S-1/A

As filed with the Securities and Exchange Commission on November 12, 2008

Registration No. 333-144865

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM S-1/A

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

eMagin Corporation

(Name of small business issuer in its charter)

Delaware	3679	56-1764501
(State or other Jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer
Incorporation or Organization)	Classification Code Number)	Identification No.)

10500 N.E. 8 th Street, Suite 1400,

Bellevue, WA 98004

(425)-749-3600

(Address and telephone number of principal executive offices and principal place of business)

Andrew G. Sculley, Chief Executive Officer

eMagin Corporation

10500 N.E. 8 th Street, Suite 1400,

Bellevue, WA 98004

(425)-749-3600

(Name, address and telephone number of agent for service)

Copies to:

  Richard A. Friedman, Esq.

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Flr.

New York, New York 10006

(212) 930-9700

(212) 930-9725 (fax)

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:

From time to time after this Registration Statement becomes effective.

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box:  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   o

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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CALCULATION OF REGISTRATION FEE

Title of each class of  securities to be registered	Amount to be registered		Proposed maximum offering price per share		Proposed maximum aggregate offering price (1)		Amount of registration fee (2)
Common Stock, $0.001 par value per share		2,450,000	$	0.38	$	931,000	$	36.59

(1)	Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the sale prices as reported on the OTCBB on October 14, 2008 which was $0.38 per share.
(2)	The registrant previously paid a filing fee in the amount of $113.00.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 12, 2008

eMagin Corporation

2,450,000 SHARES OF

COMMON STOCK

This prospectus relates to the resale by the selling stockholders of up to 2,450,000 shares of our common stock, consisting of up to (i) 1,000,000 shares issuable upon the exercise of common stock purchase warrants, (ii) 729,524 shares of common stock issuable upon conversion of the remaining $250,000 Stillwater Note (Original Stillwater Note (as described herein) of $500,000 less $250,000 partial Note conversion (as described in iii)) and accrued interest of $5,333 at a conversion price of $0.35 per share, and (iii) 720,476 shares of common stock issued (but not registered) to the selling stockholder due to the selling stockholder’s election to partially convert the Stillwater Note pursuant to its terms. With respect to the aforementioned subpart (iii) above, on July, 23 2007, Stillwater elected to convert $252,166.50 of the Stillwater Note representing $250,000 of the principal amount of the Note due on July 23, 2007 and $2,166.50 of accrued and unpaid interest into shares of common stock. Stillwater received 720,476 shares of the common stock at the conversion price of $0.35. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. We will pay the expenses of registering these shares.

Our common stock is listed on the Over-The-Counter Bulletin Board under the symbol “EMAN”. The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on October 14, 2008  was $0.50.

Investing in these securities involves significant risks. See “Risk Factors” beginning on page 10.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. You should read this prospectus carefully before you invest.

The date of this prospectus is  November         , 2008.

The information in this Prospectus is not complete and may be changed. This Prospectus is included in the Registration Statement that was filed by eMagin Corporation with the Securities and Exchange Commission. The selling stockholders may not sell these securities until the registration statement becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted.

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TABLE OF CONTENTS

	Page
Prospectus Summary	4
Risk Factors	10
Forward Looking Statements	15
Use of Proceeds	15
Market For Equity and Related Stockholder Matters	15
Selected Financial Data	16
Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Business	25
Description of Property	39
Legal Proceedings	39
Management	40
Executive Compensation	43
Indemnification for Securities Act Liabilities	55
Plan of Distribution	55
Description of Securities	57
Selling Stockholders	57
Transactions With Related Persons, Promoters and Certain Control Persons	62
Legal Matters	65
Experts	65
Available Information	65
Index to Financial Statements	66

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PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the “risk factors” section, the financial statements and the notes to the financial statements.

We design, develop, manufacture, and market virtual imaging products which utilize OLEDs, or organic light emitting diodes, OLED-on-silicon microdisplays and related information technology solutions. We integrate OLED technology with silicon chips to produce high-resolution microdisplays smaller than one-inch diagonally which, when viewed through a magnifier, create virtual images that appear comparable in size to that of a computer monitor or a large-screen television. Our products enable our original equipment manufacturer, or OEM, customers to develop and market improved or new electronic products. We believe that virtual imaging will become an important way for increasingly mobile people to have quick access to high resolution data, work, and experience new more immersive forms of communications and entertainment.

Our first commercial product, the SVGA+ (Super Video Graphics Array of 800x600 picture elements plus 52 added columns of data) OLED microdisplay was initially offered for sampling in 2001, and our first SVGA-3D (Super Video Graphics Array plus built-in stereovision capability) OLED microdisplay was shipped in early 2002. These products are being applied or considered for near-eye and headset applications in products such as entertainment and gaming headsets, handheld Internet and telecommunication appliances, viewfinders, and wearable computers to be manufactured by OEM customers for military, medical, industrial, and consumer applications. We market our products globally.

In 2006 we introduced our OLED-XL technology, which provides longer luminance half life and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. We are in the process of completing development of 2 additional OLED microdisplays, namely the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA display with a new cell architecture with embedded features) and an SXGA (1280 x 1024 picture elements).

In January 2005 we announced the world's first personal display system to combine OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm), which was first shipped in mid-2005. This product was recognized as a Digital Living Class of 2005 Innovators, and received the Consumer Electronics Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation Awards for the entire display category as well as a Design and Innovations Award for the electronic gaming category. In February 2007 the Z800 3DVisor, as integrated in Chatten Associates’ head-aimed remote viewer, was recognized as one of Advanced Imaging's Solutions of the Year.

We believe that our OLED-on-silicon microdisplays offer a number of advantages over current liquid crystal microdisplays, including greatly increased system level power efficiency, less weight and wider viewing angles. Using our active matrix OLED technology, many computer and video electronic system functions can be built directly into the OLED-on-silicon microdisplay, resulting in compact systems with expected lower overall system costs relative to alternative microdisplay technologies. We have developed our own technology to create high performance OLED-on-silicon microdisplays and related optical systems and we have licensed certain fundamental OLED and display technology from Eastman Kodak.

As the first to exploit OLED technology for microdisplays, and with the support of our partners and the development of our intellectual property, we believe that we enjoy a significant advantage in the commercialization of this display technology for virtual imaging. We believe we are the only company to sell full-color active matrix small molecule OLED-on-silicon microdisplays.

eMagin Corporation was created through the merger of Fashion Dynamics Corporation ("FDC"), which was organized on January 23, 1996 under the laws of the State of Nevada and FED Corporation ("FED"), a developer and manufacturer of optical systems and microdisplays for use in the electronics industry. FDC had no active business operations other than to acquire an interest in a business. On March 16, 2000, FDC acquired FED. The merged company changed its name to eMagin Corporation. Following the merger, the business conducted by eMagin is the business conducted by FED prior to the merger.

Our website is located at www.emagin.com and our e-commerce site is www.3dvisor.com. The contents of our website are not part of this Prospectus.

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The Offering

Common stock offered by selling stockholders	Up to 2,450,000 shares, consisting of the following:
	· 729,524 shares of common stock issuable upon conversion of the remaining Stillwater Note of $250,000 and accrued interest of $5,333 at a conversion price of $0.35 per share and 720,476 shares of common stock issued (but not registered) to Stillwater due to Stillwater's election to partially convert the Stillwater Note pursuant to its terms.*
	·   up to 1,000,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $0.48 per share.
Common Stock to be outstanding after the offering	16,748,363 shares**
Use of proceeds	We will not receive any proceeds from the sale of the common stock; however we will receive proceeds from the exercise of our warrants.
Over-The-Counter Bulletin Board Symbol	EMAN

* On July, 23 2007, Stillwater elected to convert $252,166.50 of the Stillwater Note representing $250,000 of the principal amount of the Note due on July 23, 2007 and $2,166.50 of accrued and unpaid interest into shares of common stock. Stillwater received 720,476 shares of the common stock at the conversion price of $0.35.

**The information above regarding the common stock to be outstanding after the offering is based on 15,018,839 shares of the Company’s common stock outstanding as of October 14, 2008. 

Recent Developments

Amendment of Stillwater Note Purchase Agreement (the “Stillwater Note”) - April 2007

As previously reported in the Form 8-K dated July 25, 2006, on July 21, 2006, eMagin Corporation (the “Company”) entered into a Note Purchase Agreement (the “Stillwater Agreement”) with Stillwater LLC (“Stillwater”) which provides for the purchase and sale of a 6% senior secured convertible note in the principal amount of up to $500,000, together with a warrant (the “Stillwater Warrant”) to purchase 70% of the number of shares issuable upon conversion of the Stillwater Note, at the sole discretion of the Company by delivery of a notice to Stillwater on December 14, 2006.  Interest payments from the Stillwater Note are to be made in cash, unless Stillwater elects to convert any portion of the principal of the Stillwater Note plus any accrued and unpaid interest for such principal amount.

As previously reported in the Form 8-K dated April 13, 2007, by way of amendment to the Stillwater Agreement, dated March 28, 2007 (the “Amendment”), the Company and Stillwater agreed to certain amendments to the Stillwater Agreement. Based upon the provisions of the Stillwater Agreement, Stillwater was bound to purchase the Stillwater Note and the Stillwater Warrant so long as the conditions to closing as set forth in the Stillwater Agreement were satisfied by the Company.  However, prior to Stillwater’s obligation to purchase the Stillwater Note and Stillwater Warrant, the Company received notice from the American Stock Exchange (“AMEX”) that it was no longer in compliance with their listing requirements, and the Company was subsequently de-listed in March of 2007. Since compliance with the AMEX listing requirements was a condition of closing in the Stillwater Agreement, Stillwater was no longer obligated to purchase the Stillwater Note and Stillwater Warrant.  Therefore, among other things, pursuant to the Amendment, the parties agreed to a new   conversion price for the Stillwater Note of $0.35 per share, a new exercise price for the Stillwater Warrant of $0.48 per share , a new closing date, and amended certain closing conditions, including the following: on the closing date, (i) trading in securities on the New York Stock Exchange, Inc., the AMEX, Nasdaq, the Nasdaq Capital Market, the Over-The-Counter Bulletin Board, the Pink Sheets, LLC or any similar organization shall not have been suspended or materially limited, (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, and (iii) the Company has obtained waivers from all the note holders of the other notes or has executed an additional Allonge with the majority holders to amend Section 3.2 of the Note and other notes to provide that the Company maintain cash and cash equivalents balances of at least equal to $200,000 from April 1, 2007 through and including May 15, 2007 and that subsequent to May 15, 2007 the Company maintain cash and cash equivalents balances of at least equal to $600,000.

If all of the Stillwater Warrants are exercised for cash, the Company would receive $480,000, which would be used for working capital and other corporate purposes. There cannot be any assurances that any of the Stillwater Warrants will be exercised. The closing for the sale of the Stillwater Note and Stillwater Warrant was completed on April 9, 2007 and the Company issued Stillwater the Stillwater Note in a 6% Senior Secured Convertible Note in the principal amount of $500,000 and the Stillwater Warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.48 in accordance with the terms of the Stillwater Agreement and Amendment. Interest payments from the Stillwater Note are to be made in cash, unless Stillwater elects to convert any portion of the principal of the Stillwater Note plus any accrued and unpaid interest for such principal amount.  The principal of the Stillwater Note was due in installments as follows:

Principal Amount		Due Date*
$	250,000	July 23, 2007**
$	250,000	January 21, 2008

* If the due date falls on a non-business day, the payment date will be the next business day. 

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 **On July, 23 2007, Stillwater elected to convert $252,166.50 of the Note representing $250,000 of the principal amount of the Note due on July 23, 2007 and $2,166.50 of accrued and unpaid interest into shares of common stock. Stillwater received 720,476 shares of the common stock at the conversion price of $0.35.

This prospectus covers the resale by Stillwater of the above-referenced common stock underlying the Stillwater Note and the Stillwater Warrant.

Amendment Agreements - July 2007

As previously reported in the Form 8-K of the Company dated as of July 25, 2006, the Company entered into several Note Purchase Agreements (the “Original Purchase Agreements”), including the Stillwater Agreement, to sell to certain qualified institutional buyers and accredited investors $5,990,000 in principal amount 6% Senior Secured Convertible Notes Due July 21, 2007 and January 21, 2008 (the “Notes”), together with warrants (the “Warrants”) to purchase 1,612,700 shares of the Company’s common stock, par value $0.001 per share at $3.60 per share.

As previously reported in the Form 8-K of the Company dated as of July 25, 2007, by way of Amendment Agreements dated July 23, 2007 (the “Amendment Agreements”) between the Company and each of the holders of the Notes, including Stillwater (each a “Holder” and collectively, the “Holders”), the Company agreed to issue each Holder an amended and restated Note for the outstanding Notes (the “Amended Notes”) in the principal amount equal to the principal amount outstanding as of July 23, 2007 and an amended restated Warrant (the “Amended Warrants”).   The changes to the Amended Notes and Amended Warrants include the following:

· The maturity date for the Amended Notes (totaling after conversions an aggregate of $6,020,000)  was extended to December 21, 2008;

· Liquidated damages of 1% per month related to the Company’s delisting from the American Stock Exchange will no longer accrue and the deferred interest balance of approximately $230,000 has been forgiven;

· The Company no longer has to maintain a minimum cash or cash equivalents balances of $600,000;

· The Amended Notes may not be prepaid without the consent of the Holders;

· As of July 23, 2007 the interest rate was raised from 6% per annum to 8% per annum;

· The Amended Notes are convertible into (i) 8,407,612 shares of the Company’s common stock.  The conversion price for the Amended Notes was revised from $2.60 to $.75 per share except for the Stillwater Note which remained $.35 per share for $250,000 of principal (which represents the remaining portion of the original principal balance of $500,000 after Stillwater’s partial conversion);

· In addition to the right to convert the Amended Notes in the Company’s common stock, up to $3,010,000 of the Amended Notes can be converted into (ii) 3,010 shares of the Company’s newly formed Series A Senior Secured Convertible Preferred Stock (the “Preferred”) at a stated value of $1,000 per share.  The Preferred is convertible into common stock at $.75 per share, subject to adjustment as provided for in the Certificate of Designations (discussed below);

· Except for the Stillwater Warrant whose exercise price was unchanged, the Amendment Agreements adjusted the exercise price of the Amended Warrants from $3.60 to $1.03 per share for 1,553,468 shares of common stock and requires the issuance of Warrants exercisable for an additional 3,831,859 shares of common stock  at  $1.03 per share with an expiration date of July 21, 2011;

· The Amended Notes eliminate the requirement that the Company comply with certain covenants of management contained in the Notes. Specifically, among other things, the requirements to defer management compensation and to maintain a management committee were removed; and

· The Amended Notes and/or the Preferred are subject to certain anti-dilution adjustment rights in the event the Company issues shares of its common stock or securities convertible into its common stock at a price per share that is less than the Conversion Price, in which case the Conversion Price shall be adjusted to such lower price.  The Amended Warrants are subject to certain anti-dilution adjustment rights in the event the Company issues shares of its common stock or securities convertible into its common stock at a price per share that is less than the Strike Price, in which case the Strike Price shall be adjusted to the lower of (1) 138% of the price at which such common stock is issued or issuable and (2) the exercise price of warrants, issued in such transaction.

Pursuant to the Amended Notes, the Company cannot enter into a transaction that constitutes a Fundamental Change without the consent of the Holders.  A Fundamental Change includes the following:

· the consolidation or merger of the Company or any of its subsidiaries;

· the acquisition by a person or group of entities acting in concert of 50% or more of the combined voting power of the outstanding  securities of the Company; and

· the occurrence of any transaction or event in which all or substantially all of the shares of the Company’s common stock is exchanged for converted into acquired for or constitutes the right to receive consideration which is not all or substantially all common stock which is listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting securities prices.

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Pursuant to the Amendment Agreements, the Company filed a Certificate of Designations of Series A Senior Secured Convertible Preferred Stock (the “Certificate of Designations”). The Certificate of Designations designates 3,198 shares of the Company’s preferred stock as Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”).  Each share of the Preferred Stock has a stated value of $1,000.  The Preferred Stock is entitled to cumulative dividends which accrue at a rate of 8% per annum, payable on December 21, 2008. Each share of Preferred Stock has voting rights equal to (1) in any case in which the Preferred Stock votes together with the Company’s common stock or any other class or series of stock of the Company, the number of shares of common stock issuable upon conversion of such shares of Preferred Stock at such time (determined without regard to the shares of common stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any case not covered by the immediately preceding clause one vote per share of Preferred Stock.  The Certificate of Designations prohibits the Company from entering into a Fundamental Change without consent of the Holders and contains antidilution adjustments rights that are comparable to the antidilution adjustments contained in the Amended Notes.

Pursuant to the Amendment Agreements, the Company was required to file a registration statement with the Securities and Exchange Commission by August 31, 2007 covering the resale of 100% of the sum of (a) the number of shares issuable upon conversion of the Amended Notes and Preferred Stock, and (b) the number of shares issuable upon exercise of the Warrants.

Pursuant to the Amendment Agreement, the Company and the Collateral Agent, on behalf of the note holders, executed Amendment No. 1 to the Pledge and Security Agreement; Amendment No. 1 to Patent and Trademark Security Agreement; and Amendment No. 1 to Lockbox Agreement.  The Pledge and Security Agreement, Trademark Security Agreement and Lockbox Agreement were previously entered into on July 21, 2006 (collectively, the “Ancillary Agreements”).  The Ancillary Agreements were amended to cover obligations that may become payable to holders of Preferred Stock, to delete certain definitions used in the Ancillary Agreements and substitute definitions of terms used in the Ancillary Agreements.

The summary of amendment terms contained herein does not include all information included in the Amendment Agreement, the Amended Notes, the Amended Warrants, the Certificate of Designations or the Ancillary Agreements and, consequently, is qualified in its entirety by reference to the entire text of the Amendment Agreements and the forms of the Amended Notes, Amended Warrants, Certificate of Designations, Amendment No. 1 to Pledge and Security Agreement, Amendment No. 1 to Patent and Trademark Security Agreement and Amendment No. 1 to Lockbox Agreement.

Securities Purchase Agreement – April 2008

As previously reported on a Form 8-K that was filed with the Securities and Exchange Commission on April 4, 2008, the Company entered into a Securities Purchase Agreement on April 2, 2008,  (the “Purchase Agreement”) pursuant to which it sold to certain qualified institutional buyers and accredited investors (the “Investors”) an aggregate of 1,586,539 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), and warrants to purchase an additional 793,273 shares of common stock, for an aggregate purchase price of $1,650,000. The purchase price of the common stock was $1.04 per share and the strike price of the corresponding warrant was $1.30 per share. The warrants expire April 2, 2013.

The Company entered into a Registration Rights Agreement with the Investors to register the resale of the Shares sold in the offering and the shares of common stock issuable upon exercise of the warrants.  Subject to the terms of the Registration Rights Agreement, the Company is required to file a registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”) within 45 days of the closing, to use its best efforts to cause the registration statement to be declared effective under the Securities Act of 1933 (the “Act”) as promptly as possible after the filing thereof, but in no event later than 90 days after the filing date and no later than 120 days after the filing date in the event of SEC review of the registration statement. The Company filed the registration statement within the 45 day period however the Company was notified that the registration statement was under review by the SEC.  The Company failed to file the amended registration statement by August 2, 2008 which was the 120th day from the signing of the Purchase Agreement and therefore the registration statement is not effective.

As the registration statement was not effective within the grace periods (“Event Date”), the Company must pay partial liquidated damages (“damages”) in cash to each investor equal to 2% of the aggregate purchase price paid by each investor under the Purchase Agreement on the Event Date and each monthly anniversary of the Event Date (or on a pro-rata basis for any portion of a month) until the registration statement is effective.  The Company is not liable for any damages with respect to the warrants or warrant shares.  The maximum damages payable to each investor is 36% of the aggregate purchase price.  If the Company fails to pay the damages to the investors within 7 days after the date payable, the Company must pay interest at a rate of 15% per annum to each investor which accrues daily from the date payable until damages are paid in full.  The Company estimated $399 thousand to be the maximum potential damages that the Company may be required to pay the investors if the registration statement is not effective within three years of the signing of the agreement. The Company estimated $66 thousand to be a reasonable estimate of the potential damages that may be due to the investors based on the anticipated filing date.

The Company claims an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about the company and their investment, the investors took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.

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Moriah Capital Loan Agreement and Amendments

As previously reported on a Form 8-K that was filed with the Securities and Exchange Commission on August 10, 2007, the Company and Moriah Capital LP (“Moriah”) entered into a Loan and Security Agreement, dated as of August 7, 2007 (the “Loan and Security Agreement”), which was amended as of January 30, 2008 by Amendment No. 1 and on March 18, 2008 by Amendment No. 2 (collectively, the “Original Agreement”).

As previously reported on a Form 8-K that was filed with the Securities and Exchange Commission on August 26, 2008, the Company and Moriah entered into Amendment No. 3 to the Loan and Security Agreement dated August 20, 2008 (the “Amendment No. 3”). Pursuant to Amendment No. 3, the Company issued Moriah an Amended and Restated Convertible Revolving Loan Note (the “Amended Note”).   The maturity date of the Amended Note has been extended to August 7, 2009 and the maximum amount that the Company can borrow pursuant to the Amended Note was increased to $3,000,000. The maturity date of the original revolving loan note had previously been extended to August 20, 2008.

Pursuant to Amendment No. 3, the Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase up to 370,000 shares of the Company’s common stock at an exercise price of $1.30 per share. In connection with Amendment No. 3, the Company will pay Moriah $85,000 in fees.  As previously reported, pursuant to Original Agreement, the Company issued Moriah warrants to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share.

Pursuant to Amendment No. 3, the Company and Moriah entered into an Amended and Restated Securities Issuance agreement (the “Amended and Restated Securities Issuance Agreement”). In connection with a Securities Issuance Agreement, dated as of August 7, 2007 (the “Original Securities Issuance Agreement”), the Company issued Moriah 162,500 shares of the Company’s common stock (the “2007 Shares”).  Pursuant to the Amended and Restated Securities Issuance Agreement, Moriah agreed to waive the Company’s obligation to buy back the 2007 Shares with respect to 125,000 of such shares and to defer the Company’s obligation to buy back 37,500 of such 2007 Shares  (collectively, the “Put Waiver”). Pursuant to the Amended and Restated Securities Agreement, the Company is issuing Moriah 485,000 shares of its Common Stock (of which 125,000 shares were issued in consideration for the Put Waiver from Moriah and 360,000 shares were issued in lieu of the issuance to Moriah of the Contingent Issued Shares (as described in the Original Securities Issuance Agreement)). Additionally, pursuant to the Amended and Restated Securities Issuance Agreement, the Company has also granted Moriah a put option pursuant to which Moriah can sell to the Company 162,500 shares of its common stock issued under the Amended and Restated Securities Agreement for $195,000, pro-rated for any portion thereof (the “2007 Put Price”). The 2007 Put Option shall automatically be deemed exercised by Moriah unless Moriah delivers written notice to the Company at any time between July 1, 2009 and August 1, 2009 that it does not wish to exercise the 2007 Put Option. The Company also granted Moriah a second put option pursuant to which Moriah can sell 360,000 of the shares issued to Moriah pursuant to the Amended and Restated Securities Purchase Agreement to the Company for $234,000 (the “2008 Put Option”).  The 2008 Put Option shall automatically be deemed exercised by Moriah unless Moriah delivers written notice to the Company at any time between July 1, 2009 and August 1, 2009 that Moriah does not wish to exercise the 2008 Put option in whole or in part.

Pursuant to Amendment No. 3, the Company and Moriah entered into an Amendment to Registration Rights Agreement (the “Amended Registration Rights Agreement”).   Pursuant to the Amended Registration Rights Agreement, the Company agreed to use its best efforts to file a registration statement to register the 485,000 shares of the Company’s common stock issued pursuant to the Amended and Restated Securities Issuance Agreement and the shares of common stock issuable upon exercise of the Warrant, provided that the Company is permitted under applicable securities rules and regulations and after the certain other registration statements that the Company was obligated to file on behalf of selling shareholders have been  declared effective.

On August 19, 2008, the Holders of the Amended Notes and the Investors in the Purchase Agreement consented to the Company’s execution of the Amended Note, Amendment No. 3, Amended and Restated Securities Issuance Agreement, and the Amended Registration Rights Agreement.  In consideration for the consent, a total of 144,000 shares of common stock were issued to the Holders and Investors based on individual participation in the Amended Notes and Securities Purchase Agreement on September 4, 2008.

The Company claims an exemption from the registration requirements of the Securities Act of 1933, amended (the "Act") for the private placement of the above-referenced securities pursuant to Section 4(2) of the Act since, among other things, these transactions did not involve a public offering and the Company took appropriate measures to restrict the transfer of the securities.

The foregoing description of Amendment No. 3 to the Loan and Security Agreement, the Amended and Restated Revolving Loan Note, the Amended and Restated Securities Issuance Agreement, and the Amendment to the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the entire text of the agreements.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The statements of operations data for the years ended December 31, 2007, 2006, and 2005 and the balance sheet data at December 31, 2007 and 2006 are derived from our audited financial statements which are included in our Form 10-K filed with the Securities and Exchange Commission on April 14, 2008 and included elsewhere herein. The statements of operations data for the years ended December 31, 2004 and 2003 and the balance sheet data at December 31, 2005, 2004, and 2003 are derived from our audited financial statements which are not included herein. The statements of operations data for the six months ended June 30, 2008 and 2007 and the balance sheet data at June 30, 2008 and 2007 are derived from our unaudited condensed consolidated interim financial statements filed with the Securities and Exchange Commission on August 14, 2008. The historical results are not necessarily indicative of results to be expected for future periods. The following information is presented in thousands, except per share data.

Consolidated Statements of Operations Data:

	Year Ended December 31,															Six Months Ended June 30, (unaudited)
	2007			2006			2005			2004			2003			2008			2007
	(In thousands, except per share data)
Revenue	$	17,554		$	8,169		$	3,745		$	3,593		$	2,578		$	8,284		$	7,841
Cost of goods sold		12,628			11,359			10,219			5,966			5,141			5,309			6,061
Gross profit (loss)		4,926			(3,190	)		(6,474	)		(2,373	)		(2,563	)		2,975			1,780
Operating expenses:
Research and development		2,949			4,406			4,020			898			19			1,308			1,740
Selling, general and administrative		6,591			8,860			6,316			4,428			5,712			3,504			3,764
Total operating expenses		9,540			13,266			10,336			5,326			5,731			4,812			5,504
Loss from operations		(4,614	)		(16,456	)		(16,810	)		(7,699	)		(8,294	)		(1,837	)		(3,724	)
Other income (expense), net		(13,874	)		1,190			282			(5,012	)		3,571			(959	)		(941	)
Net loss	$	(18,488	)		(15,266	)	$	(16,528	)	$	(12,711	)	$	(4,723	)	$	(2,796	)	$	(4,665	)
Basic and diluted loss per share	$	(1.59	)		(1.52	)	$	(1.94	)	$	(1.98	)	$	(1.31	)	$	(0. 21	)	$	(0.42	)
Shares used in calculation of loss per share:
Basic and diluted		11,633			10,058			8,541			6,428			3,599			13,471			10,984

Consolidated Balance Sheet Data:

	December 31,																	June 30, (unaudited)
	2007				2006			2005			2004			2003				2008				2007
	(In thousands)
Cash and cash equivalents		$	713			1,415			$	6,727		$	13,457		$	1,054			$	1,038			$	690
Working (deficit) capital			(4,708	)		(305	)			8,868			14,925			106				(4,429	)			(5,008	)
Total assets			6,648			7,005				14,142			18,436			3,749				8,026				5,544
Long-term obligations			60			2,229				56			22			6,161				41				78
Total shareholders’ (deficit) equity		$	(3,975	)		(1,164	)		$	10,401		$	16,447		$	(4,767	)		$	(3,653	)		$	(4,169	)

9

RISK FACTORS  

You should carefully consider the following risk factors and the other information included herein as well as the information included in other reports and filings made with the SEC before investing in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.

RISKS RELATED TO OUR FINANCIAL RESULTS

We have a history of losses since our inception and may incur losses for the foreseeable future

Our accumulated losses are $202 million as of June 30, 2008.  We have not yet achieved profitability and we cannot give assurance that we will achieve profitability within the foreseeable future as we fund operating and capital expenditures in areas such as market development, sales and marketing, manufacturing equipment, acquisitions, and research and development. We cannot assure investors that we will ever achieve or sustain profitability or that our operating losses will not increase in the future.

We may not be able to execute our business plan and may not generate cash from operations.

As we have reported, our business has experienced and is currently experiencing revenue growth during the six months ended June 30, 2008. We anticipate that our cash requirements to fund operating or investing activities over the next twelve months may be greater than our current cash on hand and borrowing availability under our revolving credit facility.  In the event that cash flow from operations is less than anticipated and we are unable to secure additional funding to cover our expenses, in order to preserve cash, we would be required to reduce expenditures and effect reductions in our corporate infrastructure, either of which could have a material adverse effect on our ability to continue our current level of operations. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms.

We may be subject to fines, sanctions, and/or penalties of an indeterminable nature as a result of potential violations of federal securities laws.

In July 2006, we entered into a Note Purchase Agreement with Stillwater LLC, which provided for the purchase and sale of a 6% senior secured convertible note in principal amount of up to $500,000 (the “Stillwater Note”) and a warrant to purchase 70% percent of the number of shares issuable upon conversion of the Stillwater Note, at our sole discretion by delivery of a notice to Stillwater on December 14, 2006.  We then filed a registration statement on Form S-3 up to 41,088,445 shares of common stock issuable upon conversion of our 6% senior secured convertible notes or exercise of warrants, which following the effectuation by the Company of a one-for-ten reverse stock split on November 3, 2006, amounted to 4,108,845 shares.  In July 2007, we amended the agreements with Stillwater.  Amending the Stillwater agreements without first withdrawing the Registration Statement on Form S-3 may be inconsistent with Section 5 of the Securities Act of 1933, as amended, and we may be subject to fines, sanctions and/or penalties of an indeterminable nature as a result of potential violations of federal securities laws.  If we are assessed fines and penalties our business will be materially affected.

The issuance of shares of common stock in connection with the conversion of the Notes may have not have been in compliance with certain state and federal securities laws and any damages that we may have to pay as a result of such issuance could have a material adverse effect on our revenues, profits, results of operations, financial condition and future prospects.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

Our unaudited condensed consolidated financial statements as of June 30, 2008 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm issued a report dated April 9, 2008 in connection with the audit of the 2007 financial statements that included an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern without obtaining additional capital or financing becoming available. Our ability to continue as a going concern ultimately depends on our ability to generate a profit which is likely dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

RISKS RELATED TO MANUFACTURING

The manufacture of OLED-on-silicon is new and OLED microdisplays have not been produced in significant quantities.

If we are unable to produce our products in sufficient quantity, we will be unable to maintain and attract new customers. In addition, we cannot assure you that once we commence volume production we will attain yields at high throughput that will result in profitable gross margins or that we will not experience manufacturing problems which could result in delays in delivery of orders or product introductions.

We are dependent on a single manufacturing line.

We currently manufacture our products on a single manufacturing line. If we experience any significant disruption in the operation of our manufacturing facility or a serious failure of a critical piece of equipment, we may be unable to supply microdisplays to our customers. For this reason, some OEMs may also be reluctant to commit a broad line of products to our microdisplays without a second production facility in place. However, we try to maintain product inventory to fill the requirements under such circumstances. Interruptions in our manufacturing could be caused by manufacturing equipment problems, the introduction of new equipment into the manufacturing process or delays in the delivery of new manufacturing equipment. Lead-time for delivery of manufacturing equipment can be extensive. No assurance can be given that we will not lose potential sales or be unable to meet production orders due to production interruptions in our manufacturing line. In order to meet the requirements of certain OEMs for multiple manufacturing sites, we will have to expend capital to secure additional sites and may not be able to manage multiple sites successfully.

10

We could experience manufacturing interruptions, delays, or inefficiencies if we are unable to timely and reliably procure components from single-sourced suppliers.

We maintain several single-source supplier relationships, either because alternative sources are not available or because the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations.  If the supply of a critical single-source material or component is delayed or curtailed, we may not be able to ship the related product in desired quantities and in a timely manner.  Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could harm operating results.

We expect to depend on semiconductor contract manufacturers to supply our silicon integrated circuits and other suppliers of key components, materials and services.

We do not manufacture the silicon integrated circuits on which we incorporate our OLED technology. Instead, we expect to provide the design layouts to semiconductor contract manufacturers who will manufacture the integrated circuits on silicon wafers. We also expect to depend on suppliers of a variety of other components and services, including circuit boards, graphic integrated circuits, passive components, materials and chemicals, and equipment support. Our inability to obtain sufficient quantities of high quality silicon integrated circuits or other necessary components, materials or services on a timely basis could result in manufacturing delays, increased costs and ultimately in reduced or delayed sales or lost orders which could materially and adversely affect our operating results.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

We rely on our license agreement with Eastman Kodak for the development of our products.

We rely on our license agreement with Eastman Kodak for the development of our products, and the termination of this license, Eastman Kodak's licensing of its OLED technology to others for microdisplay applications, or the sublicensing by Eastman Kodak of our OLED technology to third parties, could have a material adverse impact on our business.

Our principal products under development utilize OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce key patents held by Eastman Kodak, relating to OLED display technology. Eastman Kodak's patents expire at various times in the future. Our license with Eastman Kodak could terminate if we fail to perform any material term or covenant under the license agreement. Since our license from Eastman Kodak is non-exclusive, Eastman Kodak could also elect to become a competitor itself or to license OLED technology for microdisplay applications to others who have the potential to compete with us. The occurrence of any of these events could have a material adverse impact on our business.

We may not be successful in protecting our intellectual property and proprietary rights.

We rely on a combination of patents, trade secret protection, licensing agreements and other arrangements to establish and protect our proprietary technologies. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. Patents may not be issued for our current patent applications, third parties may challenge, invalidate or circumvent any patent issued to us, unauthorized parties could obtain and use information that we regard as proprietary despite our efforts to protect our proprietary rights, rights granted under patents issued to us may not afford us any competitive advantage, others may independently develop similar technology or design around our patents, our technology may be available to licensees of Eastman Kodak, and protection of our intellectual property rights may be limited in certain foreign countries. On April 30, 2007, the U.S. Supreme Court, in KSR International Co. vs. Teleflex, Inc., mandated a more expansive and flexible approach towards a determination as to whether a patent is obvious and invalid, which may make it more difficult for patent holders to secure or maintain existing patents. Any future infringement or other claims or prosecutions related to our intellectual property could have a material adverse effect on our business. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. Protection of intellectual property has historically been a large yearly expense for eMagin. We have not been in a financial position to properly protect all of our intellectual property, and may not be in a position to properly protect our position or stay ahead of competition in new research and the protecting of the resulting intellectual property.

11

RISKS RELATED TO THE MICRODISPLAY INDUSTRY

The commercial success of the microdisplay industry depends on the widespread market acceptance of microdisplay systems products.

The market for microdisplays is emerging. Our success will depend on consumer acceptance of microdisplays as well as the success of the commercialization of the microdisplay market. As an OEM supplier, our customer's products must also be well accepted. At present, it is difficult to assess or predict with any assurance the potential size, timing and viability of market opportunities for our technology in this market. The viewfinder microdisplay market sector is well established with entrenched competitors with whom we must compete.

The microdisplay systems business is intensely competitive.

We do business in intensely competitive markets that are characterized by rapid technological change, changes in market requirements and competition from both other suppliers and our potential OEM customers. Such markets are typically characterized by price erosion. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Our ability to compete successfully will depend on a number of factors, both within and outside our control. We expect these factors to include the following:

·   our success in designing, manufacturing and delivering expected new products, including those implementing new technologies on a timely basis;

·   our ability to address the needs of our customers and the quality of our customer services;

·   the quality, performance, reliability, features, ease of use and pricing of our products;

·   successful expansion of our manufacturing capabilities;

·   our efficiency of production, and ability to manufacture and ship products on time;

·   the rate at which original equipment manufacturing customers incorporate our product solutions into their own products;

·   the market acceptance of our customers' products; and

·   product or technology introductions by our competitors.

Our competitive position could be damaged if one or more potential OEM customers decide to manufacture their own microdisplays, using OLED or alternate technologies. In addition, our customers may be reluctant to rely on a relatively small company such as eMagin for a critical component. We cannot assure you that we will be able to compete successfully against current and future competition, and the failure to do so would have a materially adverse effect upon our business, operating results and financial condition.

The display industry may be cyclical.

Our business strategy is dependent on OEM manufacturers building and selling products that incorporate our OLED displays as components into those products. Industry-wide fluctuations and downturns in the demand for flat panel displays could cause significant harm to our business. The OLED microdisplay sector may experience overcapacity, if and when all of the facilities presently in the planning stage come on line, leading to a difficult market in which to sell our products.

Competing products may get to market sooner than ours.

Our competitors are investing substantial resources in the development and manufacture of microdisplay systems using alternative technologies such as reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix electroluminescence and scanning image systems, and transmissive active matrix LCDs. Our competitive position could be damaged if one or more of our competitors’ products get to the market sooner than our products. We cannot assure you that our product will get to market ahead of our competitors or that we will be able to compete successfully against current and future competition.  The failure to do so would have a materially adverse effect upon our business, operating results and financial condition.

Our competitors have many advantages over us.

As the microdisplay market develops, we expect to experience intense competition from numerous domestic and foreign companies including well-established corporations possessing worldwide manufacturing and production facilities, greater name recognition, larger retail bases and significantly greater financial, technical, and marketing resources than us, as well as from emerging companies attempting to obtain a share of the various markets in which our microdisplay products have the potential to compete. We cannot assure you that we will be able to compete successfully against current and future competition, and the failure to do so would have a materially adverse effect upon our business, operating results and financial condition.

Our products are subject to lengthy OEM development periods.

We plan to sell most of our microdisplays to OEMs who will incorporate them into products they sell. OEMs determine during their product development phase whether they will incorporate our products. The time elapsed between initial sampling of our products by OEMs, the custom design of our products to meet specific OEM product requirements, and the ultimate incorporation of our products into OEM consumer products is significant often with a duration of between one and three years. If our products fail to meet our OEM customers' cost, performance or technical requirements or if unexpected technical challenges arise in the integration of our products into OEM consumer products, our operating results could be significantly and adversely affected. Long delays in achieving customer qualification and incorporation of our products could adversely affect our business.

12

Our products will likely experience rapidly declining unit prices.

In the markets in which we expect to compete, prices of established products tend to decline significantly over time. In order to maintain our profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate many opportunities to reduce production costs over time, there can be no assurance that these cost reduction plans will be successful, that we will have the resources to fund the expenditures necessary to implement certain cost-saving measures, or that our costs can be reduced as quickly as any reduction in unit prices. We may also attempt to offset the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes or adjusting our product mix. If we fail to do so, our results of operations would be materially and adversely affected.

RISKS RELATED TO OUR BUSINESS

Our success depends on attracting and retaining highly skilled and qualified technical and consulting personnel.

We must hire highly skilled technical personnel as employees and as independent contractors in order to develop our products. The competition for skilled technical employees is intense and we may not be able to retain or recruit such personnel. We must compete with companies that possess greater financial and other resources than we do, and that may be more attractive to potential employees and contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and other fringe benefits offered to employees in order to attract and retain such personnel. The costs of attracting and retaining new personnel may have a materially adverse affect on our business and our operating results. In addition, difficulties in hiring and retaining technical personnel could delay the implementation of our business plan.

Our success depends in a large part on the continuing service of key personnel.

Changes in management could have an adverse effect on our business. We are dependent upon the active participation of several key management personnel and will also need to recruit additional management in order to expand according to our business plan. The failure to attract and retain additional management or personnel could have a material adverse effect on our operating results and financial performance.

The ineffectiveness of our internal control over financial reporting could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules and regulations promulgated by the SEC to implement Section 404, we are required to include in our Form 10-K an annual report by our management regarding the effectiveness of our internal control over financial reporting.  The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year.  This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

As of June 30, 2008, our internal control over financial reporting was ineffective due to the presence of material weaknesses, as more fully described in Item 9A of the December 31, 2007 Form 10-K filed with the SEC on April 14, 2008.  This could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.

Our business depends on new products and technologies.

The market for our products is characterized by rapid changes in product, design and manufacturing process technologies. Our success depends to a large extent on our ability to develop and manufacture new products and technologies to match the varying requirements of different customers in order to establish a competitive position and become profitable. Furthermore, we must adopt our products and processes to technological changes and emerging industry standards and practices on a cost-effective and timely basis. Our failure to accomplish any of the above could harm our business and operating results.

We generally do not have long-term contracts with our customers.

Our business has primarily operated on the basis of short-term purchase orders.  We are now receiving longer term purchase agreements, such as those which comprise our approximately $4.6 million backlog as of September 30, 2008, and procurement contracts, but we cannot guarantee that we will continue to do so. Our current purchase agreements can be cancelled or revised without penalty, depending on the circumstances. We plan production on the basis of internally generated forecasts of demand, which makes it difficult to accurately forecast revenues. If we fail to accurately forecast operating results, our business may suffer and the value of your investment in eMagin may decline.

13

Our business strategy may fail if we cannot continue to form strategic relationships with companies that manufacture and use products that could incorporate our OLED-on-silicon technology.

Our prospects will be significantly affected by our ability to develop strategic alliances with OEMs for incorporation of our OLED-on-silicon technology into their products. While we intend to continue to establish strategic relationships with manufacturers of electronic consumer products, personal computers, chipmakers, lens makers, equipment makers, material suppliers and/or systems assemblers, there is no assurance that we will be able to continue to establish and maintain strategic relationships on commercially acceptable terms, or that the alliances we do enter in to will realize their objectives. Failure to do so would have a material adverse effect on our business.

Our business depends to some extent on international transactions.

We purchase needed materials from companies located abroad and may be adversely affected by political and currency risk, as well as the additional costs of doing business with foreign entities. Some customers in other countries have longer receivable periods or warranty periods. In addition, many of the foreign OEMs that are the most likely long-term purchasers of our microdisplays expose us to additional political and currency risk. We may find it necessary to locate manufacturing facilities abroad to be closer to our customers which could expose us to various risks, including management of a multi-national organization, the complexities of complying with foreign laws and customs, political instability and the complexities of taxation in multiple jurisdictions.

Our business may expose us to product liability claims.

Our business may expose us to potential product liability claims. Although no such claims have been brought against us to date, and to our knowledge no such claim is threatened or likely, we may face liability to product users for damages resulting from the faulty design or manufacture of our products. While we plan to maintain product liability insurance coverage, there can be no assurance that product liability claims will not exceed coverage limits, fall outside the scope of such coverage, or that such insurance will continue to be available at commercially reasonable rates, if at all.

Our business is subject to environmental regulations and possible liability arising from potential employee claims of exposure to harmful substances used in the development and manufacture of our products.

We are subject to various governmental regulations related to toxic, volatile, experimental and other hazardous chemicals used in our design and manufacturing process. Our failure to comply with these regulations could result in the imposition of fines or in the suspension or cessation of our operations. Compliance with these regulations could require us to acquire costly equipment or to incur other significant expenses. We develop, evaluate and utilize new chemical compounds in the manufacture of our products. While we attempt to ensure that our employees are protected from exposure to hazardous materials, we cannot assure you that potentially harmful exposure will not occur or that we will not be liable to employees as a result.

RISKS RELATED TO OUR STOCK

The substantial number of shares that are or will be eligible for sale could cause our common stock price to decline even if eMagin is successful.

Sales of significant amounts of common stock in the public market, or the perception that such sales may occur, could materially affect the market price of our common stock. These sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of October 14, 2008, we have outstanding (i) options to purchase 1,564,223 shares, (ii) warrants to purchase 10,403,772 shares of common stock, and (iii) notes convertible into 8,330,689 shares of common stock.

We have a staggered board of directors and other anti-takeover provisions, which could inhibit potential investors or delay or prevent a change of control that may favor you.

Our Board of Directors is divided into three classes and our Board members are elected for terms that are staggered. This could discourage the efforts by others to obtain control of eMagin. Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately, discourage potential acquisition proposals or delay or prevent a change in control. In particular, our board of directors is authorized to issue up to 10,000,000 shares of preferred stock (less any outstanding shares of preferred stock) with rights and privileges that might be senior to our common stock, without the consent of the holders of the common stock.

14

 FORWARD LOOKING STATEMENTS

We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this prospectus and other filings with the Securities and Exchange Commission, reports to our stockholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “may,” “should,” variations of such words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. Among the important factors on which such statements are based are assumptions concerning our ability to obtain additional funding, our ability to compete against our competitors, our ability to integrate our acquisitions and our ability to attract and retain key employees.

USE OF PROCEEDS  

This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. However, we will receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants owned by the selling stockholders. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. We have not declared or paid any dividends and do not currently expect to do so in the near future.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  

Our common stock is quoted on the OTC Bulletin Board under the symbol “EMAN.OB.” The following table sets forth the high and low sales prices as reported by the OTC Bulletin Board Market for the periods indicated.

	High			Low
Fiscal 2006
First Quarter		$	7.10		$	4.60
Second Quarter		$	5.70		$	2.50
Third Quarter		$	3.80		$	1.80
Fourth Quarter		$	2.50		$	1.01
Fiscal 2007
First Quarter`		$	1.08		$	0.26
Second Quarter		$	0.85		$	0.42
Third Quarter		$	1.64		$	0.65
Fourth Quarter		$	1.75		$	0.85
Fiscal 2008
First Quarter		$	1.47		$	0.88
Second Quarter		$	1.05		$	0.63
Third Quarter		$	0.83		$	0.52
Fourth Quarter (as of October 14, 2008)		$	0.60		$	0.21

As of October 14, 2008, there were 511 holders of record of our common stock. Because brokers and other institutions hold many of the shares on behalf of shareholders, we are unable to determine the actual number of shareholders represented by these record holders.

Dividends

We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings to fund the operation of our business and do not anticipate paying dividends on our common stock in the foreseeable future.

15

SELECTED FINANCIAL DATA

The following table summarizes our consolidated financial data for the periods presented. We prepared this information using our consolidated financial statements for each of the periods presented. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The historical results are not necessarily indicative of results to be expected for future periods.

Consolidated Statements of Operations Data:

	Year Ended December 31,															Six Months Ended June 30, (unaudited)
	2007			2006			2005			2004			2003			2008			2007
	(In thousands, except per share data)
Revenue	$	17,554		$	8,169		$	3,745		$	3,593		$	2,578		$	8,284		$	7,841
Cost of goods sold		12,628			11,359			10,219			5,966			5,141			5,309			6,061
Gross profit (loss)		4,926			(3,190	)		(6,474	)		(2,373	)		(2,563	)		2,975			1,780
Operating expenses:
Research and development		2,949			4,406			4,020			898			19			1,308			1,740
Selling, general and administrative		6,591			8,860			6,316			4,428			5,712			3,504			3,764
Total operating expenses		9,540			13,266			10,336			5,326			5,731			4,812			5,504
Loss from operations		(4,614	)		(16,456	)		(16,810	)		(7,699	)		(8,294	)		(1,837	)		(3,724	)
Other income (expense), net		(13,874	)		1,190			282			(5,012	)		3,571			(959	)		(941	)
Net loss	$	(18,488	)		(15,266	)	$	(16,528	)	$	(12,711	)	$	(4,723	)	$	(2,796	)	$	(4,665	)
Basic and diluted loss per share	$	(1.59	)		(1.52	)	$	(1.94	)	$	(1.98	)	$	(1.31	)	$	(0. 21	)	$	(0.42	)
Shares used in calculation of loss per share:
Basic and diluted		11,633			10,058			8,541			6,428			3,599			13,471			10,984

  Consolidated Balance Sheet Data:

	December 31,																	June 30, (unaudited)
	2007				2006			2005			2004			2003				2008				2007
	(In thousands)
Cash and cash equivalents		$	713			1,415			$	6,727		$	13,457		$	1,054			$	1,038			$	690
Working (deficit) capital			(4,708	)		(305	)			8,868			14,925			106				(4,429	)			(5,008	)
Total assets			6,648			7,005				14,142			18,436			3,749				8,026				5,544
Long-term obligations			60			2,229				56			22			6,161				41				78
Total shareholders’ (deficit) equity		$	(3,975	)		(1,164	)		$	10,401		$	16,447		$	(4,767	)		$	(3,653	)		$	(4,169	)

16

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

Introduction

The following discussion should be read in conjunction with the Financial Statements and Notes thereto. Our fiscal year ends December 31. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, Item 1A, "Risk Factors "). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.

Overview

We design and manufacture miniature displays, which we refer to as OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging, primarily for incorporation into the products of other manufacturers. Microdisplays are typically smaller than many postage stamps, but when viewed through a magnifier they can contain all of the information appearing on a high-resolution personal computer screen. Our microdisplays use organic light emitting diodes, or OLEDs, which emit light themselves when a current is passed through the device. Our technology permits OLEDs to be coated onto silicon chips to produce high resolution OLED-on-silicon microdisplays.

We believe that our OLED-on-silicon microdisplays offer a number of advantages in near to the eye applications over other current microdisplay technologies, including lower power requirements, less weight, fast video speed without flicker, and wider viewing angles. In addition, many computer and video electronic system functions can be built directly into the OLED-on-silicon microdisplay, resulting in compact systems with lower expected overall system costs relative to alternate microdisplay technologies.

Since our inception in 1996 through 2004, we derived the majority of our revenues from fees paid to us under research and development contracts, primarily with the U.S. federal government. We have devoted significant resources to the development and commercial launch of our products. We commenced limited initial sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of our SVGA-3D microdisplay in February 2002.  As of September 30, 2008, we have a backlog of approximately $4.6 million in products ordered for delivery through December 31, 2009. These products are being applied or considered for near-eye and headset applications in products such as entertainment and gaming headsets, handheld Internet and telecommunication appliances, viewfinders, and wearable computers to be manufactured by original equipment manufacturer (OEM) customers. We have also shipped a limited number of our Z800 3DVisor personal display systems. In addition to marketing OLED-on-silicon microdisplays as components, we also offer microdisplays as an integrated package, which we call Microviewer that includes a compact lens for viewing the microdisplay and electronic interfaces to convert the signal from our customer's product into a viewable image on the microdisplay. We are also developing head-wearable displays, including our Z800 3DVisor that incorporate our Microviewer.

We license our core OLED technology from Eastman Kodak and we have developed our own technology to create high performance OLED-on-silicon microdisplays and related optical systems. We believe our technology licensing agreement with Eastman Kodak, coupled with our own intellectual property portfolio, gives us a leadership position in OLED and OLED-on-silicon microdisplay technology. We believe that we are the only company to demonstrate publicly and market full-color small molecule OLED-on-silicon microdisplays.

Company History

Historically, we have been a developmental stage company. As of January 1, 2003, we were no longer classified as a development stage company. We have transitioned to manufacturing our product and intend to significantly increase our marketing, sales, and research and development efforts, and expand our operating infrastructure. Currently, most of our operating expenses are fixed. If we are unable to generate significant revenues, our net losses in any given period could be greater than expected.

Critical Accounting Policies

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

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Revenue and Cost Recognition

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from the customer, the price is fixed, title and risk of loss to the goods has changed and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment. We record a reserve for estimated sales returns, which is reflected as a reduction of revenue at the time of revenue recognition.   Products sold directly to consumers have a fifteen day right of return.  Revenue on consumer products is deferred until the right of return has expired.

Revenues from research and development activities relating to firm fixed-price contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues from research and development activities relating to cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectibility of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization and other factors. Management has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

Fair Value of Financial Instruments

eMagin’s cash, cash equivalents, accounts receivable, short-term investments, accounts payable and debt are stated at cost which approximates fair value due to the short-term nature of these instruments.

Stock-based Compensation

eMagin maintains several stock equity incentive plans.  The 2005 Employee Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to purchase common stock through payroll deductions.  Employees purchase stock semi-annually at a price that is 85% of the fair market value at certain plan-defined dates.  As of June 30, 2008, the number of shares of common stock available for issuance was 300,000.  As of June 30, 2008, the plan had not been implemented.

The 2003 Stock Option Plan (the”2003 Plan”) provides for grants of shares of common stock and options to purchase shares of common stock to employees, officers, directors and consultants.   Under the 2003 plan, an ISO grant is granted at the market value of our common stock at the date of the grant and a non-ISO is granted at a price not to be less than 85% of the market value of the common stock.  These options have a term of up to 10 years and vest over a schedule determined by the Board of Directors, generally over a five year period.  The amended 2003 Plan provides for an annual increase of 3% of the diluted shares outstanding on January 1 of each year for a period of 9 years which commenced January 1, 2005.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires the Company to recognize expense related to the fair value of the Company’s share-based compensation issued to employees and directors. SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. The Company uses the straight-line method for recognizing compensation expense. An estimate for forfeitures is included in compensation expense for awards under SFAS 123R.

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Results of Operations

The following table presents certain financial data as a percentage of total revenue for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.

	Year ended December 31,									Six Months Ended June 30,
	2007			2006			2005			2008			2007
										(Unaudited)
Revenue		100	%		100	%		100	%		100	%		100	%
Cost of goods sold		72			139			273			64			77
Gross profit (loss)		28			(39	)		(173	)		36			23
Operating expenses:
Research and development		17			54			107			16			22
Selling, general and administrative		38			109			169			42			48
Total operating expenses		55			163			276			58			70
Loss from operations		(27	)		(202	)		(449	)		(22	)		(47	)
Other income (expense), net		(78	)		15			8			(12	)		(12	)
Net loss		(105	) %		(187	) %		(441	) %		(34	) %		(59	) %

The following table presents certain financial data for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.

		Year ended December 31,									Six Months Ended June 30,
		2007			2006			2005			2008			2007
											(Unaudited)
		(In thousands, except per share data)
Revenue	$	17,554		$	8,169		$	3,745		$	8,284		$	7,841
Cost of goods sold		12,628			11,359			10,219			5,309			6,061
Gross profit (loss)		4,926			(3,190	)		(6,474	)		2,975			1,780
Operating expenses:
Research and development		2,949			4,406			4,020			1,308			1,740
Selling, general and administrative		6,591			8,860			6,316			3,504			3,764
Total operating expenses		9,540			13,266			10,336			4,812			5,504
Loss from operations		(4,614	)		(16,456	)		(16,810	)		(1,837	)		(3,724	)
Other income (expense), net		(13,874	)		1,190			282	)		(959	)		(941	)
Net loss	$	(18,488	)	$	(15,266	)	$	(16,528	)	$	(2,796	)	$	(4,665	)
Net loss per share, basic and diluted	$	(1.59	)	$	(1.52	)	$	(1.94	)	$	(0.21	)	$	(0.42	)

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Three Months and Six Months Ended June 30, 2008 Compared to Three Months and Six Months Ended June 30, 2007

Revenues  

Revenues for the three and six months ended June 30, 2008 were approximately $5.6 million and $8.3 million, respectively, as compared to approximately $4.2 million and $7.8 million for the three and six months ended June 30, 2007, respectively, an increase of approximately 33% and 6%, respectively.  Higher revenue for the three and six month periods was due to increased availability of finished displays as a result of increased production volume and improved yields.  In addition, an increase in the number of contracts the Company is currently performing has resulted in increased contract revenue.

Cost of Goods Sold

Cost of goods sold includes direct and indirect costs associated with production.  Cost of goods sold for the three and six months ended June 30, 2008 were approximately $3.0 million and $5.3 million as compared to approximately $2.9 million and $6.1 million for the three and six months ended June 30, 2007.  There was an increase of $0.1 million for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 and there was a decrease of approximately $0.8 million for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007.  The gross margin for the three and six months ended June 30, 2008 was approximately $2.6 million and $3.0 million as compared to approximately $1.3 million and $1.8 million for the three and six months ended June 30, 2007. As a percentage of revenue this translates to a gross margin for the three and six months ended June 30, 2008 of 46% and 36%, respectively, as compared to 30% and 23%, respectively, for the three and six months ended June 30, 2007.  The increase in the gross margin was attributed to fuller utilization of our fixed production overhead due to higher unit production volume and improved yields.

Operating Expenses

Research and Development.  Research and development expenses include salaries, development materials and other costs specifically allocated to the development of new microdisplay products, OLED materials and subsystems.  Research and development expenses for the three and six months ended June 30, 2008 were approximately $0.6 million and $1.3 million, respectively, as compared to $0.9 million and $1.7 million for the three and six months ended June 30, 2007, a decrease of approximately $0.3 million and $0.4 million, respectively.  The decrease was due to the re-deployment of research and development personnel to production contract services which are included in cost of goods sold.

Selling, General and Administrative.  Selling, general and administrative expenses consist principally of salaries, fees for professional services including legal fees, as well as other marketing and administrative expenses.  Selling, general and administrative expenses for the three and six months ended June 30, 2008 were approximately $1.7 million and $3.5 million, respectively, as compared to approximately $1.5 million and $3.8 million for the three and six months ended June 30, 2007, an increase of $0.2 million and a decrease of $0.3 million, respectively. The increase of approximately $0.2 million for the three months ended June 30, 2008 was primarily related to an increase in the allowance for bad debts and professional services associated with additional SEC filings and SOX compliance.  The decrease of approximately $0.3 million for the six months ended June 30, 2008 was primarily related to decreases in personnel costs and service paid in equity offset by increases in allowance for bad debts and professional services.

Other Income (Expense), net. Other income (expense), net consists primarily of interest income earned on investments, interest expense related to the secured debt, gain from the change in the derivative liability, and income from the licensing of intangible assets.

For the three and six months ended June 30, 2008, interest income was approximately $2 thousand and $4 thousand as compared to approximately $8 thousand and $23 thousand for the three and six months ended June 30, 2007.   The decrease in interest income was primarily a result of lower cash balances available for investment.

For the three and six months ended June 30, 2008, interest expense was approximately $0.6 million and approximately $1.2 million, respectively, as compared to approximately $1.3 million and approximately $2.2 million, respectively, for the three and six months ended June 30, 2007.   The breakdown of the interest expense for the three and six month period in 2008 is as follows:  interest expense associated with debt of approximately $164 thousand and $323 thousand, respectively; the amortization of the deferred costs and waiver fees associated with the debt of approximately $373 thousand and $821 thousand, respectively; and the amortization of the debt discount associated with the debt of approximately $0 and $25 thousand, respectively.  The breakdown of the interest expense for the three and six month period in 2007 is as follows:  interest expense associated with debt of approximately $305 and $457 thousand, respectively; the amortization of the deferred costs associated with the notes payable of approximately $133 thousand and $266 thousand, respectively; and the amortization of the debt discount of approximately $878 thousand and $1.5 million, respectively.

The gain from the change in the derivative liability was $0 for the three and six months ended June 30, 2008 as compared to $182 thousand and $642 thousand, respectively, for the three and six months ended June 30, 2007.

Other income, net (excluding interest income), for the three and six months ended June 30, 2008 was approximately $121 thousand and $205, respectively,  as compared to approximately $560 thousand and $567 thousand, respectively, for the three and six months ended June 30, 2007. Other income primarily consists of income from the licensing of intangible assets.  

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

Revenues increased by approximately $9.4 million to a total of approximately $17.6 million for the year ended December 31, 2007 from approximately $8.2 million for the year ended December 31, 2006, representing an increase of 115%. This increase was primarily due to increased microdisplay sales and increased availability of finished displays due to manufacturing improvements. Our contract revenue increased approximately $1.2 million while our product revenue increased approximately $8.2 million. Average price per unit for microdisplays was $371 in 2007 and $386 in 2006.  Our current expectation is that revenue will continue to grow in 2008 if we successfully execute our business plan.

Cost of Goods Sold

Cost of goods sold includes direct and indirect costs associated with production of our products. Cost of goods sold for the years ended December 31, 2007 and 2006 was approximately $12.6 million and $11.4, respectively, an increase of $1.3 million.  The increase included an inventory write-off of approximately $0.4 million and an increase in our warranty return reserve of approximately $0.6 million, both related to a non-recurring production issue that occurred during the fourth quarter of 2007.

 The gross profit was approximately $4.9 million for the year ended December 31, 2007 and the gross loss was approximately ($3.2) million for the year ended December 31, 2006.  The gross margin was 28% for the year ended December 31, 2007 as compared to the gross loss of (39%) for the year ended December 31, 2006.  The gross margin improvement was attributed to fuller utilization of our fixed production overhead due to higher unit production volume.   

Research and Development Expenses

Research and development expenses include salaries, development materials and other costs specifically allocated to the development of new microdisplay products, OLED materials and subsystems.  Research and development expenses for the year ended December 31, 2007 were approximately $2.9 million as compared to approximately $4.4 million for the year ended December 31, 2006.  The decrease was due to the re-deployment of research and development personnel to production contract services which are included in cost of goods sold.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and fees for professional services, legal fees incurred in connection with patent filings, SEC and related matters, as well as other marketing and administrative expenses.  General and administrative expenses decreased by approximately $2.3 million to a total of approximately $6.6 million for the year ended December 31, 2007 from $8.9 million for the year ended December 31, 2006. The decrease was primarily related to a reduction of marketing, tradeshow and personnel costs.

Other (Expense) Income

Other (expense) income, net consists primarily of interest income earned on investments, interest expense related to the secured debt, loss from the change in the derivative liability, loss on the extinguishment of debt and other income from the licensing of intangible assets.

For the year ended December 31, 2007, interest expense was approximately $3.1 million as compared to $1.3 million for the year ended December 31, 2006.   Interest expense for 2007 consisted of interest expense associated with debt of approximately $744 thousand; the amortization of the deferred costs associated with debt of approximately $418 thousand; and the amortization of the debt discount associated with the debt of approximately $1.9 million.  Interest expense for the year ended December 31, 2006 was comprised of interest associated with debt of approximately $124 thousand; the amortization of the deferred costs associated with the notes payable of approximately $221 thousand; and the amortization of the debt discount associated with the debt of approximately $956 thousand.

For the year ended December 31, 2007, the change in the derivative liability was a loss of approximately $853 thousand as compared to a gain of approximately $2.4 million ended December 31, 2006.

The loss on extinguishment of debt was $10.7 million for the year ended December 31, 2007 as compared to $0 for the year ended December 31, 2006. See Note 8 to the financial statements:  Debt for additional information.

Other income for the year ended December 31, 2007 was approximately $815 thousand which consisted of interest income of approximately $43 million, a gain on the license of intangible assets of $869 thousand, offset by a write-off of a miscellaneous receivable of $103 thousand, and other income of $7 thousand as compared to $91 thousand for the year ended December 31, 2006.  See Note 12 to the December 31, 2007 consolidated financial statements:  Commitments and Contingencies – Royalties for additional information.

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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

Revenues increased by approximately $4.5 million to a total of approximately $8.2 million for the year ended December 31, 2006 from approximately $3.7 million for the year ended December 31, 2005, representing an increase of 118%. This increase was due to increased microdisplay demand and the broadening of our product revenue through the sales of the Z800 3D Visor. Our contract revenue increased approximately $150 thousand while our product revenue increased approximately $4.3 million. Average price per unit for microdisplays was $386 in 2006 and $372 in 2005.

Cost of Goods Sold

Cost of goods sold includes direct and indirect costs associated with production of our products. Cost of goods sold for the years ended December 31, 2006 and 2005 was approximately $11.4 million and approximately $10.2, respectively, an increase of $1.2 million.  The gross loss was approximately ($3.2) million and approximately ($6.5) million, respectively, for the years ended December 31, 2006 and 2005, respectively.  The gross loss was (39%) for the year ended December 31, 2006 as compared to (173%) for the year ended December 31, 2005.  The increase in cost of goods sold for the year ended December 31, 2006 was attributed to higher materials usage to support increased production as well as approximately $343 thousand of stock compensation expense reflected in accordance with SFAS No. 123R in 2006.    The decrease in gross loss was attributed to fuller utilization of our fixed production overhead due to higher unit volume. 

Research and Development Expenses

Research and development expenses included salaries, development materials and other costs specifically allocated to the development of new microdisplay products, OLED materials and subsystems.  Research and development expenses for the year ended December 31, 2006 were approximately $4.4 million as compared to approximately $4.0 million for the year ended December 31, 2005.  The increase was primarily due to the stock-based compensation expense of approximately $435 thousand in 2006.

 Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and fees for professional services, legal fees incurred in connection with patent filings and related matters, as well as other marketing and administrative expenses.  General and administrative expenses increased by approximately $2.9 million to a total of approximately $8.9 million for the year ended December 31, 2006 from $6.3 million for the year ended December 31, 2005. The increase in selling, general and administrative expenses was due primarily to stock-based compensation expense of approximately $2.9 million and an increase in marketing expenses related to our Z800 3DVisor.

Other Income (Expense)

Other income, net consists primarily of interest income earned on investments, interest expense related to the secured debentures, and gain from the change in the derivative liability.  For the year ended December 31, 2006, interest income was approximately $91 thousand as compared to approximately $210 thousand for the year ended December 31, 2005.   The decrease in interest income was primarily a result of lower cash balances available for investment.  For the year ended December 31, 2006, interest expense was approximately $1.3 million as compared to approximately $4 thousand for the year ended December 31, 2005.   The increase in the interest expense was a result of interest associated with our notes payable of approximately $124 thousand, the amortization of the deferred costs associated with the notes payable of approximately $221 thousand, and the amortization of the debt discount of approximately $956 thousand.  For the year ended December 31, 2006, income from the change in the derivative liability was approximately $2.4 million as compared to $0 for the year ended December 31, 2005.

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Liquidity and Capital Resources

As of June 30, 2008, we had approximately $1.1 million of cash and investments as compared to $0.8 million as of December 31, 2007.  The change in cash and investments was primarily due to cash provided by financing activities of $2.6 million offset by cash used for operating activities and investing activities of $2.3 million.

Sources and Uses of Cash

	Year ended December 31,												Six Months Ended June 30,
	2007				2006				2005				2008				2007
Cash flow data:													(unaudited)
Net cash used in operating activities		$	(1,943	)		$	(10,389	)		$	(15,713	)		$	(2,025	)		$	(1,151	)
Net cash provided (used) in investing activities			61				(257	)			(1,072	)			(236	)			(4	)
Net cash provided by financing activities			1,180				5,334				10,055				2,586				430
Net (decrease) increase in cash and cash equivalents			(702	)			(5,312	)			(6,730	)			325				(725	)
Cash and cash equivalents, beginning of period			1,415				6,727				13,457				713				1,415
Cash and cash equivalents, end of period		$	713			$	1,415			$	6,727			$	1,038			$	690

Cash Flows from Operating Activities

Cash flow used in operating activities during the six months ended June 30, 2008 was approximately $2.0 million primarily attributable to our net loss of $2.8 million and an increase in accounts receivable of $1.4 million offset by non-cash expenses of $1.9 million. During the six months ended June 30, 2007, operating activities used cash of $1.2 million attributable to our net loss of $4.7 million and primarily offset by non-cash expenses of $2.8 million.

Cash used in operating activities was $1.9 million in 2007, $10.4 million in 2006 and $15.7 million in 2005.  For the year ended December 31, 2007, net cash used by operating activities was approximately $1.9 million, primarily attributable to our $18.5 million net loss offset by the non-cash expense components of loss on extinguishment of debt of $10.7 million, stock based compensation of $1.7 million, amortization of discount on notes payable of $1.9 million, and issuance of common stock for services of $1.3 million. For 2006, net cash used in operating activities was approximately $10.4 million, primarily attributable to our net loss of approximately $15.3 million. For 2005, net cash used by operating activities was approximately $15.7 million, primarily attributable to our net loss of approximately $16.5 million.

Cash Flows from Investing Activities

Cash used in investing activities during the six months ended June 30, 2008 was approximately $236 thousand used for equipment purchases.  During the six months ended June 30, 2007, the cash used in investing activities was $4 thousand used for investment purchases.

Cash provided by investing activities was $61 thousand in 2007 which was primarily related to the maturing of investments.  Cash used in investing activities was $257 thousand in 2006 and $1.1 million in 2005 which were primarily related to capital expenditures.

Cash Flows from Financing Activities

Cash provided by financing activities during the six months ended June 30, 2008 was approximately $2.6 million and was comprised of approximately $1.6 million from the sale of common stock, $1.7 million from the line of credit, and offset by payments on debt of $0.7 million.  The cash provided by financing activities during the six months ended June 30, 2007 was approximately $0.4 million primarily consisting of $0.5 million, net, from debt issuance and offset by payments against debt of approximately $33 thousand.

Cash provided by financing activities was $1.2 million in 2007, $5.3 million in 2006 and, $10.1 million in 2005. Net cash provided by financing activities for the year ended December 31, 2007 was comprised primarily of approximately $1.6 million in proceeds from debt issuance and offset by payments on long-term debt and capitalized lease obligations of approximately $63 thousand and deferred financing costs of approximately $368 thousand. Net cash provided by financing activities in 2006 was comprised primarily of approximately $5.4 million in proceeds from debt issuance and offset by payments on long-term debt and capitalized lease obligations of approximately $55 thousand. Net cash provided by financing activities during 2005 consisted primarily of approximately $8.4 million in proceeds from the sale of common stock and approximately $1.6 million from the exercise of stock options and warrants.

Working Capital and Capital Expenditure Needs

Our unaudited condensed consolidated financial statements as of June 30, 2008 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report dated April 9, 2008 for the audit of the financial statements included in the Form 10-K for the year ended December 31, 2007  that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is likely dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

23

We anticipate our business to experience revenue growth during the year ending December 31, 2008. This trend may result in higher accounts receivable levels and may require increased production and/or higher inventory levels.   In addition, in December 2008, we will be obligated to repay approximately $6.0 million to the note holders.  If the funds are not available, we will negotiate with the note holders to defer the payment but no assurances can be made that they will agree. We anticipate that our cash requirements to fund these requirements as well as other operating or investing cash requirements over the next twelve months will be greater than our current cash on hand.  We anticipate that we will still require additional funds over the next twelve months.  We do not currently have commitments for these funds and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms.

The Company’s ability to obtain additional funding is impacted by its present indebtedness.  The Company’s notes payable have covenants which the Company currently is in compliance with. The Company has a line of credit with a maximum of $3.0 million which is secured by accounts receivable and inventory which effectively eliminates any additional secured indebtedness under the note covenants. Effective August 9, 2008, the Company’s line of credit was extended until August 9, 2009. In addition, pursuant to the notes payable agreement, the Company cannot enter into a consolidation, merger, or acquisition under certain conditions without consent of the note holders.  The Company may raise additional unsecured debt under the note covenants given certain restrictions.  In addition, the notes payable allow for additional equity financing.

If we are unable to obtain sufficient funds during the next twelve months, we will further reduce the size of our organization and may be forced to reduce and/or curtail our production and operations, all of which could have a material adverse impact on our business prospects. The Company is reviewing its cost structures for cost efficiencies and is taking measures to reduce non-production costs.

In addition to the foregoing, as previously reported, we have retained CIBC World Markets Corporation and Larkspur Capital Corporation to assist us in investigating and evaluating various strategic alternatives, ranging from investment to acquisition.

Contractual Obligations

The following chart describes the outstanding contractual obligations of eMagin as of June 30, 2008 (in thousands):

	Payments due by period
	Total	1 Year	2-3 Years	4-5 Years
Operating lease obligations	$1,469	$1,214	$   255	$—
Purchase obligations (a)	1,154	1,154	—	—
Other long-term liabilities (b)	6,894	6,391	253	250
Total	$9,517	$8,759	$  508	$250

(a) The majority of purchase orders outstanding contain no cancellation fees except for minor re-stocking fees.

(b) This amount represents the obligation for Notes and estimated interest, royalty payments, capitalized software and the New York Urban Development settlement.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Effect of Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB issued FASB Staff Position No. FSP 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value on a recurring basis. The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities which it will defer the adoption until January 1, 2009. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. The Company has adopted SFAS 159 and has elected not to measure any additional financial instruments and other items at fair value and therefore the adoption of SFAS 159 did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

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In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company is currently evaluating the disclosure implications of this statement.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement shall be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of thispronouncement will have a material impact on the Company's financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Market Rate Risk. We are exposed to market risk related to changes in interest rates and foreign currency exchanges rates.

Interest Rate Risk. We hold our assets in cash and cash equivalents. We do not hold derivative financial instruments other than a derivative liability on our balance sheet or equity securities. We are exposed to interest rate risk on our line of credit. Annual interest on our line of credit is equal to the greater of the sum of the prime rate plus 2% or 10%. 

Foreign Currency Exchange Rate Risk. Our revenue and expenses are denominated in U.S. dollars. We have conducted some transactions in foreign currencies and expect to continue to do so; we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging to date.

Our international business is subject to risks typical of international activity, including, but not limited to, differing economic conditions; change in political climates; differing tax structures; and other regulations and restrictions. Accordingly, our future results could be impacted by changes in these or other factors.

BUSINESS  

Recent Developments

Amendment of Stillwater Note Purchase Agreement (the “Note”) - April 2007

As stated above, as previously reported in the Form 8-K dated July 25, 2006, on July 21, 2006, eMagin Corporation (the “Company”) entered into a Note Purchase Agreement (the “Stillwater Agreement”) with Stillwater LLC (“Stillwater”) which provides for the purchase and sale of a 6% senior secured convertible note in the principal amount of up to $500,000 (the “Stillwater Note”), together with a warrant (the “Stillwater Warrant”) to purchase 70% of the number of shares issuable upon conversion of the Stillwater Note, at the sole discretion of the Company by delivery of a notice to Stillwater on December 14, 2006.  Interest payments from the Stillwater Note are to be made in cash, unless Stillwater elects to convert any portion of the principal of the Stillwater Note plus any accrued and unpaid interest for such principal amount.

As previously reported in the Form 8-K dated April 13, 2007, by way of amendment to the Stillwater Agreement, dated March 28, 2007 (the “Amendment”), the Company and Stillwater agreed to certain amendments to the Stillwater Agreement. Based upon the provisions of the Stillwater Agreement, Stillwater was bound to purchase the Stillwater Note and the Stillwater Warrant so long as the conditions to closing as set forth in the Stillwater Agreement were satisfied by the Company.  However, prior to Stillwater’s obligation to purchase the Stillwater Note and Stillwater Warrant, the Company received notice from the American Stock Exchange (“AMEX”) that it was no longer in compliance with their listing requirements, and the Company was subsequently de-listed in March of 2007. Since compliance with the AMEX listing requirements was a condition of closing in the Stillwater Agreement, Stillwater was no longer obligated to purchase the Stillwater Note and Stillwater Warrant.  Therefore, among other things, pursuant to the Amendment, the parties agreed to a new conversion price for the Stillwater Note of $0.35 per share, a new exercise price for the Stillwater Warrant of $0.48 per share, a new closing date, and amended certain closing conditions, including the following: on the closing date, (i) trading in securities on the New York Stock Exchange, Inc., the AMEX, Nasdaq, the Nasdaq Capital Market, the Over-The-Counter Bulletin Board, the Pink Sheets, LLC or any similar organization shall not have been suspended or materially limited, (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, and (iii) the Company has obtained waivers from all the note holders of the other notes or has executed an additional Allonge with the majority holders to amend Section 3.2 of the Note and other notes to provide that the Company maintain cash and cash equivalents balances of at least equal to $200,000 from April 1, 2007 through and including May 15, 2007 and that subsequent to May 15, 2007 the Company maintain cash and cash equivalents balances of at least equal to $600,000.

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If all of the Stillwater Warrants are exercised for cash, the Company would receive $480,000, which would be used for working capital and other corporate purposes. There cannot be any assurances that any of the Stillwater Warrants will be exercised. The closing for the sale of the Stillwater Note and Stillwater Warrant was completed on April 9, 2007 and the Company issued Stillwater the Stillwater Note in a 6% Senior Secured Convertible Note in the principal amount of $500,000 and the Stillwater Warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.48 in accordance with the terms of the Stillwater Agreement and Amendment. Interest payments from the Stillwater Note are to be made in cash, unless Stillwater elects to convert any portion of the principal of the Stillwater Note plus any accrued and unpaid interest for such principal amount.  The principal of the Stillwater Note was due in installments as follows:

Principal Amount		Due Date*
$	250,000	July 23, 2007**
$	250,000	January 21, 2008

* If the due date falls on a non-business day, the payment date will be the next business day.

**On July, 23 2007, Stillwater elected to convert $252,166.50 of the Note representing $250,000 of the principal amount of the Note due on July 23, 2007 and $2,166.50 of accrued and unpaid interest into shares of common stock. Stillwater will receive 720,476 shares of the common stock at the conversion price of $0.35.

This prospectus covers the resale by Stillwater of the above-referenced common stock underlying the Stillwater Note and the Stillwater Warrant.

Amendment Agreements - July 2007

As previously reported in the Form 8-K of the Company dated as of July 25, 2006, the Company entered into several Note Purchase Agreements (the “Original Purchase Agreements”), including the Stillwater Agreement, to sell to certain qualified institutional buyers and accredited investors $5,990,000 in principal amount 6% Senior Secured Convertible Notes Due July 21, 2007 and January 21, 2008 (the “Notes”), together with warrants (the “Warrants”) to purchase 1,612,700 shares of the Company’s common stock, par value $0.001 per share at $3.60 per share.

As previously reported in the Form 8-K of the Company dated as of July 25, 2007, by way of Amendment Agreements dated July 23, 2007 (the “Amendment Agreements”) between the Company and each of the holders of the Notes, including Stillwater (each a “Holder” and collectively, the “Holders”), the Company agreed to issue each Holder an amended and restated Note for the outstanding Notes (the “Amended Notes”) in the principal amount equal to the principal amount outstanding as of July 23, 2007 and an amended restated Warrant (the “Amended Warrants”).   The changes to the Amended Notes and Amended Warrants include the following:

· The maturity date for the Amended Notes (totaling after conversions an aggregate of $6,020,000)  was extended to December 21, 2008;

· Liquidated damages of 1% per month related to the Company’s delisting from the American Stock Exchange will no longer accrue and the deferred interest balance of approximately $230,000 has been forgiven;

· The Company no longer has to maintain a minimum cash or cash equivalents balances of $600,000;

· The Amended Notes may not be prepaid without the consent of the Holders;

· As of July 23, 2007 the interest rate was raised from 6% per annum to 8% per annum;

· The Amended Notes are convertible into (i) 8,407,612 shares of the Company’s common stock.  The conversion price for the Amended Notes was revised from $2.60 to $.75 per share except for the Stillwater Note which remained $.35 per share for $250,000 of principal (which represents the remaining portion of the original principal balance of $500,000 after Stillwater’s partial conversion);

· In addition to the right to convert the Amended Notes in the Company’s common stock, up to $3,010,000 of the Amended Notes can be converted into (ii) 3,010 shares of the Company’s newly formed Series A Senior Secured Convertible Preferred Stock (the “Preferred”) at a stated value of $1,000 per share.  The Preferred is convertible into common stock at $.75 per share, subject to adjustment as provided for in the Certificate of Designations (discussed below);

· Except for the Stillwater Warrant whose exercise price was unchanged,, the Amendment Agreements adjusted the exercise price of the Amended Warrants from $3.60 to $1.03 per share for 1,553,468 shares of common stock and requires the issuance of Warrants exercisable for an additional 3,831,859 shares of common stock  at  $1.03 per share with an expiration date of July 21, 2011;

· The Amended Notes eliminate the requirement that the Company comply with certain covenants of management contained in the Notes. Specifically, among other things, the requirements to defer management compensation and to maintain a management committee were removed; and

· The Amended Notes and/or the Preferred are subject to certain anti-dilution adjustment rights in the event the Company issues shares of its common stock or securities convertible into its common stock at a price per share that is less than the Conversion Price, in which case the Conversion Price shall be adjusted to such lower price.  The Amended Warrants are subject to certain anti-dilution adjustment rights in the event the Company issues shares of its common stock or securities convertible into its common stock at a price per share that is less than the Strike Price, in which case the Strike Price shall be adjusted to the lower of (1) 138% of the price at which such common stock is issued or issuable and (2) the exercise price of warrants, issued in such transaction.

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Pursuant to the Amended Notes, the Company cannot enter into a transaction that constitutes a Fundamental Change without the consent of the Holders.  A Fundamental Change includes the following:

· the consolidation or merger of the Company or any of its subsidiaries;

· the acquisition by a person or group of entities acting in concert of 50% or more of the combined voting power of the outstanding  securities of the Company; and

· the occurrence of any transaction or event in which all or substantially all of the shares of the Company’s common stock is exchanged for converted into acquired for or constitutes the right to receive consideration which is not all or substantially all common stock which is listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting securities prices.

Pursuant to the Amendment Agreements, the Company filed a Certificate of Designations of Series A Senior Secured Convertible Preferred Stock (the “Certificate of Designations”). The Certificate of Designations designates 3,198 shares of the Company’s preferred stock as Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”).  Each share of the Preferred Stock has a stated value of $1,000.  The Preferred Stock is entitled to cumulative dividends which accrue at a rate of 8% per annum, payable on December 21, 2008. Each share of Preferred Stock has voting rights equal to (1) in any case in which the Preferred Stock votes together with the Company’s common stock or any other class or series of stock of the Company, the number of shares of common stock issuable upon conversion of such shares of Preferred Stock at such time (determined without regard to the shares of common stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any case not covered by the immediately preceding clause one vote per share of Preferred Stock.  The Certificate of Designations prohibits the Company from entering into a Fundamental Change without consent of the Holders and contains antidilution adjustments rights that are comparable to the antidilution adjustments contained in the Amended Notes.

Pursuant to the Amendment Agreements, the Company was required to file a registration statement with the Securities and Exchange Commission by August 31, 2007 covering the resale of 100% of the sum of (a) the number of shares issuable upon conversion of the Amended Notes and Preferred Stock, and (b) the number of shares issuable upon exercise of the Warrants.

Pursuant to the Amendment Agreement, the Company and the Collateral Agent, on behalf of the note holders, executed Amendment No. 1 to the Pledge and Security Agreement; Amendment No. 1 to Patent and Trademark Security Agreement; Amendment No. 1 to Lockbox Agreement.  The Pledge and Security Agreement, Trademark Security Agreement and Lockbox Agreement were previously entered into on July 21, 2006 (collectively, the “Ancillary Agreements”).  The Ancillary Agreements were amended to cover obligations that may become payable to holders of Preferred Stock, to delete certain definitions used in the Ancillary Agreements and substitute definitions of terms used in the Ancillary Agreements.

The summary of amendment terms contained herein does not include all information included in the Amendment Agreement, the Amended Notes, the Amended Warrants, the Certificate of Designations or the Ancillary Agreements and, consequently, is qualified in its entirety by reference to the entire text of the Amendment Agreements and the forms of the Amended Notes, Amended Warrants, Certificate of Designations, Amendment No. 1 to Pledge and Security Agreement, Amendment No. 1 to Patent and Trademark Security Agreement and Amendment No. 1 to Lockbox Agreement.

Securities Purchase Agreement – April 2008

As previously reported on a Form 8-K that was filed with the Securities and Exchange Commission on April 4, 2008, the Company entered into a Securities Purchase Agreement on April 2, 2008, (the “Purchase Agreement”) pursuant to which it sold to certain qualified institutional buyers and accredited investors (the “Investors”) an aggregate of 1,586,539 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), and warrants to purchase an additional 793,273 shares of common stock, for an aggregate purchase price of $1,650,000. The purchase price of the common stock was $1.04 per share and the strike price of the corresponding warrant was $1.30 per share. The warrants expire April 2, 2013.

The Company entered into a Registration Rights Agreement with the Investors to register the resale of the Shares sold in the offering and the shares of common stock issuable upon exercise of the warrants.  Subject to the terms of the Registration Rights Agreement, the Company was required to file a registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”) within 45 days of the closing, to use its best efforts to cause the registration statement to be declared effective under the Securities Act of 1933 (the “Act”) as promptly as possible after the filing thereof, but in no event later than 90 days after the filing date and no later than 120 days after the filing date in the event of SEC review of the registration statement. The Company filed the registration statement within the 45 day period however the Company was notified that the registration statement was under review by the SEC.  The Company failed to file the amended registration statement by August 2, 2008 which was the 120th day from the signing of the Purchase Agreement and therefore the registration statement is not effective.

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As the registration statement is not effective within the grace periods (“Event Date”), the Company must pay partial liquidated damages (“damages”) in cash to each investor equal to 2% of the aggregate purchase price paid by each investor under the Purchase Agreement on the Event Date and each monthly anniversary of the Event Date (or on a pro-rata basis for any portion of a month) until the registration statement is effective.  The Company is not liable for any damages with respect to the warrants or warrant shares.  The maximum damages payable to each investor is 36% of the aggregate purchase price.  If the Company fails to pay the damages to the investors within 7 days after the date payable, the Company must pay interest at a rate of 15% per annum to each investor which accrues daily from the date payable until damages are paid in full.  The Company estimated $399 thousand to be the maximum potential damages that the Company may be required to pay the investors if the registration statement is not effective within three years of the signing of the agreement. The Company estimated $66 thousand to be a reasonable estimate of the potential damages that may be due to the investors based on the anticipated filing date.

The Company claims an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about the company and their investment, the investors took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.

Moriah Capital Loan Agreement and Amendments

As previously reported on a Form 8-K that was filed with the Securities and Exchange Commission on August 10, 2007, the Company and Moriah Capital LP (“Moriah”) entered into a Loan and Security Agreement, dated as of August 7, 2007 (the “Loan and Security Agreement”), which was amended as of January 30, 2008 by Amendment No. 1 and on March 18, 2008 by Amendment No. 2 (collectively, the “Original Agreement”).

As previously reported on a Form 8-K that was filed with the Securities and Exchange Commission on August 26, 2008, the Company and Moriah entered into Amendment No. 3 to the Loan and Security Agreement dated August 20, 2008 (the “Amendment No. 3”). Pursuant to Amendment No. 3, the Company issued Moriah an Amended and Restated Convertible Revolving Loan Note (the “Amended Note”).   The maturity date of the Amended Note has been extended to August 7, 2009 and the maximum amount that the Company can borrow pursuant to the Amended Note was increased to $3,000,000. The maturity date of the original revolving loan note had previously been extended to August 20, 2008.

Pursuant to Amendment No. 3, the Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase up to 370,000 shares of the Company’s common stock at an exercise price of $1.30 per share. In connection with Amendment No 3, the Company will pay Moriah $85,000 in fees.  As previously reported, pursuant to Original Agreement, the Company issued Moriah warrants to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share.

Pursuant to Amendment No. 3, the Company and Moriah entered into an Amended and Restated Securities Issuance agreement (the “Amended and Restated Securities Issuance Agreement”). In connection with a Securities Issuance Agreement, dated as of August 7, 2007 (the “Original Securities Issuance Agreement”), the Company issued Moriah 162,500 shares of the Company’s common stock (the “2007 Shares”).  Pursuant to the Amended and Restated Securities Issuance Agreement, Moriah agreed to waive the Company’s obligation to buy back the 2007 Shares with respect to 125,000 of such shares and to defer the Company’s obligation to buy back 37,500 of such 2007 Shares  (collectively, the “Put Waiver”). Pursuant to the Amended and Restated Securities Agreement, the Company is issuing Moriah 485,000 shares of its Common Stock (of which 125,000 shares were issued in consideration for the Put Waiver from Moriah and 360,000 shares were issued in lieu of the issuance to Moriah of the Contingent Issued Shares (as described in the Original Securities Issuance Agreement)). Additionally, pursuant to the Amended and Restated Securities Issuance Agreement, the Company has also granted Moriah a put option pursuant to which Moriah can sell to the Company 162,500 shares of its common stock issued under the Amended and Restated Securities Agreement for $195,000, pro-rated for any portion thereof (the “2007 Put Price”). The 2007 Put Option shall automatically be deemed exercised by Moriah unless Moriah delivers written notice to the Company at any time between July 1, 2009 and August 1, 2009 that it does not wish to exercise the 2007 Put Option. The Company also granted Moriah a second put option pursuant to which Moriah can sell 360,000 of the shares issued to Moriah pursuant to the Amended and Restated Securities Purchase Agreement to the Company for $234,000 (the “2008 Put Option”).  The 2008 Put Option shall automatically be deemed exercised by Moriah unless Moriah delivers written notice to the Company at any time between July 1, 2009 and August 1, 2009 that Moriah does not wish to exercise the 2008 Put option in whole or in part.

Pursuant to Amendment No. 3, the Company and Moriah entered into an Amendment to Registration Rights Agreement (the “Amended Registration Rights Agreement”).   Pursuant to the Amended Registration Rights Agreement, the Company agreed to use its best efforts to file a registration statement to register the 485,000 shares of the Company’s common stock issued pursuant to the Amended and Restated Securities Issuance Agreement and the shares of common stock issuable upon exercise of the Warrant, provided that the Company is permitted under applicable securities rules and regulations and after the certain other registration statements that the Company was obligated to file on behalf of selling shareholders have been  declared effective.

On August 19, 2008, the Holders of the Amended Notes and the Investors in the Purchase Agreement consented to the Company’s execution of the Amended Note, Amendment No. 3, Amended and Restated Securities Issuance Agreement, and the Amended Registration Rights Agreement.  In consideration for the consent, a total of 144,000 shares of common stock were issued to the Holders and Investors based on individual participation in the Amended Notes and Securities Purchase Agreement on September 4, 2008.

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The Company claims an exemption from the registration requirements of the Securities Act of 1933, amended (the "Act") for the private placement of the above-referenced securities pursuant to Section 4(2) of the Act since, among other things, these transactions did not involve a public offering and the Company took appropriate measures to restrict the transfer of the securities.

The foregoing description of Amendment No. 3 to the Loan and Security Agreement, the Amended and Restated Revolving Loan Note, the Amended and Restated Securities Issuance Agreement, and the Amendment to the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the entire text of the agreements.

General

eMagin Corporation designs, develops, manufactures, and markets virtual imaging products which utilize OLEDs, or organic light emitting diodes, OLED-on-silicon microdisplays and related information technology solutions. We integrate OLED technology with silicon chips to produce high-resolution microdisplays smaller than one-inch diagonally which, when viewed through a magnifier, create virtual images that appear comparable in size to that of a computer monitor or a large-screen television. Our products enable our original equipment manufacturer, or OEM, customers to develop and market improved or new electronic products. We believe that virtual imaging will become an important way for increasingly mobile people to have quick access to high resolution data, work, and experience new more immersive forms of communications and entertainment.

Our first commercial product, the SVGA+ (Super Video Graphics Array of 800x600 picture elements plus 52 added columns of data) OLED microdisplay was initially offered for sampling in 2001, and our first SVGA-3D (Super Video Graphics Array plus built-in stereovision capability) OLED microdisplay was shipped in early 2002. These products have received award recognition including: SID Display of the Year and Electronic Products Magazine Product of the Year. These products are being applied or considered for near-eye and headset applications in products such as entertainment and gaming headsets, handheld Internet and telecommunication appliances, viewfinders, and wearable computers to be manufactured by OEM customers for military, medical, industrial, and consumer applications. We market our products globally.

In 2006 we introduced our OLED-XL technology, which provides longer luminance half life and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. We are in the process of completing development of 2 additional OLED microdisplays, namely the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA display with a new cell architecture with embedded features) and an SXGA (1280 x 1024 picture elements).

In January 2005 we announced the world's first personal display system to combine OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm), which was first shipped in mid-2005. This product was recognized as a Digital Living Class of 2005 Innovators, and received the Consumer Electronics Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation Awards for the entire display category as well as a Design and Innovations Award for the electronic gaming category. In February 2007 the Z800 3DVisor, as integrated in Chatten Associates’ head-aimed remote viewer, was recognized as one of Advanced Imaging's Solutions of the Year.

We believe that our OLED-on-silicon microdisplays offer a number of advantages over current liquid crystal microdisplays, including greatly increased system level power efficiency, less weight and wider viewing angles. Using our active matrix OLED technology, many computer and video electronic system functions can be built directly into the OLED-on-silicon microdisplay, resulting in compact systems with expected lower overall system costs relative to alternative microdisplay technologies. We have developed our own technology to create high performance OLED-on-silicon microdisplays and related optical systems and we have licensed certain fundamental OLED and display technology from Eastman Kodak.

As the first to exploit OLED technology for microdisplays, and with the support of our partners and the development of our intellectual property, we believe that we enjoy a significant advantage in the commercialization of this display technology for virtual imaging. We believe we are the only company to sell full-color active matrix small molecule OLED-on-silicon microdisplays.

eMagin Corporation was created through the merger of Fashion Dynamics Corporation ("FDC"), which was organized on January 23, 1996 under the laws of the State of Nevada and FED Corporation ("FED"), a developer and manufacturer of optical systems and microdisplays for use in the electronics industry. FDC had no active business operations other than to acquire an interest in a business. On March 16, 2000, FDC acquired FED. Simultaneous with this merger, we changed our name to eMagin Corporation. Following the merger, the business conducted by eMagin is the business conducted by FED prior to the merger.

Our website is located at www.emagin.com and our e-commerce site is www.3dvisor.com. We make available on our website, free of charge, our annual report on Forms 10-K, our proxy statement, our quarterly reports on Forms 10Q, our current reports on Form 8K, and all amendments to such reports filed under the Securities and Exchange Act, earnings press releases, and other business-related press releases. We also post on our website the charters of our Audit, Compensation, Governance and Nominating committees, our Codes of Ethics and any amendments of or waiver to those codes of ethics, and other corporate governance materials recommended by the Securities and Exchange Commission as they occur.

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Industry Overview

A study by NanoMarkets (February 2007) predicts the overall OLED market will approach $10.9 billion in 2010 and grow to $15.5 billion by 2014. These markets include various sizes devices for a range of applications from cell phone size to viewfinder displays to televisions to lighting. Displays in general are sold as independent products (such as TV monitors) or as components of other systems (such as laptop computers). Our products target one segment of the display industry, the near-eye, personal display, which is viewed through a lens rather than directly, in comparison to desktop computer screens which are known as direct view displays. As an off-shoot of our work in microdisplays, we are also participating in government-funded development studies for OLED-based lighting.

