the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction). The Buyer
understands and acknowledges that the SEC currently takes the position that
coverage of short sales of shares of the Common Stock “against the box” prior to
the effective date of the Registration Statement with the Securities is a
violation of Section 5 of the 1933 Act, as set forth in Item 65, Section 5 under
Section A, of the Manual of Publicly Available Telephone Interpretations, dated
July 1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance. Notwithstanding the foregoing, the Buyer does not make any
representation, warranty or covenant hereby that it will not engage in Short
Sales in the securities of the Company after the earlier of (i) the date that
the transactions contemplated by this Agreement are first publicly announced as
described in Section 5(k) and (ii) the date, if applicable, that this Agreement
is terminated pursuant to Section 10(l). Notwithstanding the foregoing, in the
case of a Buyer that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Buyer's assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Buyer's assets, the
covenant 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.

    

    
      
        
        

      

      
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    6. CONDITIONS TO THE COMPANY’S
OBLIGATION TO SELL.

    

    The Buyer
understands that the Company’s obligation to sell the Note and issue the Warrant
to the Buyer pursuant to this Agreement is conditioned upon satisfaction of the
following conditions precedent on or before the Closing Date (any or all of
which may be waived by the Company in its sole discretion):

    

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

    

    (b) The
representations and warranties of the Buyer contained in this Agreement shall
have been true and correct on the date of this Agreement and on the Closing Date
as if made on the Closing Date and on or before the Closing Date the Buyer shall
have performed all covenants and agreements of the Buyer contained in this
Agreement and required to be performed by the Buyer on or before the Closing
Date.

    

    7. CONDITIONS TO THE BUYER’S OBLIGATION
TO PURCHASE. 

    

    The
Company understands that the Buyer’s obligation to purchase the Note and acquire
the Warrant is conditioned upon satisfaction of the following conditions
precedent on or before the Closing Date (any or all of which may be waived by
the Buyer in its sole discretion):

    

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

    

    (b) The
representations and warranties of the Company contained in this Agreement shall
have been true and correct on the date of this Agreement and shall be true and
correct on the Closing Date as if given on and as of the Closing 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 Closing Date the Company
shall have performed all covenants and agreements of the Company contained
herein or in any of the other Transaction Documents required to be performed by
the Company on or before the Closing Date;

    

    (c) No event
which, if the Note were outstanding, (1) would constitute an Event of Default or
which, with the giving of notice or the passage of time, or both, would
constitute an Event of Default shall have occurred and be continuing or (2)
would constitute a Repurchase Event or which, with the giving of notice or the
passage of time, or both, would constitute a Repurchase Event shall have
occurred and be continuing;

    

    
      
        
        

      

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

    

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

    

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

    

    (g) The Buyer
shall have received from the Company customary, current search reports of the
relevant Uniform Commercial Code filing offices, the content of which reports
shall be satisfactory to the Buyer;

    

    (h) All
filings of financing statements necessary or appropriate under the Uniform
Commercial Code in connection with the Pledge and Security Agreement shall have
been made, and the Buyer shall have received satisfactory evidence of such
filings;

    

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

    

    (j) The Buyer
shall have received from the Company customary, current search reports of the
PTO, the content of which reports shall be satisfactory to the
Buyer;

    

    (k) All
filings with the PTO necessary or appropriate in connection with the Patent and
Trademark Security Agreement shall have been made, and the Buyer shall have
received satisfactory evidence of such filings;

    

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

    

    (m) The
Conversion Shares and the Warrant Shares shall have been approved for listing,
subject only to official notice of issuance, by the AMEX and the Buyer shall
have received written evidence of such approval by the AMEX; 

    

    (n) On the
Closing Date, the Buyer shall have received an opinion of Sichenzia Ross
Friedman Ference LLP, counsel for the Company, dated the Closing Date, addressed
to the Buyer, in the form attached as Annex VII and
otherwise in form, scope and substance reasonably satisfactory to the Buyer and
an opinion of Epstein Drangel Bazerman & James, LLP, intellectual property
counsel for the Company, dated the Closing Date, addressed to the Buyer, in the
form attached as Annex VIII and
otherwise in form, scope and substance reasonably satisfactory to the Buyer;
and

    

    
      
        
        

      

      
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    (o) On the
Closing Date, (i) trading in securities on the New York Stock Exchange, Inc.,
the AMEX, Nasdaq or the Nasdaq Capital Market shall not have been suspended or
materially limited and (ii) a general moratorium on commercial banking
activities in the State of New York shall not have been declared by either
federal or state authorities.

    

    (p) John
Atherly shall have executed and delivered to the Buyers and the Company a Lockup
Agreement in the form attached as Annex IX.

    

    8. REGISTRATION
RIGHTS.

    

    (a) Mandatory Registration. 
(1) The
Company shall prepare and, as expeditiously as possible, but in no event later
than the date which is 30 days after the Closing Date, file with the SEC a
Registration Statement which covers the resale by the Buyer 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 Note plus (B) the
number of Warrant Shares issuable upon exercise of the Warrant, as Registrable
Securities, and which Registration Statement shall state that, in accordance
with Rule 416 under the 1933 Act, such Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become issuable
upon conversion of the Note or exercise of the Warrant to prevent dilution
resulting from stock splits, stock dividends or similar transactions.

    

    (2) Prior to
the earlier of the (i) SEC Effective Date, or (ii) two (2) years from the date
hereof, the Company shall not file any other registration statement or any
amendment thereto with the SEC under the 1933 Act or request the acceleration of
the effectiveness of any other registration statement previously filed with the
SEC, other than (A) any registration statement on Form S-8 and (B) any
registration statement or amendment which the Company is required to file, or as
to which the Company is required to request acceleration, pursuant to any
obligation in effect on the date of execution and delivery of this
Agreement.

    

    (3) If at any
time or from time to time after the Closing Date any Investor shall hold or be
the beneficial owner of any Registrable Securities, other than those Registrable
Securities included in the Registration Statement that the Company is required
to file under Section 8(a)(1), which Registrable Securities are not covered by a
Registration Statement, then promptly following the written demand of any
Investor following the issuance of such additional Registrable Securities or the
issuance of any securities convertible into, exchangeable for, or otherwise
entitling an Investor to acquire, such additional Registrable Securities, and in
any event within 30 days following such demand, the Company shall prepare and
file with the SEC a new Registration Statement on Form S-3 (or, if Form S-3 is
not then available to the Company, on such form of registration statement as is
then available to effect a registration for resale of such additional
Registrable Securities) covering the resale by such Investor of such additional
Registrable Securities. Such Registration Statement also shall cover, to the
extent permitted by the 1933 Act and the rules promulgated thereunder (including
Rule 416), such indeterminate number of additional securities resulting from
stock splits, stock dividends or similar transactions with respect to such
additional Registrable Securities. Nothing herein shall limit the Company’s
obligations or any Investor’s rights under Section 6.4 of the Note or Section 9
of the Warrant.

    

    
      
        
        

      

      
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    (4) If a
Payment Event occurs, then the Company will make payments to the Buyer, in
immediately available funds in lawful money of the United States, as partial
liquidated damages for the minimum amount of damages to the Buyer by reason
thereof, and not as a penalty, which payments shall accrue at the rate of 1.0%
per month of the principal amount of the Note at the time outstanding during
each Payment Period. Each such payment shall be due and payable within five
Business Days after the end of each calendar month during which any Payment
Period occurs until the termination of such Payment Period and within five
Business Days after such termination. Such payments shall be in partial
compensation to the Buyer, and shall not constitute the Buyer’s exclusive remedy
for any Payment Event. A particular Payment Period shall terminate upon (u) the
filing of the applicable Registration Statement, in the case of clause (i) of
the definition of “Payment Event”; (v) the applicable SEC Effective Date for the
particular Registration Statement, in the case of clause (ii) or (iii) of the
definition of “Payment Event”; (w) the ability of the Buyer to effect sales
pursuant to the applicable Registration Statement, in the case of clause (iv) of
the definition of “Payment Event”; (x) the listing or inclusion and/or trading
of the Common Stock on a Trading Market, as the case may be, in the case of
clause (v) of the definition of “Payment Event”; (y) the issuance and delivery
of the shares, in the case of clause (vi) of the definition of “Payment Event”;
and (z) in the case of the events described in clauses (ii), (iii) and (iv) of
the definition of “Payment Event”, the earlier termination of the Registration
Period, and in each such case in the preceding clauses (u) thorough (z), any
Payment Period that commenced by reason of the occurrence of any Payment Event
shall terminate if at the time (1) no other Payment Event is continuing or (2)
subject to the rights of any transferee under Section 10(j), the Buyer no longer
holds any portion of the Note or any Registrable Securities. Notwithstanding any
other provision of this Section 8(a)(4) to the contrary, the Company shall not
be obligated to make any payments hereunder for Payment Periods in excess of an
aggregate of 548 days. If the Company fails to pay any liquidated damages
pursuant to this Section in full within three days after the date payable, the
Company will pay interest thereon at a rate of 16% per annum (or such lesser
rate as is the highest rate permitted by applicable law) to the Buyer, accruing
daily from the date such liquidated damages are due until such amounts, plus all
such interest thereon, are paid in full.

    

    (b) Obligations of the Company. 
In
connection with the registration of the Registrable Securities, the Company
shall:

    

    (1) use its
best efforts to cause each Registration Statement to become effective as
promptly as possible after the filing thereof and to
keep such Registration Statement effective at all times during the Registration
Period. The Company shall submit to the SEC, within three Business Days after
the Company learns that no review of such Registration Statement will be made by
the staff of the SEC or that the staff of the SEC has no further comments on
such Registration Statement, as the case may be, a request for acceleration of
effectiveness of such Registration Statement to a time and date not later than
48 hours after the submission of such request. The Company represents and
warrants to the Investors that (a) each Registration Statement (including any
amendment or supplement thereto and prospectus contained therein), at the time
it is first filed with the SEC, at the time it is ordered effective by the SEC
and at all times during which it is required to be effective hereunder (and each
such amendment and supplement at the time it is filed with the SEC and at all
times during which it is available for use in connection with the offer and sale
of the Registrable Securities) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (b) each Prospectus,
at the time the related Registration Statement is declared effective by the SEC
and at all times that such Prospectus is required by this Agreement to be
available for use by any Investor and, in accordance with Section 8(c)(4), any
Investor is entitled to sell Registrable Securities pursuant to such Prospectus,
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading;

    

    
      
        
        

      

      
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    (2) subject
to Section 8(b)(5), prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to each Registration Statement and
Prospectus as may be necessary to keep such Registration Statement effective,
and such Prospectus current, at all times during the Registration Period, and,
during the Registration Period (other than during any Blackout Period during
which the provisions of Section 8(b)(5)(B) are applicable), comply with the
provisions of the 1933 Act applicable to the Company in order to permit the
disposition by the Investors of all Registrable Securities covered by such
Registration Statement;

    