Personal displays, that is, near-eye systems based on microdisplays and optics, include video headsets, camcorders, viewfinders and other portable devices. Microdisplays are typically of such high resolution that they can be practically viewed only with magnifying optics. Although microdisplays are typically physically smaller than a postage stamp, they can provide a magnified viewing area similar to that of a full-size computer screen. For example, when magnified through a lens, a high-resolution 0.6-inch diagonal display can appear comparable to a 19- to 21-inch computer screen at about 2 feet from the viewer or a 60-inch TV screen at about 6 feet.  The wearable display market, according to DisplaySearch, is expected to grow to at least $153 million in 2010. McLaughlin Consulting, in a report published December 2006, projects that, with effective marketing, the Personal Viewer market could reach nearly $1 billion in 2010.

We believe that the most significant driver of the longer term near-eye virtual imaging microdisplay market is growing consumer demand for mobile access to larger volumes of information and entertainment in smaller packages. This desire for mobility has resulted in the development of near-eye microdisplay products in two general categories: (i) an established market for electronic viewers incorporated in products such as viewfinders for digital cameras and video cameras which may potentially also be developed as personal viewers for cell phones and (ii) an emerging market for headset-application platforms which include accessories for mobile devices such as notebook and sub-notebook computers, portable DVD systems, electronic games, and other entertainment, and wearable computers.

Until now, near-eye virtual imaging microdisplay technologies have not simultaneously met all of the requirements for high resolution, full color, low power consumption, brightness, lifetime, size and cost which are required for successful commercialization in OEM consumer products. We believe that our new OLED-on-silicon microdisplay product line meets these requirements better than alternative products and will help to enable virtual imaging to emerge as an important display industry segment.

Our Approach: OLED-on-Silicon Microdisplays and Optics

There are two basic classes of organic light emitting diode, or OLED, technology, dubbed single molecule or small molecule (monomer) and polymer. Our microdisplays are currently based upon active matrix molecular OLED technology, which we call OLED-on-silicon because we build the displays directly on silicon chips. Our OLED-on-silicon technology uniquely permits millions of individual low-voltage light sources to be built on low-cost, silicon computer chips to produce single color, white or full-color display arrays. OLED-on-silicon microdisplays offer a number of advantages over current liquid crystal microdisplays, including increased brightness, lower power requirements, less weight and wider viewing angles. Using our OLED technology, many computer and video electronic system functions can be built directly into the silicon chip, under the OLED film, resulting in very compact, integrated systems with lowered overall system costs relative to alternative technologies.

We have developed our own proprietary and patented technology to create high performance OLED-on-silicon microdisplays and related optical systems, and we license fundamental OLED technology from Eastman Kodak. (See "Intellectual Property" and "Strategic Relationships"). We expect that the integration of our OLED-on-silicon microdisplays into mobile electronic products will result in lower overall system costs to our OEM customers.

We believe that our OLED-on-silicon microdisplays will initiate a new generation of virtual imaging products that could have a profound impact on many industries. Headsets providing virtual screens surrounding the user in a sphere of data become a practical reality with our displays and a low cost head tracker. Because our microdisplays generate and emit light, they have a wider viewing angle than competing liquid crystal microdisplays, and because they have the same high brightness at all forward viewing angles, our microdisplays permit a large field-of-view and superior optical image.

The wider viewing angle of our display results in the following superior optical characteristics in comparison with LCDs and other near-eye display technologies:

·   the user does not need to accurately position the head-wearable display to the eye;

·   the image will change minimally with eye movement and appear more natural; and

·   the display can be placed further from the eye and not cut off part of the image.

In addition, our OLED-on-silicon microdisplays offer faster response times and use much less power than competitive liquid crystal microdisplay systems. Our subsystem-level power consumption is so low that two SVGA, full color, full speed motion video computer displays can easily be run in stereovision off the power from a single USB port on a portable computer. Battery life is extended and weight is greatly reduced in systems using our products.

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Our SVGA+ OLED microdisplay stores all the color and luminance value information at each of the more than 1.5 million picture elements, or pixels, between refresh cycles in the display array, eliminating the flicker or color breakup seen by most other high-resolution microdisplay technologies. Even power efficient frame rates as low as 30 Hz can usually be used effectively. Power consumption at the system level is expected to be the lowest of any full-color, full-video SVGA resolution range, large view microdisplay on the market. The OLED's ability to emit light at wide angles allows customers to create large field of view (approx. 40 degrees), wide image capture range images from very compact, low-cost, one-piece optical systems. The display contains the majority of the electronics required for connection to the RGB (red, green, blue signal) port of a portable computer imbedded in its silicon chip backplane, thereby eliminating many other components required by other display technologies such as digital-analog converters, application-specific integrated circuits (ASICs), light sources, multiple optical elements, and other components. We believe that these features will enable our new class of microdisplay to potentially be the most compact, highest image quality, and lowest cost solution for high resolution near-eye applications, once they are in full production.

We have also developed advanced lens technology which permits our OLED-on-silicon microdisplays to provide large field of view images that can be viewed for extended periods with reduced eye-fatigue. Molded plastic prism lenses have been developed to help our OEM customers obtain better quality, large area virtual images using our displays at relatively low cost in comparison to alternate approaches.

Our Products

Our first commercial microdisplay products are based on our "SVGA series" OLED microdisplays. We offer products utilizing both our proprietary “OLED” or “OLED-XL” technologies, applied to the same integrated circuit base. We offer our products to OEMs and other large volume buyers as both separate components, integrated bundles coupled with our own optics, or full systems. We also offer engineering support to enable customers to quickly integrate our products into their own product development programs.

 (1) OLED Microdisplay Component Products

SVGA+ OLED Microdisplay (Super Video Graphics Array of 800x600 plus 52 added columns of data).  Our 0.62 inch diagonal SVGA+ OLED microdisplays have a resolution of 852x600 triad pixels (1.53 million picture elements). The product was dubbed "SVGA+" because it has 52 more display columns than a standard SVGA display, permitting users to run either (1) standard SVGA (800 x 600 pixels) to interface to the analog output of many portable computers or (2) 852 x 480, using all the data available from a DVD player in a 16:9 wide screen entertainment format. The display also has an internal NTSC monochrome video decoder for low power night vision systems.

SVGA-3D OLED Microdisplay (Super Video Graphics Array plus built-in stereovision capability).  Our 0.59 inch diagonal SVGA-3D OLED microdisplays have a resolution of 800x600 triad pixels (1.44 million picture elements). A built-in circuit provides compatibility with single channel frame sequential stereoscopic vision without additional external components.

Microdisplays Under Development.  We are developing two additional display products, a smaller format (SVGA-3DS) version of our SVGA display, which will have 800 x 600 triad pixels and be 0.44 inch diagonal and a 0.77 inch SXGA OLED microdisplay with resolution of 1280x 1024 triad pixels. These new products offer both analog and digital signal inputs in a compact display with greater power efficiency. With the world’s finest pitch (11.1 microns) and a high level of integrated functionality, the SVGA-3DS provides a simple path to system integration in a small format. The SXGA split chip architecture offers unprecedented power consumption savings for this display format in addition to a highly flexible system interface configuration.

Lens and Design Reference Kits. We offer a WF05 prism optic, with mounting brackets or combined with OLED microdisplays to form an optic-display module. We provide Design Reference Kits, which include a microdisplay and associated electronics to help OEMs evaluate our microdisplay products and to assist their efforts to build and test new products incorporating our microdisplays.

Integrated Modules. We provide near-eye virtual imaging modules that incorporate our OLED-on-silicon microdisplays with our lenses and electronic interfaces for integration into OEM products. We have shipped customized modules to several customers, some of which have incorporated our products into their own commercial products.

(2) Personal Display Systems (Head-Wearable and Headset Systems)

Our Z800 3DVisors(tm) give users the ability to work with their hands while simultaneously viewing information or video on the display. The Z800 3DVisor enables more versatile portable computing, using a 0.59-inch diagonal microdisplay (SVGA-3D capable of delivering an image that appears comparable to that of a 19-inch monitor at 22 to 24 inches from the eye, or a 105 inch movie screen at 12 foot distance. Our systems are currently being used for personal entertainment, electronic gaming, and military training and simulation, among other applications. We believe that personal display systems will fill the increasing demand for instant data accessibility and privacy in mobile workplaces. We sell the personal display systems to OEM systems and equipment customers, through distributors, and through our e-commerce website, www.3dvisor.com.

Our Market Opportunity - Personal Display Systems Platforms, including Head-wearable Displays

The growth potential of our selected target market segments have been investigated using information gathered from key industry market research firms, including DisplaySearch, Frost and Sullivan, Fuji-Chimera, International Data Corporation, Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was obtained using published reports and data obtained at industry symposia. We have also relied substantially on market projections obtained privately from industry leaders, industry analysts, and current and potential customers.

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The virtual-imaging markets we are targeting include industrial, medical, military, arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within each of these market sectors, we believe that our microdisplays, when combined with compact optic lenses, will become a key component for a number of mobile electronic products. Applications we are targeting the following:

Head-wearable displays incorporate microdisplays mounted in or on eyeglasses, goggles, simple headbands, helmets, or hardhats, and are often referred to as head-mounted displays (HMDs) or headsets. Head-wearable displays may block out surroundings for a fully immersive experience, or be designed as "see-through" or "see-around" to the user's surroundings. They may contain one (monocular) or two (binocular) displays. Some of the increased current interest is due to accelerating the timetable to adapt such systems to military applications such as night vision and fire and rescue applications. These have military, commercial, and consumer applications.

Military

Military demand for head-wearable displays is currently being met with microdisplay technologies that we believe to be inferior to our OLED-on-silicon products. The new generation of soldiers will be highly mobile, and will often need to carry highly computerized communications and surveillance equipment. To enable interaction with the digital battlespace, rugged, yet lightweight and energy efficient technology is required. Currently available microdisplay technologies do not meet the requirements for low power, hands-free, day and night-viewable displays. As a COTS (commercial off the shelf) component, OLED microdisplays demonstrate performance characteristics important to military and other demanding commercial and industrial applications including high brightness and resolution, wide dimming range, wider temperature operating ranges, shock and vibration resistance and insensitivity to high G-forces. The image does not suffer from flicker or color breakup in vibrating environments, and the microdisplay's wide viewing angle allows ease of viewing for long periods of time. The OLED's very low power consumption reduces battery weight and increases allowed mission length. Properly implemented, we believe that head-mounted systems incorporating our microdisplays will increase effectiveness by allowing hands-free operation and increasing situational awareness with enough brightness to be used in daylight, yet controllable for nighttime light security. The OLED's inherent wide temperature range is especially of interest for military applications because the display can turn on instantly at temperatures far below freezing and can operate at very high temperatures in desert conditions.

Our OLED microdisplays have been selected for a range of defense-security applications, including a situational awareness HMD for the US Army Land Warrior programs, a handheld thermal imager for border patrol and training, and simulation virtual monitors for Quantum 3D. The Land Warrior, a baseline program in the Army's drive to digitize the battlefield, is an integrated digital system that incorporates computerized communication, navigation, targeting and protection systems for use by the twenty-first century infantry soldier. Rockwell Collins, the principal contractor for the US Army's Land Warrior HMD system, and eMagin applied their respective expertise in HMD and imaging technology to develop rugged, yet lightweight and energy efficient products meeting the requirements of tomorrow's soldier. Our display is also used in Rockwell Collins’ commercially available ProView S035 Monocular HMD. Night Vision Equipment Corporation's HelmetIR-50(TM), a lightweight, military helmet mounted thermal imager, which provides hands-free operation and allows viewers to see through total darkness, battlefield obscurants, and even foliage, is the first OLED-equipped product to be listed on the US Government's GSA schedule. Virtually Better Inc. has incorporated our Z800 3DVisor into its “Virtual Iraq” treatment for post-traumatic stress disorders.  In addition, our displays have been commercialized, or planned to be commercialized, by military systems integrators including DRS, Elbit, Insight Technologies, Nivisys, Qioptiq, Saab, Sagem, and Thales, , among others. We cannot assure that Government projects will remain on schedule, or that they will be fully implemented. Similar systems are of interest for other military applications as well as for related operations such as urban security, fire and rescue.

Commercial, Industrial, and Medical

We believe that a wide variety of commercial and industrial markets offer significant opportunities due to increasing demand for instant data accessibility in mobile workplaces. Some examples of microdisplay applications include: immediate access to inventory such as parts, tools and equipment availability; instant accessibility to maintenance or construction manuals; routine quality assurance inspection; endoscopic surgery; and real-time viewing of images and data for a variety of applications. As one potential example, a user wearing a HMD while using test equipment, such as oscilloscopes, can view technical data while simultaneously probing printed circuit boards. Commercial products in these sectors include Sage Technologies, Ltd.'s Helmet Vue (TM) Thermal Imaging System and Liteye's 500. VRmagic GmbH, a leading developer of virtual reality simulators, is using our OLED microdisplays in their EYESI(TM) Virtual Reality Surgical Simulator, which provides real-time simulation of ophthalmic surgery, high performance biomechanical tissue simulation, precision tracking, and realistic stereo imaging. Sensics has incorporated our OLED displays in their immersive SkyVizor (TM) virtual reality headset to serve as the "eyes" of the Robonaut, a humanoid robot being developed by NASA and Department of Defense agencies. The Robonaut system can work side by side with humans, or alone in high-risk situations. Telepresence uses virtual reality display technology to visually immerse the operator into the robot's workspace, facilitating operation and interaction with the Robonaut, and potentially reducing the number of dangerous space walks required of real astronauts.  Another recent example is Saab Avitronics, which has chosen eMagin microdisplays for its new Multi-Purpose Virtual Image Display (VID) which comprises high-performance magnifying optics and the OLED, sealed in an aluminum casing.

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Consumer

Once our displays are manufactured in high volumes at reduced costs, we believe that our head-wearable display products may enhance the following consumer products:

·   Entertainment and gaming video headset systems, which permit individuals to view television, including HDTV, video CDs, DVDs and video games on virtual large screens or stereovision in private without disturbing others. We believe that these new headset game systems can provide a game or telepresence experience not otherwise practical using conventional direct view display technology. The advent of video iPods and the rapidly increasing amount of downloadable content have accelerated the movement toward portable video technology. At the same time, the desire for larger screen sizes while retaining the iPod portability has been referenced in many publications. Virtual imaging uniquely provides a large, high resolution view in a small portable package, and we believe that our OLED on silicon technology is a best fit to help open this market.

·   Notebook computers, which can use head-wearable devices to reduce power requirements as well as expand the apparent screen size and increase privacy. Current notebook computers do not use microdisplays. Our products can apply not only to new models of notebook computers, but also as aftermarket attachments to older notebooks still in use. The display can be easily used as a second monitor on notebook computers for ease of editing multiple documents to provide multiple screens or for data privacy while traveling. It can also be used to provide larger screen capability for viewing spreadsheets or complex computer aided design (CAD) files. We expect to market our head-wearable displays to be used as plug-in peripherals to be compatible with most notebook computers. We believe that the SVGA-3D microdisplay is well suited for most portable PC headsets. Our microdisplays can be operated using the USB power source of most portable computers. This eliminates added power supplies, batteries, and rechargers and reduces system complexity and cost.

·   Handheld personal computers, whose small, direct view screens are often limitations, but which are now capable of running software applications that would benefit from a larger display. Microdisplays can be built into handheld computers to display more information content on virtual screens without forfeiting portability or adding the cost a larger direct view screen. Microdisplays are not currently used in this market. We believe that GPS viewers and other novel products are likely to develop as our displays become more available.

The combination of power efficiency, high resolution, low systems cost, brightness and compact size offered by our OLED-on-silicon microdisplays has not been made available to makers and integrators of existing entertainment and gaming video headset systems, notebook computers and handheld computers. We believe that our microdisplays have the potential to propel the growth of new products and applications such as lightweight wearable computer systems.

Our Strategy

Our strategy is to establish and maintain a leadership position as a worldwide supplier of microdisplays and virtual imaging technology solutions for applications in high growth segments of the electronics industry by capitalizing on our leadership in both OLED-on-silicon technology and microdisplay lens technology. We aim to provide microdisplay and complimentary accessories to enable OEM customers to develop and manufacture new and enhanced electronic products. Some key elements of our strategy to achieve these objectives includes the following:

·   Leverage our superior technology to establish a leading market position. As the first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a significant advantage in bringing this technology to market.

 ·   Optimize manufacturing efficiencies by outsourcing while protecting proprietary processes. We outsource certain portions of microdisplay production, such as chip fabrication, to minimize both our costs and time to market. We intend to retain the OLED application and OLED sealing processes in-house. We believe that these areas are where we have a core competency and manufacturing expertise. We also believe that by keeping these processes under tight control we can better protect our proprietary technology and process know-how. This strategy will also enhance our ability to continue to optimize and customize processes and devices to meet customer needs. By performing the processes in-house we can continue to directly make improvements in the processes, which will improve device performance. We also retain the ability to customize certain aspects such as color balance, which is known as chromaticity, as well as specialized boards or interfaces, and to adjust other parameters at the customer's request. In the area of lenses and head-wearable displays, we intend to focus on design and development, while working with third parties for the manufacture and distribution of finished products. We intend to prototype new optical systems, provide customization of optical systems, and manufacture limited volumes, but we intend to outsource high volume manufacturing operations. There are numerous companies that provide these outsource services.

·    Build and maintain strong internal design capabilities. As more circuitry is added to OLED-on-silicon devices, the cost of the end product using the display can be decreased; therefore integrated circuit design capability will become increasingly important to us. To meet these requirements, we utilize in-house design capabilities supplemented by outsourced design services. Building and maintaining this capacity will allow us to reduce engineering costs, accelerate the design process and enhance design accuracy to respond to our customers' needs as new markets develop. In addition, we intend to maintain a product design staff capable of rapidly developing prototype products for our customers and strategic partners. Contracting third party design support to meet demand and for specialized design skills will also remain a part of our overall long term strategy.  

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Our Strategic Relationships

Strategic relationships have been an important part of our research and development efforts to date and are an integral part of our plans for commercial product launch. We have forged strategic relationships with major OEMs and strategic suppliers. We believe that strategic relationships allow us to better determine the demands of the marketplace and, as a result, allow us to focus our future research and development activities to better meet our customer's requirements. Moreover, we expect to provide microdisplays and Microviewers(TM) to some of these partners, thereby taking advantage of established distribution channels for our products.

Eastman Kodak is a technology partner in OLED development, OLED materials, and a potential future customer for both specialty market display systems and consumer market microdisplays. We license Eastman Kodak's OLED and optics technology portfolio. We have a nonexclusive; perpetual, worldwide license to use Eastman Kodak patented OLED technology and associated intellectual property in the development, use, manufacture, import and sale of microdisplays. The license covers emissive active matrix microdisplays with a diagonal size of less than 2 inches for all OLED display technology previously developed by Kodak. An annual minimum royalty is paid at the beginning of each calendar year and is fully creditable against the royalties we are obligated to pay based on net sales throughout the year. Eastman Kodak and eMagin have engaged in numerous discussions regarding potential product applications for eMagin's microdisplays by Eastman Kodak.

We are working cooperatively with the US Army, US Navy, and with several military system integrators to further characterize operation of our displays in rugged military environments. We have a Cooperative Research and Development Agreement (CRADA) with the US Army Night Vision Electronic Sensors Directorate (NVESD) to characterize performance of our displays. We are currently partnering with the University of Michigan to develop advanced display process via a government-sponsored research program. We intend to continue to establish additional strategic relationships in the future.

We are a member of the United States Display Consortium (USDC), a cooperative effort between industry and government whose charter is to develop an infrastructure to support North American flat panel display manufacturing. It has more than 100 members, as well as support from the Department of Defense. The USDC’s role is to provide a common platform for flat panel display manufacturers, developers, users and the manufacturing equipment and supplier base.

Our Technology Platforms

OLED-on-Silicon Technology

Scientists working at Eastman Kodak invented OLEDs in the early 1980s. OLEDs are thin films of stable organic materials that emit light of various colors when a voltage is impressed across them. OLEDs are emissive devices, which mean they create their own light, as opposed to liquid crystal displays, which require a separate light source. As a result, OLED devices use less power and can be capable of higher brightness and fuller color than liquid crystal microdisplays. Because the light they emit is Lambertian, which means that it appears equally bright from most forward directions, a moderate movement in the eye does not change the image brightness or color as it does in existing technologies. OLED films may be coated on computer chips, permitting millions of individual low-voltage light sources to be built on silicon integrated circuits to produce single color, white or full-color display arrays. Many computer and video electronic system functions can be built directly into a silicon integrated circuit as part of the OLED display, resulting in an ultra-compact system. We believe these features, together with the well-established silicon integrated circuit fabrication technology of the semiconductor industry, make our OLED-on-silicon microdisplays attractive for numerous applications.

We believe our technology licensing agreement with Eastman Kodak, coupled with our own intellectual property portfolio, gives us a leadership position in OLED and OLED-on-silicon microdisplay technology. Eastman Kodak provides OLED technology and we provide additional technology advancements that have enabled us to coat the silicon integrated circuits with OLEDs.

We have developed numerous and significant enhancements to OLED technology as well as key silicon circuit designs to effectively incorporate the OLED film on a silicon integrated circuit. For example, we have developed a unique, top-emitting structure for our OLED-on-silicon devices that enables OLED displays to be built on opaque silicon integrated circuits rather than only on glass. Our OLED devices can emit full visible spectrum light that can be isolated with color filters to create full color images. Our microdisplay prototypes have a brightness that can be greater than that of a typical notebook computer and can have a potential useful life of over 50,000 operating hours, in certain applications. New materials and device improvements in development offer future potential for even better performance for brightness, efficiency, and lifespan. Additionally, we have invested considerable work over several years to develop unique electronics control and drive designs for OLED-on-silicon microdisplays.

In addition to our OLED-on-silicon technology, we have developed compact optic and lens enhancements which, when coupled with the microdisplay, provide the high quality large screen appearance that we believe a large proportion of the marketplace demands.

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Advantages of OLED Technology

We believe that our OLED-on-silicon technology provides significant advantages over existing solutions in our targeted microdisplay markets. We believe these key advantages will include:

·  Low manufacturing cost;

·  Low cost system solutions;

·  Wide angle light emission resulting in large apparent screen size;

·  Low power consumption for improved battery life and longer system life;

·  High brightness for improved viewing;

·  High-speed performance resulting in clear video images;

·  Wide operating temperature range; and

·  Good environmental stability (vibration and humidity).

Low manufacturing cost.  Many OLED-on-silicon microdisplays can be built on an 8-inch silicon wafer using existing automated OLED and color filter processing tools. The level of automation used lowers labor costs. Only a minute amount of OLED material is used in each OLED-on-silicon microdisplay so that material costs, other than the integrated circuit itself, are small. The number of displays per silicon wafer may be higher on OLEDs than on liquid crystal displays, or LCDs, because OLEDs do not require a space-wasting perimeter seal band. Expensive transparent wafers with CMOS silicon laminated onto quartz are not required for OLED microdisplays, as standard CMOS chips may be used as backplanes.

Low cost systems solutions.   In general, an OEM using OLED-on-silicon microdisplays will not need to purchase and incorporate lighting assemblies, color converter related Applications Specific Integrated Circuits, or ASICs, or beam splitter lenses as is the case in liquid crystal microdisplays, which also require illumination. Many important display-related system functions can be incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of the system. Non-polarized light from OLEDs permit lenses for many OLED-on-silicon applications that are made of a single piece of molded plastic, which reduces size, weight and assembly cost when compared to the multipiece lens systems used for liquid crystal microdisplays. System cost relative to liquid crystal and liquid crystal on silicon, or LCOS, competitive products is thus reduced. Because our displays are power efficient, they typically require less power at the system level than other display technologies at a given display size and brightness.

Wide-angle light emission simplifies optics for large apparent screen size.  OLEDs emit light at most forward directions from each pixel. This permits the display to be placed close to the lens in compact optical systems. It also provides the added benefit of less angular dependence on the image quality relative to pupil and eye position when showing a large field of view, unlike reflective LCOS microdisplays. This results in less eye fatigue and makes it relatively easy to low power consumption for improved battery life and longer system life. OLEDs emit light rather than transmitting it, so no power-consuming backlight or front light, as required for liquid crystal displays, is required. OLEDs can be energy efficient because of their high efficiency light generation. Furthermore, OLEDs conserve power by powering only those pixels that are on while liquid crystal on silicon requires light at all pixels all the time. Most optical systems used for our OLEDs are highly efficient, permitting over 80% of the light to reach the eye, whereas reflective technologies such as liquid crystal on silicon require multiple beam splitters to get light to the display, and then into the optical system. This results in typically less than 25% light throughput efficiency in reflective microdisplay systems. Most important, we do not need a power-hungry video frame buffer, as required in liquid crystal frame-sequential color systems. Battery life can therefore be extended.

High brightness for improved viewing.  This feature can be of great value to military applications, where there is a need to see the computer image overlaid onto brightly lit real-life backgrounds such as desert sand, water reflections or sunlit clouds. The OLED can be operated over a large luminance range without loss of gray level control, permitting the displays to be used in a range of dark environments to very bright ambient applications. Since military simulation and situation awareness applications, including night vision, typically require large fields of view, the OLED's Lambertian optical characteristics make it an excellent choice.

High-speed performance resulting in clear video image.  OLEDs switch much more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This results in smear-free video rate imagery and provides improved image quality for DVD playback applications. This eliminates visible image smear and makes practicable three-dimensional stereo imaging using a split frame rate. This advantage of our OLED-on-silicon is very important for 3-D stereovision gaming applications.

Flicker-free and no color breakup.  Because the OLED-on-silicon stores brightness and color information at each pixel, the display can be run with no noticeable flicker and no color sequential breakup, even at low refresh rates. A lower refresh rate not only helps reduce power, but it also facilitates system integration. Color sequential breakup occurs in systems such as liquid crystal on silicon and some liquid crystal display microdisplays when red, green and blue frames are sequentially imaged in time for the eye to combine. Since the different color screens occur at different times, movement of the eye due to vibration or just fast pupil movement can create color bands at each dark-light edge, making the image unpleasant to view and making text difficult to read. For example, the liquid crystal on silicon display needs to run at least three times the "normal" frame rate or speed to produce color sequential images, which wastes power and makes for a difficult technological challenge as display resolutions increase.

Wide operating temperature range.   Our OLEDs offer much less temperature sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or non-operative much below freezing unless heaters are added and lose contrast above 50 degrees Celsius, while our OLEDs turn on instantly and can operate between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller temperature range on most consumer products to accommodate lower cost packaging. This is an important characteristic for many portable products that may be used outdoors in many varying environmental conditions. It is especially important for military customers. Insensitivity to vibration, shock, and pressure are also important environmental control attributes.

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Complementary lens and system technologies.  We have developed a wide range of technologies which complement our core OLED and lens technologies and which will enhance our competitive position in the microdisplay and head-wearable display markets. These include:

Lens technology. High quality, large view lenses with a wide range for eye positioning are essential for using our displays in near-eye systems. We have developed advanced lens technology for microdisplays and personal head-wearable display systems and hold key patents in these areas. Our lens technology permits our OLED-on-silicon microdisplays to provide large field of view images that can be viewed for extended periods with reduced eye-fatigue. We have engaged a firm to manufacture our lenses in order to provide them in larger quantities to our customers and are using them in our own personal display systems.

We believe that the key advantages of our lens technology include:

· Can be very low cost, with minimal assembly. A one piece, molded plastic optic attached to the microdisplay has been introduced and may potentially serve consumer end-product markets. Since our process is plastic molding, our per unit production costs are low;

· Allows a compact and lightweight lens system that can greatly magnify a microdisplay to produce a large field of view. For example, our WF05 prism lens, in combination with our SVGA OLED microdisplay, provides a virtual view equivalent to that of a 105-inch diagonal display viewed at 12 feet;

· Can use single-piece molded microdisplay lenses to permit high light throughput making the display image brighter or permitting the use of less power for an acceptable brightness;

· Can be designed to provide focusing to enable users with various eyesight qualities to view images clearly; and

· Can optionally provide focal plane adjustment for simultaneous focusing of computer images and real world objects. For example, this characteristic is beneficial for word processing or spreadsheet applications where a person is typing data in from reference material. This feature can make it easier for people with moderately poor accommodation to use a head-wearable display as a portable computer-viewing accessory.

Personal display system technology. We have developed ergonomic technologies that make head-wearable displays easier to use in a wide variety of applications. For example, the use of our patented rotatable Eyeblocker(TM) provides a sharp image without requiring most users to squint. The Eyeblocker can also be moved to create an effective see-through appearance. To our knowledge, we have made the lightest weight, high-resolution head-wearable display with an over 35 degree diagonal field of view ever publicly demonstrated. We have also incorporated low cost, small size, high speed headtrackers to further enhance game and telepresence applications.

Sales and Marketing

We primarily provide display components for OEMs to incorporate into their branded products and sell through their own well-established distribution channels. In addition, we market head-wearable displays directly to various vertical market channels, such as medical, industrial, and government customers. A typical buyer is a manufacturer of a product requiring a specific resolution of visual display or viewfinder for insertion into a product such as a portable DVD headset, a PC-gaming headset, or an instrument.

We market our services in North America, Asia, and Europe primarily through direct technical sales from our headquarters. Regular purchase orders are processed by our customer service coordinators and technical questions related to product purchases or product applications are processed by our technical support team. As a market-driven company, we assess customer needs both quantitatively and qualitatively, through market research and direct communications. Because our microdisplays are the main functional component that defines many of our customers' end products, we work closely with potential customers to define our products to optimize the final design, typically on a senior engineer-to-engineer basis. Our personal display systems are sold through select value-added resellers and on-line through PC Mall, Google Checkout, and our e-commerce site, www.3dvisor.com.

We identify companies with end products and applications for which we believe that our products will provide a system level solution and for which our products can be a key differentiator. We target both market leaders and select early adopter companies; their acceptance validates our technology and approach in the market. We believe successful marketing will require relationships with recognized consumer brand companies.

Near term sales efforts for OLED microdisplays have been focused on our military, industrial, and medical customers. We have received production orders and design wins for both the SVGA+ and SVGA 3D displays. To date, we have shipped products and evaluation kits to more than 200 OEM customers. An OEM design cycle typically requires between 6 and 36 months, depending on the uniqueness of the market and the complexity of the end product. New product development may require several design iterations prior to commercialization. Some of our initial customers have completed their initial evaluation cycle and we continue to receive follow-on orders and notification of product purchase decisions. (See "Our Market Opportunity: Military; Commercial, Industrial, and Medical; and Consumer")

Customers

Customers for our products include both large multinational and smaller OEMs. We maintain relationships with OEMs in a diverse range of industries encompassing the military, industrial, medical, and consumer market sectors. During 2007, 51% of our net revenue was to firms based in the United States and 49% was to international firms as compared to 59% domestic revenue and 41% international revenue during 2006.  In 2007, we had 10 customers that accounted for more than 54% of our total revenue as compared to 5 customers that accounted for more than 68% of our total revenue in 2006. In 2007, we did not have any customers that accounted for more than 10% of our total revenue as compared to 2006, when we had one customer that accounted for 13% of our total revenues. 

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Backlog

As of September 30, 2008, we had a backlog of approximately $4.6 million for purchases through December 31, 2009. This backlog consists of purchase orders and purchase agreements but does not include expected revenue from R&D contracts or expected NRE (non-recurring engineering) programs under development.

The majority of our backlog consists of purchase agreements for delivery over the next 12 months. Most purchase orders are subject to rescheduling or cancellation by the customer with no or limited penalties. Because of the possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments, our backlog as of a particular date may not be indicative of net sales for any succeeding period. Some customers have experienced delays in their expected product launch schedules due to their own product development delays not directly related to our microdisplays, such as development of custom optics or other aspects of their end product, or by delays in government programs contracted to them.

Research and Development 

Near-to-the-eye virtual imaging and OLED technology are relatively new technologies that have considerable room for substantial improvements in luminance, life, power efficiency, voltage swing, design compactness, field of view, optical range of visibility, headtracking options, wireless control and many other parameters. We anticipate that achieving reductions in manufacturing costs will require new technology developments. We also anticipate that improving the performance, capability and cost of our products will provide an important competitive advantage in our fast moving, high technology marketplace. Past and current research activities include development of improved OLED and display device structures, developing and/or evaluating new materials (including the synthesis of new organic molecules), manufacturing equipment and process development, electronics design methodologies and new circuits and the development of new lenses and related systems. In 2007, we spent approximately $2.9 million on research and development. In 2007 we continued to research more efficient materials and processes. We also completed the primary designs of our new smaller display, the SVGA 3DS, as well as the design of the SXGA.

External relationships play an important role in our research and development efforts. Suppliers, equipment vendors, government organizations, contract research groups, external design companies, customer and corporate partners, consortia, and university relationships all enhance the overall research and development effort and bring us new ideas (See "Strategic Relationships").

U.S. Government-Funded Research

We have entered into several U.S. government contracts to fund a portion of our efforts to develop next-generation OLED technologies for a variety of applications. These include, among others, Small Business Innovation Research (SBIR) Phase II program contracts for continued research and development and the fabrication of prototypes. On contracts for which we are the prime contractor, we subcontract portions of the work to various entities and institutions, including the University of Michigan. Our recent government contracts include the following:

OLED Performance and Reliability Improvement for Active Matrix OLED Microdisplays. Armed forces as well as other security related agencies are relying increasingly on the benefits of OLED technology in active matrix microdisplays. Applications range from night vision thermal imaging to tactical awareness and communication systems to weapons-mounted sights, among others. As the systems capabilities are expanded, the need for higher brightness and ability to display static imagery such as maps and drawings is growing, placing higher demands on the OLED technology. In 2007 eMagin was awarded a contract managed by the Night Vision Electronic Sensors Directorate (NVESD) with funding by the Department of Defense Appropriations Bill. The objective of the program is to improve on the present performance of the microdisplay-based OLED technology from lifetime, efficiency and reliability standpoints. For 2007, we received approximately $360 thousand of the $1.12 million program. The FY 2008 Department of Defense Appropriations Bill has provided for continuation of a second phase of the program

Organic Light Emitting Diode (OLED) Display Technology for Military Aircraft. In 2007 we continued our efforts to develop a robust thin film encapsulation technique for OLED displays under a Small Business Technology Transfer (STTR) program from the US Navy. University of Michigan, Ann Arbor, MI is the university partner for this STTR. Many new schemes to encapsulate OLED devices with thin film techniques were developed, evaluated and tested under accelerated environmental condition. The contract expired on February 29, 2008. For 2007 we received approximately $328 thousand in funding under this program.

Ultra High Resolution Display for Army Medicine. In 2007 we formally initiated efforts on a multiple year program under contract with the US Army TATRC (Telemedicine and Advanced Technologies Research Center) with funding provided by the FY 2006 and 2007 Department of Defense Appropriations Bills. The culmination of this multiple year effort will provide an ultra-high resolution, wide field of view display system suitable for dual-use application within Army medicine, U.S. military simulation and training, and commercial uses. We received approximately $698 thousand in funding during 2007 under this contract and expect to receive approximately $2 million during 2008.

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High Dynamic Range Microdisplay Feasibility Study. The US Army/RDECOM/NVESD and eMagin Corporation have established a CRADA (Cooperative Research and Development Agreement) with the goal of evaluating and characterizing new and existing AMOLED microdisplay configurations with an emphasis on the usable lifetime of the displays. This work is aimed at developing AMOLED microdisplays capable of being fielded in a wide range of US Army applications. The effort is for a 3 month period and is a feasibility study aimed at evaluating several concepts leading to a higher dynamic range without changing the existing pixel driver design of the microdisplays. If successful, a second phase can be considered addressing a complete high dynamic range OLED microdisplay. The total program cost for the 3 month program is approximately $236 thousand. The program started on March 14, 2008.

Manufacturing Facilities

We are located at IBM's Microelectronics Division facility, known as the Hudson Valley Research Park, located about 70 miles north of New York City in Hopewell Junction, New York. We lease approximately 33,000 square feet of space which houses our own equipment for OLED microdisplay fabrication and research and development, includes a 16,300 square foot class 10 clean room space, additional lower level clean room space, assembly space and administrative offices.

Facilities services provided by IBM include our clean room, pure gases, high purity de-ionized water, compressed air, chilled water systems, and waste disposal support. This infrastructure provided by our lease with IBM provides us with many of the resources of a larger corporation without the added overhead costs. It further allows us to focus our resources more efficiently on our product development and manufacturing goals.

We lease additional non-clean room facilities for chemical mixing, cleaning, chemical systems, and glass/silicon cutting. OLED chemicals can be purified in our facility with our own equipment, permitting the company to evaluate new chemicals in pilot production that are not yet available in suitable purity for OLED applications on the market.

Our display fabrication process starts with the silicon wafer, which is manufactured by a semiconductor foundry using conventional CMOS process. After a device is designed by a combination of internal and external designers with customer participation, we outsource wafer fabrication.

Our manufacturing process for OLED-on-silicon microdisplays has three main components: organic film deposition, organic film encapsulation (also known as sealing), and color filter processing. All steps are performed in semi-automated, hands-free environment suitable for high volume throughput. An automated cluster tool provides all OLED deposition steps in a highly controlled environment that is the centerpiece of our OLED fabrication. After wafer processing, each part is inspected using an automated inspection system, prior to shipment. We have electrical and optical instrumentation required to characterize the performance of our displays including photometric and color coordinate analysis. We are also equipped for integrated circuit and electronics design and display testing.

We also lease a facility in Bellevue, Washington where we operate our system development effort and business development activities. The facilities are well suited for designing and building limited volume prototypes and small quantity industrial or government products. Cables and electronic interfaces have recently been produced to permit our OEM customers to more rapidly create products and shorten their time-to-market. We plan to outsource medium to high volume subsystem production to low cost plastics, lenses, and assembly manufacturers. We are currently using domestic and international outside manufacturers and we are investigating new outsource opportunities.

We believe that manufacturing efficiency is an important factor for success in the consumer markets. We believe that high yield and maximum utilization of our equipment set will be key for profitability. The equipment required for initial profitable production is in place. Some equipment will be added when our production volume increases or as needed.

Intellectual Property

We have developed a significant intellectual property portfolio of patents, trade secrets and know-how, supported by our license from Eastman Kodak and our current patent portfolio.

Our license from Eastman Kodak gives us the right to use in miniature displays a portfolio in organic light emitting diode and optics technology, some of which are fundamental. Our agreement with Eastman Kodak provides for perpetual access to the OLED technology for our OLED-on-silicon applications, provided we remain active in the field and meet our contractual requirements to Eastman Kodak. We also generate intellectual property as a result of our internal research and development activities.

Our patents and patent applications cover a wide range of materials, device structures, processes, and fabrication techniques, such as methods of fabricating full color OLEDs. We believe that our patent applications relating to up-emitting structures on opaque substrates such as silicon wafers, which are critical for OLED microdisplays, and applications relating to the hermetic sealing of such structures are particularly important.

Our patents are concentrated in the following areas:

· OLED Materials, Structures, and Processes;

· Display Color Processing and Sealing;

· Active Matrix Circuit Methodologies and Designs;

· Field Emission and General Display Technologies;

· Lenses and Tracking (Eye and Head);

· Ergonomics and Industrial Design; and

· Wearable Computer Interface Methodology

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We also rely on proprietary processes, trade secrets, and know-how related to OLED technologies and materials which are not patented. To protect this information and know-how from unauthorized use or disclosure, we require all employees, and where appropriate, contractors, consultants, advisors and collaborators to enter into confidentiality and non-competition agreements. There can be no assurance, however, that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

We believe that our intellectual property portfolio, coupled with our strategic relationships and accumulated experience in the OLED field, gives us an advantage over potential competitors.

 Competition

The industry in which we operate is highly competitive. We may face competition from legacy technologies such as CRTs as well as from alternative flat panel display technologies. We believe that our key competition will come from liquid crystal on silicon microdisplays, or LCOS, also known as reflective liquid crystal displays and small transmissive LCDs. While we believe that OLED-on-silicon has the capability to provide higher quality image quality images, greater environmental ruggedness, reduced electronics cost and complexity, and improved power efficiency advantages over either type of liquid crystal based microdisplays, there is no assurance thatthese benefits will be fully realized or that liquid crystal manufacturers will not suitably improve these parameters to reduce these potential advantages of OLEDs.

Most companies pursuing liquid crystal on silicon technology, such as Syntax/Brillian Corporation, among others, have primarily focused on projection microdisplays, which do not compete directly with us. In most near-to-the-eye imaging markets, we face more serious competition from developers of transmissive liquid crystal displays, such as those developed by Kopin, or possibly laser scanning systems, such as those developed by Microvision Corporation. Large amounts of investment in an intrinsically weaker technology can potentially overcome advantages of one technology over another.

To our knowledge, the only other company that has publicly stated plans to develop OLED microdisplays for near-eye applications is MicroEmissive Displays (MED) in Britain. MED has raised substantial funds and created a newer facility than ours.  This competition has not been significant to date, but could become more serious if they enter our markets with directly relevant display designs and resolve their manufacturing and reliability-lifetime issues.

We may also compete with potential licensees of Universal Display Corporation, Eastman Kodak, or Sumitomo Corporation and other companies, each of which potentially can license OLED technology portfolios. Even though we could also potentially license technology from these developers, potential competitors could also obtain such licenses and may do so at more favorable royalty rates or allocate more resources to the competitive effort than we could obtain. However, should they decide to embark on developing microdisplays on silicon, we believe that our progress to date in this area gives us a substantial head start.

Employees

As of October 14, 2008, we had a total of 60 full time and part time staff. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

DESCRIPTION OF PROPERTY

Our corporate offices are located in Bellevue, Washington.  Our Washington location includes administrative, finance, operations, research and development and sales and marketing functions and consists of leased space of approximately 19,000 square feet.  The lease expires in 2009.  Our manufacturing facility is located in Hopewell Junction, New York, where we lease approximately 33,000 square feet from IBM.  The NY facility houses our equipment for OLED microdisplay fabrication, assembly operations, research and development, and administrative functions. The lease expires in 2009.  We believe our facilities are adequate for our current and near-term needs.  See Note 12 to our December 31, 2007 consolidated financial statements for more information about our lease commitments.

LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

A former employee (“plaintiff”) of the Company commenced legal action in the United States District Court for the Southern District of New York, on or about October 12, 2007, alleging that the plaintiff was subject to gender based discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 (Case No. 07-CV-8827 (KMK).  The plaintiff seeks unspecified compensatory damages, punitive damages and attorneys’ fees.  On November 26, 2007, the Company served and filed its Answer, in which it denied the material allegations of the Complaint and asserted numerous affirmative defenses.  This action is presently in the discovery stage.  The Company disputes the allegations of the Complaint and intends on vigorously defending this action.

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On December 6, 2005, New York State Urban Development Corporation commenced action against eMagin in the Supreme Court of the State of New York, County of New York against eMagin, asserting breach of contract and seeking to recover a $150,000 grant which was made to eMagin based on goals set forth in the agreement for recruitment of employees.  On July 13, 2006, eMagin agreed to a settlement with the New York State Urban Development Corporation to repay $112,200 of the $150,000 grant. The settlement requires that repayments be made on a monthly basis in the amount of $3,116.67 per month commencing August 1, 2006 and ending on July 1, 2009.

MANAGEMENT

The following table sets forth the names of our directors and executive officers as of September 30, 2008:

Name	Age	Position
Andrew G. Sculley (5)	57	Chief Executive Officer and President
Paul Campbell (4)	52	Interim Chief Financial Officer
Susan K. Jones	56	Chief Business Officer, Secretary
Adm. Thomas Paulsen (Ret.) (2)(3*)	71	Chairman of the Board, Director
Claude Charles (1)	71	Director
Paul Cronson	51	Director
Irwin Engelman (1*)	73	Director
Dr. Jacob Goldman (2*)(3)	86	Director
Brig. Gen. Stephen Seay (Ret.) (1)(3)	61	Director

(1)		Audit Committee
(2)	Governance & nominating Committee
(3)		Compensation Committee
(4)		On April 14, 2008, Michael D. Fowler resigned from his position as Interim Chief Financial Officer of the Company
(5)		As of June 1, 2008, Andrew G. Sculley is Chief Executive Officer and President.  Admiral Paulsen resigned from his position as interim Chief Executive Officer and continues to serve as Chairman of the Board.

* Committee Chair

Andrew G. Sculley became the Company’s Chief Executive Officer and President on June 1, 2008.  Mr. Sculley served as the General Manager of Kodak’s OLED systems Business Unit and Vice President of Kodak’s Display Business from 2004 to 2008. From 2003 to 2006, he served on the Board of Directors of SK Display, a joint venture between Sanyo and Kodak. From 1996 to 2001 Mr. Sculley served as the Manager of Operations, CFO and member of the Board of Directors of Kodak Japan Ltd., where he managed Distribution, Information Technologies, Legal, Purchasing and Finance. Previously, he held positions in strategic planning and finance in Eastman Kodak Company.  Mr. Sculley holds an MBA from Carnegie-Mellon University and an MS in physics from Cornell University. He attended Harvard University’s International Senior Management Program while an executive at Kodak. 

Paul Campbell became the Company’s Interim Chief Financial Officer on April 15, 2008. Mr. Campbell has been a partner with Tatum, LLC (“Tatum”), an executive services firm, since November 2007. Mr. Campbell served as the Chief Financial Officer of four public companies, including Checkers Drive-In Restaurants, Inc, which until 2006 was traded on the Nasdaq and as Chief Financial Officer of Famous Dave’s of America, Inc., a publicly held company currently trading on the Nasdaq.  Mr. Campbell also served as Chief Financial Officer of Sonus Corporation, a medical device retailer, and of Organic To Go, Inc., an emerging publicly-held food company, from May 2007 through October 2007.  From 2001 through April 2007, Mr. Campbell owned and operated Campbell Capital, LLC, a consulting and investment firm in Seattle, Washington providing strategic planning and financing services to small businesses. Mr. Campbell received his Masters of Business Administration from Pepperdine University and his Bachelor of Arts degree in Business Economics from the University of California at Santa Barbara.

Susan K. Jones has served as Executive Vice President and Secretary since 1992, and assumed responsibility of Chief Business Officer in 2008. Ms. Jones has more than 30 years of industrial experience, including senior research, management, and marketing assignments at Texas Instruments and Merck, Sharp, & Dohme Pharmaceuticals. Ms. Jones serves on the boards or chairs committees for industry organizations including IEEE, SPIE, and SID. Ms. Jones served as a director of eMagin Corporation from 1993 to 2000 and was a director of Virtual Vision, Inc. Ms. Jones graduated from Lamar University with a B.S. in chemistry and biology, holds more than a dozen patents, and has authored more than 100 papers and talks.

Rear Admiral Thomas Paulsen resigned from his position as Interim CEO and President on June 1, 2008 and continues to serve as Chairman of the Board.  He has served as a director since July 2003. Admiral Thomas Paulsen served for over 34 years in the US Navy in Command Control, Communications and Intelligence (C3I), Telecommunications, Network Systems Operations, Computers and Computer Systems Operations until his retirement in 1994 as a Rear Admiral. He then served as Chief Information Officer for Williams Telecommunications. Admiral Paulsen has served as a director of Umbanet, Inc. since 2002. Since 2000, Admiral Paulsen has served on the Board of Governors of the Institute of Knowledge Management, George Washington University. Since 1994, he has served as the Chairman of the Advisory Board and President Emeritus of the Center for Advanced Technologies (CAT) and a Managing Partner on the National Knowledge and Intellectual Property Management Taskforce, a not-for-profit company headquartered in Dallas, Texas, and is a member of the Board of Governors for the Japanese American National Museum, Los Angeles, California.

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Claude Charles has served as a director since April of 2000. Mr. Charles has served as President of Azure Capital Limited since 1999. From 1996 to 1998 Mr. Charles was Chairman of Equinox Group Holdings. Prior to 1996, Mr. Charles has also served as a director and in senior executive positions at SG Warburg and Co. Ltd., Peregrine Investment Holdings, Trident International Finance Ltd., and Dow Banking Corporation. Mr. Charles holds a B.S. in economics from the Wharton School at the University of Pennsylvania and a M.S. in international finance from Columbia University.

Paul Cronson has served as a director since July of 2003. Mr. Cronson is Managing Director of Larkspur Capital Corporation, which he founded in 1992. Larkspur is a broker dealer that is a member of the National Association of Securities Dealers and advises companies seeking private equity or debt. Mr. Cronson's career in finance began in 1979 at Laidlaw, Adams Peck where he worked in asset management and corporate finance. From 1983 to 1985, Mr. Cronson worked with Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and structured transactions. Subsequently from 1985 to 1987, he was employed by Chase Investment Bank Ltd., where he structured international debt securities and he developed "synthetic asset" products using derivatives. Returning to the U.S., he joined Peter Sharp Co., where he managed a real estate portfolio, structured financings and assisted with capital market investments until 1992. Mr. Cronson received his BA from Columbia College in 1979, and his MBA from Columbia University School of Business Administration in 1982. He is on the Board of Umbanet, in New York City, a private company specializing in email based distributed applications and secure messaging.

Irwin Engelman has served as a director since May of 2005. He is currently a consultant to various industrial companies. He is currently a director of Sanford Bernstein Mutual Funds, a publicly-traded company, and a member of its audit committee. From November 1999 until April 2002, he served as Executive Vice President and Chief Financial Officer of YouthStream Media Networks, Inc., a media and retailing company serving high school and college markets. From 1992 until April 1999, he served as Executive Vice President and Chief Financial Officer of MacAndrews and Forbes Holdings, Inc., a privately-held financial holding company. From November 1998 until April 1999, he also served as Vice Chairman, Chief Administrative Officer and a director of Revlon, Inc., a publicly-traded consumer products company. From 1978 until 1992, he served as an executive officer of various public companies including International Specialty Products, Inc. (a subsidiary of GAF Holdings Inc.), CitiTrust Bancorporation, General Foods Corporation and The Singer Company. Mr. Engelman received a BBA in Accounting from Baruch College in 1955 and a Juris Doctorate from Brooklyn Law School in 1961. He was admitted practice law in the State of New York in 1962. In addition, he was licensed as a CPA in the State of New Jersey in 1966.

Dr. Jack Goldman joined our board of directors in February of 2003. Dr. Goldman is the retired senior vice-president for R&D and chief technical officer of the Xerox Corporation. While at Xerox, he founded and directed the celebrated Xerox PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford Motor Company's Scientific Research Laboratory. He also served as Visiting Edwin Webster Professor at MIT. Dr. Goldman presently serves on the Boards of Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics General, GAF and Bank Leumi USA. He has also been active in government and professional advisory roles including service on the US Dept. of Commerce Technical Advisory Board, chairman of Statutory Visiting Committee of The National Bureau of Standards (National Institute of Standards and Technology), vice-president of the American Association for the Advancement of Science and president of the Connecticut Academy of Science and Engineering.

General Stephen Seay was elected to the Board of Directors in January 2006. In his 33-year Army career, General Stephen Seay held a wide variety of command and staff positions, most importantly as a soldier's soldier volunteering for his final assignment with his troops in Iraq. Most recently he was Program Executive Officer for Simulation, Training and Instrumentation, and Commanding General, Joint Contracting Command-Iraq/Head of Contracting Authority, Operation Iraqi Freedom. He has also served as Program Manager for a joint system, headed the Joint Target Oversight Council and was Commanding General, Simulation, Training and Instrumentation Command (STRICOM), Army Materiel Command. Earlier, as a Field Artillery officer, he commanded at all levels, rising to corps artillery commander. He served as Chief of Staff, United States Army, Europe (Forward) and National Security Element, Taszar, Hungary, during Operation Joint Endeavor. He held resource management, operations research, and acquisition positions during three tours on Department of the Army staff. Stephen Seay holds a Bachelor of Science degree from the University of New Hampshire and a Master of Science degree from North Carolina State University.

CORPORATE GOVERNANCE

Code of Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is posted on our website at http://www.emagin.com/investors.

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by filing a Current Report on Form 8-K with the SEC, disclosing such information.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than 10% of the issued and outstanding shares of eMagin common stock to file reports of initial ownership of common stock and other equity securities and subsequent changes in that ownership with the SEC and the NYSE. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2007 all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with except as noted below:

As of December 31, 2007, there was one Form 4 filed late by Dr. K. C. Park and Susan K. Jones filed a Form 5 as a result of certain unfiled Form 4 filings.

General Information Concerning the Board of Directors 

The Board of Directors of eMagin is classified into three classes: Class A, Class B and Class C. As of June 30, 2008, Irwin Engelman is the only Class A Director, and will hold office until the next Annual Meeting of our stockholders. Paul Cronson, Admiral Thomas Paulsen, and General Stephen Seay are Class B directors who will hold office until the 2009 Annual Meeting. Claude Charles and Dr. Jacob Goldman are Class C directors who will hold office until the next Annual Meeting.  There was no Annual Meeting held during 2007.   In each case, each director will hold office until his successor is duly elected or appointed and qualified in the manner provided in our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws, or as otherwise provided by applicable law.

Our Board of Directors held 20 meetings during 2007. Our independent directors met in executive session on a periodic basis in connection with regular meetings, as well as in their capacity as members of our Audit Committee and Compensation Committee.

Compensation of Directors

Non-management directors receive options under the Company’s stock option plan.  A grant of options to purchase 15,000 shares of common stock will automatically be granted on the date a director is first elected or reelected or otherwise validly appointed to the Board with an exercise price per share equal to 100% of the market value of one share on the date of grant. Such options granted will expire ten years after the date of grant and will become exercisable on December 31 of the year granted. For calendar years 2007 and 2008, Directors shall receive an annual cash retainer of $10,000 and an annual stock retainer of 25,000 options at market price on the date of issuance that will become fully exercisable on December 31 of the year granted.  Directors are also granted options based on committee assignments consisting of options to purchase 5,000 shares per year for members of the compensation committee, 10,000 shares for the governance committee and 15,000 shares for the audit committee. Each committee chair will receive 5,000 additional shares.  The governance and audit committee chairs will each receive an additional 10,000 option shares. In addition, each non-management director receives $1,000 for each in-person Board meeting, and $500 for each teleconference meeting or Committee meeting. Directors are eligible for reimbursement for ordinary expenses incurred in connection with attendance at such meetings.

The Audit Committee is responsible for determining the adequacy of our internal accounting and financial controls, supervising matters relating to audit functions, reviewing and setting internal policies and procedures regarding audits, accounting and other financial controls, reviewing the results of our audit performed by the independent public accountants, and recommending the selection of independent public accountants. The Audit Committee has adopted an Audit Charter, which is posted on our website at http://www.emagin.com/investors.The Audit Committee is composed of three Directors, Claude Charles, Irwin Engelman, and Adm. Stephen Seay. The Board has determined that each of the members of the Audit Committee is unrelated, an outside member with no other affiliation with us and is independent. The Board has determined that Mr. Engelman is an “audit committee financial expert” as defined by the SEC. During 2007, the Audit Committee held 5 meetings via teleconference.

Compensation Committee. The Compensation Committee determines matters pertaining to the compensation and expense reporting of certain of our executive officers, and administers our stock option, incentive compensation, and employee stock purchase plans. The Compensation Committee is presently composed of three Directors, Jack Goldman, Thomas Paulsen, and Stephen Seay, each of whom the Board has determined to be independent and none of whom has been an employee of the Company. During 2007, the Compensation Committee held 4 meetings in person or through a conference call.

Governance and Nominating Committee. The Governance and Nominating Committee is responsible for considering potential Board members, nominating Directors for election to the Board, implementing the Company’s corporate governance and ethics policies, and for all other purposes outlined in the Governance and Nominating Committee Charter, which is posted on our website at http://www.emagin.com/investors.   The Governance and Nominating Committee is composed of Jack Goldman and Thomas Paulsen, each of whom the Board has determined to be independent. During 2007, the Governance and Nominating Committee held 1meeting.

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Nomination of Directors

As provided in its charter and our company’s corporate governance principles, the Governance and Nominating Committee is responsible for identifying individuals qualified to become directors. The Governance and Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (1) the Governance and Nominating Committee members, (2) our other directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman, and (5) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating and Corporate Governance Committee considers the entirety of each candidate’s credentials.

Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board of Directors. However, at a minimum, candidates for director must possess:

•  high personal and professional ethics and integrity;

• the ability to exercise sound judgment;

•   the ability to make independent analytical inquiries;

• a willingness and ability to devote adequate time and resources to diligently perform Board and committee duties; and

•  the appropriate and relevant business experience and acumen 

In addition to these minimum qualifications, the Governance and Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors:

•  whether the person possesses specific industry expertise and familiarity with general issues affecting our business;

• whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K;

• whether the person would qualify as an “independent” director under the listing standards of the OTC Bulletin Board;

• the importance of continuity of the existing composition of the Board of Directors to provide long term stability and experienced oversight; and

• the importance of diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise.

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

This section describes the compensation program for our executive officers. In particular, this section focuses on our 2007 compensation program and related decisions.

Compensation Discussion and Analysis

The objectives of our compensation program are as follows:

• Reward performance that drives substantial increases in shareholder value, as evidenced through both future operating profits and increased market price of our common shares; and

• Attract, hire and retain well-qualified executives.

The compensation level of our executives generally reflects their unique position and incentive to positively affect our future operating performance and shareholder value. Part of the compensation of our executives is from equity compensation, primarily through stock option grants or restricted stock awards. The stock option exercise price is generally the fair market value of the stock on the date of grant. Therefore, a gain is only recognized if the value of the stock increases, which promotes a long term alignment between the interests of the Company’s executives and its shareholders. For that reason, stock options are a component of 100% of our employees’ salary package.

 Specific salary and bonus levels, as well as the amount and timing of equity incentive grants, are determined informally and judgmentally, on an individual-case basis, taking into consideration each executive's unique talents and experience as they relate to our needs. Executive compensation is paid or granted pursuant to each executive's compensation agreement. Compensation adjustments are made occasionally based on changes in an executive's level of responsibility or on changed local and specific executive employment market conditions.

The Board of Directors has established a Compensation Committee, comprised exclusively of independent outside directors which approves all compensation and awards to executive management. The members of the Compensation Committee have extensive executive level experience in other companies and bring a perspective of reasonableness to compensation matters with our Company. In addition, the Compensation committee compares executive compensation practices of similar companies at similar stages of development.

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Generally on its own initiative, at least annually, the Compensation Committee reviews the performance of executives and establishes compensation levels based on the performance evaluation, historical compensation levels of the executives, levels of responsibility and contributions to the Company, and comparable position studies provided by independent sources.  With respect to equity compensation, the Compensation Committee approves all option grants, generally based on the recommendation of the president and chief executive officer and has delegated granting authority to the president and chief executive officer or, on occasion, his designee. Executives are eligible to receive bonus compensation at the discretion of the Compensation Committee, which is primarily based on the achievement of certain goals and objectives and the executive’s contributions to the Company. Executives also are entitled to participate in the same benefit plans that are available to other Company employees.

Compensation for the Chairman

From January through May 2008, Admiral Paulsen served as Interim Chief Executive Officer. Admiral Paulsen receives an annual stipend of $60,000 for serving as Non-Executive Chairman of the Board. No change occurred in Admiral Paulsen’s compensation as a director of the Company as a result of his accepting the temporary position of Interim Chief Executive Officer and President.

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Summary Compensation Table

The following table sets forth information regarding compensation paid to our principal executive officer, principal financial officer, and our highest paid executive officer, all of whose total annual salary and bonus for the years ended December 31, 2007, 2006 and 2005 exceeded $100,000.

SUMMARY COMPENSATION TABLE
		Salary	Bonus	Stock Awards		Option awards	Non-equity incentive plan compensation	Change in pension value and non qualified deferred compensation	All Other Compensation		Total
Name and principal position	Year	($)	($)	($)		($), (a)	($)	($)	($)		($)
K.C. Park, Interim President and Chief Executive Officer (1)	2007	313,462	-	40,000	(4)	-	-	-	-		353,462
	2006	200,000	-	-		-	-	-	-		-
	2005	119,923	-	-		141,362	-	-	-		141,362
Gary Jones, President and Chief Executive Officer (2)	2007	102,060	-	430,000	(5)	-	-	-	51,638	(6)	583,698
	2006	368,170	-	-		-	-	-	127,928	(7)	496,098
	2005	320,313	-	-		404,150	-	-	147,420	(7)	871,883
John D. Atherly, Chief Financial Officer (3)	2007	243,000	-	-		-	-	-	-		243,000
	2006	242,308	-	-		-	-	-	-		242,308
	2005	221,406	-	-		316,240	-	-	-		537,646
Susan Jones, Executive Vice President, Chief Marketing and Strategy Officer, and Secretary	2007	278,888	-	-		-	-	-	175,184	(8)	454,072
	2006	289,163	-	-		-	-	-	81,379	(8)	370,542
	2005	259,568	26,049	-		316,240	-	-	26,049	(8)	627,906

(1) Dr. Park was appointed Interim President and Chief Executive Officer in January 2007 and resigned his post in January 2008.  Prior to January 2007, Dr. Park served as Executive Vice President of International Operations.

(2) Mr. Jones resigned as President and Chief Executive Officer in January 2007.

(3) Mr. Atherly resigned as Chief Financial Officer in January 2008.

(4) This amount represents a retention bonus in the form of a stock grant that was issued to the named executive officer.

(5) This amount represents a payment in the form of a stock grant pursuant to Mr. Jones' severance agreement.  Previously granted options that remained unexercised were also forfeited pursuant to the severance agreement.

(6) This amount represents legal and accounting fee reimbursement for the benefit of the named executive officer.

(7) This amount represents relocation expense reimbursement for the benefit of the named executive officer.

(8) This amount represents deferred dollar amount earned in sales incentive compensation by the named executive officer.

Column note:

(a)  The amounts in this column represent the fair value of option awards to the named executive officer as computed on the date of the option grants using the Black-Scholes option-pricing model.

Grants of Plan-Based Awards

There were no grants of plan-based awards to named executive officers for the year ended December 31, 2007.

45

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information with respect to the outstanding equity awards of our principal executive officers and principal financial officer during 2007, and each person who served as an executive officer of eMagin Corporation as of December 31, 2007:

OUTSTANDING EQUITY AWARDS AT YEAR-END
	Option awards					Stock awards
	Number of securities underlying unexercised options (#)	Number of securities underlying unexercised options (#)	Equity incentive plan awards:  Number of securities underlying unexercised options	Options exercise price	Option expiration	Number of shares or units of stock that have not vested	Market value of shares or units of stock that have not vested	Equity incentive plan awards: Number of unearned shares other rights that have not vested	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
Name and principal position	Exercisable	Unexercisable	(#), (a)	($)	Date	(#)	($)	(#)	($)
K.C. Park, Interim President and Chief Executive Officer (1)	465	-	465	2.60	July 21, 2008	-	-	-	-
	19,500	-	19,500	2.60	May 10, 2009
	3,676	-	3,676	2.60	January 11, 2010
	6,500	-	6,500	2.60	March 17, 2010
	6,500	-	6,500	2.60	November 30, 2012
	6,846	-	6,846	2.60	April 24, 2013
	4,108	-	4,108	2.60	August 30, 2013
	4,108	-	4,108	2.60	December 1, 2013
John D. Atherly, Chief Financial Officer (2)	24,375	8,125	32,500	2.60	June 16, 2011	-	-	-	-
	-	25,000(3)	25,000	2.60	June 16, 2011
	16,250	-	16,250	2.60	March 17, 2012
	11,700	-	11,700	2.60	November 30, 2012

46

OUTSTANDING EQUITY AWARDS AT YEAR-END  (cont.)
	Option awards					Stock awards
	Number of securities underlying unexercised options (#)	Number of securities underlying unexercised options (#)	Equity incentive plan awards:  Number of securities underlying unexercised options	Options exercise price	Option expiration	Number of shares or units of stock that have not vested	Market value of shares or units of stock that have not vested	Equity incentive plan awards: Number of unearned shares other rights that have not vested	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
Name and principal position	Exercisable	Unexercisable	(#), (a)	($)	Date	(#)	($)	(#)	($)
Susan Jones, Executive Vice President, Chief Marketing and Strategy Officer, and Secretary	48,750	-	48,750	2.60	May 17, 2009	-	-	-	-
	16,770	-	16,770	2.60	January 11, 2010
	9,685	-	9,685	2.60	January 11, 2010
	16,250	-	16,250	2.60	March 17, 2010
	11,700	-	11,700	2.60	November 30, 2012
	11,932	-	11,932	2.60	April 24, 2013
	7,159	-	7,159	2.60	August 30, 2013
	7,159	-	7,159	2.60	December 1, 2013

(1) Dr. Park was appointed Interim President and Chief Executive Officer in January 2007 and resigned his post in January 2008.

(2) Mr. Atherly resigned as Chief Financial Officer in January 2008 and has forfeited all options shown above.

(3) 25,000 options subject to vesting when the Company completes four consecutive EBITDA positive quarters.

Column note:

On November 3, 2006, a reverse stock split, ratio of 1-for-10, became effective.  All stock options presented reflect the stock split.

(a) The options in this column were repriced.   On July 21, 2006, certain employees agreed to cancel a portion of their existing stock options in return for repricing the remaining stock options at $2.60 per share.  The repriced unvested options continued to vest on the original schedule.

 Option Exercises and Stock Vested

No executive officer identified in the Summary Compensation Table above exercised an option in fiscal year 2007.  There were no shares of stock awarded or vested with respect to any of those executive officers.

47

Pension Benefits

eMagin does not have any plan which provides for payments or other benefits at, following, or in connection with retirement.

Non-qualified Deferred Compensation

eMagin does not have any defined contribution or other plan which provides for the deferral of compensation on a basis that is not tax-qualified.

Employment Agreements

Effective January 1, 2006, the Company entered into a revised executive employment agreement with Susan K. Jones, Chief Marketing and Strategy Officer. The agreement is effective for an initial term of three years. The agreement provides for an annual salary, benefits made available by the Company to its employees and eligibility for an incentive bonus pursuant to one or more incentive compensation plans established by the Company from time to time. The Company may terminate the employment of Ms. Jones at any time with or without notice and with or without cause (as such term is defined in the agreements). If Ms. Jones’ employment is terminated without cause, or if Ms. Jones resigns with good reason (as such term is defined in the agreements), or Ms. Jones’ position is terminated or significantly changed as result of change of control (as such term is defined in the agreements), Ms. Jones shall be entitled to receive salary until the end of the agreement’s full term or twelve months, whichever is greater, payment for accrued vacation, and bonuses which would have been accrued during the term of the agreement. If Ms. Jones voluntarily terminates employment with the Company, other than for good reason or is terminated with cause (as such term is defined in the agreement), she shall cease to accrue salary, vacation, benefits, and other compensation on the date of the voluntary or with cause termination. The Executive Employment Agreement includes other conventional terms and also contains invention assignment, non-competition, non-solicitation and non-disclosure provisions.  On April 17, 2006, the parties entered into amendments to the employment agreements pursuant to which the parties clarified that the Company has agreed to pay for health benefits equivalent to medical and dental benefits provided during Ms. Jones’ full time employment until the end of the agreement’s full term or twenty-four (24) months, whichever is greater.

Effective January 30, 2008, the Company entered into an amended employment agreement with Susan K. Jones, Chief Business Officer.  The amended agreement provides for an annual base salary of $315 thousand, an extension of the term of the agreement to January 31, 2010, modification and clarification of the basis for the incentive component of her salary, and extension of the change-of-control/material change/termination-without-cause compensation payout periods to the greater of 18 months or the remaining term of the amended employment agreement.

On January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Officer, President, and a Director of the Company.  On February 12, 2007, the Company entered in a Compensation Agreement (“the Agreement”) with Dr. Park.  Under the Agreement, the Company has agreed to pay Dr. Park an annual base salary equal to $300 thousand plus a quarterly increase in his base salary in the amount of $12.5 thousand per fiscal quarter through December 31, 2007.  The Company agreed to issue Dr. Park an aggregate of 250,000 restricted shares of common stock within 10 business days of the completion of a change of control of the Company.  In addition, if a change of control transaction is completed and Dr. Park is not offered a senior executive position in the new organization, the Company has agreed to pay Dr. Park three month’s salary.  On January 31, 2008, Dr. Park resigned his positions as Interim Chief Executive Officer, President and Director.

Effective April 2, 2008, Mr. Campbell is serving as the Company’s Chief Financial Officer pursuant to an agreement between the Company and Tatum, dated April 2, 2008 (the “Tatum Agreement”).  Pursuant to the Tatum Agreement, for a minimum term of three months, Mr. Campbell will be paid a salary of $24,500 per month and the Company will also pay Tatum a fee of $10,500 per month plus $300 per business day.  Either party may terminate the Tatum Agreement by providing the other with at least 30 days notice.  

48

Potential Payments Upon Termination or Change-in-Control

The following table sets forth information regarding potential payments and benefits Ms. Jones would receive upon termination of employment under specified circumstances, assuming that the triggering event in question occurred on December 31, 2007, the last business day of the fiscal year:

Name	Voluntary Resignation w/o Good Reason		Voluntary Resignation for Good Reason			Involuntary Termination without Cause			Involuntary Termination with Cause		Involuntary Termination with a Change in Control
Susan Jones
Cash severance	$	—	$	566,860	(1)	$	566,860	(1)	$	—	$	566,860	(1)
Post-termination health and welfare	$	—	$	—		$	11,988	(2)	$	—	$	—
Vesting of stock options	$	—	$	—	(3)	$	—		$	—	$	—	(3)

(1) This amount reflects the lump sum that is payable within thirty days of the triggering event to the named executive.  All calculations were made as of December 31, 2007 using then current salary figures for the named executive.

(2) This amount reflects the COBRA payments for health and dental benefits that eMagin would make on behalf of the named executive.

(3)  This amount would reflect the value of the stock option awards that were unvested as of December 31, 2007 which would accelerate and vest under the terms of eMagin’s option plans following a triggering event.  As of December 31, 2007, all stock options were fully vested.

Director Compensation Arrangements

The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in the year ended December 31, 2007.  The table includes only directors that were not employees of eMagin Corporation.  Any director who was also an executive officer is included in the Summary Compensation Table.

DIRECTOR COMPENSATION
Name	Fees earned or paid in cash($)		Stock awards ($)		Option awards($)		Non-equity incentive plan compensation($)		Change in pension value and nonqualified deferred compensation earnings($)		All other compensation ($)		Total($)
Claude Charles		8,000		-		42,932		-		-		-		50,932
Paul Cronson		8,000		-		40,228		-		-		-		48,228
Irwin Engelman		8,000		-		33,924		-		-		-		41,924
Jack Goldman		8,000		-		42,139		-		-		-		50,139
Thomas Paulsen		66,672		-		41,184		-		-		-		107,856
Stephen Seay		8,000		-		32,586		-		-		-		40,586

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The following table sets forth information with respect to the outstanding equity awards of our directors as of December 31, 2007:

OUTSTANDING EQUITY AWARDS AT YEAR-END
	Option awards					Stock awards
	Number of securities underlying unexercised options (#)	Number of securities underlying unexercised options (#)	Equity incentive plan awards:  Number of securities underlying unexercised options	Options exercise price	Option expiration	Number of shares or units of stock that have not vested	Market value of shares or units of stock that have not vested	Equity incentive plan awards: Number of unearned shares other rights that have not vested	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
Name and principal position	Exercisable	Unexercisable	(#), (a)	($)	Date	(#)	($)	(#)	($)
Claude Charles	1,000	-	1,000	3.50	January 2, 2010	-	-	-	-
	975	-	975	2.60	July 2, 2010
	650	-	650	2.60	September 2, 2010
	3,250	-	3,250	2.60	April 5, 2011
	1,950	-	1,950	2.60	June 15, 2014
	975	-	975	2.60	September 30, 2015
	3,900	-	3,900	2.60	December 31, 2015
	12,700	-	12,700	1.51	November 23, 2017
	25,000	-	25,000	1.44	December 3, 2017
Paul Cronson	4,875	-	4,875	2.60	July 2, 2010	-	-	-	-
	1,625	-	1,625	2.60	June 15, 2014
	3,900	-	3,900	2.60	December 31, 2015
	10,400	-	10,400	1.51	November 23, 2017
	25,000	-	25,000	1.44	December 3, 2017
Irwin Engelman	3,900	-	3,900	2.60	October 3, 2012	-	-	-	-
	975	-	975	2.60	September 30, 2015
	163	-	163	2.60	October 3, 2015
	5,038	-	5,038	1.51	November 23, 2017
	25,000	-	25,000	1.44	December 3, 2017

50

OUTSTANDING EQUITY AWARDS AT YEAR-END (cont.)
		Option awards					Stock awards
		Number of securities underlying unexercised options (#)	Number of securities underlying unexercised options (#)	Equity incentive plan awards:  Number of securities underlying unexercised options	Options exercise price	Option expiration	Number of shares or units of stock that have not vested	Market value of shares or units of stock that have not vested	Equity incentive plan awards: Number of unearned shares other rights that have not vested	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
Name and principal position		Exercisable	Unexercisable	(#), (a)	($)	Date	(#)	($)	(#)	($)
Jacob Goldman		650	-	650	2.60	July 2, 2010
		3,900	-	3,900	2.60	September 2, 2010
		2,113	-	2,113	2.60	June 15, 2014
		650	-	650	2.60	September 30, 2015
		488	-	488	2.60	October 3, 2015
		3,900	-	3,900	2.60	December 31, 2015
		12,026	-	12,026	1.51	November 23, 2017
		25,000	-	25,000	1.44	December 3, 2017
Thomas Paulsen		3,900		3,900	2.60	July 30, 2010
		1,300	-	1,300	2.60	June 15, 2014
		1,625	-	1,625	2.60	September 30, 2015
		3,250	-	3,250	2.60	October 3, 2015
		813	-	813	2.60	December 31, 2015
		11,213	-	11,213	1.51	November 23, 2017
		25,000	-	25,000	1.44	December 3, 2017
Stephen Seay		3,900	-	3,900	2.60	February 14, 2016
		3,900	-	3,900	1.51	November 23, 2017
		25,000	-	25,000	1.44	December 3, 2017
	Column note:
	On November 3, 2006, a reverse stock split, ratio of 1-for-10, became effective.  All stock options presented reflect the stock split.

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Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee has been an officer or employee of eMagin during years ending December 31, 2005, 2006 and 2007.  In addition, during the most recent fiscal year, no eMagin executive officer served on the Compensation Committee (or equivalent), or the Board, of another entity whose executive officer(s) served on our Compensation Committee or Board.   On January 31, 2008, Dr. K.C. Park resigned as our Interim Chief Executive Officer and President; and Thomas Paulsen, a director and Chairman of both the Board of Directors and the Compensation Committee, assumed that role on an interim basis until June 1, 2008 when Andrew G. Sculley, Jr. joined the Company as Chief Executive Officer and President.  No change in Admiral Paulsen’s compensation as a director of the Company occurred as a result of his accepting the temporary position of Interim Chief Executive Officer and President.

Compensation Committee Report

The Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management.  Based on its review and discussions with management, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in eMagin’s 10-K.  This report is provided by the following independent directors, who comprise the Committee:

Thomas Paulsen (Chairman)

Jacob Goldman

Stephen Seay

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 

The  following table sets forth the number of shares known to be owned by all persons who own at least 5% of eMagin's outstanding common stock, the Company's directors, the executive officers, and the directors and executive officers as a group as of October 14, 2008, unless otherwise noted. Unless otherwise indicated, the stockholders listed in the table have sole voting and investment power with respect to the shares indicated.

Name of Beneficial Owner	Common Stock Beneficially Owned		Percentage of Common Stock
Moriah Capital L.P. (1)		2,017,500		5.7	%
Stillwater LLC (2)		5,877,823		16.6	%
Alexandra Global Master Fund Ltd (3)		3,488,569		9.9	%
Ginola Limited (4)		5,071,856		14.4	%
Susan K Jones (5)		683,465		1.9	%
Rainbow Gate Corporation (6)		1,947,038		5.5	%
Kettle Hill (7)		1,467,662		4.2	%
Paul Cronson (8)		568,682		1.6	%
Claude Charles (9)		105,400		*
Jack Goldman (10)		103,727		*
Thomas Paulsen (11)		92,101		*
Irwin Engelman(12)		90,076		*
Stephen Seay( 13)		76,825		*
Andrew G. Sculley (14)		166,667		*
All executive officers and directors as a group (consisting of 8 individuals) (15)		1,886,943		5.3	%

*Less than 1*% of the outstanding common stock

** Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, or convertible debt currently exercisable or convertible, or exercisable or convertible within 60 days of October 14, 2008 are deemed outstanding for computing the percentage of the person holding such option or warrant.  Percentages are based on a total of 35,317,523 shares:  15,018,839 shares of common stock outstanding on October 14, 2008 and 20,298,684 shares issuable upon the exercise of options, warrants exercisable, and debt convertible on or within 60 days of October 14, 2008, as described below.

(1) This figure represents (i) 647,500 shares owned by Moriah Capital, L.P and (ii) warrants held by Moriah Capital L.P. to purchase 1,370,000 shares.  Alexandre Speaker and Greg Zilberstein exercise the shared voting power with respect to the shares.

(2) This figure represents: (i) 2,252,199 shares owned by Stillwater LLC, which includes 276,084 shares owned by Rainbow Gate Corporation, in which the sole member of Stillwater LLC is the investment manager of Rainbow Gate Corporation; (ii) warrants held by Stillwater LLC to purchase 1,978,006 shares, which includes warrants to purchase 737,621 shares held by Rainbow Gate Corporation, in which the sole member of Stillwater LLC is the investment manager of Rainbow Gate Corporation; and (iii) 1,647,618 shares of common stock underlying an 8% senior convertible note which includes 933,333 shares of common stock underlying an 8% senior convertible note held by Rainbow Gate Corporation, which the sole member of Stillwater LLC is the investment manager of Rainbow Gate Corporation. Mortimer D.A. Sackler exercises the sole voting power with respect to the shares held in the name of Stillwater LLC as sole member, and Mortimer D.A. Sackler exercises the sole voting power with respect to the shares held in the name of Rainbow Gate Corporation as investment manager; therefore Stillwater LLC is deemed to beneficially own the shares held by Rainbow Gate as “beneficially owned” but Stillwater LLC disclaims beneficial ownership of such shares.

(3) This figure represents:  (1) 420,387 shares owned by Alexandra Global Master Fund; (ii) warrants held to purchase 1,068,182 shares; and (iii) 2,000,000 shares of common stock underlying an 8% senior convertible note. Alexandra Investment Management, LLC, a Delaware limited liability company (“AIM”), serves as investment adviser to Alexandra Global Master Fund Ltd., a British Virgin Islands company (“Alexandra”).  By reason of such relationship, AIM may be deemed to share dispositive power over the shares of common stock stated as beneficially owned by Alexandra. AIM disclaims beneficial ownership of such shares of common stock. Mr. Mikhail A. Filimonov (“Filimonov”) is the Chairman, Chief Executive Officer, Chief Investment Officer and a managing member of AIM.  By reason of such relationships, Filimonov may be deemed to share dispositive power over the shares of common stock stated as beneficially owned by Alexandra.  Filimonov disclaims beneficial ownership of such shares of common stock.

53

(4) This figure represents: (i) 1,257,629 shares owned by Ginola Limited, which include 276,084 shares held indirectly by Rainbow Gate Corporation; 65,080 shares owned by Mount Union Corp.; 57,372 shares owned by Chelsea Trust Company Limited, as trustee; and 284,736 shares owned by Crestflower Corporation (Ginola Limited disclaims beneficial ownership of the shares owned by Crestflower Corporation; Mount Union Corp.; and Chelsea Trust Company Limited, as trustee); and (ii) warrants held by Ginola Limited to purchase 1,814,228 common shares, which includes warrants to purchase 737,620 shares held by Rainbow Gate Corporation, in which the sole shareholder of Ginola Limited is also the sole shareholder of Rainbow Gate Corporation, and warrants to purchase 32,540 shares owned by Mount Union Corp., 27,273 shares of common stock issuable upon exercise of a common stock purchase warrant held indirectly by Chelsea Trust Company Limited, as trustee, and 120,193 shares of common stock issuable upon exercise of common stock purchase warrant held by Crestflower Corporation (Ginola Limited disclaims beneficial ownership of the shares owned by Crestflower Corporation, Mount Union Corp. and Chelsea Trust Company Limited, as trustee); and (iii) 1,999,999 shares of common stock underlying an 8% senior convertible note, which includes 933,333 shares of common stock underlying an 8% senior convertible note held by Rainbow Gate Corporation, in which the sole shareholder of Ginola Limited is also the sole shareholder of Rainbow Gate Corporation. Stillwater LLC and Ginola Limited are beneficially owned by separate individuals and therefore do not exert voting control over one another. However, Stillwater LLC does include the shares held by Rainbow Gate as “beneficially owned” since the sole member of Stillwater LLC is investment manager and sole director of Rainbow Gate Corporation and exerts voting control over such shares but Stillwater LLC disclaims beneficial ownership of such shares. Jonathan White, Steven Meiklejohn, and Joerg Fischer exercise the shared voting power with respect to the shares held in the name of Mount Union Corp.. Stuart Baker, Joerg Fischer, Charles Lubar, Christopher Mitchell, Leslie Schreyer and Jonathan White exercise the shared voting power with respect to the shares held in the name of Chelsea Trust Company Limited.  Jonathan White, Joerg Fischer and Steven Meiklejohn exercise the shared voting power with respect to the shares held in the name of Crestflower Corporation.  Jonathan White, Joerg Fischer and Steven Meiklejohn are the directors of Ginola Limited and exercise the shared voting power with respect to the shares held in the name of Ginola Limited.

(5) This figure represents shares owned by Gary Jones and Susan Jones who are married to each other, including (i) 395,268 shares owned by Gary Jones and 158,792 shares owned by Susan Jones; and (ii) 129,405 shares of common stock issuable upon exercise of stock options held by Susan Jones.

(6) This figure represents (1) 276,084 shares owned by Rainbow Gate Corporation; (ii) warrants held by to purchase 737,621 shares; and (iii) 933,333 shares of common stock underlying an 8% senior convertible note. Mortimer D.A. Sackler   exercises the sole voting power with respect to the shares held in the name of Rainbow Gate Corporation but disclaims beneficial ownership of such shares.

7) This figure represents (i) 1,227,276 shares of common stock owned by Kettle Hill of which 195,941 shares held by Kettle Hill Partners, LP, 724,800 shares held by Kettle Hill Partners II, LP, and 306,534 shares held by Kettle Hill Offshore, Ltd. and (ii) warrants held by Kettle Hill to purchase 240,386 common shares which includes warrants to purchase 55,289 shares held by Kettle Hill Partners, LP, warrants to purchase 98,558 shares held by Kettle Hill Partners II, LP, and warrants to purchase 86,539 shares held by Kettle Hill Offshore, Ltd.  Kettle Hill Capital Management, LLC acts as investment manager for Kettle Hill Partners, LP, Kettle Hill Partners II LP, and Kettle Hill Offshore, Ltd.  Andrew Kurita exercises the voting power with respect to the shares.

(8) This figure represents 22,198 shares owned by Mr. Cronson, 208,235 shares underlying warrants, 70,800 shares underlying options, and 266,666 shares of common stock underlying an 8% senior convertible note held directly and indirectly by Paul Cronson. This includes (i) 12,097 common stock shares and 4,286 shares underlying warrants held indirectly by a family member of Paul Cronson; (ii) 4,366 shares underlying warrants held indirectly by Larkspur Corporation of which he is the Managing Director and (iii) 3,783 shares of common stock, 186,666 shares underlying warrants and 266,666 shares of common stock underlying an 8% senior convertible note held indirectly by Navacorp III, LLC. Mr. Paul Cronson exercises the sole voting power with respect to the shares held in the name of Larkspur Corporation, and Paul Cronson exercises the sole voting power with respect to the shares held in the name of Navacorp III, LLC.

(9) This figure represents shares underlying options.

(10) This figure represents shares underlying options.

(11) This figure represents shares underlying options.

(12) This figure represents shares underlying options.

(13) This figure represents shares underlying options.

(14) This figure represents shares underlying options.

(15) This figure represents:  (i) 577,041 shares; (ii) warrants held to purchase 208,235 shares; (iii) 266,666 shares of common stock underlying an 8% senior convertible note; and (iv) 835,001 shares of common stock issuable upon exercise of stock options.

54

Equity Compensation Plan Information

The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2007:

Plan	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column
Equity compensation plans approved by security holders		487,674	$	2.14		817,215
Equity compensation plans not approved by security holders		406,649	$	3.02

TRANSFER AGENT

Our transfer agent for our common stock is Continental Stock Transfer, 17 Battery Place, New York, NY 10004. 

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES  

Our Articles of Incorporation, as amended and restated, provide to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware that our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended and restated, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.

Our By Laws also provide that the Board of Directors may also authorize us to indemnify our employees or agents, and to advance the reasonable expenses of such persons, to the same extent, following the same determinations and upon the same conditions as are required for the indemnification of and advancement of expenses to our directors and officers. As of the date of this Registration Statement, the Board of Directors has not extended indemnification rights to persons other than directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

PLAN OF DISTRIBUTION  

We are registering the shares of common stock issuable upon exercise of the warrants and conversion of the notes to permit the resale of these shares of common stock by the holders of the warrants from time to time after the date of this prospectus.  We will receive proceeds of $480,000 from the exercise of the warrants.  We will bear all fees and expenses incident to our obligation to register the shares of common stock.

The selling stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or negotiated prices.  The selling stockholders may use any one or more of the following methods when selling shares:

·         ordinary brokerage transactions and transactions in which the broker-dealer solicits investors;

·         block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

·         purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·         an exchange distribution in accordance with the rules of the applicable exchange;

·         privately negotiated transactions;

·         to cover short sales made after the date that this registration statement is declared effective by the Commission;

·         through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

·         broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

·         a combination of any such methods of sale; and

·         any other method permitted pursuant to applicable law.

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The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated.  The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume.  The selling stockholders may also sell shares of our common stock short and if such short sale shall take place after the date that this registration statement is declared effective by the Commission, the selling stockholders may deliver these securities to close out such short sales, or loan or pledge the common stock to broker-dealers that in turn may sell these securities.  The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

Upon us being notified in writing by a selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such selling stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of common stock were sold, (iv)the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction.  In addition, upon us being notified in writing by a selling stockholder that a donee or pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.

The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.  Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of securities will be paid by the selling stockholder and/or the purchasers.

We have advised each selling stockholder that it may not use shares registered on this registration statement to cover short sales of common stock made prior to the date on which this registration statement shall have been declared effective by the Commission.  If a selling stockholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery requirements of the Securities Act unless an exemption therefrom is available.  The selling stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such selling stockholders in connection with resales of their respective shares under this registration statement.

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers.  In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.

Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

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DESCRIPTION OF SECURITIES  

COMMON STOCK

We are authorized to issue up to 200,000,000 shares of common stock, $0.001 par value. As of October 14, 2008, there were 15,018,839 shares of common stock outstanding. Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are validly issued, fully paid and non-assessable.

PREFERRED STOCK

We are authorized to issue up to 10,000,000 shares of Preferred Stock, $0.001 par value. The 10,000,000 shares of Preferred Stock authorized are undesignated as to preferences, privileges and restrictions. As the shares are issued, the Board of Directors must establish a “series” of the shares to be issued and designate the preferences, privileges and restrictions applicable to that series.

Pursuant to the Agreements entered into on July 23, 2007, as outlined above in our Recent Developments section, the Company has designated but not issued  3,198 shares of the Company’s preferred stock as Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”) at a stated value of $1,000. The Preferred Stock is entitled to cumulative dividends which accrue at a rate of 8% per annum, payable on December 21, 2008. Each share of Preferred Stock has voting rights equal to (1) in any case in which the Preferred Stock votes together with the Company’s Common Stock or any other class or series of stock of the Company, the number of shares of Common Stock issuable upon conversion of such shares of Preferred Stock at such time (determined without regard to the shares of Common Stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any case not covered by the immediately preceding clause one vote per share of Preferred Stock.

SELLING STOCKHOLDERS  

The table below sets forth information concerning the resale of the shares of common stock by the selling stockholders. We will not receive any proceeds from the resale of the common stock by the selling stockholders. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholders, none of the selling stockholders will continue to own any shares of our common stock registered pursuant to the registration statement of which this prospectus forms a part.

The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person based on its ownership of the shares of common stock and the warrants, as of October 14, 2008, assuming exercise of the warrants held by the selling stockholders on that date, without regard to any limitations on exercise, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.

Except as described below the selling stockholders do not have and within the past three years have not had any position, office or other material relationship with us or any of our predecessors or affiliates.

In accordance with the terms of registration rights agreements with the holders of the shares of common stock and the warrants, this prospectus generally covers the resale of at least the sum of (i) the number of shares of common stock issued and (ii) the shares of common stock issued and issuable upon exercise of the related warrants, determined as if the outstanding warrants were exercised, as applicable, in full, as of the trading day immediately preceding the date this registration statement was initially filed with the SEC.

Name of Selling Security Holder		Beneficial Ownership Prior to Offering (1)		Shares Offered (3)
		Shares	Percentage (2)
Stillwater LLC (4)		5,877,823	16.6%	2,450,000
( 1)	Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, or debt currently exercisable or convertible, or exercisable or convertible within 60 days of October 14, 2008 are deemed outstanding for computing the percentage of the person holding such option, warrant, or debt but are not deemed outstanding for computing the percentage of any other person.
(2)	Percentage prior to offering is based on 35,317,523 shares of common stock outstanding as of October 14, 2008 and the shares issuable upon exercise of options, warrants exercisable, and debt convertible on or within 60 days of October 14, 2008.
(3)	Represents (i) 1,000,000 shares issuable upon the exercise of common stock purchase warrants, (ii) 729,524 shares of common stock issuable upon conversion of the remaining $250,000 Stillwater Note (original Stillwater Note of $500,000 less $250,000 partial Note coversion (as described in iii)) and accrued interest of $5,333 at a conversion price of $0.35 per share, and (iii) 720,476 shares of common stock issued (but not registered) to Stillwater due to Stillwater's election to partially convert the Stillwater Note pursuant to its terms. With respect to the aforementioned subpart (iii) above, on July, 23 2007, Stillwater elected to convert $252,166.50 of the Stillwater Note representing $250,000 of the principal amount of the Note due on July 23, 2007 and $2,166.50 of accrued and unpaid interest into shares of common stock. Stillwater received 720,476 shares of the common stock at the conversion price of $0.35.
(4)	The total number of shares underlying the Note amounted to 1,428,571 shares, which was derived by dividing the Note amount, $500,000, by $0.35, the conversion price. The market price on March 28, 2007 was $0.46 per share, and the value of shares underlying notes was $657,142.66.

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Additional Disclosures

Conversion Price

With respect to the shares being registered pursuant to this registration statement, the conversion price was based on the average closing price of our stock on the five trading days prior to the March 28, 2007 agreement.  Those prices were $.40, $.34, $.33, $.33 and $.34, respectively, or an average of $.35 per share. The $500,000 Stillwater Notes converts into 1,428,571 shares of common stock at $.35 per share. The number of warrants issued was established at 70% of the underlying conversion shares. The Stillwater Notes allow the investor at the time of conversion to also convert any outstanding interest into shares of common stock.  Interest is paid quarterly therefore the maximum outstanding interest would be three months interest on $500,000 or at 6% per annum $7,500.  This interest could be converted into 21,429 shares of common stock at the $.35 conversion price if the principal is converted and such interest is accrued and unpaid at the time of conversion of principal.

Shares underlying conversion rights	1,428,571
Shares underlying warrants	1,000,000
Shares underlying interest conversion	21,429
Total shares to register	2,450,000

Payments to be made in connection with the transaction

In connection with the transaction, below is a disclosure of the dollar amount of each payment (including the value of any payments to be made in common stock) in connection with the transaction that the Company has made or may be required to make to the selling stockholder, any affiliate of the selling stockholder, or any person with whom any selling shareholder has a contractual relationship regarding the transaction (including any interest payments, liquidated damages, payments made to “finders” or “placement agents,” and any other payments or potential

payments):

Fees	Amount ($)
Accounting Fees (1)		25,000
SEC Registration Fees (2)		113
Legal Fees (3)		65,000
Roth Capital (4)		35,000
Total		125,113
(1) Represents the estimated amount of services by the Company’s auditors, Eisner LLP, in connection with services rendered for this transaction.
(2) Represents the Company’s previously paid filing fees in connection with the registration statement.
(3) Amount represents estimated fees. As of the date of the filing of this registration statement, $33,000 in legal fees have been incurred.
(4) Represents the placement agent fee.

Potential Net Proceeds to the Company in the Convertible Note Transaction

Below are the potential net proceeds to the Company from the sale of the Convertible Notes and the total possible payments to the selling stockholder and its affiliates in the first year following the sale of convertible notes:

Net Proceeds To Issuer		Interest (10 months)		Note Redemption		Total Payments
$	391,417	$	25,000	$	500,000	$	525,000

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Potential Total Profit to the Selling Stockholders from the Secured Convertible Debentures

Below is the total possible profit the selling stockholder could realize as a result of the conversion discount for the securities underlying the convertible note, along with the following information:

· the market price per share of the securities underlying the convertible note on the date of the sale of the convertible note;

· the conversion price per share of the underlying securities on the date of the sale of the convertible note;

· the total possible shares underlying the convertible note (assuming no interest payments and complete conversion throughout the term of the note);

· the combined market price of the total number of shares underlying the convertible note, calculated by using the market price per share on the date of the sale of the convertible note and the total possible shares underlying the convertible note;

· the total possible shares the selling stockholder may receive and the combine conversion price of the total number of shares underlying the convertible note; and

· the total possible discount to the market price as of the date of the sale of the convertible note.

Market Price Per Share of Securities		Conversion Price Per Share of Underlying Securities		Total Possible Shares Underlying The Convertible Debentures (1)			Market Value (Market Price Per Share * Total Possible Shares) (1)		Conversion Value of the Total Number Shares Underlying The Convertible Debentures			Total Possible Discount To Market Price as of The Date of Sale of The Convertible Note (1)
$	0.46	$	0.35		1,428,571	$      657,143		$		500,000	$		157,143

(1) The Secured Convertible Debenture contains a reset provision, in that the conversion price of the convertible debenture shall be lowered in the event that we issue shares of common stock, or securities convertible into shares of common stock, at a lower price than the then current conversion price. As of the date of the filing of this registration statement, the conversion price of the convertible debenture has not been reduced as a result of any stock issuances or the issuances of any securities convertible into shares of common stock, at a lower price than the current conversion price.

Potential Profit to be Realized as a Result of any Conversion Discounts Held by the Selling Stockholder

The below table discloses the total possible profit to be realized as a result of any conversion discounts for securities underlying any other warrants, options, notes, or other securities of the registrant that are held by the selling stockholder or any affiliates of the selling stockholder, along with:

· the market price per share of the underlying securities on the date of the sale of that other security;

· the conversion/exercise price per share as of the date of the sale of that other security;

· the combined market price of the total number of underlying shares, calculated by using the market price per share on the date of the sale of that other security and the total possible shares to be received;

· the total possible shares to be received and the combined conversion price of the total number of shares underlying the other security calculated by using the conversion price on the date of the sale of that other security and the total possible number of underlying shares; and

· the total possible discount (premium) to the market price as of the date of the sale of that other security, calculated by subtracting the total conversion/exercise price on the date of the sale of that other security from the combined market price of the total number of underlying shares on that date:

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· the market price per share of the underlying securities on the date of the sale of that other security;

· the conversion/exercise price per share as of the date of the sale of that other security;

· the combined market price of the total number of underlying shares, calculated by using the market price per share on the date of the sale of that other security and the total possible shares to be received;

· the total possible shares to be received and the combined conversion price of the total number of shares underlying the other security calculated by using the conversion price on the date of the sale of that other security and the total possible number of underlying shares; and

· the total possible discount (premium) to the market price as of the date of the sale of that other security, calculated by subtracting the total conversion/exercise price on the date of the sale of that other security from the combined market price of the total number of underlying shares on that date:

Date	Entity	Shares		Instrument	Market		Conversion		Market		Conversion		Discount
					Price		Price		Value		Value		(Premium)
3/28/2007	Stillwater		1,000,000	Warrant	$	0.46	$	0.48	$	460,000	$	480,000	$	(20,000	)
7/21/2006	Rainbow Gate (Stillwater Affiliate )		269,231	Convertible  Note	$	2.60	$	2.60	$	700,001	$	700,001	$	-
7/21/2006	Rainbow Gate (Stillwater Affiliate )		188,462	Warrant	$	2.60	$	3.60	$	490,001	$	678,463	$	(188,462	)
10/20/2005	Rainbow Gate (Stillwater Affiliate)		54,546	Warrant	$	8.70	$	10.00	$	474,550	$	545,460	$	(70,910	)
10/28/2004	Rainbow Gate (Stillwater Affiliate)		29,742	Warrant	$	10.40	$	8.60	$	309,317	$	255,781	$	53,536
3/4/2004	Stillwater		51,778	Warrant	$	24.90	$	27.60	$	1,289,272	$	1,429,073	$	(139,801	)
6/20/2002	Stillwater		30,000	Warrant	$	3.20	$	4.26	$	96,000	$	127,800	$	(31,800	)
Total			1,623,759						$	3,819,141	$	4,216,578	$	(397,437	)

Gross Proceeds Paid or Payable to the Company in the Convertible Note Transactions

The below table discloses the gross proceeds paid or payable to the registrant in the convertible note transaction, along with the following information:

· all payments that have been made or that may be required to be made by the registrant;

· the resulting net proceeds to the registrant; and

· the combined total possible profit to be realized as a result of any conversion discounts regarding the securities underlying the convertible notes and any other warrants, options, notes, or other securities of the registrant that are held by the selling stockholder or any affiliates of the selling stockholder (as disclosed elsewhere in this registration statement).

Gross		Fees		Net		Discount		Premium			Combined
Proceeds				Proceeds							Premium
$	500,000	$	108,583	$	391,417		157,143	$	(397,437	)	$	(240,294	)

The below table discloses the total amount of all possible payments and the total possible discount to the market price of the shares underlying the convertible note divided by the net proceeds to the registrant from the sale of the convertible notes as well as the amount of that resulting percentage averaged over the term of the convertible notes:

			% of Net			Monthly
Item	Amount		Proceeds			Average
Total Potential Payments	$	525,000		134	%		13	%
Total Possible Discount	$	157,143		40	%		4	%

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 Prior Securities Transactions Between the Issuer and the Selling Stockholder

Below is a tabular disclosure of prior securities transactions after March 2004 between the issuer (or any of its predecessors) and the selling stockholder, any affiliates of the selling stockholder, or any person with whom the selling stockholder has a contractual relationship regarding the transaction (or any predecessors of those persons), with the table including the following information disclosed separately for each transaction:

·   the date of the transaction;

·   the number of shares of the class of securities subject to the transaction that were outstanding prior to the transaction;

·   the number of shares of the class of securities subject to the transaction that were outstanding prior to the transaction and held by persons other than the selling stockholder, affiliates of the company, or affiliates of the selling stockholder;

·   the number of shares of the class of securities subject to the transaction that were issued or issuable in connection with the transaction;

·   the percentage of total issued and outstanding securities that were issued or issuable in the transaction (assuming full issuance), with the percentage calculated by taking the number of shares issued or issuable in connection with the applicable transaction and dividing that number by the number of shares issued and outstanding prior to the applicable transaction and held by persons other than the selling stockholder, affiliates of the company, or affiliates of the selling stockholder;

·   the market price per share of the class of securities subject to the transaction immediately prior to the transaction; and

·   the current market price per share of the class of securities subject to the transaction.

Date	Prior		Shares Held		Prior		Shares		Shares		% of			Market		Current
	Outstanding		and Affiliates		(a) - (b)		Transaction		To Selling		Net			Day		Price
	(a)		(b)		Shares		Stock & Warrants		Shareholder		Offer			Prior		10/08/07
3/28/2007		11,049,164		2,043,987		9,005,177		2,450,000		2,450,000		27	%	$	0.40	$	0.90
7/21/2006		10,052,249		1,523,832		8,528,417		4,108,845		650,001		48	%	$	2.60	$	0.90
10/20/2005		9,978,786		1,496,832		8,481,954		2,659,049		145,454		31	%	$	7.90	$	0.90
10/28/2004		6,625,759		1,309,152		5,309,152		1,950,000		276,071		37	%	$	10.70	$	0.90

Relationship Between Shares Issued and Outstanding and Shares Held by Selling Stockholders

The following tabular disclosure reflects:

·    the number of shares outstanding prior to the convertible note transaction that are held by persons other than the selling stockholder, affiliates of the Company, and affiliates of the selling stockholder;

·   the number of shares registered for resale by the selling stockholder or affiliates of the selling stockholder in prior registration statements;

·   the number of shares registered for resale by the selling stockholder or affiliates of the selling stockholder that continue to be held by the selling stockholder or affiliates of the selling stockholder;

· the number of shares that have been sold in registered resale transactions by the selling stockholder or affiliates of the selling stockholder; and

·   the number of shares registered for resale on behalf of the selling stockholder or affiliates of the selling stockholder in the current transaction.

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The number of shares stated in the first column of the table below,  “Shares not held by affiliates or selling stockholder prior to Note”, is based solely upon shares actually issued and outstanding as of the March 28, 2007. However, the other columns of the table include securities underlying outstanding convertible securities, options, or warrants held by selling stockholder.

Shares Not	Shares		Shares	Shares to be
Held by	Registered by	Registered	Sold in	Registered in
Affiliates or	Selling Stockholder	Shares	Registered	Current
Selling Stockholder	in Previous	To Be Held	Resale	Transaction
Prior to Note	Filings	Selling Stockholder	Transactions
9,005,177	1,757,744	1,610,244	147,500	2,450,000

Company’s Financial Ability to Satisfy its Obligations to the Selling Shareholder

The Company has the intention, and a reasonable basis to believe that it will have the financial ability, to make payments on the overlying securities. The Company has duly accounted for such payments in its 2007 - 2009 comprehensive strategy and financial plan.

Existing Short Positions by Selling Shareholder

Based upon information provided by the selling shareholder, to the best of management’s knowledge, the Company is not aware of the selling shareholder having an existing short position in the Company’s common stock.

Relationships Between the Company and Selling Shareholder and Affiliates

The Company hereby confirms that a description of the relationships and arrangements between and among those parties already is presented in the prospectus and that all agreements between and/or among those parties are included as exhibits to the registration statement by incorporation by reference.

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS  

2008

On April 2, 2008, the Company completed a private placement of its common stock with several institutional investors for gross proceeds of $1,650,000.  The transaction involved the sale of 1,586,539 shares of common stock at $1.04 per share, or the 5-day average closing price of the Company’s common stock on the trading days immediately preceding the closing date.  The Company also issued to the investors 793,273 warrants to buy our common stock at a price of $1.30 per share.  Pursuant to the transaction, the Company filed a registration statement for the shares issued as well as shares underlying the warrants on April 29, 2008.  Stillwater (as defined above) and Ginola Limited participated in the private placement.  Stillwater and Ginola Limited are beneficial owners of more than 5% of the Company’s common stock.

2007

As previously reported in the Form 8-K of the Company dated as of July 25, 2007, on July 23, 2007, the Company entered into Amendment Agreements (the Amendment Agreements”) with the note holders and issued 8% Amended Senior Secured Convertible Notes (“Amended Notes”) to the note holders in the principal amount equal to the principal amount outstanding as of July 23, 2007. The due date for the principal payment was extended to December 21, 2008 and the interest rate increased to 8%. The Amended Notes are convertible into 8,407,612 shares of the Company’s common stock. The conversion price for approximately $5,770,000 of principal was revised from $2.60 to $.75 per share and the conversion price of $.35 per share for $250,000 of principal was unchanged. $3,010,000 of the Notes can convert into 3,010 shares of the Company’s newly formed Series A Convertible Preferred Stock (the “Preferred”) at a conversion price of $1,000 per share. The Preferred is convertible into common stock at the same price allowable by the Amended Notes, subject to adjustment as provided for in the Certificate of Designations. The Amendment Agreements adjusted the exercise price, except for the Stillwater Warrant (as defined above),  from $3.60 to $1.03 per share for 1,553,468 warrants and require the issuance of 3,831,859 warrants exercisable at $1.03 per share pursuant to which the note holders may acquire common stock, until July 21, 2011.

Two employees and one board member participated in the Amendment Agreements. Olivier Prache, Senior VP of Display Operations, has an Amended Note of $10,000 which may be converted into 13,333 shares, received 9,333 warrants which are exercisable at $1.03 per share, and has 5,385 warrants which are exercisable at $3.60 per share.  John Atherly, former CFO as of January 2, 2008, has an Amended Note of $40,000 which may be converted into 53,333 shares and received 37,333 warrants which are exercisable at $1.03 per share.   Paul Cronson, Board member, through Navacorp III, LLC, has an Amended Note of $200,000 which may be converted into 266,666 shares and received 186,666 warrants which are exercisable at $1.03 per share.

Stillwater is a beneficial owner of more than 5% of the Company’s common stock.  Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater and its controlling shareholder is the same as Ginola Limited, has an Amended Note of $700,000 which may be converted into 933,333 shares and received 653,333 warrants exercisable at $1.03 per share.  Ginola Limited has an Amended Note of $800,000 which may be converted into 1,066,333 shares and received 746,666 warrants exercisable at $1.03 per share.

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Alexandra Global Master Fund Ltd (“Alexandra”) is a beneficial owner of more than 5% of the Company’s common stock.  Alexandra has an Amended Note of $3 million which may be converted into 4 million shares and received 2.8 million warrants exercisable at $1.03 per share.

On March 28, 2007, the Company entered into an amendment to the Stillwater Agreement (as defined above), originally dated July 21, 2006. On April 9, 2007, the sale of the Stillwater Note (as defined above) and Stillwater Warrant was complete and the Company issued a 6% Senior Secured Convertible Note in the principal amount of $500,000 and warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.48. On July 23, 2007, Stillwater elected to convert $250,000 of the principal amount of the Stillwater Note and approximately $2,167 of accrued and unpaid interest. Stillwater received 720,476 shares of Common Stock at the conversion price of $0.35.  The remaining 50% was amended to an 8% Amended Senior Secured Convertible Note on July 23, 2007.

A family member of an outside director of the Company is the holder of a Series A warrant to purchase an aggregate of 4,286 shares of common stock. As a result of the Stillwater transaction, the exercise price of all Series A warrants was reduced from $5.50 to $0.35 per share.   Family members of an outside director of the Company are holders of Series F warrants to purchase an aggregate of 10,000 shares of common stock.   As a result of the debt transactions, the exercise price of all Series F warrants was ultimately reduced from $8.60 to $4.09 per share.

2006

On July 21, 2006, the Company entered into several Note Purchase Agreements for the sale of approximately $5.99 million of senior secured debentures (the “Notes”) and warrants to purchase approximately 1.8 million shares of common stock, par value $.001 per share. The investors purchased $5.99 million principal amount of Notes with conversion prices of $2.60 per share that may convert into approximately 2.3 million shares of common stock and 5 year warrants exercisable at $3.60 per share into approximately 1.6 million shares of common stock. If the Notes are not converted, 50% of the principal amount will be due on July 21, 2007 and the remaining 50% will be due on January 21, 2008. If the due date falls on a non-business day, the payment date will be due on the next business day. Commencing September 1, 2006, 6% interest is payable in quarterly installments on outstanding notes.

In the Note Purchase transaction, two employees and one board member participated. Olivier Prache, Senior VP of Display Operations, purchased a $30,000 promissory note which may be converted into 11,539 shares and received 8,077 warrants which are exercisable at $3.60 per share. Mr. Prache converted $20,000 of his promissory note and received 7,693 shares. John Atherly, CFO, purchased a $40,000 promissory note which may be converted into 15,385 shares and received 10,770 warrants exercisable at $3.60 per share.  Paul Cronson, board member, through Navacorp III, LLC purchased a $200,000  promissory note which may be converted into 76,923 shares and received 53,847 warrants exercisable at $3.60 per share.

Stillwater is a beneficial owner of more than 5% of the Company’s common stock. Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater and its controlling shareholder is the same as Ginola Limited, purchased a $700,000 promissory note which may be converted into 269,231 shares and received 188,462 warrants exercisable at $3.60 per share. Ginola Limited purchased an $800,000 promissory note which may be converted into 307,693 shares and received 215,385 warrants exercisable at $3.60 per share. Stillwater disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.

A family member of an outside director of the Company is the holder of a Series A warrant to purchase an aggregate of 4,286 shares of common stock. As a result of the Note Purchase transaction, the exercise price of all Series A warrants was reduced from $5.50 to $2.60 per share. Family members of an outside director of the Company are holders of Series F warrants to purchase an aggregate of 10 thousand shares of common stock. As a result of the Note Purchase transaction, the exercise price of all Series F warrants was reduced from $10.90 to $8.60 per share.

The Company has entered into a financial advisory agreement with Larkspur Capital Corporation. Paul Cronson, a director of the Company, is a founder and shareholder of Larkspur Capital Corporation. The Company has agreed to pay a minimum fee of $500 thousand to Larkspur Capital Corporation in the event certain transactions occur, i.e. sale of the Company’s assets or change of control.

2005

On October 20, 2005, the Company entered into a Securities Purchase Agreement to sell to certain qualified institutional buyers and accredited investors an aggregate of 1,661,906 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), and warrants to purchase an additional 997,143 shares of common stock, for an aggregate purchase price of approximately $9.1 million. The purchase price of the common stock and corresponding warrant was $5.50 per share.

The warrants are exercisable at a price of $10.00 per share and expire on October 20, 2010. Of the 997,143 warrants, 664,762 of the warrants are exercisable on or after May 20, 2006. The remaining 332,380 are exercisable after March 31, 2007. Both Stillwater and Ginola are beneficial owners of more than 5% of the Company’s common stock.

63

Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater and its controlling shareholder is the same as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing $500,000. Stillwater disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.

Chelsea Trust Company, as trustee of a trust with the same directors and/or controlling shareholders as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing $250,000. Ginola Limited disclaims beneficial ownership of shares owned by Chelsea Trust Company.

In connection with the issuance of the Shares and the warrants pursuant to the Securities Purchase Agreement, the Company was required to lower the exercise prices of existing Series A and F warrants from $10.50 and $12.10, respectively, to $5.50 and $10.90 per share, respectively, pursuant to the anti-dilution provisions of the Series A and F warrants.

A family member of an outside director of the Company is the holder of a Series A warrant to purchase an aggregate of 4,286 shares of common stock. Accordingly, the exercise price of all Series A warrants was reduced from $10.50 to $5.50 per share.

Director Independence

Board of Directors has determined that Messrs. Thomas Paulsen, Claude Charles, Jacob Goldman, Irwin Engelman, and Stephen Seay are each independent directors as of December 31, 2007.  Thomas Paulsen was not an independent director during the period January through May 2008 when he was acting Interim CEO and President.  As of June 1, 2008, Thomas Paulsen is an independent director.

The Board of Directors has established a compensation committee which is currently comprised of Thomas Paulsen, Jacob Goldman, and Stephen Seay each of whom is independent as of December 31, 2007.  Thomas Paulsen was not an independent director during the period January through May 2008 when he was acting Interim CEO and President.  As of June 1, 2008, Thomas Paulsen is an independent director.

The Board of Directors has established a corporate governance and nominating committee, which is comprised of Thomas Paulsen and Jacob Goldman, each of whom is independent as of December 31, 2007. Thomas Paulsen was not an independent director during the period January through May 2008 when he was acting Interim CEO and President.  As of June 1, 2008, Thomas Paulsen is an independent director.

The  Board  of  Directors  has a  separately  designated  audit  committee established in accordance  with Section  3(a)(58)(A) of the Securities  Exchange Act of 1934, which is currently comprised of Claude Charles, Irwin Engelman, and Steve Seay. The members of the Audit Committee are independent.

Review, Approval or Ratification of Transactions with Related Persons

All future transactions, if any, between us and any of our officers, directors and principal security holders and their affiliates, as well as any transactions between us and any entity with which our officers, directors or principal security holders are affiliated, will be approved in accordance with applicable law governing the approval of the transactions.

Promoter and Certain Control Persons

Not applicable.

64

LEGAL MATTERS  

Sichenzia Ross Friedman & Ference LLP will issue an opinion with respect to the validity of the shares of common stock being offered hereby.

EXPERTS

Eisner LLP, Independent Registered Public Accountants, have audited, as set forth in their report thereon appearing in this Prospectus and Registration Statement, our financial statements as of December 31, 2007 and 2006 and for each of the years in the three year period ended December 31, 2007, which report included an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The financial statements referred to above are included herein in reliance upon the auditors’ opinion based on their expertise in accounting and auditing.

AVAILABLE INFORMATION

We have filed a registration statement on Form S-1 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of eMagin Corp., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.

We are subject to the informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC’s Internet website at http://www.sec.gov.

65

eMAGIN CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	67
Consolidated Balance Sheets as of December 31, 2007 and 2006	68
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005	69
Consolidated Statements of Changes in Shareholders’ Equity (Capital Deficit) for the years ended  December 31, 2007, 2006, and 2005	70
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005	71
Notes to the Consolidated Financial Statements	72
	73

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

eMagin Corporation

We have audited the accompanying consolidated balance sheets of eMagin Corporation (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders' equity (capital deficit) and cash flows for each of the three years in the period ended December 31, 2007.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company's internal control over financial reporting.  Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of eMagin Corporation as of December 31, 2007 and 2006, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses from operations which it believes will continue, and has working capital and capital deficits at December 31, 2007.  These factors raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also discussed in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation effective January 1, 2006.

\s\ Eisner LLP

New York, New York

April 9, 2008

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eMAGIN CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007			2006
	(In thousands, except
	share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	713		$	1,415
Investments – held to maturity		94			171
Accounts receivable, net		2,383			908
Inventory		1,815			2,485
Prepaid expenses and other current assets		850			656
Total current assets		5,855			5,635
Equipment, furniture and leasehold improvements, net		292			666
Intangible assets, net		51			55
Other assets		232			233
Deferred financing costs, net		218			416
Total assets	$	6,648		$	7,005
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable	$	620		$	1,192
Accrued compensation		891			959
Other accrued expenses		729			749
Advance payments		35			444
Deferred revenue		179			126
Current portion of debt		7,089			1,223
Derivative liability - warrants		—			1,195
Other current liabilities		1,020			52
Total current liabilities		10,563			5,940
Long-term debt		60			2,229
Total liabilities		10,623			8,169
Commitments and contingencies
Capital deficit:
Preferred stock, $.001 par value: authorized 10,000,000 shares; no shares issued and outstanding		—			—
Series A Senior Secured Convertible Preferred stock, stated value $1,000 per share, $.001 par value:  3,198 shares designated and none issued		—			—
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 12,620,900 shares in 2007 and 10,341,029 shares in 2006		12			10
Additional paid in capital		195,326			179,651
Accumulated deficit		(199,313	)		(180,825	)
Total capital deficit		( 3,975	)		( 1,164	)
Total liabilities and capital deficit	$	6,648		$	7,005

See notes to Consolidated Financial Statements.

68

eMAGIN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Year Ended December 31,
	2007			2006			2005
	(In thousands, except per share data)
Revenue:
Product revenue	$	16,169		$	7,983		$	3,709
Contract revenue		1,385			186			36
Total revenue, net		17,554			8,169			3,745
Cost of goods sold		12,628			11,359			10,219
Gross profit (loss)		4,926			(3,190	)		(6,474	)
Operating expenses:
Research and development		2,949			4,406			4,020
Selling, general and administrative		6,591			8,860			6,316
Total operating expenses		9,540			13,266			10,336
Loss from operations		(4,614	)		(16,456	)		(16,810	)
Other income (expense):
Interest expense		(3,087	)		(1,306	)		(4	)
Loss on extinguishment of debt		(10,749	)		—			—
(Loss) gain on warrant derivative liability		(853	)		2,405			—
Other income, net		815			91			286
Total other (expense) income, net		(13,874	)		1,190			282
Net loss	$	(18,488	)	$	(15,266	)	$	(16,528	)
Loss per share, basic and diluted	$	(1.59	)	$	(1.52	)	$	(1.94	)
Weighted average number of shares outstanding:
Basic and diluted		11,633			10,058			8,541

See notes to Consolidated Financial Statements.

69

eMAGIN CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CAPITAL DEFICIT)

										Total
	Common Stock				Additional		Accumulated			Shareholders’ Equity
	Shares		Amount		Paid –in Capital		Deficit			(Capital Deficit)
	(In thousands)
Balance, December 31, 2004		7,964	$	8	$	165,471	$	(149,031	)	$	16,448
Sale of common stock, net of issuance costs		1,662		2		8,398		—			8,400
Stock options exercised		11		—		37		—			37
Exercise of common stock warrants		306		—		1,584		—			1,584
Issuance of common stock for services		54		—		461		—			460
Net loss		—		—		—		(16,528	)		(16,528	)
Balance, December 31, 2005		9,997	$	10	$	175,950	$	(165,559	)	$	10,401
Debt to equity conversion		85		—		220		—			220
Issuance of common stock for services		254		—		580		—			580
Stock-based compensation		—		—		2,891		—			2,891
Stock options exercised		5		—		10		—			10
Net loss		—		—		—		(15,266	)		(15,266	)
Balance, December 31, 2006		10,341	$	10		179,651	$	(180,825	)	$	(1,164	)
Debt to equity conversion		797		1		310		—			311
Issuance of common stock for services		1,473		1		1,324		—			1,325
Exercise of common stock warrants		10		—		3		—			3
Stock-based compensation		—		—		1,652		—			1,652
Expiration of derivative liability- warrants		—		—		2,653		—			2,653
Beneficial conversion premium		—		—		5,078		—			5,078
Fair value of warrants issued		—		—		4,655		—			4,655
Net loss		—		—				(18,488	)		(18,488	)
Balance, December 31, 2007		12,621	$	12	$	195,326	$	(199,313	)	$	( 3,975	)

See notes to Consolidated Financial Statements.

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eMAGIN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2007			2006			2005
	(In thousands)
Cash flows from operating activities:
Net loss	$	(18,488	)	$	(15,266	)	$	(16,528	)
Adjustments to reconcile net loss to net cash used in    operating activities:
Depreciation and amortization		392			841			908
Amortization of deferred financing fees		418			221			---
Reduction of provision for sales returns and doubtful accounts		(79	)		(39	)		(284	)
Stock based compensation		1,652			2,891			---
Issuance of common stock for services, net		1,325			553			470
Amortization of discount on notes payable		1,925			956			---
Loss (gain) on warrant derivative liability		853			(2,405	)		---
Loss on extinguishment of debt		10,749			---			---
Loss on other asset		---			157			---
Write-off of miscellaneous receivable		103			---			---
Changes in operating assets and liabilities:
Accounts receivable		(1,390	)		(42	)		(2	)
Inventory		670			1,354			(1,821	)
Prepaid expenses and other current assets		(194	)		389			(175	)
Advance payments		(409	)		384			(4	)
Deferred revenue		53			30			96
Accounts payable, accrued compensation, and accrued expenses		(381	)		(566	)		1,613
Other current liabilities		858			153			14
Net cash used in operating activities		(1,943	)		(10,389	)		(15,713	)
Cash flows from investing activities:
Purchase of equipment		(16	)		(204	)		(898	)
Proceeds from maturity of (purchase of) investments – held to maturity		77			(51	)		(120	)
Purchase of intangibles and other assets		---			(2	)		(54	)
Net cash provided by (used in) investing activities		61			(257	)		(1,072	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs		---			---			8,400
Proceeds from exercise of stock options and warrants		3			10			1,621
Proceeds from long-term debt		1,608			5,970			50
Payments related to deferred financing costs		(368	)		(591	)		---
Payments of long-term debt and capitalized lease obligations		(63	)		(55	)		(16	)
Net cash provided by financing activities		1,180			5,334			10,055
Net decrease in cash and cash equivalents		(702	)		(5,312	)		(6,730	)
Cash and cash equivalents, beginning of year		1,415			6,727			13,457
Cash and cash equivalents, end of year	$	713		$	1,415		$	6,727
Cash paid for interest	$	426		$	128		$	4
Cash paid for taxes	$	78		$	40		$	15
Supplemental non-cash transactions:
Conversion of debt to equity	$	311		$	220		$	---
During the year ended December 31, 2007, the Company

· Entered into an intellectual property agreement with Kodak where Kodak was assigned the rights to a specific patent and as part of the consideration waived the royalty payments for the first six months of 2007 and reduced the royalty payment to 50% for the third and fourth quarters of 2007. $869 thousand was recorded as other income from the gain on the licensing of intangible assets;

· Entered into an amended Note Purchase Agreement with investors and issued warrants that are exercisable at $1.03 per share into approximately 5.4 million shares of common stock valued at $5.5 million.

See notes to Consolidated Financial Statements.

71

eMAGIN CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - NATURE OF BUSINESS

eMagin Corporation and its wholly owned subsidiary (the “Company”) designs,  develops, manufactures, and markets virtual imaging products for consumer, commercial, industrial and military applications.  The Company’s products are sold mainly in North America, Asia, and Europe.

Note 2 - SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying audited consolidated financial statements include the accounts of eMagin Corporation and its wholly owned subsidiary.  All intercompany transactions have been eliminated in consolidation.

Basis of presentation

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has had recurring losses from operations which it believes will continue for the foreseeable future.  The Company’s cash requirements over the next twelve months are greater than the Company’s current cash, cash equivalents, and investments.  At December 31, 2007, the Company has working capital and capital deficits. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern without continuing to obtain additional funding.  The Company does not have commitments for such financing and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. If the Company is unable to obtain sufficient funds during the next twelve months, the Company will further reduce the size of its organization and/or curtail operations which will have a material adverse impact on the Company’s business prospects. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. To partially address the liquidity issue, the Company completed a private placement of its common stock for gross proceeds of $1.65 million on April 2, 2008.  Please see Note 17 – Subsequent Events for additional information.

On November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock split of its issued and outstanding common stock.   All common and per share amounts in the accompanying financial statements have been adjusted to reflect the 1-for-10 reverse stock split.

Use of estimates

In accordance with accounting principles generally accepted in the United States of America, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Revenue and cost recognition

Revenue is recognized when products are shipped to customers, net of allowances for anticipated returns.  The Company’s revenue-earning activities generally involve delivering products and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured.  The Company defers revenue recognition on products sold directly to the consumer with a fifteen day right of return.  Revenue is recognized upon the expiration of the right of return.

The Company also earns revenues from certain R&D activities under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contracts.  Revenues relating to firm fixed-price contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis).  Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. 

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Research and development expenses

Research and development costs are expensed as incurred.

Cash and cash equivalents

All highly liquid instruments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents.

Investments-held to maturity

Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost on the accompanying balance sheet.

Accounts receivable

The majority of the Company’s commercial accounts receivable is due from Original Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are payable in U.S. dollars, are due within 30-90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Any account outstanding longer than the contractual payment terms is considered past due.

Allowance for doubtful account

The allowance for doubtful accounts reflects an estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on a variety of factors, including the length of time receivables are past due, historical experience, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole.  The Company will record a specific reserve for individual accounts when the Company becomes aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to customers change, the Company would further adjust estimates of the recoverability of receivables.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the first-in first-out method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. The Company regularly reviews inventory quantities on hand, future purchase commitments with the Company’s suppliers, and the estimated utility of the inventory. If the Company review indicates a reduction in utility below carrying value, the inventory is reduced to a new cost basis.

Equipment, furniture and leasehold improvements

Equipment, furniture and leasehold improvements are stated at cost. Depreciation on equipment is calculated using the straight-line method of depreciation over its estimated useful life. Amortization of leasehold improvements is calculated by using the straight-line method over the shorter of their estimated useful lives or lease terms. Expenditures for maintenance and repairs are charged to expense as incurred.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. Impairment losses, if any, are recognized based on the excess of the assets' carrying amounts over their estimated fair values.

Intangible Assets

The Company’s intangible assets consist of patents that are amortized over their estimated useful lives of fifteen years using the straight line method.  Total intangible amortization expense was approximately $4 thousand for each of the years ended December 31, 2007, 2006, and 2005, respectively.

Advertising

Costs related to advertising and promotion of products is charged to sales and marketing expense as incurred.  Advertising expense for the years ended December 31, 2007, 2006, and 2005 was $10 thousand, $296 thousand, and $108 thousand, respectively.

73

Income taxes

The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).  SFAS No. 109 requires that the Company recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.  The Company records an estimated valuation allowance on its deferred income tax assets if it is more likely than not that these deferred income tax assets will not be realized.

Loss per common share

In accordance with SFAS No. 128, "Basic Earnings Per Share", net loss per common share amounts ("basic EPS") is computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution. Net loss per common share amounts assuming dilution ("diluted EPS") reflects the potential dilution from the exercise of stock options and warrants. These common equivalent shares have been excluded from the computation of diluted EPS for all periods presented as their effect is antidilutive. The years ended December 31, 2007, 2006, and 2005 do not include options and warrants to purchase common equivalent shares of 9,234,832, 4,613,919, and 4,424,988, respectively, as their effect would be antidilutive.

Comprehensive income (loss)

SFAS No. 130, "Reporting Comprehensive Income", requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income (loss) is the total of net income (loss) and other comprehensive income (loss) items, such as unrealized gains or losses on foreign currency translation adjustments. Comprehensive income (loss) must be reported on the face of the annual financial statements. The Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net loss for the years ended December 31, 2007, 2006, and 2005. Accordingly, the Company's comprehensive loss is the same as its net income (loss) for the periods presented.

Stock-based compensation

On January 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment”, which requires the Company to recognize expense related to the fair value of the Company’s share-based compensation issued to employees and directors.  Prior to January 1, 2006, the Company accounted for share-based compensation under the recognition and measurement provisions of APB No. 25 and related interpretations, as permitted by SFAS No. 123.  We adopted SFAS No. 123R using the modified prospective transition method.  Accordingly, periods prior to adoption have not been restated.  Compensation cost recognized for the twelve months ended December 31, 2007 and 2006 includes a) compensation cost for all share-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No.123 and b) compensation cost for all share-based compensation granted beginning January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No.123R.  The compensation cost was recognized using the straight-line attribution method.    See Note 11 for a further discussion on stock-based compensation.

Fair value of financial instruments

At December 31, 2007, the Company's cash, cash equivalents, accounts receivable, short-term investments, accounts payable and debt are shown at cost which approximates fair value due to the short-term nature of these instruments.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents.  The Company’s cash and cash equivalents are deposited with financial institutions which, at times, may exceed federally insured limits.  To date, the Company has not experienced any loss associated with this risk.

Note 3- RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157”).  SFAS 157 provides guidance for using fair value to measure assets and liabilities.  It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a material impact on its consolidated results of operations and financial condition.

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In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities:  (“SFAS159”).  SFAS159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. SFAS 159 is effective for the Company on January 1, 2008 and is not expected to have a material impact on its consolidated results of operations and financial condition.

In June 2007, the FASB ratified EITF No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Future Research and Development Activities (“EITF 07-03”).    EITF 07-03 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.  EITF 07-03 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007.  The Company will be required to adopt EITF 07-03 in the first quarter of 2008.  The Company does not expect the adoption of EITF 07-03 to have a material effect on its operations or financial position.

Note 4- RECEIVABLES

Receivables consisted of the following (in thousands):

	December 31,
	2007			2006
Trade receivables	$	2,741		$	1,351
Less allowance for doubtful accounts		(358	)		(443	)
Net receivables	$	2,383		$	908

Note 5 - INVENTORY

The components of inventories were as follows (in thousands):

	December 31,
	2007		2006
Raw materials	$	1,069	$	1,146
Work in process		370		558
Finished goods		376		781
Total inventory	$	1,815	$	2,485

Note 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

	December 31,
	2007		2006
Vendor prepayments	$	537	$	294
Other prepaid expenses*		310		353
Other current assets		3		9
Total prepaid expenses and other current assets	$	850	$	656

*No individual amounts greater than 5% of current assets.

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Note 7 – EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS

Equipment, furniture and leasehold improvements consist of the following (in thousands):

	December 31,
	2007			2006
Computer hardware and software	$	1,025		$	1,017
Lab and factory equipment		3,318			3,312
Furniture, fixtures, and office equipment		306			306
Assets under capital leases		66			66
Leasehold improvements		473			473
Total equipment, furniture and leasehold improvements		5,188			5,174
Less:  accumulated depreciation		(4,896	)		(4,508	)
Equipment, furniture and leasehold improvements, net	$	292		$	666

Depreciation expense was $388 thousand, $837 thousand, and $904 thousand for the years ended December 31, 2007, 2006, and 2005, respectively.  Assets under capital leases are fully amortized.

Note 8 - DEBT

Debt is as follows (in thousands):

	December 31,
	2007			2006
Current portion of long-term debt:
Capitalized lease obligations	$	—		$	6
Other debt		44			58
Line of credit		1,108
6% Senior Secured Convertible Notes		—			2,880
Less:  Unamortized discount on notes payable		—			(1,721	)
8% Amended Senior Secured Convertible Notes		5,962			—
Less:  Unamortized discount on notes payable		(25	)		—
Current portion of long-term debt, net		7,089			1,223
Long-term debt:
Other debt		60			104
6% Senior Secured Convertible Notes		—			2,890
Less:  Unamortized discount on notes payable		—			(765	)
Long-term debt, net		60			2,229
Total debt, net	$	7,149		$	3,452

Maturities with respect to the other debt, line of credit and the 8% Amended Senior Secured Convertible Notes as of December 31, 2007 are as follows (in thousands):

Years Ending December 31,
2008	$	7,089
2009		60

On July 23, 2007, an investor elected to convert approximately $252 thousand of the 6% Senior Secured Convertible Note (“Original Note”) representing $250 thousand of the principal amount of the Note due on July 23, 2007 and approximately $2 thousand of accrued and unpaid interest. The investor received 720,476 shares of Common Stock at the conversion price of $0.35.

On July 23, 2007, the Company entered into Amended Agreements with the note holders of the Original Notes issued July 21, 2006 and March 28, 2007 and agreed to issue each holder an 8% Amended Senior Secured Convertible Note (“Amended Note”)

in the principal amount equal to the principal amount outstanding as of July 23, 2007 which was in total approximately $6.0 million. The significant changes to the Amended Notes include the following:

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· The due dates have been changed from July 23, 2007 and January 21, 2008 to December 21, 2008;

· The annual interest has been changed from 6% to 8%;

· The Amended Notes are convertible into 8,407,612 shares of the Company’s common stock.  The conversion price for $5.8 million of principal is at a conversion price of $0.75, originally $2.60 and the conversion price for $250,000 of principal remains the same at $0.35;

· The Agreement adjusts the exercise price of the amended Warrants from $3.60 to $1.03 per share for 1,553,468 shares of common stock and requires the issuance of warrants for an additional 3,831,859 shares of common stock at $1.03 per share with an expiration date of July 21, 2011.   The warrants are subject to anti-dilution adjustment rights;

· 50% of the Amended Notes can be converted into the Company’s newly designated Series A Senior Secured Convertible Preferred Stock which is convertible into common stock at the same rate as the Amended Notes;

· The liquidated damages of 1% per month will no longer accrue and the deferred balance at July 23, 2007 is forgiven; and

· There is no minimum cash or cash equivalents balance requirement.

Under the guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”, the Company determined the change in the present value of the expected cash flows between the Amended Notes and the Original Notes issued July 21, 2006 was greater than 10%; therefore (a) for financial reporting purposes, the modifications to the Original Notes issued July 21, 2006 were treated as an extinguishment of debt and (b) on July 23, 2007, the Company recorded a loss on extinguishment of debt of approximately $10.7 million reflecting the difference between (i) the recorded amount of debt, net of related discounts, of approximately $4.8 million and (ii) the fair value of the new debt instrument of approximately $10.7 plus the change in the fair value of the warrants  on July 23, 2007, the date of the modification, of approximately $4.7 million.  The Company has also recorded a beneficial conversion charge of approximately $5.1 million on the Amended Notes adjusting the Amended Notes to their face value of approximately $5.8 million.  The Original Note issued on March 28, 2007 and amended on July 23, 2007 was not treated as an extinguishment but a modification.

On August 16, 2007, an investor elected to convert approximately $58 thousand of the Amended Note. The investor received 76,923 shares of Common Stock at the conversion price of $0.75.

On August 7, 2007, the Company enteredinto a loan agreement with Moriah Capital, L.P. (“Moriah)and established a revolving line of credit (the “Loan”) of $2.5 million.  The Company is permitted to borrow an amount not to exceed 90% of its eligible accounts receivable and 50% of its eligible inventory capped at $600 thousand.  As part of the transaction, the Company issued 162,500 shares of unregistered common stock valued at $195 thousand and paid a servicing fee of $82,500 to Moriah which will be amortized to interest expense over the life of the agreement.  For the year ended December 31, 2007, approximately $93 thousand was amortized to interest expense.  In conjunction with entering into this loan and issuing unregistered common stock, the Company granted Moriah registration rights.  The Loan can be converted into shares of the Company’s common stock pursuant to the terms of the Loan Conversion agreement.  The Loan matures on August 8, 2008 however the Company has the option of extending it an additional year.  On January 30 and on March 25, 2008, the loan agreement was amended.  Please see Note 17 - Subsequent Events for additional information.

For the year ended December 31, 2007, interest expense consisted of interest paid or accrued on outstanding debt of $836 thousand.

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Note 9 - INCOME TAXES

The difference between the statutory federal income tax rate on the Company's pre-tax income and the Company's effective income tax rate is summarized as follows:

	For the years ended December 31,
	2007		2006		2005
U.S. Federal income tax provision (benefit) at federal statutory rate		(34)%		(34)%		(35)%
Change in valuation allowance		2 %		32%		35%
Permanent difference		32%		2%		—
		0 %		0%		0%

The tax effects of significant items comprising the Company’s deferred taxes as of December 31 are as follows (numbers are in thousands):

	For the years ended December 31,
	2007			2006			2005
Federal and state net operating loss carry-forwards	$	42,266		$	41,554		$	37,159
Research and development carry-forwards		1,397			—			—
Other provision and expenses not currently deductible		1,746			520			216
Total deferred tax assets		45,409			42,074			37,375
Less valuation allowance		(45,409	)		(42,074	)		(37,375	)
Net deferred tax asset	$	0		$	0		$	0

As of December 31, 2007, eMagin has federal and state net operating loss carryforwards of approximately $150 million and $1.4 million that will be available to offset future taxable income, if any, through December 2027. The utilization of net operating losses is subject to a limitation due to the change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating losses before their utilization. The Company has done preliminary analysis regarding prior year ownership changes, and although more analysis needs to be done, we have tentatively determined that the Section 382 limitation on the utilization of net operating losses is not material.

As of December 31, 2007 and 2006, the Company has net deferred tax assets of approximately of $45 and $42 million, respectively, primarily resulting from the future tax benefit of net operating loss carryforwards.  Such net deferred tax assets are fully offset by a valuation allowance due to the uncertainty as to their realizability.  A valuation allowance has been established to reserve for the deferred tax assets arising from the net operating losses and other temporary differences due to the uncertainty that their benefit will be realized in the future. The valuation allowance increased approximately $3.3 million for the year ended December 31, 2007 and $4.7 million for the year ended December 31, 2006.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007.  The Company did not have unrecognized tax benefits which would require an adjustment to the January 1, 2007 beginning balance of retained earnings.  The Company did not have any unrecognized tax benefits at January 1, 2007 and December 31, 2007.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense.  During the years ended December 31, 2007 and 2006 the Company recognized no interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction and New York.  The tax years 2004-2006 remain open to examination by major taxing jurisdictions to which the Company is subject.

Note 10 - SHAREHOLDERS' EQUITY

Preferred Stock

2007

The Company has designated but not issued 3,198 shares of the Company’s preferred stock as Series A Senior Secured Convertible Preferred Stock (“the Preferred Stock”) at a stated value of $1,000 per share.  The Preferred Stock is entitled to cumulative dividends which accrue at a rate of 8% per annum, payable on December 21, 2008.  Each share of the Preferred Stock has voting rights equal to (1)  in any case in which the Preferred Stock votes together with the Company's Common Stock or any other class or series of stock of the Company, the number of shares of Common Stock issuable upon conversion of such shares of Preferred Stock at such time (determined without regard to the shares of Common Stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any case not covered by the immediately preceding clause one vote per share of Preferred Stock.  The Preferred Stock has a mandatory redemption at December 21, 2008.

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Common Stock

2007

On August 16, 2007, an investor elected to convert approximately $58 thousand of the Amended Note. The investor received 76,923 shares of Common Stock at the conversion price of $0.75.

On August 7, 2007, the Company enteredinto a loan agreement with Moriah Capital, L.P. (“Moriah)and established a revolving line of credit (the “Loan”) of $2.5 million.  As part of the transaction, the Company issued 162,500 shares of unregistered common stock valued at $195 thousand, recognized as deferred financing costs, and paid a servicing fee of $82,500 to Moriah which will be amortized to interest expense over the life of the agreement.  For the year ended December 31, 2007 approximately $116 thousand was amortized to interest expense.  In conjunction with entering into this loan and issuing unregistered common stock, the Company granted Moriah registration rights.  The Loan can be converted to shares of the Company’s common stock pursuant to the terms of the Loan Conversion agreement.  The Loan matures on August 8, 2008 however the Company has the option of extending it an additional year.  On January 30, and March 25, 2008, the loan agreement was amended.  Please see Note 17 - Subsequent Events for additional information.

A registration rights agreement was entered into in connection with the Loan which requires the Company to file a registration statement for the resale of the common stock issued.  The Company must use its best efforts to have the registration statement declared effective by the end of a specified grace period and also maintain the effectiveness of the registration statement until all shares of common stock have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act.  Please see Note 17 – Subsequent Events for additional information.

On July 23, 2007, the Company entered into Agreements with the note holders and agreed to issue each holder an Amended Note in the principal amount equal to the principal amount outstanding as of July 23, 2007 which was in total approximately $6.0 million. The Amended Notes are convertible into 8,407,612 shares of the Company’s common stock.  The conversion price for $5.8 million of principal is at a conversion price of $0.75 and the conversion price for $250 thousand of principal remains the same at $0.35.   The Agreement adjusts the exercise price of the amended Warrants from $3.60 to $1.03 per share for 1,553,468 shares of common stock and requires the issuance of warrants for an additional 3,831,859 shares of common stock at $1.03 per share with an expiration date of July 21, 2011.   The warrants are subject to anti-dilution adjustment rights.  50% of the Amended Notes can be converted into the Company’s newly designated Series A Senior Secured Convertible Preferred Stock which is convertible into common stock at the same rate as the Amended Notes.

The Company had recorded the fair value of the warrants associated with the Note as a liability as the warrant agreement required a potential net-cash settlement in the first year of the warrant agreement if the registration statement is not effective as required by EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”).  The liability was adjusted to fair value at each reporting period.  As of July 23, 2007, the potential net-cash settlement had expired.  As a result, the fair value of the warrant liability on July 23, 2007, approximately $2.7 million, was reversed.  For the year ended December 31, 2007, the Company recorded losses of approximately $0.8 million from the change in the fair value of the warrant derivative liability. The change in the fair value of the warrant liability was recorded in the Consolidated Statement of Operations as other income (expense).

On July 23, 2007, an investor converted $250 thousand of the principal amount of the Original Note due on July 23, 2007 and approximately $2 thousand of accrued and unpaid interest totaling $252 thousand and received 720,476 shares of Common Stock at the conversion price of $0.35.  On August 16, 2007, an investor elected to convert approximately $58 thousand of the Amended Note. The investor received 76,923 shares of Common Stock at the conversion price of $0.75.

On March 28, 2007, the Company entered into a Note Purchase Agreement for the sale of $500 thousand of 6% senior secured convertible debentures (the “Note”) and warrants to purchase approximately 1,000,000 shares of common stock, par value $.001 per share.  The investor purchased the Note with a conversion price of $0.35 per share that may convert into approximately 1,400,000 shares of common stock and issued warrants exercisable at $0.48 per share for approximately 1,000,000 shares of common stock expiring in July 2011.  On April 9, 2007, the Company closed the transaction and received approximately $460 thousand, net of offering costs of approximately $40 thousand, which are amortized over the life of the Note.   The Note was amended on July 23, 2007 as described in Note 8:  Debt.

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As a result of the issuance of the Note, the outstanding 116,573 Series A Common Stock Purchase Warrants, that were issued to certain accredited and/or institutional investors pursuant to the Securities Purchase Agreement dated January 9, 2004, were re-priced from $2.60 to $0.35 and the outstanding 650,000 Series F Common Stock Purchase Warrants, that were issued to certain accredited and/or institutional investors pursuant to the Securities Purchase Agreement dated October 25, 2004, were re-priced from $8.60 to $7.12. As a result of the issuance of the Amended Notes the outstanding 650,000 Series F Common Stock Purchase Warrants that were issued to certain accredited and/or institutional investors pursuant to the Securities Purchase Agreement dated October 25, 2004, were re-priced from $7.12 to $4.39 in accordance with the anti-dilution provision of the original agreement.  These warrants were further re-priced in connection with the loan agreement with Moriah from $4.39 to $4.09.  The repricing of the warrants has no effect on the financial statements.

 For the year ended December 31, 2007, there were no stock options exercised and the Company received approximately $3 thousand in proceeds for warrants exercised. For the year ended December 31, 2007, the Company also issued approximately 1.5 million shares of common stock for payment of approximately $1.3 million for services rendered and to be rendered in the future.  As such, the Company recorded the fair value of the services rendered in prepaid expenses and selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2007.

2006

At the Company’s 2006 Annual Meeting of Shareholders held on October 20, 2006, the Company’s shareholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the issued and outstanding common stock on a ratio of 1-for-10.  On November 3, 2006, the reverse stock split became effective. The Company has adjusted its shareholders’ equity accounts by reducing its stated capital and increasing its additional paid-in capital by approximately $91 thousand as of December 31, 2006 and 2005 to reflect the reduction in outstanding shares as a result of the reverse stock split.

On July 21, 2006, the Company entered into several Note Purchase Agreements for the sale of approximately $5.99 million of senior secured debentures (the “Notes”) and warrants to purchase approximately 1.8 million shares of common stock, par value $.001 per share.  The investors purchased $5.99 million principal amount of Notes with conversion prices of $2.60 per share that may convert into approximately 2.3 million shares of common stock and 5 year warrants exercisable at $3.60 per share into approximately 1.6 million shares of common stock.  If the Notes are not converted, 50% of the principal amount will be due on July 23, 2007 and the remaining 50% will be due on January 21, 2008.  Commencing September 1, 2006, 6% interest is payable in quarterly installments on outstanding notes.  For the year ended December 31, 2006, the Company paid approximately $124 thousand of interest to investors. The Company received approximately $5.4 million, net of deferred financing costs of approximately $0.6 million which are amortized over the life of the Notes.   The Company amortized approximately $221 thousand of deferred financing costs in 2006. For the year ended December 31, 2006, two note holders converted their promissory notes valued at approximately $220 thousand and were issued an aggregate of approximately 85,000 shares.

Under EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants, $3.6 million, have been recorded as a liability since the warrant agreement requires a potential net-cash settlement in the first year of the warrant agreement if the registration statement is not effective.  As of December 31, 2006, the registration statement is effective.  The liability will be adjusted to fair value at each reporting period.  The change in the fair value of the warrants will be recorded in the Consolidated Statement of Operations as other income (expense).  For the twelve months ended December 31, 2006, the Company recorded approximately $2.4 million of gain from the change in the fair value of the derivative liability.

An additional $0.5 million was to be invested through the exercise of a warrant to purchase approximately 192,000 shares of common stock at $2.60 per share on or prior to December 14, 2006, or at the election of the Company, by the purchase of additional Notes and warrants.  The Company determined the relative fair value of the warrants to be approximately $157,000 which was recorded as an other asset.  The following assumptions were used to determine the fair value of the warrant:

Dividend yield	0%
Risk free interest rates	5.25%
Expected  volatility	122%
Expected term (in years)	0.4 years

The investor elected not to exercise its warrants prior to December 14, 2006.  The fair value of the warrants which was recorded as an other asset was written off as a sales, general and administrative expense.

In connection with the Notes, a registration rights agreement was entered into which requires the Company to file a registration statement for the resale of the common stock underlying the Notes and the warrants.  The Company must use its best efforts to have the registration statement declared effective by the end of a specified grace period and also maintain the effectiveness of the registration statement until all shares of common stock underlying the Notes and the warrants have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act.  If the Company fails to have the registration statement declared effective within the grace period or fails to maintain the effectiveness as set forth in the preceding sentence, the Company is required to pay each investor cash payments equal to 1.0% of the aggregate purchase price monthly until the failure is cured.  If the Company fails to pay the liquidated damages, interest at 16.0% will accrue until the liquidated damages are paid in full.  The registration statement was filed and declared effective by the Securities and Exchange Commission within the specified grace period.

The Company accounts for the registration rights agreement as a separate freestanding instrument and accounts for the liquidated damages provision as a derivative liability subject to SFAS 133.  The estimated fair value of the derivative liability is based on an estimate of the probability and costs of cash penalties being incurred.  The Company determined that the fair value of the liability was immaterial and it is not recorded in accrued liabilities.  The Company will revalue the potential liability at each balance sheet date.

As a result of the issuance of the Notes, the outstanding 116,576 Series A Common Stock Purchase Warrants, that were issued to certain accredited and/or institutional investors pursuant to the Securities Purchase Agreement dated January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001 Series F Common Stock Purchase Warrants, that were issued to certain accredited and/or institutional investors pursuant to the Securities Purchase Agreement dated October 25, 2004, were re-priced from $10.90 to $8.60.

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For the year ended December 31, 2006, the Company received approximately $10 thousand for the exercise of 5,000 options and there were no warrants exercised.  For year ended December 31, 2006, the Company issued approximately 254,000 shares of common stock in lieu of cash payments in the amount of approximately $580 thousand as compensation for services rendered and to be rendered in the future.  The fair value of the services was measured at market value of the common stock at the time of payment.  As such, the Company recorded the fair value of the services rendered in selling, general and administrative expenses in the accompanying audited consolidated statement of operations for the year ended December 31, 2006.

The 2004 Non-Employee Compensation Plan (the “2004 Plan”) was established to help the Company retain consultants, professionals and service providers.  The Board of Directors will select the recipient of the awards, the nature of the awards and the amount. At the 2006 Annual Shareholder meeting, the shareholders approved an increase in the number of authorized shares of common stock usable from 200,000 to 950,000.  This number is subject to adjustment in the event of a recapitalization, reorganization or similar event.

2005

On October 20, 2005, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold and issued 1,661,906 shares of common stock, par value $0.001 per share, at a price of $5.50 per share and warrants to purchase up to 997,143 shares of common stock for an aggregate purchase price of approximately $9.14 million.  The net proceeds received after expenses were approximately $8.4 million.

The warrants are exercisable at a price of $10.00 per share and expire on April 20, 2011.  Of the 997,143 warrants, 664,763 of the warrants are exercisable on or after May 20, 2006.  The remaining 332,381 are exercisable after March 31, 2007, however these warrants will be cancelled if the Company’s net revenue for fiscal year 2006 exceeds $20 million or if the investor has sold more than 25% of the shares purchased under the securities purchase agreement prior to December 31, 2006.

As a result of the above transaction, the outstanding 121,335 Series A Common Stock Purchase Warrants, that were issued to participants of the Securities Purchase Agreement dated January 9, 2004, were re-priced from $10.50 to $5.50 and the outstanding 650,001 Series F Common Stock Purchase Warrants, that were issued to participants of the Securities Purchase Agreement dated October 25, 2004, were re-priced from $12.10 to $10.90.

A registration rights agreement was entered into in connection with the private placement which requires the Company to file a registration statement for the resale of the common stock and the shares underlying the warrants.  The Company must use its best efforts to have the registration statement declared effective by the end of a specified grace period and also maintain the effectiveness of the registration statement until all common stock have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act.  If the Company fails to have the registration statement declared effective within the grace period or fails to maintain the effectiveness, the agreement requires the Company to pay each investor cash payments equal to 2.0% of the aggregate purchase price monthly until the failure is cured.  If the Company fails to pay the liquidated damages, interest at 15.0% will accrue until the liquidated damages are paid in full.  The registration statement was filed and declared effective within the specified grace period.  As of December 31, 2006, the registration statement remains effective.

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The Company accounts for the registration rights agreement as a separate freestanding instrument and accounts for the liquidated damages provision as a derivative liability subject to SFAS 133.  The estimated fair value of the liability is based on an estimate of the probability and costs of cash penalties being incurred.  The Company determined that the fair value of the liability was

immaterial and it is not recorded in accrued liabilities.  The Company will revalue the potential liability at each balance sheet date.

In 2005, the Company received approximately $1.6 million for the exercise of approximately 11,100 options and 306,000 warrants.  The Company also issued approximately 54,300 shares of common stock for the payment of $461 thousand of services rendered and to be rendered in the future.  The fair value of the services was measured at market value of the common stock at the time of payment.  As such, the Company recorded the fair value of the services rendered in selling, general and administrative expenses in the accompanying audited consolidated statement of operations for the year ended December 31, 2005.

Note 11 - STOCK COMPENSATION

Employee stock purchase plan

In 2005, the stockholders approved the 2005 Employee Stock Purchase Plan (“ESPP”).  The ESPP provides the Company’s employees with the opportunity to purchase common stock through payroll deductions. Employees purchase stock semi-annually at a price that is 85% of the fair market value at certain plan-defined dates. At December 31, 2007, the number of shares of common stock available for issuance was 225,000 and the plan will automatically increase 75,000 shares on January 1 of each year for a period of three years starting January 1, 2006. As of December 31, 2007, the plan had not been implemented.

Incentive compensation plans

In 2000, the Company established the 2000 Stock Option Plan (the "2000 Plan"). The Plan permits the granting of options and stock purchase rights to employees and consultants of the Company. The 2000 Plan allows for the grant of incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code of 1986 (the "Code") or non-qualified stock options which are not intended to meet such requirements.

In 2003, the Company established the 2003 Stock Option Plan (the "2003 Plan"). The 2003 Plan provided for the granting of options to purchase an aggregate of 9,200,000 shares of the common stock to employees and consultants. On July 2, 2003, the shareholders approved the plan and the 2003 Plan was subsequently amended by the Board of Directors on July 2, 2003 to reduce the number of additional shares that may be provided for issuance under the "evergreen" provisions of the 2003 Plan. The amended 2003 Plan provides for an increase of 2,000,000 shares in January 2004 and an annual increase on January 1 of each year for a period of nine (9) years commencing on January 1, 2005 of 3% of the diluted shares outstanding.  The shareholders approved an amendment to the 2003 Plan to provide grants of shares of common stock in addition to options to purchase shares of common stock.  In 2005, approximately 2.4 million shares were added to the plan.

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On February 20, 2008, the Board of Directors authorized the establishment of the 2008 Incentive Stock Plan.  Please see Note 17 - Subsequent events for addition information.

Vesting terms of the options range from immediate vesting to a ratable vesting period of 5 years. Option activity for the years ended December 31, 2007, 2006 and 2005 is summarized as follows:

	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value
Balances at December 31, 2004	1,355,916	$11.40
Options granted	582,400	9.60
Options exercised	(11,059)	3.40
Options cancelled	(121,993)	13.90
Balances at December 31, 2005	1,805,264	10.90
Options granted	185,744	4.30
Options exercised	(5,000)	2.10
Options forfeited	(453,115)	7.47
Options cancelled	(467,148)	11.97
Balances at December 31, 2006	1,065,745	2.94
Options granted	228,577	1.41
Options exercised	—	—
Options forfeited	(203,943)	2.90
Options cancelled	(196,056)	2.67
Balances at December 31, 2007	894,323	$ 2.62	5.36	$6,524
Vested or expected to vest at      December 31, 2007 (1)	877,408	$ 2.67	5.36	$—
Exercisable at December 31, 2007	682,883	$ 2.57	5.53	$—

(1)  The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.

At December 31, 2007, there were 813,185 shares available for grant under the 2003 Plan and the 2000 Plan.

The following table summarizes information about stock options outstanding at December 31, 2007:

	Options Outstanding			Options Exercisable
	Number Outstanding	Weighted Average Remaining Contractual Life (In Years)	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercisable Price
$1.00 - $1.51	228,577	9.60	$  1.41	205,277	$ 1.46
$2.60 - $2.70	624,546	3.91	2.61	445,506	2.60
$3.50 - $5.80	12,000	4.68	5.61	12,000	5.61
$6.60 - $22.50	29,200	3.57	10.91	20,100	11.23
	894,323	5.36	$  2.62	682,883	$ 2.57

(1)  The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock for the options that were in-the-money.  As of December 31, 2007 there were 23,300 options that were in-the-money.   The Company’s closing stock price was $1.28 as of December 31, 2007. The Company issues new shares of common stock upon exercise of stock options.

On July 21, 2006, certain employees and Directors of the Company agreed to cancel approximately 467,000 shares underlying existing stock options in return for the re-pricing of approximately 869,000 existing options at $2.60 per share having a weighted average original exercise price of $11.97.  Option grants that have not been re-priced remain unchanged.  The unvested options which were re-priced continue to vest on original vesting schedules, but in no event vest prior to January 19, 2007.  Previously vested options which were re-priced were fully vested on January 19, 2007.  Re-priced grants will be forfeited if the individual leaves voluntarily.  The Company has accounted for the re-pricing and cancellation transactions as a modification under SFAS No. 123R.

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Stock based compensation

On January 1, 2006, the Company adopted the provisions of SFAS No. 123R, which requires the Company to recognize expense related to the fair value of the Company’s share-based compensation issued to employees and directors.  Prior to January 1, 2006, the Company accounted for share-based compensation under the recognition and measurement provisions of APB No. 25 and related interpretations, as permitted by SFAS No. 123.  The Company adopted SFAS No. 123R using the modified prospective transition method.  Accordingly, periods prior to adoption have not been restated.  Compensation cost recognized for the twelve months ended December 31, 2007 and 2006 includes a) compensation cost for all share-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No.123 and b) compensation cost for all share-based compensation granted beginning January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No.123R.  The compensation cost was recognized using the straight-line attribution method.

The following table summarizes the allocation of stock-based compensation to expense categories for the years ended December 31, 2007 and 2006 (in thousands):

	For the years ended  December 31,
	2007		2006
Cost of revenue	$	215	$	343
Research and development		357		435
Selling, general and administrative		1,080		2,113
Total stock compensation expense	$	1,652	$	2,891

For the year ended December 31, 2007, stock compensation was approximately $1.7 million.  At December 31, 2007, total unrecognized compensation costs related to stock options was approximately $1.7 million, net of estimated forfeitures.  Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 2.6 years.  For the year ended December 31, 2006, stock compensation was approximately $2.9 million.

The Company recognizes compensation expense for options granted to non-employees in accordance with the provision of Emerging Issues Task Force (“EITF”) consensus Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” which requires using a fair value options pricing model and re-measuring such stock options to the current fair market value at each reporting period as the underlying options vest and services are rendered.

In determining the fair value of stock options granted during the years ended December 31, 2007, 2006, and 2005, the following key assumptions were used in the Black-Scholes option pricing model:

	For the years ended December 31,
	2007	2006	2005
Dividend yield	0%	0%	0%
Risk free interest rates	3.28% - 4.23%	4.59% - 4.82%	4.4%
Expected  volatility	105% -106%	123% - 126%	126%
Expected term ( in years)	5 years	5 years	5 years

We have not declared or paid any dividends and do not currently expect to do so in the near future.  The risk-free interest rate used in the Black-Scholes is based on the implied yield currently available on U.S. Treasury securities with an equivalent term.   Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the most recent five year period.  The expected term of options represents the period that eMagin’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

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The following table shows the proforma effect on eMagin’s net loss and net loss per share had compensation expense been determined based on the fair value at the award grant date in accordance with SFAS No. 123 for the twelve months ended December 31, 2005 (in thousands, except per share data):

	For the year ended December 31, 2005
Net loss applicable to common stockholders, as reported	$	(16,528	)
Add:  Stock-based employee compensation expense included in reported net loss		—
Deduct:  Stock-based employee compensation expense determined under fair value method		(3,035	)
Pro forma net loss	$	(19,563	)
Net loss per share:
Basic and diluted, as reported	$	(1.94	)
Basic and diluted, pro forma	$	(2.29	)

Warrants

At December 31, 2007, 8,340,509 warrants to purchase shares of common stock are outstanding and exercisable at exercise prices ranging from $0.35 to $27.60 and expiration dates ranging from June 10, 2008 to February 27, 2012.

	Outstanding Warrants
	Shares			Weighted Average Exercise Price
Balances at December 31, 2004		2,161,823		$	11.40
Warrants granted		997,143			10.00
Warrants exercised		(370,820	)		6.10
Warrants cancelled		(168,421	)		26.70
Balances at December 31, 2005		2,619,725		$	10.20
Warrants granted		1,805,037			3.49
Warrants exercised		—			—
Warrants expired		(876,588	)		6.90
Balances at December 31, 2006		3,548,174		$	7.05
Warrants granted		4,831,859			0.88
Warrants exercised		(9,524	)		0.35
Warrants expired		(30,000	)		4.26
Balances at December 31, 2007		8,340,509		$	2.65

On January 30 and March 25, 2008, the loan agreement with Moriah was amended and restated and 750,000 warrants and 250,000 warrants, respectively, were issued with exercise prices of $1.50 per share.  Please see Note 17 – Subsequent Events for additional information.

Note 12 - COMMITMENTS AND CONTINGENCIES

Royalties

The Company, in accordance with a royalty agreement with Eastman Kodak, is obligated to make minimum annual royalty payments of $125 thousand which commenced on January 1, 2001. Under this agreement, the Company must pay to Eastman Kodak a certain percentage of net sales with respect to certain products, which percentages are defined in the agreement. The percentages are on a sliding scale depending on the amount of sales generated. Any minimum royalties paid will be credited against the amounts due based on the percentage of sales. The royalty agreement terminates upon the expiration of the issued patent which is the last to expire.

Effective May 30, 2007, Kodak and eMagin entered into an intellectual property agreement where eMagin has assigned Kodak the rights, title, and interest to a Company owned patent currently not being used by the Company and in consideration, Kodak has waived the royalties due under existing licensing agreements for the first six months of 2007, and reduced the royalty payments by 50% for the second half of 2007 and for the entire calendar year of 2008. In addition, the minimum royalty payment is delayed until December 1st for the years 2007 and 2008.  The Company recorded approximately $868 thousand for the year ended December 31, 2007 as income from the license of intangible assets and included this amount in other income on the Consolidated Statement of Operations.

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For the years ended December 31, 2007, 2006, and 2005, royalty expense of approximately $1.2 million, $515 thousand, and $191 thousand, respectively, is included in cost of goods sold.

Operating leases

The Company leases office facilities and office, lab and factory equipment under operating leases expiring through 2009.   The Company currently has lease commitments for space in Hopewell Junction, New York and Bellevue, Washington.

The Company’s manufacturing facilities are leased from IBM in New York.  eMagin leases approximately 40,000 square feet to house its equipment for OLED microdisplay fabrication and for research and development, an assembly area and administrative offices.  In 2004, eMagin entered into an agreement to extend the term of the lease until 2009.

In July 2005, eMagin signed a sub-lease agreement for approximately 19,000 square feet in Bellevue Washington. The leased space is used as the Company’s corporate headquarters.  This lease will expire in 2009.  The Company’s lease at the Redmond Washington location expired in August 2005 and was not renewed.

The future minimum lease payments through 2009 are as follows (in thousands):

2008	$	1,444
2009		538
	$	1,982

Rent expense for the years ended December 31, 2007, 2006, and 2005 was approximately $1.3 million, $1.3 million, and $1.0 million, respectively. The Redmond lease was paid in common stock valued at $42 thousand for the 2005 and 2004 rent period.

Employee benefit plans

eMagin has a defined contribution plan (the 401(k) Plan) under Section 401(k) of the Internal Revenue Code, which is available to all employees who meet established eligibility requirements. Employee contributions are generally limited to 15% of the employee's compensation. Under the provisions of the 401(k) Plan, eMagin may match a portion of the participating employees' contributions. There was no matching contribution to the 401(k) Plan for the years ended December 31, 2007, 2006 and 2005.

Legal proceedings

A former employee (“plaintiff”) of the Company commenced legal action in the United States District Court for the Southern District of New York, on or about October 12, 2007, alleging that the plaintiff was subject to gender based discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 (Case No. 07-CV-8827 (KMK).  The plaintiff seeks unspecified compensatory damages, punitive damages and attorneys’ fees.  On November 26, 2007, the Company served and filed its Answer, in which it denied the material allegations of the Complaint and asserted numerous affirmative defenses.  This action is presently in the discovery stage.  The Company disputes the allegations of the Complaint and intends on vigorously defending this action.

On December 6, 2005, New York State Urban Development Corporation commenced action against eMagin in the Supreme Court of the State of New York, County of New York against eMagin, asserting breach of contract and seeking to recover a $150,000 grant which was made to eMagin based on goals set forth in the agreement for recruitment of employees.  On July 13, 2006, eMagin agreed to a settlement with the New York State Urban Development Corporation to repay $112,200 of the $150,000 grant. The settlement requires that repayments be made on a monthly basis in the amount of $3,116.67 per month commencing August 1, 2006 and ending on July 1, 2009.

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Note 13 – RELATED PARTY TRANSACTIONS

2007

On July 23, 2007, the Company entered into Agreements with the note holders and issued 8% Amended Senior Secured Convertible Notes (“Amended Notes”) to the note holders in the principal amount equal to the principal amount outstanding as of July 23, 2007. The due date for the principal payment has been extended to December 21, 2008 and the interest rate increased to 8%. The Amended Notes are convertible into 8,407,612 shares of the Company’s common stock. The conversion price for approximately $5,770,000 of principal was revised from $2.60 to $.75 per share and the conversion price of $.35 per share for $250,000 of principal was unchanged. $3,010,000 of the Notes can convert into 3,010 shares of the Company’s newly formed Series A Convertible Preferred Stock (the “Preferred”) at a conversion price of $1,000 per share. The Preferred is convertible into common stock at the same price allowable by the Amended Notes, subject to adjustment as provided for in the Certificate of Designations. The Amended Notes adjust the exercise price from $3.60 to $1.03 per share for 1,553,468 warrants and require the issuance of 3,831,859 warrants exercisable at $1.03 per share pursuant to which the note holders may acquire common stock, until July 21, 2011.

Two employees and one board member participated in the Agreements. Olivier Prache, Senior VP of Display Operations, has an Amended Note of $10 thousand which may be converted into 13,333 shares, received 9,333 warrants which are exercisable at $1.03 per share, and has 5,385 warrants which are exercisable at $3.60 per share.  John Atherly, former CFO as of January 2, 2008, has an Amended Note of $40 thousand which may be converted into 53,333 shares and received 37,333 warrants which are exercisable at $1.03 per share.   Paul Cronson, Board member, through Navacorp III, LLC, has an Amended Note of $200 thousand which may be converted into 266,666 shares and received 186,666 warrants which are exercisable at $1.03 per share.

Stillwater LLC is a beneficial owner of more than 5% of the Company’s common stock.  Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater LLC and its controlling shareholder is the same as Ginola Limited, has an Amended Note of $700 thousand which may be converted into 933,333 shares and received 653,333 warrants exercisable at $1.03 per share.  Ginola Limited has an Amended Note of $800 thousand which may be converted into 1,066,333 shares and received 746,666 warrants exercisable at $1.03 per share.  Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.

Alexandra Global Master Fund Ltd (“Alexandra”) is a beneficial owner of more than 5% of the Company’s common stock.  Alexandra has an Amended Note of $3 million which may be converted into 4 million shares and received 2.8 million warrants exercisable at $1.03 per share.

On March 28, 2007, the Company entered into an amendment to the Stillwater Agreement, originally dated July 21, 2006. On April 9, 2007, the sale of the Stillwater Note and Warrant was complete and the Company issued a 6% Senior Secured Convertible Note in the principal amount of $500,000 and warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.48. On July 23, 2007, Stillwater elected to convert $250,000 of the principal amount of the Note and approximately $2,167 of accrued and unpaid interest. Stillwater received 720,476 shares of Common Stock at the conversion price of $0.35.  The remaining 50% was amended to an 8% Amended Senior Secured Convertible Note on July 23, 2007.

A family member of an outside director of eMagin is the holder of a Series A warrant to purchase an aggregate of 4,286 shares of common stock. As a result of the Stillwater transaction, the exercise price of all Series A warrants was reduced from $5.50 to $0.35 per share.   Family members of an outside director of eMagin are holders of Series F warrants to purchase an aggregate of 10,000 shares of common stock.   As a result of the debt transactions, the exercise price of all Series F warrants was ultimately reduced from $8.60 to $4.09 per share.

2006

On July 21, 2006, the Company entered into several Note Purchase Agreements for the sale of approximately $5.99 million of senior secured debentures (the “Notes”) and warrants to purchase approximately 1,800,000 shares of common stock, par value $.001 per share.  The investors purchased $5.99 million principal amount of Notes with conversion prices of $2.60 per share that may convert into approximately 2.3 million shares of common stock and 5 year warrants exercisable at $3.60 per share into approximately 1,600,000 million shares of common stock.  If the Notes are not converted, 50% of the principal amount will be due on July 23, 2007 and the remaining 50% will be due on January 21, 2008.  Commencing September 1, 2006, 6% interest was payable in quarterly installments on outstanding notes.  The Notes were amended on July 23, 2007.

In the Note Purchase transaction, two employees and a board member participated.  Olivier Prache, Senior VP of Display Operations, purchased a $30 thousand promissory note which may be converted into 11,539 shares and received 8,077 warrants which are exercisable at $3.60 per share.  Mr. Prache converted $20 thousand of his promissory note and received 7,693 shares.   John Atherly, CFO, purchased a $40 thousand promissory note which may be converted into 15,385 shares and received 10,770 warrants exercisable at $3.60 per share.  Paul Cronson, Board member, through Navacorp III, LLC purchased a $200 thousand promissory note which may be converted into 76,923 shares and received 53,847 warrants exercisable at $3.60 per share.  The Notes were amended on July 23, 2007.

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Stillwater LLC is a beneficial owner of more than 5% of the Company’s common stock.  Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater LLC and its controlling shareholder is the same as Ginola Limited, purchased a $700 thousand promissory note which may be converted into 269,231 shares and received 188,462 warrants exercisable at $3.60 per share.  Ginola Limited purchased an $800 thousand promissory note which may be converted into 307,693 shares and received 215,385 warrants exercisable at $3.60 per share.  Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.  The Notes were amended on July 23, 2007.

A family member of an outside director of eMagin is the holder of a Series A warrant to purchase an aggregate of 4,286 shares of common stock. As a result of the Note Purchase transaction, the exercise price of all Series A warrants was reduced from $5.50 to $2.60 per share.   Family members of an outside director of eMagin are holders of Series F warrants to purchase an aggregate of 10,000 shares of common stock.   As a result of the Note Purchase transaction, the exercise price of all Series F warrants was reduced from $10.90 to $8.60 per share.

eMagin has entered into a financial advisory agreement with Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder and shareholder of Larkspur Capital Corporation. The Company has agreed to pay a minimum fee of $500 thousand to Larkspur Capital Corporation in the event certain transactions occur, i.e. sale of the Company’s assets or change of control.

2005

On October 20, 2005, the Company entered into a Securities Purchase Agreement to sell to certain qualified institutional buyers and accredited investors an aggregate of 1,661,906 shares of eMagin’s common stock, par value $0.001 per share (the “Shares”), and warrants to purchase an additional 997,143 shares of common stock, for an aggregate purchase price of approximately $9.1 million. The purchase price of the common stock and corresponding warrant was $5.50 per share.

The warrants are exercisable at a price of $10.00 per share and expire on October 20, 2010. Of the 997,143 warrants, 664,762 of the warrants are exercisable on or after May 20, 2006. The remaining 332,380 are exercisable after March 31, 2007.

Stillwater LLC is a beneficial owner of more than 5% of the Company’s common stock.  Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater LLC and its controlling shareholder is the same as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing $500 thousand.  Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.

Chelsea Trust Company, as trustee of a trust with the same directors and/or controlling shareholders as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing $250 thousand.  Ginola Limited disclaims beneficial ownership of shares owned by Chelsea Trust Company.

In connection with the issuance of the Shares and the warrants pursuant to the Securities Purchase Agreement, the Company was required to lower the exercise prices of existing Series A and F warrants from $10.50 and $12.10 per share, respectively, to $5.50 and $10.90 per share, respectively, pursuant to the anti-dilution provisions of the Series A and F warrants.

A family member of an outside director of eMagin is the holder of a Series A warrant to purchase an aggregate of 4,286 shares of common stock. Accordingly, the exercise price of all Series A warrants was reduced from $10.50 to $5.50 per share.

Note 14 – SEPARATION AND EMPLOYMENT AGREEMENTS

Executive Separation and Consulting Agreement

On January 11, 2007, Gary Jones resigned as the President, Chief Executive Officer, and as a Director of the Company.  Mr. Jones and the Company entered into an Executive Separation and Consulting Agreement (“the Agreement”).  Under the Agreement, the Company made a payment to Mr. Jones in an amount equal to: all accrued salary as of the date of the Agreement plus an additional 30 days of salary (approximately $47 thousand); 360 hours of unused vacation (approximately $55 thousand); advance for legal and accounting fees associated with 2004 stock options ($30 thousand); and an advance for future travel expenditures ($5 thousand). Mr. Jones also received 500,000 shares of registered common stock of the Company valued at $430 thousand. In his consulting relationship, Mr. Jones will be paid $460 thousand upon the consummation of a strategic transaction.   The Company will provide up to $7.5 thousand for reasonable moving expenses of personal property from the New York office.  In addition, the Company will pay up to an additional $30 thousand to Mr. Jones related to personal legal fees.

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Compensation Agreement

On January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Office, President, and a Director of the Company.  On February 12, 2007, the Company entered into a Compensation Agreement (“the Agreement”) with Dr. Park.  Under the Agreement, the Company paid Dr. Park an annual base salary equal to $300 thousand plus a quarterly increase in his base salary in the amount of $12.5 thousand per fiscal quarter through December 31, 2007.  The Company agreed to issue Dr. Park an aggregate of 250,000 restricted shares of common stock within 10 business days of the completion of a change of control of the Company.  In addition, if a change of control transaction is completed and Dr. Park is not offered a senior executive position in the new organization, the Company has agreed to pay Dr. Park three month’s salary.  K.C. Park resigned effective January 31, 2008.  Please see Note 17 - Subsequent Events.

Effective January 30, 2008, the Company entered into an amended employment agreement with Susan K. Jones, its Chief Marketing and Strategy Officer.  The amended agreement provides for an increase in compensation, extends the term of the agreement to January 31, 2010, changes certain incentive award payment requirements, clarifies the basis for incentive award determination, and extends the change-of-control/material change/termination-without-cause compensation payout periods. Please see Note 17 - Subsequent Events.

Note 15 - CONCENTRATIONS

The Company had no customers that accounted for more than 10% of its total revenues in 2007.  In 2006, the Company had one customer that accounted for 13% of its total revenues.  In 2005, the Company had no customers that accounted for more than 10% of its total revenues.

For the year ended December 31, 2007, approximately 51% of the Company’s net revenues were made to customers in the United States and approximately 49% of the Company’s net revenues were made to international customers.  For the year ended December 31, 2006, approximately 59% of the Company's net revenues were made to customers in the United States and approximately 41% of the Company's net revenues were made to international customers.  For the year ended December 31, 2005, approximately 49% of the Company’s net revenues were made to customers in the United States and approximately 51% of the Company’s net revenues were made to international customers.

There were 5 customers which comprised 54% of the outstanding accounts receivable at December 31, 2007.  At December 31, 2006, there were 5 customers which comprised 69% of the outstanding accounts receivable.

The Company purchases principally all of its silicon wafers from a single supplier located in Taiwan.

Note 16 – AMEX DELISTING

On October 9, 2006, the Company received notice from the American Stock Exchange (the “AMEX”) Listing Qualifications Department stating that the Company does not meet certain continued listing standards as set forth in Part 10 of the AMEX Company Guide (the “Company Guide”). Specifically, pursuant to a review by the AMEX of the Company’s 10-Q for the three and six months ended June 30, 2006, the AMEX has determined that the Company is not in compliance with Sections 1003(a)(ii) and 1003(a)(iii) of the Company Guide, respectively, which state, in relevant part, that the AMEX will normally consider suspending dealings in, or removing from the list, securities of a company that (a) has stockholders' equity of less than $4.0 million if such company has sustained losses from continuing operations and/or net losses in three of its four most recent fiscal years; or (b) has stockholders' equity of less than $6.0 million if such company has sustained losses from continuing operations and/or net losses in its five most recent fiscal years, respectively.

On November 6, 2006, the Company submitted a plan advising the AMEX of actions that it would take, which may bring it into compliance with Sections 1003 (a)(ii) and 1003(a)(iii) of the Company Guide within a maximum of 18 months of receipt of the notice letter. On January 5, 2007, the Company received notice from the staff of the AMEX indicating that it intended to strike the Company’s common stock from listing on AMEX by filing a delisting application with the Securities and Exchange Commission as it had determined that the Company has failed to comply with the continued listing standards.  The Company requested a verbal hearing which was held on February 27, 2007.

On March 1, 2007, the Company received notice from the AMEX indicating that the AMEX would initiate the delisting process with respect to the Company’s common stock.  On March 12, 2007, in accordance with Part 12 of the Company Guide, the Company was suspended from trading on the AMEX.   The Company’s common stock is trading on the Over-the-Counter Bulletin Board under the symbol, EMAN.

The delisting from the AMEX triggered a compliance condition on the notes payable.  As a result the Company was required to pay the note holders monthly interest at 1% rather than .5% on the outstanding principal of the notes payable.  The Company received a waiver from the note holders that allowed the Company to accrue the interest and delay the interest payment until the earliest of the Company (i) completing $2 million of debt or equity financing or (ii) the occurrence of a Repurchase Event per the note.  On July 23, 2007, the Company entered into Amended Agreements with the note holders where the 1% monthly interest will no longer accrue and the accrued interest was forgiven.

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Note 17 – SUBSEQUENT EVENTS

Effective January 2, 2008, John Atherly resigned as Chief Financial Officer.  There was no separation agreement executed between Mr. Atherly and the Company.  Michael D. Fowler became the Company’s Interim Chief Financial Officer effective December 27, 2007.

Effective January 31, 2008, K.C. Park resigned as Interim Chief Executive Officer, President and Director.  Dr. Park and the Company entered into a Separation Agreement and General Release (“Separation Agreement”).  The Company will pay Dr. Park severance of $60 thousand to be payable over a three month period.  Dr. Park and the Company also entered into a Consulting Agreement (“Agreement”) for a term beginning February 1 and ending on August 1, 2008.  He will be paid a sum of $75 thousand, payable in monthly installments of $10 thousand for the first three months of the term and $15 thousand for the remaining three months of the term.  In addition to the compensation, Dr. Park will be entitled to receive non-qualified stock options to acquire 18,750 shares of common stock on each three month anniversary of the Agreement at the fair market value on the date of the grant and will be fully vested and exercisable on the date of the grant.  If the Agreement is not renewed at the end of the term, he will be entitled to an additional grant of 18,750 shares of common stock with the same terms.  In addition, on May 1, 2008, Dr. Park will be entitled to receive non-qualified stock options to acquire 51,703 shares of common stock at the fair market value and will be fully vested.

Effective January 30, 2008, the Company entered into an amended employment agreement with Susan K. Jones, its Chief Marketing and Strategy Officer.  The amended agreement provides for an increase in compensation, extends the term of the agreement to January 31, 2010, changes certain incentive award payment requirements, clarifies the basis for incentive award determination, and extends the change-of-control/material change/termination-without-cause compensation payout periods.

Michael D. Fowler, the Company’s Interim Chief Financial Officer, has indicated his intention to resign his position with the Company following the filing of the Annual Report on Form 10-K for December 31, 2007 to pursue other interests.

Line of Credit

On January 30, 2008, the Company amended and restated its Loan and Security Agreement (“Amended Loan Agreement”) with Moriah.  The Amended Loan Agreement’s borrowing base calculation was modified to include 70% of eligible foreign accounts.  The Loan conversion agreement was terminated. The amendment eliminated optional conversion of principal up to $2.0 million into common stock at $1.50, in lieu of issuance of a Warrant to purchase 750,000 shares of its common stock at a price of $1.50 per share with an expiration date of January 29, 2013.

The Amended Loan Agreement has specific terms to which the Company must comply including (a) maintaining a lockbox account into which payments from related accounts receivable must be deposited, (b) periodic certifications as to borrowing base amounts equaling or exceeding net balances outstanding under the Line of Credit, and (c) a requirement that a registration statement with respect to shares held or to be issued to the lender be filed within thirty days of January 30, 2008.  A delay in establishing the required lockbox account created a technical default under the Line of Credit agreement.  Similarly, the production and subsequent discovery of defective displays resulted in an inadvertent overstatement of inventory during December, January and early February that created a technical default under the agreement.  Finally, the Company was not able to complete the registration of shares within the thirty day timeframe mandated in the amended agreement.  On March 25, 2008 the Company received a waiver from the lender (a) waiving compliance with the lockbox account requirement through March 14, 2008, (b) waiving compliance with the borrowing base requirement in so far as it related exclusively to the defective displays inadvertently included in inventory, and (c) extending the period for filing a registration statement for certain shares held or to be issued to the lender until April 29, 2008.

Effective March 25, 2008, the Company amended the Warrant Issuance Agreement (“Amended Warrant Agreement”) with Moriah. In connection with such amendment, the Company issued a Warrant to purchase an additional 250,000 shares of its common stock at a price of $1.50 expiring March 25, 2013.

Incentive Compensation Plan

On February 20, 2008, the Board of Directors authorized the establishment of the 20087 Incentive Stock Plan with 2,000,000 options available for grant.  The 2008 Incentive Stock Plan is intended to provide long-term performance incentives to directors, executives, selected employees and consultants and reward them for making major contributions to the success and well being of the Company.

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Private Placement

On April 2, 2008, the Company completed a private placement of its common stock with several institutional investors for gross proceeds of $1.65 million.  The transaction involved the sale of 1,586,539 shares of common stock at $1.04 per share, or the 5-day average closing price of the Company’s common stock on the trading days immediately preceding the closing date.  The Company also issued to the investors 793,273 warrants to buy our common stock at a price of $1.30 per share.  Pursuant to the transaction, the Company is obligated to file a registration statement for the shares issued as well as shares underlying the warrants by May 17, 2008.

Note 18 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial information for 2007 and 2006 are as follows (in thousands except per share data):

	Quarters Ended
	March 31, 2007			June 30, 2007			September 30, 2007			December 31, 2007
Revenues	$	3,609		$	4,232		$	5,071		$	4,642
Gross margin	$	494		$	1,286		$	2,012		$	1,134
Net loss	$	(2,937	)	$	(1,728	)	$	(12,651	)	$	(1,172	)
Net loss per share – basic and diluted	$	(0.27	)	$	(0.15	)	$	(1.06	)	$	(0.10	)
Weighted average number of shares outstanding – basic and diluted		10,792			11,176			11,935			12,249
	Quarters Ended
	March 31, 2006			June 30, 2006			September 30, 2006			December 31, 2006
Revenues	$	1,641		$	1,674		$	2,292		$	2,562
Gross margin (loss)	$	(1,388	)	$	(1,291	)	$	(648	)	$	137
Net loss	$	(5,160	)	$	(4,838	)	$	(3,769	)	$	(1,499	)
Net loss per share – basic and diluted	$	(0.52	)	$	(0.48	)	$	(0.37	)	$	(0.15	)
Weighted average number of shares outstanding – basic and diluted		10,004			10,011			10,077			10,196

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eMagin Corporation

June 30, 2008

Table of Contents

		Page
PART I   FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007	93
	Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2008 and 2007 (unaudited)	94
	Condensed Consolidated Statements of Changes in Capital Deficit for the Six Months ended June 30, 2008 (unaudited)	95
	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007 (unaudited)	96
	Notes to Condensed Consolidated Financial Statements (unaudited)	97

92

eMAGIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30,
	2008 (unaudited)			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	1,038		$	713
Investments – held to maturity		94			94
Accounts receivable, net		3,601			2,383
Inventory		1,726			1,815
Prepaid expenses and other current assets		750			850
Total current assets		7,209			5,855
Equipment, furniture and leasehold improvements, net		401			292
Intangible assets, net		49			51
Other assets		232			232
Deferred financing costs, net		135			218
Total assets	$	8,026		$	6,648
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable	$	1,135		$	620
Accrued compensation		962			891
Other accrued expenses		704			729
Advance payments		13			35
Deferred revenue		80			179
Current portion of  debt		8,148			7,089
Other current liabilities		596			1,020
Total current liabilities		11,638			10,563
Long-term debt		41			60
Total liabilities		11,679			10,623
Commitments and contingencies
Capital deficit:
Preferred stock, $.001 par value: authorized 10,000,000 shares; no shares issued and outstanding		—			—
Series A Senior Secured Convertible Preferred stock, stated value $1,000 per share, $.001 par value:  3,198 shares designated and none issued		—			—
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 14,389,439 shares as of June 30, 2008 and 12,620,900 shares as of December 31, 2007		14			12
Additional paid-in capital		198,442			195,326
Accumulated deficit		(202,109	)		(199,313	)
Total capital deficit		( 3,653	)		( 3,975	)
Total liabilities and capital deficit	$	8,026		$	6,648

See notes to Condensed Consolidated Financial Statements.

93

eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue:
Product revenue	$	4,496		$	4,144		$	6,958		$	7,667
Contract revenue		1,123			88			1,326			174
Total revenue, net		5,619			4,232			8,284			7,841
Cost of goods sold		2,996			2,946			5,309			6,061
Gross profit		2,623			1,286			2,975			1,780
Operating expenses:
Research and development		634			887			1,308			1,740
Selling, general and administrative		1,697			1,543			3,504			3,764
Total operating expenses		2,331			2,430			4,812			5,504
Income (loss) from operations		292			(1,144	)		(1,837	)		(3,724	)
Other income (expense):
Interest expense		(537	)		(1,333	)		(1,168	)		(2,174	)
Gain on warrant derivative liability		—			182			—			643
Other income, net		123			567			209			590
Total other expense		(414	)		(584	)		(959	)		(941	)
Net loss	$	(122	)	$	(1,728	)	$	(2,796	)	$	(4,665	)
Loss per share, basic and diluted	$	(0.01	)	$	(0.15	)	$	(0.21	)	$	(0.42	)
Weighted average number of shares outstanding:
Basic and diluted		14,320,570			11,175,888			13,470,735			10,983,981

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL DEFICIT

(In thousands)

					Additional					Total
	Common Stock				Paid-In		Accumulated			Shareholders’
	Shares		Amount		Capital		Deficit			Deficit
Balance, December 31, 2007		12,621	$	12	$	195,326	$	(199,313	)	$	( 3,975	)
Sale of common stock, net of issuance costs		1,587		2		1,578		—			1,580
Issuance of common stock for services		181		—		202		—			202
Stock-based compensation		—		—		607		—			607
Fair value of warrants issued		—		—		729		—			729
Net loss		—		—		—		(2,796	)		(2,796	)
Balance, June 30, 2008 (unaudited)		14,389	$	14	$	198,442	$	(202,109	)	$	(3,653	)

See notes to Condensed Consolidated Financial Statements.

95

eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six months Ended
	June 30,
	2008			2007
	(unaudited)
Cash flows from operating activities:
Net loss	$	(2,796	)	$	(4,665	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		129			227
Amortization of deferred financing and waiver fees		821			265
Increase in (reduction of) provision for sales returns and doubtful accounts		146			(35	)
Stock-based compensation		607			899
Amortization of common stock issued for services		88			677
Amortization of discount on notes payable		25			1,452
Gain on warrant derivative liability		—			(643	)
Changes in operating assets and liabilities:
Accounts receivable		(1,364	)		(329	)
Inventory		89			675
Prepaid expenses and other current assets		214			55
Deferred revenue		(99	)		(45	)
Accounts payable, accrued compensation, other accrued expenses, and advance payments		539			323
Other current liabilities		(424	)		(7	)
Net cash used in operating activities		(2,025	)		(1,151	)
Cash flows from investing activities:
Purchase of equipment		(236	)		—
Purchase of investments – held to maturity		—			(4	)
Net cash used in investing activities		(236	)		(4	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs		1,580			—
Proceeds from exercise of warrants		—			3
Proceeds from debt		1,700			500
Payments related to deferred financing costs		(9	)		(40	)
Payments of debt and capital leases		(685	)		(33	)
Net cash provided by financing activities		2,586			430
Net increase (decrease) in cash and cash equivalents		325			(725	)
Cash and cash equivalents beginning of period		713			1,415
Cash and cash equivalents end of period	$	1,038		$	690
Cash paid for interest	$	314		$	180
Cash paid for taxes	$	21		$	46
During the six months ended June 30, 2008, the Company:

· Entered into amended Loan and Security Agreement and issued warrants that are exercisable at $1.50 per share into 1.0 million shares of common stock valued at approximately $0.7 million.

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

Note 1:  Description of the Business and Summary of Significant Accounting Policies

The Business

eMagin Corporation (the “Company”) designs, develops, manufactures, and markets virtual imaging products for consumer, commercial, industrial and military applications.  The Company’s products are sold mainly in North America, Asia, and Europe.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation.  Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission.  The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  The results of operations for the period ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.

The unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has had recurring losses from operations which it believes will continue through the foreseeable future.  The Company’s cash requirements over the next twelve months are greater than the Company’s current cash, cash equivalents, and investments at June 30, 2008.  In addition, the Company’s line of credit was temporarily extended (see Notes 8 and 15). The Company has working capital and capital deficits as of June 30, 2008. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern without continuing to obtain additional funding.  The Company does not have commitments for such financing and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. If the Company is unable to obtain sufficient funds during the next twelve months, the Company will further reduce the size of its organization and/or curtail operations which will have a material adverse impact on the Company’s business prospects. The Company is reviewing its cost structures for cost efficiencies and is taking measures to reduce costs. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

In accordance with accounting principles generally accepted in the United States of America, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized when products are shipped to customers, net of allowances for anticipated returns.  The Company’s revenue-earning activities generally involve delivering products. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured.  

The Company also earns revenues from certain R&D activities under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contracts.  Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. 

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Note 2:  Recently Issued Accounting Pronouncements

 In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB issued FASB Staff Position No. FSP 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value on a recurring basis. The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities which it will defer the adoption until January 1, 2009. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. The Company has adopted SFAS 159 and has elected not to measure any additional financial instruments and other items at fair value and therefore the adoption of SFAS 159 did not have a material impact on the Company’s condensed consolidated results of operations, financial condition or cash flows.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company is currently evaluating the disclosure implications of this statement.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement shall be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of this pronouncement will have a material impact on the Company's financial statements.

Note 3:  Receivables

The majority of the Company’s commercial accounts receivable are due from Original Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are payable in U.S. dollars, are due within 30-90 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. Any account outstanding longer than the contractual payment terms is considered past due.

The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time the trade accounts receivable are past due, eMagin's previous loss history, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole.   The Company will record a specific reserve for individual accounts when the Company becomes aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position.  If circumstances related to customers change, the Company would further adjust estimates of the recoverability of receivables.

98

Receivables consisted of the following (in thousands):

	June 30,  2008 (unaudited)			December 31, 2007
Accounts receivable	$	4,105		$	2,741
Less allowance for doubtful accounts		(504	)		(358	)
Net receivables	$	3,601		$	2,383

Note 4:  Research and Development Costs

Research and development costs are expensed as incurred.

Note 5:  Net Loss per Common Share

In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS") was computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution.  Net loss per common share assuming dilution ("diluted EPS") was computed by reflecting potential dilution from the exercise of stock options and warrants.  As of June 30, 2008 and 2007, there were stock options, warrants and convertible notes outstanding to acquire 11,508,295 and 5,297,927 shares of our common stock, respectively.  These shares were excluded from the computation of diluted loss per share because their effect would be antidilutive.