    (3) furnish
to Investors whose Registrable Securities are included in a particular
Registration Statement and such Investors’ respective legal counsel, promptly
after the same is prepared and publicly distributed, filed with the SEC or
received by the Company, (1) one conformed copy of such Registration Statement
and any amendment thereto and the related Prospectus and each amendment or
supplement thereto and (2) such number of copies of such Prospectus and all
amendments and supplements thereto and such other documents, as such Investor
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor; and notify the Investor and its legal counsel
within one Business Day after the same is filed with the SEC, or received by the
Company, of the filing or receipt of each letter written by or on behalf on the
Company to the SEC or the staff of the SEC, and each item of correspondence from
the SEC or the staff of the SEC, in each case relating to such Registration
Statement (other than any portion of any thereof which contains information for
which the Company has sought confidential treatment), and permit counsel
designed by the Investor to review letters and items of correspondence upon the
request of such counsel;

    

    (4) subject
to Section 8(b)(5), use its best efforts (i) to register and qualify the
Registrable Securities covered by each Registration Statement under the
securities or blue sky laws of such jurisdictions as any Investor who owns or
holds any Registrable Securities reasonably requests, (ii) to prepare and to
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times during the
Registration Period and (iii) to take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale by the Investors in
such jurisdictions; provided,
however, that the
Company shall not be required in connection therewith or as a condition thereto
(I) to qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 8(b)(4), (II) to subject itself to
general taxation in any such jurisdiction, (III) to file a general consent to
service of process in any such jurisdiction, (IV) to provide any undertakings
that cause more than nominal expense or burden to the Company or (V) to make any
change in its certificate or article of incorporation or by-laws which the Board
of Directors of the Company determines to be contrary to the best interests of
the Company and its stockholders;

    

    
      
        
        

      

      
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    (5) (A) as
promptly as practicable after becoming aware of such event or circumstance,
notify each Investor of the occurrence of any event or circumstance of which the
Company has knowledge (x) as a result of which any Prospectus, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, (y) which requires the Company to amend or supplement any
Registration Statement due to the receipt from an Investor or any other selling
stockholder named in the Prospectus of new or additional information about such
Investor or selling stockholder or its intended plan of distribution of its
Registrable Securities or other securities covered by such Registration
Statement, or (z) which requires the Company to amend or supplement any
Registration Statement pursuant to the Company’s undertakings as set forth in
the Registration Statement and in Item 512 of Regulation S-K under the 1933 Act,
and use its best efforts promptly to prepare a supplement or amendment to such
Registration Statement and Prospectus to correct such untrue statement or
omission or to add any new or additional information, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request;

    

    (B) notwithstanding
Section 8(b)(5)(A) above, if at any time the Company notifies the Investors as
contemplated by Section 8(b)(5)(A) with respect to a particular Registration
Statement or Prospectus the Company also notifies the Investors that the event
giving rise to such notice relates to a development involving the Company which
occurred subsequent to the later of (x) the SEC Effective Date of the applicable
Registration Statement and (y) the latest date prior to such notice on which the
Company has amended or supplemented such Registration Statement, then the
Company shall not be required to use best efforts to make such amendment during
a Blackout Period; provided,
however, that in
any period of 365 consecutive days the Company shall not be entitled to avail
itself of its rights under this Section 8(b)(5)(B) with respect to more than two
Blackout Periods; and provided further, however,
that no
Blackout Period may commence sooner than 90 days after the end of an earlier
Blackout Period;

    

    (6) as
promptly as practicable after becoming aware of such event, notify each Investor
who holds Registrable Securities being offered or sold pursuant to a particular
Registration Statement of the issuance by the SEC of any stop order or other
suspension of effectiveness of such Registration Statement at the earliest
possible time;

    

    (7) permit
the Investors who hold Registrable Securities being included in a particular
Registration Statement (or their designee) and their counsel to review and have
a reasonable opportunity to comment on such Registration Statement and any
related Prospectus and all amendments and supplements thereto at least two
Business Days prior to their filing with the SEC;

    

    
      
        
        

      

      
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    (8) make
generally available to its security holders as soon as practical, but not later
than 90 days after the close of the period covered thereby, an earning statement
(in form complying with the provisions of Rule 158 under the 1933 Act) covering
a 12-month period beginning not later than the first day of the Company’s fiscal
quarter next following the SEC Effective Date of each Registration
Statement;

    

    (9) make
available for inspection by any Investor and any Inspector retained by such
Investor, at such Investor’s sole expense, all Records as shall be reasonably
necessary or appropriate to enable such Investor to exercise due diligence for
purposes of the 1933 Act and the 1934 Act as it relates to the Registration
Statement and cause the Company’s and the Subsidiaries officers, directors and
employees to supply all information which such Investor or Inspector may
reasonably request for purposes of such due diligence; provided, however,
that such
Investor shall hold in confidence and shall not make any disclosure of any
Record or other information which the Company determines in good faith to be
confidential, and of which determination such Investor is so notified, unless
(i) the disclosure of such Record is necessary to avoid or correct a
misstatement or omission in a Registration Statement or Prospectus and a
reasonable time prior to such disclosure the Investor shall have notified the
Company of the need to so correct such misstatement or omission and the Company
shall have failed to correct such misstatement or omission, (ii) the release of
such Record is ordered pursuant to a subpoena or other order from a court or
governmental body of competent jurisdiction or (iii) the information in such
Record has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into a confidentiality agreement
with the Company with respect thereto, substantially in the form of this Section
8(b)(9), which agreement shall permit such Inspector to disclose Records to the
Investor who has retained such Inspector. Each Investor agrees that it shall,
upon learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at the Company’s expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. The Company shall hold in confidence
and shall not make any disclosure of information concerning an Investor provided
to the Company pursuant to this Agreement unless (i) the disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in a Registration Statement or the related Prospectus,
(iii) the release of such information is ordered pursuant to a subpoena or other
order from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor and
allow such Investor, at such Investor’s expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, such
information;

    

    (10) use its
best efforts to cause all the Registrable Securities covered by a particular
Registration Statement as of the SEC Effective Date of such Registration
Statement to be listed, quoted or traded on the principal securities market on
which securities of the same class or series issued by the Company are then
listed, quoted or traded;

    

    
      
        
        

      

      
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    (11) provide a
transfer agent and registrar, which may be a single entity, for the Registrable
Securities at all times;

    

    (12) cooperate
with the Investors who hold Registrable Securities being offered pursuant to a
particular Registration Statement to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legends) representing
Registrable Securities to be offered pursuant to such Registration Statement and
enable such certificates to be in such denominations or amounts as the Investors
may reasonably request and registered in such names as the Investors may
request; and, not later than the SEC Effective Date of such Registration
Statement, the Company shall cause legal counsel selected by the Company to
deliver to the Investors whose Registrable Securities are included in the
Registration Statement opinions of counsel in form and substance as is
customarily given to underwriters in an underwritten public offering;

    

    (13) advise
the Investors in writing on the date that the Registration Statement is declared
effective by the SEC that the form of Prospectus contained in the Registration
Statement at the time of effectiveness meets the requirements of Section 10(a)
of the 1933 Act or that it intends to file a Prospectus pursuant to Rule 424(b)
that meets the requirements of Section 10(a) of the 1933 Act;

    

    (14) during
the Registration Period, the Company shall not bid for or purchase any Common
Stock or any right to purchase Common Stock or attempt to induce any Person to
purchase any such security or right if such bid, purchase or attempt would in
any way limit the right of the Investors to sell Registrable Securities by
reason of the limitations set forth in Regulation M under the 1934 Act;
and

    

    (15) take all
other reasonable actions necessary to expedite and facilitate disposition by the
Investors of the Registrable Securities pursuant to the Registration Statement
relating thereto.

    

    (c) Obligations of the Buyer and other
Investors.  In
connection with the registration of the Registrable Securities, the Investors
shall have the following obligations:

    

    (1) It shall
be a condition precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Investor that such Investor shall furnish to the
Company completed Selling Securityholder Questionnaire in the form attached
hereto as Exhibit A and
shall execute such other documents in connection with such registration as the
Company may reasonably request.

    

    (2) Each
Investor by such Investor’s acceptance of the Registrable Securities agrees to
cooperate with the Company as reasonably requested by the Company in connection
with the preparation and filing of each Registration Statement hereunder that
covers such Registrable Securities, unless such Investor has notified the
Company of such Investor’s election to exclude all of such Investor’s
Registrable Securities from such Registration Statement;

    

    
      
        
        

      

      
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    (3) Each
Investor agrees that it will not effect any disposition of the Registrable
Securities except as contemplated in the applicable Registration Statement or
Prospectus or as otherwise is in compliance with applicable securities laws and
that it will promptly notify the Company of any material changes in the
information set forth in the Registration Statement regarding such Investor or
its plan of distribution before selling any Registrable Securities pursuant to
such Registration Statement or Prospectus subsequent to such material change;
each Investor agrees (a) to notify the Company in writing in the event that such
Investor enters into any material agreement with a broker or a dealer for the
sale pursuant to a Registration Statement of Registrable Securities through a
block trade, special offering, exchange distribution or a purchase by a broker
or dealer and (b) in connection with such agreement, to provide to the Company
in writing the information necessary to prepare any supplemental Prospectus
pursuant to Rule 424(c) under the 1933 Act which is required with respect to
such transaction; and

    

    (4) Each
Investor acknowledges that there may occasionally be times as specified in
Section 8(b)(5) or 8(b)(6) when the Company must suspend the use of a Prospectus
until such time as an amendment to the related Registration Statement has been
filed by the Company and declared effective by the SEC, the Company has prepared
a supplement to such Prospectus or the Company has filed an appropriate report
with the SEC pursuant to the 1934 Act. Each Investor hereby covenants that it
will not sell any Registrable Securities pursuant to such Prospectus during the
period commencing at the time at which the Company gives such Investor notice of
the suspension of the use of such Prospectus in accordance with Section 8(b)(5)
or 8(b)(6) and ending at the time the Company gives such Investor notice that
such Investor may thereafter effect sales pursuant to the Prospectus, or until
the Company delivers to such Investor or files with the SEC an amended or
supplemented Prospectus.

    

    (d) Rule 144. 
 With a
view to making available to each Investor the benefits of Rule 144, the Company
agrees:

    

    (1) so long
as any Investor owns Registrable Securities, promptly upon request of such
Investor, to furnish to such Investor such information as may be necessary to
permit such Investor to sell Registrable Securities pursuant to Rule 144 without
registration and otherwise reasonably to cooperate with such Investor
and

    

    (2) if at any
time the Company is not required by applicable law or this Agreement to file
reports with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, to use its
best efforts, upon the request of an Investor, to make publicly available other
information so long as is necessary to permit publication by brokers and dealers
of quotations for the Common Stock and sales of the Registrable Securities in
accordance with Rule 15c2-11 under the 1934 Act.

    

    9. INDEMNIFICATION AND
CONTRIBUTION.

    

    (a) Indemnification. 
(1) To
the extent not prohibited by applicable law, the Company will indemnify and hold
harmless each Indemnified Person against any Claims to which any of them may
become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claims (or actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any Violation. Subject to the
restrictions set forth in Section 9(a)(3) with respect to the number of legal
counsel, the Company shall  reimburse the

     

    
      
        
        

      

      
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     Investors
and each such controlling Person, promptly as such expenses are incurred and are
due and payable, for any documented reasonable legal fees or other documented
and reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 9(a)(1) shall
not apply to: (I) a Claim arising out of or based upon a Violation which occurs
in reliance upon and in conformity with information relating to an Indemnified
Person furnished in writing to the Company by such Indemnified Person or an
underwriter for such Indemnified Person expressly for use in connection with the
preparation of any Registration Statement or any such amendment thereof or
supplement thereto; (II) any Claim arising out of or based on any statement or
omission in any Prospectus, which statement or omission was corrected in any
subsequent Prospectus that was delivered to the Indemnified Person prior to the
pertinent sale or sales of Registrable Securities by such Indemnified Person;
and (III) amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors.

    

    (2) In
connection with each Registration Statement, each Investor who is named as a
selling stockholder in such Registration Statement agrees to indemnify and hold
harmless, to the same extent and in the same manner set forth in Section
9(a)(1), each Indemnified Party against any Claim to which any of them may
become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim arises out of or is based upon any Violation, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement or any
amendment thereof or supplement thereto; and such Investor will reimburse any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such Claim; provided,
however, that
the indemnity agreement contained in this Section 9(a)(2) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor; provided,
further,
however, that an
Investor shall be liable under this Section 9(a)(2) for only that amount of all
Claims in the aggregate as does not exceed the amount by which the proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement exceeds the amount paid by such Investor for such
Registrable Securities or for the Common Stock Equivalents pursuant to which
such Registrable Securities were issued, as the case may be. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 9(a)(2) with respect to any preliminary prospectus shall not inure to
the benefit of any Indemnified Party if the untrue statement or omission of
material fact contained in such preliminary prospectus was corrected on a timely
basis in the related Prospectus, as then amended or supplemented.

    

    
      
        
        

      

      
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    (3) Promptly
after receipt by an Indemnified Person or Indemnified Party under this Section
9(a) of notice of the commencement of any action (including any governmental
action), such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section
9(a), deliver to the indemnifying party a notice of the commencement thereof and
the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
reasonably satisfactory to the Indemnified Person or the Indemnified Party, as
the case may be; provided,
however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding, in which case the
indemnifying party shall not be responsible for more than one such separate
counsel, and one local counsel in each jurisdiction in which an action is
pending, for all Indemnified Persons or Indemnified Parties, as the case may be.
The failure to deliver notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying party
of any liability to the Indemnified Person or Indemnified Party under this
Section 9(a), except to the extent that the indemnifying party is prejudiced in
its ability to defend such action. The indemnification required by this Section
9(a) shall be made by periodic payments of the amount thereof during the course
of the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.

    

    (b) Contribution.
To the
extent any indemnification by an indemnifying party as set forth in Section 9(a)
above is applicable by its terms but is prohibited or limited by law, the
indemnifying party agrees to make the maximum contribution with respect to any
amounts for which it would otherwise be liable under Section 9(a) to the fullest
extent permitted by law. In determining the amount of contribution to which the
respective parties are entitled, there shall be considered the relative fault of
each party, the parties’ relative knowledge of and access to information
concerning the matter with respect to which the claim was asserted, the
opportunity to correct and prevent any statement or omission and any other
equitable considerations appropriate under the circumstances; provided,
however, that
(a) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 9(a), (b) no Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any other Person who was not guilty of such fraudulent misrepresentation and (c)
the aggregate contribution by any seller of Registrable Securities shall be
limited to the amount by which the proceeds received by such seller from the
sale of such Registrable Securities exceeds the amount paid by such Investor for
such Registrable Securities or for the Common Stock Equivalents pursuant to
which such Registrable Securities were issued, as the case may be.

    

    (c) Other Rights.
The
indemnification and contribution provided in this Section shall be in addition
to any other rights and remedies available at law or in equity.

     

     

    
      
        
        

      

      
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    10. MISCELLANEOUS.

    

    (a)  Governing Law. 
THIS
AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.

    

    (b) Headings. 
 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.

    

    (c) 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.

    

    (d) Notices. 
 Any
notices required or permitted to be given under the terms of this Agreement
shall be in writing and shall be sent by certified mail, personal delivery,
telephone line facsimile transmission or courier and shall be effective five
days after being placed in the mail, if mailed, or upon receipt, if delivered
personally, by telephone line facsimile transmission or by courier, in each case
addressed to a party at such party’s address (or telephone line facsimile
transmission number) shown in the introductory paragraph or on the signature
page of this Agreement or such other address (or telephone line facsimile
transmission number) as a party shall have provided by notice to the other party
in accordance with this provision. In the case of any notice to the Company,
such notice shall be addressed to the Company at its address shown in the
introductory paragraph of this Agreement, Attention: Chief Executive Officer
(telephone line facsimile number (425) 749-3601).

    

    (e) Counterparts. 
This
Agreement may be executed in counterparts and by the parties hereto on separate
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument. A telephone line
facsimile transmission of this Agreement bearing a signature on behalf of a
party hereto shall be legal and binding on such party. Although this Agreement
is dated as of the date first set forth above, the actual date of execution and
delivery of this Agreement by each party is the date set forth below such
party’s signature on the signature page hereof. Any reference in this Agreement
or in any of the documents executed and delivered by the parties hereto in
connection herewith to (1) the date of execution and delivery of this Agreement
by the Buyer shall be deemed a reference to the date set forth below the Buyer’s
signature on the signature page hereof, (2) the date of execution and delivery
of this Agreement by the Company shall be deemed a reference to the date set
forth below the Company’s signature on the signature page hereof and (3) the
date of execution and delivery of this Agreement, or the date of execution and
delivery of this Agreement by the Buyer and the Company, shall be deemed a
reference to the later of the dates set forth below the signatures of the
parties on the signature page hereof.

    

    (f) Entire Agreement; Benefit. 
This
Agreement, including the Annexes, Schedules and Exhibits hereto, constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof. There are no restrictions, promises, warranties, or undertakings, other
than those set forth or referred to herein and in the Annexes and Exhibits. This
Agreement, including the Annexes and Exhibits, supersedes all prior agreements
and understandings, whether written or oral, between the parties hereto with
respect to the subject matter hereof. This Agreement and the terms and
provisions hereof are for the sole benefit of only the Company, the Buyer and
their respective successors and permitted assigns.

    

    
      
        
        

      

      
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    (g) Waiver. 
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 dealing
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. 

    

    (h) Amendment. 
(1) No
amendment, modification, waiver, discharge or termination of any provision of
this Agreement on or prior to the Closing Date nor consent to any departure by
the Buyer or the Company therefrom on or prior to the Closing Date shall in any
event be effective unless the same shall be in writing and signed by the party
to be charged with enforcement, and in any such case shall be effective only in
the specific instance and for the purpose for which given.

    

    (2) No
amendment, modification, waiver, discharge or termination of any provision of
this Agreement after the Closing Date nor consent to any departure by the
Company therefrom after the Closing Date shall in any event be effective unless
the same shall be in writing and signed (x) by the Company, if the Company is to
be charged with enforcement or (y) by the Majority Holders, if the Buyer is to
be charged with enforcement, and in any such case shall be effective only in the
specific instance and for the purpose for which given but shall nonethless bind
the Buyer and its transferees, successors and assigns; provided, however, that no
such amendment modification, waiver, discharge or termination which (i)
increases the Buyer’s liability, (ii) amends this Section 10(h) or (iii)
adversely affects the Buyer’s rights under Sections 5(a), 5(b), 5(c), 5(d),
5(e), 5(f), 5(j), 5(k), 5(l), 5(m), 8(a), 8(b) and 9, shall be effective unless
in writing signed by the Buyer. 

    

    (3) No course
of dealing between the parties hereto shall operate as an amendment of this
Agreement.

    

    (i) 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.

    

    (j) Assignment of Certain Rights and
Obligations.  The
rights of an Investor under Sections 5(a), 5(b), 8, 9, and 10 of this Agreement
shall be automatically assigned by such Investor to any transferee of all or any
portion of such Investor’s Registrable Securities (or all or any portion of the
Note or the Warrant) if: (1) such Investor agrees in writing with such
transferee to assign such rights, and a copy of such agreement is furnished to
the Company within a reasonable time after such assignment, (2) the Company is,
within a reasonable
time after such transfer, furnished with notice of (A) the name and address of
such transferee and (B) the securities with respect to which such rights and
obligations are being
transferred, (3) in  the case of assignment of  rights under Section
8,  immediately following such transfer or assignment the  further
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    transferee
or assignee is restricted under the 1933 Act and applicable state securities
laws, (4) at or before the time the Company received the notice contemplated by
clause (2) of this sentence the transferee agrees in writing with the Company to
be bound with respect to such assigned securities by such of the provisions
contained in Sections 5(a), 5(b), 8, 9, and 10 hereof as shall have been so
assigned to such transferee and (5) if Section 5(a) shall be applicable to such
transfer, such Investor shall have complied with Section 5(a). Upon any such
transfer, the Company shall be obligated to such transferee to perform all of
its covenants under Sections 5(a), 5(b), 8, 9, and 10 of this Agreement, to the
extent the same have been so assigned to such transferee, as if such transferee
were the Buyer. In connection with any such transfer the Company shall, at its
sole cost and expense, promptly after such transfer take such actions as shall
be reasonably acceptable to the transferring Investor and such transferee to
assure that each Registration Statement and related Prospectus for which the
transferring Investor is a selling stockholder are or become available for use
by such transferee for sales of the Registrable Securities in respect of which
such rights and obligations have been so transferred. 

    

    (k) Expenses. 
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 closing occurs, the Company shall be obligated to
pay or reimburse the legal fees and expenses and out-of-pocket due diligence
expenses of Alexandra Global Master Fund Ltd., not in excess of $40,000, in
connection with the negotiation and execution of, and closing under, this
Agreement. All expenses incurred in connection with registrations, filings or
qualifications pursuant to Sections 5(d), 5(e), 5(g) and 8 of
this Agreement shall be paid by the Company, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company but excluding (a) fees and
expenses of investment bankers or other advisors retained by any Investor and
(b) brokerage commissions incurred by any Investor. The Company shall pay
promptly upon demand all expenses incurred by the Buyer after the Closing Date,
including reasonable attorneys’ fees and expenses, as a consequence of, or in
connection with (1) the negotiation, preparation or execution of any amendment,
modification or waiver of any of the Transaction Documents, (2) any default or
breach of any of the Company’s representations, warranties, covenants or
obligations set forth in any of the Transaction Documents, and (3) the
enforcement or restructuring of any right of, including the collection of any
payments due, the Buyer under any of the Transaction Documents, including,
without limitation, 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 Buyer. Except as otherwise provided in Section 9 and this
Section 10(k), each of the Company and the Buyer shall bear its own expenses in
connection with this Agreement and the transactions contemplated hereby.

    

    (l) Termination. 
(1) The
Buyer shall have the right to terminate this Agreement by giving notice to the
Company at any time at or prior to the Closing Date if:

    

    
      
        
        

      

      
        44

        
          

        

      

      
        
        

      

    

    (A) the
Company shall have failed, refused, or been unable at or prior to the date of
such termination of this Agreement to perform any of its obligations hereunder
required to be performed prior to the time of such termination;

    

    (B) any
condition to the Buyer’s obligations hereunder is not fulfilled at or prior to
the time such condition is required to be satisfied; or

    

    (C) the
closing shall not have occurred on a Closing Date on or before July 21, 2006,
other than solely by reason of a breach of this Agreement by the
Buyer.