Note 6:  Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the first-in first-out method.  The Company reviews the value of its inventory and reduces the inventory value to its net realizable value based upon current market prices and contracts for future sales. The components of inventories are as follows (in thousands):

	June 30,  2008  (unaudited)		December 31, 2007
Raw materials	$	945	$	1,069
Work in process		260		370
Finished goods		521		376
Total inventory	$	1,726	$	1,815

Note 7:  Prepaid Expenses and Other Current Assets:

Prepaid expenses and other current assets consist of the following (in thousands):

	June 30,  2008  (unaudited)		December 31, 2007
Vendor prepayments	$	339	$	537
Other prepaid expenses *		408		310
Other assets		3		3
Total prepaid expenses and other current assets	$	750	$	850

*No individual amounts greater than 5% of current assets.

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Note 8:  Debt

Debt is as follows (in thousands):

	June 30,
	2008 (unaudited)		December 31, 2007
Current portion of long-term debt:
Other debt	$	38	$	44
Line of credit		2,148		1,108
8% Senior Secured Convertible Notes		5,962		5,962
Less:  Unamortized discount on notes payable		—		(25	)
Current portion of long-term debt, net		8,148		7,089
Long-term debt:
Other debt		41		60
Long-term debt, net		41		60
Total debt, net	$	8,189	$	7,149

On August 7, 2007, the Company enteredinto a loan agreement with Moriah Capital, L.P. (“Moriah)and established a revolving line of credit (the “Loan”) of $2.5 million.  The Company is permitted to borrow an amount not to exceed 90% of its domestic eligible accounts receivable and 50% of its eligible inventory capped at $600 thousand.  As part of the transaction, the Company issued 162,500 shares of unregistered common stock valued at $195 thousand and paid a servicing fee of $82,500 to Moriah which are amortized to interest expense over the life of the agreement. In conjunction with entering into this loan and issuing unregistered common stock, the Company granted Moriah registration rights.  The Loan can be converted into shares of the Company’s common stock pursuant to the terms of the Loan Conversion agreement.  The Loan matures on August 8, 2008 with an option to extend it an additional year if the Company meets certain requirements.  On August 8, 2008, Moriah granted to the Company an extension of the Loan with the same terms for 8 days.

On January 30, 2008, the Company amended and restated its Loan and Security Agreement (“Amended Loan Agreement”) with Moriah.  The Amended Loan Agreement’s borrowing base calculation was modified to include 70% of eligible foreign accounts.  The Amended Loan Agreement eliminated the optional conversion of principal up to $2.0 million into common stock at $1.50.  In connection with the amendment, the Company issued a Warrant to purchase 750,000 shares of its common stock at a price of $1.50 per share with an expiration date of January 29, 2013.

The Amended Loan Agreement has specific terms to which the Company must comply including (a) maintaining a lockbox account into which payments from related accounts receivable must be deposited, (b) periodic certifications as to borrowing base amounts equaling or exceeding net balances outstanding under the Line of Credit, and (c) a requirement that a registration statement with respect to shares held or to be issued to the lender be filed within thirty days of January 30, 2008.  A delay in establishing the required lockbox account created a technical default under the Line of Credit agreement.  Similarly, the production and subsequent discovery of defective displays resulted in an inadvertent overstatement of inventory during December, January and early February that created a technical default under the agreement.  Finally, the Company was not able to complete the registration of shares within the thirty day timeframe mandated in the amended agreement.  On March 25, 2008 the Company received a waiver from the lender (a) waiving compliance with the lockbox account requirement through March 14, 2008, (b) waiving compliance with the borrowing base requirement in so far as it related exclusively to the defective displays inadvertently included in inventory, and (c) extending the period for filing a registration statement for certain shares held or to be issued to the lender until April 29, 2008.  The Company established a lockbox account by March 14, 2008 and filed a registration statement with the SEC on April 29, 2008.

Effective March 25, 2008, the Company amended the Warrant Issuance Agreement (“Amended Warrant Agreement”) with Moriah. In connection with such amendment, the Company issued a Warrant to purchase an additional 250,000 shares of its common stock at a price of $1.50 expiring March 25, 2013.

The Company determined the fair value of the 1,000,000 warrants to be $729 thousand which was recorded as deferred debt issuance and waiver fees of which $168 thousand was expensed immediately and $561 thousand will be amortized over the life of the loan.  The following assumptions were used to determine the fair value of the warrants:  dividend yield of 0%; risk free interest rates of 2.61 % and 2.96%; expected volatility of 90.9% and 92.3%; and expected contractual term of 5 years.  The deferred debt issuance costs are being amortized to interest expense over the life of the loan.

100

In the three and six months ended June 30, 2008, approximately $373 thousand and $821 thousand, respectively, of deferred debt issuance and waiver fees were amortized to interest expense.  For the three and six months ended June 30, 2008, interest expense includes interest paid or accrued on outstanding debt of approximately $164 thousand and $323 thousand, respectively.

The 8% Senior Secured Convertible Notes can also convert into the Company’s Series A convertible Preferred Stock (the “Preferred Stock”).  See Note 10:  Shareholders’ Equity for additional information.

Note 9:  Stock-based Compensation

The Company accounts for the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)). Under SFAS 123(R), the fair value of stock awards is estimated at the date of grant using the Black-Scholes option valuation model.  Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three and six month periods ended June 30, 2008 and 2007 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of revenue	$	23	$	61		75	$	130
Research and development		52		97		134		200
Selling, general and administrative		176		227		398		569
Total stock compensation expense	$	251	$	385	$	607	$	899

At June 30, 2008, total unrecognized non-cash compensation cost related to stock options was approximately $964 thousand, net of forfeitures.  Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 1.7 years.

The Company recognizes compensation expense for options granted to non-employees in accordance with the provisions of Emerging Issues Task Force (“EITF”) consensus Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” which requires using a fair value options pricing model and re-measuring such stock options to the current fair market value at each reporting period as the underlying options vest and services are rendered.

There were approximately 588,000 and 748,000 options granted to employees and directors during the three and six months ended June 30, 2008. The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:

	For the Six Months Ended June 30, 2008
Dividend yield		0	%
Risk free interest rates	2.46 to 3.28%
Expected  volatility	89.6 to 92.3%
Expected term (in years)		5

There were no stock options granted during the three and six month period ended June 30, 2007.  We have not declared or paid any dividends and do not currently expect to do so in the near future.  The risk-free interest rate used in the Black-Scholes option pricing model is based on the implied yield currently available on U.S. Treasury securities with an equivalent term.   Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the most recent five year period.  The expected term of options represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

On February 20, 2008, the Board of Directors authorized the establishment of the 2008 Incentive Stock Plan with 2,000,000 options available for grant.  The 2008 Incentive Stock Plan is intended to provide long-term performance incentives to directors, executives, selected employees and consultants and reward them for making major contributions to the success and well being of the Company.  No options were granted from this plan as of June 30, 2008.

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A summary of the Company’s stock option activity for the six months ended June 30, 2008 is presented in the following tables:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2008		894,323		$	2.62
Options granted		748,153			0.94
Options exercised		—
Options forfeited		(167,953	)		2.60
Options cancelled		—
Outstanding at June 30, 2008		1,474,523		$	1.77		6.50	$	15,000
Vested or expected to vest at June 30, 2008 (1)		1,434,149		$	1.68		6.50	$	14,200
Exercisable at June 30, 2008		969,855		$	1.96		6.60	$	5,000

	Options Outstanding			Options Exercisable
	Number Outstanding	Weighted Average Remaining Contractual Life (In Years)	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercisable Price
$0.81 - $1.51	976,730	8.04	$  1.05	592,397	$  1.19
$2.60 - $2.70	456,593	3.49	2.61	345,358	2.60
$3.50 - $5.80	12,000	4.18	5.61	12,000	5.61
$6.60 - $22.50	29,200	3.07	10.91	20,100	11.23
	1,474,523	6.50	$  1.77	969,855	$  1.96

(1)  The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock.  There were 500,000 options in-the-money at June 30, 2008.   The Company’s closing stock price was $0.84 as of June 30, 2008. The Company issues new shares of common stock upon exercise of stock options.

Note 10:  Shareholders’ Equity

Preferred Stock

The Company has designated but not issued 3,198 shares of the Company’s Preferred Stock at a stated value of $1,000 per share.  The Preferred Stock is entitled to cumulative dividends which accrue at a rate of 8% per annum, payable on December 21, 2008.  Each share of the Preferred Stock has voting rights equal to (1)  in any case in which the Preferred Stock votes together with the Company's Common Stock or any other class or series of stock of the Company, the number of shares of Common Stock issuable upon conversion of such shares of Preferred Stock at such time (determined without regard to the shares of Common Stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any case not covered by the immediately preceding clause one vote per share of Preferred Stock.  The Preferred Stock, if issued, has a mandatory redemption at December 21, 2008.

Common Stock

On January 30, 2008, the Company amended and restated its Loan and Security Agreement (“Amended Loan Agreement”) with Moriah.   As part of the amended agreement, the Loan Conversion agreement was terminated which eliminated the optional conversion of principal up to $2.0 million into common stock at $1.50.  In connection with the Amended Loan agreement, the Company issued a Warrant to purchase 750,000 shares of its common stock at a price of $1.50 per share with an expiration date of January 29, 2013.

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Effective March 25, 2008, the Company amended the Warrant Issuance Agreement (“Amended Warrant Agreement”) with Moriah. In connection with such amendment, the Company issued a Warrant to purchase an additional 250,000 shares of its common stock at a price of $1.50 expiring March 25, 2013.

On April 2, 2008, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”), pursuant to which the Company sold and issued 1,586,539 shares of common stock, par value of $0.001 per share, at a price of $1.04 per share and warrants to purchase an additional 793,273 shares of common stock for an aggregate purchase price of approximately $1.65 million.  The net proceeds received after expenses were approximately $1.58 million.  The warrants are exercisable at a price of $1.30 per share and expire on April 2, 2013.

As a result of the Purchase Agreement, the outstanding 650,000 Series F Common Stock Purchase Warrants that were issued to participants of the Securities Purchase Agreement dated October 25, 2004, were repriced from $4.09 to $3.45.

A registration rights agreement was entered into on April 2, 2008 in connection with the private placement which required the Company to file a registration statement for the resale of the common stock and the shares underlying the warrants within 45 days of the signing of the agreement.  The Company must use its best efforts to have the registration statement declared effective within 90 days of the signing of the agreement or if a SEC review, 120 days.  In addition, the Company must use its best efforts to maintain the effectiveness of the registration statement until all common stock have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act.

If the registration statement is not effective within the grace periods (“Event Date”) or the Company cannot maintain its effectiveness (“Event Date”), the Company must pay partial liquidated damages (“damages”) in cash to each investor equal to 2% of the aggregate purchase price paid by each investor under the Purchase Agreement on the Event Date and each monthly anniversary of the Event Date (or on a pro-rata basis for any portion of a month) until the registration statement is effective.  The Company is not liable for any damages with respect to the warrants or warrant shares.  The maximum damages payable to each investor is 36% of the aggregate purchase price.  If the Company fails to pay the damages to the investors within 7 days after the date payable, the Company must pay interest at a rate of 15% per annum to each investor which accrues daily from the date payable until damages are paid in full.

The Company filed the registration statement within the 45 day period however the Company was notified that the registration statement was under review by the SEC.  The Company failed to file the amended registration statement by August 2, 2008 which was the 120th day from the signing of the purchase agreement and therefore the registration statement is not effective.

The Company accounted for the registration payment arrangement under the guidance of EITF 00-19-2, “Accounting for Registration Payment Arrangements”, (“EITF 00-19-2”) which requires the contingent obligation to make future payments be recognized and measured in accordance with FASB Statement No. 5, “Accounting for Contingencies”, (“Statement 5”) and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”, (“Interpretation 14”). The Company estimated $399 thousand to be the maximum potential damages that the Company may be required to pay the investors if the registration statement is not effective within three years of the signing of the agreement. The Company estimated $66 thousand to be a reasonable estimate of the potential damages that may be due to the investors.  As a result, the Company recorded a liability of $66 thousand in the condensed consolidated balance sheets and the associated expense in other income in the condensed consolidated statements of operations for the three and six months ended June 30, 2008.

For the three and six months ended June 30, 2008 and 2007, there were no stock options exercised.  For the three and six months ended June 30, 2008, there were no warrants exercised and for the three and six months ended June 30, 2007, the Company received approximately $3 thousand in proceeds for warrants exercised.

For the three and six months ended June 30, 2008, the Company issued approximately 182,000 shares of common stock for payment of approximately $202 thousand for services rendered or to be rendered in the future.  For the three and six months ended June 30, 2007, the Company issued approximately 206,000 and 914,000 shares of common stock, respectively, for payment of approximately $138 thousand and $758 thousand, respectively, for services rendered and to be rendered in the future.  As such, the Company recorded the fair value of the services to be rendered in prepaid expenses and rendered in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2008 and 2007, respectively.

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Note 11:  Income Taxes

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, we did not recognize any adjustment in the liability for unrecognized income tax benefits. The tax years 2004-2007 remain open to examination by the major taxing jurisdictions to which we are subject. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the financial statements as general and administrative expense.  The Company has not provided for income taxes in the three and six months ended June 30, 2008 as the Company expects its effective interest rate to be zero due to continuing losses.

Note 12:  Commitments and Contingencies

Royalty Payments

The Company, in accordance with a royalty agreement with Eastman Kodak, must pay to Eastman Kodak a certain percentage of net sales with respect to certain products, which percentages are defined in the agreement. The percentages are on a sliding scale depending on the amount of sales generated. Any minimum royalties paid will be credited against the amounts due based on the percentage of sales. The royalty agreement terminates upon the expiration of the issued patent which is the last to expire.

Effective May 30, 2007, Kodak and eMagin entered into an intellectual property agreement where eMagin has assigned Kodak the rights, title, and interest to a Company owned patent currently not being used by the Company and in consideration, Kodak waived the royalties due under the existing licensing agreements for the first six months of 2007, and reduced the royalty payments by 50% for the second half of 2007 and for the entire calendar year of 2008. In addition, the minimum royalty payment is delayed until December 1st for the years 2007 and 2008.  The Company recorded approximately $170 thousand and $254 thousand for the three and six months ended June 30, 2008, respectively, and $560 thousand for the three and six months ended June 30, 2007 as income from the license of intangible assets and included this amount as other income in the condensed consolidated statements of operations.  The income from the license of intangible assets is equivalent to the royalty payments that have been waived by Kodak.

Royalty expense (including amounts imputed – see above) was approximately $341 thousand and $509 thousand, respectively, for the three and six months ended June 30, 2008 and approximately $304 thousand and $560 thousand, respectively, for the three and six months ended June 30, 2007.

Contractual Obligations

The Company leases office facilities and office, lab and factory equipment under operating leases expiring through 2009.  Certain leases provide for payments of monthly operating expenses. The Company currently has lease commitments for space in Hopewell Junction, New York and Bellevue, Washington.  Rent expense was approximately $332 thousand and $664 thousand, respectively, for the three and six months ended June 30, 2008 and 2007.

Note 13:  Legal Proceedings

A former employee (“plaintiff”) of the Company commenced legal action in the United States District Court for the Southern District of New York, on or about October 12, 2007, alleging that the plaintiff was subject to gender based discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 ( Case No. 07-CV-8827 (KMK)). The plaintiff seeks unspecified compensatory damages, punitive damages and attorneys’ fees.  On November 26, 2007, the Company served and filed its Answer, in which it denied the material allegations of the Complaint and asserted numerous affirmative defenses.  This action is presently in the discovery stage.  The Company disputes the allegations of the Complaint and intends on vigorously defending this action.

Note 14:  Separation and Employment Agreements

Effective April 14, 2008, Michael D. Fowler, the Company’s Interim Chief Financial Officer, resigned his position with the Company. There was no separation agreement executed between Mr. Fowler and the Company. On April 15, 2008, Paul Campbell was appointed as Interim Chief Financial Officer of the Company.  There is no employment agreement between the Company and Mr. Campbell.

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On May 13, 2008, the Company signed an executive employment agreement with Andrew Sculley, Jr. to serve as the Company’s Chief Executive Officer and President effective June 1, 2008.  Pursuant to the Employment Agreement, Mr. Sculley is paid a salary of $300,000.  The salary will increase to $310,000, per annum, after six months and to $320,000 per annum at the end of the first year.   If Mr. Sculley voluntarily terminates his employment with the Company, other than for Good Reason as defined in the Employment Agreement, he shall cease to accrue salary, personal time off, benefits and other compensation on the date of voluntary termination.  The Company may terminate Mr. Sculley’s employment with or without cause.  If the Company terminates without cause, Mr. Sculley will be entitled to, at the Company’s sole discretion, either (i) monthly salary payments for twelve (12) months, based on his monthly rate of base salary at the date of such termination, or (ii) a lump-sum payment of his salary for such 12 month period, based on his monthly rate of base salary at the date of such termination. Mr. Sculley shall also be entitled to receive (i) payment for accrued and unpaid vacation pay and (ii) all bonuses that have accrued during the term of the Employment Agreement, but not been paid.   Mr. Sculley was granted 500,000 options of which one third vested immediately and one third will vest annually on the subsequent two anniversary dates.

Effective June 1, 2008, Admiral Thomas Paulsen resigned from his position as Interim Chief Executive Officer.   Admiral Paulsen continues to serve as the Company’s Chairman of the Board.

Note 15:  Subsequent Events

On August 8, 2008, Moriah granted to the Company an extension of the Loan with the same terms for 8 days.

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered:

NATURE OF EXPENSE AMOUNT

SEC Registration fee	$	113
Accounting fees and expenses	25,000		*
Legal fees and expenses	65,000		*
Miscellaneous	35,000
TOTAL	$	125,113	*

 * Estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Our Articles of Incorporation, as amended and restated, provide to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware that our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended and restated, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.

Our By Laws also provide that the Board of Directors may also authorize us to indemnify our employees or agents, and to advance the reasonable expenses of such persons, to the same extent, following the same determinations and upon the same conditions as are required for the indemnification of and advancement of expenses to our directors and officers. As of the date of this Registration Statement, the Board of Directors has not extended indemnification rights to persons other than directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On August 26, 2008, the Company and Moriah Capital, L.P. (“Moriah”) entered into Amendment No. 3 to the Loan and Security Agreement dated as of August 20, 2008 (the “Amendment No. 3”). Pursuant to Amendment No. 3, the Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase up to 370,000 shares of the Company’s common stock at an exercise price of $1.30 per share.

Pursuant to Amendment No. 3, the Company and Moriah entered into an Amended and Restated Securities Issuance agreement (the “Amended and Restated Securities Issuance Agreement”). In connection with a Securities Issuance Agreement, dated as of August 7, 2007 (the “Original Securities Issuance Agreement”), the Company issued Moriah 162,500 shares of the Company’s common stock (the “2007 Shares”).  Pursuant to the Amended and Restated Securities Issuance Agreement, Moriah agreed to waive the Company’s obligation to buy back the 2007 Shares with respect to 125,000 of such shares and to defer the Company’s obligation to buy back 37,500 of such 2007 Shares  (collectively, the “Put Waiver”). Pursuant to the Amended and Restated Securities Agreement, the Company is issuing Moriah 485,000 shares of its Common Stock (of which 125,000 shares were issued in consideration for the Put Waiver from Moriah and 360,000 shares were issued in lieu of the issuance to Moriah of the Contingent Issued Shares (as described in the Original Securities Issuance Agreement)). Additionally, pursuant to the Amended and Restated Securities Issuance Agreement, the Company has also granted Moriah a put option pursuant to which Moriah can sell 162,500 shares of its common stock issued under the Amended and Restated Securities Agreement for $195,000, pro-rated for any portion thereof (the “2007 Put Price”). The 2007 Put Option shall automatically be deemed exercised by Moriah unless Moriah delivers written notice to the Company at any time between July 1, 2009 and August 1, 2009 that it does not wish to exercise the 2007 Put Option. The Company also granted Moriah a second put option pursuant to which Moriah can sell 360,000 of the shares issued to Moriah pursuant to the Amended and Restated Securities Purchase Agreement to the Company for $234,000 (the “2008 Put Option”).  The 2008 Put Option shall automatically be deemed exercised by Moriah unless Moriah delivers written notice to the Company at any time between July 1, 2009 and August 1, 2009 that Moriah does not wish to exercise the 2008 Put option in whole or in part.

On August 19, 2008, the Holders of the Amended Notes and the Investors in the Purchase Agreement consented to the Company’s execution of the Amended Note, Amendment No. 3, Amended and Restated Securities Issuance Agreement, and the Amended Registration Rights Agreement.  In consideration for the consent, a total of 144,000 shares of common stock were issued to the Holders and Investors based on individual participation in the Amended Notes and Securities Purchase Agreement on September 4, 2008.

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On April 2, 2008, the Company entered into a Securities Purchase Agreement, pursuant to which it sold to certain qualified institutional buyers and accredited investors an aggregate of 1,586,539 shares of the Company’s common stock, par value $0.001 per share, and warrants to purchase an additional 793,273 shares of common stock, for an aggregate purchase price of $1,650,000. The purchase price of the common stock was $1.04 per share and the strike price of the corresponding warrant was $1.30 per share. The warrants expire April 2, 2013.

The Company and Moriah entered into Amendment No. 2 to the Loan and Security Agreement dated as of March 25, 2008 (the “Amendment No. 2”).  Pursuant to Amendment No. 2, Moriah waived the Company’s noncompliance with Sections 7.2, 7.3, 8.11, 9.1, 9.3, 9.5(c) and 11.5 of the Loan and Security Agreement to the extent such noncompliance resulted solely from the Company’s inadvertently misstating the amount of its inventory that contained defective parts (the “Defective Inventory Count”), provided that on or before April 8, 2008 the Company repays Moriah all prior Advances (as defined in the Loan and Security Agreement), which exceed the Maximum Credit (as defined in the Loan and Security Agreement) if any, as a result of the Defective Inventory Count.

Pursuant to Amendment No. 2 the Company has advised Moriah of certain delays in implementing the Lockbox Agreement, as required under the Loan and Security Agreement, which, if unwaived, would result in the Company’s noncompliance with section 2.1(f) of the Loan and Security Agreement and with Section 3 of the Post-Closing Agreement between the Company and Moriah, dated August 7, 2007.  Moriah agreed to waive noncompliance with Sections 2.1(f) of the Loan and Security Agreement and Section 3 of the Post-Closing Agreement in reliance on the Company’s representation and warranty that all lockbox arrangements required to be implemented under Section 2.1(f) of the Loan and Security Agreement and under Section 3 of the Post-Closing Agreement have been consummated and are in full force and effect as of March 12, 2008.

On January 30, 2008, the Company and Moriah entered into a Warrant Issuance Agreement (the “Warrant Issuance Agreement”).  The Company and Moriah entered into Amendment No. 1 to the Warrant Issuance Agreement. Pursuant to the Amendment No. 1 to Warrant Issuance Agreement, the Company issued Moriah a Warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.50 per share until March 25, 2013 (the “March 2008 Warrant”). Pursuant to the Amendment No. 1 to the Warrant Issuance Agreement, Section 3.2 of the Warrant Issuance Agreement was amended to provide that the Company has to file by April 29, 2008 a registration statement with the Securities and Exchange Commission to register 1,000,000 shares of the Company’s common stock issuable upon exercise of warrants issued to Moriah (including the March 2008 Warrant and a warrant to purchase 750,000 shares of the Common Stock which was previously issued to Moriah).

The Company entered into a Loan and Security Agreement, effective as of August 7, 2007 with Moriah.  In connection with the transaction, a Securities Issuance Agreement pursuant to which the Company issued 162,500 shares of its common stock, which shares had an aggregate market value at the Closing Date of $195,000.

On July 23, 2007, the Company entered into Amendment Agreements with the holders of the Notes issued July 21, 2006 and March 28, 2007 (each a “Holder” and collectively, the “Holders”) and agreed to issue each Holder an amended and restated Note (the “Amended Notes”) in the principal amount equal to the principal amount outstanding as of July 23, 2007.

The changes to the Amended Notes include the following:

· The due date for the outstanding Notes (totaling after conversions an aggregate of $6,020,000) has been extended to December 21, 2008;

· The Amended Notes are convertible into (i) 8,407,612 shares of the Company’s common stock. The conversion price for $5,770,000 of principal was revised from $2.60 to $0.75 per share. The conversion price of $0.35 per share for $250,000 of principal was unchanged;

· $3,010,000 of the Notes can convert into (ii) 3,010 shares of the Company’s newly formed Series A Convertible Preferred Stock (the “Preferred”) at a conversion price of $1,000 per share. The Preferred is convertible into common stock at the same price allowable by the Amended Notes, subject to adjustment as provided for in the Certificate of Designations;

· The Amended Notes adjust the exercise price from $3.60 to $1.03 per share for 1,553,468 Warrants and require the issuance of 3,831,859 Warrants exercisable at $1.03 per share pursuant to which the holders may acquire common stock, until July 21, 2011; and

· As of July 23, 2007 the interest rate was raised from 6% to 8%.

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On March 28, 2007, we entered into an amendment of the Note Purchase Agreement (the “Stillwater Note Purchase Agreement”) for the sale of $500 thousand of senior secured debentures (the “Stillwater Note”) and warrants to purchase approximately 1.0 million shares of common stock, par value $.001 per share. The investor purchased the Stillwater Note with a conversion price of $0.35 per share that may convert into approximately 1.4 million shares of common stock and warrants exercisable at $0.48 per share into approximately 1.0 million shares of common stock expiring in 4.2 years. If the Stillwater Notes are not converted, 50% of the principal amount will be due on July 21, 2007 and the remaining 50% will be due on January 21, 2008. 6% interest is payable in quarterly installments on outstanding notes with the first installment to be paid June 1, 2007. On April 9, 2007, we closed the transaction and received approximately $460 thousand, net of offering costs of approximately $40 thousand which are amortized over the life of the Stillwater Note.

In 2006, we issued options to purchase an aggregate of 114,855 shares of common stock at a weighted average price of $2.64 per share to employees as compensation for services performed on behalf of our company. In addition, we issued options to purchase an aggregate of 3,900 shares of common stock at a price equal to $2.60 per share to a director as compensation for services performed on our behalf as his capacity as director of our company.

On July 21, 2006, we entered into several Note Purchase Agreements, including the Stillwater Note Purchase Agreement, for the sale of approximately $5.99 million of senior secured debentures (the “Notes”) together with warrants to purchase approximately 1.8 million shares of common stock. The Notes may convert into approximately $2.3 million shares at a conversion price of $2.60. The 5 year warrants are exercisable at $3.60 per share into approximately 1.6 million shares of common stock. 50% of the aggregate principal amount matures on July 21, 2007 and the remaining 50% matures on January 21, 2008. For the year ended December 31, 2006, two note holders converted their promissory notes valued at approximately $0.22 million and were issued an aggregate of approximately 85 thousand shares.

On October 20, 2005, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold and issued 1,661,906 shares of common stock, par value $0.001 per share, at a price of $5.50 per share and warrants to purchase up to 997,143 shares of common stock for an aggregate purchase price of approximately $9.14 million. The warrants are exercisable at a price of $10.00 per share and expire on April 20, 2011. Of the 997,143 warrants, 664,763 of the warrants are exercisable on or after May 20, 2006. The remaining 332,381 are exercisable after March 31, 2007.

In 2005, we issued options to purchase an aggregate of 267,900 shares of common stock at a weighted average price of $12.10 per share to employees as compensation for services performed on behalf of our company. In addition, we issued options to purchase an aggregate of 49,750 shares of common stock at a weighted average price of $6.80 per share to directors as compensation for services performed on our behalf in each of their capacities as directors of our company.

On January 9, 2004, the Company entered into a Securities Purchase Agreement with several accredited institutional and private investors whereby such investors purchased an aggregate of 333,336 shares of common stock and 431,221 warrant shares for an aggregate purchase price of approximately $4.2 million. The shares of common stock were priced at a 20% discount to the average closing price of the stock from December 30, 2003 to January 6, 2004, which ranged from $13.80 to $19.40 per share during the period for an average closing price of $12.60 per share. In addition, the investors received warrants to purchase an aggregate of 200,002 shares of common stock (subject to anti-dilution adjustments) exercisable at a price of $17.40 per share for a period of five (5) years. The warrants were priced at a 10% premium to the average closing price of the stock for the pricing period. In connection with the Securities Purchase Agreement, eMagin also issued additional warrants to the investors to acquire an aggregate of 231,219 shares of common stock. On April 9, 2007, the 116,573 outstanding Series A Common Stock Purchase Warrants were re-priced to $0.35.

In February 2004, the Company and all of the holders of the Secured Convertible Notes (the "Notes"), which were due in November 2005, entered into an agreement whereby the holders agreed to an early conversion of 100% of the principal amount of the Notes aggregating $7.825 million, together with all of the accrued interest of approximately $742,000 on the Notes, into 1,139,462 shares of the Company's common stock. In consideration of the Note holders agreeing to the early conversion of the Notes, eMagin agreed to issue the Note holders warrants to purchase an aggregate of 250,000 shares of common stock (the "warrants"), which warrants are exercisable at a price of $27.60 per share. 150,000 of the warrants (series D warrants) expired on December 31, 2005. The remaining 100,000 of the warrants (series E warrants) are exercisable until June 10, 2008.

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In August 2004, the Company and certain of the holders of its outstanding Class A, B and C common stock purchase warrants entered into an agreement pursuant to which the Company and the holders of the warrants agreed to the $9.00 re-pricing and exercise of Class A, B and C common stock purchase warrants. As a condition to the transaction, the holders of the warrants agreed to limit the right of participation that they were granted in January 9, 2004. As a result of the transaction, the holders agreed to re-price and exercise approximately, 209,989 Class A, B and/or C common stock purchase warrants for an aggregate of $1,889,900.

On October 21, 2004, the Company entered into a Securities Purchase Agreement, pursuant to which eMagin sold and issued 1,033,453 shares of common stock, and series F common stock warrants to purchase 512,976 of common stock for an aggregate purchase price of $10,772,500. The common stock was priced at $10.50. The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010 at an exercise price of $12.10 per share, subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations or reclassifications of the Company’s common stock or distributions of cash or other assets. In addition, the Series F Warrants contain provisions protecting against dilution resulting from the sale of additional shares of the Company’s common stock for less than the exercise price of the Series F Warrants, or the market price of the common stock, on the date of such issuance or sale.

On October 28, 2004, eMagin entered into a Securities Purchase Agreement, pursuant to which eMagin sold and issued 274,048 shares of common stock, and series F common stock purchase warrants to purchase eMagin’s common stock to purchasers for an aggregate purchase price of $2,877,500. The common stock was priced at $10.50. The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010 to purchase up to 137,024 shares of common stock at an exercise price of $12.10 per share, subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations or reclassifications of eMagin’s common stock or distributions of cash or other assets. In addition, the Series F Warrants contain provisions protecting against dilution resulting from the sale of additional shares of eMagin’s common stock for less than the exercise price of the Series F Warrants, or the market price of the common stock, on the date of such issuance or sale. On April 9, 2007, the outstanding 650,001 Series F Common Stock Purchase Warrants were re-priced to $7.12.

In 2004, we issued options to purchase an aggregate of 313,300 shares of common stock at a weighted average price of $15.30 per share to employees as compensation for services performed on behalf of our company. In addition, we issued options to purchase an aggregate of 16,250 shares of common stock at a weighted average price of $17.70 per share to directors as compensation for services performed on our behalf in each of their capacities as directors of our company.

*All of the above issuances and sales were deemed to be exempt under Rule 506 of Regulation D and Section (2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of eMagin or executive officers of eMagin, and transfer was restricted by eMagin in accordance with the requirement of the Securities Act of 1933. In addition to representations by the above-reference persons, we have made independent determinations that 11 of the above-referenced person were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following exhibits are included as part of this Form S-1. References to “the Company” in this Exhibit List mean eMagin Corp., a Delaware corporation.

Exhibit Number	Description
2.1	Agreement and Plan of Merger between Fashion Dynamics Corp., FED Capital Acquisition Corporation and FED Corporation dated March 13, 2000 (incorporated by reference to exhibit 2.1 to the Registrant's Current Report on Form 8-K/A filed on March 17, 2000).
3.1	Amended and Restated Articles of Incorporation (incorporated by reference to exhibit 99.2 to the Registrant's Definitive Proxy Statement filed on June 14, 2001).
3.2	Amended Articles of Incorporation (incorporated by reference to exhibit A to the Registrant's Definitive Proxy Statement filed on June 13, 2003).
3.3	Bylaws of the Registrant (incorporated by reference to exhibit 99.3 to the Registrant's Definitive Proxy Statement filed on June 14, 2001).
4.1	Form of Warrant dated as of April 25, 2003 (incorporated by reference to exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on April 28, 2003).
4.2	Form of Series A Common Stock Purchase Warrant dated as of January 9, 2004 (incorporated by reference to exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on January 9, 2004).
4.3	Form of Series B Common Stock Purchase Warrant dated as of January 9, 2004 (incorporated by reference to exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on January 9, 2004).
4.4	Form of Series C Common Stock Purchase Warrant dated as of January 9, 2004 (incorporated by reference to exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on January 9, 2004).
4.5	Form of Series D Warrant (incorporated by reference to exhibit 4.1 to the Registrant's current report on Form 8-K filed on March 4, 2004).
4.6	Form of Series E Warrant (incorporated by reference to exhibit 4.2 to the Registrant's current report on Form 8-K filed on March 4, 2004).
4.7	Form of Common Stock Purchase Warrant (incorporated by reference to exhibit 4.1 to the Registrant's current report on Form 8-K filed on August 26, 2008).
4.8	Form of Amended and Restated Secured Revolving Loan Note (incorporated by reference to exhibit 4.2 to the Registrant's current report on Form 8-K filed on August 26, 2008).
4.9	Form of Series F Warrant (incorporated by reference to exhibit 4.1 to the Registrant's current report on Form 8-K filed on October 26, 2004).
4.10	Form of Common Stock Purchase Warrant dated October 20, 2005, filed October 31, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference.
5.1	Consent of Sichenzia Ross Friedman Ference LLP (filed herewith).
10.1	2000 Stock Option Plan, (incorporated by reference to Annex A to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 filed on March 14, 2000).*
10.2	Form of Agreement for Stock Option Grant pursuant to 2003 Stock Option Plan (incorporated by reference to exhibit 99.2 to the Registrant's Registration Statement on Form S-8 filed on March 14, 2000).*
10.3	Nonexclusive Field of Use License Agreement relating to OLED Technology for miniature, high resolution displays between the Eastman Kodak Company and FED Corporation dated March 29, 1999 (incorporated by reference to exhibit 10.6 to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 2000 filed on April 30, 2001).

10.4	Amendment Number 1 to the Nonexclusive Field of Use License Agreement relating to the LED Technology for miniature, high resolution displays between the Eastman Kodak Company and FED Corporation dated March 16, 2000 (incorporated by reference to exhibit 10.7 to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 2000 filed on April 30, 2001).
10.5	Lease between International Business Machines Corporation and FED Corporation dated May 28, 1999 (incorporated by reference to exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30 , 2001).
10.6	Amendment Number 1 to the Lease between International Bushiness Machines Corporation and FED Corporation dated July 9, 1999 (incorporated by reference to exhibits 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30, 2001)
10.7	Amendment Number 2 to the Lease between International Business Machines Corporation and FED Corporation dated January 29, 2001 (incorporated by reference to exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30, 2001).
10.8	Amendment Number 3 to Lease between International Business Machines Corporation and FED Corporation dated May 28, 2002 (filed herewith).
10.9	Amendment Number 4 to Lease between International Business Machines Corporation and FED Corporation dated December 14, 2004 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 20, 2004).
10.10	Securities Purchase Agreement dated as of April 25, 2003 by and among eMagin and the investors identified on the signature pages thereto, filed April 28, 2003, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 11	Registration Rights Agreement dated as of April 25, 2003 by and among eMagin and certain initial investors identified on the signature pages thereto (incorporated by reference to exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on April 28, 2003).
10. 12	Securities Purchase Agreement dated as of January 9, 2004 by and among eMagin and the investors identified on the signature pages thereto (incorporated by reference to exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on January 9, 2004).
10. 13	Registration Rights Agreement dated as of January 9, 2004 by and among eMagin and certain initial investors identified on the signature pages thereto (incorporated by reference to exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 9, 2004).
10. 14	Master Amendment Agreement dated as of February 17, 2004 by and among eMagin and the investors identified on the signature pages thereto (incorporated by reference to exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 4, 2004).
10. 15	Registration  Rights  Agreement  dated as of February  17, 2004 by and among eMagin and certain initial investors identified on the signature pages  thereto  (incorporated  by  reference to  exhibit  10.2  to the Registrant's Current Report on Form 8-K filed on March 4, 2004).
10. 16	Letter Agreement  amending the Master Amendment  Agreement dated as of  March 1,  2004 by and  among  eMagin  and the  parties  to the  Master  Amendment Agreement  (incorporated by reference to exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on March 4, 2004).
10. 17	Lease between  International  Business  Machines  Corporation  and FED Corporation  dated May 28,  1999,  as filed in the  Registrant's  Form 10-K/A for the year ended December 31, 2000  (incorporated by reference   to the Form 10-K filed on March 30, 2001).
10. 18	Amendment  Number  2  to  the  Lease  between  International  Business Machines  Corporation and FED  Corporation  dated January 29, 2001, as  filed in the Registrant's  Form 10-K/A for the year ended December 31, 2000 (incorporated by reference   to Form 10-K filed March 30, 2001).
10. 19	Secured Note Purchase  Agreement entered into as of November 27, 2001, by and among eMagin  Corporation and certain  investors named therein, as  filed  in the  Registrant's  Form  8-K  dated  December  18,  2001 (incorporated by reference to Form 8-K filed December 18, 2001).

10. 20	2004 Non-Employee Compensation Plan, filed July 7, 2004, as filed in the Registrant’s Form S-8, incorporated herein by reference.*
10. 21	Form of Letter Agreement by and among eMagin and the holders of the Class A, Class B and Class C common stock purchase warrants, filed August 9, 2004 , as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 22	Securities Purchase Agreement dated as of October 21, 2004 by and among eMagin and the purchasers listed on the signature pages thereto, filed October 26, 2004 as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 23	Placement Agency Agreement dated as of October 21, 2004 by and among eMagin and W.R. Hambrecht & Co., LLC, filed October 26, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 24	Agreement, dated as of June 29, 2004, by and between eMagin and Larkspur Capital Corporation, filed October 26, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 25	Sublease Agreement dated as of July 14, 2005 by and between eMagin and Cap Gemini U.S., LLC, filed August 2, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 26	Amended and Restated 2003 Stock Option Plan, filed September 1, 2005, as filed in the Registrant’s Definitive Proxy Statement, incorporated herein by reference.*
10. 27	Amended and Restated 2004 Non-Employee Compensation Plan, filed September 1, 2005, as filed in the Registrant’s Definitive Proxy Statement, incorporated herein by reference.*

10. 28	2005 Employee Stock Purchase Plan, filed September 1, 2005, as filed in the Registrant’s Definitive Proxy Statement, incorporated herein by reference.*
10. 29	Securities Purchase Agreement dated as of October 20, 2005, by and among eMagin and the purchasers listed on the signature pages thereto, filed October 31, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 30	Registration Rights Agreement dated as of October 20, 2005, by and among eMagin and the purchasers listed on the signature pages thereto, filed October 31, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 31	Employment Agreement effective as of January 1, 2006 by and between eMagin and Gary Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 32	Employment Agreement effective as of January 1, 2006 by and between eMagin and Susan Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 33	Amendment to Employment Agreement as of April 17, 2006 by and between eMagin and Gary Jones.
10. 34	Amendment to Employment Agreement as of April 17, 2006 by and between eMagin and Susan Jones.
10. 35	Form of Note Purchase Agreement dated July 21, 2006, by and among the Company and the investors named on the signature pages thereto, (filed herewith) .

10. 36	Form of Note Purchase Agreement dated July 21, 2006, by and between the Company and Stillwater LLC, (filed herewith)
10. 37*	2004 Amended and Restated Non-Employee Compensation Plan, filed September 21, 2006, as filed in the Registrant's Definitive Proxy Statement incorporated herein by reference.
10. 38	Executive Separation and Consulting Agreement dated as of January 11, 2007 by and between eMagin Corporation and Gary W. Jones, filed January 19, 2007, as filed in the Registrant's Form 8-K/A incorporated herein by reference.
10. 39	Letter Agreement dated as of February 12, 2007 by and between eMagin Corporation and Dr. K.C. Park, filed February 16, 2007, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 40	Allonge to the 6% Senior Secured Convertible Notes Due 2007-2008 of eMagin Corporation dated as of March 9, 2007, filed March 13, 2007, as filed in the Registrant's Form 8-K incorporated herein by reference.
10. 41	First Amendment to Note Purchase Agreement as of March 28, 2007 by and between eMagin Corporation and Stillwater LLC, as filed in the Registrant's Form 8-K dated April 26, 2007 incorporated herein by reference.

10. 42	Note Purchase Agreement as of April 9, 2007 by and between eMagin Corporation and Stillwater LLC, as filed in the Registrant's Form 8-K dated April 25, 2007 (filed herewith).
10. 43	6% Senior Secured Convertible Note, dated April 9, 2007, by and between the Company and Stillwater LLC, incorporated by reference to the Company’s Form 8-K as filed on April 26, 2007.
10. 44	Common Stock Purchase Warrant, dated April 9, 2007, by and between the Company and Stillwater LLC, incorporated by reference to the Company’s Form 8-K as filed on April 26, 2007.
10. 45	Employment Agreement between the Company and Tatum, LLC, dated December 26, 2007, incorporated by reference to the Company’s Form 8-K as filed on January 3, 2008.
10. 46	Form of Common Stock Purchase Warrant, incorporated by reference to the Company’s Form 8-K/A as filed on February 8, 2008.
10. 47	Amendment No. 1 to Loan and Security Agreement, dated as of January 30, 2008, to the Loan and Security Agreement, dated August 7, 2007, incorporated by reference to the Company’s Form 8-K/A as filed February 8, 2008.
10. 48	Warrant Issuance Agreement, dated January 30, 2008, incorporated by reference to the Company’s Form 8-K/A as filed February 8, 2008.
10. 49	Form of Common Stock Purchase Warrant, incorporated by reference to the Company’s Form 8-K, as filed on March 31, 2008.
10. 50	Amendment No. 2 to Loan and Security Agreement, dated as of March 25, 2008 to the Loan and Security Agreement, dated August 7, 2007, as amended on January 30, 2008, incorporated by reference to the Company’s Form 8-K, as filed March 31, 2008.
10. 51	Amendment No. 1 to Warrant Issuance Agreement, dated as of March 25, 2008, as amended on January 30, 2008, incorporated by reference to the Company’s Form 8-K, as filed March 31, 2008.
10 .52	Form of Common Stock Purchase Warrant, incorporated by reference to the Company’s Form 8-K, as filed on April 4, 2008.

10. 53	Securities Purchase Agreement, dated as of April 2, 2008, incorporated by reference to the Company’s Form 8-K, as filed April 4, 2008 (filed herewith).
10. 54	Registration Rights Agreement, dated as of April 2, 2008, incorporated by reference to the Company’s Form 8-K, as filed April 4, 2008.
10 .55	Agreement between the Company and Tatum, LLC, incorporated by reference to the Company’s Form 8-K, filed April 18, 2008
10. 56	Employment Agreement effective as of June 1, 2008 by and between eMagin and Andrew Sculley, incorporated by reference to the Company’s Form 8-K/A as filed August 19, 2008.
10. 57	Amendment No. 3 to Loan and Security Agreement, dated as of August  20, 2008 to the Loan and Security Agreement, dated August 7, 2007, incorporated by reference to the Company’s Form 8-K, as filed August 26, 2008.
10. 58	Warrant Issuance Agreement No. 2, dated August 20, 2008, incorporated by reference to the Company’s Form 8-K as filed August 26, 2008.
10. 59	Amended and restated Securities Issuance Agreement, dated as of August 20, 2008, incorporated by reference to the Company’s Form 8-K, as filed August 26, 2008.
10. 60	Amendment, dated August 20, 2008, to Registration Rights Agreement, dated as of August 7, 2007, incorporated by reference to the Company’s Form 8-K, as filed August 26, 2008.
10. 61	Loan and Security Agreement between Moriah Capital, L.P. and  eMagin Corporation, dated as of August 7, 2007, (filed herewith).

23.1	Consent of Sichenzia Ross Friedman Ference LLP (included in Exhibit 5.1).
23.2	Consent of Independent Registered Public Accounting Firm (filed herewith).
* Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to:

(1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);

(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement, and,

(iii) Include any additional or changed material information on the plan of distribution.

(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

(4) For purposes of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective.

116

(5) For the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

1.   Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

2.   Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

3.   The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

4.   Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(6) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

(7) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(8) Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

117

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorizes this registration statement to be signed on its behalf by the undersigned, in the City of Bellevue, State of Washington, on November 12, 2008.

	EMAGIN CORP.
Date:   November 12 , 2008	By:/s/ ANDREW G. SCULLEY
	Andrew G. Sculley
	Chief Executive Officer and President (Principal Executive Officer)
Date:   November 12 , 2008	By:/s/ PAUL CAMPBELL
	Paul Campbell
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.

Signature	Title	Date
/s/ Andrew G. Sculley Andrew G. Sculley	Chief Executive Officer and President (Principal Executive Officer)	November 12, 2008
/s/ Paul S. Campbell Paul S. Campbell	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	November 12,2008
* Thomas Paulsen	Director	November 12, 2008
* Claude Charles	Director	November 12, 2008
* Paul Cronson	Director	November 12, 2008
* Irwin Engelman	Director	November 12, 2008
* Dr. Jacob E. Goldman	Director	November 12, 2008
* Brig. Gen. Stephen Seay	Director	November 12, 2008

*  By:	/s/  THOMAS PAULSEN
	Thomas Paulsen
	Attorney-in-fact

118

EX-5.1

Exhibit 5.1

SICHENZIA ROSS FRIEDMAN FERENCE LLP  

61 Broadway, 32 nd Flr.

New York, NY 10025

Telephone: (212) 930-9700

Facsimile: (212) 930-9725

November 12, 2008

VIA ELECTRONIC TRANSMISSION

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549

RE: eMagin Corporation Form S-1 Registration Statement (File No. 333-144865).

Ladies and Gentlemen:

We refer to the above-captioned registration statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), filed by eMagin Corporation, a Delaware corporation (the "Company"), with the Securities and Exchange Commission.

We have examined the originals, photocopies, certified copies or other evidence of such records of the Company, certificates of officers of the Company and public officials, and other documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as certified copies or photocopies and the authenticity of the originals of such latter documents.

Based on our examination mentioned above, we are of the opinion that the securities being sold pursuant to the Registration Statement, are duly authorized and will be, when issued in the manner described in the Registration Statement, legally and validly issued, fully paid and non-assessable.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to our firm under "Legal Matters" in the related Prospectus. In giving the foregoing consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act, or the rules and regulations of the Securities and Exchange Commission.

/s/ Sichenzia Ross Friedman Ference LLP

Sichenzia Ross Friedman Ference LLP

EX-10.8

Exhibit 10.8

 

International Business Machines Corporation

Hudson Valley Research Park

2070 Route 52

Hopewell Junction, NY 12533-6531

Mr. Gary Jones

President and Chief Executive Officer

eMagin Corporation

Hudson Valley Research Park

2070 Route 52

Hopewell Junction, NY 12533-6531 May 28, 2002

Subject : Third Amendment to the Lease executed on May 28, 1999, between International Business Machines Corporation (IBM) and eMagin Corporation

Dear Mr. Jones:

This letter, upon your signed acceptance, amends the above referenced Lease between IBM and eMagin Corporation for space located at the Hudson Valley Research Park in Hopewell Junction, New York. The Lease shall be amended as follows:

Replace "EXHIBIT Al", dated 07-02-99 in its entirety with "EXHIBIT Al," effective date 06-01-02.

Replace "EXHIBIT A2', dated 01-15-99 in its entirety with "EXHIBIT A2," effective date 06-01-02.

Replace "EXHIBIT A3", dated 01-15-99 in its entirety with "EXHIBIT A3," effective date 06-01-02.

Replace "SCHEDULE A", dated 06-01-99 in its entirety with "SCHEDULE A" effective date 06-01-02.

Replace "SCHEDULE B", dated 06-01-99 in its entirety with "SCHEDULE Et" effective date 06-02-02.

Except as amended herein, all the terms and conditions of the Lease shall remain in full force and in effect. Please indicate your acceptance by signing two (2) copies of this letter and returning them to IBM for counter signature. Thank you.

Accepted and agreed to:

INTERNATIONAL BUSINESS		eMagin CORPORATION
MACHINES CORPORATION
By:	/s/ Raymond J. Wagner	By:	/s/ Gary Jones
	Raymond J. Wagner		Gary Jones
	Senior Program Manager		President and Chief Executive Officer
Date:	06/05/02	Date:	June 5, 2002

SCHEDULE A

eMagin CORPORATION

BASE RENT COMPUTATION SCHEDULE

					Effective 06/01/02
Space Type	Net Productive Sq. Ft.	This Amendment	Rate $/NPSF	Annual Base Rent
Wet	3004	-3004	$22.00	$0.00
Dry	7691	0	$18.00	$138,438.00
Office	11209	-1997	$15.00	$138,180.00
Clean	16316	0	$30.00	$489,480.00
Storage	9727	5001	$5.00	$73,640.00
					Net Prod. Rent
Total Sq. Ft.	47,947.00	0		$839,738.00	$ per Year
	New Total Sq. Ft	47,947.00
Amortized Loan Payment				$47,231.76
$155,000 Fit-up cost at 18.0% at a 5 yr term7 ( See Schedule-E )				$888,969.76	Total Rent Charge
				$73,914.15	Rent $ per Mo.
				$18.50:	per Sq. Ft. per Yr. Avg. Rent

Deriving Net Rentable Basis

Building Number	Net Productive Sq. Ft.	NP to NR Factor	Net Rentable Sq. Ft.	Net Rentable Delta (Sq.Ft.)
310	10352	1.26	13043.52	2692
320	0	1.27	0	0
321	0		0	0
330	28991	1.26	36528.66	7538
334	8604	1.47	12647.88	4044
640	0		0	0
Total	47,947.00		62,220	14,273

BOMA Formula for Net Productive to Net Rentable				Date 05/24/02
Building Rentable	= Bulding Net Rentable	Example	475000	= 1.55
Building Net Productive			308300

SCHEDULE B

eMagin CORPORATION

BASE RENT PAYMENT SCHEDULE

Effective Date

06/01/02

		1999	2000	2001		2002	2003	2004
January		$70,589.25	$79,833.98	$79,833.98		$79,833.98	$73,914.15	$73,914.15
February		$70,589.25	$79,833.98	$79,833.98		$79,833.98	$73,914.15	$73,914.15
March		$70,589.25	$79,833.98	$79,833.98		$79,833.98	$73,914.15	$73,914.15
April		$70,589.25	$79,833.98	$79,833.98		$79,833.98	$73,914.15	$0.00
May	1	$70,589.25	$79,833.98	$79,833.98		$79,833.98	$73,914.15	$0.00
June	1	$71,308.31	$79,833.98	$79,833.98	2	$73,914.15	$73,914.15	$0.00
July		$71,308.31	$79,833.98	$79,833.98		$73,914.15	$73914.15	$0.00
Aug		$79,833.98	$79,833.98	$79,833.98		$73,914.15	$73,914.15	$0.00
September		$79,833.98	$79,833.98	$79,833.98		$73,914.15	$73,914.15	$0.00
October		$79,833.98	$79,833.98	$79,833.98		$73,914.15	$73,914.15	$0.00
November		$79,833.98	$79,833.98	$79,833.98		$73,914.15	$73,914.15	$0.00
December		$79,833.98	$79,833.98	$79,833.98		$73,914.15	$73,914.15	$0.00
Total		$894,732.77	$958,007.76	$958,007.76		$916,568.93	$886,969.76	$221,742.44

Notes:

1. $8,525.67 Per Mo., credit for 6,254 S/F in B/310, under consturciotn & unabavaible7

2. Reclassified office and lab (5,000 s.f.) to storage space

EX-10.35

Exhibit 10.35
 

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 COMPANYS OBLIGATION TO SELL.			31
7. CONDITIONS TO THE BUYERS OBLIGATION TO PURCHASE.			31
8. REGISTRATION RIGHTS.			33
(a)	Mandatory Registration.		33
(b)	Obligations of the Company.		34

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(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

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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).

WITNESSETH:

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.

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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).

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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.

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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,

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(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 Companys 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.

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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 yearsafter 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.

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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 Companys (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 Companys 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 Buyers 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.

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(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 Companys responses to the Buyers 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 Buyers 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.

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(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 Buyerdid 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.

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(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.

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(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 underthe Pledge and Security Agreement, (5) the filings with the PTO as required by the Patent and Trademark Security Agreement and(6)thefilingof theTransactionForm 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.

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(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.

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(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, warehousemens, mechanics', materialmen's, repairmens, landlords 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 Companys 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 Companys 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 purchasers 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 Companys transfer agent promptly after the SEC Effective Date if required by the Companys 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 Companys 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 Buyers 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 Companys 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 others 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 Companys equity securities or other securities that are convertible into or exchangeable for any of the Companys 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 Shareof 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 Buyers 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 Companys 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 Buyers 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 Buyers 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 Buyers 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 6.7of 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 Buyers 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 Buyers 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 Companys 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 Companys 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 Companys 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 COMPANYS OBLIGATION TO SELL.

The Buyer understands that the Companys 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 BUYERS OBLIGATION TO PURCHASE.

The Company understands that the Buyers 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 Companys obligations or any Investors 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 Buyers 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 thereofand 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 Companys 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 Companys 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 Investors 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 Companys 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 Companys 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 Investors 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 Investors 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 Investors election to exclude all of such Investors 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 partys 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 partys 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 Buyers 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 Companys 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 Buyers liability, (ii) amends this Section 10(h) or (iii) adversely affects the Buyers 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 Investors 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 disposition of Registrable Securities by the

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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 Companys 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 Buyers 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 Companys liability for the Buyers 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 AGMFs 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 Buyers legal counsel in connection therewith.

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[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

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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 Companys 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 Securityholders 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-3

Annex 1
 

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, aDelaware 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.

1

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

1.1Certain 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.

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“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

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(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 majorityof 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.

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“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.

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“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

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 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:

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(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).

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“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.

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“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

2.1Optional 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.

2.2Installments 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.

2.3No 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:

3.1Limitations 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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3.2Maintenance 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.

3.3Payment 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.

3.4Maintenance 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.

3.5Conduct 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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3.6Compliance 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.

3.7Investment 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.

3.8Limitations 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.

3.9Limitations 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.

3.10Transactions 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.

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3.11Rule 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.

3.12Limitation 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.

3.13Certain 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.

3.14Notice 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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3.15Listing 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.

3.16Designation 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.

3.17Management 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

4.1If 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

5.1Repurchase 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.

5.2Notices; 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.

5.3Other.(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

6.1Right 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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6.2Exercise 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.

6.3Adjustment 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.

6.4Effect 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.

6.5Reservation 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.

6.6Notice 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.

6.7Restricted 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

7.1Failure 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.

7.2Notices. 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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7.3Amendment, 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.

7.4Assignability. 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.

7.5Certain 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.

7.6Governing 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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7.7Transfer 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.

7.8Enforceable 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.

7.9Note 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.

7.10Payment 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

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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.

7.11Conversion 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.

7.12Construction. 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]

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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

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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)

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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:

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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.)

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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:_____________________________________________________________________________________________________________________________

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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.)

: 

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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:

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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]

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Annex II

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

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

No. W-     Right to Purchase __________ Shares ofCommonStockofeMagin Corporation

EMAGIN CORPORATION

Common Stock Purchase Warrant

EMAGIN CORPORATION, aDelaware corporation, hereby certifies that, for value received, ______________________ or registered assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., New York City time, on the Expiration Date (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), [BEFORE ISSUANCE INSERT AMOUNT OF SHARES EQUAL TO 70% OF THE NUMBER OF SHARES INITIALLY ISSUABLE UPON CONVERSION OF THE NOTE BEING ISSUED TO THE HOLDER OF THIS WARRANT, DETERMINED WITHOUT REGARD TO ANY LIMITATION ON CONVERSION] paid and nonassessable shares of Common Stock at a purchase price per share equal to the Purchase Price. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant.

1.Definitions.

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

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

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

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

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

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

“AMEX” means the American Stock Exchange, Inc.

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

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

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

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

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

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

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

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

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

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

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

“Expiration Date” means July 21, 2011.

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

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

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

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

“Nasdaq” means the Nasdaq Global Market.

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

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

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

“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 Warrant.

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

“Other Note Purchase Agreements” means the several Note Purchase Agreements by and between the Company and the several buyers named therein in the form of the Note Purchase Agreement pursuant to which certain of the Notes are being or will be issued.

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

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

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

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

“Purchase Price” means $0.36,subject to adjustment as provided in this Warrant.

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

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

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

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

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

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

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

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

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

“SEC” means the Securities and Exchange Commission.

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

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

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

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

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

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

2.Exercise of Warrant.

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

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

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X = Y x (A - B)

A

where,

X =	the number of shares of Common Stock to be issued to the Holder
Y =	the number of shares of Common Stock as to which this Warrant is to be exercised

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

B = the Purchase Price

(c)9.9% Limitation.

(1)Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof at any time shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by the Holder (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”), together with all shares of Common Stock deemed beneficially owned at such time (other than by virtue of the ownership of the Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by the Holder for purposes of determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Parties”), in either such case for purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the 1934 Act and the rules promulgated thereunder), would result in beneficial ownership by the Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may be modified by the Holder as provided herein, the “Restricted Ownership Percentage”). The Holder shall have the right 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 2(c) make this Warrant unexercisable in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter but prior to the Expiration Date upon exercise of this Warrant as and when shares of Common Stock may be issued in compliance with such restrictions.

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

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

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

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

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

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

(c)other or additional stock, rights, warrants or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement,

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

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

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

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

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

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

Such adjustment shall become effective immediately after the opening of business on the day following the record date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Purchase Price shall be readjusted to the Purchase Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall be readjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to the number which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall again be adjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to be the number which would then be in effect if such record date had not been fixed. In determining whether any rights or warrants entitle the Holder to subscribe for or purchase shares of Common Stock at less than such Current Fair Market Value, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. Notwithstanding the foregoing, if any of the adjustments to the Purchase Price as set forth in this Section 7 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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8.Adjustment in Connection Sales by a Designated Person. So long as any Note is outstanding, if at any time on or after the Issuance Date any Designated Person, directly or indirectly, sells, transfers or disposes of shares of Common Stock or Common Stock Equivalents other than a Permitted Designated Person Sale and on the Measurement Date for such sale, transfer or disposition the Purchase Price in effect on such Measurement Date is greater than the Computed Market Price on such Measurement Date, then, subject to the next succeeding sentence, the Purchase Price shall be reduced to such Computed Market Price, such adjustment to become effective immediately after the opening of business on the day following the Measurement Date. If a reduction of the Purchase 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 Purchase Price shall be reduced to a price equal to the Conversion Price (as defined in the Note) then in effect until such time as the Stockholder Approval is obtained at which time the Purchase Price shall be reduced to such Computed Market Price. 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 23.

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

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

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

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

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

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

(x) this Warrant shall thereafter entitle the Holder to purchase the kind and amount of shares of stock and Other Securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon exercise of this Warrant (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to exercise this Warrant) immediately prior to such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder's rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 8 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares),

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

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

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

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(b)The above provisions of this Section 9 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

(c)If this Section 9 applies to any event or occurrence, Section 5 shall not apply.

10.Tax Adjustments.The Company may make such reductions in the Purchase Price, in addition to those required by Sections 4, 5, 6, 7 and 8 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.

11.Minimum Adjustment. (a) No adjustment in the Purchase Price (and no related adjustment in the number of shares of Common Stock which may thereafter be purchased upon exercise of this Warrant) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All such calculations under this Warrant shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be.

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

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

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

14.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

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

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

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

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

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

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

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

18.Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office or agency of the Company referred to in Section 16, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender.

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

20.Warrant Agent. The Company may, by written notice to the Holder, appoint the transfer agent and registrar for the Common Stock as the Company's agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 2, and the Company may, by written notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 18, and replacing this Warrant pursuant to Section 19, or any of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent.

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

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

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23.Notices, etc. All notices and other communications from the Company to the Holder shall be in writing and delivered personally, by confirmed facsimile, by a nationally recognized overnight courier service or mailed by first class certified mail, postage prepaid, at such facsimile telephone number or address as may have been furnished to the Company in writing by the Holder or at such facsimile telephone number or the address shown for the Holder on the register of Warrants referred to in Section 17.

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

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

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

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

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

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

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

[Signature Page Follows]

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

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

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ASSIGNMENT

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

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

[]To the Company or a Subsidiary; or

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

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

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

[]The transferee is an affiliate of the Company.

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

Dated: ____________________________________	NAME:____________________________________________
	____________________________________________________________
	Signature(s)

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Exhibit 1

FORM OF SUBSCRIPTION

EMAGIN CORPORATION

(To be signed only on exercise of Warrant)

TO:	eMagin Corporation
	10500 N.E. 8th Street, Suite 1400
	Bellevue, WA 98004

Attention: Chief Financial Officer

Facsimile No.: (425) 749-3601

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

2.The undersigned Holder (check one):

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

or

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

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

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Name:_________________________________________________________________

Address_______________________________________________________________

Social Security or Tax Identification Number (if any):

____________________________________________________________

Dated:                 ________________________________________________________

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

________________________________________________________

(Address)

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Annex III

PATENT AND TRADEMARK SECURITY AGREEMENT

This PATENT AND TRADEMARK SECURITY AGREEMENT, dated as of July 21, 2006 (this “Agreement”), made by EMAGIN CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used in this Agreement having the respective meanings provided in this Agreement).

W I T N E S S E T H:

WHEREAS, the Grantor and the several Buyers are parties to the several Note Purchase Agreements pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of Notes of the Grantor;

WHEREAS, the Grantor has certain right, title and interest in and to certain patents, patent applications and trademarks and related property;

WHEREAS, the Grantor has agreed to grant to the Collateral Agent a security interest in its right, title and interest in and to certain patents, patent applications, trademarks and related rights to secure the payment and performance of certain obligations of the Grantor, including, without limitation, obligations of the Grantor under the Notes, the Note Purchase Agreements, the Security Agreement and this Agreement;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes that the Grantor shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor is contemporaneously herewith entering into the Security Agreement and the Lockbox Agreement with the Collateral Agent for the ratable benefit of the Holders;

NOW, THEREFORE, in consideration of the premises and to induce the Buyers to purchase their respective Notes pursuant to the Note Purchase Agreements, the Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Holders, as follows:

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1. Definitions.

(a)As used in this Agreement, the terms “Agreement”, “Grantor” and “Collateral Agent” shall have the respective meanings assigned to such terms in the introductory paragraph of and the recitals to 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)Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Notes.

(d)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):

“Accounts” means all rights to payment for goods sold or leased or for services rendered, whether or not such rights have been earned by performance.

“Additional Note” means the Note issued pursuant to the Additional Note Purchase Agreement.

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Grantor and Stillwater LLC, which by its terms contemplates the issuance of up to $500,000 aggregate principal amount of Notes on or after December 10, 2006.

“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.

“Buyer” means any of the several buyers party to a Note Purchase Agreement.

“Code” means the Uniform Commercial Code as from time to time in effect in the State of Delaware.

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“Collateral” means all of the Grantor’s right, title and interest in and to each of the following, whether now owned or at any time hereafter acquired by the Grantor or in which the Grantor now has or at any time in the future may acquire any right, title or interest:

(1)all Patents;

(2)all Patent Licenses;

(3)all Trademarks;

(4)all Trademark Licenses;

(5)all Contracts, Documents and General Intangibles developed or acquired by the Grantor relating to any and all of the foregoing;

(6)all insurance policies to the extent they relate to the preceding items (1) through (5); and

(7)to the extent not otherwise included in the preceding items (1) through (6), all Proceeds, products, rents, issues, profits and returns of and arising from any and all of the foregoing.

“Contracts” shall have the meaning assigned to such term under the Code.

“Documents” shall have the meaning assigned to such term under the Code.

“Event of Default” means:

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

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

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

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

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

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

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

“General Intangibles” shall have the meaning ascribed to such term in the Code.

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

“Issuance Date” means the date on which the Notes are initially issued.

“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction or performance of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States.

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

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

“Majority Holders” means at any time such of the holders of Notes, which based on the outstanding principal amount of the Notes, represents a majority of the aggregate outstanding principal amount of the Notes.

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

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“Notes” means the Grantor’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Obligations” shall mean:

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

(2)any and all sums advanced by the Collateral Agent or any Holder in order to preserve the Collateral or to preserve the Collateral Agent’s security interest in the Collateral;

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

(4)any amounts for which any Holder is entitled to indemnification under Section 4(n).

“Patent(s)” means all patents, patent applications and patent disclosures which are presently, or in the future may be, owned, issued, acquired or used (whether pursuant to a license or otherwise) anywhere in the world by the Grantor, in whole or in part, and all of the Grantor’s right, title and interest in and to all patentable inventions and to file applications for patents under patent laws of the United States or of any other jurisdiction, including any and all extensions, reissues, substitutes, continuations, continuations-in-part, divisional, patents of addition, re-examinations and renewals thereof, and patents issuing therefrom, and any other proprietary rights related to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of an interest therein under the laws of all jurisdictions) and any and all foreign counterparts of any of the foregoing, including without limitation, those listed on Exhibit A to this Agreement.

“Patent Licenses” means each license agreement identified in Exhibit A to this Agreement as it may be amended, supplemented or otherwise modified from time to time, and each license agreement relating to Patents hereafter granted to, used or acquired by the Grantor, in each case together with the right to use and rely upon the inventions and other intellectual property conveyed thereunder.

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“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.

“Proceeds” shall have the meaning assigned to such term under the Code.

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

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

“Security Interest” means the security interest and collateral assignment granted in the Collateral pursuant to this 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.

“Trademark License” means each license agreement identified in Exhibit B hereto as it may be amended, supplemented or otherwise modified from time to time, and each license agreement relating to Trademarks hereafter used, adopted or acquired by the Grantor.

“Trademarks” means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers of the Grantor adopted for use in conjunction with the sale of Medical Devices or Competitive Products, now existing anywhere in the world or hereinafter adopted or acquired, whether currently in use or not, and the goodwill associated therewith, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, those identified in Exhibit B to this Agreement, and (b) all renewals thereof by the Grantor.

“Transaction Documents” means the Notes, the Note Purchase Agreements, this Agreement, the Security Agreement, the Lockbox Agreement, the Warrants and the other agreements, instruments and documents contemplated hereby and thereby, and any amendments, extensions or renewals thereof or replacements therefor.

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2.Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due of the Obligations and for the other purposes provided in this Agreement, the Grantor hereby grants, assigns and conveys to the Collateral Agent, for the ratable benefit of the Holders, all of the Grantor’s right, title and interest in and to the Collateral as collateral security and hereby grants the Collateral Agent a continuing first priority security interest therein. Such grant includes, without limitation, a grant of the security interest to secure the payment and performance of Obligations relating to the Additional Note upon the date of issuance of such Additional Note. Notwithstanding the foregoing assignment, unless and until there shall have occurred and be continuing an Event of Default, the Grantor shall retain and the Collateral Agent hereby grants to the Grantor the exclusive, non-transferable, revocable right and license to use the Collateral on and in connection with making, having made, using and selling products sold by the Grantor, for the Grantor’s own benefit and account and for none other (except as provided in the Patent Licenses identified on Exhibit A and the Trademark Licenses identified on Exhibit B). The Grantor agrees not to sell or assign its interest in, or grant any sublicense under, the foregoing license granted to the Grantor without the prior written consent of the Collateral Agent, which may be withheld in the Collateral Agent’s sole and absolute discretion.

3.Representations and Warranties. The Grantor hereby represents and warrants that:

(a)Description of Collateral. True and complete schedules setting forth all Patents, Patent Licenses, Trademarks and Trademark Licenses owned, held, controlled or used by the Grantor or to which the Grantor is a party on the date of this Agreement, together with a summary description and full information in respect of the filing, registration, issuance and expiration dates thereof, as applicable, are set forth on Exhibit A with respect to Patents and Patent Licenses and on Exhibit B with respect to Trademarks and Trademark Licenses, respectively, to this Agreement.

(b)Title; No Other Liens. Except for the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to this Agreement and the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to the Security Agreement, the Grantor is the sole and exclusive owner of and has good and marketable title to each item of the Collateral free and clear of any and all Liens or claims of others, except as permitted by Section 3.9 of the Notes. None of the Grantor’s Subsidiaries or other entities controlled by the Grantor has any right, title or interest in or to any of the Collateral. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Collateral Agent, for the ratable benefit of the Holders, pursuant to this Agreement or the Security Agreement.

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(c)Perfected First Priority Liens. The Liens granted pursuant to this Agreement will constitute, upon the completion of all the filings or notices listed in Exhibit C to this Agreement, which Exhibit includes all UCC-1 financing statements to be filed pursuant to the terms of the Security Agreement, all requisite filings to be made with the PTO in the forms substantially similar to that of Exhibit E and Exhibit F to this Agreement, valid and perfected Liens on all Collateral in favor of the Collateral Agent for the ratable benefit of the Holders, which are prior to all other Liens on such Collateral and which are enforceable as such against all Persons.

(d)Consents under Contracts. No consent (other than consents that have been obtained) of any party (other than the Grantor) to any Contract that constitutes part of the Collateral is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement or the exercise of the Collateral Agent’s rights and remedies provided herein or at law.

(e)Chief Executive Office. The Grantor’s chief executive office and chief place of business is located at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004.

(f)Authority. The Grantor has full power, authority and legal right to grant the Collateral Agent the Lien on the Collateral pursuant to this Agreement.

(g)Approvals, Filings, Etc. No authorization, approval or consent of, or filing, registration, recording or other action with, any United States or foreign court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market, the stockholders of the Company or any other Person, including, without limitation, the PTO, is required to be obtained or made by the Company or any Subsidiary (x) for the grant by the Grantor of the Lien on the Collateral pursuant to this Agreement, (y) the collateral assignment of the Collateral to the Collateral Agent pursuant to this Agreement or (z) to perfect the Lien purported to be created by this Agreement, in each case except as has been obtained or made or (z) for the exercise of the Collateral Agent’s rights and remedies provided herein or at law.

(h)No Claims. Each of the Patents and Trademarks existing on the date hereof is valid and enforceable, and the Grantor is not presently aware of any past, present or prospective claim by any third party that any of such Patents or Trademarks are invalid or unenforceable, or that the use of any Patents does or may violate the rights of any third person, or of any basis for any such claims.

(i)Statutory Notice. The Grantor has used and will continue to use proper statutory notice in connection with its use of the Patents.

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(j)Certain Patent Matters. To its knowledge, the Grantor does not lack any material rights or licenses to use the Patents or to make, have made, use, sell, or offer for sale the claimed subject matter of the Patents. To the knowledge of the Grantor, there are no facts which would form a basis for a finding that any of the claims of the Patents is unpatentable, unenforceable or invalid. To the knowledge of the Grantor, there are no pending U.S. or foreign patent applications which, if issued, would limit or prohibit the ability of the Grantor or the Collateral Agent to make, have made, use, sell, or offer for sale the claimed subject matter of the Patents.

(k)Custom License Matters. Each Patent License or Trademark License is the legal, valid and binding obligation of the Grantor and the respective licensor thereunder; the Grantor is not, and, to the best knowledge of the Grantor, each licensor is not, in default of any of its obligations under any Patent License or Trademark License; no event has occurred and no circumstance exists that with the giving of notice or the passage of time, or both, would constitute such a default by the Grantor; and, to the best knowledge of the Grantor, no such event has occurred or circumstance exists that would constitute a default by the licensor under any Patent License or Trademark License.

4.Covenants. The Grantor covenants and agrees with the Collateral Agent that from and after the date of this Agreement until the payment and performance in full by the Grantor of all of the Obligations:

(a)Further Documentation. At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of the Grantor, the Grantor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Collateral Agent may request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, any applicable filing with the PTO and the filing of any financing or continuation statements under the Code or similar laws in effect in any such jurisdiction with respect to the Liens created hereby. The Grantor also hereby authorizes the Collateral Agent to file any such financing or continuation statement without the signature of the Grantor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction.

(b)Maintenance of Records. The Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral. For the further security of the Collateral Agent for the ratable benefit of the Holders, the Grantor hereby grants to the Collateral Agent, for the ratable benefit of the Holders, a security interest in all of the Grantor’s books and records pertaining to the Collateral, and the Grantor shall turn over any such books and records for inspection at the office of the Grantor to the Collateral Agent or to its representatives during normal business hours at the request of the Collateral Agent.

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(c)Limitation on Liens on Collateral. The Grantor (x) will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Liens created hereby and by the Security Agreement and Liens permitted by Section 3.9 of the Notes, and (y) will defend the right, title and interest of the Collateral Agent in and to any of the Collateral against the claims and demands of all Persons.

(d)Limitations on Dispositions of Collateral. The Grantor will not sell, transfer, assign, grant any participation in, sublicense or otherwise dispose of any of the Collateral to any Persons, including, without limitation, any Subsidiary or Affiliate, or attempt, offer or contract to do so.

(e)Limitations on Modifications, Waivers, Extensions of Patent Licenses and Trademark Licenses. The Grantor will not (i) amend, modify, terminate or waive any provision of any Patent License with respect to any Patent or Trademark License with respect to any Trademark in any manner which could reasonably be expected to materially adversely affect the value of such Patent License or Trademark License as Collateral, (ii) fail to exercise promptly and diligently each and every material right and perform each material obligation which it may have under each Patent License and Trademark License with respect to any Trademarks. Within two Business Days of receipt thereof, the Grantor will deliver to the Collateral Agent a copy of each material demand, notice or document received by it relating in any way to each Patent License and Trademark License.

(f)Further Identification of Collateral. The Grantor shall furnish to the Collateral Agent from time to time, upon the request of the Collateral Agent, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail.

(g)Notices. The Grantor shall advise the Collateral Agent promptly, but in no event later than two Business Days after the occurrence thereof, in reasonable detail, at its address specified in accordance with Section 15 (i) of any Lien on, or claim asserted against, any of the Collateral, other than as created hereby or as permitted hereby, (ii) of any Event of Default or any event which, with the giving of notice or the passage of time, or both, would become an Event of Default and (iii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the Liens created hereunder or the rights of the Collateral Agent hereunder.

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(h)Patents.

(1)The Grantor will notify the Collateral Agent immediately if it knows, or has reason to know, that any application relating to any Patent may become abandoned or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the PTO or any court or tribunal in any country) regarding the Grantor’s ownership of or license rights or other rights with respect to any Patent.

(2)The Grantor will, with respect to any Patent that the Grantor obtains after the Issuance Date or any Patent License that the Grantor acquires after the Issuance Date, promptly, but in no event later than five Business Days thereafter, (i) take all actions necessary so that the Collateral Agent shall obtain a perfected security interest in such Patent or Patent License and (ii) provide to the Collateral Agent a revised Exhibit A, listing all Patents and all Patent Licenses in which the Grantor has an interest.

(3)Upon request of the Collateral Agent, the Grantor shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent’s security interest in such Patents or Patent Licenses, and the Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Grantor shall have paid and performed in full all of its obligations under this Agreement and the other Transaction Documents.

(4)The Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the PTO to maintain and pursue each Patent including, without limitation, payment of maintenance fees.

(5)In the event that any Patent included in the Collateral is infringed by a third party, the Grantor shall promptly notify the Collateral Agent after it learns thereof and shall, if appropriate, sue for infringement, seeking injunctive relief where appropriate and to recover any and all damages for such infringement, or take such other actions as the Grantor shall reasonably deem appropriate under the circumstances to protect such Patent.

(6)The Grantor hereby grants to the Collateral Agent and its employees and agents the right, upon prior written notice, to visit the Grantor’s plants and facilities, and the Grantor shall use its best efforts to arrange for the Collateral Agent and its employees and agents to have access to such plants and facilities of third parties which manufacture or supply goods or services, for or under contract with the Grantor.

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(i)Trademarks.

(1)The Grantor (either itself or through licensees) will, with respect to each Trademark identified in Exhibit B, as Exhibit B may be amended, supplemented or otherwise modified from time to time, (i) continue to use or have used such Trademark to the extent necessary to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Collateral Agent, for the ratable benefit of the Holders, shall obtain a first priority perfected security interest in the Company’s interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any such Trademark may become invalidated.

(2)The Grantor will promptly notify the Collateral Agent if any application or registration relating to any Trademark may become abandoned, canceled or denied, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the PTO or any court or tribunal in any country) regarding the Grantor’s ownership interest in such Trademark or its right to register the same or to keep and maintain the same.

(3)The Grantor will, with respect to any Trademark that the Grantor registers after the Issuance Date or any Trademark License that the Grantor acquires after the Issuance Date, promptly (i) take all actions necessary so that the Collateral Agent, for the ratable benefit of the Holders, shall obtain a perfected security interest in such Trademark or Trademark License and (ii) provide to the Collateral Agent a revised Exhibit B listing all registered Trademarks and all Trademark Licenses in which the Grantor has an interest.

(4)Upon request of the Collateral Agent, the Grantor shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent’s security interest in any Trademark and the goodwill and general intangibles of the Grantor relating thereto or represented thereby, and the Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Grantor shall have paid and performed in full all of its obligations under the Transaction Documents.

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(5)The Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the PTO, to maintain and pursue each application (and to obtain the relevant registration) and to maintain the registration of the Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

(6)In the event that any Trademark included in the Collateral is infringed, misappropriated or diluted by a third party, the Grantor shall notify the Collateral Agent and shall, if appropriate, sue for infringement, misappropriation or dilution, seeking injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other action as the Grantor reasonably deems appropriate under the circumstances to protect such Trademark.

(j)Further Actions. Without limiting the foregoing provisions of this Section 4, the Grantor further agrees for itself and its successors and assigns to execute upon request any other lawful documents and likewise to perform any other lawful acts which may be necessary or desirable to secure fully for the Collateral Agent, for the ratable benefit of the Holders, all right, title and interest in and to the Collateral, including, but not limited to, the execution of substitution, reissue, divisional or continuation patent applications; and preliminary or other statement of the giving of testimony in any interference or other proceeding in which the Collateral or any application, Patent or Trademark directed thereto or derived therefrom may be involved.

(k)License Agreements. The Grantor shall comply with its obligations under each of its Patent Licenses and Trademark Licenses.

(l)Changes in Locations, Name, Etc. The Grantor will not (i) change the location of its chief executive office/chief place of business from that specified in Section 3(e) or (ii) change its name, identity or corporate structure to such an extent that any statement filed by the Collateral Agent with the PTO in connection with this Agreement would become misleading, unless it shall have given the Collateral Agent at least 30 days prior written notice thereof and, prior to such action or event, shall have taken appropriate action satisfactory to the Collateral Agent to preserve and protect the Collateral Agent’s collateral assignment and the Security Interest under this Agreement.

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(m)Subsidiaries. This Agreement is entered into on behalf of and for the benefit of the Grantor. The Grantor will not permit any of its Subsidiaries or Affiliates or any other entities controlled by the Grantor to have any ownership or other rights in or to exercise any control over the Collateral.

(n)Indemnification. The Grantor agrees to indemnify and hold harmless the Collateral Agent and each Holder and their respective officers, directors, Affiliates, agents and investment advisors (each, an “Indemnified Person”) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and to reimburse the Collateral Agent and each Holder for all costs and expenses, including reasonable attorneys’ fees and expenses, arising out of or resulting from this Agreement, including any breach hereof or Event of Default hereunder, or the exercise by the Collateral Agent or any Holder, as the case may be, of any right or remedy granted to it hereunder or under the other Transaction Documents or under applicable law; provided, however, that the Grantor shall not be required to indemnify a particular Indemnified Person to the extent any claim, demand, loss, judgment, liability, cost or expense is determined by final judgment (not subject to further appeal) of a court of competent jurisdiction to have arisen primarily from the gross negligence or willful misconduct of such Indemnified Person. In no event shall any Indemnified Person other than the Collateral Agent have any liability or obligation to the Grantor under this Agreement or applicable law (liability under which the Grantor hereby waives) for any matter or thing in connection with this Agreement, and in no event shall the Collateral Agent or any Holder be liable, in the absence of a determination of gross negligence or willful misconduct on its part by final judgment (not subject to further appeal) of a court of competent jurisdiction, for any matter or thing in connection with this Agreement other than to account for moneys actually received by it in accordance with the terms hereof. If and to the extent that the obligations of the Grantor under this Section 4(n) are unenforceable for any reason, the Grantor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. In any suit, proceeding or action brought by the Collateral Agent or any Holder under any Account or Contract that constitutes part of the Collateral for any sum owing thereunder, or to enforce any provisions of any such Account or Contract, the Grantor will save, indemnify and keep the Collateral Agent and each Holder harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Grantor.

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5.Collateral Agent’s Powers.

(a)Powers. The Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof or investment advisor thereto, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Grantor and in the name of the Grantor or in its own name, from time to time in the Collateral Agent’s discretion, during any period in which an Event of Default is continuing, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Grantor hereby gives the Collateral Agent and each such officer, agent and investment advisor the power and right, on behalf of the Grantor, without notice to or assent by the Grantor, except any notice required by law, to do the following:

(1)to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under or with respect to any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under or with respect to any such Collateral whenever payable, in each case in the name of the Grantor or its own name, or otherwise;

(2)to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral and to pay all or any part of the premiums therefor and the costs thereof; and

(3)(A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Grantor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Collateral Agent may deem appropriate; (G) to assign (along with  the goodwill of  the business pertaining thereto)  any Patent or Trademark for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in

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its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent’s option and the Grantor’s expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent’s Liens thereon and to effect the intent of this Agreement, all as fully and effectively as the Grantor might do.

The Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the Grantor shall have paid and performed in full all of the Obligations.

(b)Filing and Recordation. In addition to the filings the Grantor is required to make as specified in Exhibit C, this Agreement or an instrument referring hereto may be filed and recorded in such public offices and with such governmental authorities, including the PTO, as the Collateral Agent may determine from time to time. The Collateral Agent may so file and record this Agreement as a “security interest”, “collateral assignment”, “assignment” or similar designation as the Collateral Agent may determine (so long as such designation is consistent with the terms of this Agreement) and the Collateral Agent may from time to time rerecord and refile or take other action to change the designation under which this Agreement is filed or recorded (so long as such designation is consistent with the terms of this Agreement).

(c)Other Powers. The Grantor also authorizes the Collateral Agent, at any time and from time to time, to execute, in connection with the sale provided for herein, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral.

(d)No Duty on Collateral Agent’s Part. The powers conferred on the Collateral Agent hereunder are solely to protect the Collateral Agent’s interests in the Collateral for the ratable benefit of the Holders and shall not impose any duty upon the Collateral Agent to exercise any such powers. The Collateral Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

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(e)Grantor Remains Liable under Contracts. Anything herein to the contrary notwithstanding, the Grantor shall remain liable under each of the ontracts that constitute part of the Collateral to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with and pursuant to the terms and provisions of each such Contract. The Collateral Agent shall not have any obligation or liability under any Contract that constitutes part of the Collateral by reason of or arising out of this Agreement or the receipt by the Collateral Agent of any payment relating to such Contract pursuant hereto, nor shall the Collateral Agent be obligated in any manner to perform any of the obligations of the Grantor under or pursuant to any such Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any such Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

6.Performance by Collateral Agent of Grantor’s Obligations. If the Grantor fails to perform or comply with any of its agreements contained herein and the Collateral Agent, as provided for by the terms of this Agreement and following reasonable notice to the Grantor, may itself perform or comply, or otherwise cause performance or compliance, with such agreement, and the expenses of the Collateral Agent incurred in connection with such performance or compliance shall be payable by the Grantor to the Collateral Agent on demand and shall constitute Obligations secured hereby.

7.Remedies. If an Event of Default has occurred and is continuing, but in the case of Events of Default that are solely ones covered by the final clause (2) of Section 4.01 of any Note, only after the expiration of the 120-day period specified in such clause (2) the Collateral Agent may exercise, in addition to all other rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, if an Event of Default has occurred and is continuing, but in the case of Events of Default that are solely ones covered by the final clause (2) of Section 4.01 of any Note, only after the expiration of the 120-day period specified in such clause (2) the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or expressly provided for) to or upon the Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are, to the extent permitted by applicable law, hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, license, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), at public or private sale or sales, at any exchange, broker’s board or office of the Collateral Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Grantor, which right or equity is hereby waived, to the extent permitted by applicable law, or released.

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The Grantor further agrees, if an Event of Default has occurred and is continuing, at the Collateral Agent’s request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at the Grantor’s premises or elsewhere. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, need the Collateral Agent account for the surplus, if any, to the Grantor. To the extent permitted by applicable law, the Grantor waives all claims, damages and demands it may acquire against the Collateral Agent arising out of the exercise by it of any rights hereunder, provided, that nothing contained in this Section shall relieve the Collateral Agent from liability arising solely from its gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten days before such sale or other disposition. The Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency.

8.Limitation on Duties Regarding Preservation of Collateral. The Collateral Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under the Code or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Grantor or otherwise.

9.Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest until the Grantor has paid and performed in full all of the Obligations.

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

11.Paragraph Headings, Captions, Etc. The paragraph headings, the captions and the footers, used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

12.No Waiver; Cumulative Remedies. The Collateral Agent shall not by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have on any future occasion. The rights and remedies herein and in the other Transaction Documents provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law or in equity or by statute.

13.Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party to be charged with enforcement; provided, however, that any provision of this Agreement may be waived, amended, supplemented or otherwise modified by the Collateral Agent only with the prior written approval of the Majority Holders. This Agreement shall be binding upon the successors and assigns of the Grantor and shall inure to the benefit of the Collateral Agent and its successors and assigns. The Grantor may not assign its rights or obligations under this Agreement without the prior written consent of the Collateral Agent, which the Collateral Agent may withhold in the discretion of the Majority Holders. The requirements for resignation, and appointment of a successor to, the Collateral Agent are established by Exhibit D hereto and not by this Agreement.

14.Termination of Security Interest; Release of Collateral. (a) Upon the payment and performance in full by the Grantor of the Obligations, all right, title and interest of the Collateral Agent in and to the Collateral, including the Security Interest, pursuant to this Agreement shall terminate and all rights to the Collateral shall revert to the Grantor.

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(b)At any time and from time to time prior to termination of the right, title and interest of the Collateral Agent in and to the Collateral pursuant to Section 14(a), the Collateral Agent shall release any of the Collateral only with the prior written consent of the Majority Holders.

(c)Upon any such termination of the Security Interest, the Collateral Agent will, at the expense of the Grantor, execute and deliver to the Grantor such documents and take such other actions as the Grantor shall reasonably request to evidence the reassignment of the Collateral to the Grantor and the termination of the Security Interest. The Collateral Agent shall deliver to the Grantor all Collateral so released then in its possession.

15.Notices. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by 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 below 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 Grantor, such notice shall be addressed to the Grantor at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004, Attention: Chief Financial Officer (telephone line facsimile number (425) 749-3601), 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. (telephone line facsimile number (212) 930-9725), and in the case of any notice to the Collateral Agent, such notice shall be addressed to the Collateral Agent at c/o Alexandra Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, New York 10017, Attention: Chief Compliance Officer (telephone line facsimile transmission number (212) 301-1800).

16.Fees and Expenses. The Grantor agrees to pay the fees of the Collateral Agent in performing its services under this Agreement and all reasonable expenses (including but not limited to attorneys’ fees and costs for legal services, costs of insurance and payments of taxes or other charges) of, or incidental to, the custody, care, sale or realization on any of the Collateral or in any way relating to the performance of the obligations or the enforcement or protection of the rights of the Collateral Agent hereunder.

17.Concerning Collateral Agent. The Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or

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nonexercise by the Collateral Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Holders, be governed by Exhibit D to this Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantor, except as expressly provided in Sections 13 and 14, the Collateral Agent shall be conclusively presumed to be acting as agent for the Holders with full and valid authority so to act or refrain from acting, and the Grantor shall not be under any obligation to make any inquiry respecting such authority. The Collateral Agent hereby waives for the benefit of the Holders any claim, right or Lien of the Collateral Agent against the Collateral arising under applicable law or arising from any business or transaction between the Collateral Agent and the Grantor other than pursuant to this Agreement or any of the other Transaction Documents.

18.Survival. All representations, warranties, covenants and agreements of the Grantor and of the Collateral Agent contained herein will survive the execution and delivery hereof and the release of any Collateral pursuant hereto and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Collateral Agent or the Grantor or any person who controls the Collateral Agent or the Grantor.

19.Grantor’s Obligations Absolute, Etc. The obligations of the Grantor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any of the Transaction Documents or any other agreement or instrument referred to therein, or any assignment or transfer of any thereof; (b) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such Transaction Document or other agreement or instrument; (c) any furnishing of any additional security to the Collateral Agent or its assignees or any acceptance thereof or any release of any security by the Collateral Agent or its assignees; (d) any limitation on any party’s liability or obligations under any such Transaction Document or other agreement or instrument or any invalidity or unenforceability, in whole or in part, of any such Transaction Document or other agreement or instrument or any term thereof; or (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Grantor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not the Grantor shall have notice or knowledge of any of the foregoing.

20.Integration. This Agreement and the Security Agreement represent the entire agreement of the Grantor and the Collateral Agent with respect to the subject matter hereof, and there are no promises, undertakings,

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representations or warranties by the Collateral Agent relative to subject matter hereof not expressly set forth or referred to herein or therein.

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

22.Governing Law. This Agreement and the rights and obligations of the Grantor under this Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted hereunder.

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

[signature page follows]

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

EMAGIN CORPORATION
By:	/s/ Gary W. Jones
	Name: Gary W. Jones
	Title: Chief Executive Officer

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/s/ Mikhail Filimonov
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

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STATE OF_________________________)

       )  SS:

COUNTY OF_______________________)

[CHECK FOR APPLICABLE FORM OF ACKNOWLEDGEMENT WHERE SIGNED] On this day of July __, 2006, before me personally appeared proved to me on the basis of satisfactory evidence to be the person who executed the above Patent and Trademark Security Agreement as on behalf of eMagin Corporation, a Delaware corporation, and acknowledged to me that the corporation executed it.

WITNESS my hand and official seal.

________________________________________

NOTARY PUBLIC

STATE OF__________________   )

) SS:

COUNTY OF________________    )

On this day of July __, 2006, before me personally appeared proved to me on the basis of satisfactory evidence to be the person who executed the above Patent and Trademark Security Agreement as on behalf of Alexandra Investment Management, LLC, as Investment Adviser to Alexandra Global Master Fund Ltd., and acknowledged to me that the limited liability company executed it.

WITNESS my hand and official seal.