     

    Any such
termination shall be effective upon the giving of notice thereof by the Buyer.
Upon such termination, the Buyer shall have no further obligation to the Company
hereunder and the Company shall remain liable for any breach of this Agreement
or the other documents contemplated hereby which occurred on or prior to the
date of such termination.

    

    (2) The
Company shall have the right to terminate this Agreement by giving notice to the
Buyer at any times at or prior to the Closing Date if the closing shall not have
occurred on a Closing Date on or before July 21, 2006, other than solely by
reason of a breach of this Agreement by the Company, so long as the Company is
not in breach of this Agreement at the time it gives such notice. Any such
termination shall be effective upon the giving of notice thereof by the Company.
Upon such termination, neither the Company nor the Buyer shall have any further
obligation to one another hereunder, except for the Company’s liability for the
Buyer’s expenses as provided in Section 10(k).

    

    (m) Survival. 
The
respective representations, warranties, covenants and agreements of the Company
and the Buyer contained in this Agreement and the documents delivered in
connection with this Agreement shall survive the execution and delivery of this
Agreement and the other Transaction Documents and the closing hereunder and
delivery of and payment for the Note and the issuance of the Warrant, and shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Buyer or any Person controlling or acting on behalf of the Buyer
or by the Company or any Person controlling or acting on behalf of the
Company.

    

    (n) Construction; Buyer 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 Buyer 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
or proposes to become a party to any Other Note Purchase Agreement, or who is
acquiring or holds any Other Note or Other Warrant, in negotiating and entering
into this Agreement or purchasing the Note and the Warrant or acquiring,
disposing of or voting any of the Shares. The Company hereby confirms that it
understands and agrees that the Buyer is not acting as part of any such group.
If the Buyer is other than AGMF, such Buyer acknowledges and agrees that such
Buyer is not relying on AGMF or AGMF’s legal counsel in making a decision to
enter into this Agreement, purchase the Note, acquire the Warrant or otherwise
in connection with the Transaction Documents, and such legal counsel are not
acting as the Buyer’s legal counsel in connection therewith.

    

    

    
      
        
        

      

      
        45

        
          

        

      

      
        
        

      

    

     

     

     

    [Signature pages
follow]

     

     

     

     

     

     

     

     

    
 

    
      
        
        

      

      
        46

        
          

        

      

      
        
        

      

    

     

     

    IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed by their
respective officers or other representatives thereunto duly authorized on the
respective dates set forth below their signatures hereto.

    

    Purchase
Price: $

    Principal
Amount of Note: $

    Initial
Conversion Price of Note: $0.26 

    Warrant
Shares Initially 

    Issuable
Upon Exercise of Warrant: 

    Initial
Exercise Price of Warrant: $0.36

     

     

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

    

     

    With a
copy to:

     

    
      	 	 	 
	 	
              Sichenzia Ross
      Friedman Ference LLP

              1065
      Avenue of the Americas, 21st
      Floor

              New
      York, New York 10018

              Attention:
      Richard A. Friedman, Esq.

               

              Facsimile
      No: (212) 930-9725

            
	 
 	
              
  
THE BUYER:

               

              [NAME]

               

               

            
	 	By:  	[NAME], 
	 	
              its Investment
      Advisor

            
	 	 

    

     

    
      	 	 	 
	 	 
	 
 	 
 	 
 
	 	By:  	 
	 	
              
      Name:
      
	 	
              Title 

              Date:
      July 21, 2006

            

    

     

     

     

    
      
        
        

      

      
        47

        
          

        

      

      
        
        

      

    

     

     

     

     

     

    Address
for Notices:

    

    

    

    
      
        
        

      

      
        48

        
          

        

      

      
        
        

        
          

        

      

    

    eMagin
Corporation

     

    Selling Securityholder
Questionnaire

     

    The
undersigned beneficial owner (the “Selling Securityholder”) of Common Stock, par
value $.001 per share, of eMagin Corporation, a Delaware corporation (the
“Company”), understands that the Company intends to file with the Securities and
Exchange Commission (the “SEC”) a registration statement (the “Registration
Statement”) for registration of the resale under the Securities Act of 1933, as
amended (the “Securities Act”), of such securities (the “Registrable
Securities”). This Questionnaire is delivered pursuant to the terms of the Note
Purchase Agreement, dated as of July 21, 2006 (the
“Purchase Agreement”), between the Company and the Buyer named therein. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Purchase Agreement.

     

    Certain
legal consequences arise from being named as a selling securityholder in the
Registration Statement and the related prospectus. Accordingly, the Selling
Securityholder is advised to consult its own securities law counsel regarding
the consequences of being named or not being named as a selling securityholder
in the Registration Statement and the related prospectus.

     

    The
Selling Securityholder hereby provides the following information to the Company
in connection with the Company’s preparation of the Registration
Statement:

     

    1.     Name.

     

    
      	 	
              (a)

            	
              Full
      Legal Name of Selling
Securityholder

            

    

     

    
      

    

    
      	 

    

    
      	 	
              (b)

            	
              Full
      Legal Name of Registered Holder (if not the same as (a) above) through
      which Registrable Securities listed in Item 3 below are
    held:

            

    

     

    
      

    

    
      	 

    

    
      	 	
              (c)

            	
              Full
      Legal Name of the natural person who directly or indirectly has power to
      vote or dispose of the Registrable Securities listed in Item 3
      below:

            

    

     

    
      

    

     

    2.     Address for Notices to Selling
Securityholder:

     

    Complete
the following only if the Selling Securityholder wishes to receive notices
relating to the Registration at a different address or to a different person
than the current notice address for purposes of the Purchase
Agreement.

     

    
      

    

    
      

    

    
      

    

     

    
      
        
        

      

      
        A-1

        
          

        

      

      
        
        

      

    

     

    Telephone: ________________________________________________ 

    Fax:
______________________________________________________

    Contact
Person: _____________________________________________

    

    3.     Beneficial Ownership of Registrable
Securities:

     

    
      	 	
              (a)

            	
              Number
      of Registrable Securities (all of which are shares of Common Stock)
      beneficially owned:

            

    

    
       

      
        

      

      
        

      

      
        

      

       

    

     

    4.     Broker-Dealer
Status:

     

    
      	 	
              (a)

            	
              Are
      you a broker-dealer?

            

    

     

    Yes
__ No
__

     

    
      	 	
              Note:

            	
              If
      yes, the SEC staff has indicated that you should be identified as an
      underwriter in the Registration
Statement.

            

    

     

    
      	 	
              (b)

            	
              Are
      you an affiliate of a
broker-dealer?

            

    

     

    Yes
__ No
__

     

    
      	 	
              (c)

            	
              If
      you are an affiliate of a broker-dealer, do you certify that you bought
      the Registrable Securities in the ordinary course of business, and at the
      time of the purchase of the Registrable Securities to be resold, you had
      no agreements or understandings, directly or indirectly, with any person
      to distribute the Registrable
Securities?

            

    

     

    Yes
__ No
__

     

    
      	 	
              Note:

            	
              If
      no, the SEC staff has indicated that you should be identified as an
      underwriter in the Registration
Statement.

            

    

     

    
      	
              5.

            	
              Other Beneficial Ownership of
      Common Stock by the Selling
  Securityholder.

            

    

     

    Except as set forth below in this
Item 5, the Selling Securityholder is not the beneficial or registered owner of
any shares of Common Stock of the Company other than the Registrable Securities
listed above in Item 3.

     

     

    
      
        
        

      

      
        A-2

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (a)

            	
              Number
      of other shares of Common Stock held of record or beneficially owned by
      the Selling Securityholder:

            

    

     

    
      
        

      

      
        

      

      
        

      

    

     

    6. Relationships with the
Company:

     

    Except for the Purchase Agreement
and transactions related thereto and except as set forth below, the Selling
Securityholder has not held any position or office or had any other material
relationship with the Company (or its predecessors or affiliates) during the
past three years.

     

    State any
exceptions here:

     

    
      
        

      

      
        

      

    

     

    The
Selling Securityholder’s obligations with respect to the information it provides
in response to this Questionnaire are set forth in Section 8(c) of the Purchase
Agreement.

     

    IN
WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Questionnaire to be executed and delivered either in person or by its duly
authorized agent.

     

     

     

    
      	 Dated:________________________________	
                Beneficial
      Owner:_________________________________  

            
	 	
              By:____________________________________________ 

            
	 	
               
      Name: 

            
	 	
               
      Title: 

            
	 	 

    

           

    
 

    PLEASE FAX OR E-MAIL THE
COMPLETED

    AND EXECUTED QUESTIONNAIRE
TO:

    

    Sichenzia
Ross Friedman Ference LLP

    1065
Avenue of the Americas, 21st
Floor

    New York,
New York 10018

    Attention:
Richard A. Friedman, Esq.

    e-Mail
address: rfriedman@srff.com

     

     

    A-3ex1043.htm

     

    Exhibit
10.43
 

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

    

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

    

    EMAGIN
CORPORATION

    

    6% SENIOR SECURED CONVERTIBLE NOTE
DUE 2007-2008

    

    No.                                                           $                                        

    New York,
New York

    July
21, 2006

    

    FOR VALUE RECEIVED, EMAGIN
CORPORATION,
a Delaware
corporation (hereinafter called the “Company”), hereby promises to pay to
[NAME],
[ADDRESS], or
registered assigns (the “Holder”), or order, the sum of                   Dollars
($                                        ), in
installments on the Installment Maturity Date and on the Final Maturity Date,
and to pay interest on the unpaid principal balance hereof at the Applicable
Rate from the date hereof, until the same becomes due and payable, whether at
maturity or upon acceleration or by redemption or repurchase in accordance with
the terms hereof or otherwise. Any amount, including, without limitation,
principal of or interest on this Note, the Optional Redemption Price and the
Repurchase Price, that is payable under this Note that is not paid when due
shall bear interest at the Default Rate from the due date thereof until the same
is paid (“Default Interest”). Regular interest shall be payable in arrears on
each Interest Payment Date, commencing on September 1, 2006, on the principal
amount outstanding on such date. Regular interest on this Note shall be computed
on the basis of a 360-day year of 12 30-day months and actual days elapsed. No
regular interest shall be payable on an Interest Payment Date on any portion of
the principal amount of this Note which shall have been redeemed prior to such
Interest Payment Date so long as the Company shall have complied in full with
its obligations with respect to such redemption.

    

    
      
         

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

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

    

    

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

    

    This Note
is one of a duly authorized issue of the Company’s 6% Senior Secured Convertible
Notes due 2007-2008 limited to an aggregate principal amount of $7,000,000.00
(excluding 6% Senior Secured Convertible Notes due 2007-2008 issued in
replacement of lost, stolen, destroyed or mutilated notes or issued on transfer
of such notes). 

    

    The
following terms shall apply to this Note:

    

    

    ARTICLE I

    

    DEFINITIONS

    

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

    

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

    

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

    

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

    
      
         

        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

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

    

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

    

    “AMEX”
means the American Stock Exchange, Inc.

    

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

    

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

    

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

    

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

    

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

    

    "Cash and
Cash Equivalents Balances" of any Person on any date shall be determined on an
unconsolidated basis from such Person's books maintained in accordance with
Generally Accepted Accounting Principles, and means, without duplication, the
sum of (1) the cash held by such Person on such date and available for use by
such Person on such date, (2) all assets which would, on a balance sheet of such
Person prepared as of such date in accordance with Generally Accepted Accounting
Principles, be classified as cash equivalents; provided,
however, that (x)
for purposes of computing the Cash and Cash Equivalents Balances as of any date,
no amount shall be included as cash or a cash equivalent if such amount is
subject to any lien, charge, equity or encumbrance in favor of any other Person
or is subject to any agreement, arrangement or understanding by the Company with
any other Person to maintain the amount thereof or which restricts the use
thereof by the Company (in any such case, other than as provided in Section 3.9
of this Note and the Other Notes and other than the lien and security interest
in favor of the Collateral Agent arising under the Security Agreement) (y) cash
and cash equivalents described in the preceding clauses (1) and (2) that are
held at any time as Collateral under the Security Agreement and in which the
Collateral Agent has a perfected first priority security interest and which
are not subject to any lien, charge, equity or encumbrance in favor of any other
Person shall be included in determining the amount of Cash and Cash Equivalents
Balances at such time.

    
      
         

        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Conversion
Notice” means a
duly executed Notice of Conversion of 6% Senior Secured Convertible Note Due
2007-2008 substantially in the form of Exhibit C to this
Note.

    

    “Conversion
Price” means
$0.26, subject to adjustment as provided in Section 6.3.

    

    “Current
Fair Market Value” when used with respect to the Common Stock as of a specified
date means with respect to each share of Common Stock the average of the closing
prices of the Common Stock sold on all securities exchanges (including the NYSE,
the AMEX, the Nasdaq and the Nasdaq Capital Market) on which the Common Stock
may at the time be listed, or, if there have been no sales on any such exchange
on such day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of regular trading such day, or, if on
such day the  Common Stock is not so listed, the average of 
the representative bid and asked prices quoted in  the  NASDAQ
System as  of  4:00 p.m., 

     

     

    
      
         

        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    New York City time, or, if on such day the Common Stock is not quoted in
the NASDAQ System, the average of the highest bid and lowest asked price on such
day in the domestic over-the-counter market as reported by the Pink Sheets, LLC,
or any similar successor organization, in each such case averaged over a period
of five Trading Days consisting of the day as of which the Current Fair Market
Value of Common Stock is being determined (or if such day is not a Trading Day,
the Trading Day next preceding such day) and the four consecutive Trading Days
prior to such day. If on the date for which Current Fair Market Value is to be
determined the Common Stock is not listed on any securities exchange or quoted
in the NASDAQ System or the over-the-counter market, the Current Fair Market
Value of Common Stock shall be the greater of (i) the highest price per share of
Common Stock at which the Company has sold shares of Common Stock or Common
Stock Equivalents during the 365 days prior to the date of such determination
and (ii) the highest price per share which the Company could then obtain from a
willing buyer (not an employee or director of the Company at the time of
determination) for shares of Common Stock sold by the Company, from authorized
but unissued shares, as determined in good faith by the Board of
Directors.

     

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

    

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

    
      
         

        
        

      

      
        5

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Extended
Optional Redemption Date” means with respect to any portion of this Note to
which Section 2.1(e) applies, the date that is 30 Trading Days, after the latest
date on which the Restricted Ownership Percentage no longer restricts the
Holder’s right to convert the remaining Uncovered Portion, but in no event later
than the Final Maturity Date.

    

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

    

    “Final
Maturity Date” means January 21, 2008.

    

    “Fundamental
Change” means

    
      
         

        
        

      

      
        6

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    
 

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

    

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

    

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

    

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

    

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

    

    “Installment
Maturity Date” means July 21, 2007.

    

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

    

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

    

    “Issuance
Date” means July 21, 2006.

    

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

    
      
         

        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    

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

    

    “Lockbox
Agreement” means that certain Lockbox Agreement, dated as of July 21, 2006, by
and between the Company, the Lockbox Agent and the Collateral
Agent.

    

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

    

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

    

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

    

    “Nasdaq”
means the Nasdaq Global Market.

    

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

    

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

    

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

    

    “Note
Purchase Agreement” means the Note Purchase Agreement, dated as of July 21,
2006, by and between the Company and the original Holder of this Note or its
predecessor instrument.

    
      
         

        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    

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

    

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

    

    “Optional
Redemption Date” means the Business Day on which this Note is to be redeemed
pursuant to Section 2.1.

    

    “Optional
Redemption Notice” means an Optional Redemption Notice in the form attached
hereto as Exhibit D.

    

    “Optional
Redemption Period” means the period which commences on the date that is ten days
after the SEC Effective Date and ends on the Final Maturity Date.

    

    “Optional
Redemption Price” means an amount in cash equal to the sum of (1) 100% of the
outstanding principal amount of this Note plus (2)
accrued and unpaid interest on such principal amount to the Optional Redemption
Date plus (3)
accrued and unpaid Default Interest, if any, on the amount referred to in the
immediately preceding clause (2) at the rate provided in this Note to the
Optional Redemption Date plus (4) an
amount equal to the interest that would have accrued on this Note from the
Optional Redemption Date until the Final Maturity Date (assuming, in case the
Optional Redemption Date is prior to the Installment Maturity Date, the Company
paid when due the installment of principal due on the Installment Maturity Date)
had this Note not been redeemed on the Optional Redemption Date.

    

    “Other
Note Purchase Agreements” means the several Note Purchase Agreements, dated as
of July 21, 2006, by and between the Company and the respective original holders
of the Other Notes. 

    

    “Other
Notes” means the several 6% Senior Secured Convertible Notes due 2007-2008,
issued by the Company pursuant to the Other Note Purchase
Agreements.

    

    “Other
Warrants” means the Common Stock Purchase Warrants issued by the Company to the
original holders of the Other Notes or their respective predecessor
instruments.

    

    “Patent
and Trademark Security Agreement” means the Patent and Trademark Security
Agreement, dated as of July 21, 2006, by and between the Company and the
Collateral Agent.

    

    “Pledge
and Security Agreement” means the Pledge and Security Agreement, dated as of
July 21, 2006, by and between the Company and the Collateral Agent.

    

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

    
      
         

        
        

      

      
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    “Permitted
Indebtedness” means 

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    (8) Permitted
Refinancing Indebtedness;

    

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

    
      
         

        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    “Permitted
Liens” means:

    

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

    

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

    

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

    

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

    

    (e) Liens for
taxes or assessments or governmental charges or levies on its property if such
taxes or assessments or charges or levies shall not at the time be due and
payable or if the amount, applicability, or validity of any such tax,
assessment, charge or levy shall currently be contested in good faith by
appropriate proceedings or necessary preliminary steps are being taken to
contest, compromise or settle the amount thereof or to determine the
applicability or validity thereof and if the Company or such Subsidiary, as the
case may be, shall have set aside on its books reserves (segregated to the
extent required by sound accounting practice) deemed by it adequate with respect
thereto; deposits or pledges to secure payment of worker's compensation,
unemployment insurance, old age pensions or other social security; deposits or
pledges to secure performance of bids, tenders, contracts (other than contracts
for the payment of money borrowed or credit extended), leases, public or
statutory obligations, surety or appeal bonds, or other deposits or pledges for
purposes of like general nature in the ordinary course of
business; mechanics', carriers', workers', repairmen's or other  like Liens
arising

     

    
      
         

        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

     in the
ordinary course of business securing obligations which are not overdue for a
period of 60 days, or which are in good faith being contested or litigated, or
deposits to obtain the release of such Liens; Liens created by or resulting from
any litigation or legal proceedings or proceedings being contested in good faith
by appropriate proceedings, provided any execution levied thereon shall be
stayed; leases made, or existing on property acquired, in the ordinary course of
business; landlords' Liens under leases to which the Company or any Subsidiary
is a party; and zoning restrictions, easements, licenses or restrictions on the
use of real property or minor irregularities in title thereto; provided that all
such Liens described in this subsection (d) do not, in the aggregate, materially
impair the use of such property in the operations of the business of the Company
or any Subsidiary or the value of such property for the purpose of such
business; and

     

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

    

    “Permitted
Refinancing Indebtedness” means any Indebtedness of the Company issued in
exchange for, or the net proceeds of which are used to redeem Indebtedness
represented by this Note and the Other Notes in accordance with Section 2.1;
provided that so long as on or before the date of incurrence of such Permitted
Refinancing Indebtedness the Company shall have (a) given the Optional
Redemption Notice to the Holder and the holders of the Other Notes in accordance
with Section 2.1 and (b) irrevocably deposited in trust with a trustee (other
than the Company or any Subsidiary), for the exclusive benefit of the Holder and
the holders of the Other Notes being redeemed, an amount at least equal to the
aggregate amount that the Company will be obligated to pay in respect of such
Indebtedness from such date to the date of payment in full of such
Indebtedness.

    

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    

    (a) The
Common Stock ceases to be traded on the AMEX and is not listed for trading on
the Nasdaq, the Nasdaq Capital Market or the NYSE;

    

    (b) Any
Fundamental Change; 

    

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

    

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

    

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

    

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

    

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

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

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

    

    “SEC”
means the Securities and Exchange Commission.

     

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Unconverted
Portion” shall have the meaning provided in Section 2.1(d)(1).

    

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

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    “Warrants”
means Common Stock Purchase Warrants of the Company issued to the
original Holder of this Note pursuant to the Note Purchase Agreement or any such
instrument issued upon transfer or split up thereof.

    

    

    ARTICLE II

    

    OPTIONAL REDEMPTION; INSTALLMENT OF
PRINCIPAL

    

    

    2.1 Optional
Redemption.  (a) At
any time during the Optional Redemption Period, the Company shall have the right
to redeem at any one time all of the outstanding principal amount of this Note
at the Optional Redemption Price pursuant to this Section 2.1 on any
Optional Redemption Date, so long as the following conditions are
met:

    

    (1) on the
date the Company gives the Optional Redemption Notice and at all times to and
including the Optional Redemption Date, no Event of Default and no event which,
with notice or passage of time, or both, would become an Event of Default has
occurred and is continuing (unless the requirements of this clause (1) will be
satisfied immediately after the redemption of this Note and the Other Notes on
the Optional Redemption Date and the Company shall furnish Company Certificates
to the Holder to such effect on the date the Optional Redemption Notice is given
to the Holder and on the Optional Redemption Date), 

    

    (2) on the
date the Company gives the Optional Redemption Notice and at all times to and
including the Optional Redemption Date, no Repurchase Event has occurred with
respect to which the Holder has the right to exercise repurchase rights pursuant
to Sections 5.1 and 5.2 or with respect to which the Holder has exercised such
repurchase rights and the Repurchase Price has not been paid to the Holder and
no event which, with notice or passage of time, or both, would become a
Repurchase Event has occurred and is continuing,

    

    (3) on the
date the Company gives the Optional Redemption Notice and at all times
thereafter to and including the Optional Redemption Date, the Registration
Statement shall be effective and available for use by the Holder, the holders of
the Other Notes and the holders of the Warrants for the resale of the shares of
Common Stock issued and issuable upon conversion of this Note and the Other
Notes and issued or issuable upon exercise of the Warrants, as the case may be,
and is reasonably expected to remain effective and available for such use for at
least 30 Trading Days after the Optional Redemption Date; and

    

    (4) on the
date the Company gives the Optional Redemption Notice, the Company (x) has funds
available to pay the Optional Redemption Price of this Note and the redemption
prices of the Other Notes, or (y) has funds which, together with the proceeds to
be paid to the Company at the closing of a transaction in which the Company
proposes to issue Permitted Refinancing Indebtedness, will be sufficient to pay
the Optional Redemption Price of this Note and the redemption prices of the
Other Notes.