________________________________________

NOTARY PUBLIC

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EXHIBIT A

Patents, Patent Licenses and Patent Applications

ISSUED PATENTS

Patent Number	Title	Issue Date
7,068,258	Portable communication device with virtual image display module	June 27, 2006
2,173,248 (Canada)	Head Mounted Display System with Aspheric Optics (corr. to 5,543,816)	May 27, 2005
6,885,147	Organic Light Emitting Diode Devices with Improved Anode Stability	April 26, 2005
2,173,624 (Canada)	Binocular Head Mounted Display System	March 29, 2005
6,858,989	Method and System for Stabilizing Thin Film Transistors in AMOLED displays	February 22, 2005
6,809,710	Grey Scale Pixel Driver for Electronic Display and Method of Operation Therefor	October 26, 2004
6,809,710	Grey Scale Pixel Driver for Electronic Display and Method of Operation Therefor	October 26, 2004
6,760,034	Three Dimensional Display Emulation Method and System	July 6, 2004
98808734,0	Laser Ablation Method to Fabricate Color Organic Light Emitting Diode Displays	May 26, 2004
6,657,224	Organic Light Emitting Diode Devices Using Thermostable Hole-Injection and Hole-Transport Compounds	December 2, 2003
6,608,283	Apparatus and Method for Solder-Sealing an active Matrix Organic Light Emitting Diode	August 19, 2003
6,608,439	Inorganic-Based Color Conversion Matrix Element for Organic Color Display Devices and Method of Fabrication	August 19, 2003

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6,337,492	Serially-Connected Organic Light Emitting Diode Stack Having Conductors Sandwiching Each Light Emitting Layer	January 8, 2002
6,288,232	Synthesis of Pyrazolinynaphthalic Acid Derivatives	September 11, 2001
6,278,237	Laterally Structured High Resolution Multicolor Organic Electroluminescence Display Device	August 21, 2001
6,265,820	Heat Removal System for use in Organic Light Emitting Diode Displays Having High Brightness	July 24, 2001
6,255,771	Flashover Control Structure for Field Emitter Displays and Method of making the same	July 3, 2001
6,232,934	Binocular Head Mounted Display System	May 15, 2001
6,218,777	Field Emission Display Spacer with Guard Electrode	April 14, 2001
6,215,840	Method and Apparatus for Sequential Memory Addressing	April 10, 2001
6,204,975	Reflective Micro-Display System	March 20, 2001
6,198,214	Large Area Spacer-Less Field Emissive Display Package	March 6, 2001
6,198,220	Sealing Structure for Organic Light Emitting Devices	March 6, 2001
6,181,304	Convertible Right Eye/Left Eye Monocular Head Mounted Display System	January 30, 2001
6,169,358	Method and Apparatus for Flashover Control Including a High Voltage Spacer for Parallel Plate Electron Beam Array Devices and Method of Making Thereof	January 2, 2001
6,166,820	Laser Interferometric Lithographic System Providing Automatic Change of Fringe Spacing	December 26, 2000
6,157,291	Head Mounted Display System	December 5, 2000
6,144,145	High Performance Field Emitter and Method of Producing the Same	November 7, 2000

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6,136,621	High Aspect Ratio Gated Emitter Structure and Method of Making	October 24, 2000
6,101,028	Miniature Microscope	August 8, 2000
6,069,443	Passive Matrix OLED Display	May 30, 2000
6,060,728	Organic Light Emitting Device Structure and Process	May 9, 2000
6,027,388	Lithographic Structure and Method for Making Field Emitters	February 22, 2000
6,023,259	OLED Active Matrix Using a Single Transistor Current Mode Pixel Design	February 8, 2000
6,016,033	Electrode Structure for High Resolution Organic Light-Emitting Diode Displays and Method for Making the Same	January 18, 2000
6,005,720	Reflective Micro-Display System	December 21, 1999
5,965,898	High Aspect Ratio Gated Emitter Structure and Method of Making	October 12, 1999
5,959,725	Large Area Energy Beam Intensity Profiler	September 28, 1999
5,920,080	Emissive Display Using Organic Light Emitting Diodes	July 6, 1999
5,903,098	Field Emission Display Device Having Multiplicity of Through Conductive Vias and a Backside Connector	May 11, 1999
5,903,243	Compact body-Mountable Field Emission Display Device and Display Panel Having Utility for use Therewith	May 11, 1999
5,771,098	Laser Interferometric Lithographic System Providing Automatic Change of Fringe Spacing	June 23, 1998
5,708,449	Binocular Head Mounted Display System	January 13, 1998
5,688,158	Planarizing Process for Field Emitter Displays and Other Electron Source Applications	November 18, 1997
5,672,938	Light Emission Device Comprising Light Emitting Organic Material and Electron Injection Enhancement Structure	September 30, 1997

101

5,663,608	Field Emission Display Devices, and Field Emission Electron Beam Source and Isolation Structure Components Therefor	September 2, 1997
5,647,785	Methods of Making Vertical Microelectronic Field Emission Devices	July 15, 1997
Des 380,482	Head Mounted Display System	July 1, 1997
5,629,583	Flat Panel Display Assembly Comprising Photoformed Spacer Structure and Method of Making the Same	May 13, 1997
5,619,889	Method of Making Microstructural Surgical Instruments	April 15, 1997
5,619,097	Panel Display with Dielectric Spacer Structure	April 8, 1997
5,587,623	Field Emitter Structure and Method of Making the Same	December 24, 1996
5,583,393	Selectively Shaped Field Emission Electron Beam Source and Phosphor Array for use Therewith	December 10, 1996
5,561,339	Field Emission Array Magnetic Sensor Devices	October 1, 1996
5,548,181	Field Emission Device Comprising Dielectric Overlayer	August 20, 1996
5,546,099	Head Mounted Display System Light Blocking Structure	August 13, 1996
5,543,816	Head Mounted Display System with Aspheric Optics	August 6, 1996
5,539,422	Head Mounted Display System	July 23, 1996
5,534,743	Field Emission Display Devices, and Field Emission Electron Beam Source and Isolation Structure Components Therefor	July 9, 1996
5,529,524	Method of Forming a Spacer Structure Between Opposedly Facing Plate Members	June 25, 1996
Des 359,729	Portable Interface Unit for a Head-Up Display System	June 27, 1995

102

5,144,191	Horizontal Microelectronic Field Emission Devices	September 1, 1992
5,126,287	Self-Aligned Electron Emitter Fabrication Method and Device Formed Thereby	June 30, 1992
4,902,898	Wand Optices Column and Associated Array Wand and Charged Particle Source	February 20, 1990
98808734.0 (China)	Laser Ablation Method To Fabricate Color OLED Displays	May 26, 2004

103

PATENT APPLICATIONS IN PROGRESS

Patent Application No.	Title	Issue Date
11/169,154	Method of Clearing Electrical Contact Pads in Thin Film Sealed OLED Devices	N/A
09/785,270	Display Method and System	N/A
09/849,745	Portable Communication Device With Virtual Image Display Module	N/A
60/684,633	Tapered Fiber Optic Bundle Megadisplay	N/A
60/583,158	Photoresist Laser Ablation	N/A
09/814,853	Light Extraction from Color Changing Medium Layers in Organic Light Emitting Diode Devices	N/A
504797/99 (Japan)	Emissive Display Using Organic Light Emitting Diodes	N/A
2000-550128 (Japan)	An Improved Electrode Structure for Organic Light Emitting Diode Devices	N/A
6-523218 (Japan)	Head Mounted Display System	N/A
9-531760 (Japan)	Support for a Head Mounted Display System	N/A
2004-261527 (Japan; divisional)	Binocular Head Mounted Display System	N/A
2000-565526 (Japan)	Convertible Right Eye/Left Eye Monocular Head Mounted Display System	N/A
2000-589993 (Japan)	Reflective Micro-Display System; Miniature Microscope and Reflective Micro-display system respectively	N/A
01950594,0 (Europe)	OLED Devices Using Thermostable Hole-Injection and Hole-Transport Compounds	N/A
11/439,014	Tapered Fiber Optic Bundle Metadisplay	N/A

104

11/402,092	Auto-calibrating Gamma Correction Circuit	N/A
11/399,170	OLED Active Matrix Cell Designed For Optimal Uniformity	N/A
133,678 (Israel)	Emissive Display Using Organic Light Emitting Diodes	N/A
60/755,907	Automatic Timeout Image Orientation System For FOLED Micro-display	N/A
60/725,406	Novel OLED Lighting Device	N/A
2,490,344 (Canada; divisional)	Binocular Head-Mounted Display System	N/A

105

KODAK PATENTS (partial list)

Topic	U.S. Pat. No.	Issued
Multilayer structure	4,356,429	1982
Multilayer structure - Alq	4,539,507	1985
Porphyrin injecting layer	4,720,432	1988
Luminescent zone - dye dopant	4,769,292	1988
Improved cathode	4,885,211	1989
Silazane HTL	4,950,950	1990
Improved intensity circuit	4,996,523	1991
Cathode overlayer for stability	5,047,687	1991
Cathode metal cap	5,059,861	1991
Mg, Al cathode	5,059,862	1991
Organic amines HTL	5,061,569	1991
Fused metal cathode	5,073,446	1991
Blue emitters	5,141,671	1992
Blue emitters	5,150,006	1992
Blue emitters	5,151,629	1992
Integral shadow mask	5,276,380	1994
Integral shadow mask color	5,294,869	1994
Color change medium	5,294,870	1994
White emitter (2-layer) BAlq	5,405,709	1995
Phalocyanine dopant	5,409,783	1995
OLED ultra thin device	5,482,896	1996
ALQ blue	5,484,922	1996
OLED ultra thin substrate	5,530,269	1996
OLED TFT process	5,550,066	1996
AC drive scheme	5,552,678	1997
Polyaromatic amine HTL	5,554,450	1996
Quinacridone green	5,593,788	1997
Electron injector (silicides etc.)	5,608,287	1997
Camera data printer	5,634,156	1997
Blue emitter oxadizoles	5,645,948	1997
Camera Information Display	5,652,930	1997
White emitter structure	5,683,823	1997
OLED TFT device	5,684,365	1997
Blue emitter metal complex	5,755,999	1998
LiF cathode	5,776,622	1998

106

EXHIBIT B

Trademarks and Trademark Licenses

Serial App. No.	Item	Status	Filing Date	Published, Allowed, or Registered
78-463416	VIRTUAL VISION VERACITY (Block letters)	Allowed - 1st extension of time granted	Aug 6, 2004	P May 2, 2006
78-463402	VERACITY (Block letters)		Aug 6, 2004	A Sep 27, 2005
78-235749	EGLASS	Registered, Int'l	Apr 9, 2003	R Aug 17, 2004
78-853656	PRIVATE EYES (Block letters)	Pending - Initialized, Int'l	Apr 4, 2006
78-853655	PRIVATE EYE	Pending - Initialized, Int'l	Apr 4, 2006
78-852411	EYEVIEWER	Pending - Initialized, Int'l	Apr 3, 2006
78-852409	EYEWITNESS (	Pending - Initialized, Int'l	Apr 3, 2006
78-541421	Z800 3D VISOR	Pending - Non-final action, Int'l	Jan 3, 2005
78-667562	PERSONAL VIEWER	Pending - Non-final action, Int'l	Jul 11, 2005
78-667564	3DVISOR	Pending - Suspension letter, Int'l	Jul 11, 2005
78-667565	GET INSIDE THE GAME	Pending - Non-final action, Int'l	Jul 11, 2005
78-720607	EYEBUD	Pending - Non-final action, Int'l	Sep 26, 2005
75-856770	EMAGIN	Registered, Int'l	Nov 23, 1999	R Mar 23, 2004
74-285,321	VIRTUAL VISION	Registered	June 16, 1992	Dec. 6, 1994

107

EXHIBIT C

Filings Required for Collateral Assignment

and to Perfect Security Interest

1.Filing with the PTO

2.Filing of UCC-1 Financing Statement with the State of Delaware

3.Filing of UCC-1 Financing Statement withthe State of Washington

4.Filing of UCC-1 Financing Statement with the State of New York

108

EXHIBIT D

The Collateral Agent

1.Appointment.The Holders (all capitalized terms used in this Exhibit D and not otherwise defined shall have the respective meanings provided in the Patent and Trademark Security Agreement to which this Exhibit D is attached (the “Patent and Trademark Security Agreement”)), by their acceptance of the benefits of the Patent and Trademark Security Agreement, hereby irrevocably designate Alexandra Global Master Fund Ltd., as Collateral Agent, to act as specified herein and in the Patent and Trademark Security Agreement. Each Buyer hereby irrevocably authorizes, and each other Holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Collateral Agent to take such action on its behalf under the provisions of the Patent and Trademark Security Agreement and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Collateral Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Collateral Agent may perform any of its duties hereunder by or through its agents or employees.

2.Nature of Duties. The Collateral Agent shall have no duties or responsibilities except those expressly set forth in the Patent and Trademark Security Agreement. Neither the Collateral Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Patent and Trademark Security Agreement or hereunder or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Collateral Agent shall be mechanical and administrative in nature; the Collateral Agent shall not have by reason of the Patent and Trademark Security Agreement or any other Transaction Document a fiduciary relationship in respect of any Holder; and nothing in the Patent and Trademark Security Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Collateral Agent any obligations in respect of the Patent and Trademark Security Agreement except as expressly set forth herein. The Collateral Agent shall not take any material action or exercise any material right or power pursuant to Section 5, 6 or 7 of this Agreement without the authorization or direction of the Majority Holders; provided, however, that if the Collateral Agent determines that it is unable to contact the Majority Holders for purposes of seeking such authorization or direction or time will not permit the Collateral Agent to so contact the Majority Holders prior to such time as detriment may occur to the rights of the Collateral Agent or the Holders from any failure of the Collateral Agent to act or exercise such right, then in any such case the Collateral Agent may take such action or exercise such right without specific authorization or direction from the Majority Holders.

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The Collateral Agent shall not be liable for any act it may do or omit to do while acting in good faith and in the exercise of its own best judgment. Any act done or omitted by the Collateral Agent on the advice of its own attorneys shall be deemed conclusively to have been done or omitted in good faith. The Collateral Agent shall have the right at any time to consult with counsel on any question arising under this Patent and Trademark Security Agreement. The Collateral Agent shall incur no liability for any delay reasonably required to obtain the advice of counsel.

3.Lack of Reliance on the Collateral Agent. Independently and without reliance upon the Collateral Agent, each Holder, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Grantor and its subsidiaries in connection with the making and the continuance of the Obligations and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Grantor and its subsidiaries, and the Collateral Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Holder with any credit or other information with respect thereto, whether coming into its possession before any Obligation arises or the purchase of any Note, or at any time or times thereafter. The Collateral Agent shall not be responsible to any Holder for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Patent and Trademark Security Agreement or the financial condition of the Grantor or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Patent and Trademark Security Agreement, or the financial condition of the Grantor, or the existence or possible existence of any Event of Default.

4.Certain Rights of the Collateral Agent. No Holder shall have the right to cause the Collateral Agent to take any action with respect to the Collateral, with only the Majority Holders having the right to direct the Collateral Agent to take any such action. If the Collateral Agent shall request instructions from the Majority Holders with respect to any act or action (including failure to act) in connection with the Patent and Trademark Security Agreement, the Collateral Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions from the Majority Holders, and to the extent requested, appropriate indemnification in respect of actions to be taken by the Collateral Agent; and the Collateral Agent shall not incur liability to any person by reason of so refraining. Without limiting the foregoing, no Holder shall have any right of action whatsoever against the Collateral Agent as a result of the Collateral Agent acting or refraining from acting hereunder in accordance with the instructions of the Majority Holders or as otherwise specifically provided in the Patent and Trademark Security Agreement.

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5.Reliance. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to the Patent and Trademark Security Agreement and its duties thereunder, upon advice of counsel selected by it.

6.Limitation of Holder Liability. The Holders shall not be liable for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Collateral Agent in performing its duties hereunder or under the Patent and Trademark Security Agreement.

7.The Collateral Agent in its Individual Capacity. The Collateral Agent and its affiliates may lend money to, purchase, sell and trade in securities of and generally engage in any kind of business with the Grantor or any affiliate or subsidiary of the Grantor as if it were not performing the duties specified herein, and may accept fees and other consideration from the Grantor for services to the Grantor in connection with the Transaction Documents and otherwise without having to account for the same to the Holders; provided, however, that the Collateral Agent on behalf of itself and such affiliates, hereby waives any claim, right or Lien against the Collateral in any way arising from or relating to any such loan, securities transaction or business with the Grantor.

8.Holders. The Collateral Agent may deem and treat the holder of record of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, as the case may be, shall have been filed with the Collateral Agent. Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of record of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee, as the case may be, of such Note or of any Note(s) issued in exchange therefor.

9.Resignation by the Collateral Agent. (a) The Collateral Agent may resign from the performance of all its functions and duties under the Patent and Trademark Security Agreement at any time by giving 60 Business Days’ prior written notice (as provided in the Patent and Trademark Security Agreement) to the Grantor and the Holders. Such resignation shall take effect upon the appointment of a successor Collateral Agent pursuant to clauses (b) and (c) below.

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(b)Upon any such notice of resignation, the Majority Holders shall appoint a successor Collateral Agent hereunder.

(c)If a successor Collateral Agent shall not have been so appointed within said 60 Business Day period, the Collateral Agent shall then appoint a successor Collateral Agent who shall serve as Collateral Agent hereunder or thereunder until such time, if any, as the Majority Holders appoint a successor Collateral Agent as provided above. If a successor Collateral Agent has not been appointed within such 60-day period, the Collateral Agent may petition any court of competent jurisdiction or may interplead the Grantor and Holders in a proceeding for the appointment of a successor Collateral Agent, and all fees, including but not limited to extraordinary fees associated with the filing of interpleader, and expenses associated therewith shall be payable by the Grantor.

(d)The fees of any successor Collateral Agent for its services as such shall be payable by the Grantor.

112

EXHIBIT E

FORM OF PATENT COLLATERAL ASSIGNMENT

AND SECURITY AGREEMENT

This PATENT SECURITY AGREEMENT, dated as of July 21, 2006, made by eMagin Corporation, a Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders.

W I T N E S S E T H:

WHEREAS, the Grantor has acquired certain right, title and interest in certain United States patents and patent applications identified in Exhibit 1 hereto (the “Patents”);

WHEREAS, the Grantor and the Buyers are parties to certain Note Purchase Agreements, dated as of July 21, 2006 (as from time to time amended or supplemented, the “Note Purchase Agreements”), pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of 6% Senior Secured Convertible Notes due 2007-2008 (the “Notes”) of the Grantor;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes that the Grantor shall have executed and delivered a Patent and Trademark Security Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor wishes to grant to the Collateral Agent a security interest in certain of its property and assets to secure the performance of its obligations under the Notes;

WHEREAS, the Grantor is contemporaneously entering into a Security Agreement and a Patent and Trademark Security Agreement with the Collateral Agent for the ratable benefit of the Holders; and

WHEREAS, the Grantor and Collateral Agent by this instrument seek to confirm and make a record of the collateral assignment of and grant of a security interest in the Patents.

113

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor does hereby acknowledge and confirm that it has made a collateral assignment to the Collateral Agent of, and has granted to the Collateral Agent a security interest in, all of the Grantor’s right, title and interest in, to, and under the Patents. The Grantor also acknowledges and confirms that the rights and remedies of the Collateral Agent with respect to the collateral assignment of and security interests in the Patents acknowledged and confirmed hereby are more fully set forth in the Patent and Trademark Security Agreement and the Security Agreement, the terms and provisions of which are incorporated herein by reference.

EMAGIN CORPORATION
By:
	Name
	Title

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

114

For eMagin Corporation:

STATE OF____________________)

                                                            ) SS:

COUNTY OF__________________ )

Subscribed and sworn to this day of , 2006.

_________________________________________________

Notary Public

My Commission Expires:

For Alexandra Global Master Fund Ltd.,

as Collateral Agent:

STATE OF_______________________ )

                                                          ) SS:

COUNTY OF_____________________  )

Subscribed and sworn to this day of , 2006.

_______________________________________________

Notary Public

My Commission Expires:

115

EXHIBIT 1

Patents and Patent Applications

116

EXHIBIT F

FORM OF TRADEMARK COLLATERAL ASSIGNMENT

AND SECURITY AGREEMENT

This TRADEMARK SECURITY AGREEMENT, dated as of July 21, 2006, made by eMagin Corporation, a Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders.

W I T N E S S E T H:

WHEREAS, the Grantor has acquired an interest in certain trademarks identified in Exhibit B hereto (the “Trademarks”);

WHEREAS, the Grantor and the Buyers are parties to certain Note Purchase Agreements, dated as of July 21, 2006 (as from time to time amended or supplemented, the “Note Purchase Agreements”), pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of 6% Senior Secured Convertible Notes due 2007-2008 (the “Notes”) of the Grantor;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes that the Grantor shall have executed and delivered a Patent and Trademark Security Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor wishes to grant to Collateral Agent a security interest in certain of its property and assets to secure the performance of its obligations under the Notes;

WHEREAS, the Grantor is contemporaneously entering into a Security Agreement and a Patent and Trademark Security Agreement with the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor and the Collateral Agent by this instrument seek to confirm and make a record of the collateral assignment of and grant of a security interest in the Trademarks.

117

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor does hereby acknowledge and confirm that it has made a collateral assignment to the Collateral Agent of, and has granted to the Collateral Agent a security interest in, all of the Grantor’s interests the Trademarks. The Grantor also acknowledges and confirms that the rights and remedies of Collateral Agent with respect to the collateral assignment of and security interests in the Trademarks acknowledged and confirmed hereby are more fully set forth in the Patent and Trademark Security Agreement and the Security Agreement, the terms and provisions of which are incorporated herein by reference.

EMAGIN CORPORATION
By:	/s/
	Name:
	Title:

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
By:	ALEXADRA INVESTMENT MANAGEMENT, LLC,  as Investment Advisor
By:
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

118

For eMagin Corporation:

STATE OF_____________________)

                                                                     ) SS:

COUNTY OF___________________ )

Subscribed and sworn to this day of , 2006.

___________________________________________

Notary Public

My Commission Expires:

For Alexandra Global Master Fund Ltd., as

Collateral Agent:

STATE OF_____________________)

                                                                     ) SS:

COUNTY OF                                             )

Subscribed and sworn to this day of , 2006.

_____________________________________________

Notary Public

My Commission Expires:

F-3

119

Annex IV

PLEDGE AND SECURITY AGREEMENT

THISPLEDGE AND SECURITY AGREEMENT, dated as of July 21, 2006 (this “Agreement”), made by EMAGIN CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used in this Agreement having the respective meanings provided in this Agreement).

WITNESSETH:

WHEREAS, the Grantor and the several Buyers are parties to the several Note Purchase Agreements, pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of Notes of the Grantor;

WHEREAS, in connection with the transactions contemplated by the Note Purchase Agreements, the Grantor has agreed to grant to the Collateral Agent a security interest in certain of its property, assets and rights;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes and Warrants pursuant to the Note Purchase Agreements that the Grantor shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, contemporaneously with the execution and delivery of this Agreement the Company and the Collateral Agent are executing and delivering the Patent and Trademark Security Agreement and the Lockbox Agreement; and

NOW, THEREFORE, in consideration of the premises and to induce the Buyers to purchase their respective Notes and Warrants, the Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Holders, as follows:

1. Definitions.

(a)As used in this Agreement, the terms “Agreement”, “Grantor” and “Collateral Agent” shall have the respective meanings assigned to such terms in the introductory paragraph of and the recitals to 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)Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Notes.

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(d)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):

“Accounts” means all rights to payment for goods sold or leased or for services rendered, whether or not such rights have been earned by performance.

“Additional Note” means the Note issued pursuant to the Additional Note Purchase Agreement.

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Grantor and Stillwater LLC, which by its terms contemplates the issuance of up to $500,000 aggregate principal amount of Notes on or after December 10, 2006.

“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.

“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.

“Buyer” means any of the several buyers party to a Note Purchase Agreement.

“Chattel Paper” shall have the meaning assigned to such term under the Code.

“Code” means the Uniform Commercial Code as from time to time in effect in the State of Delaware.

“Collateral” means each of the following, whether now existing or hereafter arising:

(1)all Accounts of the Grantor and, if the Collateral Agent exercises its rights under Section 3(b), the Lockbox and each and every General Intangible relating thereto;

(2)all Inventory of the Grantor;

(3)all Equipment of the Grantor;

(4)all Proprietary Information owned or licensed by the Grantor, whether existing on the date hereof or developed or acquired hereafter;

121

(5)all of the Grantor’s right, title and interest in and to all Contracts, Documents, Chattel Paper, Instruments, Investment Property and General Intangibles, whether existing on the date hereof or hereafter arising;

(6)all cash, securities, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of the Collateral, including, without limitation in respect of the cash or other property held in the Lockbox or the Collateral Account;

(7)all Patents, Patent Licenses, Trademarks and Trademark Licenses;

(8)all insurance policies to the extent they relate to items (1) through (7) above;

(9)all books, ledgers, books of account, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating, or referring to any of the foregoing; and

(10)to the extent not otherwise included, all Proceeds, products, rents, issues, profits and returns of and from any and all of the foregoing, which Proceeds may be in the form of Accounts, Chattel Paper, Inventory or otherwise.

“Collateral Account” shall have the meaning provided in the Lockbox Agreement.

“Contracts” shall have the meaning assigned to that term under the Code.

“Documents” shall have the meaning assigned to such term under the Code.

“Event of Default” means:

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

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

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

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

122

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

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

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

“General Intangibles” shall have the meaning assigned to such term under the Code.

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

“Indemnified Person” shall have the meaning provided in Section 5(j).

“Inventory” shall have the meaning assigned to such term under the Code, and in any event, including, without limitation, all raw material, work-in process and finished goods, inventory, merchandise, goods and other personal property that are held by or on behalf of a Person for sale or lease or to be furnished under a contract of service or which give rise to any Account, including, without limitation, returned goods.

“Issuance Date” means the date on which the Notes are initially issued.

“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction or performance of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States.

“Lockbox” shall have the meaning assigned to such term in the Lockbox Agreement.

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

“Lockbox Agreement” means that certain Lockbox Agreement dated as of the date hereof, by and between the Grantor and the Lockbox Agent.

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

123

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

“Notes” means the Grantor’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Obligations” means:

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

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

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

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

“Patent(s)” means all present and future patents, patent applications and patent disclosures which are presently, or in the future may be, owned, issued, acquired or used (whether pursuant to a license or otherwise) anywhere in the world by the Grantor, in whole or in part, and all of the Grantor's right, title and interest in and to all patentable inventions and to file applications for patents under patent laws of the United States or of any other jurisdiction, including, without limitation, any and all extensions, reissues, substitutes, continuations, continuations-in-part, divisional, patents of addition, re-examinations and renewals thereof, and patents issuing therefrom, and any other proprietary rights related to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of an interest therein under the laws of all jurisdictions) and any and all foreign counterparts of any of the foregoing.

“Patent Licenses” means each license agreement relating to Patents granted to, used or acquired by the Grantor, in each case together with the right to use and rely upon the inventions and other intellectual property conveyed thereunder.

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

“Permitted Liens” shall have the meaning assigned to such term in the Notes.

“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.

“Proceeds” shall have the meaning assigned to such term under the Code.

“Proprietary Information” means information in whatever form generally unavailable to the public that has been created, discovered, developed or otherwise become known to the Grantor or in which property rights have been assigned or otherwise conveyed to the Grantor, which information has economic value or potential economic value to the creation, operation, use, modification, extension, upgrade, application, marketing, sale and distribution of the Grantor’s products and services. Proprietary Information shall include, but not be limited to, trade secrets, processes, formulas, writings, data, know-how, negative know-how, improvements, discoveries, developments, designs, inventions, techniques, technical data, customer and supplier lists, financial information, business plans or projections and modifications or enhancements to any of the above. Proprietary Information shall include all information existing on the date hereof and all information developed or acquired hereafter.

“Security Interest” means the security interest granted in the Collateral pursuant to this 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 Grantor.

“Trademark License” means each license agreement relating to Trademarks used, adopted or acquired by the Grantor.

“Trademarks” means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers of the Grantor adopted for use in conjunction with the Grantor’s business products and services, now existing anywhere in the world or hereinafter adopted or acquired, whether currently in use or not, and the goodwill associated therewith, all registrations and recordings thereof, and all applications in connection therewith, and (b) all renewals thereof by the Grantor.

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

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2.Grant of Security Interest. As collateral security for the prompt and complete payment and performance of the Obligations and for the other purposes provided in this Agreement, the Grantor hereby grants to the Collateral Agent for the ratable benefit of the Holders a first priority security interest in all of the Collateral. Such grant includes, without limitation, a grant of the security interest to secure the payment and performance of Obligations relating to the Additional Note upon the date of issuance of such Additional Note.

3.Rights of Collateral Agent; Limitations on Collateral Agent's Obligations.

(a)Grantor Remains Liable under Accounts and Contracts. Anything herein to the contrary notwithstanding, the Grantor shall remain liable under each of the Accounts and Contracts that constitute part of the Collateral to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account and in accordance with and pursuant to the terms and provisions of each such Contract. The Collateral Agent shall not have any obligation or liability under any Account that constitutes part of the Collateral (or any agreement giving rise thereto) or under any Contract that constitutes part of the Collateral by reason of or arising out of this Agreement or the receipt by the Collateral Agent of any payment relating to such Account or Contract pursuant hereto, nor shall the Collateral Agent be obligated in any manner to perform any of the obligations of the Grantor under or pursuant to any such Account (or any agreement giving rise thereto) or under or pursuant to any such Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any such Account (or any agreement giving rise thereto) or under any such Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

(b)Notice to Account Debtors and Contracting Parties. Upon the direction of the Collateral Agent at any time that an Event of Default has occurred and is continuing,the Grantor shall promptly, but in no event later than five Business Days, after such direction is given, notify all the account debtors on the Accounts that constitute part of the Collateral and parties to the Contracts that constitute part of the Collateral that such Accounts and such Contracts have been assigned to the Collateral Agent for the ratable benefit of the Holders and that payments in respect thereof shall be made directly to the Collateral Agent or as the Collateral Agent shall direct in accordance with the Lockbox Agreement.

(c)Verification and Analysis of Accounts. If an Event of Default has occurred and the Collateral Agent shall have directed the Grantor to notify the account debtors on the Accounts and parties to the Contracts in accordance with Section 3(b), in addition to its rights pursuant to clause (1) of this Section 3(c) the Collateral Agent shall have the right in its own name or in the name of others to communicate with account debtors on the Accounts that constitute part of the Collateral and parties to the Contracts that constitute part of the Collateral to verify with them to its satisfaction the existence, amount and terms of any such Accounts or Contracts and to make test verifications of such Accounts in any manner and through any medium that it reasonably considers advisable, and the Grantor shall furnish all such assistance and information as the Collateral Agent may require in connection therewith. At any time and from time to time, upon the Collateral Agent's reasonable request and at the expense of the Grantor, the Grantor shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, such Accounts.

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4.Representations and Warranties. The Grantor hereby represents and warrants that:

(a)Title; No Other Liens. Except for the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to this Agreement, the Patent and Trademark Security Agreement, the Lockbox Agreement and the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to the Patent and Trademark Security Agreement, the Grantor owns and has good and marketable title to each item of the Collateral free and clear of any and all Liens or claims of others except Permitted Liens. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Collateral Agent, for the ratable benefit of the Holders, pursuant to this Agreement or pursuant to the Patent and Trademark Security Agreement.

(b)Perfected First Priority Liens. The Liens granted pursuant to this Agreement will constitute upon the completion of all the filings or notices listed in Schedule I hereto, perfected Liens on all Collateral in favor of the Collateral Agent for the benefit of the Holders, which are prior to all other Liens (except Permitted Liens, if any) on such Collateral and which are enforceable as such against all Persons.

(c)Accounts. No amount payable to the Grantor under or in connection with any Account that constitutes part of the Collateral is evidenced by any Instrument (other than checks in the ordinary course of business) or Chattel Paper which has not been delivered to the Collateral Agent. The place where the Grantor keeps its records concerning the Accounts that constitute part of the Collateral is set forth on Schedule II hereto.

(d)Consents under Contracts. No consent (other than consents that have been obtained) of any party (other than the Grantor), to any Contract that constitutes part of the Collateral is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement or the exercise of the Collateral Agent's rights and remedies provided herein or at law.

(e)Inventory. The items of Inventory that constitute part of the Collateral are, as of the Issuance Date, kept at the locations listed on Schedule III hereto and have not been kept at any other location within the six-month period ending on the Issuance Date.

(f)Chief Executive Office. The Grantor's chief executive office and chief place of business is located at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004.

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(g)Power and Authority. The Grantor has full power, authority and legal right to grant the Collateral Agent the Lien on the Collateral pursuant to this Agreement.

(h)Approvals, Filings, Etc. No authorization, approval or consent of, or filing, registration, recording or other action with, any United States or foreign court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market, the stockholders of the Grantor or any other Person, is required to be obtained or made by the Grantor or any Subsidiary (x) for the grant by the Grantor of the Security Interest in the Collateral pursuant to this Agreement, (y) to perfect the Security Interest purported to be created by this Agreement, or (z) for the exercise of the Collateral Agent's rights and remedies provided herein or at law, in each case except as has been obtained or made.

5.Covenants. The Grantor covenants and agrees with the Collateral Agent that from and after the date of this Agreement until the payment or performance in full by the Grantor of all of the Obligations:

(a)Further Documentation; Pledge of Instruments and Chattel Paper. At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of the Grantor, the Grantor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Code or similar laws in effect in any such jurisdiction with respect to the Liens created hereby. The Grantor also hereby authorizes the Collateral Agent to file any such financing or continuation statement without the signature of the Grantor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Agreement.

(b)Maintenance of Records. The Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to any Accounts that may constitute part of the Collateral. For the further security of the Collateral Agent, the Grantor hereby grants to the Collateral Agent a security interest in all of the Grantor's books and records pertaining to the Collateral, and the Grantor shall turn over any such books and records for inspection at the office of the Grantor to the Collateral Agent or to its representatives during normal business hours at the request of the Collateral Agent.

(c)Limitation on Liens on Collateral. The Grantor (x) will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Security Interest created hereby and Liens created by the Patent and Trademark Security Agreement, and (y) will defend the right, title and interest of the Collateral Agent in and to any of the Collateral against the claims and demands of all Persons.

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(d)Limitations on Dispositions of Collateral. The Grantor will not sell, transfer, lease, assign, grant any participation or interest in, or otherwise dispose of, any of the Collateral to any Person, including, without limitation, any Subsidiary or Affiliate of the Grantor, or attempt, offer or contract to do so.

(e)Performance of Contracts and Agreements Giving Rise to Accounts. The Grantor shall (i) exercise promptly and diligently each and every material right and perform each material obligation which it may have under each Contract that constitutes part of the Collateral and each agreement giving rise to an Account that constitutes part of the Collateral (other than any right of termination) and (ii) deliver to the Collateral Agent, upon request, a copy of each material demand, notice or document received by it relating in any way to any Contract that constitutes part of the Collateral or any agreement giving rise to an Account that constitutes part of the Collateral. The Grantor shall not amend or modify the terms of, or waive any rights under, any Contracts, in a manner which would materially adversely affect the Security Interest or the value of such Contracts.

(f)Further Identification of Collateral. The Grantor shall furnish to the Collateral Agent from time to time, upon the request of the Collateral Agent, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail.

(g)Notices. The Grantor will advise the Collateral Agent within two Business Days of the occurrence thereof, in reasonable detail, at its address in accordance with Section 16, (i) of any Lien (other than Liens permitted hereunder) on, or claim asserted against, any of the Collateral, (ii) of any Event of Default or any event which, with notice or the lapse of time, or both, would become an Event of Default and (iii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the Collateral, the Security Interest or the rights of the Collateral Agent hereunder.

(h)Changes in Locations, Name, Etc. The Grantor will not

(1)change the location of its chief executive office/chief place of business from that specified in Section 4(f) or remove its books and records from the location specified in Section 4(c), or

(2)change its name, identity or corporate structure to such an extent that any financing statement filed in connection with this Agreement and naming the Collateral Agent as secured party would become misleading or invalid, or

(3)change the location at which any item of Inventory that constitutes Collateral is kept from the locations specified in Section 4(e),

unless in any such case it shall have given the Collateral Agent at least 30 days prior written notice thereof and, prior to such action or event, shall have taken appropriate action satisfactory to the Collateral Agent to preserve and protect the Collateral Agent's security interest under this Agreement.

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(i)Subsidiaries. This Agreement is entered into on behalf of and for the benefit of the Grantor. The Subsidiaries and the Affiliates of the Grantor have no ownership or other rights in the Collateral. The Grantor will not permit any Subsidiary or any Affiliate of the Grantor to have any ownership or other rights in or to exercise any control over the Collateral.

(j)Indemnification. The Grantor agrees to indemnify and hold harmless the Collateral Agent and each Holder and their respective officers, directors, Affiliates, agents, members, shareholders and investment advisors (each, an “Indemnified Person”) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and to reimburse the Collateral Agent and each Holder for all costs and expenses, including reasonable attorneys’ fees and expenses, arising out of or resulting from this Agreement, including any breach hereof or Event of Default hereunder, or the exercise by the Collateral Agent or any Holder, as the case may be, of any right or remedy granted to it hereunder or under the other Transaction Documents under applicable law; provided, however, that the Grantor shall not be required to indemnify a particular Indemnified Person to the extent any claim, demand, loss, judgment, liability, cost or expense is determined by final judgment (not subject to further appeal) of a court of competent jurisdiction to have arisen primarily from the gross negligence or willful misconduct of such Indemnified Person. In no event shall any Indemnified Person other than the Collateral Agent have any liability or obligation to the Grantor under this Agreement or applicable law (liability under which the Grantor hereby waives) for any matter or thing in connection with this Agreement, and in no event shall the Collateral Agent be liable, in the absence of a determination of gross negligence or willful misconduct on its part by final judgment (not subject to further appeal) of a court of competent jurisdiction, for any matter or thing in connection with this Agreement other than to account for moneys actually received by it in accordance with the terms hereof. If and to the extent that the obligations of the Grantor under this Section 4(j) are unenforceable for any reason, the Grantor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law.

6.Collateral Agent's Powers.

(a)Powers. The Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof or investment advisor thereto, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Grantor and in the name of the Grantor or in its own name, from time to time in the Collateral Agent's discretion, during any period in which an Event of Default is continuing, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Grantor hereby gives the Collateral Agent and each such officer, agent and investment advisor the power and right, on behalf of the Grantor, without notice to or assent by the Grantor, except any notice required by law, to do the following:

(i)to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under or with respect to any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under or with respect to any such Collateral whenever payable, in each case in the name of the Grantor or its own name, or otherwise;

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(ii)to pay or discharge taxes and liens levied or placed on or threatened against the Collateral and to pay all or any part of the premiums therefor and the costs thereof; and

(iii)(A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Grantor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Collateral Agent may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent's option and the Grantor's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's Liens thereon and to effect the intent of this Agreement, all as fully and effectively as the Grantor might do.

The Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the Grantor shall have paid and performed in full all of the Obligations.

(b)Other Powers. The Grantor also authorizes the Collateral Agent, from time to time during any period in which an Event of Default is continuing,to execute, in connection with the sale provided for herein, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral.

(c)No Duty on Collateral Agent's Part. The powers conferred on the Collateral Agent hereunder are solely to protect the Collateral Agent's interests in the Collateral for the pro rata benefit of the Holders and shall not impose any duty upon the Collateral Agent to exercise any such powers. The Collateral Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

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7.Performance by Collateral Agent of Grantor's Obligations. If the Grantor fails to perform or comply with any of its agreements contained herein and the Collateral Agent, as provided for by the terms of this Agreement and following reasonable notice to the Grantor, may itself perform or comply, or otherwise cause performance or compliance, with such agreement, and the expenses of the Collateral Agent incurred in connection with such performance or compliance shall be payable by the Grantor to the Collateral Agent on demand and shall constitute Obligations secured hereby.

8.Remedies in General. If an Event of Default has occurred and is continuing, the Collateral Agent may exercise, in addition to all other rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, if an Event of Default has occurred and is continuing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or expressly provided for) to or upon the Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are, to the extent permitted by applicable law, hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, license, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), at public or private sale or sales, at any exchange, broker's board or office of the Collateral Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Grantor, which right or equity is hereby waived, to the extent permitted by applicable law, or released.

The Grantor further agrees that, if an Event of Default has occurred and is continuing,at the Collateral Agent's request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at the Grantor's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, need the Collateral Agent account for the surplus, if any, to the Grantor. To the extent permitted by applicable law, the Grantor waives all claims, damages and demands it may acquire against the Collateral Agent arising out of the exercise by it of any rights hereunder, provided, that nothing contained in this Section 8 shall relieve the Collateral Agent from liability arising solely from its gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten days before such sale or other disposition. The Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency.

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9.Limitation on Duties Regarding Preservation of Collateral. The Collateral Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under the Code or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Grantor or otherwise.

10.Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest until the Grantor has paid and performed in full all of its obligations under the Transaction Documents.

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

12.Paragraph Headings, Captions, Etc. The paragraph headings, the captions and the footers used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

13.No Waiver; Cumulative Remedies. The Collateral Agent shall not by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have on any future occasion. The rights and remedies herein and in the Notes and the other Transaction Documents are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law or in equity or by statute.

14.Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party to be charged with enforcement; provided, however, that any provision of this Agreement may be waived, amended, supplemented or otherwise modified by the Collateral Agent only with the prior written approval of the Majority Holders. This Agreement shall be binding upon the successors and permitted assigns of the Grantor and shall inure to the benefit of the Collateral Agent and its successors and assigns. The Grantor may not assign its rights or obligations under this Agreement without the prior written consent of the Collateral Agent, which the Collateral Agent may withhold in the sole discretion of the Majority Holders. The requirements for resignation, and appointment of a successor to, the Collateral Agent are established by Schedule IV hereto and not by this Agreement.

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15.Termination of Security Interest; Release of Collateral.

(a)Upon the payment in full of all principal of and premium, if any, and interest on the Notes and the payment in full of all other amounts for Obligations that are due and payable at such time, and if no claims for payment by the Company of any Obligations are at the time pending, the Security Interest shall terminate and all rights to the Collateral shall revert to the Grantor.

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

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

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

(iii)Third, to pay each Holder on a pro rata basis the amount, if any, of unpaid principal then due on the Maturity Date of any installment of principal of such Holder’s Notes;

(iv)Fourth, to pay each Holder, on a pro rata basis, the amount then due upon acceleration, if any, pursuant to Section 4 of such Holder’s Note(s); and then

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

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

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

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

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(c)At any time and from time to time prior to termination of the Security Interest pursuant to Section 15(a), the Collateral Agent shall release any of the Collateral only with the prior written consent of the Majority Holders.

(d)Upon any such termination of the Security Interest or release of all the Collateral, the Collateral Agent will, at the expense of the Grantor, execute and deliver to the Grantor such documents and take such other actions as the Grantor shall reasonably request to evidence the termination of the Security Interest and deliver to the Grantor all Collateral so released then in its possession.

16.Notices. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by 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 below 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 Grantor, such notice shall be addressed to the Grantor at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004, Attention: Chief Financial Officer (telephone line facsimile number (425) 749-3601), 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. (telephone line facsimile number (212) 930-9725) and in the case of any notice to the Collateral Agent, such notice shall be addressed to the Collateral Agent at c/o Alexandra Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, New York 10017 (telephone line facsimile number (212) 301-1810), with a copy to Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York (telephone line facsimile number (212) 980-7055).

17.Fees and Expenses. The Grantor agrees to pay the fees of the Collateral Agent in performing its services under this Agreement and all expenses (including but not limited to reasonable attorneys' fees and costs for legal services, costs of insurance and payments of taxes or other charges) of, or incidental to, the custody, care, sale or realization on any of the Collateral or in any way relating to the performance of the obligations or the enforcement or protection of the rights of the Collateral Agent hereunder.

18.Concerning Collateral Agent. The Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or nonexercise by the Collateral Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Holders, be governed by Schedule IV hereto and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantor, except as expressly provided in Sections 14 and 15, the Collateral Agent shall be conclusively presumed to be acting as agent for the Holders with full and valid authority so to act or refrain from acting, and the Grantor shall not be under any obligation to make any inquiry respecting such authority. The Collateral Agent hereby waives for the benefit of the Holders any claim, right or lien of the Collateral Agent against the Collateral arising under applicable law or arising from any business or transaction between the Collateral Agent and the Grantor other than pursuant to this Agreement or any of the other Transaction Documents.

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19.Survival. All representations, warranties, covenants and agreements of the Grantor and of the Collateral Agent contained herein will survive the execution and delivery hereof and the release of any Collateral pursuant hereto and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Collateral Agent or the Grantor or any person who controls the Collateral Agent or the Grantor.

20.Grantor’s Obligations Absolute, Etc. The obligations of the Grantor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any of the Transaction Documents or any other agreement or instrument referred to therein, or any assignment or transfer of any thereof; (b) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such Transaction Document or other agreement or instrument; (c) any furnishing of any additional security to the Collateral Agent or its assignees or any acceptance thereof or any release of any security by the Collateral Agent or its assignees; (d) any limitation on any party’s liability or obligations under any such Transaction Document or other agreement or instrument or any invalidity or unenforceability, in whole or in part, of any such Transaction Document or other agreement or instrument or any term thereof; or (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Grantor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not the Grantor shall have notice or knowledge of any of the foregoing.

21.Integration. This Agreement represents the entire agreement of the Grantor and the Collateral Agent with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the parties relative to the subject matter hereof not expressly set forth or referred to herein or therein.

22.Governing Law. This Agreement and the rights and obligations of the Grantor under this Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted hereunder.

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

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

[Signature page follows]

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

EMAGIN CORPORATION
By:	/s/ Gary W. Jones
	Name: Gary W. Jones
	Title: Chief Executive Officer

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/s/ Mikhail Filimonov
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

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SCHEDULE I

Filings Required to Perfect Security Interest

1.Secretary of State of the State of Delaware

2.Department of State of the State of New York

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SCHEDULE II

Location of Records Concerning Accounts

eMagin Corporation

10500 NE 8th Street, Suite 1400

Bellevue, WA. 98004

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SCHEDULE III

Inventory Locations

eMagin Corporation

2070 Route 52

Hopewell Junction, NY 12533

eMagin Corporation

10500 NE 8th Street, Suite 1400

Bellevue, WA. 98004

Asteria Manufacturing and Brimal Holding (same address):

Wisma AIC

Lot 3

Persiaran Kemajuan

Seksyen 16

40200 Shah Alam

Selangor Darul Ehsan

Malaysia

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SCHEDULE IV

The Collateral Agent

1.Appointment.The Holders (all capitalized terms used in this Schedule IV and not  otherwise  defined shall have the respective meanings provided in  the  Security agreement to which this Schedule IV is attached (the “Agreement”)), by their acceptance of the benefits of the Agreement, hereby irrevocably designate Alexandra Global Master Fund Ltd., as Collateral Agent, to act as specified herein and in the Agreement. Each Buyer hereby irrevocably authorizes, and each other Holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Collateral Agent to take such action on its behalf under the provisions of the Agreement and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Collateral Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Collateral Agent may perform any of its duties hereunder by or through its agents or employees.

2.Nature of Duties. The Collateral Agent shall have no duties or responsibilities except those expressly set forth in the Agreement. Neither the Collateral Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Collateral Agent shall be mechanical and administrative in nature; the Collateral Agent shall not have by reason of the Agreement or any other Transaction Document a fiduciary relationship in respect of any Holder; and nothing in the Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Collateral Agent any obligations in respect of the Agreement except as expressly set forth herein. The Collateral Agent shall not take any material action or exercise any material right or power pursuant to Section 5, 6 or 7 of this Agreement without the authorization or direction of the Majority Holders; provided, however, that if the Collateral Agent determines that it is unable to contact the Majority Holders for purposes of seeking such authorization or direction or time will not permit the Collateral Agent to so contact the Majority Holders prior to such time as detriment may occur to the rights of the Collateral Agent or the Holders from any failure of the Collateral Agent to act or exercise such right, then in any such case the Collateral Agent may take such action or exercise such right without specific authorization or direction from the Majority Holders.

The Collateral Agent shall not be liable for any act it may do or omit to do while acting in good faith and in the exercise of its own best judgment. Any act done or omitted by the Collateral Agent on the advice of its own attorneys shall be deemed conclusively to have been done or omitted in good faith. The Collateral Agent shall have the right at any time to consult with counsel on any question arising under the Agreement. The Collateral Agent shall incur no liability for any delay reasonably required to obtain the advice of counsel.

3.Lack of Reliance on the Collateral Agent. Independently and without reliance upon the Collateral Agent, each Holder, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Grantor and its subsidiaries in connection with the making and the continuance of the Obligations and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Grantor and its subsidiaries, and the Collateral Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Holder with any credit or other information with respect thereto, whether coming into its possession before any Obligation arises or the purchase of any Note, or at any time or times thereafter. The Collateral Agent shall not be responsible to any Holder for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Agreement or the financial condition of the Grantor or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement, or the financial condition of the Grantor, or the existence or possible existence of any Event of Default.

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4.Certain Rights of the Collateral Agent. No Holder shall have the right to cause the Collateral Agent to take any action with respect to the Collateral, with only the Majority Holders having the right to direct the Collateral Agent to take any such action. If the Collateral Agent shall request instructions from the Majority Holders with respect to any act or action (including failure to act) in connection with the Agreement, the Collateral Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions from the Majority Holders, and to the extent requested, appropriate indemnification in respect of actions to be taken by the Collateral Agent; and the Collateral Agent shall not incur liability to any person by reason of so refraining. Without limiting the foregoing, no Holder shall have any right of action whatsoever against the Collateral Agent as a result of the Collateral Agent acting or refraining from acting hereunder in accordance with the instructions of the Majority Holders or as otherwise specifically provided in the Agreement.

5.Reliance. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to the Agreement and its duties thereunder, upon advice of counsel selected by it.

6.Limitation of Holder Liability. The Holders shall not be liable for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Collateral Agent in performing its duties hereunder or under the Agreement, or in any way relating to or arising out of the Agreement.

7.The Collateral Agent in its Individual Capacity. The Collateral Agent and its affiliates may lend money to, purchase, sell and trade in securities of and generally engage in any kind of business with the Grantor or any affiliate or subsidiary of the Grantor as if it were not performing the duties specified herein, otherwise without having to account for the same to the Holders; provided, however, that the Collateral Agent on behalf of itself and such affiliates, hereby waives any claim, right or lien against the Collateral in any way arising from or relating to any such loan, securities transaction or business with the Grantor.

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8.Holders. The Collateral Agent may deem and treat the holder of record of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, as the case may be, shall have been filed with the Collateral Agent. Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of record of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee, as the case may be, of such Note or of any Note(s) issued in exchange therefor.

9.Resignation by the Collateral Agent. (a) The Collateral Agent may resign from the performance of all its functions and duties under the Agreement at any time by giving 60 days' prior written notice (as provided in the Agreement) to the Grantor and the Holders. Such resignation shall take effect upon the appointment of a successor Collateral Agent pursuant to clauses (b) and (c) below.

(b)Upon any such notice of resignation, the Majority Holders shall appoint a successor Collateral Agent hereunder.

(c)If a successor Collateral Agent shall not have been so appointed within said 60-day period, the Collateral Agent shall then appoint a successor Collateral Agent who shall serve as Collateral Agent hereunder or thereunder until such time, if any, as the Majority Holders appoint a successor Collateral Agent as provided above. If a successor Collateral Agent has not been appointed within such 60-day period, the Collateral Agent may petition any court of competent jurisdiction or may interplead the Grantor and Holders in a proceeding for the appointment of a successor Collateral Agent, and all fees, including but not limited to extraordinary fees associated with the filing of interpleader, and expenses associated therewith shall be payable by the Grantor.

(d)The fees of any successor Collateral Agent for its services as such shall be payable by the Grantor.

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Annex V

LOCKBOX AGREEMENT

THIS LOCKBOX AGREEMENT, dated as of July 21, 2006 (this “Agreement”), by and between EMAGIN CORPORATION, a Delaware corporation (the “Company”), the bank or other financial institution which may become a party hereto in accordance with Section 25, as lockbox agent (the “Lockbox Agent”), and ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company (the “Collateral Agent”).

WITNESSETH:

WHEREAS, the Company and the several Buyers (such capitalized term and all other capitalized terms used in this Agreement having the meanings provided in Section 1) are parties to the several Note Purchase Agreements, pursuant to which, among other things, the Buyers have agreed to purchase the Notes from the Company;

WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Company and the Collateral Agent are executing and delivering the Security Agreement with the Collateral Agent pursuant to which, among other things, the Company is granting a security interest in the Collateral, including, without limitation, all of the Company's right, title and interest in and to all Accounts and Contracts arising thereunder and the Collateral Account to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, in order to give effect to and perfect the security interest in certain of the collateral subject to the Security Agreement, this Agreement provides that all payments to the Company pursuant to the Security Agreement shall be paid into a lockbox or a Collateral Account controlled by the Lockbox Agent and disbursed from the Collateral Account in accordance with the terms of this Agreement; and

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes pursuant to the Note Purchase Agreements that the Company and the Collateral Agent shall have executed and delivered this Agreement for the ratable benefit of the Holders;

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

1. Definitions.

(a)As used in this Agreement, the terms “Agreement”, “Company”, “Collateral Agent”, and “Lockbox Agent” 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.

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(c)Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Notes.

(d)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):

“Accounts” shall have the meaning given such term in the Security Agreement.

“Additional Note” means the Note issued pursuant to the Additional Note Purchase Agreement.

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Company and Stillwater LLC, which by its terms contemplates the issuance of up to $500,000 aggregate principal amount of Notes on or after December 10, 2006.

“Agreement” means this Lockbox Agreement, as amended, supplemented or otherwise modified from time to time.

“Available Specified Funds” means with respect to each Deposit Date the amount of the Specified Funds less the Retained Amount.

“Buyer” means any of the several buyers party to a Note Purchase Agreement.

“Collateral” shall have the meaning given such term in the Security Agreement.

“Collateral Account” means the account maintained at the Collateral Agent for the ratable benefit of the Holders which is identified in clause (b) of Section 2 and entitled “eMagin Noteholder Collateral Account”, and any successor or replacement account.

“Deposit Date” shall have the meaning given such term in Section 7(a).

“Event of Default” means:

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

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

(3)any Event of Default, as that term is defined in the Security Agreement;

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(4)any Event of Default, as that term is defined in the Patent and Trademark Security Agreement; or

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

“Event of Default Notice” means a notice given by the Company, the Collateral Agent or a Holder to the Lockbox Agent of the occurrence of an Event of Default.

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

“Instruction” shall have the meaning provided in Section 2(a).

“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction or performance of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States.

“Lockbox” means the lockbox administered by the Lockbox Agent for the ratable benefit of the Holders which is identified in clause (a) of Section 2, and any successor or replacement lockbox.

“Lockbox Agent's Designees” shall have the meaning given such term in Section 10(a).

“Majority Holders” means at any time such of the holders of Notes, which based on the outstanding principal amount of the Notes, represents a majorityof the aggregate outstanding principal amount of the Notes.

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

“Notes” means the Company’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Notice Date” means the date on which the Company gives the Instruction in accordance with Section 2.

“Obligations Schedule” means a schedule prepared by the Company which for each Holder and each Note held thereby states, as of the date thereof, the following:

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(i)such Holder's name, address, telephone line facsimile transmission number and payment instructions, including wire transfer instructions,

(ii)the original principal amount, the outstanding principal amount and the and the maturity date of the Note,

(iii)the amount of accrued and unpaid interest on each Note,

(iv)the amount of unpaid interest due on each Note as of the most recent Interest Payment Date,

(v)the amount of unpaid Default Interest, if any, due on each Note,

(vi)the occurrence or continuation of any Event of Default with respect to each Note,

(vii)the occurrence of any event which with notice or the passage of time, or both, could become an Event of Default,

(viii)the amount, due date of, and reasons for any unpaid obligation due with respect to each Note by reason of (A) an Event of Default or (B) any other repurchase, redemption or acceleration obligation, and

(ix)the aggregate amount then due to the Holder with respect to each Note.

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

“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.

“Retained Amount” means that portion, which may be all, of the Specified Funds for each Deposit Date which equal (to the extent of the Specified Funds available) the sum of all amounts with respect to the Notes which are scheduled to accrue or which otherwise are expected to become due to the Holders during the Retention Period for principal of and interest and Default Interest on the Notes or for costs and expenses arising under the Transaction Documents and payable by the Company.

“Retention Period” means the 45-day period after each Deposit Date.

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

“Specified Funds” shall have the meaning given such term in Section 7(a).

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“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.

“Termination Notice” means a notice given to the Lockbox Agent by and signed by the Company, the Majority Holders and the Collateral Agent, which notice states that a particular Event of Default has terminated or has been satisfied or waived and no Holder has any continuing rights with respect thereto.

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

2.Payments. (a) The Company agrees, that, upon the direction of the Collateral Agent given at any time that an Event of Default has occurred and is continuing, in accordance with Section 3(b) of the Security Agreement the Company shall irrevocably instruct in writing (the “Instruction”) all the account debtors on the Accounts that constitute part of the Collateral and all of the parties (other than the Company) who are parties to Contracts that constitute part of the Collateral that such Accounts and Contracts have been assigned to the Collateral Agent for the ratable benefit of the Holders and that payments in respect thereof shall be shall be made either

(i)by check or money order to the address of the Lockbox, which address shall be identified to the Company by the Collateral Agent or if the Lockbox Agent is a bank shall be the address of the office of the Lockbox Agent, or

(ii) by wire transfer of funds to the Collateral Account, which account shall be identified to the Company by the Collateral Agent.

If the Company fails to give the Instruction in accordance with Section 3(b) of the Security Agreement, the Collateral Agent may, in its own name or in the name of the Company, give the Instruction directly to the account debtors on the Accounts that constitute part of the Collateral and to all of the parties to Contracts that constitute part of the Collateral.

(b)If the Collateral Agent shall so require, at or prior to the time any Person who has not already received the Instruction is to become an account debtor on Accounts that constitute part of the Collateral or a party to Contracts that constitute part of the Collateral, the Company shall instruct such Person that such Accounts and Contracts have been assigned to the Collateral Agent for the ratable benefit of the Holders and that payments in respect thereof shall be made in the manner set forth in Section 2(a). If the Company fails to give the instructions in accordance with this Section 2(b), the Collateral Agent may, in its own name or in the name of the Company, give such instructions directly to such Person.

3. No Contrary Instructions. Without the prior written consent of the Collateral Agent and the Majority Holders, the Company shall not revoke, rescind or modify the Instruction or take any other action which is contrary to or inconsistent with this Agreement or the Security Agreement. If for any reason the Company receives any payment from an account debtor or party to a Contract on or after the Notice Date, the Company shall immediately deposit such payment, and any interest or proceeds thereon, in the Collateral Account. Prior to such deposit, the Company shall hold all such funds in trust for the exclusive benefit of the Collateral Agent and the Holders pursuant to this Agreement.

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4.Lockbox. The Lockbox shall be under the sole and exclusive control of the Lockbox Agent, as agent for the Collateral Agent only. On each Business Day on or after the date the Company gives or is required to give the Instruction, the Lockbox Agent will remove all items from the Lockbox and promptly deposit all checks, money orders and other payments included in such items in the Collateral Account. The Company irrevocably authorizes and directs the Lockbox Agent to endorse and deposit all such checks and money orders in the Collateral Account on the Business Day of receipt by the Lockbox.

5.Collateral Account. The Collateral Account shall be under the sole and exclusive control of the Lockbox Agent, as agent for the Collateral Agent only. All cash deposited in the Collateral Account pursuant to this Agreement, and all interest earned thereon, shall be held in the Collateral Account and shall at all times be segregated from the funds and property of any other Person. The Collateral Account shall be an interest-bearing account which pays interest at the rate determined from time to time by the Lockbox Agent for comparable, fully liquid commercial accounts. Without the prior consent of the Company, the Collateral Agent and the Majority Holders, the assets in the Collateral Account shall be held in cash only and shall not be invested in any securities. Funds may be withdrawn from the Collateral Account only as expressly provided in this Agreement.

6.Events of Default. Upon the occurrence of an Event of Default, the Company shall immediately, and the Collateral Agent may at any time, notify the Lockbox Agent thereof by giving an Event of Default Notice. If an Event of Default Notice is so given to the Lockbox Agent by the Company or the Collateral Agent, then thereafter the Lockbox Agent shall deem an Event of Default to have occurred and be continuing for all purposes unless and until the Lockbox Agent receives a Termination Notice executed by the Company, the Majority Holders and the Collateral Agent.

7.Release of Funds.(a) Three Business Days after the Business Day on which funds received from any person are deposited into the Collateral Account in a minimum amount of $100,000 (or which would increase the balance in the Collateral Account to at least $100,000) (the “Deposit Date”), the Lockbox Agent shall disburse the amount of funds, including interest received, held in the Collateral Account on such Deposit Date (the “Specified Funds”) as follows:

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

(ii)Second, to pay each Holder on a pro rata basis the unpaid amount, if any, then due such Holder pursuant to Article II of the Notes for any Determination Period ended at least 45 days prior to the date of such payment;

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(iii)Third, to pay each Holder on a pro rata basis the amount, if any, of unpaid principal then due on the maturity date of any installment of principal of such Holder's Notes;

(iv)Fourth, to the Holders and the Collateral Agent to pay or reimburse them for their respective amounts of costs and expenses payable by the Company pursuant to the Transaction Documents and not theretofore paid or reimbursed by the Company (including under this Section 7(a)); and

(v)Fifth, if no Event of Default shall have occurred and be deemed continuing pursuant to Section 6, to pay the Available Specified Funds remaining in the Collateral Account to the Company.

(b)During each Retention Period, the Lockbox Agent shall hold the Retained Amount in the Lockbox Account. On the Business Day following the end of such Retention Period, the Lockbox Agent shall (1) pay each Holder, on a pro rata basis, from the Retained Amount any unpaid amounts due to the Holders for interest, Default Interest and principal as described in clauses (i)-(iii) of Section 7(a) which have accrued and become due during the Retention Period and then (2) pay costs and expenses of the Holders and the Collateral Agent as described in clause (iv) of Section 7(a) and then (3) provided no Event of Default shall have occurred and be continuing, pay the remaining Retained Amount to the Company.

(c)If an Event of Default shall have occurred and be continuing, after disbursing the Specified Funds in the Collateral Account pursuant to clauses (i) through (iv) of Section 7(a), the Lockbox Agent shall disburse the remaining Specified Funds to pay each Holder, on a pro rata basis, the amount of unpaid principal then due upon acceleration, if any, pursuant to Article IV of such Holder's Note(s); provided, however, that if the amount of such Specified Funds is insufficient to pay all amounts due to the Holders, then the amount paid to the Holders pursuant to this Section 7(c) shall be prorated among the Holders in proportion to the respective amounts due each Holder.

(d)For each Deposit Date, after making the payments to the Holders required by Sections 7(b) and 7(c) and after the Company shall have paid the Holders any other amounts then due under the Notes, the Lockbox Agent shall pay to the Company all Specified Funds remaining in the Collateral Account. Funds received in the Collateral Account and interest received thereon after any Deposit Date shall be deemed new Specified Funds to be disbursed, three Business Days after the next Deposit Date to occur, in accordance with all of the provisions and priorities of this Section 7 before being paid to the Company.

8.Reporting Requirements; Payment Instructions. (a) On or before the Notice Date, on the first Business Day of each calendar month thereafter, and at such other times as requested by the Lockbox Agent in order to comply with its obligations under this Agreement or by the Collateral Agent, the Company shall furnish to the Lockbox Agent and the Collateral Agent an updated Obligations Schedule. The Company shall promptly correct any errors in any Obligations Schedule and furnish copies of such corrected Obligations Schedule to the Lockbox Agent and the Collateral Agent. If the Collateral Agent or any Holder shall notify the Lockbox Agent and the Company of any error in or dispute concerning an Obligations Schedule, the Lockbox Agent shall not release any funds from the Collateral Account which are the subject of such error or dispute until such error is corrected or such dispute is resolved with the consent of the affected Holders and the Company. The Lockbox Agent may release from the Collateral Account, in accordance with this Agreement, funds which are not subject to such error or dispute.

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(b)All payments by the Lockbox Agent to the Holders under this Agreement shall be made by wire transfer of immediately available funds to the applicable account, or if no wire transfer instructions are given to the address, specified for each Holder in the Obligations Schedule or in a superseding notice given by a Holder to the Lockbox Agent. All payments by the Lockbox Agent to the Company under this Agreement shall be deposited in the Company's separate account maintained at the Lockbox Agent or shall be sent by wire transfer of immediately available funds to such other account as the Company shall have specified by notice to the Lockbox Agent.

9.Representations and Warranties. The Company hereby represents and warrants to and for the benefit of the Lockbox Agent, the Collateral Agent and the Holders that:

(a)Power and Authority. The Company has full power, authority and legal right to enter into this Agreement.

(b)Binding Obligation. Thi s Agreement has been duly authorized by the Company and has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

(c)Non-Contravention. The execution, delivery and performance of this Agreement will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, or of any securities issued by the Company or any Subsidiary, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company or any Subsidiary is a party or which purports to be binding upon the Company or any Subsidiary or upon any of their respective assets and will not result in the creation or imposition of any Lien on any of the assets of the Company or any Subsidiary except as expressly permitted by this Agreement and the other Transaction Documents.

(d)Consents. No consent (other than consents which have been obtained) of any party, and no filing, approval, registration, recording or other action is required in connection with the execution, delivery or performance of this Agreement by the Company.

10.Limitation of Liability.The Lockbox Agent's liability in connection with the performance of the transactions covered by this Agreement shall be strictly limited as follows:

(a)The Lockbox Agent shall exercise ordinary care in selecting agents and independent contractors, adequately bonded, to pick up and deliver the contents of the Lockbox (“Lockbox Agent's Designees”) but shall not be liable for loss caused by Lockbox Agent's Designees' negligence or misconduct. In the event of such loss, the Lockbox Agent will exercise its commercially reasonable best efforts, at the Company's cost and expense, to assist the Company in obtaining redress from the responsible party.

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(b)The Lockbox Agent shall exercise its commercially reasonable best efforts in determining the optimum time to pick up mail at the Lockbox and the best carrier to deliver that mail to the Lockbox Agent’s designated processing facility. However, the Lockbox Agent shall not be liable if the chosen pickup time and carrier prove not to result in the earliest possible availability of funds.

(c)In performing it duties hereunder, the Lockbox Agent will exercise ordinary care and will act in good faith. The Lockbox Agent will not be accountable for its failure to perform any of its obligations hereunder, except for its gross negligence or willful misconduct, or that of its employees, officers or agents. If, as a result of such gross negligence or willful misconduct, the Lockbox Agent is liable for mishandling any item, such liability shall be limited to the lesser of the face amount of any check involved or the amount of the Company's direct loss as a result of such mishandling, and in no event shall the Lockbox Agent be responsible for any incidental or consequential damages. IN NO EVENT SHALL THE LOCKBOX AGENT BE LIABLE FOR ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSS OF PROFIT, NOTWITHSTANDING NOTICE TO THE LOCKBOX AGENT OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES.

11.Indemnification. The Company agrees to pay, indemnify, and to save the Lockbox Agent, the Collateral Agent and each Holder harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (i) with respect to, or resulting from, any delay in paying any and all excise, sales or other taxes which may be payable or determined to be payable with respect to the Collateral Account, (ii) with respect to, or resulting from, any failure or delay by the Company in complying with any law or regulation applicable to the Collateral Account or (iii) in connection with this Agreement, any breach or alleged breach hereof, or any action taken by the Lockbox Agent, the Collateral Agent or any Holder in exercising its rights hereunder.

12.Security Agreement. The Collateral Account and the Lockbox, and all funds due to the Company and deposited in the Lockbox and the Collateral Account, are subject to the security interest of the Collateral Agent pursuant to the Security Agreement in accordance with the terms thereof.

13.Paragraph Headings, Captions, Etc. The paragraph headings, the captions and the footers used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

14.No Waiver; Cumulative Remedies. The Lockbox Agent shall not by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lockbox Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lockbox Agent, the Collateral Agent or the Holders of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lockbox Agent, the Collateral Agent or the Holders would otherwise have on any future occasion. The rights and remedies herein and in the Transaction Documents are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law or in equity or by statute.

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15.Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party to be charged with enforcement; provided, however, that any provision of this Agreement may be waived, amended, supplemented or otherwise modified by the Lockbox Agent only with the prior written approval of the Collateral Agent or the Majority Holders. This Agreement shall be binding upon the successors and permitted assigns of the Company and shall inure to the benefit of the Lockbox Agent and its successors and assigns. The Company may not assign its rights or obligations under this Agreement without the prior written consent of the Lockbox Agent, which the Lockbox Agent may withhold in its sole discretion.

16.Effective Date; Termination. This Agreement shall become effective at the time of first issuance of any Note on the earliest Issuance Date when executed and delivered by the Company and the Collateral Agent. Upon the payment and performance in full by the Company of its obligations under the Transaction Documents, the Company's obligations to the Lockbox Agent and the Holders pursuant to Sections 2 through 8 shall terminate, any funds remaining in the Collateral Account shall be paid to the Company, and promptly thereafter the parties shall instruct the account debtors on all Accounts that theretofore constituted Collateral and all parties to Contracts that theretofore constituted Collateral to make all further payments due to the Company directly to the Company.

17. Notices. Except as otherwise specifically provided herein, any notice required or permitted to be given under the terms of this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or five days after deposit with the United States Postal Service, by registered or certified mail, postage prepaid to the party to be notified at such party’s address indicated in this Section 17 or at such other address as such party may designate by ten days’ advance written notice to the other parties. Notices in writing shall also be deemed effectively given upon delivery by an overnight courier, or upon transmission by facsimile, except that the time at which the notice is given will be the time at which confirmation of receipt is generated by the receiving facsimile  machine. In the case of any notice to the Company, such notice shall be addressed to the Company at, 10500 N.E. 8th Street, Suite 1400, Bellevue, WA 98004 Attention: Chief Financial Officer (telephone line facsimile number (425) 749-3601), 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. (telephone line facsimile number (212) 930-9725), and in the case of any notice to the Collateral Agent or to the Collateral Agent while it serves as Lockbox Agent, such notice shall be addressed to the Collateral Agent (or Lockbox Agent, as applicable) at Alexandra Global Master Fund Ltd., c/o Alexandra Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, New York 10017 (telephone line facsimile number (212) 301-1810), and if the Collateral Agent is not the Lockbox Agent, in the case of any notice to the Lockbox Agent, such notice shall be addressed to the Lockbox Agent at its address or telephone line facsimile transmission number provided in writing to the Company and the Collateral Agent at the time it becomes the Lockbox Agent.

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18.Fees and Expenses.The Company agrees to pay the fees of the Lockbox Agent in performing its services under this Agreement and all reasonable expenses (including, but not limited to, attorneys' fees and costs for legal services, costs of insurance and payments of taxes or other charges) of, incidental to, or in any way relating to the performance by the Lockbox Agent of its obligations and the enforcement or protection of the rights of the Lockbox Agent hereunder.

19.Concerning LockboxAgent. The Company acknowledges that the rights and responsibilities of the Lockbox Agent under this Agreement with respect to any action taken by the Lockbox Agent or the exercise or nonexercise by the Lockbox Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Lockbox Agent and the Holders, be governed by Exhibit A to this Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Lockbox Agent and the Company, except as expressly provided in Section 16, the Lockbox Agent shall be conclusively presumed to be acting as agent for the Collateral Agent with full and valid authority so to act or refrain from acting, and the Company shall not be under any obligation to make any inquiry respecting such authority.

20.Concerning the Collateral Agent. The Collateral Agent hereby appoints the Lockbox Agent as its agent upon the terms provided in this Agreement, with the Lockbox Agent to act exclusively for the benefit of the Collateral Agent. The Collateral Agent is executing and delivering this Agreement solely for purposes of this Section 20.

21.Integration.This Agreement represents the entire agreement of the Company and the Lockbox Agent with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the parties relative to the subject matter hereof not expressly set forth or referred to herein.

22.Governing Law.This Agreement and the rights and obligations of the Company under this Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York.

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

24.Third Party Beneficiaries. The Collateral Agent and the Holders shall be third party beneficiaries of this Agreement.

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25.Collateral Agent as Lockbox Agent. Whenever there shall not be a bank or other financial institution serving as Lockbox Agent, the Collateral Agent shall serve as Lockbox Agent. The Collateral Agent may select a bank or financial institution to serve as Lockbox Agent. During any period that the Collateral Agent serves as Lockbox Agent any reference to the Collateral Agent in this Agreement shall be a nullity. A bank selected by the Collateral Agent to serve as Lockbox Agent may, by executing and delivering to the Company and the Collateral Agent a counterpart of this Agreement, become a party to this Agreement, as Lockbox Agent, whereupon, the Collateral Agent shall cease to be the Lockbox Agent, and the Company agrees to all amendments to the form of this Agreement as such bank or financial institution so selected by the Collateral Agent to serve as Lockbox Agent may require. While the Collateral Agent serves as Lockbox Agent, it may maintain the Collateral Account at a bank selected by the Collateral Agent, notwithstanding any provision of this Agreement to the contrary.

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

[Signature page follows]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and delivered as of the date first above written.

EMAGIN CORPORATION
By:	/s/ Gary W. Jones
	Name: Gary W. Jones
	Title: Chief Executive Officer

ACKNOWLEDGED AND AGREED:

ALEXANDRA GLOBAL MASTER FUND LTD.,

as Collateral Agent and Lockbox Agent

BY: Alexandra Investment Management, LLC,

as Investment Advisor

/s/ Mikhail Filimonov

Name Mikhail Filimonov
Title Chairman and Chief Executive Officer

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Exhibit A

The Lockbox Agent

1.Appointment.The Holders (all capitalized terms used in this Exhibit A and not otherwise defined herein shall have the respective meanings provided in the Lockbox Agreement to which this Exhibit A is attached (the “Agreement”)), by their acceptance of the benefits of the Agreement, hereby irrevocably designate Alexandra Global Master Fund Ltd. as Lockbox Agent to act as specified herein and in the Agreement. Each Investor hereby irrevocably authorizes, and each other Holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Lockbox Agent to take such action on its behalf under the provisions of the Agreement and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Lockbox Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Lockbox Agent may perform any of its duties hereunder by or through its agents or employees.

2.Nature of Duties. The Lockbox Agent shall have no duties or responsibilities except those expressly set forth in the Agreement. Neither the Lockbox Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Lockbox Agent shall be mechanical and administrative in nature; the Lockbox Agent shall not have by reason of the Agreement or any other Transaction Document a fiduciary relationship in respect of the Collateral Agent or any Holder; and nothing in the Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Lockbox Agent any obligations in respect of the Agreement except as expressly set forth herein.

The Lockbox Agent shall not be liable for any act it may do or omit to do while acting in good faith and in the exercise of its own best judgment. Any act done or omitted by the Lockbox Agent on the advice of its own attorneys shall be deemed conclusively to have been done or omitted in good faith. The Lockbox Agent shall have the right at any time to consult with counsel on any question arising under the Agreement. The Lockbox Agent shall incur no liability for any delay reasonably required to obtain the advice of counsel. Nothing herein shall constitute a release or waiver of such legal counsel from any liability it may have for the advice given to the Lockbox Agent.

3.Lack of Reliance on the LockboxAgent. Independently and without reliance upon the Lockbox Agent, the Collateral Agent and each Holder, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Company and its subsidiaries in connection with the making and the continuance of the Company's obligations under the Transaction Documents and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Company and its subsidiaries, and the Lockbox Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide the Collateral Agent or any Holder with any credit or other information with respect thereto, whether coming into its possession before any such obligation arises or the purchase of any Note, or at any time or times thereafter. The Lockbox Agent shall not be responsible to the Collateral Agent or any Holder for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability or sufficiency of the Agreement or the financial condition of the Company or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement, or the financial condition of the Company, or the existence or possible existence of any Event of Default.

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4.Certain Rights of the Lockbox Agent.No Holder shall have the right to cause the Lockbox Agent to take any action with respect to the Lockbox or the Collateral Account, with only the Collateral Agent or the Majority Holders having the right to direct the Lockbox Agent to take any such action. If the Lockbox Agent shall request instructions from the Collateral Agent or the Majority Holders with respect to any act or action (including failure to act) in connection with the Agreement, the Lockbox Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions from the Collateral Agent or the Majority Holders, and to the extent requested, appropriate indemnification in respect of actions to be taken by the Lockbox Agent; and the Lockbox Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, neither the Collateral Agent nor any Holder shall have any right of action whatsoever against the Lockbox Agent as a result of the Lockbox Agent acting or refraining from acting hereunder in accordance with the instructions of the Collateral Agent or the Majority Holders or as otherwise specifically provided in the Agreement.

5.Reliance. The Lockbox Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telephone line facsimile transmission, email, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to the Agreement and its duties thereunder, upon advice of counsel selected by it.

6.Limitation of Collateral Agent and Holder Liability. The Collateral Agent and the Holders shall not be liable for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Lockbox Agent in performing its duties hereunder or under the Agreement, or in any way relating to or arising out of the Agreement.

7.The Lockbox Agent in its Individual Capacity. The Lockbox Agent and its affiliates may lend money to, purchase, sell and trade in securities of and generally engage in any kind of business with the Company or any affiliate or subsidiary of the Company as if it were not performing the duties specified herein, and may accept fees and other consideration from the Company for services to the Company in connection with the Transaction Documents and otherwise without having to account for the same to the Holders; provided, however, that the Collateral Agent on behalf of itself and such affiliates, hereby waives any claim, right or Lien against the Collateral Account in any way arising from or relating to any such loan, securities transaction or business with the Company.

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8.Holders. The Lockbox Agent may deem and treat the holder of record of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, as the case may be, shall have been filed with the Lockbox Agent. Any request, authority or consent of any Person or entity who, at the time of making such request or giving such authority or consent, is the holder of record of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee, as the case may be, of such Note or of any Note(s) issued in exchange therefor.

9.Resignation by the LockboxAgent. (a) The Lockbox Agent may resign from the performance of all its functions and duties under the Agreement at any time by giving 60 Business Days' prior written notice (as provided in the Agreement) to the Company, the Collateral Agent and the Holders. Such resignation shall take effect upon the appointment of a successor Lockbox Agent pursuant to clauses (b) and (c) below.

(b)Upon any such notice of resignation, the Collateral Agent shall appoint a successor Lockbox Agent hereunder.

(c)If a successor Lockbox Agent shall not have been so appointed within said 60 Business Day period, the Lockbox Agent shall then appoint a successor Lockbox Agent who shall serve as Lockbox Agent hereunder or thereunder until such time, if any, as the Collateral Agent appoints a successor Lockbox Agent as provided above. If a successor Lockbox Agent has not been appointed within such 60-day period, the Lockbox Agent may, at the sole cost and expense of the Company, petition any court of competent jurisdiction or may interplead the Company, the Collateral Agent and the Holders in a proceeding for the appointment of a successor Lockbox Agent, and all fees, including but not limited to extraordinary fees associated with the filing of interpleader, and expenses associated therewith shall be payable by the Company.

(d)The fees of any successor Lockbox Agent for its services as such shall be payable by the Company.

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Annex VI

Press Release

eMagin Enters Into Agreements To Raise

Approximately $6.5 Million Private Placement

BELLEVUE, Wash., July 24, 2006 – eMagin Corporation (AMEX: EMA), a leader in virtual imaging technology, has entered into definitive agreements with institutional and accredited investors for the sale of approximately $6.5 million of senior secured convertible debentures and warrants. The net proceeds from the financing will be used for general working capital purposes. 

Under the agreements, investors agreed to purchase $5,970,000 principal amount of notes with conversion prices of $0.26 per share that may convert into 22,192,301 shares of common stock and 5 year warrants exercisable at $0.36 per share for 15,534,607 shares of common stock.  An additional $500,000 will be invested through exercise of a warrant to purchase approximately 1.92 million shares of common stock at $0.26 per share prior to December 14, 2006 or, at the request of the Company, by the purchase of additional notes and warrants. If not converted half of the principal amount will be due July 21, 2007 and the remaining balance due January 21, 2008.  Interest at 6% per annum is payable in quarterly installments on outstanding Notes during their term commencing on September 1, 2006. 

In a showing of commitment to the Company’s prospects, Paul Cronson, Director, John Atherly, Chief Financial Officer, and Olivier Prache, Senior Vice President of Display Manufacturing and Development Operations participated in the transaction, and Gary Jones, Chief Executive Officer and Susan Jones, Chief Marketing and Strategy Officer, who collectively own 5% of the Company’s outstanding shares, agreed to defer 10% of their compensation until eMagin becomes EBITDA positive or until the occurrence of certain other events.

In conjunction with the note purchase transaction the Company will submit to shareholders at its annual meeting a resolution to enact a reverse stock split of 1 for 10 which, if approved, normalizes the company’s share price and shares outstanding.

In order to reestablish performance incentives employees and Directors have also agreed to forfeit approximately 4.7 million shares of existing stock options in return for re-pricing 8.8 million existing options at $0.26 per share. Re-priced options will not be exercisable until 2007 or in some cases not until 2011, depending on individual grant-vesting schedules. 

In addition, to further strengthen its management team the Company intends to add two new Directors recommended by the new investors and to recruit additional senior management.

Additional details regarding the private placement are provided on Form 8-K which is being filed today.  Representing the company in this transaction was Sichenzia Ross Friedman Ference, LLP.

The note shares and warrants are being issued in a private placement under regulation D of the Securities Act of 1933, as amended. The company has agreed to file a registration statement covering the resale of the common stock and underlying the notes and warrants purchased by these investors following the closing.  This press release does not constitute an offer to sell, or the solicitation of an offer to buy, any securities, nor shall there be any sale of the securities in any jurisdiction in which such offering would be unlawful.

About eMagin Corporation

A leader in OLED microdisplay and virtual imaging technologies, eMagin integrates high-resolution OLED microdisplays, magnifying optics, and systems technologies to create a virtual image that appears comparable to that of a computer monitor or a large-screen television. eMagin’s OLED displays have broad market reach and are incorporated into a variety of near-to-eye imaging products by military, industrial, medical and consumer OEMs who choose eMagin’s award-winning technology as a core component for their solutions. eMagin has recently introduced its first direct-to-consumer system, the Z800 3DVisor, which provides superb 3D stereovision and headtracking for PC gaming, training and simulation, and business applications. eMagin's microdisplay manufacturing and R&D operations are co-located with IBM on its campus in East Fishkill, New York.  System design facilities and sales and marketing are located in Bellevue, Washington. A sales office is located in Tokyo, Japan. For additional information, please visit www.emagin.com and www.3dvisor.com.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including those regarding eMagin Corporation and its subsidiaries' expectations, intentions, strategies and beliefs pertaining to future events or future financial performance. All statements contained herein are based upon information available to eMagin's management as of the date hereof, and actual results may vary based upon future events, both within and without eMagin management's control. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those in the forward-looking statements as a result of various important factors, including those described in the Company's most recent filings with the SEC. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such statements should not be regarded as a representation by the Company, or any other person, that such forward-looking statements will be achieved. The business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in forward-looking statements. We undertake no duty to update any of the forward-looking statements, whether as a result of new information, future events or otherwise. In light of the foregoing, readers are cautioned not to place undue reliance on such forward-looking statements.

Note:  eMagin and 3DVisor are trademarks of eMagin Corporation.

Media Contact:

Joe Runde, 425-749-3636, jrunde@emagincorp.com

Investor Contact:

John Atherly, 425-749-3622, jatherly@emagincorp.com

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Annex VII

Annex VII

to

Note Purchase

Agreement

[Letterhead of Company Counsel]

[Closing Date]

The Buyers listed on

Exhibit A Hereto

Re: eMagin Corporation

Ladies and Gentlemen:

We have acted as counsel to eMagin Corporation, a Delaware corporation (the "Company"), in connection with the issuance by the Company of $[7,000,000] aggregate principal amount of 6% Senior Secured Convertible Note due 2007-2008 (the - -"Notes"), and related Common Stock Purchase Warrants (the "Warrants"), pursuant to the several Note Purchase Agreements, dated as of July , 2006 (the "Agreements"), by and between the Company and the several Buyers named therein (the "Buyers"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreements. This opinion is being delivered to you pursuant to Section 7(n) of the Agreements.

In so acting, we have examined originals or copies (certified or otherwise identified to our satisfaction) of the Agreements, the Notes, the Warrants, the Pledge and Security Agreement, dated as of July , 2006, by and between the Company and the Collateral Agent named therein (the "Security Agreement"), the Patent and Trademark Security Agreement, dated as of July , 2006, by and between the Company and the Collateral Agent named therein (the "Patent and Trademark Security Agreement"), the Lockbox Agreement, dated as of July 2006, by and between the Company and the Lockbox Agent named therein (the "Lockbox Agreement"), and such corporate records, agreements, documents and other instruments, and such certificates or comparable' documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. The Agreements, the Notes, the Warrants, the Security Agreement, the Patent and Trademark Security Agreement and the Lockbox Agreement are hereinafter referred to collectively as the "Transaction Documents."

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In rendering the opinions set forth in this opinion letter, we assume the following:

(a) - the legal capacity of each natural person;

(b) the legal existence of all parties to the transactions referred to in the Transaction Documents excluding the Company;

(c) the power and authority of each person other than the Company or person(s) acting on behalf of the Company to execute, deliver and perform each document executed and delivered and to do each other act done or to be done by such person;

(d) the authorization, execution and delivery by each person other than the Company or person(s) acting on behalf of the Company of each document executed and delivered or to be executed and delivered by such person;

(e) the legality, validity, binding effect and enforceability as to each person other than the Company or person(s) acting on behalf of the Company of each document executed and delivered or to be executed or delivered and of each other act done or to be done by such person;

(f) the transactions referred to in the Transaction Documents have been consummated;

(g) the payment of all the required documentary stamps taxes and fees imposed upon the execution, filing or recording of the Transaction Documents;

(h) that there have been no undisclosed modifications of any provision of any document reviewed by us in connection with the rendering of the opinions set forth in this opinion letter and no undisclosed prior waiver of any right or remedy contained in the Transaction Documents;

(i) the genuineness of each signature (other than the signatures of the officers of the Company), the completeness of each document submitted to us, the authenticity of each document reviewed by us as an original, the conformity to the original of each document reviewed by us as a copy and the authenticity of the original of each document received by us as a copy;

(j) the truthfulness of each statement as to all factual matters otherwise not known to us to be untruthful contained in any document encompassed within the due diligence review undertaken by us;

(k) the accuracy on the date of this letter as well as on the date stated in all governmental certifications of each statement as to each factual matter contained in such governmental certifications;

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(l) that the addressee has acted in good faith, without notice of adverse claims, and has complied with all laws applicable to it that affect the transactions referred to in the Transaction Documents;

(m) that the transactions referred to in the Transaction Documents comply with all tests of good faith, fairness and conscionability required by law;

(n) that routine procedural matters such as service of process or qualification to do business in the relevant jurisdictions will be satisfied by the parties seeking to enforce the Transaction Documents;

(o) that all statutes, judicial and administrative decisions, and rules and regulations of governmental agencies constituting the law for which we are assuming responsibility are published (e.g., reported court decisions and the specialized reporting services of BNA, CCH and Prentice-Hall) or otherwise generally accessible (e.g., LEXIS or WESTLAW) in each case in a manner generally available (i.e., in terms of access and distribution following publication) to lawyers practicing in our judicial circuit;

(p) that other agreements related to the transactions referred to in the Transaction Documents will be enforced as written;

(q) that no action, discretionary or otherwise, will be taken by or on behalf of the Company in the future that might result in a violation of law;

(r) that there are no other agreements or understandings among the parties that would modify the terms of the Transaction Documents or the respective rights or obligations of the parties to the Transaction Documents;

(s) that with respect to the Transaction Documents and to the transactions referred to therein, there has been no mutual mistake of fact and there exists no fraud or duress; and

(t) the constitutionality and validity of all relevant laws, regulations and agency actions unless a reported case has otherwise held or widespread concern has been expressed by commentators as reflected in materials which lawyers routinely consult.

As to certain questions of fact material to this opinion, we have relied upon statements or certificates of public officials and officers of the Company.

Whenever a statement herein is qualified by "to our knowledge" or similar phrase, it means that, during the course of our representation of the Company for the purposes of this opinion letter, (1) no information that would give those lawyers who participated in the preparation of the letter (collectively, the "Opinion Letter Participants") current actual knowledge of the inaccuracy of such statement has come to their attention; (2) we have not undertaken any independent investigation or inquiry to determine the accuracy of such statement; (3) any limited investigation or inquiry otherwise undertaken by the Opinion Letter Participants during the preparation of this opinion letter should–not be regarded as such an investigation or inquiry; and (4) no inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Company. We also call to your attention to the fact that we are not general counsel to the Company and we are not familiar with all aspects of the Company's business affairs. We have not conducted an independent audit of the Company or its files.

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The validity, binding effect and enforceability of Transaction Documents may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or other laws affecting the enforcement of creditors' rights and remedies generally and (b) the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith. In addition, certain remedies, waivers and other provisions contained in the Transaction Documents might not be enforceable; nevertheless, such unenforceability will not render such agreements invalid as a whole or preclude the practical realization of the benefits to the Secured Party thereunder. We express no opinions as to the application of the laws of usury to the Transaction Documents.

Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that:

1. The Company and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted.

2. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under each of the the Transaction Documents and to consummate the transactions contemplated thereby.

3. The Transaction Documents have been duly and validly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the other parties thereto) constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with there respective terms, subject, as to enforceability, to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject to general principles of equity, whether enforcement is sought in a proceeding at law or in equity.

4. The Shares have been duly authorized and, when issued upon conversion of the Notes in accordance with the terms of the Notes or upon exercise of the Warrants in accordance with the tern-is of the Warrants, as the case may be, will be validly issued, fully-paid and non-assessable.

165

5. Assuming the representations and warranties of the Buyers in Section 3 of the Agreements are true and correct, the Notes and the Warrants may be offered and issued to the Buyers pursuant to the Agreements, the Conversion Shares may be offered and issued to the Buyers upon conversion of the Notes, and the Warrant Shares may be offered and issued to the Buyers upon exercise of the Warrants, in each such case, without registration under the 1933 Act.

6. The execution and delivery of the Transaction Documents by the Company, and the consummation by the Company of the issuance of the Securities and 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 of the Certificate of Incorporation or by-laws of the Company or any Subsidiary, (ii) 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 or (iii) 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 businesses or the ability of the Company or any Subsidiary to make use thereof.

7. Assuming the representations and warranties of the Buyers in Section 3 of the Agreements are true and correct, no authorization, approval or consent of, or filing with, any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained or made by the Company for the offer, issuance and sale of the Notes and the offer and issuance of the Warrants as contemplated by the Agreements or the offer and issuance of the Conversion Shares upon conversion of the Notes in accordance with the terms thereof or the offer and issuance of the Warrant Shares upon exercise of the Warrants in accordance with the terms thereof except such as have been obtained or made and other than (a) the filing pursuant to the Agreements of a Registration Statement with the SEC covering the resale of the Shares (b) such as may be required under the securities or "blue sky" laws of certain jurisdictions (as to which we express no opinion) and (c) the Form D to be filed by the Company with the SEC.

8. The Security Agreement is effective to create in favor of the Collateral Agent, for the benefit of the holders from time to time of the Notes, as secured party, valid security interests in the Collateral (as defined in the Security Agreement) including, without limitation, the funds and proceeds from time to time deposited or held in the Collateral Account (as defined in the Lockbox Agreement), as security for the Obligations (as defined in the Security Agreement), financing statements in proper form covering such security interests will be duly filed in the offices listed on Schedule I hereto, and when filed, such security interests in the Collateral will be perfected to the extent that security interests in such Collateral may be perfected by the filing of financing statements under the Uniform Commercial Code. Our opinions expressed above are specifically subject to the following limitations, exceptions, qualifications and assumptions:

166

A. The effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the relief of debtors or the rights and remedies of creditors generally, including without limitation the effect of statutory or other law regarding fraudulent conveyances and preferential transfers.

B. Limitations imposed by state law, federal law or general equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions of any applicable agreement and upon the availability of injunctive relief or other equitable remedies, regardless of whether enforcement of any such agreement is considered in a proceeding in equity or at law.

We are counsel admitted to practice in the State of New York and we do not express any opinion with respect to the effect or applicability of the laws of any jurisdiction, other than the laws of the State of New York, Delaware General Corporation Law and the federal laws of the United States of America. In furnishing the opinion regarding the valid existence and good standing of the Company, we have relied solely upon a good standing certificate issued by the Secretary of State of Delaware on June 27, 2006.

This opinion is rendered as of the date first written above, is solely for your benefit in connection with the Agreements and may not be relief upon or used by, circulated, quoted, or referred to nor may any copies hereof by delivered to any other person without our prior written consent. We disclaim any obligation to update this opinion letter or to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinions expressed herein.

Very truly yours,
By:	/s/

167

Exhibit A

Alexandra Global Master Fund Ltd.

do Alexandra Investnient Management, LLC

767 Third Avenue

39th Floor

New York, New York 10017

[NAME]

[ADDRESS]

168

Schedule II

[Secretary of State of the State of Delaware]

169

Schedule II

[Secretary of State of the State of Delaware]

[Department of State of the State of New York]

170

 Annex VIII

 Annex VIII

to

Note Purchase

Agreement

[Closing Date]

The Buyers listed on

Exhibit A Hereto

Re: eMagin Corporation

Ladies and Gentlemen:

We have acted as intellectual property counsel to eMagin Corporation, a Delaware corporation (the "Company"), in connection with the issuance by the Company of $[7,000,000] aggregate principal amount of 6% Senior Secured Convertible Note due 2007-2008 (the "Notes"), and related Common Stock Purchase Warrants (the "Warrants"), pursuant to the several Note Purchase Agreements, dated as of July 2006 (the "Agreements"), by and between the Company and the several Buyers named therein (the "Buyers"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreements. This opinion is being delivered to you pursuant to Section 7(n) of the Agreements.

In so acting, we have examined originals or copies (certified or otherwise identified to our satisfaction) of the Patent and Trademark Security Agreement, dated as of July , 2006, by and between the Company and the Collateral Agent named therein (the "Patent and Trademark Security Agreement") and such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth.

Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that:

1. The Patent and Trademark Security Agreement, taken together with the Security Agreement, creates valid and enforceable security interests in favor of the Collateral Agent, for the benefit of the holders from time to time of the Notes, as secured parties, in all of the Company's right, title and interest in, to and under the Collateral (as defined in the Patent and Trademark Security Agreement for purposes of this opinion). The Patent Security Agreement and the Trademark Security Agreement (attached as Exhibits E and F to the Patent and Trademark Security Agreement) have or will be filed in the PTO, and together with the filing of financing statements, have or will result in the perfection of the Collateral Agent's security interests in the Collateral in the United States.

171

The opinion herein is subject to (i) the limitations on perfection of security interests in proceeds resulting from the operation of Section 9-315 of the UCC; (ii) the limitations with respect to securities imposed by Sections 8-302 and 9-312 of the UCC; (iii) the provisions of Section 9-203 of the UCC relating to the time of attachment; and (iv) Section 552 of Title 11 of the United States Code (the "Bankruptcy Code") with respect to any Collateral acquired by the Company subsequent to the commencement of a case against or by the Company under the Bankruptcy Code.

The opinions expressed herein are limited to the laws of the State of New York, the laws of the State of Delaware and the federal laws of the United States, and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction.

The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. Those opinions may not be used or relied upon by any other person, nor may this letter or any copies hereof be furnished to a third party, filed with a governmental agency, quoted, cited or otherwise referred to without our prior written consent.

Very truly yours,

/s/ Jason M. Drangel

Epstein Drangel Bazerman & James, LLP

172

Annex IX

Annex IX

to

Note Purchase

Agreement

LOCKUP AGREEMENT

July __, 2006

To: eMagin Corporation

and the Buyers Parties to the Note Purchase

Agreements Referred to Below

Re: eMagin Corporation Note Purchase Agreements

Dear Sir or Madam:

Reference is made to the several Note Purchase Agreements, dated as of the date hereof, by and between eMagin Corporation, a Delaware corporation (the "Company"), and the respective buyers who are parties thereto and hereto (each, a "Buyer" and collectively, the "Buyers"), and any successors and assigns thereto (the "Note Purchase Agreements"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreements.

The undersigned stockholder (the "Stockholder") of the Company understands that it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes and Warrants pursuant to the Note Purchase Agreements that the Stockholder shall have executed and delivered this Agreement to the Buyers and the Company. Pursuant to a Note Purchase Agreement, the Stockholder is purchasing a 6% Senior Secured Convertible Note due 2007-2008 of the Company in the aggregate principal amount of $40,000.00 (the Note") and a Warrant to purchaseshares of Common Stock (the "Warrant"). The Note, the Warrant and the shares of Common Stock issuable upon conversion of the Note and upon exercise of the Warrant are collectively referred to herein as the "Securities".