    
      
         

        
        

      

      
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    In order
to exercise its right of redemption under this Section 2.1, the Company
shall give the Optional Redemption Notice to the Holder not less than ten
Trading Days or more than 30 Trading Days prior to the Optional Redemption Date
stating: (1) that the Company is exercising its right to redeem this Note in
accordance with this Section 2.1, (2) the principal amount of this Note to
be redeemed, (3) the Optional Redemption Price, (4) the Optional Redemption Date
and (5) that all of the conditions of this Section 2.1 entitling the Company to
call this Note for redemption have been met. On the Optional Redemption Date (or
such later date as the Holder surrenders this Note to the Company) the Company
shall pay to or upon the order of the Holder, by wire transfer of immediately
available funds to such account as shall be specified for such purpose by the
Holder at least one Business Day prior to the Optional Redemption Date, an
amount equal to the Optional Redemption Price of the portion (which may be all)
of this Note to be redeemed. 

    

    (b) In order
that the Company shall not discriminate among the Holder and the holders of the
Other Notes, the Company agrees that it shall not redeem any of the Other Notes
pursuant to the provisions thereof similar to this Section 2.1 or
repurchase or otherwise acquire any of the Other Notes (other than a mandatory
redemption pursuant to provisions of the Other Notes comparable to Article V)
unless the Company offers simultaneously to redeem, repurchase or otherwise
acquire this Note for cash at the same unit price as the Other Note or Other
Notes.

    

    (c) The
Company shall not be entitled to give an Optional Redemption Notice or to redeem
any portion of this Note with respect to which the Holder has given a Conversion
Notice on or prior to the date the Company gives such Optional Redemption
Notice. Notwithstanding the giving of the Optional Redemption Notice, the Holder
shall be entitled to convert all or any portion of this Note, in accordance with
the terms of this Note, by giving a Conversion Notice at any time on or prior to
the later of (1) the date which is one Trading Day prior to the Optional
Redemption Date and (2) if the Company fails to pay and deliver to the Holder,
or deposit in accordance with Section 7.10, the Optional Redemption Price
payable on the Optional Redemption Date on or before the Optional Redemption
Date, the date on which the Company pays and delivers to the Holder, or deposits
in accordance with Section 7.10, such Optional Redemption Price. If after giving
effect to any such conversion of this Note that occurs after the date the
Company gives the Optional Redemption Notice to the Holder, the principal amount
of this Note remaining outstanding is less than the amount thereof to be
redeemed as stated in the Optional Redemption Notice, then the Optional
Redemption Price set forth in the Optional Redemption Notice shall be adjusted
to reflect the reduced outstanding principal amount of this Note and related
accrued interest (and Default Interest, if any, thereon at the Default Rate) on
the Optional Redemption Date resulting from any such conversions of this Note
after the Company gives the Optional Redemption Notice to the
Holder.

    

    (d) (1) Notwithstanding
any other provision of this Note or applicable law to the contrary, in case the
Company shall give the Optional Redemption Notice to the Holder, and on the date
the Company gives the Optional Redemption Notice or at any time thereafter to
and including the Optional Redemption Date, the Holder shall be restricted from
converting any portion of this Note by reason of the Restricted Ownership
Percentage (the “Unconverted Portion”), then the Optional Redemption Date for
the Unconverted Portion so called for redemption by the Company and which the
Holder may not convert at any such time during such period from the date the
Company gives the Optional Redemption Notice to the Optional Redemption Date
may, at the election of the Holder exercised by notice to the Company given on
or before the Optional Redemption Date, be extended to be  the 
Extended 

     

    
      
         

        
        

      

      
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      Optional
Redemption Date. On the applicable Extended Optional Redemption Date, the
Company shall pay the Optional Redemption Price for any portion of this Note
redeemed on such Extended Optional Redemption Date. Any portion of this Note for
which there is an Extended Optional Redemption Date shall remain convertible by
the Holder in accordance with Section 6 at any time to and including the close
of business on the Business Day prior to the applicable Extended Optional
Redemption Date.

    (2) Notwithstanding
anything to the contrary contained in Section 6.7, solely for the purposes of
calculating the Restricted Ownership Percentage for purposes of this Section
2.1(d), the shares of Common Stock issuable upon exercise of the Warrants held
by the Holder shall not be deemed to be Excluded Shares and shall be taken into
account in calculating the Restricted Ownership Percentage to determine the
amount of the Unconverted Portion.

    

    2.2 Installments of Principal.
The
principal of this Note shall become due in installments as follows:

     

    
 

    
      	 Principal
      Amount 	 Due
      Date
	 $[PRIOR
      TO ISSUANCE, INSERT 50%	 
	 OF PRINCIPAL
      AMOUNTOF NOTE]	 Installment
      Maturity Date
	 	 
	 $[PRIOR
      TO ISSUANCE, INSERT 50% 	 
	 OF PRINCIPAL
      AMOUNTOF NOTE]	 Final
      Maturity Date

    

     

    

     

    The
amounts of such installments that are payable on each such date are subject to
reduction as provided in Sections 5 and 6.

    

    2.3 No Other
Prepayment. Except
as specifically provided in Section 2.1, this Note may not be prepaid, redeemed
or repurchased at the option of the Company prior to the applicable Installment
Maturity Date or the Final Maturity Date, as the case may be. 

    

    

    ARTICLE III

    

    CERTAIN COVENANTS

    

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

    

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

    

     

    
      
         

        
        

      

      
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    3.2 Maintenance of Cash and Cash
Equivalents Balances. The
Company shall at
all times maintain Cash and Cash Equivalents Balances at least equal to
$600,000. The Company shall certify the amount of its Cash and Cash Equivalents
Balances to the Holder as of the end of each calendar quarter, and from time to
time upon request of the Majority Holders, as provided herein. Not later than
the due date for filing with the SEC (determined without regard to any extension
thereof permitted by the SEC) the Company’s Quarterly Report on Form 10-Q (in
the case of the first three calendar quarters of each year) or the Company’s
Annual Report on Form 10-K (in the case of the fourth calendar quarter of each
year), and within five Business Days after a request therefor made by notice to
the Company from the Majority Holders, the Company shall furnish to the Holder a
Company Certificate, setting forth the amount of the Company's Cash and Cash
Equivalents Balances as of the end of such calendar quarter or as of the date of
such notice, as the case may be. Each Company Certificate delivered pursuant to
this Section 3.2 shall state (1) the amount of the Company’s Cash and Cash
Equivalents Balances and the date as of which such amount has been determined,
(2) separately, the amount of cash and the amount of cash equivalents included
in the amount of Cash and Cash Equivalents Balances shown in such Company
Certificate and (3) that the amount of Cash and Cash Equivalents Balances stated
in such Company Certificate has been determined in accordance with the terms of
this Note. If necessary in order to avoid furnishing the Holder information
that, for purposes of the 1934 Act, would be considered to be material
non-public information if not publicly disclosed, at the time the Company
furnishes each Company Certificate to the Holder the Company shall make an
appropriate public announcement disclosing the information contained in such
Company Certificate relating to the Cash and Cash Equivalents Balances;
provided,
however, that in
case the Company makes no such public disclosure the Holder expressly undertakes
no agreement, obligation or duty to refrain from trading in the Company’s
securities while in possession of such information.

    

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

    

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

    

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

    

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

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

     

    
      
         

        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

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

    

    3.12 Limitation on Certain
Issuances.  The
Company shall not offer, sell or issue, or enter into any agreement, arrangement
or understanding to offer, sell or issue, any Common Stock or Common Stock
Equivalent (A) that is convertible into, exchangeable or exercisable for, or
includes the right to receive additional shares of Common Stock either (x) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the Common Stock at any time
after the initial issuance of such Common Stock or Common Stock Equivalent, or
(y) with a fixed conversion, exercise, exchange or purchase price that is
subject to being reset at some future date after the initial issuance of such
Common Stock or Common Stock Equivalent or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company
or the market for the Common Stock (but excluding customary stock split, reverse
stock split, stock dividend and similar anti-dilution provisions substantially
similar to those set forth in clauses (a) through (e) of Section 6.3), or (B)
pursuant to an “equity line” structure in which one or more Persons commits to
provide capital to the Company by the purchase of securities of the Company from
time to time, whether at specified times, times determined by the Company or by
such Person(s) or by mutual agreement between the Company and such Person(s), at
prices based on the market prices of the Common Stock at or near the time of
each purchase, which securities are registered for sale or resale pursuant to
the 1933 Act; provided, however,
that
nothing in this Section 3.11 shall prohibit the Company from issuing shares of
Common Stock for cash for the account of the Company in an offering that is
underwritten on a firm commitment basis and registered with the SEC under the
1933 Act.

    

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

    

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

    
      
         

        
        

      

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

    

    

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

    

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

    
      
         

        
        

      

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

    

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

    

    (b) The
Company shall use its best efforts to successfully complete a search for a
qualified additional member of senior management and, subject to approval by the
Board of Directors, to hire such additional member of senior management.
 Until
such time as such additional member of senior management has been hired the
Board of Directors shall form a three person committee to supervise the
management of the Company of which at least one person shall be a director
designated as a member of the Board of Directors pursuant to Section 3.16, one
person shall initially be John Atherly and the other person shall be Gary W.
Jones.

    
      
         

        
        

      

      
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    (c) The
Company shall use its best efforts to design, develop, manufacture and market
the display, subsystem and personal display systems, and focus on funded
research business
consistent with Company’s business plan in effect on the Issuance Date and shall
limit new market business development until the EBITDA Positive Quarter has
occurred.

    

    (d) Unless
the Company’s “Statement of Company Policy Regarding Confidentiality and
Securities Trades by Company Personnel” shall have been amended by the unanimous
approval of the three person committee set forth in Section 3.17(b), all
transactions in securities of the Company, including, without limitation,
acquisitions, dispositions and transfers, by directors, officers, managers and
all accounting and administrative personnel, must be pre-cleared by the office
of the Chief Financial Officer of the Company and such persons shall be
prohibited from making any trades in Company securities during the period
commencing 15 days prior to the end of each fiscal quarter and ending on the
third Business Day after the financial results of the Company for such fiscal
quarter are publicly released.

    

    

    ARTICLE IV

    

    EVENTS OF DEFAULT

    

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

    

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

    

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

    

    (c) Breach of
Covenant. The
Company (1) fails to comply with Sections 3.1, 3.2, 3.8, 3.9, 3.12, 3.13, 3.15,
3.16 or 3.17(a) (2) fails to comply in any material respect with any provision
of Article III of this Note (other than Sections 3.1, 3.2, 3.8, 3.9, 3.12, 3.13,
3.15, 3.16 or 3.17(a)) or breaches any other material covenant or other material
term or condition of this Note or any of the other Transaction Documents (other
than as specifically provided in clauses (a), (b) or (c)(1) of this Section
4.1), and in the case of this clause (2) of this Section 4.1(c) only, such
breach continues for a period of ten days after written notice thereof to the
Company from the Holder; or

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

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

    

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

    

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

    

    

    ARTICLE V

    

    REPURCHASE UPON A REPURCHASE EVENT

    

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

    

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

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    

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

     

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

     

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

    
      
         

        
        

      

      
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    ARTICLE VI

    

    CONVERSION

    

    6.1 Right to
Convert. Subject
to and upon compliance with the provisions of this Note, the Holder shall have
the right, at the Holder's option, at any time prior to the close of business on
the Final Maturity Date (except that, if the Holder shall have exercised
repurchase rights under Sections 5.1 and 5.2 or the Company shall have exercised
its redemption rights under Section 2.1, such conversion right shall terminate
with respect to the portion of this Note to be repurchased or redeemed, as the
case may be, at the close of business on the last Trading Day prior to the later
of (x) the date the Company is required to make such repurchase or the Optional
Redemption Date, as the case may be, and (y) the date the Company pays or
deposits in accordance with Section 7.10 the applicable Repurchase Price or the
Optional Redemption Price unless in any such case the Company shall default in
payment due upon repurchase or redemption hereof) to convert the principal
amount of this Note, or any portion of such principal amount which is at least
$1,000 (or such lesser principal amount of this Note as shall be outstanding at
such time), plus accrued and unpaid interest, into that number of fully paid and
non-assessable shares of Common Stock (as such shares shall then be constituted)
obtained by dividing (1) the sum of (x) the principal amount of this Note or
portion thereof being converted plus (y)
accrued and unpaid interest on the portion of the principal amount of this Note
being converted to the applicable Conversion Date plus (z)
accrued and unpaid Default Interest, if any, on the amount referred to in the
immediately preceding clause (y) to the applicable Conversion Date by (2) the
Conversion Price in effect on the applicable Conversion Date, by giving a
Conversion Notice in the manner provided in Section 6.2; provided, however,
that, if
at any time this Note is converted in whole or in part pursuant to this Section
6.1, the Company does not have available for issuance upon such conversion as
authorized and unissued shares or in its treasury at least the number of shares
of Common Stock required to be issued pursuant hereto, then, at the election of
the Holder made by notice from the Holder to the Company, this Note (or portion
hereof as to which conversion has been requested), to the extent that sufficient
shares of Common Stock are not then available for issuance upon conversion,
shall be converted into the right to receive from the Company, in lieu of the
shares of Common Stock into which this Note or such portion hereof would
otherwise be converted and which the Company is unable to issue, payment in an
amount equal to the product obtained by multiplying (x) the number of shares of
Common Stock which the Company is unable to issue times (y) the
arithmetic average of the Market Price for the Common Stock during the five
consecutive Trading Days immediately prior to the applicable Conversion Date.
Any such payment shall, for all purposes of this Note, be deemed to be a payment
of principal plus a premium equal to the total amount payable less the principal
portion of this Note converted as to which such payment is required to be made
because shares of Common Stock are not then available for issuance upon such
conversion. The Holder is not entitled to any rights of a holder of Common Stock
until the Holder has converted this Note to Common Stock, and only to the extent
this Note is deemed to have been converted to Common Stock under this Article
VI. For purposes of Sections 6.5 and 6.6, whenever a provision references the
shares of Common Stock into which this Note (or a portion hereof) is convertible
or the shares of Common Stock issuable upon conversion of this Note (or a
portion hereof) or words of similar import, any determination required by such
provision shall be made as if a sufficient number of shares of Common Stock were
then available for issuance upon conversion in full of this
Note.

    
      
         

        
        

      

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

    

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

    

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

    

    (d) A
Conversion Notice shall be deemed for all purposes to be in proper form absent
timely notice from the Company to the Holder of manifest error therein. The
Company shall notify the Holder of any claim by the Company of manifest error in
a Conversion Notice within two Trading Days after the Holder gives such
Conversion Notice (which notice from the Company
shall  specify all defects in  the Conversion Notice) and no such
claim of  error shall limit or delay performance of the Company's
obligation to issue upon such 

     

    
      
         

        
        

      

      
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    conversion
the number of shares of Common Stock which are not in dispute. Time shall be of
the essence in the giving of any such notice by the Company. Any Conversion
Notice containing any such defect shall nonetheless be effective on the date
given if the Holder promptly undertakes to correct all such defects. The Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of shares of Common Stock or
other securities or property on conversion of this Note in a name other than
that of the Holder, and the Company shall not be required to issue or deliver
any such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Company the full
amount of any such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for the
amount of any withholding tax payable in connection with any conversion of this
Note.

    

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

    

    (2) If in any
case the Company shall fail to issue and deliver the shares of Common Stock to
the Holder in connection with a particular conversion of this Note within five
Trading Days after the Holder gives the Conversion Notice for such conversion,
in addition to any other liabilities the Company may have hereunder and under
applicable law (A) the Company shall pay or reimburse the Holder on demand for
all out-of-pocket expenses, including, without limitation, reasonable fees and
expenses of legal counsel, incurred by the Holder as a result of such failure,
(B) if as a result of such failure the Holder shall suffer any direct damages or
liabilities from such failure (including, without limitation, margin interest
and the cost of purchasing securities to cover a sale (whether by the Holder or
the Holder's securities broker) or borrowing of shares of Common Stock by the
Holder for purposes of settling any trade involving a sale of shares of Common
Stock made by the Holder during the period beginning on the Issuance Date and
ending on the date the Company delivers or causes to be delivered to the Holder
such shares of Common Stock), then the Company shall upon demand of the Holder
pay to the Holder an amount equal to the actual direct, out-of-pocket damages
and liabilities suffered by the Holder by reason thereof which the Holder
documents to the reasonable satisfaction of the Company, and (C) the Holder may
by written notice (which may be given by mail, courier, personal
service or telephone line facsimile transmission), given at any time prior to
delivery to the Holder of the shares of Common Stock issuable in connection with
such exercise of the Holder's conversion right, rescind such exercise and the
Conversion Notice relating thereto, in which case the Holder shall thereafter
 be 

     

    
      
         

        
        

      

      
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      entitled
to convert that portion of this Note as to which such exercise is so rescinded
and to exercise its other rights and remedies with respect to such failure by
the Company. Notwithstanding the foregoing the Company shall not be liable to
the Holder under clause (B) of the immediately preceding sentence to the extent
the failure of the Company to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Company (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, or any
similar event outside the control of the Transfer Agent or the bankruptcy,
liquidation or reorganization of the Transfer Agent under any bankruptcy,
insolvency or other similar law). In the case of the Company’s failure to issue
and deliver or cause to be delivered the shares of Common Stock to the Holder
within three Trading Days of a particular conversion of the Note, the amount
payable by the Company pursuant to clause (B) of this Section 6.2(e)(2) with
respect to such conversion shall be reduced by the amount of payments previously
paid by the Company to the Holder pursuant to Section 8(a)(4) of the Purchase
Agreement with respect to such conversion. The Holder shall notify the Company
in writing (or by telephone conversation, confirmed in writing) as promptly as
practicable following the third Trading Day after the Holder gives a Conversion
Notice if the Holder becomes aware that such shares of Common Stock so issuable
have not been received as provided herein, but any failure so to give such
notice shall not affect the Holder's rights under this Note or otherwise. If the
Holder shall have exercised the conversion right in any particular instance and
either (1) the Company shall notify the Holder on or after the date the Holder
gives such Conversion Notice that the shares of Common Stock issuable upon such
conversion might not be delivered within three Trading Days after the date the
Holder gives such Conversion Notice or (2) the Holder learns after the date
which is three Trading Days after the date the Holder gives such Conversion
Notice that the Holder has not received such shares of Common Stock, then,
without releasing the Company of its obligations with respect thereto, from and
after the Trading Day next succeeding the earlier of the events described in the
preceding clauses (1) and (2) of this sentence the Holder shall make reasonable
efforts not to sell shares of Common Stock in anticipation of receipt of such
shares of Common Stock in a manner which is likely to increase materially the
liability of the Company under clause (B) of the first sentence of this Section
6.2(e)(2).

 

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

    

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

    
      
         

        
        

      

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

    

    (b) Weighted Adjustments for Certain
Issuances of Rights or Warrants. In case
the Company shall on or after the Issuance Date issue rights or warrants (other
than any rights or warrants referred to in Section 6.3(d)) to all holders of its
outstanding shares of Common Stock entitling them (for a period expiring within
45 days after the date fixed for the determination of stockholders entitled to
receive such rights or warrants) to subscribe for or purchase shares of Common
Stock at a price per share less than the Current Market Price on the Record Date
fixed for the determination of stockholders entitled to receive such rights or
warrants, the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in effect at the
opening of business on the date after such Record Date by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Current Market Price, and the denominator shall be the number of shares
of Common Stock outstanding on the close of business on the Record Date plus the
total number of additional shares of Common Stock so offered for subscription or
purchase. Such adjustment shall become effective immediately after the opening
of business on the day following the Record Date fixed for determination of
stockholders entitled to receive such rights or warrants. To the extent that
shares of Common Stock are not delivered pursuant to such rights or warrants,
upon the expiration or termination of such rights or warrants, the Conversion
Price shall be readjusted to the Conversion Price which would then be in effect
had the adjustments made upon the issuance of such rights or warrants been made
on the basis of delivery of only the number of shares of Common Stock actually
delivered. In the event that such rights or warrants are not so issued, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such date fixed for the determination of stockholders
entitled to receive such rights or warrants had not been fixed. In determining
whether any rights or warrants entitle the holder to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received for such rights or
warrants, the value of such consideration, if other than cash, to be determined
by the Board of Directors. Notwithstanding the foregoing, if any of the
adjustments as set forth in this Section 6.3(b) will require the Company to seek
stockholder approval pursuant to Rule 713 of the AMEX and such stockholder
approval has not yet been obtained, then the adjustment shall not take effect
until such stockholder approval is obtained. The Company shall use its
commercially reasonable best efforts to obtain, as promptly as practicable, but
in no event later than 90 days thereafter, the stockholder approval that is
necessary under the rules of the AMEX.