The Stockholder hereby agrees that, except for transfers occurring upon the death of Stockholder and except for intra-family transfers or transfers to trusts for estate planning purposes (provided that in each such case, the transferee first agrees to become bound by the provisions of this letter agreement), the Stockholder will not, directly or indirectly, offer, sell, pledge, contract to sell, grant any option for the sale of, transfer or otherwise dispose of: yle Securities or any interest therein for a period beginning on the date of this letter agreement and ending on January , 2008. Notwithstanding the foregoing, (A) this letter agreement and the obligations hereunder shall terminate and be of no further force and effect upon the date of consummation of a sale of all or substantially all of the assets of the Company and (B) the Stockholder may sell shares of Common Stock issued upon conversion of the Note or upon exercise of the Warrant in accordance with the following schedule:

173

Period	Number of Shares
Prior to December 31, 2006	NONE
After December 31, 2006	Up to 50,000 shares of Common Stock in each 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 date of this Agreement)

The Company hereby agrees to notify its transfer agent of the provisions of this letter agreement. The Stockholder acknowledges and agrees that the Company may enter a stop transfer order with its transfer agent prohibiting transfer of the Securities, except in compliance with the requirements of this letter agreement.

This letter agreement may be executed in any number of counterparts, all of which shall together constitute one and the same instrument. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York. In the event of the invalidity or unenforceability of any part or provision of this letter agreement, such invalidity or unenforceability shall not affect the validity or enforceability of any other part or provision of this letter agreement.

Please indicate your agreement with the terms of this letter by signing and returning to the undersigned a copy hereof.

Very truly yours,

/s/

John Atherly

Accepted and Agreed as of the above date.

EMAGIN CORPORATION

By:
	Name:
	Title:

174

EX-10.36

Exhibit 10.36

NOTE PURCHASE AGREEMENT

dated as of July 21, 2006

by and between

EMAGIN CORPORATION

and

STILLWATER LLC

6% SENIOR SECURED CONVERTIBLE NOTES DUE 2007-2008

AND

COMMON STOCK PURCHASE WARRANTS

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EMAGIN CORPORATION

NOTE PURCHASE AGREEMENT

6% SENIOR SECURED CONVERTIBLE NOTES DUE 2007-2008

AND

COMMON STOCK PURCHASE WARRANTS

TABLE OF CONTENTS

			Page
1.	DEFINITIONS		5
			16
2.	PURCHASE AND SALE; PURCHASE PRICE.		16
	(a)	Purchase.	17
	(b)	Form of Payment.	17
	(c)	Closing.	17
3.	REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYER.		17
	(a)	Circumstances of Purchase.	18
	(b)	Accredited Investor; Residence	18
	(c)	Reoffers and Resales.	18
	(d)	Company Reliance.	18
	(e)	Information Provided.	19
	(f)	Absence of Approvals.	19
	(g)	Note Purchase Agreement.	19
	(h)	Buyer Status	20
	(i)	Experience of the Buyer.	20
	(j)	General Solicitation.	20
	(k)	Short Sales and Confidentiality Prior To The Date Hereof.	20
4.	REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY.		20
	(a)	Organization and Authority.	20
	(b)	Qualifications.	21
	(c)	Concerning the Shares and the Common Stock.	21
	(d)	Corporate Authorization.	22

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	(e)	Non-contravention.	22
	(f)	Approvals, Filings, Etc.	22
	(g)	Information Provided.	23
	(h)	Investment Company.	23
	(i)	Absence of Brokers, Finders, Etc.	23
	(j)	No Solicitation.	24
	(k)	No Integrated Offering	24
	(l)	Dilutive Effect.	24
	(m)	Absence of Certain Changes.	24
	(n)	No Undisclosed Events, Liabilities, Developments or Circumstances.	25
	(o)	Conduct of Business; Regulatory Permits.	25
	(p)	Indebtedness and Other Contracts.	26
	(q)	Absence of Litigation.	26
	(r)	Insurance.	26
	(s)	Employee Relations	26
	(t)	Title.	27
	(u)	Intellectual Property.	27
	(v)	Environmental Law	28
	(w)	Subsidiary Rights.	28
	(x)	Tax Status.	28
	(y)	Internal Accounting Controls; Financial Statements.	29
	(z)	Sarbanes-Oxley Act.	29
	(aa)	S-3 Eligibility.	29
	(bb)	Concerning the Collateral.	29
	(cc)	Disclosures.	30
	(dd)	Absence of Rights Agreement.	30
5.	CERTAIN COVENANTS.		30
	(a)	Transfer Restrictions.	30
	(b)	Restrictive Legends.	31
	(c)	Reporting Status.	33
	(d)	Form D.	33
	(e)	State Securities Laws	33
	(f)	Limitation on Certain Actions.	34
	(g)	Use of Proceeds.	34
	(h)	Best Efforts.	34
	(i)	Debt Obligation.	35
	(j)	Right of the Buyer to Participate in Future Transactions.	35
	(k)	Press Releases.	37
	(l)	Form 8-K; Limitation on Information and Buyer Obligations.	38
	(m)	Limitation on Certain Transactions.	38
	(n)	Debt Obligation.	39
	(o)	Security Agreement; Financing Statements, Etc.	39
	(p)	Short Sales and Confidentiality After The Date Hereof.	39

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6.	CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.		40
7.	CONDITIONS TO THE BUYER’S OBLIGATION TO PURCHASE		41
8.	REGISTRATION RIGHTS.		42
	(a)	Mandatory Registration.	42
	(b)	Obligations of the Company.	44
	(c)	Obligations of the Buyer and other Investors.	49
	(d)	Rule 144.	50
9.	INDEMNIFICATION AND CONTRIBUTION.		50
	(a)	Indemnification.	50
	(b)	Contribution.	52
	(c)	Other Rights.	53
10.	MISCELLANEOUS.		53
	(a)	Governing Law.	53
	(b)	Headings.	53
	(c)	Severability.	53
	(d)	Notices	53
	(e)	Counterparts.	53
	(f)	Entire Agreement; Benefit.	54
	(g)	Waiver.	54
	(h)	Amendment.	54
	(i)	Further Assurances.	55
	(j)	Assignment of Certain Rights and Obligations.	55
	(k)	Expenses.	56
	(l)	Termination.	56
	(m)	Survival.	57
	(n)	Construction; Buyer Status.	57

Annex I	Form of 6% Senior Secured Convertible Note due 2007-2008
Annex II	Form of Common Stock Purchase Warrant to be issued on the Closing Date (Closing Date 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 Lock Up Agreement
Annex X	Form of Company Put Notice
Annex XI	Form of Common Stock Purchase Warrant to be issued on the closing date of the Other Note Purchase Agreement (July 2006 Warrant)

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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 Stillwater LLC (the “Buyer”)

WITNESSETH:

WHEREAS, upon the terms and subject to the conditions of this Agreement, the Buyer wishes to agree to purchase from the Company and the Company wishes to agree to sell to the Buyer, which except as set forth herein shall be on the same terms and conditions as the securities sold pursuant to the Other Note Purchase Agreements (such capitalized term and all other capitalized terms used in this Agreement having the meanings provided in Section 1), the Note 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 (i) a warrant to purchase shares of Common Stock on the closing date of the Other Note Purchase Agreement (Annex XI) and (ii) a warrant to purchase shares of Common Stock on the Closing Date (Annex II).

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.

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“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 the date ten (10) Business Days after the Company Put Notice or such other mutually agreed to time by the Company and the Buyer.

“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.

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“Company Put Notice” means the written notice required to be provided by the Company to the Buyer, in the form attached as Annex X, in accordance with the provisions of Section 2(a) of this Agreement to effectuate the purchase and sale of the Note and December Closing Date Warrant.

“Company Put Notice Date” means December 14, 2006.

“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.

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

“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.

“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.

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“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).

“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.

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“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.

“July 2006 Warrant” means the Common Stock Purchase Warrant in the form attached hereto as Annex XI.

“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.

“Nasdaq” means the Nasdaq Global Market.

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“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 as of even date herewith, by and between the Company and the buyers of the Other Notes.

“Other Notes” means the Notes issued pursuant to the Other Note Purchase Agreements.

“Other Warrants” means the Common Stock Purchase Warrants 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 150 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 180 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),

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(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,

(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 Warrants or shares of Common Stock issuable upon exercise of any Other Warrants in accordance with the terms of the Warrants or any Other Warrants, 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, Warrants or Other Warrants 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.

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“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 Warrants 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 Warrants 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.

“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 up to [$500,000.] [Prior to execution of this NPA, please reduce the $500,000 amount by the difference, if any, between the principal amount of the Other Notes in this round of financing and $6.5 million]. The Purchase Price will be adjusted downward in the event that (i) the Company obtains additional financing prior to the Closing Date, or (ii) all or a portion of any common stock purchase warrant of the Company owned by the Buyer is exercised prior to the Closing Date and the Company receives the exercise price of such warrants in cash. On the Closing Date, the Purchase Price will be the difference between [$500,000] [Prior to execution of this NPA, please reduce the $500,000 amount by the difference, if any, between the principal amount of the Other Notes in this round of financing and $6.5 million]and the sum of (i) the amount of additional financing raised by the Company prior to the Closing Date, and (ii) the aggregate exercise price paid by the Buyer to the Company upon exercise of all or a portion of any common stock purchase warrant owned by the Buyer prior to the Closing Date.

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

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“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 yearsafter 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.

“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.

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“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 Warrants.

“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 collectively 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).

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

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“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,

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(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.

“Warrants” means both the December Closing Date Warrant and the July 2006 Warrant.

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

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 equal to the Purchase Price and having the terms and conditions as set forth in the form of the Note attached hereto as Annex I for the Purchase Price. The Company shall have the right to require the Buyer to purchase the Note by delivering to the Buyer a Company Put Notice on December 14, 2006 by electronic mail and facsimile by the Company Put Notice Date and the Buyer shall be obligated to purchase the Notes specified in such Company Put Notice if the conditions to closing set forth in Section 7 are satisfied. 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 the December Closing Date Warrant initially entitling the holder to purchase the number of shares of Common Stock equal to seventy percent (70%) of the number of shares issuable upon conversion of the Note on the Closing Date. The Company shall not be obligated to sell the Note or issue such December Closing Date Warrant to the Buyer until the Company shall, in its sole discretion, have given the Company Put Notice to the Buyer, whereupon the Company shall be obligated to sell the Note and issue such December Closing Date Warrant to the Buyer upon the terms and subject to the conditions of this Agreement. The Buyer acknowledges and agrees that it will be irrevocably bound to purchase the Note and December Closing Date Warrant on the Closing Date so long as (i) the Company Put Notice has been delivered to the Buyer, and (ii) the conditions to closing as set forth in Section 7 of this Agreement have been satisfied by the Company. In consideration of the Buyer agreeing to enter into this Agreement, the Company shall also issue to the Buyer on the closing date of the Other Note Purchase Agreement the July 2006 Warrant, attached hereto as Annex XI.

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(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:

(c)Closing.

The issuance and sale of the Note and the issuance of the December Closing Date Warrant shall occur on the Closing Date at Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York 10112 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 December Closing Date 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 December Closing Date Warrant.

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 Warrants 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.

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(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 Warrants are 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 Warrants for cash, or upon cashless exercise of the Warrants 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.

(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 Warrants 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 Warrants, 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 Warrants).

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(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.

(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.

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(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 Buyerdid 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.

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(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 Warrants, 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 Warrants 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 Warrants, so long as the Note, the Other Notes or the Warrants 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 Warrants 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.

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(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 Warrants 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 underthe Pledge and Security Agreement, (5) the filings with the PTO as required by the Patent and Trademark Security Agreement and(6)thefilingof theTransactionForm 8-K.

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(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.

(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.

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(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.

(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 Warrants 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 Warrants in accordance with this Agreement, the Note and the Warrants are, 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.

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(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.

(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.

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(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.

(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.

(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.

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(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.

(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 Other Notes and, when issued by the Company to the Buyer, this Note.

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(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 Warrants 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 Warrants 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 Warrants to be transferred may be transferred without such registration; (2) no sale, conveyance assignment or other transfer of the Note or the Warrants 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) 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.

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(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.

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

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.

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(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 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.

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(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 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 Shareof 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 Warrants) 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 (x) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company in the event and only to the extent that Section 16 of the 1934 Act or the rules promulgated thereunder (or any successor statute or rules) is changed to reduce the beneficial ownership percentage threshold thereunder to a percentage less than 10% and (y) at any time and from time to time, to increase its Restricted Ownership Percentage unless the Buyer shall have, by written instrument delivered to the Company, irrevocably waived its rights to so increase its Restricted Ownership Percentage. 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 6.7of 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.

(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 Warrants 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.

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(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 and the shares of Common Stock issuable upon conversion or exercise thereof) 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 Warrants.

(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 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 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 Notes pursuant to the Patent and Trademark Security Agreement. Prior to the Closing, 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)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 subsequent to the Closing Date 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 subsequent to the Closing Date 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 December Closing Date 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 December Closing Date 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;

(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;

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(e) The Company shall have delivered to the Buyer an appropriate 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, and (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;

(f) The closings under the Other Note Purchase Agreements shall have occurred;

(g)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;

(h)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 substantially similar to the attached as Annex VII 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 substantially similar to the attached as Annex VIII; and

(i)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.

(j) 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; and

(k) None of the Other Notes shall have been redeemed by the Company;

8.REGISTRATION RIGHTS.

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(a)Mandatory Registration.

(1) The Company shall prepare and, as expeditiously as possible, but in no event later than the date which is 90 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 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 Warrants, 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 Warrants to prevent dilution resulting from stock splits, stock dividends or similar transactions. Such Registration Statement may also cover the resale by other holders of shares of Common Stock issued or issuable by the Company pursuant to any equity or convertible debt financing completed by the Company prior to the SEC Filing Date.

(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 Warrants.

(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.

   (5) Notwithstanding the foregoing, the registration rights set forth in this Section 8 apply to the Note and December Closing Date Warrant. The July 2006 Warrant shall have the same registration rights mutatis mutandis as, and be registered with, the Other Warrants pursuant to the registration rights set forth in the Other Note Purchase Agreement.

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(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 thereofand 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;

(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;

(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;

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(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;

(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 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.

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(f)Entire Agreement; Benefit.

This Agreement, including the Annexes, Schedules and Exhibits hereto, and Section 8 of the Other Note Purchase Agreement with regard to the registration rights for the July 2006 Warrant set forth in Section 8(a)(5) of this Agreement, 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.

(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 Warrants) 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 disposition of Registrable Securities by the 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.

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(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. 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:

(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 December 29, 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 December 29, 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 Warrants, 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 Warrants 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 Warrants or otherwise in connection with the Transaction Documents, and such legal counsel are not acting as the Buyer’s legal counsel in connection therewith.

[Signature pages follow]

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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: See defined term in this Agreement

Principal Amount of Note: TBD

Initial Conversion Price of Note: TBD

December Closing Date Warrant Shares

Initially Issuable Upon Exercise of Warrant: TBD

Initial Exercise Price of December Closing

Date Warrant: TBD

July 2006 Warrant Shares Initially Issuable

Upon Exercise of Warrant: 1,923,076

Initial Exercise Price of July 2006 Warrant: $0.26

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

STILLWATER LLC
By:	/s/ Mortimer D.A. Sackler
	Name: Mortimer D.A. Sackler
	Title: President
	Date: July 21, 2006
	Address for Notices:

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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 July21,2006 (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:

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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.

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.

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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) 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

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Annex X

to

Note Purchase

Agreement

COMPANY PUT NOTICE

(6% Senior Secured Convertible Notes due 2007-2008

of eMagin Corporation)

TO: [NAME OF BUYER][FACSIMILE NO.]

(1)Pursuant to the terms of the Note Purchase Agreement, dated as of July __, 2006 (the "Note Purchase Agreement"), by and between eMagin Corporation, a Delaware corporation (the “Company”), and ______________________, a _______________ organized and existing under the laws of the State of _____________ (the “Buyer”), the Company hereby exercises its right to sell the Securities to the Buyer, subject to the closing conditions set forth in Sections 6 and 7 of the Note Purchase Agreement being satisfied prior to the Closing Date.

(2)The principal amount of the Notes to be sold to the Buyer is $[INSERT AN AMOUNT UP TO [$500,000] BASED ON THE PURCHASE PRICE ADJUSTMENTS - SEE DEFINITION OF PURCHASE PRICE [Prior to execution of this NPA, please reduce the $500,000 amount by the difference, if any, between the principal amount of the Other Notes in this round of financing and $6.5 million]] ____________________.

(3)Subject to the closing conditions set forth in Sections 6 and 7 of the Note Purchase Agreement being satisfied, the Closing Date for the sale and purchase of Notes will be December __, 2006 [INSERT DATE WHICH IS TEN BUSINESS DAYS AFTER THE DATE THIS NOTICE IS GIVEN],

or such other mutually agreed to time by the Company and the Buyer.

(4)Capitalized terms used in this Notice and not defined in this Notice have the respective meanings provided in the Note Purchase Agreement.

Dated: December _____, 2006

	EMAGIN CORPORATION
Date:	By:	/s/
		Title

Annex 1
 

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, aDelaware 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.

1

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

1.1Certain 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.

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“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.,

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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.

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“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

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(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;

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(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.

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“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 majorityof 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.

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“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.

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“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

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 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:

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(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).

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“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.

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“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

2.1Optional 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.

2.2Installments 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.

2.3No 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:

3.1Limitations 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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3.2Maintenance 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.

3.3Payment 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.

3.4Maintenance 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.

3.5Conduct 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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3.6Compliance 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.

3.7Investment 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.

3.8Limitations 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.

3.9Limitations 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.

3.10Transactions 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.

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3.11Rule 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.

3.12Limitation 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.

3.13Certain 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.

3.14Notice 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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3.15Listing 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.

3.16Designation 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.

3.17Management 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

4.1If 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

5.1Repurchase 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.

5.2Notices; 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.

5.3Other.(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

6.1Right 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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6.2Exercise 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.

6.3Adjustment 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.

6.4Effect 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.

6.5Reservation 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.

6.6Notice 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.

6.7Restricted 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

7.1Failure 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.

7.2Notices. 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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7.3Amendment, 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.

7.4Assignability. 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.

7.5Certain 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.

7.6Governing 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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7.7Transfer 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.

7.8Enforceable 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.

7.9Note 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.

7.10Payment 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.

7.11Conversion 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.

7.12Construction. 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]

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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

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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)

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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:

47

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.)

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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:_____________________________________________________________________________________________________________________________

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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.)

: 

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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:

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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]

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Annex II

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

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

No. W-     Right to Purchase __________ Shares ofCommonStockofeMagin Corporation

EMAGIN CORPORATION

Common Stock Purchase Warrant

EMAGIN CORPORATION, aDelaware corporation, hereby certifies that, for value received, ______________________ or registered assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., New York City time, on the Expiration Date (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), [BEFORE ISSUANCE INSERT AMOUNT OF SHARES EQUAL TO 70% OF THE NUMBER OF SHARES INITIALLY ISSUABLE UPON CONVERSION OF THE NOTE BEING ISSUED TO THE HOLDER OF THIS WARRANT, DETERMINED WITHOUT REGARD TO ANY LIMITATION ON CONVERSION] paid and nonassessable shares of Common Stock at a purchase price per share equal to the Purchase Price. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant.

1.Definitions.

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

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

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

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

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

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

“AMEX” means the American Stock Exchange, Inc.

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

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

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

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

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

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

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

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

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

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

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

“Expiration Date” means July 21, 2011.

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

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

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

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

“Nasdaq” means the Nasdaq Global Market.

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

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

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

“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 Warrant.

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

“Other Note Purchase Agreements” means the several Note Purchase Agreements by and between the Company and the several buyers named therein in the form of the Note Purchase Agreement pursuant to which certain of the Notes are being or will be issued.

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

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

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

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

“Purchase Price” means $0.36,subject to adjustment as provided in this Warrant.

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

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

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

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

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

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

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

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

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

“SEC” means the Securities and Exchange Commission.

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

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

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

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

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

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

2.Exercise of Warrant.

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

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

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X = Y x (A - B)

A

where,

X =	the number of shares of Common Stock to be issued to the Holder
Y =	the number of shares of Common Stock as to which this Warrant is to be exercised

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

B = the Purchase Price

(c)9.9% Limitation.

(1)Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof at any time shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by the Holder (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”), together with all shares of Common Stock deemed beneficially owned at such time (other than by virtue of the ownership of the Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by the Holder for purposes of determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Parties”), in either such case for purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the 1934 Act and the rules promulgated thereunder), would result in beneficial ownership by the Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may be modified by the Holder as provided herein, the “Restricted Ownership Percentage”). The Holder shall have the right 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 2(c) make this Warrant unexercisable in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter but prior to the Expiration Date upon exercise of this Warrant as and when shares of Common Stock may be issued in compliance with such restrictions.

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

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

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

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

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

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

(c)other or additional stock, rights, warrants or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement,

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

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

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

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

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

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

Such adjustment shall become effective immediately after the opening of business on the day following the record date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Purchase Price shall be readjusted to the Purchase Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall be readjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to the number which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall again be adjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to be the number which would then be in effect if such record date had not been fixed. In determining whether any rights or warrants entitle the Holder to subscribe for or purchase shares of Common Stock at less than such Current Fair Market Value, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. Notwithstanding the foregoing, if any of the adjustments to the Purchase Price as set forth in this Section 7 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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8.Adjustment in Connection Sales by a Designated Person. So long as any Note is outstanding, if at any time on or after the Issuance Date any Designated Person, directly or indirectly, sells, transfers or disposes of shares of Common Stock or Common Stock Equivalents other than a Permitted Designated Person Sale and on the Measurement Date for such sale, transfer or disposition the Purchase Price in effect on such Measurement Date is greater than the Computed Market Price on such Measurement Date, then, subject to the next succeeding sentence, the Purchase Price shall be reduced to such Computed Market Price, such adjustment to become effective immediately after the opening of business on the day following the Measurement Date. If a reduction of the Purchase 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 Purchase Price shall be reduced to a price equal to the Conversion Price (as defined in the Note) then in effect until such time as the Stockholder Approval is obtained at which time the Purchase Price shall be reduced to such Computed Market Price. 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 23.

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

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

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

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

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

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

(x) this Warrant shall thereafter entitle the Holder to purchase the kind and amount of shares of stock and Other Securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon exercise of this Warrant (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to exercise this Warrant) immediately prior to such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder's rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 8 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares),

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

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

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

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(b)The above provisions of this Section 9 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

(c)If this Section 9 applies to any event or occurrence, Section 5 shall not apply.

10.Tax Adjustments.The Company may make such reductions in the Purchase Price, in addition to those required by Sections 4, 5, 6, 7 and 8 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.

11.Minimum Adjustment. (a) No adjustment in the Purchase Price (and no related adjustment in the number of shares of Common Stock which may thereafter be purchased upon exercise of this Warrant) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All such calculations under this Warrant shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be.

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

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

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

14.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

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

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

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

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

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

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

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

18.Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office or agency of the Company referred to in Section 16, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender.

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

20.Warrant Agent. The Company may, by written notice to the Holder, appoint the transfer agent and registrar for the Common Stock as the Company's agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 2, and the Company may, by written notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 18, and replacing this Warrant pursuant to Section 19, or any of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent.

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

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

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23.Notices, etc. All notices and other communications from the Company to the Holder shall be in writing and delivered personally, by confirmed facsimile, by a nationally recognized overnight courier service or mailed by first class certified mail, postage prepaid, at such facsimile telephone number or address as may have been furnished to the Company in writing by the Holder or at such facsimile telephone number or the address shown for the Holder on the register of Warrants referred to in Section 17.

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

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

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

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

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

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

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

[Signature Page Follows]

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

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

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ASSIGNMENT

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

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

[]To the Company or a Subsidiary; or

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

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

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

[]The transferee is an affiliate of the Company.

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

Dated: ____________________________________	NAME:____________________________________________
	____________________________________________________________
	Signature(s)

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Exhibit 1

FORM OF SUBSCRIPTION

EMAGIN CORPORATION

(To be signed only on exercise of Warrant)

TO:	eMagin Corporation
	10500 N.E. 8th Street, Suite 1400
	Bellevue, WA 98004

Attention: Chief Financial Officer

Facsimile No.: (425) 749-3601

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

2.The undersigned Holder (check one):

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

or

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

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

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Name:_________________________________________________________________

Address_______________________________________________________________

Social Security or Tax Identification Number (if any):

____________________________________________________________

Dated:                 ________________________________________________________

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

________________________________________________________

(Address)

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Annex III

PATENT AND TRADEMARK SECURITY AGREEMENT

This PATENT AND TRADEMARK SECURITY AGREEMENT, dated as of July 21, 2006 (this “Agreement”), made by EMAGIN CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used in this Agreement having the respective meanings provided in this Agreement).

W I T N E S S E T H:

WHEREAS, the Grantor and the several Buyers are parties to the several Note Purchase Agreements pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of Notes of the Grantor;

WHEREAS, the Grantor has certain right, title and interest in and to certain patents, patent applications and trademarks and related property;

WHEREAS, the Grantor has agreed to grant to the Collateral Agent a security interest in its right, title and interest in and to certain patents, patent applications, trademarks and related rights to secure the payment and performance of certain obligations of the Grantor, including, without limitation, obligations of the Grantor under the Notes, the Note Purchase Agreements, the Security Agreement and this Agreement;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes that the Grantor shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor is contemporaneously herewith entering into the Security Agreement and the Lockbox Agreement with the Collateral Agent for the ratable benefit of the Holders;

NOW, THEREFORE, in consideration of the premises and to induce the Buyers to purchase their respective Notes pursuant to the Note Purchase Agreements, the Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Holders, as follows:

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1. Definitions.

(a)As used in this Agreement, the terms “Agreement”, “Grantor” and “Collateral Agent” shall have the respective meanings assigned to such terms in the introductory paragraph of and the recitals to 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)Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Notes.

(d)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):

“Accounts” means all rights to payment for goods sold or leased or for services rendered, whether or not such rights have been earned by performance.

“Additional Note” means the Note issued pursuant to the Additional Note Purchase Agreement.

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Grantor and Stillwater LLC, which by its terms contemplates the issuance of up to $500,000 aggregate principal amount of Notes on or after December 10, 2006.

“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.

“Buyer” means any of the several buyers party to a Note Purchase Agreement.

“Code” means the Uniform Commercial Code as from time to time in effect in the State of Delaware.

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“Collateral” means all of the Grantor’s right, title and interest in and to each of the following, whether now owned or at any time hereafter acquired by the Grantor or in which the Grantor now has or at any time in the future may acquire any right, title or interest:

(1)all Patents;

(2)all Patent Licenses;

(3)all Trademarks;

(4)all Trademark Licenses;

(5)all Contracts, Documents and General Intangibles developed or acquired by the Grantor relating to any and all of the foregoing;

(6)all insurance policies to the extent they relate to the preceding items (1) through (5); and

(7)to the extent not otherwise included in the preceding items (1) through (6), all Proceeds, products, rents, issues, profits and returns of and arising from any and all of the foregoing.

“Contracts” shall have the meaning assigned to such term under the Code.

“Documents” shall have the meaning assigned to such term under the Code.

“Event of Default” means:

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

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

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

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

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

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

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

“General Intangibles” shall have the meaning ascribed to such term in the Code.

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

“Issuance Date” means the date on which the Notes are initially issued.

“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction or performance of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States.

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

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

“Majority Holders” means at any time such of the holders of Notes, which based on the outstanding principal amount of the Notes, represents a majority of the aggregate outstanding principal amount of the Notes.

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

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“Notes” means the Grantor’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Obligations” shall mean:

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

(2)any and all sums advanced by the Collateral Agent or any Holder in order to preserve the Collateral or to preserve the Collateral Agent’s security interest in the Collateral;

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

(4)any amounts for which any Holder is entitled to indemnification under Section 4(n).

“Patent(s)” means all patents, patent applications and patent disclosures which are presently, or in the future may be, owned, issued, acquired or used (whether pursuant to a license or otherwise) anywhere in the world by the Grantor, in whole or in part, and all of the Grantor’s right, title and interest in and to all patentable inventions and to file applications for patents under patent laws of the United States or of any other jurisdiction, including any and all extensions, reissues, substitutes, continuations, continuations-in-part, divisional, patents of addition, re-examinations and renewals thereof, and patents issuing therefrom, and any other proprietary rights related to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of an interest therein under the laws of all jurisdictions) and any and all foreign counterparts of any of the foregoing, including without limitation, those listed on Exhibit A to this Agreement.

“Patent Licenses” means each license agreement identified in Exhibit A to this Agreement as it may be amended, supplemented or otherwise modified from time to time, and each license agreement relating to Patents hereafter granted to, used or acquired by the Grantor, in each case together with the right to use and rely upon the inventions and other intellectual property conveyed thereunder.

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“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.

“Proceeds” shall have the meaning assigned to such term under the Code.

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

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

“Security Interest” means the security interest and collateral assignment granted in the Collateral pursuant to this 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.

“Trademark License” means each license agreement identified in Exhibit B hereto as it may be amended, supplemented or otherwise modified from time to time, and each license agreement relating to Trademarks hereafter used, adopted or acquired by the Grantor.

“Trademarks” means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers of the Grantor adopted for use in conjunction with the sale of Medical Devices or Competitive Products, now existing anywhere in the world or hereinafter adopted or acquired, whether currently in use or not, and the goodwill associated therewith, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, those identified in Exhibit B to this Agreement, and (b) all renewals thereof by the Grantor.

“Transaction Documents” means the Notes, the Note Purchase Agreements, this Agreement, the Security Agreement, the Lockbox Agreement, the Warrants and the other agreements, instruments and documents contemplated hereby and thereby, and any amendments, extensions or renewals thereof or replacements therefor.

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2.Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due of the Obligations and for the other purposes provided in this Agreement, the Grantor hereby grants, assigns and conveys to the Collateral Agent, for the ratable benefit of the Holders, all of the Grantor’s right, title and interest in and to the Collateral as collateral security and hereby grants the Collateral Agent a continuing first priority security interest therein. Such grant includes, without limitation, a grant of the security interest to secure the payment and performance of Obligations relating to the Additional Note upon the date of issuance of such Additional Note. Notwithstanding the foregoing assignment, unless and until there shall have occurred and be continuing an Event of Default, the Grantor shall retain and the Collateral Agent hereby grants to the Grantor the exclusive, non-transferable, revocable right and license to use the Collateral on and in connection with making, having made, using and selling products sold by the Grantor, for the Grantor’s own benefit and account and for none other (except as provided in the Patent Licenses identified on Exhibit A and the Trademark Licenses identified on Exhibit B). The Grantor agrees not to sell or assign its interest in, or grant any sublicense under, the foregoing license granted to the Grantor without the prior written consent of the Collateral Agent, which may be withheld in the Collateral Agent’s sole and absolute discretion.

3.Representations and Warranties. The Grantor hereby represents and warrants that:

(a)Description of Collateral. True and complete schedules setting forth all Patents, Patent Licenses, Trademarks and Trademark Licenses owned, held, controlled or used by the Grantor or to which the Grantor is a party on the date of this Agreement, together with a summary description and full information in respect of the filing, registration, issuance and expiration dates thereof, as applicable, are set forth on Exhibit A with respect to Patents and Patent Licenses and on Exhibit B with respect to Trademarks and Trademark Licenses, respectively, to this Agreement.

(b)Title; No Other Liens. Except for the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to this Agreement and the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to the Security Agreement, the Grantor is the sole and exclusive owner of and has good and marketable title to each item of the Collateral free and clear of any and all Liens or claims of others, except as permitted by Section 3.9 of the Notes. None of the Grantor’s Subsidiaries or other entities controlled by the Grantor has any right, title or interest in or to any of the Collateral. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Collateral Agent, for the ratable benefit of the Holders, pursuant to this Agreement or the Security Agreement.

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(c)Perfected First Priority Liens. The Liens granted pursuant to this Agreement will constitute, upon the completion of all the filings or notices listed in Exhibit C to this Agreement, which Exhibit includes all UCC-1 financing statements to be filed pursuant to the terms of the Security Agreement, all requisite filings to be made with the PTO in the forms substantially similar to that of Exhibit E and Exhibit F to this Agreement, valid and perfected Liens on all Collateral in favor of the Collateral Agent for the ratable benefit of the Holders, which are prior to all other Liens on such Collateral and which are enforceable as such against all Persons.

(d)Consents under Contracts. No consent (other than consents that have been obtained) of any party (other than the Grantor) to any Contract that constitutes part of the Collateral is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement or the exercise of the Collateral Agent’s rights and remedies provided herein or at law.

(e)Chief Executive Office. The Grantor’s chief executive office and chief place of business is located at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004.

(f)Authority. The Grantor has full power, authority and legal right to grant the Collateral Agent the Lien on the Collateral pursuant to this Agreement.

(g)Approvals, Filings, Etc. No authorization, approval or consent of, or filing, registration, recording or other action with, any United States or foreign court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market, the stockholders of the Company or any other Person, including, without limitation, the PTO, is required to be obtained or made by the Company or any Subsidiary (x) for the grant by the Grantor of the Lien on the Collateral pursuant to this Agreement, (y) the collateral assignment of the Collateral to the Collateral Agent pursuant to this Agreement or (z) to perfect the Lien purported to be created by this Agreement, in each case except as has been obtained or made or (z) for the exercise of the Collateral Agent’s rights and remedies provided herein or at law.

(h)No Claims. Each of the Patents and Trademarks existing on the date hereof is valid and enforceable, and the Grantor is not presently aware of any past, present or prospective claim by any third party that any of such Patents or Trademarks are invalid or unenforceable, or that the use of any Patents does or may violate the rights of any third person, or of any basis for any such claims.

(i)Statutory Notice. The Grantor has used and will continue to use proper statutory notice in connection with its use of the Patents.

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(j)Certain Patent Matters. To its knowledge, the Grantor does not lack any material rights or licenses to use the Patents or to make, have made, use, sell, or offer for sale the claimed subject matter of the Patents. To the knowledge of the Grantor, there are no facts which would form a basis for a finding that any of the claims of the Patents is unpatentable, unenforceable or invalid. To the knowledge of the Grantor, there are no pending U.S. or foreign patent applications which, if issued, would limit or prohibit the ability of the Grantor or the Collateral Agent to make, have made, use, sell, or offer for sale the claimed subject matter of the Patents.

(k)Custom License Matters. Each Patent License or Trademark License is the legal, valid and binding obligation of the Grantor and the respective licensor thereunder; the Grantor is not, and, to the best knowledge of the Grantor, each licensor is not, in default of any of its obligations under any Patent License or Trademark License; no event has occurred and no circumstance exists that with the giving of notice or the passage of time, or both, would constitute such a default by the Grantor; and, to the best knowledge of the Grantor, no such event has occurred or circumstance exists that would constitute a default by the licensor under any Patent License or Trademark License.

4.Covenants. The Grantor covenants and agrees with the Collateral Agent that from and after the date of this Agreement until the payment and performance in full by the Grantor of all of the Obligations:

(a)Further Documentation. At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of the Grantor, the Grantor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Collateral Agent may request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, any applicable filing with the PTO and the filing of any financing or continuation statements under the Code or similar laws in effect in any such jurisdiction with respect to the Liens created hereby. The Grantor also hereby authorizes the Collateral Agent to file any such financing or continuation statement without the signature of the Grantor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction.

(b)Maintenance of Records. The Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral. For the further security of the Collateral Agent for the ratable benefit of the Holders, the Grantor hereby grants to the Collateral Agent, for the ratable benefit of the Holders, a security interest in all of the Grantor’s books and records pertaining to the Collateral, and the Grantor shall turn over any such books and records for inspection at the office of the Grantor to the Collateral Agent or to its representatives during normal business hours at the request of the Collateral Agent.

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(c)Limitation on Liens on Collateral. The Grantor (x) will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Liens created hereby and by the Security Agreement and Liens permitted by Section 3.9 of the Notes, and (y) will defend the right, title and interest of the Collateral Agent in and to any of the Collateral against the claims and demands of all Persons.

(d)Limitations on Dispositions of Collateral. The Grantor will not sell, transfer, assign, grant any participation in, sublicense or otherwise dispose of any of the Collateral to any Persons, including, without limitation, any Subsidiary or Affiliate, or attempt, offer or contract to do so.

(e)Limitations on Modifications, Waivers, Extensions of Patent Licenses and Trademark Licenses. The Grantor will not (i) amend, modify, terminate or waive any provision of any Patent License with respect to any Patent or Trademark License with respect to any Trademark in any manner which could reasonably be expected to materially adversely affect the value of such Patent License or Trademark License as Collateral, (ii) fail to exercise promptly and diligently each and every material right and perform each material obligation which it may have under each Patent License and Trademark License with respect to any Trademarks. Within two Business Days of receipt thereof, the Grantor will deliver to the Collateral Agent a copy of each material demand, notice or document received by it relating in any way to each Patent License and Trademark License.

(f)Further Identification of Collateral. The Grantor shall furnish to the Collateral Agent from time to time, upon the request of the Collateral Agent, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail.

(g)Notices. The Grantor shall advise the Collateral Agent promptly, but in no event later than two Business Days after the occurrence thereof, in reasonable detail, at its address specified in accordance with Section 15 (i) of any Lien on, or claim asserted against, any of the Collateral, other than as created hereby or as permitted hereby, (ii) of any Event of Default or any event which, with the giving of notice or the passage of time, or both, would become an Event of Default and (iii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the Liens created hereunder or the rights of the Collateral Agent hereunder.

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(h)Patents.

(1)The Grantor will notify the Collateral Agent immediately if it knows, or has reason to know, that any application relating to any Patent may become abandoned or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the PTO or any court or tribunal in any country) regarding the Grantor’s ownership of or license rights or other rights with respect to any Patent.

(2)The Grantor will, with respect to any Patent that the Grantor obtains after the Issuance Date or any Patent License that the Grantor acquires after the Issuance Date, promptly, but in no event later than five Business Days thereafter, (i) take all actions necessary so that the Collateral Agent shall obtain a perfected security interest in such Patent or Patent License and (ii) provide to the Collateral Agent a revised Exhibit A, listing all Patents and all Patent Licenses in which the Grantor has an interest.

(3)Upon request of the Collateral Agent, the Grantor shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent’s security interest in such Patents or Patent Licenses, and the Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Grantor shall have paid and performed in full all of its obligations under this Agreement and the other Transaction Documents.

(4)The Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the PTO to maintain and pursue each Patent including, without limitation, payment of maintenance fees.

(5)In the event that any Patent included in the Collateral is infringed by a third party, the Grantor shall promptly notify the Collateral Agent after it learns thereof and shall, if appropriate, sue for infringement, seeking injunctive relief where appropriate and to recover any and all damages for such infringement, or take such other actions as the Grantor shall reasonably deem appropriate under the circumstances to protect such Patent.

(6)The Grantor hereby grants to the Collateral Agent and its employees and agents the right, upon prior written notice, to visit the Grantor’s plants and facilities, and the Grantor shall use its best efforts to arrange for the Collateral Agent and its employees and agents to have access to such plants and facilities of third parties which manufacture or supply goods or services, for or under contract with the Grantor.

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(i)Trademarks.

(1)The Grantor (either itself or through licensees) will, with respect to each Trademark identified in Exhibit B, as Exhibit B may be amended, supplemented or otherwise modified from time to time, (i) continue to use or have used such Trademark to the extent necessary to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Collateral Agent, for the ratable benefit of the Holders, shall obtain a first priority perfected security interest in the Company’s interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any such Trademark may become invalidated.

(2)The Grantor will promptly notify the Collateral Agent if any application or registration relating to any Trademark may become abandoned, canceled or denied, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the PTO or any court or tribunal in any country) regarding the Grantor’s ownership interest in such Trademark or its right to register the same or to keep and maintain the same.

(3)The Grantor will, with respect to any Trademark that the Grantor registers after the Issuance Date or any Trademark License that the Grantor acquires after the Issuance Date, promptly (i) take all actions necessary so that the Collateral Agent, for the ratable benefit of the Holders, shall obtain a perfected security interest in such Trademark or Trademark License and (ii) provide to the Collateral Agent a revised Exhibit B listing all registered Trademarks and all Trademark Licenses in which the Grantor has an interest.

(4)Upon request of the Collateral Agent, the Grantor shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent’s security interest in any Trademark and the goodwill and general intangibles of the Grantor relating thereto or represented thereby, and the Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Grantor shall have paid and performed in full all of its obligations under the Transaction Documents.

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(5)The Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the PTO, to maintain and pursue each application (and to obtain the relevant registration) and to maintain the registration of the Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

(6)In the event that any Trademark included in the Collateral is infringed, misappropriated or diluted by a third party, the Grantor shall notify the Collateral Agent and shall, if appropriate, sue for infringement, misappropriation or dilution, seeking injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other action as the Grantor reasonably deems appropriate under the circumstances to protect such Trademark.

(j)Further Actions. Without limiting the foregoing provisions of this Section 4, the Grantor further agrees for itself and its successors and assigns to execute upon request any other lawful documents and likewise to perform any other lawful acts which may be necessary or desirable to secure fully for the Collateral Agent, for the ratable benefit of the Holders, all right, title and interest in and to the Collateral, including, but not limited to, the execution of substitution, reissue, divisional or continuation patent applications; and preliminary or other statement of the giving of testimony in any interference or other proceeding in which the Collateral or any application, Patent or Trademark directed thereto or derived therefrom may be involved.

(k)License Agreements. The Grantor shall comply with its obligations under each of its Patent Licenses and Trademark Licenses.

(l)Changes in Locations, Name, Etc. The Grantor will not (i) change the location of its chief executive office/chief place of business from that specified in Section 3(e) or (ii) change its name, identity or corporate structure to such an extent that any statement filed by the Collateral Agent with the PTO in connection with this Agreement would become misleading, unless it shall have given the Collateral Agent at least 30 days prior written notice thereof and, prior to such action or event, shall have taken appropriate action satisfactory to the Collateral Agent to preserve and protect the Collateral Agent’s collateral assignment and the Security Interest under this Agreement.

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(m)Subsidiaries. This Agreement is entered into on behalf of and for the benefit of the Grantor. The Grantor will not permit any of its Subsidiaries or Affiliates or any other entities controlled by the Grantor to have any ownership or other rights in or to exercise any control over the Collateral.

(n)Indemnification. The Grantor agrees to indemnify and hold harmless the Collateral Agent and each Holder and their respective officers, directors, Affiliates, agents and investment advisors (each, an “Indemnified Person”) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and to reimburse the Collateral Agent and each Holder for all costs and expenses, including reasonable attorneys’ fees and expenses, arising out of or resulting from this Agreement, including any breach hereof or Event of Default hereunder, or the exercise by the Collateral Agent or any Holder, as the case may be, of any right or remedy granted to it hereunder or under the other Transaction Documents or under applicable law; provided, however, that the Grantor shall not be required to indemnify a particular Indemnified Person to the extent any claim, demand, loss, judgment, liability, cost or expense is determined by final judgment (not subject to further appeal) of a court of competent jurisdiction to have arisen primarily from the gross negligence or willful misconduct of such Indemnified Person. In no event shall any Indemnified Person other than the Collateral Agent have any liability or obligation to the Grantor under this Agreement or applicable law (liability under which the Grantor hereby waives) for any matter or thing in connection with this Agreement, and in no event shall the Collateral Agent or any Holder be liable, in the absence of a determination of gross negligence or willful misconduct on its part by final judgment (not subject to further appeal) of a court of competent jurisdiction, for any matter or thing in connection with this Agreement other than to account for moneys actually received by it in accordance with the terms hereof. If and to the extent that the obligations of the Grantor under this Section 4(n) are unenforceable for any reason, the Grantor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. In any suit, proceeding or action brought by the Collateral Agent or any Holder under any Account or Contract that constitutes part of the Collateral for any sum owing thereunder, or to enforce any provisions of any such Account or Contract, the Grantor will save, indemnify and keep the Collateral Agent and each Holder harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Grantor.

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5.Collateral Agent’s Powers.

(a)Powers. The Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof or investment advisor thereto, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Grantor and in the name of the Grantor or in its own name, from time to time in the Collateral Agent’s discretion, during any period in which an Event of Default is continuing, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Grantor hereby gives the Collateral Agent and each such officer, agent and investment advisor the power and right, on behalf of the Grantor, without notice to or assent by the Grantor, except any notice required by law, to do the following:

(1)to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under or with respect to any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under or with respect to any such Collateral whenever payable, in each case in the name of the Grantor or its own name, or otherwise;

(2)to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral and to pay all or any part of the premiums therefor and the costs thereof; and

(3)(A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Grantor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Collateral Agent may deem appropriate; (G) to assign (along with  the goodwill of  the business pertaining thereto)  any Patent or Trademark for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in

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its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent’s option and the Grantor’s expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent’s Liens thereon and to effect the intent of this Agreement, all as fully and effectively as the Grantor might do.

The Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the Grantor shall have paid and performed in full all of the Obligations.

(b)Filing and Recordation. In addition to the filings the Grantor is required to make as specified in Exhibit C, this Agreement or an instrument referring hereto may be filed and recorded in such public offices and with such governmental authorities, including the PTO, as the Collateral Agent may determine from time to time. The Collateral Agent may so file and record this Agreement as a “security interest”, “collateral assignment”, “assignment” or similar designation as the Collateral Agent may determine (so long as such designation is consistent with the terms of this Agreement) and the Collateral Agent may from time to time rerecord and refile or take other action to change the designation under which this Agreement is filed or recorded (so long as such designation is consistent with the terms of this Agreement).

(c)Other Powers. The Grantor also authorizes the Collateral Agent, at any time and from time to time, to execute, in connection with the sale provided for herein, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral.

(d)No Duty on Collateral Agent’s Part. The powers conferred on the Collateral Agent hereunder are solely to protect the Collateral Agent’s interests in the Collateral for the ratable benefit of the Holders and shall not impose any duty upon the Collateral Agent to exercise any such powers. The Collateral Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

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(e)Grantor Remains Liable under Contracts. Anything herein to the contrary notwithstanding, the Grantor shall remain liable under each of the ontracts that constitute part of the Collateral to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with and pursuant to the terms and provisions of each such Contract. The Collateral Agent shall not have any obligation or liability under any Contract that constitutes part of the Collateral by reason of or arising out of this Agreement or the receipt by the Collateral Agent of any payment relating to such Contract pursuant hereto, nor shall the Collateral Agent be obligated in any manner to perform any of the obligations of the Grantor under or pursuant to any such Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any such Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

6.Performance by Collateral Agent of Grantor’s Obligations. If the Grantor fails to perform or comply with any of its agreements contained herein and the Collateral Agent, as provided for by the terms of this Agreement and following reasonable notice to the Grantor, may itself perform or comply, or otherwise cause performance or compliance, with such agreement, and the expenses of the Collateral Agent incurred in connection with such performance or compliance shall be payable by the Grantor to the Collateral Agent on demand and shall constitute Obligations secured hereby.

7.Remedies. If an Event of Default has occurred and is continuing, but in the case of Events of Default that are solely ones covered by the final clause (2) of Section 4.01 of any Note, only after the expiration of the 120-day period specified in such clause (2) the Collateral Agent may exercise, in addition to all other rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, if an Event of Default has occurred and is continuing, but in the case of Events of Default that are solely ones covered by the final clause (2) of Section 4.01 of any Note, only after the expiration of the 120-day period specified in such clause (2) the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or expressly provided for) to or upon the Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are, to the extent permitted by applicable law, hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, license, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), at public or private sale or sales, at any exchange, broker’s board or office of the Collateral Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Grantor, which right or equity is hereby waived, to the extent permitted by applicable law, or released.

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The Grantor further agrees, if an Event of Default has occurred and is continuing, at the Collateral Agent’s request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at the Grantor’s premises or elsewhere. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, need the Collateral Agent account for the surplus, if any, to the Grantor. To the extent permitted by applicable law, the Grantor waives all claims, damages and demands it may acquire against the Collateral Agent arising out of the exercise by it of any rights hereunder, provided, that nothing contained in this Section shall relieve the Collateral Agent from liability arising solely from its gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten days before such sale or other disposition. The Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency.

8.Limitation on Duties Regarding Preservation of Collateral. The Collateral Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under the Code or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Grantor or otherwise.

9.Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest until the Grantor has paid and performed in full all of the Obligations.

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

11.Paragraph Headings, Captions, Etc. The paragraph headings, the captions and the footers, used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

12.No Waiver; Cumulative Remedies. The Collateral Agent shall not by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have on any future occasion. The rights and remedies herein and in the other Transaction Documents provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law or in equity or by statute.

13.Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party to be charged with enforcement; provided, however, that any provision of this Agreement may be waived, amended, supplemented or otherwise modified by the Collateral Agent only with the prior written approval of the Majority Holders. This Agreement shall be binding upon the successors and assigns of the Grantor and shall inure to the benefit of the Collateral Agent and its successors and assigns. The Grantor may not assign its rights or obligations under this Agreement without the prior written consent of the Collateral Agent, which the Collateral Agent may withhold in the discretion of the Majority Holders. The requirements for resignation, and appointment of a successor to, the Collateral Agent are established by Exhibit D hereto and not by this Agreement.

14.Termination of Security Interest; Release of Collateral. (a) Upon the payment and performance in full by the Grantor of the Obligations, all right, title and interest of the Collateral Agent in and to the Collateral, including the Security Interest, pursuant to this Agreement shall terminate and all rights to the Collateral shall revert to the Grantor.

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(b)At any time and from time to time prior to termination of the right, title and interest of the Collateral Agent in and to the Collateral pursuant to Section 14(a), the Collateral Agent shall release any of the Collateral only with the prior written consent of the Majority Holders.

(c)Upon any such termination of the Security Interest, the Collateral Agent will, at the expense of the Grantor, execute and deliver to the Grantor such documents and take such other actions as the Grantor shall reasonably request to evidence the reassignment of the Collateral to the Grantor and the termination of the Security Interest. The Collateral Agent shall deliver to the Grantor all Collateral so released then in its possession.

15.Notices. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by 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 below 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 Grantor, such notice shall be addressed to the Grantor at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004, Attention: Chief Financial Officer (telephone line facsimile number (425) 749-3601), 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. (telephone line facsimile number (212) 930-9725), and in the case of any notice to the Collateral Agent, such notice shall be addressed to the Collateral Agent at c/o Alexandra Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, New York 10017, Attention: Chief Compliance Officer (telephone line facsimile transmission number (212) 301-1800).

16.Fees and Expenses. The Grantor agrees to pay the fees of the Collateral Agent in performing its services under this Agreement and all reasonable expenses (including but not limited to attorneys’ fees and costs for legal services, costs of insurance and payments of taxes or other charges) of, or incidental to, the custody, care, sale or realization on any of the Collateral or in any way relating to the performance of the obligations or the enforcement or protection of the rights of the Collateral Agent hereunder.

17.Concerning Collateral Agent. The Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or

94

nonexercise by the Collateral Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Holders, be governed by Exhibit D to this Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantor, except as expressly provided in Sections 13 and 14, the Collateral Agent shall be conclusively presumed to be acting as agent for the Holders with full and valid authority so to act or refrain from acting, and the Grantor shall not be under any obligation to make any inquiry respecting such authority. The Collateral Agent hereby waives for the benefit of the Holders any claim, right or Lien of the Collateral Agent against the Collateral arising under applicable law or arising from any business or transaction between the Collateral Agent and the Grantor other than pursuant to this Agreement or any of the other Transaction Documents.

18.Survival. All representations, warranties, covenants and agreements of the Grantor and of the Collateral Agent contained herein will survive the execution and delivery hereof and the release of any Collateral pursuant hereto and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Collateral Agent or the Grantor or any person who controls the Collateral Agent or the Grantor.

19.Grantor’s Obligations Absolute, Etc. The obligations of the Grantor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any of the Transaction Documents or any other agreement or instrument referred to therein, or any assignment or transfer of any thereof; (b) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such Transaction Document or other agreement or instrument; (c) any furnishing of any additional security to the Collateral Agent or its assignees or any acceptance thereof or any release of any security by the Collateral Agent or its assignees; (d) any limitation on any party’s liability or obligations under any such Transaction Document or other agreement or instrument or any invalidity or unenforceability, in whole or in part, of any such Transaction Document or other agreement or instrument or any term thereof; or (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Grantor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not the Grantor shall have notice or knowledge of any of the foregoing.

20.Integration. This Agreement and the Security Agreement represent the entire agreement of the Grantor and the Collateral Agent with respect to the subject matter hereof, and there are no promises, undertakings,

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representations or warranties by the Collateral Agent relative to subject matter hereof not expressly set forth or referred to herein or therein.

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

22.Governing Law. This Agreement and the rights and obligations of the Grantor under this Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted hereunder.

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

[signature page follows]

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

EMAGIN CORPORATION
By:	/s/ Gary W. Jones
	Name: Gary W. Jones
	Title: Chief Executive Officer

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/s/ Mikhail Filimonov
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

97

STATE OF_________________________)

       )  SS:

COUNTY OF_______________________)

[CHECK FOR APPLICABLE FORM OF ACKNOWLEDGEMENT WHERE SIGNED] On this day of July __, 2006, before me personally appeared proved to me on the basis of satisfactory evidence to be the person who executed the above Patent and Trademark Security Agreement as on behalf of eMagin Corporation, a Delaware corporation, and acknowledged to me that the corporation executed it.

WITNESS my hand and official seal.

________________________________________

NOTARY PUBLIC

STATE OF__________________   )

) SS:

COUNTY OF________________    )

On this day of July __, 2006, before me personally appeared proved to me on the basis of satisfactory evidence to be the person who executed the above Patent and Trademark Security Agreement as on behalf of Alexandra Investment Management, LLC, as Investment Adviser to Alexandra Global Master Fund Ltd., and acknowledged to me that the limited liability company executed it.

WITNESS my hand and official seal.

________________________________________

NOTARY PUBLIC

98

EXHIBIT A

Patents, Patent Licenses and Patent Applications

ISSUED PATENTS

Patent Number	Title	Issue Date
7,068,258	Portable communication device with virtual image display module	June 27, 2006
2,173,248 (Canada)	Head Mounted Display System with Aspheric Optics (corr. to 5,543,816)	May 27, 2005
6,885,147	Organic Light Emitting Diode Devices with Improved Anode Stability	April 26, 2005
2,173,624 (Canada)	Binocular Head Mounted Display System	March 29, 2005
6,858,989	Method and System for Stabilizing Thin Film Transistors in AMOLED displays	February 22, 2005
6,809,710	Grey Scale Pixel Driver for Electronic Display and Method of Operation Therefor	October 26, 2004
6,809,710	Grey Scale Pixel Driver for Electronic Display and Method of Operation Therefor	October 26, 2004
6,760,034	Three Dimensional Display Emulation Method and System	July 6, 2004
98808734,0	Laser Ablation Method to Fabricate Color Organic Light Emitting Diode Displays	May 26, 2004
6,657,224	Organic Light Emitting Diode Devices Using Thermostable Hole-Injection and Hole-Transport Compounds	December 2, 2003
6,608,283	Apparatus and Method for Solder-Sealing an active Matrix Organic Light Emitting Diode	August 19, 2003
6,608,439	Inorganic-Based Color Conversion Matrix Element for Organic Color Display Devices and Method of Fabrication	August 19, 2003

99

6,337,492	Serially-Connected Organic Light Emitting Diode Stack Having Conductors Sandwiching Each Light Emitting Layer	January 8, 2002
6,288,232	Synthesis of Pyrazolinynaphthalic Acid Derivatives	September 11, 2001
6,278,237	Laterally Structured High Resolution Multicolor Organic Electroluminescence Display Device	August 21, 2001
6,265,820	Heat Removal System for use in Organic Light Emitting Diode Displays Having High Brightness	July 24, 2001
6,255,771	Flashover Control Structure for Field Emitter Displays and Method of making the same	July 3, 2001
6,232,934	Binocular Head Mounted Display System	May 15, 2001
6,218,777	Field Emission Display Spacer with Guard Electrode	April 14, 2001
6,215,840	Method and Apparatus for Sequential Memory Addressing	April 10, 2001
6,204,975	Reflective Micro-Display System	March 20, 2001
6,198,214	Large Area Spacer-Less Field Emissive Display Package	March 6, 2001
6,198,220	Sealing Structure for Organic Light Emitting Devices	March 6, 2001
6,181,304	Convertible Right Eye/Left Eye Monocular Head Mounted Display System	January 30, 2001
6,169,358	Method and Apparatus for Flashover Control Including a High Voltage Spacer for Parallel Plate Electron Beam Array Devices and Method of Making Thereof	January 2, 2001
6,166,820	Laser Interferometric Lithographic System Providing Automatic Change of Fringe Spacing	December 26, 2000
6,157,291	Head Mounted Display System	December 5, 2000
6,144,145	High Performance Field Emitter and Method of Producing the Same	November 7, 2000

100

6,136,621	High Aspect Ratio Gated Emitter Structure and Method of Making	October 24, 2000
6,101,028	Miniature Microscope	August 8, 2000
6,069,443	Passive Matrix OLED Display	May 30, 2000
6,060,728	Organic Light Emitting Device Structure and Process	May 9, 2000
6,027,388	Lithographic Structure and Method for Making Field Emitters	February 22, 2000
6,023,259	OLED Active Matrix Using a Single Transistor Current Mode Pixel Design	February 8, 2000
6,016,033	Electrode Structure for High Resolution Organic Light-Emitting Diode Displays and Method for Making the Same	January 18, 2000
6,005,720	Reflective Micro-Display System	December 21, 1999
5,965,898	High Aspect Ratio Gated Emitter Structure and Method of Making	October 12, 1999
5,959,725	Large Area Energy Beam Intensity Profiler	September 28, 1999
5,920,080	Emissive Display Using Organic Light Emitting Diodes	July 6, 1999
5,903,098	Field Emission Display Device Having Multiplicity of Through Conductive Vias and a Backside Connector	May 11, 1999
5,903,243	Compact body-Mountable Field Emission Display Device and Display Panel Having Utility for use Therewith	May 11, 1999
5,771,098	Laser Interferometric Lithographic System Providing Automatic Change of Fringe Spacing	June 23, 1998
5,708,449	Binocular Head Mounted Display System	January 13, 1998
5,688,158	Planarizing Process for Field Emitter Displays and Other Electron Source Applications	November 18, 1997
5,672,938	Light Emission Device Comprising Light Emitting Organic Material and Electron Injection Enhancement Structure	September 30, 1997

101

5,663,608	Field Emission Display Devices, and Field Emission Electron Beam Source and Isolation Structure Components Therefor	September 2, 1997
5,647,785	Methods of Making Vertical Microelectronic Field Emission Devices	July 15, 1997
Des 380,482	Head Mounted Display System	July 1, 1997
5,629,583	Flat Panel Display Assembly Comprising Photoformed Spacer Structure and Method of Making the Same	May 13, 1997
5,619,889	Method of Making Microstructural Surgical Instruments	April 15, 1997
5,619,097	Panel Display with Dielectric Spacer Structure	April 8, 1997
5,587,623	Field Emitter Structure and Method of Making the Same	December 24, 1996
5,583,393	Selectively Shaped Field Emission Electron Beam Source and Phosphor Array for use Therewith	December 10, 1996
5,561,339	Field Emission Array Magnetic Sensor Devices	October 1, 1996
5,548,181	Field Emission Device Comprising Dielectric Overlayer	August 20, 1996
5,546,099	Head Mounted Display System Light Blocking Structure	August 13, 1996
5,543,816	Head Mounted Display System with Aspheric Optics	August 6, 1996
5,539,422	Head Mounted Display System	July 23, 1996
5,534,743	Field Emission Display Devices, and Field Emission Electron Beam Source and Isolation Structure Components Therefor	July 9, 1996
5,529,524	Method of Forming a Spacer Structure Between Opposedly Facing Plate Members	June 25, 1996
Des 359,729	Portable Interface Unit for a Head-Up Display System	June 27, 1995

102

5,144,191	Horizontal Microelectronic Field Emission Devices	September 1, 1992
5,126,287	Self-Aligned Electron Emitter Fabrication Method and Device Formed Thereby	June 30, 1992
4,902,898	Wand Optices Column and Associated Array Wand and Charged Particle Source	February 20, 1990
98808734.0 (China)	Laser Ablation Method To Fabricate Color OLED Displays	May 26, 2004

103

PATENT APPLICATIONS IN PROGRESS

Patent Application No.	Title	Issue Date
11/169,154	Method of Clearing Electrical Contact Pads in Thin Film Sealed OLED Devices	N/A
09/785,270	Display Method and System	N/A
09/849,745	Portable Communication Device With Virtual Image Display Module	N/A
60/684,633	Tapered Fiber Optic Bundle Megadisplay	N/A
60/583,158	Photoresist Laser Ablation	N/A
09/814,853	Light Extraction from Color Changing Medium Layers in Organic Light Emitting Diode Devices	N/A
504797/99 (Japan)	Emissive Display Using Organic Light Emitting Diodes	N/A
2000-550128 (Japan)	An Improved Electrode Structure for Organic Light Emitting Diode Devices	N/A
6-523218 (Japan)	Head Mounted Display System	N/A
9-531760 (Japan)	Support for a Head Mounted Display System	N/A
2004-261527 (Japan; divisional)	Binocular Head Mounted Display System	N/A
2000-565526 (Japan)	Convertible Right Eye/Left Eye Monocular Head Mounted Display System	N/A
2000-589993 (Japan)	Reflective Micro-Display System; Miniature Microscope and Reflective Micro-display system respectively	N/A
01950594,0 (Europe)	OLED Devices Using Thermostable Hole-Injection and Hole-Transport Compounds	N/A
11/439,014	Tapered Fiber Optic Bundle Metadisplay	N/A

104

11/402,092	Auto-calibrating Gamma Correction Circuit	N/A
11/399,170	OLED Active Matrix Cell Designed For Optimal Uniformity	N/A
133,678 (Israel)	Emissive Display Using Organic Light Emitting Diodes	N/A
60/755,907	Automatic Timeout Image Orientation System For FOLED Micro-display	N/A
60/725,406	Novel OLED Lighting Device	N/A
2,490,344 (Canada; divisional)	Binocular Head-Mounted Display System	N/A

105

KODAK PATENTS (partial list)

Topic	U.S. Pat. No.	Issued
Multilayer structure	4,356,429	1982
Multilayer structure - Alq	4,539,507	1985
Porphyrin injecting layer	4,720,432	1988
Luminescent zone - dye dopant	4,769,292	1988
Improved cathode	4,885,211	1989
Silazane HTL	4,950,950	1990
Improved intensity circuit	4,996,523	1991
Cathode overlayer for stability	5,047,687	1991
Cathode metal cap	5,059,861	1991
Mg, Al cathode	5,059,862	1991
Organic amines HTL	5,061,569	1991
Fused metal cathode	5,073,446	1991
Blue emitters	5,141,671	1992
Blue emitters	5,150,006	1992
Blue emitters	5,151,629	1992
Integral shadow mask	5,276,380	1994
Integral shadow mask color	5,294,869	1994
Color change medium	5,294,870	1994
White emitter (2-layer) BAlq	5,405,709	1995
Phalocyanine dopant	5,409,783	1995
OLED ultra thin device	5,482,896	1996
ALQ blue	5,484,922	1996
OLED ultra thin substrate	5,530,269	1996
OLED TFT process	5,550,066	1996
AC drive scheme	5,552,678	1997
Polyaromatic amine HTL	5,554,450	1996
Quinacridone green	5,593,788	1997
Electron injector (silicides etc.)	5,608,287	1997
Camera data printer	5,634,156	1997
Blue emitter oxadizoles	5,645,948	1997
Camera Information Display	5,652,930	1997
White emitter structure	5,683,823	1997
OLED TFT device	5,684,365	1997
Blue emitter metal complex	5,755,999	1998
LiF cathode	5,776,622	1998

106

EXHIBIT B

Trademarks and Trademark Licenses

Serial App. No.	Item	Status	Filing Date	Published, Allowed, or Registered
78-463416	VIRTUAL VISION VERACITY (Block letters)	Allowed - 1st extension of time granted	Aug 6, 2004	P May 2, 2006
78-463402	VERACITY (Block letters)		Aug 6, 2004	A Sep 27, 2005
78-235749	EGLASS	Registered, Int'l	Apr 9, 2003	R Aug 17, 2004
78-853656	PRIVATE EYES (Block letters)	Pending - Initialized, Int'l	Apr 4, 2006
78-853655	PRIVATE EYE	Pending - Initialized, Int'l	Apr 4, 2006
78-852411	EYEVIEWER	Pending - Initialized, Int'l	Apr 3, 2006
78-852409	EYEWITNESS (	Pending - Initialized, Int'l	Apr 3, 2006
78-541421	Z800 3D VISOR	Pending - Non-final action, Int'l	Jan 3, 2005
78-667562	PERSONAL VIEWER	Pending - Non-final action, Int'l	Jul 11, 2005
78-667564	3DVISOR	Pending - Suspension letter, Int'l	Jul 11, 2005
78-667565	GET INSIDE THE GAME	Pending - Non-final action, Int'l	Jul 11, 2005
78-720607	EYEBUD	Pending - Non-final action, Int'l	Sep 26, 2005
75-856770	EMAGIN	Registered, Int'l	Nov 23, 1999	R Mar 23, 2004
74-285,321	VIRTUAL VISION	Registered	June 16, 1992	Dec. 6, 1994

107

EXHIBIT C

Filings Required for Collateral Assignment

and to Perfect Security Interest

1.Filing with the PTO

2.Filing of UCC-1 Financing Statement with the State of Delaware

3.Filing of UCC-1 Financing Statement withthe State of Washington

4.Filing of UCC-1 Financing Statement with the State of New York

108

EXHIBIT D

The Collateral Agent

1.Appointment.The Holders (all capitalized terms used in this Exhibit D and not otherwise defined shall have the respective meanings provided in the Patent and Trademark Security Agreement to which this Exhibit D is attached (the “Patent and Trademark Security Agreement”)), by their acceptance of the benefits of the Patent and Trademark Security Agreement, hereby irrevocably designate Alexandra Global Master Fund Ltd., as Collateral Agent, to act as specified herein and in the Patent and Trademark Security Agreement. Each Buyer hereby irrevocably authorizes, and each other Holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Collateral Agent to take such action on its behalf under the provisions of the Patent and Trademark Security Agreement and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Collateral Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Collateral Agent may perform any of its duties hereunder by or through its agents or employees.

2.Nature of Duties. The Collateral Agent shall have no duties or responsibilities except those expressly set forth in the Patent and Trademark Security Agreement. Neither the Collateral Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Patent and Trademark Security Agreement or hereunder or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Collateral Agent shall be mechanical and administrative in nature; the Collateral Agent shall not have by reason of the Patent and Trademark Security Agreement or any other Transaction Document a fiduciary relationship in respect of any Holder; and nothing in the Patent and Trademark Security Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Collateral Agent any obligations in respect of the Patent and Trademark Security Agreement except as expressly set forth herein. The Collateral Agent shall not take any material action or exercise any material right or power pursuant to Section 5, 6 or 7 of this Agreement without the authorization or direction of the Majority Holders; provided, however, that if the Collateral Agent determines that it is unable to contact the Majority Holders for purposes of seeking such authorization or direction or time will not permit the Collateral Agent to so contact the Majority Holders prior to such time as detriment may occur to the rights of the Collateral Agent or the Holders from any failure of the Collateral Agent to act or exercise such right, then in any such case the Collateral Agent may take such action or exercise such right without specific authorization or direction from the Majority Holders.

109

The Collateral Agent shall not be liable for any act it may do or omit to do while acting in good faith and in the exercise of its own best judgment. Any act done or omitted by the Collateral Agent on the advice of its own attorneys shall be deemed conclusively to have been done or omitted in good faith. The Collateral Agent shall have the right at any time to consult with counsel on any question arising under this Patent and Trademark Security Agreement. The Collateral Agent shall incur no liability for any delay reasonably required to obtain the advice of counsel.

3.Lack of Reliance on the Collateral Agent. Independently and without reliance upon the Collateral Agent, each Holder, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Grantor and its subsidiaries in connection with the making and the continuance of the Obligations and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Grantor and its subsidiaries, and the Collateral Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Holder with any credit or other information with respect thereto, whether coming into its possession before any Obligation arises or the purchase of any Note, or at any time or times thereafter. The Collateral Agent shall not be responsible to any Holder for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Patent and Trademark Security Agreement or the financial condition of the Grantor or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Patent and Trademark Security Agreement, or the financial condition of the Grantor, or the existence or possible existence of any Event of Default.

4.Certain Rights of the Collateral Agent. No Holder shall have the right to cause the Collateral Agent to take any action with respect to the Collateral, with only the Majority Holders having the right to direct the Collateral Agent to take any such action. If the Collateral Agent shall request instructions from the Majority Holders with respect to any act or action (including failure to act) in connection with the Patent and Trademark Security Agreement, the Collateral Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions from the Majority Holders, and to the extent requested, appropriate indemnification in respect of actions to be taken by the Collateral Agent; and the Collateral Agent shall not incur liability to any person by reason of so refraining. Without limiting the foregoing, no Holder shall have any right of action whatsoever against the Collateral Agent as a result of the Collateral Agent acting or refraining from acting hereunder in accordance with the instructions of the Majority Holders or as otherwise specifically provided in the Patent and Trademark Security Agreement.

110

5.Reliance. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to the Patent and Trademark Security Agreement and its duties thereunder, upon advice of counsel selected by it.

6.Limitation of Holder Liability. The Holders shall not be liable for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Collateral Agent in performing its duties hereunder or under the Patent and Trademark Security Agreement.

7.The Collateral Agent in its Individual Capacity. The Collateral Agent and its affiliates may lend money to, purchase, sell and trade in securities of and generally engage in any kind of business with the Grantor or any affiliate or subsidiary of the Grantor as if it were not performing the duties specified herein, and may accept fees and other consideration from the Grantor for services to the Grantor in connection with the Transaction Documents and otherwise without having to account for the same to the Holders; provided, however, that the Collateral Agent on behalf of itself and such affiliates, hereby waives any claim, right or Lien against the Collateral in any way arising from or relating to any such loan, securities transaction or business with the Grantor.

8.Holders. The Collateral Agent may deem and treat the holder of record of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, as the case may be, shall have been filed with the Collateral Agent. Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of record of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee, as the case may be, of such Note or of any Note(s) issued in exchange therefor.

9.Resignation by the Collateral Agent. (a) The Collateral Agent may resign from the performance of all its functions and duties under the Patent and Trademark Security Agreement at any time by giving 60 Business Days’ prior written notice (as provided in the Patent and Trademark Security Agreement) to the Grantor and the Holders. Such resignation shall take effect upon the appointment of a successor Collateral Agent pursuant to clauses (b) and (c) below.

111

(b)Upon any such notice of resignation, the Majority Holders shall appoint a successor Collateral Agent hereunder.

(c)If a successor Collateral Agent shall not have been so appointed within said 60 Business Day period, the Collateral Agent shall then appoint a successor Collateral Agent who shall serve as Collateral Agent hereunder or thereunder until such time, if any, as the Majority Holders appoint a successor Collateral Agent as provided above. If a successor Collateral Agent has not been appointed within such 60-day period, the Collateral Agent may petition any court of competent jurisdiction or may interplead the Grantor and Holders in a proceeding for the appointment of a successor Collateral Agent, and all fees, including but not limited to extraordinary fees associated with the filing of interpleader, and expenses associated therewith shall be payable by the Grantor.

(d)The fees of any successor Collateral Agent for its services as such shall be payable by the Grantor.

112

EXHIBIT E

FORM OF PATENT COLLATERAL ASSIGNMENT

AND SECURITY AGREEMENT

This PATENT SECURITY AGREEMENT, dated as of July 21, 2006, made by eMagin Corporation, a Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders.

W I T N E S S E T H:

WHEREAS, the Grantor has acquired certain right, title and interest in certain United States patents and patent applications identified in Exhibit 1 hereto (the “Patents”);

WHEREAS, the Grantor and the Buyers are parties to certain Note Purchase Agreements, dated as of July 21, 2006 (as from time to time amended or supplemented, the “Note Purchase Agreements”), pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of 6% Senior Secured Convertible Notes due 2007-2008 (the “Notes”) of the Grantor;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes that the Grantor shall have executed and delivered a Patent and Trademark Security Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor wishes to grant to the Collateral Agent a security interest in certain of its property and assets to secure the performance of its obligations under the Notes;

WHEREAS, the Grantor is contemporaneously entering into a Security Agreement and a Patent and Trademark Security Agreement with the Collateral Agent for the ratable benefit of the Holders; and

WHEREAS, the Grantor and Collateral Agent by this instrument seek to confirm and make a record of the collateral assignment of and grant of a security interest in the Patents.

113

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor does hereby acknowledge and confirm that it has made a collateral assignment to the Collateral Agent of, and has granted to the Collateral Agent a security interest in, all of the Grantor’s right, title and interest in, to, and under the Patents. The Grantor also acknowledges and confirms that the rights and remedies of the Collateral Agent with respect to the collateral assignment of and security interests in the Patents acknowledged and confirmed hereby are more fully set forth in the Patent and Trademark Security Agreement and the Security Agreement, the terms and provisions of which are incorporated herein by reference.

EMAGIN CORPORATION
By:
	Name
	Title

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

114

For eMagin Corporation:

STATE OF____________________)

                                                            ) SS:

COUNTY OF__________________ )

Subscribed and sworn to this day of , 2006.

_________________________________________________

Notary Public

My Commission Expires:

For Alexandra Global Master Fund Ltd.,

as Collateral Agent:

STATE OF_______________________ )

                                                          ) SS:

COUNTY OF_____________________  )

Subscribed and sworn to this day of , 2006.

_______________________________________________

Notary Public

My Commission Expires:

115

EXHIBIT 1

Patents and Patent Applications

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EXHIBIT F

FORM OF TRADEMARK COLLATERAL ASSIGNMENT

AND SECURITY AGREEMENT

This TRADEMARK SECURITY AGREEMENT, dated as of July 21, 2006, made by eMagin Corporation, a Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders.

W I T N E S S E T H:

WHEREAS, the Grantor has acquired an interest in certain trademarks identified in Exhibit B hereto (the “Trademarks”);

WHEREAS, the Grantor and the Buyers are parties to certain Note Purchase Agreements, dated as of July 21, 2006 (as from time to time amended or supplemented, the “Note Purchase Agreements”), pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of 6% Senior Secured Convertible Notes due 2007-2008 (the “Notes”) of the Grantor;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes that the Grantor shall have executed and delivered a Patent and Trademark Security Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor wishes to grant to Collateral Agent a security interest in certain of its property and assets to secure the performance of its obligations under the Notes;

WHEREAS, the Grantor is contemporaneously entering into a Security Agreement and a Patent and Trademark Security Agreement with the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, the Grantor and the Collateral Agent by this instrument seek to confirm and make a record of the collateral assignment of and grant of a security interest in the Trademarks.

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NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor does hereby acknowledge and confirm that it has made a collateral assignment to the Collateral Agent of, and has granted to the Collateral Agent a security interest in, all of the Grantor’s interests the Trademarks. The Grantor also acknowledges and confirms that the rights and remedies of Collateral Agent with respect to the collateral assignment of and security interests in the Trademarks acknowledged and confirmed hereby are more fully set forth in the Patent and Trademark Security Agreement and the Security Agreement, the terms and provisions of which are incorporated herein by reference.

EMAGIN CORPORATION
By:	/s/
	Name:
	Title:

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
By:	ALEXADRA INVESTMENT MANAGEMENT, LLC,  as Investment Advisor
By:
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

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For eMagin Corporation:

STATE OF_____________________)

                                                                     ) SS:

COUNTY OF___________________ )

Subscribed and sworn to this day of , 2006.

___________________________________________

Notary Public

My Commission Expires:

For Alexandra Global Master Fund Ltd., as

Collateral Agent:

STATE OF_____________________)

                                                                     ) SS:

COUNTY OF                                             )

Subscribed and sworn to this day of , 2006.

_____________________________________________

Notary Public

My Commission Expires:

F-3

119

Annex IV

PLEDGE AND SECURITY AGREEMENT

THISPLEDGE AND SECURITY AGREEMENT, dated as of July 21, 2006 (this “Agreement”), made by EMAGIN CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used in this Agreement having the respective meanings provided in this Agreement).

WITNESSETH:

WHEREAS, the Grantor and the several Buyers are parties to the several Note Purchase Agreements, pursuant to which, among other things, the Buyers have agreed to purchase up to $7,000,000 aggregate principal amount of Notes of the Grantor;

WHEREAS, in connection with the transactions contemplated by the Note Purchase Agreements, the Grantor has agreed to grant to the Collateral Agent a security interest in certain of its property, assets and rights;

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes and Warrants pursuant to the Note Purchase Agreements that the Grantor shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, contemporaneously with the execution and delivery of this Agreement the Company and the Collateral Agent are executing and delivering the Patent and Trademark Security Agreement and the Lockbox Agreement; and

NOW, THEREFORE, in consideration of the premises and to induce the Buyers to purchase their respective Notes and Warrants, the Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Holders, as follows:

1. Definitions.

(a)As used in this Agreement, the terms “Agreement”, “Grantor” and “Collateral Agent” shall have the respective meanings assigned to such terms in the introductory paragraph of and the recitals to 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)Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Notes.

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(d)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):

“Accounts” means all rights to payment for goods sold or leased or for services rendered, whether or not such rights have been earned by performance.

“Additional Note” means the Note issued pursuant to the Additional Note Purchase Agreement.

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Grantor and Stillwater LLC, which by its terms contemplates the issuance of up to $500,000 aggregate principal amount of Notes on or after December 10, 2006.

“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.

“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.

“Buyer” means any of the several buyers party to a Note Purchase Agreement.

“Chattel Paper” shall have the meaning assigned to such term under the Code.

“Code” means the Uniform Commercial Code as from time to time in effect in the State of Delaware.

“Collateral” means each of the following, whether now existing or hereafter arising:

(1)all Accounts of the Grantor and, if the Collateral Agent exercises its rights under Section 3(b), the Lockbox and each and every General Intangible relating thereto;

(2)all Inventory of the Grantor;

(3)all Equipment of the Grantor;

(4)all Proprietary Information owned or licensed by the Grantor, whether existing on the date hereof or developed or acquired hereafter;

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(5)all of the Grantor’s right, title and interest in and to all Contracts, Documents, Chattel Paper, Instruments, Investment Property and General Intangibles, whether existing on the date hereof or hereafter arising;

(6)all cash, securities, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of the Collateral, including, without limitation in respect of the cash or other property held in the Lockbox or the Collateral Account;

(7)all Patents, Patent Licenses, Trademarks and Trademark Licenses;

(8)all insurance policies to the extent they relate to items (1) through (7) above;

(9)all books, ledgers, books of account, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating, or referring to any of the foregoing; and

(10)to the extent not otherwise included, all Proceeds, products, rents, issues, profits and returns of and from any and all of the foregoing, which Proceeds may be in the form of Accounts, Chattel Paper, Inventory or otherwise.

“Collateral Account” shall have the meaning provided in the Lockbox Agreement.

“Contracts” shall have the meaning assigned to that term under the Code.

“Documents” shall have the meaning assigned to such term under the Code.

“Event of Default” means:

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

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

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

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

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

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

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

“General Intangibles” shall have the meaning assigned to such term under the Code.

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

“Indemnified Person” shall have the meaning provided in Section 5(j).

“Inventory” shall have the meaning assigned to such term under the Code, and in any event, including, without limitation, all raw material, work-in process and finished goods, inventory, merchandise, goods and other personal property that are held by or on behalf of a Person for sale or lease or to be furnished under a contract of service or which give rise to any Account, including, without limitation, returned goods.

“Issuance Date” means the date on which the Notes are initially issued.

“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction or performance of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States.

“Lockbox” shall have the meaning assigned to such term in the Lockbox Agreement.

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

“Lockbox Agreement” means that certain Lockbox Agreement dated as of the date hereof, by and between the Grantor and the Lockbox Agent.

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

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

“Notes” means the Grantor’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Obligations” means:

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

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

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

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

“Patent(s)” means all present and future patents, patent applications and patent disclosures which are presently, or in the future may be, owned, issued, acquired or used (whether pursuant to a license or otherwise) anywhere in the world by the Grantor, in whole or in part, and all of the Grantor's right, title and interest in and to all patentable inventions and to file applications for patents under patent laws of the United States or of any other jurisdiction, including, without limitation, any and all extensions, reissues, substitutes, continuations, continuations-in-part, divisional, patents of addition, re-examinations and renewals thereof, and patents issuing therefrom, and any other proprietary rights related to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of an interest therein under the laws of all jurisdictions) and any and all foreign counterparts of any of the foregoing.

“Patent Licenses” means each license agreement relating to Patents granted to, used or acquired by the Grantor, in each case together with the right to use and rely upon the inventions and other intellectual property conveyed thereunder.

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

“Permitted Liens” shall have the meaning assigned to such term in the Notes.

“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.

“Proceeds” shall have the meaning assigned to such term under the Code.

“Proprietary Information” means information in whatever form generally unavailable to the public that has been created, discovered, developed or otherwise become known to the Grantor or in which property rights have been assigned or otherwise conveyed to the Grantor, which information has economic value or potential economic value to the creation, operation, use, modification, extension, upgrade, application, marketing, sale and distribution of the Grantor’s products and services. Proprietary Information shall include, but not be limited to, trade secrets, processes, formulas, writings, data, know-how, negative know-how, improvements, discoveries, developments, designs, inventions, techniques, technical data, customer and supplier lists, financial information, business plans or projections and modifications or enhancements to any of the above. Proprietary Information shall include all information existing on the date hereof and all information developed or acquired hereafter.

“Security Interest” means the security interest granted in the Collateral pursuant to this 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 Grantor.

“Trademark License” means each license agreement relating to Trademarks used, adopted or acquired by the Grantor.

“Trademarks” means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers of the Grantor adopted for use in conjunction with the Grantor’s business products and services, now existing anywhere in the world or hereinafter adopted or acquired, whether currently in use or not, and the goodwill associated therewith, all registrations and recordings thereof, and all applications in connection therewith, and (b) all renewals thereof by the Grantor.

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

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2.Grant of Security Interest. As collateral security for the prompt and complete payment and performance of the Obligations and for the other purposes provided in this Agreement, the Grantor hereby grants to the Collateral Agent for the ratable benefit of the Holders a first priority security interest in all of the Collateral. Such grant includes, without limitation, a grant of the security interest to secure the payment and performance of Obligations relating to the Additional Note upon the date of issuance of such Additional Note.

3.Rights of Collateral Agent; Limitations on Collateral Agent's Obligations.

(a)Grantor Remains Liable under Accounts and Contracts. Anything herein to the contrary notwithstanding, the Grantor shall remain liable under each of the Accounts and Contracts that constitute part of the Collateral to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account and in accordance with and pursuant to the terms and provisions of each such Contract. The Collateral Agent shall not have any obligation or liability under any Account that constitutes part of the Collateral (or any agreement giving rise thereto) or under any Contract that constitutes part of the Collateral by reason of or arising out of this Agreement or the receipt by the Collateral Agent of any payment relating to such Account or Contract pursuant hereto, nor shall the Collateral Agent be obligated in any manner to perform any of the obligations of the Grantor under or pursuant to any such Account (or any agreement giving rise thereto) or under or pursuant to any such Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any such Account (or any agreement giving rise thereto) or under any such Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

(b)Notice to Account Debtors and Contracting Parties. Upon the direction of the Collateral Agent at any time that an Event of Default has occurred and is continuing,the Grantor shall promptly, but in no event later than five Business Days, after such direction is given, notify all the account debtors on the Accounts that constitute part of the Collateral and parties to the Contracts that constitute part of the Collateral that such Accounts and such Contracts have been assigned to the Collateral Agent for the ratable benefit of the Holders and that payments in respect thereof shall be made directly to the Collateral Agent or as the Collateral Agent shall direct in accordance with the Lockbox Agreement.

(c)Verification and Analysis of Accounts. If an Event of Default has occurred and the Collateral Agent shall have directed the Grantor to notify the account debtors on the Accounts and parties to the Contracts in accordance with Section 3(b), in addition to its rights pursuant to clause (1) of this Section 3(c) the Collateral Agent shall have the right in its own name or in the name of others to communicate with account debtors on the Accounts that constitute part of the Collateral and parties to the Contracts that constitute part of the Collateral to verify with them to its satisfaction the existence, amount and terms of any such Accounts or Contracts and to make test verifications of such Accounts in any manner and through any medium that it reasonably considers advisable, and the Grantor shall furnish all such assistance and information as the Collateral Agent may require in connection therewith. At any time and from time to time, upon the Collateral Agent's reasonable request and at the expense of the Grantor, the Grantor shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, such Accounts.

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4.Representations and Warranties. The Grantor hereby represents and warrants that:

(a)Title; No Other Liens. Except for the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to this Agreement, the Patent and Trademark Security Agreement, the Lockbox Agreement and the Lien granted to the Collateral Agent for the ratable benefit of the Holders pursuant to the Patent and Trademark Security Agreement, the Grantor owns and has good and marketable title to each item of the Collateral free and clear of any and all Liens or claims of others except Permitted Liens. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Collateral Agent, for the ratable benefit of the Holders, pursuant to this Agreement or pursuant to the Patent and Trademark Security Agreement.

(b)Perfected First Priority Liens. The Liens granted pursuant to this Agreement will constitute upon the completion of all the filings or notices listed in Schedule I hereto, perfected Liens on all Collateral in favor of the Collateral Agent for the benefit of the Holders, which are prior to all other Liens (except Permitted Liens, if any) on such Collateral and which are enforceable as such against all Persons.

(c)Accounts. No amount payable to the Grantor under or in connection with any Account that constitutes part of the Collateral is evidenced by any Instrument (other than checks in the ordinary course of business) or Chattel Paper which has not been delivered to the Collateral Agent. The place where the Grantor keeps its records concerning the Accounts that constitute part of the Collateral is set forth on Schedule II hereto.

(d)Consents under Contracts. No consent (other than consents that have been obtained) of any party (other than the Grantor), to any Contract that constitutes part of the Collateral is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement or the exercise of the Collateral Agent's rights and remedies provided herein or at law.

(e)Inventory. The items of Inventory that constitute part of the Collateral are, as of the Issuance Date, kept at the locations listed on Schedule III hereto and have not been kept at any other location within the six-month period ending on the Issuance Date.

(f)Chief Executive Office. The Grantor's chief executive office and chief place of business is located at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004.

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(g)Power and Authority. The Grantor has full power, authority and legal right to grant the Collateral Agent the Lien on the Collateral pursuant to this Agreement.

(h)Approvals, Filings, Etc. No authorization, approval or consent of, or filing, registration, recording or other action with, any United States or foreign court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market, the stockholders of the Grantor or any other Person, is required to be obtained or made by the Grantor or any Subsidiary (x) for the grant by the Grantor of the Security Interest in the Collateral pursuant to this Agreement, (y) to perfect the Security Interest purported to be created by this Agreement, or (z) for the exercise of the Collateral Agent's rights and remedies provided herein or at law, in each case except as has been obtained or made.

5.Covenants. The Grantor covenants and agrees with the Collateral Agent that from and after the date of this Agreement until the payment or performance in full by the Grantor of all of the Obligations:

(a)Further Documentation; Pledge of Instruments and Chattel Paper. At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of the Grantor, the Grantor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Code or similar laws in effect in any such jurisdiction with respect to the Liens created hereby. The Grantor also hereby authorizes the Collateral Agent to file any such financing or continuation statement without the signature of the Grantor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Agreement.

(b)Maintenance of Records. The Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to any Accounts that may constitute part of the Collateral. For the further security of the Collateral Agent, the Grantor hereby grants to the Collateral Agent a security interest in all of the Grantor's books and records pertaining to the Collateral, and the Grantor shall turn over any such books and records for inspection at the office of the Grantor to the Collateral Agent or to its representatives during normal business hours at the request of the Collateral Agent.

(c)Limitation on Liens on Collateral. The Grantor (x) will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Security Interest created hereby and Liens created by the Patent and Trademark Security Agreement, and (y) will defend the right, title and interest of the Collateral Agent in and to any of the Collateral against the claims and demands of all Persons.

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(d)Limitations on Dispositions of Collateral. The Grantor will not sell, transfer, lease, assign, grant any participation or interest in, or otherwise dispose of, any of the Collateral to any Person, including, without limitation, any Subsidiary or Affiliate of the Grantor, or attempt, offer or contract to do so.

(e)Performance of Contracts and Agreements Giving Rise to Accounts. The Grantor shall (i) exercise promptly and diligently each and every material right and perform each material obligation which it may have under each Contract that constitutes part of the Collateral and each agreement giving rise to an Account that constitutes part of the Collateral (other than any right of termination) and (ii) deliver to the Collateral Agent, upon request, a copy of each material demand, notice or document received by it relating in any way to any Contract that constitutes part of the Collateral or any agreement giving rise to an Account that constitutes part of the Collateral. The Grantor shall not amend or modify the terms of, or waive any rights under, any Contracts, in a manner which would materially adversely affect the Security Interest or the value of such Contracts.

(f)Further Identification of Collateral. The Grantor shall furnish to the Collateral Agent from time to time, upon the request of the Collateral Agent, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail.

(g)Notices. The Grantor will advise the Collateral Agent within two Business Days of the occurrence thereof, in reasonable detail, at its address in accordance with Section 16, (i) of any Lien (other than Liens permitted hereunder) on, or claim asserted against, any of the Collateral, (ii) of any Event of Default or any event which, with notice or the lapse of time, or both, would become an Event of Default and (iii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the Collateral, the Security Interest or the rights of the Collateral Agent hereunder.

(h)Changes in Locations, Name, Etc. The Grantor will not

(1)change the location of its chief executive office/chief place of business from that specified in Section 4(f) or remove its books and records from the location specified in Section 4(c), or

(2)change its name, identity or corporate structure to such an extent that any financing statement filed in connection with this Agreement and naming the Collateral Agent as secured party would become misleading or invalid, or

(3)change the location at which any item of Inventory that constitutes Collateral is kept from the locations specified in Section 4(e),

unless in any such case it shall have given the Collateral Agent at least 30 days prior written notice thereof and, prior to such action or event, shall have taken appropriate action satisfactory to the Collateral Agent to preserve and protect the Collateral Agent's security interest under this Agreement.

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(i)Subsidiaries. This Agreement is entered into on behalf of and for the benefit of the Grantor. The Subsidiaries and the Affiliates of the Grantor have no ownership or other rights in the Collateral. The Grantor will not permit any Subsidiary or any Affiliate of the Grantor to have any ownership or other rights in or to exercise any control over the Collateral.

(j)Indemnification. The Grantor agrees to indemnify and hold harmless the Collateral Agent and each Holder and their respective officers, directors, Affiliates, agents, members, shareholders and investment advisors (each, an “Indemnified Person”) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and to reimburse the Collateral Agent and each Holder for all costs and expenses, including reasonable attorneys’ fees and expenses, arising out of or resulting from this Agreement, including any breach hereof or Event of Default hereunder, or the exercise by the Collateral Agent or any Holder, as the case may be, of any right or remedy granted to it hereunder or under the other Transaction Documents under applicable law; provided, however, that the Grantor shall not be required to indemnify a particular Indemnified Person to the extent any claim, demand, loss, judgment, liability, cost or expense is determined by final judgment (not subject to further appeal) of a court of competent jurisdiction to have arisen primarily from the gross negligence or willful misconduct of such Indemnified Person. In no event shall any Indemnified Person other than the Collateral Agent have any liability or obligation to the Grantor under this Agreement or applicable law (liability under which the Grantor hereby waives) for any matter or thing in connection with this Agreement, and in no event shall the Collateral Agent be liable, in the absence of a determination of gross negligence or willful misconduct on its part by final judgment (not subject to further appeal) of a court of competent jurisdiction, for any matter or thing in connection with this Agreement other than to account for moneys actually received by it in accordance with the terms hereof. If and to the extent that the obligations of the Grantor under this Section 4(j) are unenforceable for any reason, the Grantor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law.

6.Collateral Agent's Powers.

(a)Powers. The Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof or investment advisor thereto, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Grantor and in the name of the Grantor or in its own name, from time to time in the Collateral Agent's discretion, during any period in which an Event of Default is continuing, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Grantor hereby gives the Collateral Agent and each such officer, agent and investment advisor the power and right, on behalf of the Grantor, without notice to or assent by the Grantor, except any notice required by law, to do the following:

(i)to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under or with respect to any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under or with respect to any such Collateral whenever payable, in each case in the name of the Grantor or its own name, or otherwise;

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(ii)to pay or discharge taxes and liens levied or placed on or threatened against the Collateral and to pay all or any part of the premiums therefor and the costs thereof; and

(iii)(A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Grantor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Collateral Agent may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent's option and the Grantor's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's Liens thereon and to effect the intent of this Agreement, all as fully and effectively as the Grantor might do.

The Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the Grantor shall have paid and performed in full all of the Obligations.

(b)Other Powers. The Grantor also authorizes the Collateral Agent, from time to time during any period in which an Event of Default is continuing,to execute, in connection with the sale provided for herein, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral.

(c)No Duty on Collateral Agent's Part. The powers conferred on the Collateral Agent hereunder are solely to protect the Collateral Agent's interests in the Collateral for the pro rata benefit of the Holders and shall not impose any duty upon the Collateral Agent to exercise any such powers. The Collateral Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

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7.Performance by Collateral Agent of Grantor's Obligations. If the Grantor fails to perform or comply with any of its agreements contained herein and the Collateral Agent, as provided for by the terms of this Agreement and following reasonable notice to the Grantor, may itself perform or comply, or otherwise cause performance or compliance, with such agreement, and the expenses of the Collateral Agent incurred in connection with such performance or compliance shall be payable by the Grantor to the Collateral Agent on demand and shall constitute Obligations secured hereby.

8.Remedies in General. If an Event of Default has occurred and is continuing, the Collateral Agent may exercise, in addition to all other rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, if an Event of Default has occurred and is continuing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or expressly provided for) to or upon the Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are, to the extent permitted by applicable law, hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, license, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), at public or private sale or sales, at any exchange, broker's board or office of the Collateral Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Grantor, which right or equity is hereby waived, to the extent permitted by applicable law, or released.

The Grantor further agrees that, if an Event of Default has occurred and is continuing,at the Collateral Agent's request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at the Grantor's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, need the Collateral Agent account for the surplus, if any, to the Grantor. To the extent permitted by applicable law, the Grantor waives all claims, damages and demands it may acquire against the Collateral Agent arising out of the exercise by it of any rights hereunder, provided, that nothing contained in this Section 8 shall relieve the Collateral Agent from liability arising solely from its gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten days before such sale or other disposition. The Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency.