    
      
         

        
        

      

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

    

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

    
      
         

        
        

      

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

    

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

    
      
        
        

      

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

    

    (f) Adjustment in Connection Sales by a
Designated Person. (1) If at
any time on or after the Issuance Date any Designated Person, directly or
indirectly, sells, transfers or disposes of shares of Common Stock or Common
Stock Equivalents other than a Permitted Designated Person Sale and on the
Measurement Date for such sale, transfer or disposition the Conversion Price in
effect on such Measurement Date is greater than the Computed Market Price on
such Measurement Date, then, subject to the next succeeding sentence, the
Conversion
Price shall be reduced to such Computed Market Price, such
adjustment to become effective immediately after the opening of business on the
day following the Measurement Date. If a reduction of the Conversion Price to
such Computed Market Price pursuant to the immediately preceding sentence would
require the Company to seek stockholder approval of the transactions
contemplated by the Note Purchase Agreement pursuant to Rule 713 of the AMEX and
the Stockholder Approval has not yet been obtained, then the adjustment provided
in this Section 6.3(f) shall not take effect until such time as the Stockholder
Approval is obtained at which time the Conversion Price shall be reduced to such
Computed Market Price.

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
         

        
        

      

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

    

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

    

     

    
      
         

        
        

      

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

    

    

    ARTICLE VII

    

    MISCELLANEOUS

    

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

    

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

    

    
      
         

        
        

      

      
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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 scheduled Installment Maturity Date or Final
Maturity Date of this Note or any Other Note, or reduce the rate or extend the
time of payment of interest (other than as a result of waiving the applicability
of any post-default increase in interest rates) hereon or thereon or reduce the
principal amount hereof or thereof or the Repurchase Price or the Optional
Redemption Price hereof or thereof, (ii) increase or decrease the Conversion
Price except as set forth in this Note, (iii) release the Collateral or reduce
the amount of Collateral required to be deposited or maintained by the Company
pursuant to the Security Agreement, except as expressly provided in the Security
Agreement, (iv) amend, modify or waive any provision of this Section 7.3 or
(v) reduce any percentage specified in, or otherwise modify, the definition of
Majority Holders.  Notwithstanding anything
to the contrary contained herein, no amendment or waiver shall increase or
eliminate the Restricted Ownership Percentage, whether permanently or
temporarily, unless, in addition to complying with the other requirements of
this Note, such amendment or waiver shall have been approved in accordance with
the General Corporation Law of the State of Delaware and the Company's By-laws
by holders of the outstanding shares of Common Stock entitled to vote at a
meeting or by written consent in lieu of such
meeting.

    

    

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

    

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

    

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

    

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

    

     

    
      
         

        
        

      

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

    

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

    

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

    

    7.10 Payment of Note on Redemption or
Repurchase; Deposit of Optional Redemption Price or Repurchase Price,
Etc. (a) If
this Note or any portion of this Note is to be redeemed as provided in Section
2.1 or repurchased as provided in Sections 5.1 and 5.2 and any notice required
in connection therewith shall have been given as provided therein and the
Company shall have otherwise complied with the requirements of this Note with
respect thereto, then this Note or the portion of this Note to be so redeemed or
repurchased and with respect to which any such notice has been given shall
become due and payable on the date stated in such notice at the Optional
Redemption Price or Repurchase Price. On and after the Optional Redemption Date
or repurchase date so stated in such notice, provided that the Company shall
have deposited with an Eligible Bank on or prior to such Optional Redemption
Date or repurchase date, an amount in cash sufficient to pay the Optional
Redemption Price or Repurchase Price, interest on this Note or the portion of
this Note to be so redeemed or repurchased shall cease to accrue, and this Note
or such portion hereof shall be deemed not to be outstanding and shall not be
entitled to any benefit  with respect 

     

    
      
         

        
        

      

      
        43

        
          

        

      

      
        
        

      

    

    to
principal of or interest on the portion to be so redeemed or repurchased except
to receive payment of the Optional Redemption Price or
Repurchase Price. On presentation and surrender
of this Note or such portion hereof, this Note or the specified portion hereof
shall be paid and repurchased at the Optional Redemption Price or Repurchase
Price. If a portion of this Note is to be redeemed or repurchased, upon
surrender of this Note to the Company in accordance with the terms hereof, the
Company shall execute and deliver to the Holder without service charge, a new
Note or Notes, having the same date hereof and containing identical terms and
conditions, in such denomination or denominations as requested by the Holder in
aggregate principal amount equal to, and in exchange for, the unredeemed or
unrepurchased portion of the principal amount of this Note so
surrendered.

    

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

    

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

    

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

    

    

    [Remainder of Page Intentionally
Left Blank]

    

    
      
         

        
        

      

      
        44

        
          

        

      

      
        
        

      

    

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

     

     

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

    

    
      
        
           

        

        
        

      

      
        45

        
          

        

      

      
        
        

        
          

        

      

    

    ASSIGNMENT

    

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

    

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

    

    
      	 	
              [

            	
              ]

            	
              To
      the Company or a subsidiary thereof;
or

            

    

    

    
      	 	
              [

            	
              ]

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

            

    

    

    
      	 	
              [

            	
              ]

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

            

    

    

    
      	 	
              [

            	
              ]

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

            

    

    

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

     

    
      	 	
              [

            	
              ]

            	
              The
      transferee is an Affiliate of the
Company.

            

    

    

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

    

     

    
 

    
      	 Dated:____________________________________	  NAME:__________________________________________
	 	 __________________________________________
	 	
               Signature(s)

            

    

    
 

     

    

     

    

    

    
      
        
           

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

        

      

    

    Exhibit A

    

    

    COMPANY NOTICE

    (Section 5.2(a) of 6% Senior
Secured Convertible Note due 2007-2008)

    

    TO:  ______________________________

    (Name of
Holder)

    

    

    (1) A
Repurchase Event described in the 6% Senior Secured Convertible Note due
2007-2008 (the “Note”) of eMagin Corporation, a Delaware corporation (the
“Company”), occurred on                     ,
      . As a
result of such Repurchase Event, the Holder is entitled to exercise its
repurchase rights pursuant to Section 5.2 of the Note.

    

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

    

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

    

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

    

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

    

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

    

     

    

    

    
      	 Date_________________________________	 EMAGIN
      CORPORATION
	 	 By:____________________________________
	 	 Title:

    

    

     

    

      
        
          
             

          

          
          

        

        
          A-1

          
            

          

        

        
          
          

          
            

          

        

      

    Exhibit B

    

    HOLDER NOTICE

    (Section 5.2(b) of 6% Senior
Secured Convertible Note due 2007-2008)

    

    TO:   EMAGIN
CORPORATION

    

    (1) Pursuant
to the terms of the 6% Senior Secured Convertible Note due 2007-2008 (the
“Note”), the undersigned Holder hereby elects to exercise its right to require
repurchase by the Company pursuant to Sections 5.2(a) and 5.2(b) of
$                          of the
Note, equal to the sum of $                    
principal amount of the Note, $                     of
accrued and unpaid interest on such principal amount and $                     of
Default Interest on the Note at the Repurchase Price provided in the
Note.

    

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

    

     

    
 

    
      	 Date:_____________________	 NAME OF
      HOLDER:
	 	 ___________________________________
	 	 
	 	 By____________________________________________
      
	 	
               Signature
      of Registered Holder

              (Must
      be signed exactly as name

              appears
      in the Note.)

            

    

     

    

    
 

    
      
        
           

        

        
        

      

      
        B-1

        
          

        

      

      
        
        

        
          

        

      

    

     

    Exhibit C

    

    NOTICE OF
CONVERSION

    OF 6% SENIOR SECURED CONVERTIBLE NOTE
DUE 2007-2008

    OF EMAGIN
CORPORATION

    

    
      	
              To: eMagin
      Corporation

                  10500 N.E. 8th
      Street, Suite 1400 

                    Bellevue,
      Washington 98004

               

              Attention:
      Chief Financial Officer 

               

              Facsimile
      No.: (425) 749-3601

               

            	 
	 	 

    

    

    1. Pursuant
to the terms of the 6% Senior Secured Convertible Note Due 2007-2008 (the
“Note”), the undersigned hereby elects to convert $_______________ of the Note,
equal to the sum of $_______________ principal amount of the Note,
$_______________ of accrued and unpaid interest on such principal amount and
$_______________ of Default Interest on such interest into shares of Common
Stock of eMagin Corporation, a Delaware corporation (the “Company”), at a
Conversion Price per share equal to $_______________. Capitalized terms used
herein and not otherwise defined herein have the respective meanings provided in
the Note.

    

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

    

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

    

     

    
      	 ____________________________________________	____________________________________________ 
	 Name	 Name
	 	 
	____________________________________________	____________________________________________ 
	 Address	 Address
	____________________________________________ 	____________________________________________ 
	 SS or Tax ID
      Number 	
               SS or Tax ID Number

            
	 	 
	 	 
	
              Delivery
      Instructions

              for
      Common
      Stock:_____________________________________________________________________________________________________________________________

            

    

    
 

    
      
         

        
        

      

      
        C-1

        
          

        

      

      
        
        

      

    

    Portions
of installments of principal to which this conversion is allocated:

     

    
      	 Due Initial
      Installment Date:	 $____________
	 Due Maturity
      Date:	 $____________
	 	 
	 	 
	 	 NAME: ___________________________________________
	 	 
	 	 
	 	 
	 Date: _____________________________	 ___________________________________________
	 	
               Signature
      of Registered Holder

              (Must
      be signed exactly as name

              appears
      in the Note.)

            

    

    :   

        

    

    

    

     

    

    

    

      

    

    

    

    

    
      
        
           

        

        
        

      

      
        C-2

        
          

        

      

      
        
        

        
          

        

      

    

    

    Exhibit D

    

    

    OPTIONAL REDEMPTION
NOTICE

    (Section 2.1 of 6% Senior
Secured

    Convertible Note due
2007-2008)

    

    TO:_________________________________     

    (Name of
Holder)

    

    (1) Pursuant
to the terms of the 6% Senior Secured Convertible Note due 2007-2008 (the
“Note”), eMagin Corporation, a Delaware corporation (the “Company”), hereby
notifies the above-named Holder that the Company is exercising its right to
redeem the Note in accordance with Section 2.1 of the Note as set forth
below:

    

    (i) The
principal amount of the Note to be redeemed is $             .

    

    (ii) The
Optional Redemption Price is $               .

    

    (iii) The
Optional Redemption Date is               .

    

    (2) All of
the conditions specified in Section 2.1 of the Note entitling the Company to
call the Note for redemption have been satisfied.

    

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

    

     

    
      	 Date
    	 EMAGIN
      CORPORATION
	 	 
	 	 By:______________________________________
	 	 Name:
	 	 Title:

    

     

     

    

    
      
        
           

        

        
        

      

      
        D-1

        
          

        

      

      
        
        

        
          

        

      

    

    Exhibit E

    

    

    EMAGIN
CORPORATION

    

    CONVERSION
SCHEDULE

    

    This
Conversion Schedule shows reductions in the outstanding principal amount of the
6% Senior Secured Convertible Note due 2007-2008 (the “Note”) of eMagin
Corporation, a Delaware corporation, upon conversions pursuant to Section 6 of
the Note. Capitalized terms used in this Schedule and not otherwise defined
herein shall have the respective meanings provided in the Note.

    

    

    
      	 	
              Date
      of Conversion 

              (or
      for first entry, the Issuance Date)

            	
              Principal

              Amount
      of Conversion 

              (if
      applicable)

            	
              Principal
      Amount Remaining 

              Subsequent
      to Conversion 

              (or
      original Principal Amount)

            
	
              1.

            	
              7/_/06

            	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

    [continue
as necessary]

    

     

    E-1

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