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9.Limitation on Duties Regarding Preservation of Collateral. The Collateral Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under the Code or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Grantor or otherwise.

10.Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest until the Grantor has paid and performed in full all of its obligations under the Transaction Documents.

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

12.Paragraph Headings, Captions, Etc. The paragraph headings, the captions and the footers used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

13.No Waiver; Cumulative Remedies. The Collateral Agent shall not by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have on any future occasion. The rights and remedies herein and in the Notes and the other Transaction Documents are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law or in equity or by statute.

14.Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party to be charged with enforcement; provided, however, that any provision of this Agreement may be waived, amended, supplemented or otherwise modified by the Collateral Agent only with the prior written approval of the Majority Holders. This Agreement shall be binding upon the successors and permitted assigns of the Grantor and shall inure to the benefit of the Collateral Agent and its successors and assigns. The Grantor may not assign its rights or obligations under this Agreement without the prior written consent of the Collateral Agent, which the Collateral Agent may withhold in the sole discretion of the Majority Holders. The requirements for resignation, and appointment of a successor to, the Collateral Agent are established by Schedule IV hereto and not by this Agreement.

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15.Termination of Security Interest; Release of Collateral.

(a)Upon the payment in full of all principal of and premium, if any, and interest on the Notes and the payment in full of all other amounts for Obligations that are due and payable at such time, and if no claims for payment by the Company of any Obligations are at the time pending, the Security Interest shall terminate and all rights to the Collateral shall revert to the Grantor.

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

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

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

(iii)Third, to pay each Holder on a pro rata basis the amount, if any, of unpaid principal then due on the Maturity Date of any installment of principal of such Holder’s Notes;

(iv)Fourth, to pay each Holder, on a pro rata basis, the amount then due upon acceleration, if any, pursuant to Section 4 of such Holder’s Note(s); and then

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

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

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

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

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(c)At any time and from time to time prior to termination of the Security Interest pursuant to Section 15(a), the Collateral Agent shall release any of the Collateral only with the prior written consent of the Majority Holders.

(d)Upon any such termination of the Security Interest or release of all the Collateral, the Collateral Agent will, at the expense of the Grantor, execute and deliver to the Grantor such documents and take such other actions as the Grantor shall reasonably request to evidence the termination of the Security Interest and deliver to the Grantor all Collateral so released then in its possession.

16.Notices. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by 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 below 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 Grantor, such notice shall be addressed to the Grantor at 10500 N.E. 8th Street, Suite 1400,Bellevue, WA 98004, Attention: Chief Financial Officer (telephone line facsimile number (425) 749-3601), 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. (telephone line facsimile number (212) 930-9725) and in the case of any notice to the Collateral Agent, such notice shall be addressed to the Collateral Agent at c/o Alexandra Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, New York 10017 (telephone line facsimile number (212) 301-1810), with a copy to Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York (telephone line facsimile number (212) 980-7055).

17.Fees and Expenses. The Grantor agrees to pay the fees of the Collateral Agent in performing its services under this Agreement and all expenses (including but not limited to reasonable attorneys' fees and costs for legal services, costs of insurance and payments of taxes or other charges) of, or incidental to, the custody, care, sale or realization on any of the Collateral or in any way relating to the performance of the obligations or the enforcement or protection of the rights of the Collateral Agent hereunder.

18.Concerning Collateral Agent. The Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or nonexercise by the Collateral Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Holders, be governed by Schedule IV hereto and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantor, except as expressly provided in Sections 14 and 15, the Collateral Agent shall be conclusively presumed to be acting as agent for the Holders with full and valid authority so to act or refrain from acting, and the Grantor shall not be under any obligation to make any inquiry respecting such authority. The Collateral Agent hereby waives for the benefit of the Holders any claim, right or lien of the Collateral Agent against the Collateral arising under applicable law or arising from any business or transaction between the Collateral Agent and the Grantor other than pursuant to this Agreement or any of the other Transaction Documents.

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19.Survival. All representations, warranties, covenants and agreements of the Grantor and of the Collateral Agent contained herein will survive the execution and delivery hereof and the release of any Collateral pursuant hereto and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Collateral Agent or the Grantor or any person who controls the Collateral Agent or the Grantor.

20.Grantor’s Obligations Absolute, Etc. The obligations of the Grantor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any of the Transaction Documents or any other agreement or instrument referred to therein, or any assignment or transfer of any thereof; (b) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such Transaction Document or other agreement or instrument; (c) any furnishing of any additional security to the Collateral Agent or its assignees or any acceptance thereof or any release of any security by the Collateral Agent or its assignees; (d) any limitation on any party’s liability or obligations under any such Transaction Document or other agreement or instrument or any invalidity or unenforceability, in whole or in part, of any such Transaction Document or other agreement or instrument or any term thereof; or (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Grantor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not the Grantor shall have notice or knowledge of any of the foregoing.

21.Integration. This Agreement represents the entire agreement of the Grantor and the Collateral Agent with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the parties relative to the subject matter hereof not expressly set forth or referred to herein or therein.

22.Governing Law. This Agreement and the rights and obligations of the Grantor under this Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted hereunder.

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

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

[Signature page follows]

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

EMAGIN CORPORATION
By:	/s/ Gary W. Jones
	Name: Gary W. Jones
	Title: Chief Executive Officer

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/s/ Mikhail Filimonov
	Name: Mikhail Filimonov
	Title: Chairman and Chief Executive Officer

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SCHEDULE I

Filings Required to Perfect Security Interest

1.Secretary of State of the State of Delaware

2.Department of State of the State of New York

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SCHEDULE II

Location of Records Concerning Accounts

eMagin Corporation

10500 NE 8th Street, Suite 1400

Bellevue, WA. 98004

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SCHEDULE III

Inventory Locations

eMagin Corporation

2070 Route 52

Hopewell Junction, NY 12533

eMagin Corporation

10500 NE 8th Street, Suite 1400

Bellevue, WA. 98004

Asteria Manufacturing and Brimal Holding (same address):

Wisma AIC

Lot 3

Persiaran Kemajuan

Seksyen 16

40200 Shah Alam

Selangor Darul Ehsan

Malaysia

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SCHEDULE IV

The Collateral Agent

1.Appointment.The Holders (all capitalized terms used in this Schedule IV and not  otherwise  defined shall have the respective meanings provided in  the  Security agreement to which this Schedule IV is attached (the “Agreement”)), by their acceptance of the benefits of the Agreement, hereby irrevocably designate Alexandra Global Master Fund Ltd., as Collateral Agent, to act as specified herein and in the Agreement. Each Buyer hereby irrevocably authorizes, and each other Holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Collateral Agent to take such action on its behalf under the provisions of the Agreement and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Collateral Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Collateral Agent may perform any of its duties hereunder by or through its agents or employees.

2.Nature of Duties. The Collateral Agent shall have no duties or responsibilities except those expressly set forth in the Agreement. Neither the Collateral Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Collateral Agent shall be mechanical and administrative in nature; the Collateral Agent shall not have by reason of the Agreement or any other Transaction Document a fiduciary relationship in respect of any Holder; and nothing in the Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Collateral Agent any obligations in respect of the Agreement except as expressly set forth herein. The Collateral Agent shall not take any material action or exercise any material right or power pursuant to Section 5, 6 or 7 of this Agreement without the authorization or direction of the Majority Holders; provided, however, that if the Collateral Agent determines that it is unable to contact the Majority Holders for purposes of seeking such authorization or direction or time will not permit the Collateral Agent to so contact the Majority Holders prior to such time as detriment may occur to the rights of the Collateral Agent or the Holders from any failure of the Collateral Agent to act or exercise such right, then in any such case the Collateral Agent may take such action or exercise such right without specific authorization or direction from the Majority Holders.

The Collateral Agent shall not be liable for any act it may do or omit to do while acting in good faith and in the exercise of its own best judgment. Any act done or omitted by the Collateral Agent on the advice of its own attorneys shall be deemed conclusively to have been done or omitted in good faith. The Collateral Agent shall have the right at any time to consult with counsel on any question arising under the Agreement. The Collateral Agent shall incur no liability for any delay reasonably required to obtain the advice of counsel.

3.Lack of Reliance on the Collateral Agent. Independently and without reliance upon the Collateral Agent, each Holder, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Grantor and its subsidiaries in connection with the making and the continuance of the Obligations and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Grantor and its subsidiaries, and the Collateral Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Holder with any credit or other information with respect thereto, whether coming into its possession before any Obligation arises or the purchase of any Note, or at any time or times thereafter. The Collateral Agent shall not be responsible to any Holder for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Agreement or the financial condition of the Grantor or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement, or the financial condition of the Grantor, or the existence or possible existence of any Event of Default.

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4.Certain Rights of the Collateral Agent. No Holder shall have the right to cause the Collateral Agent to take any action with respect to the Collateral, with only the Majority Holders having the right to direct the Collateral Agent to take any such action. If the Collateral Agent shall request instructions from the Majority Holders with respect to any act or action (including failure to act) in connection with the Agreement, the Collateral Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions from the Majority Holders, and to the extent requested, appropriate indemnification in respect of actions to be taken by the Collateral Agent; and the Collateral Agent shall not incur liability to any person by reason of so refraining. Without limiting the foregoing, no Holder shall have any right of action whatsoever against the Collateral Agent as a result of the Collateral Agent acting or refraining from acting hereunder in accordance with the instructions of the Majority Holders or as otherwise specifically provided in the Agreement.

5.Reliance. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to the Agreement and its duties thereunder, upon advice of counsel selected by it.

6.Limitation of Holder Liability. The Holders shall not be liable for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Collateral Agent in performing its duties hereunder or under the Agreement, or in any way relating to or arising out of the Agreement.

7.The Collateral Agent in its Individual Capacity. The Collateral Agent and its affiliates may lend money to, purchase, sell and trade in securities of and generally engage in any kind of business with the Grantor or any affiliate or subsidiary of the Grantor as if it were not performing the duties specified herein, otherwise without having to account for the same to the Holders; provided, however, that the Collateral Agent on behalf of itself and such affiliates, hereby waives any claim, right or lien against the Collateral in any way arising from or relating to any such loan, securities transaction or business with the Grantor.

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8.Holders. The Collateral Agent may deem and treat the holder of record of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, as the case may be, shall have been filed with the Collateral Agent. Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of record of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee, as the case may be, of such Note or of any Note(s) issued in exchange therefor.

9.Resignation by the Collateral Agent. (a) The Collateral Agent may resign from the performance of all its functions and duties under the Agreement at any time by giving 60 days' prior written notice (as provided in the Agreement) to the Grantor and the Holders. Such resignation shall take effect upon the appointment of a successor Collateral Agent pursuant to clauses (b) and (c) below.

(b)Upon any such notice of resignation, the Majority Holders shall appoint a successor Collateral Agent hereunder.

(c)If a successor Collateral Agent shall not have been so appointed within said 60-day period, the Collateral Agent shall then appoint a successor Collateral Agent who shall serve as Collateral Agent hereunder or thereunder until such time, if any, as the Majority Holders appoint a successor Collateral Agent as provided above. If a successor Collateral Agent has not been appointed within such 60-day period, the Collateral Agent may petition any court of competent jurisdiction or may interplead the Grantor and Holders in a proceeding for the appointment of a successor Collateral Agent, and all fees, including but not limited to extraordinary fees associated with the filing of interpleader, and expenses associated therewith shall be payable by the Grantor.

(d)The fees of any successor Collateral Agent for its services as such shall be payable by the Grantor.

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Annex V

LOCKBOX AGREEMENT

THIS LOCKBOX AGREEMENT, dated as of July 21, 2006 (this “Agreement”), by and between EMAGIN CORPORATION, a Delaware corporation (the “Company”), the bank or other financial institution which may become a party hereto in accordance with Section 25, as lockbox agent (the “Lockbox Agent”), and ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company (the “Collateral Agent”).

WIT NESSE TH:

WHEREAS, the Company and the several Buyers (such capitalized term and all other capitalized terms used in this Agreement having the meanings provided in Section 1) are parties to the several Note Purchase Agreements, pursuant to which, among other things, the Buyers have agreed to purchase the Notes from the Company;

WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Company and the Collateral Agent are executing and delivering the Security Agreement with the Collateral Agent pursuant to which, among other things, the Company is granting a security interest in the Collateral, including, without limitation, all of the Company's right, title and interest in and to all Accounts and Contracts arising thereunder and the Collateral Account to the Collateral Agent for the ratable benefit of the Holders;

WHEREAS, in order to give effect to and perfect the security interest in certain of the collateral subject to the Security Agreement, this Agreement provides that all payments to the Company pursuant to the Security Agreement shall be paid into a lockbox or a Collateral Account controlled by the Lockbox Agent and disbursed from the Collateral Account in accordance with the terms of this Agreement; and

WHEREAS, it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes pursuant to the Note Purchase Agreements that the Company and the Collateral Agent shall have executed and delivered this Agreement for the ratable benefit of the Holders;

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

1. Definitions.

(a)As used in this Agreement, the terms “Agreement”, “Company”, “Collateral Agent”, and “Lockbox Agent” 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.

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(c)Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Notes.

(d)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):

“Accounts” shall have the meaning given such term in the Security Agreement.

“Additional Note” means the Note issued pursuant to the Additional Note Purchase Agreement.

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Company and Stillwater LLC, which by its terms contemplates the issuance of up to $500,000 aggregate principal amount of Notes on or after December 10, 2006.

“Agreement” means this Lockbox Agreement, as amended, supplemented or otherwise modified from time to time.

“Available Specified Funds” means with respect to each Deposit Date the amount of the Specified Funds less the Retained Amount.

“Buyer” means any of the several buyers party to a Note Purchase Agreement.

“Collateral” shall have the meaning given such term in the Security Agreement.

“Collateral Account” means the account maintained at the Collateral Agent for the ratable benefit of the Holders which is identified in clause (b) of Section 2 and entitled “eMagin Noteholder Collateral Account”, and any successor or replacement account.

“Deposit Date” shall have the meaning given such term in Section 7(a).

“Event of Default” means:

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

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

(3)any Event of Default, as that term is defined in the Security Agreement;

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(4)any Event of Default, as that term is defined in the Patent and Trademark Security Agreement; or

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

“Event of Default Notice” means a notice given by the Company, the Collateral Agent or a Holder to the Lockbox Agent of the occurrence of an Event of Default.

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

“Instruction” shall have the meaning provided in Section 2(a).

“Lien” shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction or performance of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States.

“Lockbox” means the lockbox administered by the Lockbox Agent for the ratable benefit of the Holders which is identified in clause (a) of Section 2, and any successor or replacement lockbox.

“Lockbox Agent's Designees” shall have the meaning given such term in Section 10(a).

“Majority Holders” means at any time such of the holders of Notes, which based on the outstanding principal amount of the Notes, represents a majorityof the aggregate outstanding principal amount of the Notes.

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

“Notes” means the Company’s 6% Senior Secured Convertible Notes due 2007-2008 originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Notice Date” means the date on which the Company gives the Instruction in accordance with Section 2.

“Obligations Schedule” means a schedule prepared by the Company which for each Holder and each Note held thereby states, as of the date thereof, the following:

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(i)such Holder's name, address, telephone line facsimile transmission number and payment instructions, including wire transfer instructions,

(ii)the original principal amount, the outstanding principal amount and the and the maturity date of the Note,

(iii)the amount of accrued and unpaid interest on each Note,

(iv)the amount of unpaid interest due on each Note as of the most recent Interest Payment Date,

(v)the amount of unpaid Default Interest, if any, due on each Note,

(vi)the occurrence or continuation of any Event of Default with respect to each Note,

(vii)the occurrence of any event which with notice or the passage of time, or both, could become an Event of Default,

(viii)the amount, due date of, and reasons for any unpaid obligation due with respect to each Note by reason of (A) an Event of Default or (B) any other repurchase, redemption or acceleration obligation, and

(ix)the aggregate amount then due to the Holder with respect to each Note.

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

“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.

“Retained Amount” means that portion, which may be all, of the Specified Funds for each Deposit Date which equal (to the extent of the Specified Funds available) the sum of all amounts with respect to the Notes which are scheduled to accrue or which otherwise are expected to become due to the Holders during the Retention Period for principal of and interest and Default Interest on the Notes or for costs and expenses arising under the Transaction Documents and payable by the Company.

“Retention Period” means the 45-day period after each Deposit Date.

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

“Specified Funds” shall have the meaning given such term in Section 7(a).

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“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.

“Termination Notice” means a notice given to the Lockbox Agent by and signed by the Company, the Majority Holders and the Collateral Agent, which notice states that a particular Event of Default has terminated or has been satisfied or waived and no Holder has any continuing rights with respect thereto.

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

2.Payments. (a) The Company agrees, that, upon the direction of the Collateral Agent given at any time that an Event of Default has occurred and is continuing, in accordance with Section 3(b) of the Security Agreement the Company shall irrevocably instruct in writing (the “Instruction”) all the account debtors on the Accounts that constitute part of the Collateral and all of the parties (other than the Company) who are parties to Contracts that constitute part of the Collateral that such Accounts and Contracts have been assigned to the Collateral Agent for the ratable benefit of the Holders and that payments in respect thereof shall be shall be made either

(i)by check or money order to the address of the Lockbox, which address shall be identified to the Company by the Collateral Agent or if the Lockbox Agent is a bank shall be the address of the office of the Lockbox Agent, or

(ii) by wire transfer of funds to the Collateral Account, which account shall be identified to the Company by the Collateral Agent.

If the Company fails to give the Instruction in accordance with Section 3(b) of the Security Agreement, the Collateral Agent may, in its own name or in the name of the Company, give the Instruction directly to the account debtors on the Accounts that constitute part of the Collateral and to all of the parties to Contracts that constitute part of the Collateral.

(b)If the Collateral Agent shall so require, at or prior to the time any Person who has not already received the Instruction is to become an account debtor on Accounts that constitute part of the Collateral or a party to Contracts that constitute part of the Collateral, the Company shall instruct such Person that such Accounts and Contracts have been assigned to the Collateral Agent for the ratable benefit of the Holders and that payments in respect thereof shall be made in the manner set forth in Section 2(a). If the Company fails to give the instructions in accordance with this Section 2(b), the Collateral Agent may, in its own name or in the name of the Company, give such instructions directly to such Person.

3. No Contrary Instructions. Without the prior written consent of the Collateral Agent and the Majority Holders, the Company shall not revoke, rescind or modify the Instruction or take any other action which is contrary to or inconsistent with this Agreement or the Security Agreement. If for any reason the Company receives any payment from an account debtor or party to a Contract on or after the Notice Date, the Company shall immediately deposit such payment, and any interest or proceeds thereon, in the Collateral Account. Prior to such deposit, the Company shall hold all such funds in trust for the exclusive benefit of the Collateral Agent and the Holders pursuant to this Agreement.

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4.Lockbox. The Lockbox shall be under the sole and exclusive control of the Lockbox Agent, as agent for the Collateral Agent only. On each Business Day on or after the date the Company gives or is required to give the Instruction, the Lockbox Agent will remove all items from the Lockbox and promptly deposit all checks, money orders and other payments included in such items in the Collateral Account. The Company irrevocably authorizes and directs the Lockbox Agent to endorse and deposit all such checks and money orders in the Collateral Account on the Business Day of receipt by the Lockbox.

5.Collateral Account. The Collateral Account shall be under the sole and exclusive control of the Lockbox Agent, as agent for the Collateral Agent only. All cash deposited in the Collateral Account pursuant to this Agreement, and all interest earned thereon, shall be held in the Collateral Account and shall at all times be segregated from the funds and property of any other Person. The Collateral Account shall be an interest-bearing account which pays interest at the rate determined from time to time by the Lockbox Agent for comparable, fully liquid commercial accounts. Without the prior consent of the Company, the Collateral Agent and the Majority Holders, the assets in the Collateral Account shall be held in cash only and shall not be invested in any securities. Funds may be withdrawn from the Collateral Account only as expressly provided in this Agreement.

6.Events of Default. Upon the occurrence of an Event of Default, the Company shall immediately, and the Collateral Agent may at any time, notify the Lockbox Agent thereof by giving an Event of Default Notice. If an Event of Default Notice is so given to the Lockbox Agent by the Company or the Collateral Agent, then thereafter the Lockbox Agent shall deem an Event of Default to have occurred and be continuing for all purposes unless and until the Lockbox Agent receives a Termination Notice executed by the Company, the Majority Holders and the Collateral Agent.

7.Release of Funds.(a) Three Business Days after the Business Day on which funds received from any person are deposited into the Collateral Account in a minimum amount of $100,000 (or which would increase the balance in the Collateral Account to at least $100,000) (the “Deposit Date”), the Lockbox Agent shall disburse the amount of funds, including interest received, held in the Collateral Account on such Deposit Date (the “Specified Funds”) as follows:

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

(ii)Second, to pay each Holder on a pro rata basis the unpaid amount, if any, then due such Holder pursuant to Article II of the Notes for any Determination Period ended at least 45 days prior to the date of such payment;

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(iii)Third, to pay each Holder on a pro rata basis the amount, if any, of unpaid principal then due on the maturity date of any installment of principal of such Holder's Notes;

(iv)Fourth, to the Holders and the Collateral Agent to pay or reimburse them for their respective amounts of costs and expenses payable by the Company pursuant to the Transaction Documents and not theretofore paid or reimbursed by the Company (including under this Section 7(a)); and

(v)Fifth, if no Event of Default shall have occurred and be deemed continuing pursuant to Section 6, to pay the Available Specified Funds remaining in the Collateral Account to the Company.

(b)During each Retention Period, the Lockbox Agent shall hold the Retained Amount in the Lockbox Account. On the Business Day following the end of such Retention Period, the Lockbox Agent shall (1) pay each Holder, on a pro rata basis, from the Retained Amount any unpaid amounts due to the Holders for interest, Default Interest and principal as described in clauses (i)-(iii) of Section 7(a) which have accrued and become due during the Retention Period and then (2) pay costs and expenses of the Holders and the Collateral Agent as described in clause (iv) of Section 7(a) and then (3) provided no Event of Default shall have occurred and be continuing, pay the remaining Retained Amount to the Company.

(c)If an Event of Default shall have occurred and be continuing, after disbursing the Specified Funds in the Collateral Account pursuant to clauses (i) through (iv) of Section 7(a), the Lockbox Agent shall disburse the remaining Specified Funds to pay each Holder, on a pro rata basis, the amount of unpaid principal then due upon acceleration, if any, pursuant to Article IV of such Holder's Note(s); provided, however, that if the amount of such Specified Funds is insufficient to pay all amounts due to the Holders, then the amount paid to the Holders pursuant to this Section 7(c) shall be prorated among the Holders in proportion to the respective amounts due each Holder.

(d)For each Deposit Date, after making the payments to the Holders required by Sections 7(b) and 7(c) and after the Company shall have paid the Holders any other amounts then due under the Notes, the Lockbox Agent shall pay to the Company all Specified Funds remaining in the Collateral Account. Funds received in the Collateral Account and interest received thereon after any Deposit Date shall be deemed new Specified Funds to be disbursed, three Business Days after the next Deposit Date to occur, in accordance with all of the provisions and priorities of this Section 7 before being paid to the Company.

8.Reporting Requirements; Payment Instructions. (a) On or before the Notice Date, on the first Business Day of each calendar month thereafter, and at such other times as requested by the Lockbox Agent in order to comply with its obligations under this Agreement or by the Collateral Agent, the Company shall furnish to the Lockbox Agent and the Collateral Agent an updated Obligations Schedule. The Company shall promptly correct any errors in any Obligations Schedule and furnish copies of such corrected Obligations Schedule to the Lockbox Agent and the Collateral Agent. If the Collateral Agent or any Holder shall notify the Lockbox Agent and the Company of any error in or dispute concerning an Obligations Schedule, the Lockbox Agent shall not release any funds from the Collateral Account which are the subject of such error or dispute until such error is corrected or such dispute is resolved with the consent of the affected Holders and the Company. The Lockbox Agent may release from the Collateral Account, in accordance with this Agreement, funds which are not subject to such error or dispute.

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(b)All payments by the Lockbox Agent to the Holders under this Agreement shall be made by wire transfer of immediately available funds to the applicable account, or if no wire transfer instructions are given to the address, specified for each Holder in the Obligations Schedule or in a superseding notice given by a Holder to the Lockbox Agent. All payments by the Lockbox Agent to the Company under this Agreement shall be deposited in the Company's separate account maintained at the Lockbox Agent or shall be sent by wire transfer of immediately available funds to such other account as the Company shall have specified by notice to the Lockbox Agent.

9.Representations and Warranties. The Company hereby represents and warrants to and for the benefit of the Lockbox Agent, the Collateral Agent and the Holders that:

(a)Power and Authority. The Company has full power, authority and legal right to enter into this Agreement.

(b)Binding Obligation. T his Agreement has been duly authorized by the Company and has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

(c)Non-Contravention. The execution, delivery and performance of this Agreement will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, or of any securities issued by the Company or any Subsidiary, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company or any Subsidiary is a party or which purports to be binding upon the Company or any Subsidiary or upon any of their respective assets and will not result in the creation or imposition of any Lien on any of the assets of the Company or any Subsidiary except as expressly permitted by this Agreement and the other Transaction Documents.

(d)Consents. No consent (other than consents which have been obtained) of any party, and no filing, approval, registration, recording or other action is required in connection with the execution, delivery or performance of this Agreement by the Company.

10.Limitation of Liability.The Lockbox Agent's liability in connection with the performance of the transactions covered by this Agreement shall be strictly limited as follows:

(a)The Lockbox Agent shall exercise ordinary care in selecting agents and independent contractors, adequately bonded, to pick up and deliver the contents of the Lockbox (“Lockbox Agent's Designees”) but shall not be liable for loss caused by Lockbox Agent's Designees' negligence or misconduct. In the event of such loss, the Lockbox Agent will exercise its commercially reasonable best efforts, at the Company's cost and expense, to assist the Company in obtaining redress from the responsible party.

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(b)The Lockbox Agent shall exercise its commercially reasonable best efforts in determining the optimum time to pick up mail at the Lockbox and the best carrier to deliver that mail to the Lockbox Agent’s designated processing facility. However, the Lockbox Agent shall not be liable if the chosen pickup time and carrier prove not to result in the earliest possible availability of funds.

(c)In performing it duties hereunder, the Lockbox Agent will exercise ordinary care and will act in good faith. The Lockbox Agent will not be accountable for its failure to perform any of its obligations hereunder, except for its gross negligence or willful misconduct, or that of its employees, officers or agents. If, as a result of such gross negligence or willful misconduct, the Lockbox Agent is liable for mishandling any item, such liability shall be limited to the lesser of the face amount of any check involved or the amount of the Company's direct loss as a result of such mishandling, and in no event shall the Lockbox Agent be responsible for any incidental or consequential damages. IN NO EVENT SHALL THE LOCKBOX AGENT BE LIABLE FOR ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSS OF PROFIT, NOTWITHSTANDING NOTICE TO THE LOCKBOX AGENT OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES.

11.Indemnification. The Company agrees to pay, indemnify, and to save the Lockbox Agent, the Collateral Agent and each Holder harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (i) with respect to, or resulting from, any delay in paying any and all excise, sales or other taxes which may be payable or determined to be payable with respect to the Collateral Account, (ii) with respect to, or resulting from, any failure or delay by the Company in complying with any law or regulation applicable to the Collateral Account or (iii) in connection with this Agreement, any breach or alleged breach hereof, or any action taken by the Lockbox Agent, the Collateral Agent or any Holder in exercising its rights hereunder.

12.Security Agreement. The Collateral Account and the Lockbox, and all funds due to the Company and deposited in the Lockbox and the Collateral Account, are subject to the security interest of the Collateral Agent pursuant to the Security Agreement in accordance with the terms thereof.

13.Paragraph Headings, Captions, Etc. The paragraph headings, the captions and the footers used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

14.No Waiver; Cumulative Remedies. The Lockbox Agent shall not by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lockbox Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lockbox Agent, the Collateral Agent or the Holders of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lockbox Agent, the Collateral Agent or the Holders would otherwise have on any future occasion. The rights and remedies herein and in the Transaction Documents are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law or in equity or by statute.

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15.Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party to be charged with enforcement; provided, however, that any provision of this Agreement may be waived, amended, supplemented or otherwise modified by the Lockbox Agent only with the prior written approval of the Collateral Agent or the Majority Holders. This Agreement shall be binding upon the successors and permitted assigns of the Company and shall inure to the benefit of the Lockbox Agent and its successors and assigns. The Company may not assign its rights or obligations under this Agreement without the prior written consent of the Lockbox Agent, which the Lockbox Agent may withhold in its sole discretion.

16.Effective Date; Termination. This Agreement shall become effective at the time of first issuance of any Note on the earliest Issuance Date when executed and delivered by the Company and the Collateral Agent. Upon the payment and performance in full by the Company of its obligations under the Transaction Documents, the Company's obligations to the Lockbox Agent and the Holders pursuant to Sections 2 through 8 shall terminate, any funds remaining in the Collateral Account shall be paid to the Company, and promptly thereafter the parties shall instruct the account debtors on all Accounts that theretofore constituted Collateral and all parties to Contracts that theretofore constituted Collateral to make all further payments due to the Company directly to the Company.

17. Notices. Except as otherwise specifically provided herein, any notice required or permitted to be given under the terms of this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or five days after deposit with the United States Postal Service, by registered or certified mail, postage prepaid to the party to be notified at such party’s address indicated in this Section 17 or at such other address as such party may designate by ten days’ advance written notice to the other parties. Notices in writing shall also be deemed effectively given upon delivery by an overnight courier, or upon transmission by facsimile, except that the time at which the notice is given will be the time at which confirmation of receipt is generated by the receiving facsimile  machine. In the case of any notice to the Company, such notice shall be addressed to the Company at, 10500 N.E. 8th Street, Suite 1400, Bellevue, WA 98004 Attention: Chief Financial Officer (telephone line facsimile number (425) 749-3601), 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. (telephone line facsimile number (212) 930-9725), and in the case of any notice to the Collateral Agent or to the Collateral Agent while it serves as Lockbox Agent, such notice shall be addressed to the Collateral Agent (or Lockbox Agent, as applicable) at Alexandra Global Master Fund Ltd., c/o Alexandra Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, New York 10017 (telephone line facsimile number (212) 301-1810), and if the Collateral Agent is not the Lockbox Agent, in the case of any notice to the Lockbox Agent, such notice shall be addressed to the Lockbox Agent at its address or telephone line facsimile transmission number provided in writing to the Company and the Collateral Agent at the time it becomes the Lockbox Agent.

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18.Fees and Expenses.The Company agrees to pay the fees of the Lockbox Agent in performing its services under this Agreement and all reasonable expenses (including, but not limited to, attorneys' fees and costs for legal services, costs of insurance and payments of taxes or other charges) of, incidental to, or in any way relating to the performance by the Lockbox Agent of its obligations and the enforcement or protection of the rights of the Lockbox Agent hereunder.

19.Concerning LockboxAgent. The Company acknowledges that the rights and responsibilities of the Lockbox Agent under this Agreement with respect to any action taken by the Lockbox Agent or the exercise or nonexercise by the Lockbox Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Lockbox Agent and the Holders, be governed by Exhibit A to this Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Lockbox Agent and the Company, except as expressly provided in Section 16, the Lockbox Agent shall be conclusively presumed to be acting as agent for the Collateral Agent with full and valid authority so to act or refrain from acting, and the Company shall not be under any obligation to make any inquiry respecting such authority.

20.Concerning the Collateral Agent. The Collateral Agent hereby appoints the Lockbox Agent as its agent upon the terms provided in this Agreement, with the Lockbox Agent to act exclusively for the benefit of the Collateral Agent. The Collateral Agent is executing and delivering this Agreement solely for purposes of this Section 20.

21.Integration.This Agreement represents the entire agreement of the Company and the Lockbox Agent with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the parties relative to the subject matter hereof not expressly set forth or referred to herein.

22.Governing Law.This Agreement and the rights and obligations of the Company under this Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York.

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

24.Third Party Beneficiaries. The Collateral Agent and the Holders shall be third party beneficiaries of this Agreement.

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25.Collateral Agent as Lockbox Agent. Whenever there shall not be a bank or other financial institution serving as Lockbox Agent, the Collateral Agent shall serve as Lockbox Agent. The Collateral Agent may select a bank or financial institution to serve as Lockbox Agent. During any period that the Collateral Agent serves as Lockbox Agent any reference to the Collateral Agent in this Agreement shall be a nullity. A bank selected by the Collateral Agent to serve as Lockbox Agent may, by executing and delivering to the Company and the Collateral Agent a counterpart of this Agreement, become a party to this Agreement, as Lockbox Agent, whereupon, the Collateral Agent shall cease to be the Lockbox Agent, and the Company agrees to all amendments to the form of this Agreement as such bank or financial institution so selected by the Collateral Agent to serve as Lockbox Agent may require. While the Collateral Agent serves as Lockbox Agent, it may maintain the Collateral Account at a bank selected by the Collateral Agent, notwithstanding any provision of this Agreement to the contrary.

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

[Signature page follows]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and delivered as of the date first above written.

EMAGIN CORPORATION
By:	/s/ Gary W. Jones
	Name: Gary W. Jones
	Title: Chief Executive Officer

ACKNOWLEDGED AND AGREED:

ALEXANDRA GLOBAL MASTER FUND LTD.,

as Collateral Agent and Lockbox Agent

BY: Alexandra Investment Management, LLC,

as Investment Advisor

/s/ Mikhail Filimonov

Name Mikhail Filimonov
Title Chairman and Chief Executive Officer

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Exhibit A

The Lockbox Agent

1.Appointment.The Holders (all capitalized terms used in this Exhibit A and not otherwise defined herein shall have the respective meanings provided in the Lockbox Agreement to which this Exhibit A is attached (the “Agreement”)), by their acceptance of the benefits of the Agreement, hereby irrevocably designate Alexandra Global Master Fund Ltd. as Lockbox Agent to act as specified herein and in the Agreement. Each Investor hereby irrevocably authorizes, and each other Holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Lockbox Agent to take such action on its behalf under the provisions of the Agreement and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Lockbox Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Lockbox Agent may perform any of its duties hereunder by or through its agents or employees.

2.Nature of Duties. The Lockbox Agent shall have no duties or responsibilities except those expressly set forth in the Agreement. Neither the Lockbox Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Lockbox Agent shall be mechanical and administrative in nature; the Lockbox Agent shall not have by reason of the Agreement or any other Transaction Document a fiduciary relationship in respect of the Collateral Agent or any Holder; and nothing in the Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Lockbox Agent any obligations in respect of the Agreement except as expressly set forth herein.

The Lockbox Agent shall not be liable for any act it may do or omit to do while acting in good faith and in the exercise of its own best judgment. Any act done or omitted by the Lockbox Agent on the advice of its own attorneys shall be deemed conclusively to have been done or omitted in good faith. The Lockbox Agent shall have the right at any time to consult with counsel on any question arising under the Agreement. The Lockbox Agent shall incur no liability for any delay reasonably required to obtain the advice of counsel. Nothing herein shall constitute a release or waiver of such legal counsel from any liability it may have for the advice given to the Lockbox Agent.

3.Lack of Reliance on the LockboxAgent. Independently and without reliance upon the Lockbox Agent, the Collateral Agent and each Holder, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Company and its subsidiaries in connection with the making and the continuance of the Company's obligations under the Transaction Documents and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Company and its subsidiaries, and the Lockbox Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide the Collateral Agent or any Holder with any credit or other information with respect thereto, whether coming into its possession before any such obligation arises or the purchase of any Note, or at any time or times thereafter. The Lockbox Agent shall not be responsible to the Collateral Agent or any Holder for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability or sufficiency of the Agreement or the financial condition of the Company or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement, or the financial condition of the Company, or the existence or possible existence of any Event of Default.

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4.Certain Rights of the Lockbox Agent.No Holder shall have the right to cause the Lockbox Agent to take any action with respect to the Lockbox or the Collateral Account, with only the Collateral Agent or the Majority Holders having the right to direct the Lockbox Agent to take any such action. If the Lockbox Agent shall request instructions from the Collateral Agent or the Majority Holders with respect to any act or action (including failure to act) in connection with the Agreement, the Lockbox Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions from the Collateral Agent or the Majority Holders, and to the extent requested, appropriate indemnification in respect of actions to be taken by the Lockbox Agent; and the Lockbox Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, neither the Collateral Agent nor any Holder shall have any right of action whatsoever against the Lockbox Agent as a result of the Lockbox Agent acting or refraining from acting hereunder in accordance with the instructions of the Collateral Agent or the Majority Holders or as otherwise specifically provided in the Agreement.

5.Reliance. The Lockbox Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telephone line facsimile transmission, email, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to the Agreement and its duties thereunder, upon advice of counsel selected by it.

6.Limitation of Collateral Agent and Holder Liability. The Collateral Agent and the Holders shall not be liable for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Lockbox Agent in performing its duties hereunder or under the Agreement, or in any way relating to or arising out of the Agreement.

7.The Lockbox Agent in its Individual Capacity. The Lockbox Agent and its affiliates may lend money to, purchase, sell and trade in securities of and generally engage in any kind of business with the Company or any affiliate or subsidiary of the Company as if it were not performing the duties specified herein, and may accept fees and other consideration from the Company for services to the Company in connection with the Transaction Documents and otherwise without having to account for the same to the Holders; provided, however, that the Collateral Agent on behalf of itself and such affiliates, hereby waives any claim, right or Lien against the Collateral Account in any way arising from or relating to any such loan, securities transaction or business with the Company.

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8.Holders. The Lockbox Agent may deem and treat the holder of record of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, as the case may be, shall have been filed with the Lockbox Agent. Any request, authority or consent of any Person or entity who, at the time of making such request or giving such authority or consent, is the holder of record of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee, as the case may be, of such Note or of any Note(s) issued in exchange therefor.

9.Resignation by the LockboxAgent. (a) The Lockbox Agent may resign from the performance of all its functions and duties under the Agreement at any time by giving 60 Business Days' prior written notice (as provided in the Agreement) to the Company, the Collateral Agent and the Holders. Such resignation shall take effect upon the appointment of a successor Lockbox Agent pursuant to clauses (b) and (c) below.

(b)Upon any such notice of resignation, the Collateral Agent shall appoint a successor Lockbox Agent hereunder.

(c)If a successor Lockbox Agent shall not have been so appointed within said 60 Business Day period, the Lockbox Agent shall then appoint a successor Lockbox Agent who shall serve as Lockbox Agent hereunder or thereunder until such time, if any, as the Collateral Agent appoints a successor Lockbox Agent as provided above. If a successor Lockbox Agent has not been appointed within such 60-day period, the Lockbox Agent may, at the sole cost and expense of the Company, petition any court of competent jurisdiction or may interplead the Company, the Collateral Agent and the Holders in a proceeding for the appointment of a successor Lockbox Agent, and all fees, including but not limited to extraordinary fees associated with the filing of interpleader, and expenses associated therewith shall be payable by the Company.

(d)The fees of any successor Lockbox Agent for its services as such shall be payable by the Company.

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Annex VI

Press Release

eMagin Enters Into Agreements To Raise

Approximately $6.5 Million Private Placement

BELLEVUE, Wash., July 24, 2006 – eMagin Corporation (AMEX: EMA), a leader in virtual imaging technology, has entered into definitive agreements with institutional and accredited investors for the sale of approximately $6.5 million of senior secured convertible debentures and warrants. The net proceeds from the financing will be used for general working capital purposes. 

Under the agreements, investors agreed to purchase $5,970,000 principal amount of notes with conversion prices of $0.26 per share that may convert into 22,192,301 shares of common stock and 5 year warrants exercisable at $0.36 per share for 15,534,607 shares of common stock.  An additional $500,000 will be invested through exercise of a warrant to purchase approximately 1.92 million shares of common stock at $0.26 per share prior to December 14, 2006 or, at the request of the Company, by the purchase of additional notes and warrants. If not converted half of the principal amount will be due July 21, 2007 and the remaining balance due January 21, 2008.  Interest at 6% per annum is payable in quarterly installments on outstanding Notes during their term commencing on September 1, 2006. 

In a showing of commitment to the Company’s prospects, Paul Cronson, Director, John Atherly, Chief Financial Officer, and Olivier Prache, Senior Vice President of Display Manufacturing and Development Operations participated in the transaction, and Gary Jones, Chief Executive Officer and Susan Jones, Chief Marketing and Strategy Officer, who collectively own 5% of the Company’s outstanding shares, agreed to defer 10% of their compensation until eMagin becomes EBITDA positive or until the occurrence of certain other events.

In conjunction with the note purchase transaction the Company will submit to shareholders at its annual meeting a resolution to enact a reverse stock split of 1 for 10 which, if approved, normalizes the company’s share price and shares outstanding.

In order to reestablish performance incentives employees and Directors have also agreed to forfeit approximately 4.7 million shares of existing stock options in return for re-pricing 8.8 million existing options at $0.26 per share. Re-priced options will not be exercisable until 2007 or in some cases not until 2011, depending on individual grant-vesting schedules. 

In addition, to further strengthen its management team the Company intends to add two new Directors recommended by the new investors and to recruit additional senior management.

Additional details regarding the private placement are provided on Form 8-K which is being filed today.  Representing the company in this transaction was Sichenzia Ross Friedman Ference, LLP.

The note shares and warrants are being issued in a private placement under regulation D of the Securities Act of 1933, as amended. The company has agreed to file a registration statement covering the resale of the common stock and underlying the notes and warrants purchased by these investors following the closing.  This press release does not constitute an offer to sell, or the solicitation of an offer to buy, any securities, nor shall there be any sale of the securities in any jurisdiction in which such offering would be unlawful.

About eMagin Corporation

A leader in OLED microdisplay and virtual imaging technologies, eMagin integrates high-resolution OLED microdisplays, magnifying optics, and systems technologies to create a virtual image that appears comparable to that of a computer monitor or a large-screen television. eMagin’s OLED displays have broad market reach and are incorporated into a variety of near-to-eye imaging products by military, industrial, medical and consumer OEMs who choose eMagin’s award-winning technology as a core component for their solutions. eMagin has recently introduced its first direct-to-consumer system, the Z800 3DVisor, which provides superb 3D stereovision and headtracking for PC gaming, training and simulation, and business applications. eMagin's microdisplay manufacturing and R&D operations are co-located with IBM on its campus in East Fishkill, New York.  System design facilities and sales and marketing are located in Bellevue, Washington. A sales office is located in Tokyo, Japan. For additional information, please visit www.emagin.com and www.3dvisor.com.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including those regarding eMagin Corporation and its subsidiaries' expectations, intentions, strategies and beliefs pertaining to future events or future financial performance. All statements contained herein are based upon information available to eMagin's management as of the date hereof, and actual results may vary based upon future events, both within and without eMagin management's control. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those in the forward-looking statements as a result of various important factors, including those described in the Company's most recent filings with the SEC. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such statements should not be regarded as a representation by the Company, or any other person, that such forward-looking statements will be achieved. The business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in forward-looking statements. We undertake no duty to update any of the forward-looking statements, whether as a result of new information, future events or otherwise. In light of the foregoing, readers are cautioned not to place undue reliance on such forward-looking statements.

Note:  eMagin and 3DVisor are trademarks of eMagin Corporation.

Media Contact:

Joe Runde, 425-749-3636, jrunde@emagincorp.com

Investor Contact:

John Atherly, 425-749-3622, jatherly@emagincorp.com

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Annex VII

Annex VII

to

Note Purchase

Agreement

[Letterhead of Company Counsel]

[Closing Date]

The Buyers listed on

Exhibit A Hereto

Re: eMagin Corporation

Ladies and Gentlemen:

We have acted as counsel to eMagin Corporation, a Delaware corporation (the "Company"), in connection with the issuance by the Company of $[7,000,000] aggregate principal amount of 6% Senior Secured Convertible Note due 2007-2008 (the - -"Notes"), and related Common Stock Purchase Warrants (the "Warrants"), pursuant to the several Note Purchase Agreements, dated as of July , 2006 (the "Agreements"), by and between the Company and the several Buyers named therein (the "Buyers"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreements. This opinion is being delivered to you pursuant to Section 7(n) of the Agreements.

In so acting, we have examined originals or copies (certified or otherwise identified to our satisfaction) of the Agreements, the Notes, the Warrants, the Pledge and Security Agreement, dated as of July , 2006, by and between the Company and the Collateral Agent named therein (the "Security Agreement"), the Patent and Trademark Security Agreement, dated as of July , 2006, by and between the Company and the Collateral Agent named therein (the "Patent and Trademark Security Agreement"), the Lockbox Agreement, dated as of July 2006, by and between the Company and the Lockbox Agent named therein (the "Lockbox Agreement"), and such corporate records, agreements, documents and other instruments, and such certificates or comparable' documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. The Agreements, the Notes, the Warrants, the Security Agreement, the Patent and Trademark Security Agreement and the Lockbox Agreement are hereinafter referred to collectively as the "Transaction Documents."

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In rendering the opinions set forth in this opinion letter, we assume the following:

(a) - the legal capacity of each natural person;

(b) the legal existence of all parties to the transactions referred to in the Transaction Documents excluding the Company;

(c) the power and authority of each person other than the Company or person(s) acting on behalf of the Company to execute, deliver and perform each document executed and delivered and to do each other act done or to be done by such person;

(d) the authorization, execution and delivery by each person other than the Company or person(s) acting on behalf of the Company of each document executed and delivered or to be executed and delivered by such person;

(e) the legality, validity, binding effect and enforceability as to each person other than the Company or person(s) acting on behalf of the Company of each document executed and delivered or to be executed or delivered and of each other act done or to be done by such person;

(f) the transactions referred to in the Transaction Documents have been consummated;

(g) the payment of all the required documentary stamps taxes and fees imposed upon the execution, filing or recording of the Transaction Documents;

(h) that there have been no undisclosed modifications of any provision of any document reviewed by us in connection with the rendering of the opinions set forth in this opinion letter and no undisclosed prior waiver of any right or remedy contained in the Transaction Documents;

(i) the genuineness of each signature (other than the signatures of the officers of the Company), the completeness of each document submitted to us, the authenticity of each document reviewed by us as an original, the conformity to the original of each document reviewed by us as a copy and the authenticity of the original of each document received by us as a copy;

(j) the truthfulness of each statement as to all factual matters otherwise not known to us to be untruthful contained in any document encompassed within the due diligence review undertaken by us;

(k) the accuracy on the date of this letter as well as on the date stated in all governmental certifications of each statement as to each factual matter contained in such governmental certifications;

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(l) that the addressee has acted in good faith, without notice of adverse claims, and has complied with all laws applicable to it that affect the transactions referred to in the Transaction Documents;

(m) that the transactions referred to in the Transaction Documents comply with all tests of good faith, fairness and conscionability required by law;

(n) that routine procedural matters such as service of process or qualification to do business in the relevant jurisdictions will be satisfied by the parties seeking to enforce the Transaction Documents;

(o) that all statutes, judicial and administrative decisions, and rules and regulations of governmental agencies constituting the law for which we are assuming responsibility are published (e.g., reported court decisions and the specialized reporting services of BNA, CCH and Prentice-Hall) or otherwise generally accessible (e.g., LEXIS or WESTLAW) in each case in a manner generally available (i.e., in terms of access and distribution following publication) to lawyers practicing in our judicial circuit;

(p) that other agreements related to the transactions referred to in the Transaction Documents will be enforced as written;

(q) that no action, discretionary or otherwise, will be taken by or on behalf of the Company in the future that might result in a violation of law;

(r) that there are no other agreements or understandings among the parties that would modify the terms of the Transaction Documents or the respective rights or obligations of the parties to the Transaction Documents;

(s) that with respect to the Transaction Documents and to the transactions referred to therein, there has been no mutual mistake of fact and there exists no fraud or duress; and

(t) the constitutionality and validity of all relevant laws, regulations and agency actions unless a reported case has otherwise held or widespread concern has been expressed by commentators as reflected in materials which lawyers routinely consult.

As to certain questions of fact material to this opinion, we have relied upon statements or certificates of public officials and officers of the Company.

Whenever a statement herein is qualified by "to our knowledge" or similar phrase, it means that, during the course of our representation of the Company for the purposes of this opinion letter, (1) no information that would give those lawyers who participated in the preparation of the letter (collectively, the "Opinion Letter Participants") current actual knowledge of the inaccuracy of such statement has come to their attention; (2) we have not undertaken any independent investigation or inquiry to determine the accuracy of such statement; (3) any limited investigation or inquiry otherwise undertaken by the Opinion Letter Participants during the preparation of this opinion letter should–not be regarded as such an investigation or inquiry; and (4) no inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Company. We also call to your attention to the fact that we are not general counsel to the Company and we are not familiar with all aspects of the Company's business affairs. We have not conducted an independent audit of the Company or its files.

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The validity, binding effect and enforceability of Transaction Documents may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or other laws affecting the enforcement of creditors' rights and remedies generally and (b) the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith. In addition, certain remedies, waivers and other provisions contained in the Transaction Documents might not be enforceable; nevertheless, such unenforceability will not render such agreements invalid as a whole or preclude the practical realization of the benefits to the Secured Party thereunder. We express no opinions as to the application of the laws of usury to the Transaction Documents.

Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that:

1. The Company and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted.

2. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under each of the the Transaction Documents and to consummate the transactions contemplated thereby.

3. The Transaction Documents have been duly and validly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the other parties thereto) constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with there respective terms, subject, as to enforceability, to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject to general principles of equity, whether enforcement is sought in a proceeding at law or in equity.

4. The Shares have been duly authorized and, when issued upon conversion of the Notes in accordance with the terms of the Notes or upon exercise of the Warrants in accordance with the tern-is of the Warrants, as the case may be, will be validly issued, fully-paid and non-assessable.

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5. Assuming the representations and warranties of the Buyers in Section 3 of the Agreements are true and correct, the Notes and the Warrants may be offered and issued to the Buyers pursuant to the Agreements, the Conversion Shares may be offered and issued to the Buyers upon conversion of the Notes, and the Warrant Shares may be offered and issued to the Buyers upon exercise of the Warrants, in each such case, without registration under the 1933 Act.

6. The execution and delivery of the Transaction Documents by the Company, and the consummation by the Company of the issuance of the Securities and 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 of the Certificate of Incorporation or by-laws of the Company or any Subsidiary, (ii) 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 or (iii) 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 businesses or the ability of the Company or any Subsidiary to make use thereof.

7. Assuming the representations and warranties of the Buyers in Section 3 of the Agreements are true and correct, no authorization, approval or consent of, or filing with, any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained or made by the Company for the offer, issuance and sale of the Notes and the offer and issuance of the Warrants as contemplated by the Agreements or the offer and issuance of the Conversion Shares upon conversion of the Notes in accordance with the terms thereof or the offer and issuance of the Warrant Shares upon exercise of the Warrants in accordance with the terms thereof except such as have been obtained or made and other than (a) the filing pursuant to the Agreements of a Registration Statement with the SEC covering the resale of the Shares (b) such as may be required under the securities or "blue sky" laws of certain jurisdictions (as to which we express no opinion) and (c) the Form D to be filed by the Company with the SEC.

8. The Security Agreement is effective to create in favor of the Collateral Agent, for the benefit of the holders from time to time of the Notes, as secured party, valid security interests in the Collateral (as defined in the Security Agreement) including, without limitation, the funds and proceeds from time to time deposited or held in the Collateral Account (as defined in the Lockbox Agreement), as security for the Obligations (as defined in the Security Agreement), financing statements in proper form covering such security interests will be duly filed in the offices listed on Schedule I hereto, and when filed, such security interests in the Collateral will be perfected to the extent that security interests in such Collateral may be perfected by the filing of financing statements under the Uniform Commercial Code. Our opinions expressed above are specifically subject to the following limitations, exceptions, qualifications and assumptions:

166

A. The effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the relief of debtors or the rights and remedies of creditors generally, including without limitation the effect of statutory or other law regarding fraudulent conveyances and preferential transfers.

B. Limitations imposed by state law, federal law or general equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions of any applicable agreement and upon the availability of injunctive relief or other equitable remedies, regardless of whether enforcement of any such agreement is considered in a proceeding in equity or at law.

We are counsel admitted to practice in the State of New York and we do not express any opinion with respect to the effect or applicability of the laws of any jurisdiction, other than the laws of the State of New York, Delaware General Corporation Law and the federal laws of the United States of America. In furnishing the opinion regarding the valid existence and good standing of the Company, we have relied solely upon a good standing certificate issued by the Secretary of State of Delaware on June 27, 2006.

This opinion is rendered as of the date first written above, is solely for your benefit in connection with the Agreements and may not be relief upon or used by, circulated, quoted, or referred to nor may any copies hereof by delivered to any other person without our prior written consent. We disclaim any obligation to update this opinion letter or to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinions expressed herein.

Very truly yours,
By:	/s/

167

Exhibit A

Alexandra Global Master Fund Ltd.

do Alexandra Investnient Management, LLC

767 Third Avenue

39th Floor

New York, New York 10017

[NAME]

[ADDRESS]

168

Schedule II

[Secretary of State of the State of Delaware]

169

Schedule II

[Secretary of State of the State of Delaware]

[Department of State of the State of New York]

170

 Annex VIII

 Annex VIII

to

Note Purchase

Agreement

[Closing Date]

The Buyers listed on

Exhibit A Hereto

Re: eMagin Corporation

Ladies and Gentlemen:

We have acted as intellectual property counsel to eMagin Corporation, a Delaware corporation (the "Company"), in connection with the issuance by the Company of $[7,000,000] aggregate principal amount of 6% Senior Secured Convertible Note due 2007-2008 (the "Notes"), and related Common Stock Purchase Warrants (the "Warrants"), pursuant to the several Note Purchase Agreements, dated as of July 2006 (the "Agreements"), by and between the Company and the several Buyers named therein (the "Buyers"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreements. This opinion is being delivered to you pursuant to Section 7(n) of the Agreements.

In so acting, we have examined originals or copies (certified or otherwise identified to our satisfaction) of the Patent and Trademark Security Agreement, dated as of July , 2006, by and between the Company and the Collateral Agent named therein (the "Patent and Trademark Security Agreement") and such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth.

Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that:

1. The Patent and Trademark Security Agreement, taken together with the Security Agreement, creates valid and enforceable security interests in favor of the Collateral Agent, for the benefit of the holders from time to time of the Notes, as secured parties, in all of the Company's right, title and interest in, to and under the Collateral (as defined in the Patent and Trademark Security Agreement for purposes of this opinion). The Patent Security Agreement and the Trademark Security Agreement (attached as Exhibits E and F to the Patent and Trademark Security Agreement) have or will be filed in the PTO, and together with the filing of financing statements, have or will result in the perfection of the Collateral Agent's security interests in the Collateral in the United States.

171

The opinion herein is subject to (i) the limitations on perfection of security interests in proceeds resulting from the operation of Section 9-315 of the UCC; (ii) the limitations with respect to securities imposed by Sections 8-302 and 9-312 of the UCC; (iii) the provisions of Section 9-203 of the UCC relating to the time of attachment; and (iv) Section 552 of Title 11 of the United States Code (the "Bankruptcy Code") with respect to any Collateral acquired by the Company subsequent to the commencement of a case against or by the Company under the Bankruptcy Code.

The opinions expressed herein are limited to the laws of the State of New York, the laws of the State of Delaware and the federal laws of the United States, and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction.

The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. Those opinions may not be used or relied upon by any other person, nor may this letter or any copies hereof be furnished to a third party, filed with a governmental agency, quoted, cited or otherwise referred to without our prior written consent.

Very truly yours,

/s/ Jason M. Drangel

Epstein Drangel Bazerman & James, LLP

172

Annex IX

Annex IX

to

Note Purchase

Agreement

LOCKUP AGREEMENT

July __, 2006

To: eMagin Corporation

and the Buyers Parties to the Note Purchase

Agreements Referred to Below

Re: eMagin Corporation Note Purchase Agreements

Dear Sir or Madam:

Reference is made to the several Note Purchase Agreements, dated as of the date hereof, by and between eMagin Corporation, a Delaware corporation (the "Company"), and the respective buyers who are parties thereto and hereto (each, a "Buyer" and collectively, the "Buyers"), and any successors and assigns thereto (the "Note Purchase Agreements"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreements.

The undersigned stockholder (the "Stockholder") of the Company understands that it is a condition precedent to the several obligations of the Buyers to purchase their respective Notes and Warrants pursuant to the Note Purchase Agreements that the Stockholder shall have executed and delivered this Agreement to the Buyers and the Company. Pursuant to a Note Purchase Agreement, the Stockholder is purchasing a 6% Senior Secured Convertible Note due 2007-2008 of the Company in the aggregate principal amount of $40,000.00 (the Note") and a Warrant to purchaseshares of Common Stock (the "Warrant"). The Note, the Warrant and the shares of Common Stock issuable upon conversion of the Note and upon exercise of the Warrant are collectively referred to herein as the "Securities".

The Stockholder hereby agrees that, except for transfers occurring upon the death of Stockholder and except for intra-family transfers or transfers to trusts for estate planning purposes (provided that in each such case, the transferee first agrees to become bound by the provisions of this letter agreement), the Stockholder will not, directly or indirectly, offer, sell, pledge, contract to sell, grant any option for the sale of, transfer or otherwise dispose of: yle Securities or any interest therein for a period beginning on the date of this letter agreement and ending on January , 2008. Notwithstanding the foregoing, (A) this letter agreement and the obligations hereunder shall terminate and be of no further force and effect upon the date of consummation of a sale of all or substantially all of the assets of the Company and (B) the Stockholder may sell shares of Common Stock issued upon conversion of the Note or upon exercise of the Warrant in accordance with the following schedule:

173

Period	Number of Shares
Prior to December 31, 2006	NONE
After December 31, 2006	Up to 50,000 shares of Common Stock in each 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 date of this Agreement)

The Company hereby agrees to notify its transfer agent of the provisions of this letter agreement. The Stockholder acknowledges and agrees that the Company may enter a stop transfer order with its transfer agent prohibiting transfer of the Securities, except in compliance with the requirements of this letter agreement.

This letter agreement may be executed in any number of counterparts, all of which shall together constitute one and the same instrument. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York. In the event of the invalidity or unenforceability of any part or provision of this letter agreement, such invalidity or unenforceability shall not affect the validity or enforceability of any other part or provision of this letter agreement.

Please indicate your agreement with the terms of this letter by signing and returning to the undersigned a copy hereof.

Very truly yours,

/s/

John Atherly

Accepted and Agreed as of the above date.

EMAGIN CORPORATION

By:
	Name:
	Title:

Annex XI

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

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

No. W-     Right to Purchase __________ Shares ofCommonStockofeMagin Corporation

EMAGIN CORPORATION

Common Stock Purchase Warrant

EMAGIN CORPORATION, aDelaware corporation, hereby certifies that, for value received, ______________________ or registered assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., New York City time, on the Expiration Date (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), [BEFORE ISSUANCE INSERT AMOUNT OF SHARES EQUAL TO 70% OF THE NUMBER OF SHARES INITIALLY ISSUABLE UPON CONVERSION OF THE NOTE BEING ISSUED TO THE HOLDER OF THIS WARRANT, DETERMINED WITHOUT REGARD TO ANY LIMITATION ON CONVERSION] paid and nonassessable shares of Common Stock at a purchase price per share equal to the Purchase Price. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant.

1.Definitions.

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

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

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

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

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

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

“AMEX” means the American Stock Exchange, Inc.

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

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

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

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

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

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

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

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

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

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

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

“Expiration Date” means July 21, 2011.

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

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

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

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

“Nasdaq” means the Nasdaq Global Market.

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

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

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

“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 Warrant.

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

“Other Note Purchase Agreements” means the several Note Purchase Agreements by and between the Company and the several buyers named therein in the form of the Note Purchase Agreement pursuant to which certain of the Notes are being or will be issued.

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

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

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

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

“Purchase Price” means $0.36,subject to adjustment as provided in this Warrant.

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

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

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

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

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

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

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

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

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

“SEC” means the Securities and Exchange Commission.

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

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

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

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

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

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

2.Exercise of Warrant.

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

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

X = Y x (A - B)

A

where,

X =	the number of shares of Common Stock to be issued to the Holder
Y =	the number of shares of Common Stock as to which this Warrant is to be exercised

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

B = the Purchase Price

(c)9.9% Limitation.

(1)Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof at any time shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by the Holder (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”), together with all shares of Common Stock deemed beneficially owned at such time (other than by virtue of the ownership of the Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by the Holder for purposes of determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Parties”), in either such case for purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the 1934 Act and the rules promulgated thereunder), would result in beneficial ownership by the Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may be modified by the Holder as provided herein, the “Restricted Ownership Percentage”). The Holder shall have the right 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 2(c) make this Warrant unexercisable in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter but prior to the Expiration Date upon exercise of this Warrant as and when shares of Common Stock may be issued in compliance with such restrictions.

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

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

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

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

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

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

(c)other or additional stock, rights, warrants or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement,

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

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

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

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

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

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

Such adjustment shall become effective immediately after the opening of business on the day following the record date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Purchase Price shall be readjusted to the Purchase Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall be readjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to the number which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall again be adjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to be the number which would then be in effect if such record date had not been fixed. In determining whether any rights or warrants entitle the Holder to subscribe for or purchase shares of Common Stock at less than such Current Fair Market Value, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. Notwithstanding the foregoing, if any of the adjustments to the Purchase Price as set forth in this Section 7 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.

8.Adjustment in Connection Sales by a Designated Person. So long as any Note is outstanding, if at any time on or after the Issuance Date any Designated Person, directly or indirectly, sells, transfers or disposes of shares of Common Stock or Common Stock Equivalents other than a Permitted Designated Person Sale and on the Measurement Date for such sale, transfer or disposition the Purchase Price in effect on such Measurement Date is greater than the Computed Market Price on such Measurement Date, then, subject to the next succeeding sentence, the Purchase Price shall be reduced to such Computed Market Price, such adjustment to become effective immediately after the opening of business on the day following the Measurement Date. If a reduction of the Purchase 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 Purchase Price shall be reduced to a price equal to the Conversion Price (as defined in the Note) then in effect until such time as the Stockholder Approval is obtained at which time the Purchase Price shall be reduced to such Computed Market Price. 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 23.

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

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

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

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

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

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

(x) this Warrant shall thereafter entitle the Holder to purchase the kind and amount of shares of stock and Other Securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon exercise of this Warrant (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to exercise this Warrant) immediately prior to such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder's rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 8 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares),

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

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

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

(b)The above provisions of this Section 9 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

(c)If this Section 9 applies to any event or occurrence, Section 5 shall not apply.

10.Tax Adjustments.The Company may make such reductions in the Purchase Price, in addition to those required by Sections 4, 5, 6, 7 and 8 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.

11.Minimum Adjustment. (a) No adjustment in the Purchase Price (and no related adjustment in the number of shares of Common Stock which may thereafter be purchased upon exercise of this Warrant) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All such calculations under this Warrant shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be.

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

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

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

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

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

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

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

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

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

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

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

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

18.Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office or agency of the Company referred to in Section 16, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender.

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

20.Warrant Agent. The Company may, by written notice to the Holder, appoint the transfer agent and registrar for the Common Stock as the Company's agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 2, and the Company may, by written notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 18, and replacing this Warrant pursuant to Section 19, or any of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent.

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

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

23.Notices, etc. All notices and other communications from the Company to the Holder shall be in writing and delivered personally, by confirmed facsimile, by a nationally recognized overnight courier service or mailed by first class certified mail, postage prepaid, at such facsimile telephone number or address as may have been furnished to the Company in writing by the Holder or at such facsimile telephone number or the address shown for the Holder on the register of Warrants referred to in Section 17.

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

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

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

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

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

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

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

[Signature Page Follows]

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

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

ASSIGNMENT

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

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

[]To the Company or a Subsidiary; or

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

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

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

[]The transferee is an affiliate of the Company.

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

Dated: ____________________________________	NAME:____________________________________________
	____________________________________________________________
	Signature(s)

Exhibit 1

FORM OF SUBSCRIPTION

EMAGIN CORPORATION

(To be signed only on exercise of Warrant)

TO:	eMagin Corporation
	10500 N.E. 8th Street, Suite 1400
	Bellevue, WA 98004

Attention: Chief Financial Officer

Facsimile No.: (425) 749-3601

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

2.The undersigned Holder (check one):

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

or

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

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

Name:_________________________________________________________________

Address_______________________________________________________________

Social Security or Tax Identification Number (if any):

____________________________________________________________

Dated:            &# 160;    ________________________________________________________

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

________________________________________________________

(Address)

EX-10.42

Exhibit 10.42

AMENDMENT AGREEMENT

Dated as of July 23, 2007

by and between

EMAGIN CORPORATION

and

[NAME OF INVESTOR]

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EMAGIN CORPORATION

AMENDMENT AGREEMENT

TABLE OF CONTENTS

			Page
1.	Definitions.		1
	2.	Amendments; Exchange.	1
	(a)	Amendments.	1
	(b)	Exchange.	1
3.	Amendments to Note Purchase Agreement.		1
4.	Representations and Warranties of the Company.		1
	(a)	Organization and Authority.	1
	(b)	Qualifications.	1
	(c)	Agreement, Amended Transaction Documents.	1
	(d)	Concerning the Shares and the Common Stock.	1
	(e)	Non-contravention.	1
	(f)	Approvals.	1
	(g)	Absence of Certain Proceedings.	1
	(h)	Information Provided.	1
	(i)	Absence of Certain Changes.	1
	(j)	Dilutive Effect.	1
	(k)	No Undisclosed Events, Liabilities, Developments or Circumstances.	1
	(l)	Absence of Rights Agreement.	1
	(m)	Absence of Brokers, Finders, Etc.	1
	(n)	SEC Filings.	1
5.	Representations and Warranties of the Holder.		1
	(a)	Authorization.	1
	(b)	Acquisition Entirely for Own Account.	1
	(c)	Accredited Investor.	1
6.	Certain Covenants.		1
	(a)	Press Releases.	1
	(b)	Form 8-K; Limitation on Information and Holder Obligations.	1
	(c)	SEC Registration Matters.	1
	(d)	Certificate of Designations.	1
	(e)	Certain Waivers.	1
	(f)	Certain Acknowledgments.	1
7.	Effectiveness.		1
8.	Confirmation of Agreements; Entire Agreement.		1
9.	Miscellaneous.		1
	(a)	Governing Law.	1
	(b)	Counterparts.	1
	(c)	Headings, etc.	1
	(d)	Severability.	1
	(e)	Amendments.	1
	(f)	Waivers.	1
	(g)	Notices.	1
	(h)	Certain Expenses and Fees.	1
	(i)	Survival.	1
	(j)	Further Assurances.	1
	(k)	Construction; Holder Status.	1

ANNEXES
Annex I	Form of Amended and Restated 8% Senior Secured Convertible Note due 2008
Annex II	Form of Amended and Restated Common Stock Purchase Warrant
Annex III	Form of Amendment No. 1 to Patent and Trademark Security Agreement
Annex IV	Form of Amendment No. 1 to Pledge and Security Agreement
Annex V	Form of Amendment No. 1 to Lockbox Agreement
Annex VI	Form of Certificate of Designation of Series A Senior Secured Convertible Preferred Stock
Annex VII	Form of Press Release

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AMENDMENT AGREEMENT

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

W I T N E S S E T H:

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

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

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

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

1. Definitions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. Amendments; Exchange.

(a) Amendments. 

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

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

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

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

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

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

6

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

(b) Exchange.

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

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

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

3. Amendments to Note Purchase Agreement.

The Note Purchase Agreement is hereby amended as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

8

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

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

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

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

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

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

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

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

9

4. Representations and Warranties of the Company.

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

(a) Organization and Authority.

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

(b) Qualifications.

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

(c) Amendment Transaction Documents.

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

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 (d) Concerning the Shares and the Common Stock.

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

(e) Non-contravention.

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

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(f) Approvals.

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

(g) Absence of Certain Proceedings.

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

(h) Information Provided.

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

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(i) Absence of Certain Changes.

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

(j) Dilutive Effect.

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

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

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

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(l) Absence of Rights Agreement.

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

(m) Absence of Brokers, Finders, Etc.

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

(n) SEC Filings.

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

5. Representations and Warranties of the Holder.

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

(a) Authorization.

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

(b) Acquisition Entirely for Own Account.

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

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(c) Accredited Investor.

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

6. Certain Covenants.

(a) Press Releases.

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

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

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

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

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(c) SEC Registration Matters.

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

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

(d) Certificate of Designations.

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

(e) Certain Waivers.

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

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

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

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

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

(f) Certain Acknowledgments.

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

7. Effectiveness.

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

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

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

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

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

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

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

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

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

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

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

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

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

8. Confirmation of Agreements; Entire Agreement.

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

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9. Miscellaneous.

(a) Governing Law.

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

(b) Counterparts.

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

(c) Headings, etc.

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

(d) Severability.

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

(e) Amendments.

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

(f) Waivers.

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

(g) Notices.

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

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(h) Certain Expenses and Fees.

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

(i) Survival.

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

(j) Further Assurances.

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

(k) Construction; Holder Status.

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

[Signature Pages Follow]

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

EMAGIN CORPORATION
By:	/s/
	Name: Title:

HOLDER
By:	/s/
	Name:
	Title:
	Address:
	Facsimile No.:

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Annex I

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

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

EMAGIN CORPORATION

AMENDED AND RESTATED

8% SENIOR SECURED CONVERTIBLE NOTE DUE 2008

No. ARN -	$
New York, New York
July23, 2007

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

[Missing Graphic Reference]

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

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

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

The following terms shall apply to this Note:

ARTICLE I

DEFINITIONS

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

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

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

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

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

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

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

“AMEX” means the American Stock Exchange, Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Fundamental Change” means

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Maturity Date” means December 21, 2008.

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

“Nasdaq” means the Nasdaq Global Market.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 Maturity Date;

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

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

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

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“Permitted Liens” means:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(b) Any Fundamental Change;

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

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

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

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

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

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

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“SEC” means the Securities and Exchange Commission.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ARTICLE II

NO REDEMPTION AT THE OPTION

OF THE COMPANY

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

ARTICLE III

CERTAIN COVENANTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ARTICLE IV

EVENTS OF DEFAULT

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

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

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

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

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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, the AMEX, the OTCBB, the Pink Sheets, LLC or any similar organization;

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

ARTICLE V

REPURCHASE UPON A REPURCHASE EVENT

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

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

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

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

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

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

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

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

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

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

ARTICLE VI

CONVERSION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

35

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

ARTICLE VII

MISCELLANEOUS

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

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

36

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

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

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

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

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

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

37

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

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

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

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

38

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

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

[Remainder of Page Intentionally Left Blank]

39

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

EMAGIN CORPORATION
By:	/s/
	Name: Title:

40

ASSIGNMENT

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

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

[ ] To the Company or a subsidiary thereof; or

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

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

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

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

[ ] The transferee is an Affiliate of the Company.

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

Dated:	NAME:
	Signature(s)

41

Exhibit A

COMPANY NOTICE

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

TO: 

(Name of Holder)

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

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

(3) At or before the date set forth in the preceding paragraph (2), the Holder must:

(a) deliver to the Company a Holder Notice, in the form attached as Exhibit B to the Note; and

(b) the Note, duly endorsed for transfer to the Company of the portion of the principal amount to be repurchased.

(4) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note.

	EMAGIN CORPORATION
Date:	By:	/s/
		Title

42

Exhibit B

HOLDER NOTICE

(Section 5.2(b) of Amended and Restated 8% Senior Secured Convertible Note due 2008)

TO: EMAGIN CORPORATION

(1) Pursuant to the terms of the Amended and Restated 8% Senior Secured Convertible Note due 2008 (the “Note”), the undersigned Holder hereby elects to exercise its right to require repurchase by the Company pursuant to Sections 5.2(a) and 5.2(b) of $ of the Note, equal to the sum of $ principal amount of the Note, $ of accrued and unpaid interest on such principal amount and $ of Default Interest on the Note at the Repurchase Price provided in the Note.

(2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note.

	NAME OF HOLDER:
Date:	By:	/s/
		Signature of Registered Holder
		(Must be signed exactly as name appears in the Note.)

43

Exhibit C

NOTICE OF CONVERSION

OF AMENDED AND RESTATED 8% SENIOR SECURED

CONVERTIBLE NOTE DUE 2008

OF EMAGIN CORPORATION

To: eMagin Corporation

10500 N.E. 8th Street, Suite 1400

Bellevue, Washington 98004

Attention: Chief Financial Officer

Facsimile No.: (425) 749-3601

1. Pursuant to the terms of the Amended and Restated 8% Senior Secured Convertible Note Due 2008 (the “Note”), the undersigned hereby elects to convert $_______________ of the Note, equal to the sum of $_______________ principal amount of the Note, $_______________ of accrued and unpaid interest on such principal amount and $_______________ of Default Interest on such interest into shares of Common Stock of eMagin Corporation, a Delaware corporation (the “Company”), at a Conversion Price per share equal to $_______________. Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note.

2. The number of shares of Common Stock issuable upon the conversion of the Note to which this Notice relates is _______________ (the “Conversion Shares”).

3. Please issue a certificate or certificates for _______________ shares of Common Stock in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:

Name	Name
Address	Address
SS or Tax ID Number	SS or Tax ID Number
Delivery Instructions for Common Stock:

	NAME:
Date:	By:	/s/
		Signature of Registered Holder
		(Must be signed exactly as name appears in the Note.)

44

Exhibit D

NOTICE OF CONVERSION

INTO SERIES A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

UNDER SECTION 6.8

OF AMENDED AND RESTATED 8% SENIOR SECURED

CONVERTIBLE NOTE DUE 2008

OF EMAGIN CORPORATION

To:  eMagin Corporation

10500 N.E. 8th Street, Suite 1400

Bellevue, Washington 98004

Attention: Chief Financial Officer

Facsimile No.: (425) 749-3601

1. Pursuant to the terms of Section 6.8 of the Amended and Restated 8% Senior Secured Convertible Note Due 2008 (the “Note”), the undersigned hereby elects to convert $_______________ of the Note, equal to the sum of $_______________ principal amount of the Note, $_______________ of accrued and unpaid interest on such principal amount and $_______________ of Default Interest on such interest into shares of Series A Senior Secured Convertible Preferred Stock of eMagin Corporation, a Delaware corporation (the “Company”), at a Conversion Price per share equal to $1,000. Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note.

2. The number of shares of Series A Senior Secured Convertible Preferred Stock issuable upon the conversion of the Note to which this Notice relates is _______________ (the “Preferred Shares”).

3. Please issue a certificate or certificates for _______________ shares of Series A Senior Secured Convertible Preferred Stock in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:

Name	Name
Address	Address
SS or Tax ID Number	SS or Tax ID Number
Delivery Instructions for Common Stock:

	NAME:
Date:	By:	/s/
		Signature of Registered Holder
		(Must be signed exactly as name appears in the Note.)

45

Exhibit E

EMAGIN CORPORATION

CONVERSION SCHEDULE

This Conversion Schedule shows reductions in the outstanding principal amount of the Amended and Restated 8% Senior Secured Convertible Note due 2008 (the “Note”) of eMagin Corporation, a Delaware corporation, upon conversions pursuant to Section 6 of the Note. Capitalized terms used in this Schedule and not otherwise defined herein shall have the respective meanings provided in the Note.

	Date of Conversion (or for first entry, the Issuance Date)	Principal Amount of Conversion (if applicable)	Principal Amount Remaining Subsequent to Conversion (or original Principal Amount)
1.	7/_/06

[continue as necessary]

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Annex II

NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORS OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), AND, ACCORDINGLY, MAY NOT BE, NOR MAY ANY INTEREST THEREIN BE, OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY, SUBJECT TO CERTAIN EXCEPTIONS, A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, IN FORM AND SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

THIS WARRANT MAY NOT BE TRANSFERRED EXCEPT AS PROVIDED IN SECTION 24.

No. ARW- Right to Purchase __________ Shares of Common Stock of eMagin Corporation

EMAGIN CORPORATION

Amended and Restated

Common Stock Purchase Warrant

EMAGIN CORPORATION, aDelaware corporation, hereby certifies that, for value received, ______________________ or registered assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., New York City time, on the Expiration Date (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), paid and nonassessable shares of Common Stock at a purchase price per share equal to the Purchase Price. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant. This Warrant amends and restates Common Stock Warrant No. W-___ issued by the Company pursuant to the Note Purchase Agreement, registered in the name of the Holder or the registered holder of the predecessor instrument of this Warrant.

1. Definitions.

(a) As used in this Warrant, the term “Holder” shall have the meaning assigned to such term in the first paragraph of this Warrant.

(b) All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Warrant.

1

(c) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject Person. For purposes of this definition, “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.

“Aggregate Purchase Price” means at any time an amount equal to the product obtained by multiplying (x) the Purchase Price times (y) the number of shares of Common Stock for which this Warrant may be exercised at such time, determined without regard to any limitations on exercise of this Warrant contained in Section 2(c).

“Aggregation Parties” shall have the meaning provided in Section 2(c).

“Amendment Agreement” means the Amendment Agreement, dated as of July 23, 2007, by and between the Company and the original Holder of the Common Stock Purchase Warrant that was amended and restated by this Warrant or its predecessor instrument.

“AMEX” means the American Stock Exchange, Inc.

“Board of Directors” means the Board of Directors of the Company.

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed.

2

“Common Stock” includes the Company's Common Stock, par value $0.001 per share, (and any purchase rights issued with respect to the Common Stock in the future) as authorized on the date hereof, and any other securities into which or for which the Common Stock (and any such rights issued with respect to the Common Stock) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise and any stock (other than Common Stock) and other securities of the Company or any other Person which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock.

“Common Stock Equivalents” means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security convertible into, exchangeable for, or otherwise entitling the holder thereof to acquire, shares of Common Stock or any warrant, option, subscription or purchase right with respect to any such convertible, exchangeable or other security.

“Company” shall include eMagin Corporation, a Delaware corporation, and any corporation that shall succeed to or assume the obligations of eMagin Corporation hereunder in accordance with the terms hereof.

“Computed Market Price”shall mean the arithmetic average of the daily VWAPs for each of the three Trading Days immediately preceding the applicable Measurement Date (such VWAPs being appropriately and equitably adjusted for any stock splits, stock dividends, recapitalizations and the like occurring or for which the record date occurs during such three Trading Days).

“Current Fair Market Value” means when used with respect to the Common Stock as of a specified date with respect to each share of Common Stock, the average of the closing prices of the Common Stock sold on all securities exchanges (including the OTCBB, the NYSE, the AMEX, the Nasdaq and the Nasdaq Capital Market) on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of regular trading on such day, or, if on such day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq System as of 4:00 p.m., New York City time, or, if on such day the Common Stock is not quoted in the Nasdaq System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by Pink Sheets, LLC, or any similar successor organization, in each such case averaged over a period of five Trading Days consisting of the day as of which the Current Fair Market Value of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day. If on the date for which Current Fair Market Value is to be determined the Common Stock is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the Current Fair Market Value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not an employee or director of the Company at the time of determination) in an arms'-length transaction for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors.

3

“Designated Person” means any of Mr. John Atherly, Mr. Gary Jones and Ms. Susan Jones.

“DTC” shall have the meaning provided in Section 2(c).

“Event of Default” shall have the meaning provided in the Notes.

“Excluded Shares” shall have the meaning provided in Section 2(c).

“Expiration Date” means July 21, 2011.

“FAST” shall have the meaning provided in Section 2(c).

“Issuance Date” means the date of original issuance of this Warrant or its predecessor instrument.

“Market Price” means with respect to any security on any day the closing price of such security on such day on the Nasdaq or the Nasdaq Capital Market or the NYSE or the AMEX or the OTCBB, as applicable, or, if such security is not listed or admitted to trading on the Nasdaq, the Nasdaq Capital Market, the NYSE, the AMEX or the OTCBB, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, in any such case as reported by Bloomberg, L.P. or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question, as reported by the Pink Sheets, LLC, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors.

“Measurement Date” for any sale, transfer or disposition (but not including the cancellation or expiration) of Common Stock or Common Stock Equivalents by a Designated Person means the date that is three Trading Days after the earlier of (i) the date such Designated Person files a Form 4 with the SEC with respect to such sale, transfer or disposition and (ii) the date such Designated Person is required to file a Form 4 with the SEC with respect to such sale, transfer or disposition; provided, however, that if such Designated Person is not required, or is no longer required, to file a Form 4 with respect to such sale, transfer or disposition, the Measurement Date shall be the date that is five Trading Days after the date of such sale, transfer or disposition.

“Nasdaq” means the Nasdaq Global Market.

“1934 Act” means the Securities Exchange Act of 1934, as amended.

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“1933 Act” means the Securities Act of 1933, as amended.

“Newly Issued Shares” shall have the meaning provided in Section 8(a).

“Note” means any of the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Company upon amendment and restatement of the Company’s 6% Senior Secured Convertible Notes due 2007-2008, as amended, originally issued by the Company pursuant to the Note Purchase Agreement and the Other Note Purchase Agreements.

“Note Purchase Agreement” means the Note Purchase Agreement (including the Annexes, Schedules and Exhibits thereto), dated as of July 21, 2006, by and between the Company and the original Holder of this Warrant, as amended by the Amendment Agreement.

“NYSE” means the New York Stock Exchange, Inc.

“OTCBB” means the Over-The-Counter Bulletin Board.

“Other Note Purchase Agreements” means the several Note Purchase Agreements, (including the Annexes, Schedules and Exhibits thereto), dated as of July 21, 2006, as amended, by and between the Company and the several buyers named therein in the form of the Note Purchase Agreement pursuant to which certain of the Notes are being or will be issued.

“Other Securities” means any stock (other than Common Stock) and other securities of the Company or any other Person which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5.

“Other Warrants” shall mean the Common Stock Purchase Warrants (other than this Warrant) issued or issuable pursuant to the Other Note Purchase Agreements.

“Permitted Designated Person Sale” means a sale by John Atherly, occurring on or after January 1, 2007, of shares of Common Stock in an amount not to exceed 50,000 shares in the aggregate in any fiscal quarter of the Company (such number of shares subject to equitable adjustments for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the Issuance Date).

“Person” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein.

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“Purchase Price” means $1.03 [$0.48 for Stillwater Amended Warrant],subject to adjustment as provided in this Warrant.

“Registration Period” shall have the meaning provided in the Note Purchase Agreement.

“Registration Statement” shall have the meaning provided in the Note Purchase Agreement.

“Reorganization Event” means the occurrence of any one or more of the following events:

(i) any consolidation, merger or similar transaction of the Company or any Subsidiary with or into another entity (other than a merger or consolidation or similar transaction of a Subsidiary into the Company or a wholly-owned Subsidiary in which there is no change in the outstanding Common Stock); or the sale or transfer of all or substantially all of the assets of the Company and the Subsidiaries in a single transaction or a series of related transactions; or

(ii) the occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive securities of any other Person (whether by means of a Tender Offer, liquidation, consolidation, merger, share exchange, combination, reclassification, recapitalization, or otherwise); or

(iii) the acquisition by a Person or group of Persons acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 50% or more of the combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors.

“Restricted Ownership Percentage” shall have the meaning provided in Section 2(c).

“Restricted Securities” means securities that are not eligible for resale pursuant to Rule 144(k) under the 1933 Act (or any successor provision).

“Rule 144A” means Rule 144A as promulgated under the 1933 Act.

“SEC” means the Securities and Exchange Commission.

“Series A Preferred Stock” means the shares of Series A Senior Secured Convertible Preferred Stock, $0.001 par value, of the Company.

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“Subsidiary” means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by the Company.

“Tender Offer” means a tender offer, exchange offer or other offer by the Company to repurchase outstanding shares of its capital stock.

“Trading Day” means a day on whichever of the national securities exchange, the Nasdaq, the Nasdaq Capital Market, the OTCBB or other securities market which then constitutes the principal securities market for the Common Stock is open for general trading of securities.

“VWAP” of any security on any Trading Day means the volume-weighted average price of such security on such Trading Day on the Principal Market, as reported by Bloomberg Financial, L.P., based on a Trading Day from 9:30 a.m., Eastern Time, to 4:00 p.m., Eastern Time, using the AQR Function, for such Trading Day; provided, however, that during any period the VWAP is being determined, the VWAP shall be subject to equitable adjustments from time to time on terms consistent with Section 6.3 of the Note and otherwise reasonably acceptable to the Holder for (i) stock splits, (ii) stock dividends, (iii) combinations, (iv) capital reorganizations, (v) issuance to all holders of Common Stock of rights or warrants to purchase shares of Common Stock, (vi) distribution by the Company to all holders of Common Stock of evidences of indebtedness of the Company or cash (other than regular quarterly cash dividends), and (vii) similar events relating to the Common Stock, in each case which occur, or with respect to which the “ex” date occurs, during such period.

“Warrant” means this instrument as originally executed or if later amended or supplemented in accordance with its terms, then as so amended or supplemented.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of this Warrant.

2. Exercise of Warrant.

(a) Exercise. This Warrant may be exercised by the Holder in whole at any time or in part from time to time on or before the Expiration Date by (x) giving a subscription form in the form of Exhibit 1 to this Warrant (duly executed by the Holder) to the Company, (y) making payment, in cash or by certified or official bank check payable to the order of the Company, or by wire transfer of funds to the account of the Company, in any such case, in the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription form by (b) the Purchase Price then in effect and (z) surrendering this Warrant to the Company within three Trading Days after such submission of a subscription form. An exercise of this Warrant shall be deemed to have occurred on the date when the Holder shall have so given the subscription form and made such payment. On any partial exercise the Company will forthwith issue and deliver to or upon the order of the Holder a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the purchase of the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. The subscription form may be surrendered by telephone line facsimile transmission to such telephone number for the Company as shall have been specified in writing to the Holder by the Company; provided, however, that if the subscription form is given to the Company by telephone line facsimile transmission the Holder shall send an original of such subscription form to the Company within ten Business Days after such subscription form is so given to the Company; provided further, however, that any failure or delay on the part of the Holder in giving such original of any subscription form shall not affect the validity or the date on which such subscription form is so given by telephone line facsimile transmission.

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(b) Net Exercise.Notwithstanding anything to the contrary contained in Section 2(a), if the Holder shall exercise this Warrant (1) during the period beginning one year after the Issuance Date and at a time when a Registration Statement covering the resale by the Holder of shares of Common Stock (or Other Securities) issuable upon exercise of this Warrant is not effective or is not available for use by the Holder or (2) an Event of Default shall have occurred and be continuing, then in either such case in the preceding clause (1) or (2) the Holder may elect to exercise this Warrant, in whole at any time or in part from time to time, by receiving upon each such exercise a number of shares of Common Stock as determined below, upon submission of the subscription form annexed hereto (duly executed by the Holder) to the Company (followed by surrender of this Warrant to the Company within three Trading Days after such submission of a subscription form), in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:

X = Y x (A - B)

A

where,

X = the number of shares of Common Stock to be issued to the Holder

Y = the number of shares of Common Stock as to which this Warrant is to be exercised

A = the Current Fair Market Value of one share of Common Stock calculated as of the latest Trading Day immediately preceding the exercise of this Warrant

B = the Purchase Price

(c) 9.9% Limitation.

(1) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof at any time shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by the Holder (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”), together with all shares of Common Stock deemed beneficially owned at such time (other than by virtue of the ownership of the Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by the Holder for purposes of determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Parties”), in either such case for purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the 1934 Act and the rules promulgated thereunder), would result in beneficial ownership by the Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may be modified by the Holder as provided herein, the “Restricted Ownership Percentage”). The Holder shall have the right (x) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company in the event and only to the extent that Section 16 of the 1934 Act or the rules promulgated thereunder (or any successor statute or rules) is changed to reduce the beneficial ownership percentage threshold thereunder to a percentage less than 10% [FOR RAINBOW GATE/STILLWATER /GINOLA WARRANTS ONLY: and (y) at any time and from time to time, to increase its Restricted Ownership Percentage unless the Holder shall have, by written instrument delivered to the Company, irrevocably waived its rights to so increase its Restricted Ownership Percentage]. If at any time the limits in this Section 2(c) make this Warrant unexercisable in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter but prior to the Expiration Date upon exercise of this Warrant as and when shares of Common Stock may be issued in compliance with such restrictions.

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(2) For purposes of this Section 2(c), in determining the number of outstanding shares of Common Stock at any time the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's then most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a public announcement by the Company that is later than any such filing referred to in the preceding clause (1) or (3) any other notice by the Company or its transfer agent setting forth the number shares of Common Stock outstanding and knowledge the Holder may have about the number of shares of Common Stock issued upon conversion or exercise of Common Stock Equivalents by any Person, including the Holder, which are not reflected in the preceding clauses (1) through (3). Upon the written request of the Holder, the Company shall within three Business Days confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of Common Stock Equivalents, including the Warrants, by the Holder or its Affiliates, in each such case subsequent to, the date as of which such number of outstanding shares of Common Stock was reported.

3. Delivery of Stock Certificates, etc., on Exercise. (a) As soon as practicable after the exercise of this Warrant and in any event within three Trading Days thereafter, upon the terms and subject to the conditions of this Warrant, the Company at its expense (including the payment by it of any applicable issue or stamp taxes) will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which the Holder shall be entitled on such exercise, in such denominations as may be requested by the Holder, which certificate or certificates shall be free of restrictive and trading legends (except to the extent permitted under Section 5(b) of the Note Purchase Agreement), plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Current Fair Market Value of one full share of Common Stock, together with any other stock or Other Securities or any property (including cash, where applicable) to which the Holder is entitled upon such exercise pursuant to Section 2 or otherwise. In lieu of delivering physical certificates for the shares of Common Stock or (Other Securities) issuable upon any exercise of this Warrant, provided the Company's transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder, the Company shall use commercially reasonable efforts to cause its transfer agent electronically to transmit such shares of Common Stock (or Other Securities) issuable upon conversion to the Holder (or its designee), by crediting the account of the Holder’s (or such designee’s) broker with DTC through its Deposit Withdrawal Agent Commission system (provided that the same time periods herein as for stock certificates shall apply). The Company shall pay any taxes and other governmental charges that may be imposed under the laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of shares of Common Stock (or Other Securities) or payment of cash upon exercise of this Warrant (other than income taxes imposed on the Holder). The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock (or Other Securities) issuable upon exercise of this Warrant or payment of cash to any Person other than the Holder, and in case of such transfer or payment the Company shall not be required to deliver any certificate for shares of Common Stock (or Other Securities) upon such exercise or pay any cash until such tax or charge has been paid or it has been established to the Company's reasonable satisfaction that no such tax or charge is due.

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(b) If in any case the Company shall fail to issue and deliver or cause to be delivered the shares of Common Stock to the Holder within five Trading Days of a particular exercise of this Warrant, in addition to any other liabilities the Company may have hereunder, under the Note Purchase Agreement and under applicable law, (A) the Company shall pay or reimburse the Holder on demand for all out-of-pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by the Holder as a result of such failure; (B) if as a result of such failure the Holder shall suffer any direct damages or liabilities from such failure (including, without limitation, margin interest and the cost of purchasing securities to cover a sale (whether by the Holder or the Holder's securities broker) or borrowing of shares of Common Stock by the Holder for purposes of settling any trade involving a sale of shares of Common Stock made by the Holder during the period beginning on the Issuance Date and ending on the date the Company delivers or causes to be delivered to the Holder such shares of Common Stock), then, in addition to any amounts payable pursuant to Section 3(a), the Company shall upon demand of the Holder pay to the Holder an amount equal to the actual, direct, demonstrable out-of-pocket damages and liabilities suffered by the Holder by reason thereof which the Holder documents, and (C) the Holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing), given at any time prior to delivery to the Holder of the shares of Common Stock issuable in connection with such exercise of the Holder's right, rescind such exercise and the subscription form relating thereto, in which case the Holder shall thereafter be entitled to exercise that portion of this Warrant as to which such exercise is so rescinded and to exercise its other rights and remedies with respect to such failure by the Company. Notwithstanding the foregoing the Company shall not be liable to the Holder under clauses (A) or (B) of the immediately preceding sentence to the extent the failure of the Company to deliver or to cause to be delivered such shares of Common Stock results from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, or any similar event outside the control of the Company (it being understood that the action or failure to act of the Company's Transfer Agent shall not be deemed an event outside the control of the Company except to the extent resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, or any similar event outside the control of such Transfer Agent or the bankruptcy, liquidation or reorganization of such Transfer Agent under any bankruptcy, insolvency or other similar law). The Holder shall notify the Company in writing (or by telephone conversation, confirmed in writing) as promptly as practicable following the third Trading Day after the Holder exercises this Warrant if the Holder becomes aware that such shares of Common Stock so issuable have not been received as provided herein, but any failure so to give such notice shall not affect the Holder's rights under this Warrant or otherwise. In the case of the Company’s failure to issue and deliver or cause to be delivered the shares of Common Stock to the Holder within five Trading Days of a particular exercise of this Warrant, the amount payable by the Company pursuant to clause (B) of this Section 3(b) with respect to such exercise shall be reduced by the amount of payments previously paid by the Company to the Holder pursuant to Section 8(a)(4) of the Note Purchase Agreement with respect to such exercise.

4. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time on or after the Issuance Date, all holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor,

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(a) other or additional stock, rights, warrants or other securities or property (other than cash) by way of dividend, or

(b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or

(c) other or additional stock, rights, warrants or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than (i) additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 6) and (ii) rights or warrants to subscribe for Common Stock at less than the Current Fair Market Value (adjustments in respect of which are provided in Section 7), then and in each such case the Holder, on the exercise hereof as provided in Section 2, shall be entitled to receive the amount of stock, rights, warrants and Other Securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 4) which the Holder would hold on the date of such exercise if on the date of such action specified in the preceding clauses (a) through (c) (or the record date therefor) the Holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date thereof to and including the date of such exercise, retained such shares and all such other or additional stock, rights, warrants and Other Securities and property (including cash in the case referred to in subdivisions (b) and (c) of this Section 4) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Section 5.

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5. Exercise upon a Reorganization Event. In case of any Reorganization Event the Company shall, as a condition precedent to the consummation of the transactions constituting, or announced as, such Reorganization Event, cause effective provisions to be made so that the Holder shall have the right thereafter, by exercising this Warrant (in lieu of the shares of Common Stock of the Company and Other Securities or property purchasable and receivable upon exercise of the rights represented hereby immediately prior to such Reorganization Event) to purchase the kind and amount of shares of stock and Other Securities and property (including cash) receivable upon such Reorganization Event by a holder of the number of shares of Common Stock that might have been received upon exercise of this Warrant immediately prior to such Reorganization Event. Any such provision shall include provisions for adjustments in respect of such shares of stock and Other Securities and property that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The provisions of this Section 5 shall apply to successive Reorganization Events.

6. Adjustment for Certain Extraordinary Events. If on or after the Issuance Date the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the Purchase Price in effect immediately prior to such event by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 6. The Holder shall thereafter, on the exercise hereof as provided in Section 2, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would be issuable on such exercise immediately prior to such issuance, subdivision or combination, as the case may be, by a fraction of which (i) the numerator is the Purchase Price in effect immediately prior to such issuance and (ii) the denominator is the Purchase Price in effect on the date of such exercise.

7. Issuance of Rights or Warrants to Common Stockholders at less than Current Fair Market Value. If the Company shall on or after the Issuance Date issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Current Fair Market Value on the record date fixed for the determination of stockholders entitled to receive such rights or warrants, then

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(a) the Purchase Price shall be adjusted so that the same shall equal the price determined by multiplying the Purchase Price in effect at the opening of business on the day after such record date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such record date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Fair Market Value, and the denominator shall be the number of shares of Common Stock outstanding on the close of business on such record date plus the total number of additional shares of Common Stock so offered for subscription or purchase; and

(b) the number of shares of Common Stock which the Holder may thereafter purchase upon exercise of this Warrant at the opening of business on the day after such record date shall be increased to a number equal to the quotient obtained by dividing (x) the Aggregate Purchase Price in effect immediately prior to such adjustment in the Purchase Price pursuant to clause (a) of this Section 7 by (y) the Purchase Price in effect immediately after such adjustment in the Purchase Price pursuant to clause (a) of this Section 7.

Such adjustment shall become effective immediately after the opening of business on the day following the record date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Purchase Price shall be readjusted to the Purchase Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall be readjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to the number which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed and the number of shares of Common Stock for which this Warrant may thereafter be exercised shall again be adjusted (subject to proportionate adjustment for any intervening exercises of this Warrant) to be the number which would then be in effect if such record date had not been fixed. In determining whether any rights or warrants entitle the Holder to subscribe for or purchase shares of Common Stock at less than such Current Fair Market Value, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors.

8. Adjustments for Certain Issuances of Newly Issued Shares.

(a) In case at any time on or after the Issuance Date the Company shall issue shares of Common Stock or Common Stock Equivalents (collectively, the “Newly Issued Shares”) at a price below the Purchase Price in effect at the time of such issuance, then following such issuance of Newly Issued Shares the Purchase Price shall be reduced to the lower of (x) 138% of the lowest price per share of Common Stock reflected in the price at which such Newly Issued Shares are issued and (y) the exercise price of any warrants to purchase Common Stock issued in connection with such transaction, in either such case, if the same is lower than the Purchase Price in effect immediately prior to such issuance.

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(b) If the Purchase Price is reduced in connection with the issuance of Newly Issued Shares as provided in Section 8(a), then the number of shares of Common Stock for which this Warrant may thereafter be exercised shall be increased at the time of such reduction in the Purchase Price to a number equal to the quotient obtained by dividing (x) the Aggregate Purchase Price in effect immediately prior to such issuance of Newly Issued Shares by (y) the Purchase Price in effect immediately after such issuance of Newly Issued Shares after such reduction in the Purchase Price pursuant to Section 8(a).

(c) If the Newly Issued Shares are Common Stock Equivalents, then the price per share of Common Stock at which the Newly Issued Shares shall be deemed issued shall be the price per share of Common Stock at which the Newly Issued Shares are convertible into, exchangeable for, or otherwise entitle the stockholder to acquire, Common Stock.

(d) Notwithstanding the foregoing, no adjustment shall be made under this Section 8 by reason of:

(i) the issuance by the Company of shares of Common Stock pro rata to all holders of the Common Stock so long as (i) any adjustment required by Section 6 is made and (ii) the Company shall have given notice thereof to the Holder pursuant to Section 15;

(ii) the issuance by the Company of the Notes or the Other Warrants or shares of Common Stock upon conversion of the Notes or upon exercise of this Warrant or the Other Warrants in accordance with the terms hereof and thereof;

(iii) the issuance by the Company of shares of Series A Preferred Stock upon conversion of the Notes or Common Stock upon conversion of the Series A Preferred Stock in accordance with the terms thereof;

(iv) the issuance by the Company of Newly Issued Shares upon grant or exercise of options for employees, directors and consultants under the 2003 Stock Option Plan, 2004 Non-Employee Stock Compensation Plan and the 2005 Employee Stock Purchase Plan or any other stock compensation plan that has been duly adopted by the Board of Directors and duly approved by the Company’s stockholders;

(v) the issuance by the Company of Newly Issued Shares upon conversion of Common Stock Equivalents that are outstanding on the Issuance Date in accordance with the terms of such Common Stock Equivalents in effect on the Issuance Date;

(vi) the issuance by the Company for cash of Newly Issued Shares in connection with a strategic alliance, collaboration, joint venture, partnership or similar arrangement of the Company with another Person which strategic alliance, collaboration, joint venture, partnership or similar arrangement relates to the Company’s business as conducted immediately prior thereto and which Person is engaged in a business similar or related to the business of the Company so long as (x) the price per Newly Issued Share is not less than 85 percent of the Current Fair Market Value of the Common Stock on the date of issuance of such Newly Issued Shares and (y) the consideration other than cash which the Company receives in connection with such strategic alliance, collaboration, joint venture, partnership or similar arrangement has a value, as determined by the Board of Directors in its reasonable judgment, at least equal to the amount by which (i) the product of the Newly Issued Shares so issued times the Current Fair Market Value of the Common Stock on the date such Newly Issued Shares are issued exceeds (ii) the aggregate cash consideration received by the Company for such Newly Issued Shares at the time of issuance thereof and (z) such issuance has been duly approved by the Board of Directors.

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9. Adjustment in Connection with Sales by a Designated Person. So long as any Note is outstanding, if at any time on or after the Issuance Date any Designated Person, directly or indirectly, sells, transfers or disposes of shares of Common Stock or Common Stock Equivalents other than a Permitted Designated Person Sale and on the Measurement Date for such sale, transfer or disposition the Purchase Price in effect on such Measurement Date is greater than the Computed Market Price on such Measurement Date, then, subject to the next succeeding sentence, the Purchase Price shall be reduced to such Computed Market Price, such adjustment to become effective immediately after the opening of business on the day following the Measurement Date. The Company shall inform the Holder immediately by phone and electronic transmission upon becoming aware of any sale, transfer or disposition of any shares of Common Stock or Common Stock Equivalents by any Designated Person and will follow up with formal written notice to the Holder pursuant to Section 24.

10. Effect of Reclassification, Consolidation, Merger or Sale.

(a) If any of the following events occur, namely:

(i)  any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination),

(ii)  any consolidation, merger statutory exchange or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or

(iii)  any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that:

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(x)  this Warrant shall thereafter entitle the Holder to purchase the kind and amount of shares of stock and Other Securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon exercise of this Warrant (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to exercise this Warrant) immediately prior to such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder's rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 10 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares),

(y) in the case of any such successor or purchasing Person, upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company's obligations under this Warrant and the Note Purchase Agreement and

(z) if registration or qualification is required under the 1933 Act or applicable state law for the public resale by the Holder of such shares of stock and Other Securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale.

Such written agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. If, in the case of any such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance, the stock or other securities or other property or assets receivable thereupon by a holder of shares of Common Stock includes shares of stock, other securities, other property or assets of a Person other than the Company or any such successor or purchasing Person, as the case may be, in such reclassification, change, consolidation, merger, statutory exchange, combination, sale or conveyance, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors shall reasonably consider necessary by reason of the foregoing.

(b) The above provisions of this Section 10 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

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(c) If this Section 10 applies to any event or occurrence, Section 5 shall not apply.

11. Tax Adjustments.The Company may make such reductions in the Purchase Price, in addition to those required by Sections 4, 5, 6, 7, 8 and 9 as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.

12. Minimum Adjustment. (a) No adjustment in the Purchase Price (and no related adjustment in the number of shares of Common Stock which may thereafter be purchased upon exercise of this Warrant) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 12 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All such calculations under this Warrant shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be.

(b) No adjustment need be made for a change in the par value of the Common Stock or from par value to no par value or from no par value to par value.

13. Notice of Adjustments. Whenever the Purchase Price is adjusted as herein provided, the Company shall promptly, but in no event later than five Trading Days thereafter, give a notice to the Holder setting forth the Purchase Price and number of shares of Common Stock which may be purchased upon exercise of this Warrant after such adjustment and setting forth a brief statement of the facts requiring such adjustment but which such statement shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.

14. Further Assurances. The Company will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of all or any portion of this Warrant from time to time outstanding.

15. Notice to Holder Prior to Certain Actions.In case on or after the Issuance Date:

(a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or

(b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or

(c) the Board of Directors shall authorize any reclassification of the Common Stock (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or any consolidation or merger or other business combination transaction to which the Company is a party and for which approval of any stockholders of the Company is required, or the sale or transfer of all or substantially all of the assets of the Company; or

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(d) there shall be pending the voluntary or involuntary dissolution, liquidation or winding-up of the Company;

the Company shall give the Holder, as promptly as possible but in any event at least ten Trading Days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record who shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up shall be determined. Such notice shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. In the case of any such action of which the Company gives such notice to the Holder or is required to give such notice to the Holder, the Holder shall be entitled to give a subscription form to exercise this Warrant in whole or in part that is contingent on the completion of such action.

16. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available out of its authorized but unissued shares of capital stock, solely for issuance and delivery on the exercise of this Warrant, a sufficient number of shares of Common Stock (or Other Securities) to effect the full exercise of this Warrant and the exercise, conversion or exchange of all other Common Stock Equivalents from time to time outstanding (or Other Securities), and if at any time the number of authorized but unissued shares of Common Stock (or Other Securities) shall not be sufficient to effect such exercise, conversion or exchange, the Company shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock (or Other Securities) to such number as shall be sufficient for such purposes.

17. Transfer of Warrant. This Warrant shall inure to the benefit of the successors to and assigns of the Holder. This Warrant and all rights hereunder, in whole or in part, are registrable at the office or agency of the Company referred to below by the Holder in person or by his duly authorized attorney, upon surrender of this Warrant properly endorsed accompanied by an assignment form in the form attachedto this Warrant, or other customary form, duly executed by the transferring Holder.

18. Register of Warrants. The Company shall maintain, at the principal office of the Company (or such other office as it may designate by notice to the Holder), a register in which the Company shall record the name and address of the Person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the Person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes.

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19. Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office or agency of the Company referred to in Section 17, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender.

20. Replacement of Warrant. On receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and (a) in the case of loss, theft or destruction, of indemnity from the Holder reasonably satisfactory in form to the Company (and without the requirement to post any bond or other security), or (b) in the case of mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver to the Holder a new Warrant of like tenor without charge to the Holder.

21. Warrant Agent. The Company may, by written notice to the Holder, appoint the transfer agent and registrar for the Common Stock as the Company's agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 2, and the Company may, by written notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 19, and replacing this Warrant pursuant to Section 20, or any of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent.

22. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced (x) by a decree for the specific performance of any agreement contained herein, including, without limitation, a decree for issuance of the shares of Common Stock (or Other Securities) issuable upon exercise of this Warrant or (y) by an injunction against a violation of any of the terms hereof or (z) otherwise.

23. No Rights or Liabilities as a Stockholder. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Common Stock (or Other Securities) purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms.

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24. Notices, etc. All notices and other communications from the Company to the Holder shall be in writing and delivered personally, by confirmed facsimile, by a nationally recognized overnight courier service or mailed by first class certified mail, postage prepaid, at such facsimile telephone number or address as may have been furnished to the Company in writing by the Holder or at such facsimile telephone number or the address shown for the Holder on the register of Warrants referred to in Section 18.

25. Transfer Restrictions. This Warrant has not been and is not being registered under the provisions of the 1933 Act or any state securities laws and this Warrant may not be transferred prior to the end of the holding period applicable to sales hereof under Rule 144(k) unless (1) the transferee is an “accredited investor” (as defined in Regulation D under the 1933 Act) and (2) the Holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that this Warrant may be sold or transferred without registration under the 1933 Act. Prior to any such transfer, such transferee shall have represented in writing to the Company that such transferee has requested and received from the Company all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company deemed relevant by such transferee; that such transferee has been afforded the opportunity to ask questions of the Company concerning the foregoing and has had the opportunity to obtain and review the Registration Statement and the prospectus related thereto, each as amended or supplemented to the date of transfer to such transferee, and the reports and other information concerning the Company which at the time of such transfer have been filed by the Company with the SEC pursuant to the 1934 Act and which are incorporated by reference in such prospectus as of the date of such transfer. If such transfer is intended to assign the rights and obligations of the Holder under Section 5,8,9 and 10 of the Note Purchase Agreement, such transfer shall otherwise be made in compliance with the applicable provisions of the Note Purchase Agreement.

26. Rule 144A Information Requirement.Within the period prior to the expiration of the holding period applicable to sales hereof under Rule 144(k) under the 1933 Act (or any successor provision), the Company covenants and agrees that it shall, during any period in which it is not subject to Section 13 or 15(d) under the 1934 Act, make available to the Holder and the holder of any shares of Common Stock issued upon exercise of this Warrant which continue to be Restricted Securities in connection with any sale thereof and any prospective purchaser of this Warrant from the Holder, the information required pursuant to Rule 144A(d)(4) under the 1933 Act upon the request of the Holder and it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell this Warrant without registration under the 1933 Act within the limitation of the exemption provided by Rule 144A, as Rule 144A may be amended from time to time. Upon the request of the Holder, the Company will deliver to the Holder a written statement as to whether it has complied with such requirements.

27. Legend. The provisions of Section 5(b) of the Note Purchase Agreement and the related definitions of capitalized terms used therein and defined in the Note Purchase Agreement are by this reference incorporated herein as if set forth in full at this place.

28. Amendment; Waiver. (a) This Warrant and any terms hereof may be changed, modified or amended only by an instrument in writing signed by the party against which enforcement of such change, modification or amendment is sought. [TO BE DELETED IN [RAINBOW GATE][STILLWATER][GINOLA] WARRANTS ONLY: Notwithstanding anything to the contrary contained herein, no amendment or waiver shall increase or eliminate the Restricted Ownership Percentage, whether permanently or temporarily, unless, in addition to complying with the other requirements of this Warrant, such amendment or waiver shall have been approved in accordance with the General Corporation Law of the State of Delaware and the Company's By-laws by holders of the outstanding shares of Common Stock entitled to vote at a meeting or by written consent in lieu of such meeting.]

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(b) Any term or condition of this Warrant may be waived by the Holder or Company at any time if the waiving party is entitled to the benefit thereof, but no such waiver will be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Warrant, in any one or more instances, will be deemed to be or construed as a waiver of the same or any other term or condition of this Warrant on any future occasion.

29. Miscellaneous. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of New York. The headings, captions and footers in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.

30. Attorneys' Fees. In any litigation, arbitration or court proceeding between the Company and Holder relating hereto, the prevailing party shall be entitled to attorneys’ fees and expenses and all costs of proceedings incurred in enforcing this Warrant.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on its behalf by one of its officers thereunto duly authorized.

	EMAGIN CORPORATION
Date:	By:	/s/
		Title

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ASSIGNMENT

For value hereby sell(s), assign(s) and transfer(s) unto (Please insert social security or other Taxpayer Identification Number of assignee: ) the attached original, executed Warrant to purchase share of Common Stock of eMagin Corporation, a Delaware corporation (the “Company”), and hereby irrevocably constitutes and appoints attorney to transfer the Warrant on the books of the Company, with full power of substitution in the premises.

In connection with any transfer of the Warrant within the period prior to the expiration of the holding period applicable to sales thereof under Rule 144(k) under the 1933 Act (or any successor provision) (other than any transfer pursuant to a registration statement that has been declared effective under the 1933 Act), the undersigned confirms that such Warrant is being transferred:

[ ] To the Company or a Subsidiary; or

[ ] To an “accredited investor” (as defined in Regulation D under the 1933 Act) pursuant to and in compliance with the 1933 Act; or

[ ] Pursuant to and in compliance with Rule 144 under the 1933 Act;

and unless the box below is checked, the undersigned confirms that, to the knowledge of the undersigned, such Warrant is not being transferred to an “affiliate” (as defined in Rule 144 under the 1933 Act) of the Company.

[ ] The transferee is an affiliate of the Company.

Capitalized terms used in this Assignment and not defined in this Assignment shall have the respective meanings provided in the Warrant.

Dated:	NAME:
	Signature(s)

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Exhibit 1

FORM OF SUBSCRIPTION

EMAGIN CORPORATION

(To be signed only on exercise of Warrant)

TO: eMagin Corporation

10500 N.E. 8th Street, Suite 1400

Bellevue, WA 98004

Attention: Chief Financial Officer

Facsimile No.: (425) 749-3601

1. The undersigned Holder of the attached original, executed Warrant hereby elects to exercise its purchase right under such Warrant with respect to shares (the “Exercise Shares”) of Common Stock, as defined in the Warrant, of eMagin Corporation, a Delaware corporation (the “Company”).

2. The undersigned Holder (check one):

q   (a)elects to pay the Aggregate Purchase Price for such shares of Common Stock (i) in lawful money of the United States or by the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $, or (ii) by wire transfer of United States funds to the account of the Company in the amount of $, which transfer has been made before or simultaneously with the delivery of this Form of Subscription pursuant to the instructions of the Company;

or

q   (b)elects to receive shares of Common Stock having a value equal to the value of the Warrant calculated in accordance with Section 2(b) of the Warrant.

3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other name(s) as is specified below:

Name: 

Address: 

Social Security or Tax Identification Number (if any):

Dated:
	(Signature must conform to name of Holder as specified on the face of the Warrant)
	(Address)

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Annex III

AMENDMENT NO. 1 TO PATENT AND TRADEMARK SECURITY AGREEMENT

THIS AMENDMENT NO. 1 TO PATENT AND TRADEMARK SECURITY AGREEMENT, dated as of July 23, 2007 (this “Agreement”), by and between EMAGIN CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), amends the PATENT AND TRADEMARK SECURITY AGREEMENT, dated as of July 21, 2006 (the “Patent and Trademark Security Agreement”), made bythe Grantor to the Collateral Agent.

W I T N E S S E T H:

WHEREAS, the Grantor and the Collateral Agent are parties to the Patent and Trademark Security Agreement;

WHEREAS, the Grantor and the Collateral Agent wish to amend the Patent and Trademark Security Agreement as provided in this Agreement; and

NOW THEREFORE, in consideration of the premises and the mutual covenants made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions. 

1.1 As used in this Agreement, the terms “Agreement”, “Grantor”, “Collateral Agent” and “Patent and Trademark Security Agreement” shall have the respective meanings assigned to such terms in the introductory paragraph of this Agreement.

1.2 Capitalized terms used in this Agreement and not defined in this Agreement shall have the respective meanings provided in the Patent and Trademark Security Agreement.

1.3 All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement.

1.4 The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Amended Lockbox Agreement” means the Lockbox Agreement, dated as of July 21, 2006, by and between the Grantor, the Lockbox Agent and the Collateral Agent, as amended by Amendment No. 1 to Lockbox Agreement, dated as of July 23, 2007, by and between the Grantor and the Collateral Agent.

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“Amended Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Grantor upon amendment and restatement of the Notes.

“Amended Patent and Trademark Security Agreement” means the Patent and Trademark Security Agreement as amended by this Agreement.

“Amended Pledge and Security Agreement” means the Pledge and Security Agreement, dated as of July 21, 2006, by and between the Grantor and the Collateral Agent, as amended by Amendment No. 1 to the Pledge and Security Agreement, dated as of July 23, 2007 by and between the Grantor and the Collateral Agent.

“Amendment Agreements” means the several Amendment Agreements, dated as of July 23, 2007 by and between the Company and the Holders.

“Amendment Transaction Documents” means the Amended Notes, the Amended Warrants, the Certificate Designations, the Amended Patent and Trademark Security Agreement, the Amended Pledge and Security Agreement, the Amended Lockbox Agreementand the other agreements, instruments and documents contemplated hereby and thereby.

“Certificate of Designations” means the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Grantor as filed with the Secretary of State of the State of Delaware.

“Effective Date” shall have the meaning provided in Section 4.

“Effective Time” shall have the meaning provided in the Amendment Agreements.

“Holders” means with respect to any time prior to the Effective Time on the Effective Date the holders of Notes and with respect to any time after the Effective Time on the Effective Date, the holders from time to time of any Amended Notes or shares of Series A Preferred Stock.

“Series A Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock, par value $0.001 per share, of the Grantor.

2. Amendments.

2.1 Amendments to Patent and Trademark Security Agreement. Upon the terms and subject to the conditions of this Agreement, the Patent and Trademark Security Agreement is hereby amended as follows:

(a) Amendment of Certain Definitions. Section 1(d) of the Patent and Trademark Security Agreement shall be amended by deleting the terms “Additional Note Purchase Agreement”, “Event of Default”, “Holder”, “Note Purchase Agreements”, “Majority Holders”, “Notes”, “Obligations” and “Transaction Documents” and the accompanying definitions thereof and substituting in lieu thereof in their respective alphabetical order the following:

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“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, as amended on March 28, 2007, by and between the Company and Stillwater LLC, as amended by the Amendment Agreement, pursuant to which the Company issued the Additional Note.

“Event of Default” means:

(1) the failure by the Grantor to perform in any material respect any obligation of the Grantor under this Agreement as and when required by this Agreement; or

(2) the failure by the Grantor to pay the Optional Redemption Price or the Mandatory Redemption Price; or

(3) the breach by the Grantor of any other material covenant or other term or condition of the Certificate of Designations; or

(4) any representation or warranty made by the Grantor pursuant to this Agreement shall have been untrue in any material respect when made or deemed to have been made; or

(5) the failure by the Grantor to perform in any material respect any obligation of the Grantor under the Patent and Trademark Security Agreement as and when required by the Patent and Trademark Security Agreement;

(6) any representation or warranty made by the Grantor pursuant to the Patent and Trademark Security Agreement shall have been untrue in any material respect when made or deemed to have been made;

(7) the failure by the Grantor to perform in any material respect any obligation of the Grantor under the Lockbox Agreement as and when required by the Lockbox Agreement;

(8) any representation or warranty made by the Grantor pursuant to the Lockbox Agreement shall have been untrue in any material respect when made or deemed to have been made; or

(9) any Event of Default, as that term is defined in any of the Notes.

“Holder” means any Buyer or any holder from time to time of any Note or any Preferred Shares.

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“Majority Holders” means at any time (i) such of the holders of Notes who hold Notes which, based on the outstanding principal amounts thereof, represent a majority of the aggregate outstanding principal amount of the Notes at such time, and (ii) such of the holders of Preferred Shares which shares constitute a majority of the outstanding Preferred Shares at such time.

“Note Purchase Agreements” means the several Note Purchase Agreements, dated as of July 21, 2006, by and between the Grantor and the respective Buyer party thereto, as amended by the Amendment Agreement, pursuant to which the Grantor issued the Notes, including, without limitation, the Additional Note Purchase Agreement.

“Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Grantor upon amendment and restatement of the Grantor’s 6% Senior Secured Convertible Notes due 2007-2008, as amended, originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Obligations” means:

(1) the full and prompt payment when due of all obligations and liabilities to the Holders, whether now existing or hereafter arising, under the Transaction Documents and the due performance and compliance with the terms of the Transaction Documents;

(2) the full and prompt payment when due of all obligations and liabilities of the Grantor to pay the Optional Redemption Price and Mandatory Redemption Price pursuant to the Preferred Shares and the due performance and compliance with the terms of the Certificate of Designations;

(3) any and all sums advanced by the Collateral Agent or any Holder in order to preserve the Collateral or to preserve the Security Interest;

(4) in the event of any proceeding for the collection or enforcement of any obligations or liabilities of the Grantor referred to in the immediately preceding clauses (1) and (2) in accordance with the terms of the Transaction Documents, the reasonable expenses of re-taking, holding, preparing for sale, selling or otherwise disposing of or realizing on the Collateral, or of any other exercise by the Collateral Agent of its rights hereunder, together with reasonable attorneys' fees and court costs; and

(5) any amounts for which the Collateral Agent or any Holder is entitled to indemnification under Section 4(n).

(b) Additional Defined Terms.Section 1(d) of the Patent and Trademark Security Agreement shall be amended by adding new defined terms and definitions thereof, in the places constituting their respective alphabetical orders, as follows:

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“Amendment Agreement” means the several Amendment Agreements, dated as of July 23, 2007, by and between the Grantor and the Holders.

“Certificate of Designations” means the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Grantor as filed with the Secretary of State of the State of Delaware.

“Mandatory Redemption Price” shall have the meaning assigned to such term in the Certificate of Designations.

“Optional Redemption Price” shall have the meaning assigned to such term in the Certificate of Designations.

“Preferred Shares” means shares of Series A Senior Secured Convertible Preferred Stock issued by the Grantor.

3. Effect of Amendment; Confirmation.

(a) From and after the Effective Date, the rights and obligations of the Grantor, the Collateral Agent and the Holders under the Patent and Trademark Security Agreement and the Transaction Documents and all other agreements, documents and instruments contemplated hereby and thereby shall apply with full force and effect to the Patent and Trademark Security Agreement, as amended by this Agreement, and each reference to the Patent and Trademark Security Agreement in the Transaction Documents shall be deemed to be a reference to the Patent and Trademark Security Agreement, as amended by this Agreement and each reference in the Patent and Trademark Security Agreement to “this Agreement,” “hereunder,” “hereof,” “herein,” or words of like import shall mean and be a reference to the Patent and Trademark Security Agreement as amended hereby, and this Agreement and the Patent and Trademark Security Agreement shall be read together and construed as a single instrument.

(b) Except as amended by this Agreement, the Patent and Trademark Security Agreement shall remain in full force and effect in accordance with its respective terms.

(c) The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Collateral Agent, the Grantor or the Holders under the Patent and Trademark Security Agreement or any of the Transaction Documents, nor constitute a waiver or amendment of any other provision of the Patent and Trademark Security Agreement or any of the Transaction Documents or for any purpose except as expressly set forth herein.

(d) Nothing in this Agreement or in connection with the transactions contemplated by this Agreement or otherwise shall be construed, directly or indirectly, by implication or otherwise to impair the validity, enforceability, priority, perfection or other attributes of the security interest granted pursuant to the Patent and Trademark Security Agreement.

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4. Effectiveness.

The amendment of the Patent and Trademark Security Agreement pursuant to this Agreement shall become effective on the date (the “Effective Date”) when all of the following conditions are satisfied:

(a) The Collateral Agent shall have received Acknowledgement and Consents, in the form attached hereto as Exhibit A, from the Majority Holders; and

(b) On the Effective Date the Effective Time under all of the Amendment Agreements shall have occurred.

5. Miscellaneous.

5.1 Waiver and Amendments; Successors and Assigns.

The provisions of Section 13 of the Patent and Trademark Security Agreement shall be applicable to this Agreement as if this Agreement were the “Agreement” referred to in Section 13 of the Patent and Trademark Security Agreement.

5.2 Counterparts.

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

5.3 Titles and Subtitles.

The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

5.4 Notices.

Any notice required or permitted under this Agreement shall be given as provided in the Patent and Trademark Security Agreement.

5.5 Severability.

If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

5.6 Entire Agreement.

This Agreement and the other Amendment Transaction Documents and other documents contemplated hereby and thereby constitute the entire agreement among the parties hereof with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter hereof and thereof.

5.7 Further Assurances.

The parties shall execute and deliver all such further instruments and documents and take all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.

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5.8 Applicable Law.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to principles of conflicts of laws, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted under the Patent and Trademark Security Agreement, as amended by this Agreement.

5.9 Counterparts; Execution.

This Agreement may be executed in any number of counterparts and by the parties hereto on separate counterparts, but all the counterparts taken together shall be deemed to constitute one and the same instrument. This Agreement, once executed by a party, may be delivered to the other party hereto by electronic or telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

5.10 Construction.

The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

[Signature Pages Follow]

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IN WITNESS WHEREOF, the Grantor and the Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers or other representatives thereunto duly authorized as of the date first above written.

EMAGIN CORPORATION
By:	/s/
	Name: Title:
ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent By: ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/s/
	Name: Title:

8

EXHIBIT A

ACKNOWLEDGEMENT AND CONSENT

To: ALEXANDRA GLOBAL MASTER FUND LTD.,

As Collateral Agent

c/o Alexandra Investment Management, LLC

767 Third Avenue, 39th Floor

New York, New York 10017

Re: eMagin Corporation

Reference is made to the Patent and Trademark Security Agreement, dated as of July 21, 2006 (as amended, supplemented or otherwise modified from time to time, the “Patent and Trademark Security Agreement”) by and between eMagin Corporation, a Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders. Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Patent and Trademark Security Agreement.

The Grantor has requested that the Holders consent to an Amendment to the Patent and Trademark Security Agreement on the terms described in that certain Amendment No. 1 to the Patent and Trademark Security Agreement (“Amendment No. 1 to Patent and Trademark Security Agreement”), the form of which is attached hereto.

Pursuant to Section 13 of the Patent and Trademark Security Agreement, the undersigned Holder hereby consents to the terms of Amendment No. 1 to Patent and Trademark Security Agreement and authorizes the Collateral Agent to execute and deliver Amendment No. 1 to Patent and Trademark Security Agreement on its behalf.

	Very truly yours, NAME OF HOLDER: ______________________________
Dated as of July 23, 2007	By:	/s/
		Name: Title:

9

Annex IV

AMENDMENT NO. 1 TO PLEDGE AND SECURITY AGREEMENT

THIS AMENDMENT NO. 1 TO PLEDGE AND SECURITY AGREEMENT, dated as of July 23, 2007 (this “Agreement”), by and between EMAGIN CORPORATION, a Delaware corporation (the “Grantor”), to ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), amends the PLEDGE AND SECURITY AGREEMENT, dated as of July 21, 2006 (the “Pledge and Security Agreement”), made bythe Grantor to the Collateral Agent.

W I T N E S S E T H:

WHEREAS, the Grantor and the Collateral Agent are parties to the Pledge and Security Agreement;

WHEREAS, the Grantor and the Collateral Agent wish to amend the Pledge and Security Agreement as provided in this Agreement; and

NOW THEREFORE, in consideration of the premises and the mutual covenants made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions. 

1.1 As used in this Agreement, the terms “Agreement”, “Grantor”, “Collateral Agent” and “Pledge and Security Agreement” shall have the respective meanings assigned to such terms in the introductory paragraph of this Agreement.

1.2 Capitalized terms used in this Agreement and not defined in this Agreement shall have the respective meanings provided in the Pledge and Security Agreement.

1.3 All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement.

1.4 The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Amended Lockbox Agreement” means the Lockbox Agreement, dated as of July 21, 2006, by and between the Grantor, the Lockbox Agent and the Collateral Agent, as amended by Amendment No. 1 to Lockbox Agreement, dated as of July 23, 2007, by and between the Grantor and the Collateral Agent.

“Amended Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Grantor upon amendment and restatement of the Notes.

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“Amended Patent and Trademark Security Agreement” means the Patent and Trademark Security Agreement, dated as of July 21, 2006, by and between the Grantor and the Collateral Agent, as amended by Amendment No. 1 to the Patent and Trademark Security Agreement, dated as of July 23, 2007 by and between the Grantor and the Collateral Agent.

“Amended Pledge and Security Agreement” means the Pledge and Security Agreement as amended by this Agreement.

“Amendment Agreements” means the several Amendment Agreements, dated as of July 23, 2007 by and between the Grantor and the Holders.

“Amendment Transaction Documents” means the Amended Notes, the Amended Warrants, the Certificate Designations, the Amended Patent and Trademark Security Agreement, the Amended Pledge and Security Agreement, the Amended Lockbox Agreementand the other agreements, instruments and documents contemplated hereby and thereby.

“Certificate of Designations” means the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Grantor as filed with the Secretary of State of the State of Delaware.

“Effective Date” shall have the meaning provided in Section 4.

“Effective Time” shall have the meaning provided in Amendment Agreements.

“Holders” means with respect to any time prior to the Effective Time on the Effective Date the holders of Notes and with respect to any time after the Effective Time on the Effective Date, the holders from time to time of any Amended Notes or shares of Series A Preferred Stock.

“Series A Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock, par value $0.001 per share, of the Grantor.

2. Amendments.

2.1 Amendments to Pledge and Security Agreement. Upon the terms and subject to the conditions of this Agreement, the Pledge and Security Agreement is hereby amended as follows:

(a) Amendment of Certain Definitions. Section 1(d) of the Pledge and Security Agreement shall be amended by deleting the terms “Additional Note Purchase Agreement”, “Event of Default”, “Holder”, “Note Purchase Agreements”, “Majority Holders”, “Notes”, “Obligations” and “Transaction Documents” and the accompanying definitions thereof and substituting in lieu thereof in their respective alphabetical order the following:

2

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, as amended on March 28, 2007, by and between the Company and Stillwater LLC, as amended by the Amendment Agreement, pursuant to which the Company issued the Additional Note.

“Event of Default” means:

(1) the failure by the Grantor to perform in any material respect any obligation of the Grantor under this Agreement as and when required by this Agreement; or

(2) the failure by the Grantor to pay the Optional Redemption Price or the Mandatory Redemption Price; or

(3) the breach by the Grantor of any other material covenant or other term or condition of the Certificate of Designations; or

(4) any representation or warranty made by the Grantor pursuant to this Agreement shall have been untrue in any material respect when made or deemed to have been made; or

(5) the failure by the Grantor to perform in any material respect any obligation of the Grantor under the Patent and Trademark Security Agreement as and when required by the Patent and Trademark Security Agreement;

(6) any representation or warranty made by the Grantor pursuant to the Patent and Trademark Security Agreement shall have been untrue in any material respect when made or deemed to have been made;

(7) the failure by the Grantor to perform in any material respect any obligation of the Grantor under the Lockbox Agreement as and when required by the Lockbox Agreement;

(8) any representation or warranty made by the Grantor pursuant to the Lockbox Agreement shall have been untrue in any material respect when made or deemed to have been made; or

(9) any Event of Default, as that term is defined in any of the Notes.

“Holder” means any Buyer or any holder from time to time of any Note or any Preferred Shares.

“Majority Holders” means at any time (i) such of the holders of Notes who hold Notes which, based on the outstanding principal amounts thereof, represent a majority of the aggregate outstanding principal amount of the Notes at such time, and (ii) such of the holders of Preferred Shares which shares constitute a majority of the outstanding Preferred Shares at such time.

3

“Note Purchase Agreements” means the several Note Purchase Agreements, dated as of July 21, 2006, by and between the Grantor and the respective Buyer party thereto, as amended by the Amendment Agreement, pursuant to which the Grantor issued the Notes, including, without limitation, the Additional Note Purchase Agreement.

“Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Grantor upon amendment and restatement of the Grantor’s 6% Senior Secured Convertible Notes due 2007-2008, as amended, originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

“Obligations” means:

(1) the full and prompt payment when due of all obligations and liabilities to the Holders, whether now existing or hereafter arising, under the Transaction Documents and the due performance and compliance with the terms of the Transaction Documents;

(2) the full and prompt payment when due of all obligations and liabilities of the Grantor to pay the Optional Redemption Price and Mandatory Redemption Price pursuant to the Preferred Shares and the due performance and compliance with the terms of the Certificate of Designations;

(3) any and all sums advanced by the Collateral Agent or any Holder in order to preserve the Collateral or to preserve the Security Interest;

(4) in the event of any proceeding for the collection or enforcement of any obligations or liabilities of the Grantor referred to in the immediately preceding clauses (1) and (2) in accordance with the terms of the Transaction Documents, the reasonable expenses of re-taking, holding, preparing for sale, selling or otherwise disposing of or realizing on the Collateral, or of any other exercise by the Collateral Agent of its rights hereunder, together with reasonable attorneys' fees and court costs; and

(5) any amounts for which the Collateral Agent or any Holder is entitled to indemnification under Section 5(j).

(b) Additional Defined Terms.Section 1(d) of the Pledge and Security Agreement shall be amended by adding new defined terms and definitions thereof, in the places constituting their respective alphabetical orders, as follows:

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“Amendment Agreement” means the several Amendment Agreements, dated as of July 23, 2007, by and between the Grantor and the Holders.

“Certificate of Designations” means the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Grantor as filed with the Secretary of State of the State of Delaware.

“Mandatory Redemption Price” shall have the meaning assigned to such term in the Certificate of Designations.

“Optional Redemption Price” shall have the meaning assigned to such term in the Certificate of Designations.

“Preferred Shares” means shares of Series A Senior Secured Convertible Preferred Stock issued by the Grantor.

(c)  Amendment of Section 15(b). Section 15(b) of the Pledge and Security Agreement shall be amended by deleting Section 15(b) of the Pledge and Security in its entirety and substituting in lieu thereof the following:

(b) If an Event of Default shall have occurred and be continuing, the Collateral Agent shall disburse the funds held by it pursuant to this Agreement as follows:

(i) First, to pay any amounts payable to the Collateral Agent pursuant to Section 17 that have not been paid by the Grantor; and then

(ii) Second, to pay each Holder on a pro rata basis the amount of all accrued and unpaid interest (and interest, if any, thereon at the Default Rate) then due each Holder in accordance with the terms of their respective Notes through the most recent Interest Payment Date; and then

(iii)  Third, to pay each Holder on a pro rata basis the amount, if any, of unpaid principal then due on the Maturity Date of any installment of principal of such Holder’s Notes and the unpaid Mandatory Redemption Price for the Preferred Shares required to be redeemed on the Mandatory Redemption Date; and then

(iv) Fourth, to pay each Holder, on a pro rata basis, the amount then due upon acceleration, if any, pursuant to Section 5 of such Holder’s Note(s); and then

(v) Fifth, to pay each Holder who has exercised its repurchase rights under Section 5 of the Notes or its optional redemption rights under Section 11 of the Certificate of Designations, on a pro rata basis, all of the applicable unpaid Repurchase Price for each of the Notes or portions thereof required to be repurchased and all of the applicable and unpaid Optional Redemption Price for the Preferred Shares required to be redeemed; and then

(vi) Sixth, to pay each Holder any other amount due and payable to such Holder under the Transaction Documents; and then

5

(vii) Seventh, the remaining amount, if any, to the Grantor.

provided, however, that if the amount of funds held by the Collateral Agent is insufficient to pay all amounts due to the Holders pursuant to clauses (ii) and (iv) above, then the amount paid to the Holders pursuant to this Section 15(b) shall be prorated among the Holders in proportion to the respective amounts due each Holder pursuant to the particular such clause or clauses for which such funds are insufficient.

3. Effect of Amendment; Confirmation.

(a) From and after the Effective Date, the rights and obligations of the Grantor, the Collateral Agent and the Holders under the Pledge and Security Agreement and the Transaction Documents and all other agreements, documents and instruments contemplated hereby and thereby shall apply with full force and effect to the Pledge and Security Agreement, as amended by this Agreement, and each reference to the Pledge and Security Agreement in the Transaction Documents shall be deemed to be a reference to the Pledge and Security Agreement, as amended by this Agreement and each reference in the Pledge and Security Agreement to “this Agreement,” “hereunder,” “hereof,” “herein,” or words of like import shall mean and be a reference to the Pledge and Security Agreement as amended hereby, and this Agreement and the Pledge and Security Agreement shall be read together and construed as a single instrument.

(b) Except as amended by this Agreement, the Pledge and Security Agreement shall remain in full force and effect in accordance with its respective terms.

(c) The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Collateral Agent, the Grantor or the Holders under the Pledge and Security Agreement or any of the Transaction Documents, nor constitute a waiver or amendment of any other provision of the Pledge and Security Agreement or any of the Transaction Documents or for any purpose except as expressly set forth herein.

(d) Nothing in this Agreement or in connection with the transactions contemplated by this Agreement or otherwise shall be construed, directly or indirectly, by implication or otherwise to impair the validity, enforceability, priority, perfection or other attributes of the security interest granted pursuant to the Pledge and Security Agreement.

4. Effectiveness.

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The amendment of the Pledge and Security Agreement pursuant to this Agreement shall become effective on the date (the “Effective Date”) when all of the following conditions are satisfied:

(a) The Collateral Agent shall have received Acknowledgement and Consents, in the form attached hereto as Exhibit A, from the Majority Holders; and

(b) On the Effective Date the Effective Time under all of the Amendment Agreements shall have occurred.

5. Miscellaneous.

5.1 Waiver and Amendments; Successors and Assigns.

The provisions of Section 14 of the Pledge and Security Agreement shall be applicable to this Agreement as if this Agreement were the “Agreement” referred to in Section 14 of the Pledge and Security Agreement.

5.2 Counterparts.

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

5.3 Titles and Subtitles.

The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

5.4 Notices.

Any notice required or permitted under this Agreement shall be given as provided in the Pledge and Security Agreement.

5.5 Severability.

If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

5.6 Entire Agreement.

This Agreement and the other Amendment Transaction Documents and other documents contemplated hereby and thereby constitute the entire agreement among the parties hereof with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter hereof and thereof.

5.7 Further Assurances.

The parties shall execute and deliver all such further instruments and documents and take all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.

5.8 Applicable Law.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to principles of conflicts of laws, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted under the Pledge and Security Agreement, as amended by this Agreement.

7

5.9 Counterparts; Execution.

This Agreement may be executed in any number of counterparts and by the parties hereto on separate counterparts, but all the counterparts taken together shall be deemed to constitute one and the same instrument. This Agreement, once executed by a party, may be delivered to the other party hereto by electronic or telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

5.10 Construction.

The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

[Signature Pages Follow]

8

IN WITNESS WHEREOF, the Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers or other representatives thereunto duly authorized as of the date first above written.

EMAGIN CORPORATION
By:	/s/
	Name:
	Title:

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent
	ALEXANDRA INVESTMENT MANAGEMENT, LLC,  as Investment Advisor
By:	/s/

9

EXHIBIT A

ACKNOWLEDGEMENT AND CONSENT

To: ALEXANDRA GLOBAL MASTER FUND LTD.,

As Collateral Agent

c/o Alexandra Investment Management, LLC

767 Third Avenue, 39th Floor

New York, New York 10017

Re: eMagin Corporation

Reference is made to the Pledge and Security Agreement, dated as of July 21, 2006 (as amended, supplemented or otherwise modified from time to time, the “Pledge and Security Agreement”) by and between eMagin Corporation, a Delaware corporation (the “Grantor”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders. Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Pledge and Security Agreement.

The Grantor has requested that the Holders consent to an Amendment to the Pledge and Security Agreement on the terms described in that certain Amendment No. 1 to the Pledge and Security Agreement (“Amendment No. 1 to Pledge and Security Agreement”), the form of which is attached hereto.

Pursuant to Section 14 of the Pledge and Security Agreement, the undersigned Holder hereby consents to the terms of Amendment No. 1 to Pledge and Security Agreement and authorizes the Collateral Agent to execute and deliver Amendment No. 1 to Pledge and Security Agreement on its behalf.

		Very truly yours,
Dated as of July 23, 2007	NAME OF HOLDER:
	By:	/s/
		Name:
		Title:

10

Annex V

AMENDMENT NO. 1 TO LOCKBOX AGREEMENT

THIS AMENDMENT NO. 1 TO LOCKBOX AGREEMENT, dated as of July 23, 2007 (this “Agreement”), by and between EMAGIN CORPORATION, a Delaware corporation (the “Company”), and ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), amends the LOCKBOX AGREEMENT, dated as of July 21, 2006 (the “Lockbox Agreement”), made bythe Company to the Collateral Agent.

W I T N E S S E T H:

WHEREAS, the Company and the Collateral Agent are parties to the Lockbox Agreement;

WHEREAS, the Company and the Collateral Agent wish to amend the Lockbox Agreement as provided in this Agreement; and

NOW THEREFORE, in consideration of the premises and the mutual covenants made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions. 

1.1 As used in this Agreement, the terms “Agreement”, “Company”, “Collateral Agent” and “Lockbox Agreement” shall have the respective meanings assigned to such terms in the introductory paragraph of this Agreement.

1.2 Capitalized terms used in this Agreement and not defined in this Agreement shall have the respective meanings provided in the Lockbox Agreement.

1.3 All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement.

1.4 The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Amended Lockbox Agreement” means the Lockbox Agreement, as amended by this Agreement.

“Amended Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Company upon amendment and restatement of the Notes.

1

“Amended Patent and Trademark Security Agreement” means the Patent and Trademark Security Agreement dated as of July 21, 2006, by and between the Company and the Collateral Agent, as amended by Amendment No. 1 to Patent and Trademark Security Agreement, dated as of July 23, 2007, by and between the Company and the Collateral Agent.

“Amended Pledge and Security Agreement” means the Pledge and Security Agreement, dated as of July 21, 2006, by and between the Company and the Collateral Agent, as amended by Amendment No. 1 to the Pledge and Security Agreement, dated as of July 23, 2007 by and between the Company and the Collateral Agent.

“Amendment Agreements” means the several Amendment Agreements, dated as of July 23, 2007 by and between the Company and the Holders.

“Amendment Transaction Documents” means the Amended Notes, the Amended Warrants, the Certificate Designations, the Amended Patent and Trademark Security Agreement, the Amended Pledge and Security Agreement, the Amended Lockbox Agreementand the other agreements, instruments and documents contemplated hereby and thereby.

“Certificate of Designations” means the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Company as filed with the Secretary of State of the State of Delaware.

“Effective Date” shall have the meaning provided in Section 4.

“Effective Time” shall have the meaning provided in the Amendment Agreements.

“Holders” means with respect to any time prior to the Effective Time on the Effective Date the holders of Notes and with respect to any time after the Effective Time on the Effective Date, the holders from time to time of any Amended Notes or shares of Series A Preferred Stock.

“Series A Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock, par value $0.001 per share, of the Company.

2. Amendments.

2.1 Amendments to Lockbox Agreement. Upon the terms and subject to the conditions of this Agreement, the Lockbox Agreement is hereby amended as follows:

(a) Amendment of Certain Definitions. Section 1(a) of the Lockbox Agreement shall be amended by deleting the terms “Additional Note Purchase Agreement”, “Event of Default”, “Holder”, “Note Purchase Agreements”, “Majority Holders”, “Notes” and “Transaction Documents” and the accompanying definitions thereof and substituting in lieu thereof in their respective alphabetical order the following:

2

“Additional Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, as amended on March 28, 2007, by and between the Company and Stillwater LLC, as amended by the Amendment Agreement, pursuant to which the Company issued the Additional Note.

“Event of Default” means:

(1) the failure by the Company to perform in any material respect any obligation of the Company under this Agreement as and when required by this Agreement; or

(2) the failure by the Company to pay the Optional Redemption Price or the Mandatory Redemption Price; or

(3) the breach by the Company of any other material covenant or other term or condition of the Certificate of Designations; or

(4) any representation or warranty made by the Company pursuant to this Agreement shall have been untrue in any material respect when made or deemed to have been made; or

(5) the failure by the Company to perform in any material respect any obligation of the Company under the Lockbox Agreement as and when required by the Lockbox Agreement;

(6) any representation or warranty made by the Company pursuant to the Lockbox Agreement shall have been untrue in any material respect when made or deemed to have been made;

(7) any Event of Default, as that term is defined in any of the Notes.

“Holder” means any Buyer or any holder from time to time of any Note or any Preferred Shares.

“Majority Holders” means at any time (i) such of the holders of Notes who hold Notes which, based on the outstanding principal amounts thereof, represent a majority of the aggregate outstanding principal amount of the Notes at such time, and (ii) such of the holders of Preferred Shares which shares constitute a majority of the outstanding Preferred Shares at such time.

“Note Purchase Agreements” means the several Note Purchase Agreements, dated as of July 21, 2006, by and between the Company and the respective Buyer party thereto, as amended by the Amendment Agreement, pursuant to which the Company issued the Notes, including, without limitation, the Additional Note Purchase Agreement.

3

“Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 issued by the Company upon amendment and restatement of the Company’s 6% Senior Secured Convertible Notes due 2007-2008, as amended, originally issued pursuant to the Note Purchase Agreements, including, without limitation, the Additional Note.

(b) Additional Defined Terms.Section 1(a) of the Lockbox Agreement shall be amended by adding new defined terms and definitions thereof, in the places constituting their respective alphabetical orders, as follows:

“Amendment Agreement” means the several Amendment Agreements, dated as of July 23, 2007, by and between the Company and the Holders.

“Certificate of Designations” means the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Company as filed with the Secretary of State of the State of Delaware.

“Mandatory Redemption Price” shall have the meaning assigned to such term in the Certificate of Designations.

“Optional Redemption Price” shall have the meaning assigned to such term in the Certificate of Designations.

“Preferred Shares” means shares of Series A Senior Secured Convertible Preferred Stock issued by the Company.

3. Effect of Amendment; Confirmation.

(a) From and after the Effective Date, the rights and obligations of the Company, the Collateral Agent and the Holders under the Lockbox Agreement and the Transaction Documents and all other agreements, documents and instruments contemplated hereby and thereby shall apply with full force and effect to the Lockbox Agreement, as amended by this Agreement, and each reference to the Lockbox Agreement in the Transaction Documents shall be deemed to be a reference to the Lockbox Agreement, as amended by this Agreement and each reference in the Lockbox Agreement to “this Agreement,” “hereunder,” “hereof,” “herein,” or words of like import shall mean and be a reference to the Lockbox Agreement as amended hereby, and this Agreement and the Lockbox Agreement shall be read together and construed as a single instrument.

(b) Except as amended by this Agreement, the Lockbox Agreement shall remain in full force and effect in accordance with its respective terms.

(c) The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Collateral Agent, the Company or the Holders under the Lockbox Agreement or any of the Transaction Documents, nor constitute a waiver or amendment of any other provision of the Lockbox Agreement or any of the Transaction Documents or for any purpose except as expressly set forth herein.

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(d) Nothing in this Agreement or in connection with the transactions contemplated by this Agreement or otherwise shall be construed, directly or indirectly, by implication or otherwise to impair the validity, enforceability, priority, perfection or other attributes of the security interest granted pursuant to the Lockbox Agreement.

4. Effectiveness.

The amendment of the Lockbox Agreement pursuant to this Agreement shall become effective on the date (the “Effective Date”) when all of the following conditions are satisfied:

(a) The Collateral Agent shall have received Acknowledgement and Consents, in the form attached hereto as Exhibit A, from the Majority Holders; and

(b) On the Effective Date the Effective Time under all of the Amendment Agreements shall have occurred.

5. Miscellaneous.

5.1 Waiver and Amendments; Successors and Assigns.

The provisions of Section 15 of the Lockbox Agreement shall be applicable to this Agreement as if this Agreement were the “Agreement” referred to in Section 15 of the Lockbox Agreement.

5.2 Counterparts.

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

5.3 Titles and Subtitles.

The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

5.4 Notices.

Any notice required or permitted under this Agreement shall be given as provided in the Lockbox Agreement.

5.5 Severability.

If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

5.6 Entire Agreement.

This Agreement and the other Amendment Transaction Documents and other documents contemplated hereby and thereby constitute the entire agreement among the parties hereof with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter hereof and thereof.

5

5.7 Further Assurances.

The parties shall execute and deliver all such further instruments and documents and take all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.

5.8 Applicable Law.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to principles of conflicts of laws, except to the extent that under the New York Uniform Commercial Code the laws of another jurisdiction govern matters of perfection and the effect of perfection or non-perfection of any security interest granted under the Lockbox Agreement, as amended by this Agreement.

5.9 Counterparts; Execution.

This Agreement may be executed in any number of counterparts and by the parties hereto on separate counterparts, but all the counterparts taken together shall be deemed to constitute one and the same instrument. This Agreement, once executed by a party, may be delivered to the other party hereto by electronic or telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

5.10 Construction.

The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

[Signature Pages Follow]

6

IN WITNESS WHEREOF, the Company and the Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers or other representatives thereunto duly authorized as of the date first above written.

EMAGIN CORPORATION
By:	/s/
	Name: Title:

ALEXANDRA GLOBAL MASTER FUND LTD., as Collateral Agent By: ALEXANDRA INVESTMENT MANAGEMENT, LLC, as Investment Advisor
By:	/s/
	Name: Title:

7

EXHIBIT A

ACKNOWLEDGEMENT AND CONSENT

To: ALEXANDRA GLOBAL MASTER FUND LTD.,

As Collateral Agent

c/o Alexandra Investment Management, LLC

767 Third Avenue, 39th Floor

New York, New York 10017

Re: eMagin Corporation

Reference is made to the Lockbox Agreement, dated as of July 21, 2006 (as amended, supplemented or otherwise modified from time to time, the “Lockbox Agreement”) by and between eMagin Corporation, a Delaware corporation (the “Company”), to Alexandra Global Master Fund Ltd., a British Virgin Islands international business company, as collateral agent (in such capacity, the “Collateral Agent”) on behalf of the Holders. Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Lockbox Agreement.

The Company has requested that the Holders consent to an Amendment to the Lockbox Agreement on the terms described in that certain Amendment No. 1 to the Lockbox Agreement (“Amendment No. 1 to Lockbox Agreement”), the form of which is attached hereto.

Pursuant to Section 15 of the Lockbox Agreement, the undersigned Holder hereby consents to the terms of Amendment No. 1 to Lockbox Agreement and authorizes the Collateral Agent to execute and deliver Amendment No. 1 to Lockbox Agreement on its behalf.

	Very truly yours, NAME OF HOLDER: ______________________________
Dated as of July 23, 2007	By:	/s/
		Name: Title:

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Annex VI

EMAGIN CORPORATION

CERTIFICATE OF DESIGNATIONS OF

SERIES A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

(Pursuant to Section 151 of the General Corporation

Law of the State of Delaware)

eMagin Corporation, a Delaware corporation (the “Corporation”), in accordance with the provisions of Section 103 of the General Corporation Law of the State of Delaware (the “DGCL”), DOES HEREBY CERTIFY: 

That pursuant to authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, as amended, of the Corporation, the Board of Directors of the Corporation, [at a meeting duly called and held on] [by unanimous written consent dated] July __, 2007 adopted a resolution providing for the creation of a series of the Corporation's Preferred Stock, $.001 par value, which series is designated as “Series A Convertible Preferred Stock,” which resolution is as follows:

RESOLVED, that pursuant to authority vested in the Board of Directors by the Certificate of Incorporation, as amended, of the Corporation, the Board of Directors does hereby provide for the creation of a series of Preferred Stock, $.001 par value (hereinafter called the “Preferred Stock”), of the Corporation, and to the extent that the voting powers and the designations, preferences and relative, participating, optional or other special rights thereof and the qualifications, limitations or restrictions of such rights have not been set forth in the Certificate of Incorporation, as amended, of the Corporation, does hereby fix the same as follows:

SERIES A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

Section 1. Definitions. (a) All the agreements or instruments defined in this Certificate of Designations shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Certificate of Designations.

(b) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Accrual Amount” means with respect to any share of Series A Convertible Preferred Stock on any date the amount of all accrued but unpaid dividends on such share from the Issuance Date to the date of determination.

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“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject Person; for purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.

“Aggregation Parties” shall have the meaning set forth in Section 10(g).

“Amendment Agreements” means the several Amendment Agreements, dated as of July 23, 2007, by and between the Corporation and the holders of Notes.

“AMEX” means the American Stock Exchange, Inc.

“Average Market Price” for any date means the arithmetic average of the Market Price for each of the Trading Days during the applicable Measurement Period.

“Board of Directors” or “Board” means the Board of Directors of the Corporation.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Corporation to have been duly adopted by the Board of Directors, or duly authorized committee thereof (to the extent permitted by applicable law), and to be in full force and effect on the date of such certification, and delivered to the Holders.

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

“Collateral” shall have the meaning provided in the Security Agreements or in either of them.

“Collateral Agent” means the collateral agent under the Security Agreements, or its successors.

“Common Stock” includes the Common Stock, $.001 par value, of the Corporation as authorized on the date hereof, and any other securities into which or for which the Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise and any stock (other than Common Stock) and other securities of the Corporation or any other Person which any Holder at any time shall be entitled to receive, or shall have received, on the exercise of conversion rights of the Series A Convertible Preferred Stock, in lieu of or in addition to Common Stock.

“Common Stock Equivalent”means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security convertible into, exchangeable for, or otherwise entitling the holder thereof to acquire, shares of Common Stock or any warrant, option, subscription or purchase right with respect to any such convertible, exchangeable or other security.

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“Computed Market Price” shall mean the arithmetic average of the daily VWAPs for each of the three Trading Days immediately preceding the applicable Measurement Date (such VWAPs being appropriately and equitably adjusted for any stock splits, stock dividends, recapitalizations and the like occurring or for which the record date occurs during such three Trading Days).

“Conversion Date” means the date on which a Conversion Notice is given by a Holder, whether by mail, courier, personal service, telephone line facsimile transmission or other means, as provided in Section 10(b).

“Conversion Notice” means a written notice, duly signed by or on behalf of a Holder substantially in the form set forth in Section 14(a).

“Conversion Price” means the “Conversion Price” of the Notes in effect on the Issuance Date; provided, however, that the Conversion Price shall be subject to further adjustment as provided in Section 10.

“Converted Market Price” means, for any share of Series A Convertible Preferred Stock as of any date of determination, an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which would, at the time of such determination, be issuable on conversion in accordance with Section 10(a) of one share of Series A Convertible Preferred Stock if a Conversion Notice were given by the holder of such share of Series A Convertible Preferred Stock on the date of such determination (determined without regard to any limitation on conversion based on beneficial ownership contained in Section 10(g)) times (y) the Average Market Price of the Common Stock during the Measurement Period for the date of such determination.

“Corporation Notice” means a Corporation Notice substantially in the form set forth in Section 14(c).

“Current Fair Market Value” when used with respect to the Common Stock as of a specified date means with respect to each share of Common Stock the average of the closing prices of the Common Stock sold on all securities exchanges (including the OTCBB, the NYSE, the AMEX, the Nasdaq and the Nasdaq Capital Market) on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of regular trading such day, or, if on such day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on such day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the Pink Sheets, LLC, or any similar successor organization, in each such case averaged over a period of five Trading Days consisting of the day as of which the Current Fair Market Value of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day. If on the date for which Current Fair Market Value is to be determined the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the Current Fair Market Value of Common Stock shall be the greater of (i) the highest price per share of Common Stock at which the Corporation has sold shares of Common Stock or Common Stock Equivalents during the 365 days prior to the date of such determination and (ii) the highest price per share which the Corporation could then obtain from a willing buyer (not an employee or director of the Corporation at the time of determination) for shares of Common Stock sold by the Corporation, from authorized but unissued shares, as determined in good faith by the Board of Directors.

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“Current Market Price”shall mean the arithmetic average of the daily Market Prices per share of Common Stock for the five consecutive Trading Days immediately prior to the date in question; provided, however, that (1) if the “ex” date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 10(c)(1), (2), (3), (4), (5), (6) or (7), occurs during such five consecutive Trading Days, the Market Price for each Trading Day prior to the “ex” date for such other event shall be adjusted by multiplying such Market Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the “ex” date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 10(c)(1), (2), (3), (4), (5), (6) or (7), occurs on or after the “ex” date for the issuance or distribution requiring such computation and prior to the day in question, the Market Price for each Trading Day on and after the “ex” date for such other event shall be adjusted by multiplying such Market Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the “ex” date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Market Price for each Trading Day on or after such “ex” date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 10(c)(4) or (6), whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such “ex” date. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to Section 10(c), such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of Section 10(c) and to avoid unjust or inequitable results as determined in good faith by the Board of Directors.

“Designated Person” means any of Mr. John Atherly, Mr. Gary Jones and Ms. Susan Jones.

“DTC” shall have the meaning provided in Section 10(b)(2).

“Eligible Bank” means a corporation organized or existing under the laws of the United States or any other state, having combined capital and surplus of at least $100 million and subject to supervision by federal or state authority and which has a branch located in New York, New York.

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“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Excluded Shares” shall have the meaning provided in Section 10(g).

“Expiration Time” shall have the meaning provided in Section 10(c)(6).

“FAST” shall have the meaning provided in Section 10(b)(2).

“Fundamental Change”means

(a) Any consolidation or merger of the Corporation or any Subsidiary with or into another entity (other than a merger or consolidation of a Subsidiary into the Corporation or a wholly-owned Subsidiary in connection with which no change in outstanding Common Stock occurs) where the stockholders of the Corporation immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction; or the sale of all or substantially all of the assets of the Corporation and the Subsidiaries in a single transaction or a series of related transactions; or

(b) The occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, will be) listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices; or

(c) The acquisition by a Person or entity or group of Persons or entities acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Corporation representing 50% or more of the combined voting power of the outstanding voting securities of the Corporation ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, provided, however, that (1) an acquisition by a group of unrelated and unaffiliated Persons comprised solely of newly issued equity securities of the Corporation which issuance results in the pro rata dilution of the equity interests of the Persons who are holders of Common Stock immediately prior to such acquisition and for which no consideration is paid to or for the benefit of any holders of Common Stock or the Affiliates of such holders of Common Stock and (2) the issuance of shares of Common Stock upon conversion, exercise or exchange of Common Stock Equivalents outstanding as of the date hereof (including shares issuable upon conversion of the Notes or exercise of the Warrants) in accordance with the terms of such Common Stock Equivalents in effect on the date hereof, shall not constitute a Fundamental Change.

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“Generally Accepted Accounting Principles” for any person means the generally accepted accounting principles and practices applied by such person from time to time in the preparation of its audited financial statements.

“Holder” means at any time with respect to any share of Series A Convertible Preferred Stock the Person shown as the holder of record of such share of Series A Convertible Preferred Stock on the records of the Corporation relating to the Series A Convertible Preferred Stock which records are maintained in accordance with applicable law.

“Holder Notice” means a Holder Notice substantially in the form set forth in Section 14(d).

“Indebtedness” means, when used with respect to any Person, without duplication:

(1) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person for borrowed money (including obligations of such Person in respect of overdrafts, foreign exchange contracts, currency exchange agreements, currency purchase or similar agreements, Interest Rate Protection Agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes or other instruments for the payment of money, or incurred in connection with the acquisition of any property, services or assets (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof), other than any account payable or other accrued current liability or obligation to trade creditors incurred in the ordinary course of business in connection with the obtaining of materials or services;

(2) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees, bankers’ acceptances, surety bonds, performance bonds or other guaranty of contractual performance;

(3) all obligations and liabilities (contingent or otherwise) in respect of (a) leases of such Person required, in conformity with Generally Accepted Accounting Principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person and (b) any lease or related documents (including a purchase agreement) in connection with the lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the landlord and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase the leased property;

(4) all direct or indirect guaranties or similar agreements by such Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness, obligations or liabilities of another Person of the kind described in clauses (1) through (3);

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(5) any indebtedness or other obligations described in clauses (1) through (4) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall be payable by or shall have been assumed by such Person; and

(6) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (1) through (5).

“Interest Rate Protection Agreement” means, with respect to any Person, any interest rate swap agreement, interest rate cap or collar agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates, as in effect from time to time.

“Issuance Date” means the first date of original issuance of any shares of Series A Convertible Preferred Stock.

“Junior Dividend Stock” means, collectively, the Common Stock and any other class or series of capital stock of the Corporation ranking junior as to dividends to the Series A Convertible Preferred Stock.

“Junior Liquidation Stock” means the Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series A Convertible Preferred Stock.

“Lien” means any mortgage, lien, pledge, security interest or other charge or encumbrance, including, without limitation, the lien or retained security title of a conditional vendor.

“Liquidation Preference” means, for each share of Series A Convertible Preferred Stock, the sum of (i) an amount equal to the Accrual Amount thereon to the date of final distribution to such holders and (ii) $1,000.00.

“Majority Holders” means with respect to any time prior to the Issuance Date, the Majority Noteholders, and with respect to any time on or after the Issuance Date, the holders of shares of Series A Convertible Preferred Stock which shares constitute a majority of the outstanding shares of Series A Convertible Preferred Stock.

“Majority Noteholders” means at any time such of the holders of the Notes who hold Notes which, based on the outstanding principal amounts thereof, represent a majority of the aggregate outstanding principal amount of the Notes at such time.

“Mandatory Redemption Date” means December 21, 2008.

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“Mandatory Redemption Notice” means a Mandatory Redemption Notice substantially in the form set forth in Section 14(b).

“Mandatory Redemption Price” means an amount in cash equal to the sum of (A) the Stated Value plus (B) an amount equal to the Accrual Amount plus (C) an amount equal to accrued and unpaid interest, if any, on cash dividends in arrears on such share of Series A Convertible Preferred Stock to the Mandatory Redemption Date.

“Market Price” with respect to any security on any day shall mean the closing price of such security on such day on the Nasdaq, the Nasdaq Capital Market, the NYSE, the AMEX or the OTCBB, as applicable, or, if such security is not listed or admitted to trading on the Nasdaq, the Nasdaq Capital Market, the NYSE, the AMEX or the OTCBB, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, in any such case as reported by Bloomberg, L.P. (or if such source ceases to be available, comparable source selected by the Holder and acceptable to the Corporation in its reasonable judgment) or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question, as reported by Pink Sheets, LLC, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any NYSE member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution.

“Measurement Date” for any sale, transfer or disposition (but not including the cancellation or expiration) of Common Stock or Common Stock Equivalents by a Designated Person means the date that is three Trading Days after the earlier of (i) the date such Designated Person files a Form 4 with the SEC with respect to such sale, transfer or disposition and (ii) the date such Designated Person is required to file a Form 4 with the SEC with respect to such sale, transfer or disposition; provided, however, that if such Designated Person is not required, or is no longer required, to file a Form 4 with respect to such sale, transfer or disposition, the Measurement Date shall be the date that is five Trading Days after the date of such sale, transfer or disposition.

“Measurement Period” means, with respect to any date, the period of ten consecutive Trading Days ending on the Trading Day prior to such date.

“Nasdaq” means the Nasdaq Global Market.

“Newly Issued Shares” shall have the meaning provided in Section 10(c)(6).

“1933 Act” means the Securities Act of 1933, as amended.

“Notes” means the Amended and Restated 8% Senior Secured Convertible Notes due 2008 of the Corporation.

“Note Purchase Agreement” means the Note Purchase Agreement, dated as of July 21, 2006, by and between the Corporation and the original holders of the Notes, as amended by the Amendment Agreement.

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“NYSE” means the New York Stock Exchange, Inc.

“Optional Redemption Event” means any one of the following events:

(1) The Common Stock ceases to be traded on the OTCBB and is not listed for trading on any of the Nasdaq, the Nasdaq Capital Market, the NYSE, the Pink Sheets, LLC or any similar organization;

(2) The Corporation shall (A) default in the timely performance of the obligation to issue shares of Common Stock upon conversion of shares of Series A Convertible Preferred Stock as and when required by Section 10 or (B) fail or default in the timely performance of any material obligation (other than as specifically set forth elsewhere in this definition) to a holder of shares of Series A Convertible Preferred Stock under the terms of this Certificate of Designations or under any other agreement or document entered into in connection with the issuance of shares of Series A Convertible Preferred Stock, as such instruments may be amended from time to time; provided, however, that (i) with respect to the first two occurrences of an event described in clause (A) above, each of such events shall be an Optional Redemption Event only if such default shall have continued for a period of five Trading Days after notice thereof is given to the Corporation by any holder of shares of Series A Convertible Preferred Stock and (ii) an event described in clause (B) above shall be an Optional Redemption Event only if such failure or default shall have continued for a period of 10 days after notice thereof is given to the Corporation by any holder of shares of Series A Convertible Preferred Stock;

(2) Any Fundamental Change;

(3) Any material representation or warranty of the Corporation made herein or in any other Transaction Document shall be false or misleading in any material respect when made or deemed made;

(4) The inability of a Holder for 20 Trading Days (whether or not consecutive) during any period of 365 consecutive days occurring on or after the SEC Effective Date to sell shares of Common Stock issued or issuable upon conversion of shares of Series A Preferred Stock or exercise of the Warrants pursuant to the Registration Statement (1) by reason of the requirements of the 1933 Act, the 1934 Act or any of the rules or regulations under either thereof or (2) due to the Registration Statement containing any untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading or other failure of the Registration Statement to comply with the rules and regulations of the SEC other than by reason of a review by the SEC staff of the Registration Statement or a post effective amendment to the Registration Statement excluding any such inability to sell that results from an untrue statement of a material fact in such Registration Statement or omission to state a material fact required to be stated in such Registration Statement in order to make the statements therein not misleading, which misstatement or omission was made by such Holder in written information it furnished to the Corporation specifically for inclusion in such Registration Statement which such information was substantially relied upon by the Corporation in preparation of the Registration Statement or any amendment or supplement thereto, unless the Corporation shall have failed timely to amend or supplement such Registration Statement after such Holder shall have corrected such misstatement or omission; or

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(9) An Event of Default (as defined in the Notes) shall have occurred.

“Optional Redemption Price” for each share of Series A Convertible Preferred Stock means an amount in cash equal to the greater of (x) the sum of (A) the Stated Value plus (B) an amount equal to the Accrual Amount plus (C) an amount equal to accrued and unpaid interest, if any, on cash dividends in arrears on such share of Series A Convertible Preferred Stock to the applicable Optional Redemption Date and (y) the Converted Market Price.

“OTCBB” means the Over-The-Counter Bulletin Board.

“Parity Dividend Stock” means any class or series of the Corporation's capital stock ranking, as to dividends, on a parity with the Series A Convertible Preferred Stock.

“Parity Liquidation Stock” means any class or series of the Corporation's capital stock having parity as to liquidation rights with the Series A Convertible Preferred Stock.

“Patent and Trademark Security Agreement” means the Patent and Trademark Security Agreement, dated as of July 21, 2006, by and between the Corporation and the Collateral Agent, as amended by Amendment No. 1 to Patent and Trademark Security Agreement, dated as of July 23, 2007, by and between the Corporation and the Collateral Agent.

“Permitted Designated Person Sale” means a sale by John Atherly, occurring on or after January 1, 2007, of shares of Common Stock in an amount not to exceed 50,000 shares in the aggregate in any fiscal quarter of the Corporation (such number of shares subject to equitable adjustments for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the Issuance Date).

“Permitted Indebtedness” shall have the meaning provided in the Notes.

“Permitted Liens” shall have the meaning provided in the Notes.

“Person” means any natural person, partnership, corporation, limited liability company, trust, incorporated organization, unincorporated association or similar entity or any government, governmental agency or political subdivision.

“Pledge and Security Agreement” means the Pledge and Security Agreement, dated as of July 21, 2006, by and between the Corporation and the Collateral Agent, as amended by Amendment No. 1 to Pledge and Security Agreement, dated as of July 23, 2007, by and between the Corporation and the Collateral Agent.

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“Principal Market” means, at any time, whichever of the Nasdaq, Nasdaq Capital Market, AMEX, NYSE, OTCBB or such other U.S. market or exchange is at the time the principal market on which the Common Stock is then listed for trading.

“Record Date”shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

“Registration Statement” shall have the meaning provided in the Note Purchase Agreement.

“Restricted Ownership Percentage” shall have the meaning provided in Section 10(g).

“SEC” means the United States Securities and Exchange Commission.

“SEC Effective Date” means the date the Registration Statement is first declared effective by the SEC.

“Security Agreement” means either or both of the Pledge and Security Agreement and the Patent and Trademark Security Agreement.

“Senior Dividend Stock” means any class or series of capital stock of the Corporation ranking senior as to dividends to the Series A Convertible Preferred Stock.

“Senior Liquidation Stock” means any class or series of capital stock of the Corporation ranking senior as to liquidation rights to the Series A Convertible Preferred Stock.

“Series A Convertible Preferred Stock” means the Series A Senior Secured Convertible Preferred Stock, $.001 par value, of the Corporation.

“Stated Value” means $1,000 per share of Series A Convertible Preferred Stock.

“Subsidiary” means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Corporation.

“Tender Offer” means a tender offer or exchange offer.

“Trading Day” means at any time a day on which the Principal Market is open for general trading of securities.

“Transaction Documents” shall have the meaning provided in the Amendment Agreements.

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“Transfer Agent” Continental Stock Transfer & Trust Company, or its successor as transfer agent and registrar for the Common Stock.

“Trigger Event” shall have the meaning provided in Section 10(c)(4).

“VWAP” of any security on any Trading Day means the volume-weighted average price of such security on such Trading Day on the Principal Market, as reported by Bloomberg Financial, L.P., based on a Trading Day from 9:30 a.m., Eastern Time, to 4:00 p.m., Eastern Time, using the AQR Function, for such Trading Day; provided, however, that during any period the VWAP is being determined, the VWAP shall be subject to equitable adjustments from time to time on terms consistent with Section 10(c) and otherwise reasonably acceptable to the Majority Holders for (i) stock splits, (ii) stock dividends, (iii) combinations, (iv) capital reorganizations, (v) issuance to all holders of Common Stock of rights or warrants to purchase shares of Common Stock, (vi) distribution by the Corporation to all holders of Common Stock of evidences of indebtedness of the Corporation or cash (other than regular quarterly cash dividends), and (vii) similar events relating to the Common Stock, in each case which occur, or with respect to which the “ex” date occurs, during such period.

“Warrants” means the Common Stock Purchase Warrants issued by the Corporation in connection with the issuance of the Notes.

Section 2. Designation and Amount. The shares of such series shall be designated as “Series A Senior Secured Convertible Preferred Stock”, par value $.001 per share, and the maximum number of shares constituting the Series A Convertible Preferred Stock shall be 3,000, and shall not be subject to increase. The Corporation shall not issue any shares of Series A Convertible Preferred Stock other than pursuant to the Notes, unless such issuance shall have been approved by the Majority Holders. Any shares of Series A Convertible Preferred Stock which are redeemed by the Corporation and retired and any shares of Series A Convertible Preferred Stock which are converted in accordance with Section 10 shall be restored to the status of authorized, unissued and undesignated shares of the Corporation's class of Preferred Stock and shall not be subject to issuance, and may not thereafter be outstanding, as shares of Series A Convertible Preferred Stock.

Section 3. Series A Convertible Preferred Stock Capital. The amount to be represented in stated capital at all times for each share of Series A Convertible Preferred Stock shall be an amount equal to the sum of $1,000.

Section 4. Rank. Subject to Section 12(b), all Series A Convertible Preferred Stock shall rank (i) senior to the Common Stock, now or hereafter issued, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, (ii) senior to any additional series of the class of Preferred Stock which series the Board of Directors may from time to time authorize, both as to payment of dividends and as to distributions of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, and (iii) senior to any additional class of preferred stock (or series of preferred stock of such class) which the Board of Directors or the stockholders may from time to time authorize in accordance herewith.

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Section 5. Distributions. (a) The holders of shares of Series A Convertible Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors out of funds legally available for such purpose, dividends at the rate of $80.00 per annum per share, and no more, which shall be fully cumulative, shall accrue without interest (except as otherwise provided herein as to dividends in arrears) from the date of original issuance of each share of Series A Convertible Preferred Stock and shall be payable in cash on the Mandatory Redemption Date. The amount of such dividends shall be included in the Accrual Amount for each share. The amount of dividends payable for the initial dividend period and any period shorter than a full yearly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. No dividends or other distributions, other than the dividends payable solely in shares of any Junior Dividend Stock, shall be paid or set apart for payment on any shares of Junior Dividend Stock, and no purchase, redemption, or other acquisition shall be made by the Corporation of any shares of Junior Dividend Stock, unless and until all accrued and unpaid cash dividends on the Series A Convertible Preferred Stock and interest on dividends in arrears at the rate specified herein shall have been paid or declared and set apart for payment.

Any references to “distribution” contained in this Section 5 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary.

(b) Neither the Corporation nor any Subsidiary shall redeem, repurchase or otherwise acquire in any one transaction or series of related transactions any shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock if the number of shares so repurchased, redeemed or otherwise acquired in such transaction or series of related transactions is more than either (x) 5% of the number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions or (y) 1% of the number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions if such transaction or series of related transactions is with any one Person or group of affiliated Persons, unless (x) at the time of such redemption, repurchase or acquisition the Registration Statement is effective and available for use by the holders of shares of Series A Preferred Stock named as selling stockholders in the Registration Statement, (y) no Optional Redemption Event shall have occurred and (z) the Corporation or such subsidiary offers to purchase for cash from each holder of shares of Series A Convertible Preferred Stock at the time of such redemption, repurchase or acquisition the same percentage of such holder's shares of Series A Convertible Preferred Stock as the percentage of the number of outstanding shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to be so redeemed, repurchased or acquired at a purchase price per share of Series A Convertible Preferred Stock equal to the greater of (i) (A) the Stated Value plus (B) an amount equal to the Accrual Amount plus (C) an amount equal to any accrued and unpaid interest on cash dividends in arrearsand (ii) the Converted Market Price on the date of purchase pursuant to this Section 5(b).

(c) Neither the Corporation nor any Subsidiary shall (1) make any Tender Offer for outstanding shares of Common Stock, unless the Corporation contemporaneously therewith makes an offer, or (2) enter into an agreement regarding such a Tender Offer for outstanding shares of Common Stock by any person other than the Corporation or any Subsidiary, unless such person agrees with the Corporation to make an offer, in either such case to each holder of outstanding shares of Series A Convertible Preferred Stock to purchase for cash at the time of purchase in such Tender Offer the same percentage of shares of Series A Convertible Preferred Stock held by such holder as the percentage of outstanding shares of Common Stock actually purchased in such Tender Offer at a price per share of Series A Convertible Preferred Stock equal to the greater of (i) (A) the Stated Value plus (B) an amount equal to the Accrual Amount plus (C) an amount equal to any accrued and unpaid interest on cash dividends in arrears and (ii) the Converted Market Price on the date of purchase pursuant to this Section 5(c).

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Section 6. Liquidation Preference. In the event of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets constitute stated capital or surplus of any nature, an amount per share of Series A Convertible Preferred Stock equal to the Liquidation Preference, and no more, before any payment shall be made or any assets distributed to the holders of Junior Liquidation Stock; provided, however,that such rights shall accrue to the holders of Series A Convertible Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preference of the holders of Senior Liquidation Stock are fully met. After the liquidation preferences of the Senior Liquidation Stock are fully met, the entire assets of the Corporation available for distribution shall be distributed ratably among the holders of the Series A Convertible Preferred Stock and any Parity Liquidation Stock in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the liquidation price of the shares of the Series A Convertible Preferred Stock and the Parity Liquidation Stock, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities, or other property in and of itself will be considered a liquidation, dissolution or winding up of the Corporation.

Section 7. Mandatory Redemption. (a) On the Mandatory Redemption Date, the Corporation shall redeem all outstanding shares of Series A Convertible Preferred Stock. The Corporation shall give a Mandatory Redemption Notice to the Holders not less than 30 or more than 35 Business Days prior to the Mandatory Redemption Date. Any failure or defect in the giving of the Mandatory Redemption Notice shall not affect the Corporation's obligation to redeem the shares of Series A Convertible Preferred Stock pursuant to this Section 7.

(b) On the Mandatory Redemption Date (or such later date as a particular Holder shall surrender to the Corporation the certificate(s) for the shares of Series A Convertible Preferred Stock redeemed), the Corporation shall pay to or upon the order of each Holder by wire transfer of immediately available funds to such account as shall be specified for such purpose by such Holder an amount equal to the Mandatory Redemption Price of all of such Holder's shares of Series A Convertible Preferred Stock to be redeemed that are outstanding on the Mandatory Redemption Date. A Holder of such shares of Series A Convertible Preferred Stock shall not be entitled to payment of the Mandatory Redemption Price of such shares of Series A Convertible Preferred Stock until such Holder shall have surrendered the certificate(s) for such shares of Series A Convertible Preferred Stock to the Corporation or, in the case of the loss, theft or destruction of any such certificate, given indemnity in accordance with Section 15(b).

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(c) The Corporation shall not be entitled to give the Mandatory Redemption Notice with respect to, or to redeem, any shares of Series A Convertible Preferred Stock with respect to which a Conversion Notice has been given on a Conversion Date which is on or prior to the date on which the Mandatory Redemption Notice is given. If a Mandatory Redemption Notice has been given, thereafter the proceedings for such redemption shall not affect the rights of the Holders to convert in accordance with Section 10 any shares of Series A Convertible Preferred Stock called for redemption at any time prior to the Mandatory Redemption Date. If on the applicable Mandatory Redemption Date the Corporation fails to pay the Mandatory Redemption Price of any outstanding shares of Series A Convertible Preferred Stock to be redeemed in full to such Holder or to deposit the same with an Eligible Bank in accordance with Section 15(c), such Holder shall be entitled to convert in accordance with Section 10 the shares of Series A Convertible Preferred Stock of such Holder so called for redemption at any time after the Mandatory Redemption Date and prior to the date on which the Corporation pays the Mandatory Redemption Price in full to such Holder for all shares of Series A Convertible Preferred Stock to be redeemed from such Holder (together with any amount due to such Holder pursuant to Section 15(d)) or so deposits the same (together with any amount due to such Holder pursuant to Section 15(d)) and gives notice to such Holder of such deposit and in the case of any such conversion of any share of Series A Convertible Preferred Stock, upon delivery to the converting Holder of the shares of Common Stock issuable upon such conversion the Corporation shall have no further liability in respect of the Mandatory Redemption Price of such share of Series A Convertible Preferred Stock other than payment of the amount payable pursuant to Section 15(d) in respect of the period from the Mandatory Redemption Date to the Conversion Date for such conversion.

Section 8. No Sinking Fund. The shares of Series A Convertible Preferred Stock shall not be entitled to the benefits of any sinking fund for the redemption or repurchase of shares of Series A Convertible Preferred Stock.

Section 9. No Redemption at the Option of the Corporation. The Corporation shall not have any right to redeem any shares of Series A Convertible Preferred Stock at the option of the Corporation.

Section 10. Conversion.

(a) Conversion at Option of Holder. Subject to and upon compliance with the provisions of this Section 10, each Holder shall have the right, at such Holder's option, at any time (except that if such Holder shall have exercised redemption rights under Section 11, such conversion right shall terminate with respect to the shares of Series A Convertible Preferred Stock to be redeemed at the close of business on the last Trading Day prior to the date the Corporation pays or deposits in accordance with Section 15(c) the applicable Optional Redemption Price, unless the Corporation shall default in payment due upon redemption of any share of Series A Convertible Preferred Stock) to convert the outstanding shares of Series A Convertible Preferred Stock held by such Holder, or from time to time any portion of such shares, plus an amount equal to accrued and unpaid dividends on such shares, into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing (1) the sum of (x) the aggregate Stated Value of all shares of Series A Convertible Preferred Stock being converted by such Holder on the same Conversion Date plus (y) accrued and unpaid dividends on the shares of Series A Convertible Preferred Stock being converted to the applicable Conversion Date by (2) the Conversion Price in effect on the applicable Conversion Date, by giving a Conversion Notice in the manner provided in Section 10(b); provided, however, that, if at any time any share of Series A Convertible Preferred Stock is converted in whole or in part pursuant to this Section 10(a), the Corporation does not have available for issuance upon such conversion as authorized and unissued shares or in its treasury at least the number of shares of Common Stock required to be issued pursuant hereto, then, at the election of such Holder made by notice from such Holder to the Corporation, such share of Series A Convertible Preferred Stock, to the extent that sufficient shares of Common Stock are not then available for issuance upon conversion, shall be converted into the right to receive from the Corporation, in lieu of the shares of Common Stock into which such share of Series A Convertible Preferred Stock would otherwise be converted and which the Corporation is unable to issue, payment in an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which the Corporation is unable to issue times (y) the arithmetic average of the Market Price of the Common Stock during the five consecutive Trading Days immediately prior to the applicable Conversion Date. Any such payment shall, for all purposes of this Certificate of Designations, be deemed to be satisfaction in full of the Corporation's obligation to issue upon such conversion shares of Common Stock that are not then available for issuance upon such conversion. A Holder is not entitled to any rights of a holder of Common Stock until such Holder has converted one or more shares of Series A Convertible Preferred Stock to Common Stock, and only to the extent any such shares of Series A Convertible Preferred Stock are deemed to have been converted to Common Stock under this Section 10. For purposes of Sections 10(e) and 10(f), whenever a provision references the shares of Common Stock into which any share of Series A Convertible Preferred Stock is convertible or the shares of Common Stock issuable upon conversion of any share of Series A Convertible Preferred Stock or words of similar import, any determination required by such provision shall be made as if a sufficient number of shares of Common Stock were then available for issuance upon conversion in full of all outstanding shares of Series A Convertible Preferred Stock.

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(b) Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends. (1) In order to exercise the conversion privilege with respect to the Series A Convertible Preferred Stock, a Holder shall give a Conversion Notice (or such other notice which is acceptable to the Corporation) to the Corporation and the Transfer Agent or to the office or agency designated by the Corporation for such purpose by notice to the Holders. A Conversion Notice may be given by telephone line facsimile transmission to the numbers set forth on the form of Conversion Notice.

(2) As promptly as practicable, but in no event later than three Trading Days, after a Conversion Notice is given, the Corporation shall issue and shall deliver to the Holder giving such Conversion Notice or such Holder's designee the number of full shares of Common Stock issuable upon such conversion of shares of Series A Convertible Preferred Stock in accordance with the provisions of this Section 10 and make payment by wire transfer of immediately available funds to such account as shall be specified from time to time by such Holder or deliver a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 10(b)(6) and, if applicable, any cash payment required pursuant to the proviso to the first sentence of Section 10(a) (which payment, if any, shall be paid no later than three Trading Days after the applicable Conversion Date). In lieu of delivering physical certificates for the shares of Common Stock issuable upon any conversion of shares of Series A Convertible Preferred Stock, provided the Corporation 's transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder, the Corporation shall use commercially reasonable efforts to cause its transfer agent electronically to transmit such shares of Common Stock issuable upon conversion to the Holder (or its designee), by crediting the account of the Holder’s (or such designee’s) broker with DTC through its Deposit Withdrawal Agent Commission system (provided that the same time periods herein as for stock certificates shall apply).

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(3) Each conversion of shares of Series A Convertible Preferred Stock shall be deemed to have been effected on the applicable Conversion Date, and the person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on such Conversion Date the holder of record of the shares represented thereby; provided, however, that if a Conversion Date is a date on which the stock transfer books of the Corporation shall be closed such conversion shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the applicable Conversion Date. Upon conversion of any shares of Series A Convertible Preferred Stock, the accrued and unpaid dividends on such shares of Series A Convertible Preferred Stock to (but excluding) the applicable Conversion Date shall be deemed to be paid to the Holder through receipt of such number of shares of Common Stock issued upon conversion of such shares of Series A Convertible Preferred Stock as shall have an aggregate Current Fair Market Value on the Trading Day immediately preceding such Conversion Date equal to the amount of such accrued and unpaid dividends.

(4) A Conversion Notice shall be deemed for all purposes to be in proper form absent timely notice from the Corporation to the Holder of manifest error therein. The Corporation shall notify the Holder of any claim by the Corporation of manifest error in a Conversion Notice within two Trading Days after the Holder gives such Conversion Notice (which notice from the Corporation shall specify all defects in the Conversion Notice) and no such claim of error shall limit or delay performance of the Corporation 's obligation to issue upon such conversion the number of shares of Common Stock which are not in dispute. Time shall be of the essence in the giving of any such notice by the Corporation. Any Conversion Notice containing any such defect shall nonetheless be effective on the date given if the Holder promptly undertakes to correct all such defects. The Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock or other securities or property on conversion of shares of Series A Convertible Preferred Stock in a name other than that of such Holder, and the Corporation shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. The converting Holder shall be responsible for the amount of any withholding tax payable in connection with any conversion of shares of Series A Convertible Preferred Stock.

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(5) (A) If a Holder shall have given a Conversion Notice in accordance with the terms of this Certificate of Designations, the Corporation's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of any action or inaction by such Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Corporation to any Holder, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by any Holder or any other person of any obligation to the Corporation or any violation or alleged violation of law by any Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to such Holder in connection with such conversion; provided, however, that nothing herein shall limit or prejudice the right of the Corporation to pursue any such claim in any other manner permitted by applicable law. The occurrence of an event which requires an adjustment of the Conversion Price as contemplated by Section 10(c) shall in no way restrict or delay the right of any Holder to receive certificates for Common Stock upon conversion of shares of Series A Convertible Preferred Stock and the Corporation shall use its best efforts to implement such adjustment on terms reasonably acceptable to the Holder within two Trading Days after such occurrence.

(B) If the Corporation fails to issue and deliver the shares of Common Stock to a converting Holder in connection with a particular conversion of shares of Series A Convertible Preferred Stock within five Trading Days after such Holder gives the Conversion Notice for such conversion, in addition to any other liabilities the Corporation may have hereunder and under applicable law (i) the Corporation shall pay or reimburse such Holder on demand for all out-of-pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by the Holder as a result of such failure, (ii) if as a result of such failure such Holder shall suffer any direct damages or liabilities from such failure (including, without limitation, margin interest and the cost of purchasing securities to cover a sale (whether by such Holder or such Holder's securities broker) or borrowing of shares of Common Stock by such Holder for purposes of settling any trade involving a sale of shares of Common Stock made by such Holder during the period beginning on the Issuance Date and ending on the date the Corporation delivers or causes to be delivered to such Holder such shares of Common Stock, then the Corporation shall upon demand of such Holder pay to the Holder an amount equal to the actual direct, out-of-pocket damages and liabilities suffered by such Holder by reason thereof which such Holder documents to the reasonable satisfaction of the Corporation, and (iii) the Holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing), given at any time prior to delivery to such Holder of the shares of Common Stock issuable in connection with such exercise of the Holder's conversion right, rescind such exercise and the Conversion Notice relating thereto, in which case such Holder shall thereafter be entitled to convert, in accordance with this Section 10 that portion of such shares of Series A Convertible Preferred Stock as to which such exercise is so rescinded. Notwithstanding the foregoing, the Corporation shall not be liable to such Holder under clause (ii) of the immediately preceding sentence to the extent the failure of the Corporation to deliver or to cause to be delivered such shares of Common Stock results from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, or any similar event outside the control of the Corporation (it being understood that the action or failure to act of the Transfer Agent shall not be deemed an event outside the control of the Corporation except to the extent resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, the bankruptcy, liquidation or reorganization of the Transfer Agent under any bankruptcy, insolvency or other similar law or any similar event outside the control of the Transfer Agent). A converting Holder shall notify the Corporation in writing (or by telephone conversation, confirmed in writing) as promptly as practicable following the third Trading Day after such Holder gives a Conversion Notice if such Holder becomes aware that such shares of Common Stock so issuable have not been received as provided herein, but any failure so to give such notice shall not affect the Holder's rights under this Certificate of Designations or otherwise. If the Holder shall have exercised the conversion right in any particular instance and either (1) the Corporation shall notify the Holder on or after the date the Holder gives such Conversion Notice that the shares of Common Stock issuable upon such conversion might not be delivered within three Trading Days after the date the Holder gives such Conversion Notice or (2) the Holder learns after the date which is three Trading Days after the date the Holder gives such Conversion Notice that the Holder has not received such shares of Common Stock, then, without releasing the Corporation of its obligations with respect thereto, from and after the Trading Day next succeeding the earlier of the events described in the preceding clauses (1) and (2) of this sentence the Holder shall make reasonable efforts not to sell shares of Common Stock in anticipation of receipt of such shares of Common Stock in a manner which is likely to increase materially the liability of the Corporation under clause (B) of the first sentence of this Section 10(b)(5).

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(6) No fractional shares of Common Stock shall be issued upon conversion of any shares of Series A Convertible Preferred Stock but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of such conversion, the Corporation shall pay lawful money of the United States of America for such fractional share, based on a value of one share of Common Stock being equal to the Market Price of the Common Stock on the applicable Conversion Date.

(c) Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time by the Corporation as follows:

(1) Adjustments for Certain Dividends and Distributions in Common Stock. In case the Corporation shall on or after the Issuance Date pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following such Record Date. If any dividend or distribution of the type described in this Section 10(c)(1) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared.

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(2) Weighted Adjustments for Certain Issuances of Rights or Warrants. In case the Corporation shall on or after the Issuance Date issue rights or warrants (other than any rights or warrants referred to in Section 10(c)(4)) to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price on the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the applicable Record Date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and the denominator shall be the number of shares of Common Stock outstanding on the close of business on such Record Date plus the total number of additional shares of Common Stock so offered for subscription or purchase. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such Record Date had not been fixed. In determining whether any rights or warrants entitle the holder to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors.

(3) Adjustments for Certain Subdivisions of the Common Stock. In case the outstanding shares of Common Stock shall on or after the Issuance Date be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the earlier of the day following the day upon which such subdivision becomes effective and the day on which “ex-” trading of the Common Stock begins with respect to such subdivision shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the earlier of the day following the day upon which such combination becomes effective and the day on which “ex-” trading of the Common Stock with respect to such combination begins shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the earlier of the day following the day upon which such subdivision or combination becomes effective and the day on which “ex-” trading of the Common Stock begins with respect to such subdivision or combination.

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(4) Adjustments for Certain Dividends and Distributions. In case the Corporation shall on or after the Issuance Date, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Corporation (other than any dividends or distributions to which Section 10(c)(1) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants referred to in Section 10(c)(2) and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation to which Section 10(d) applies) (the foregoing hereinafter in this Section 10(c)(4) called the “Securities”)), then, in each such case, subject to the second paragraph of this Section 10(c)(4), the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following such Record Date; provided, however, that in the event the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that the Holders shall have the right to receive upon conversion of shares of Series A Convertible Preferred Stock the amount of Securities such Holder would have received had such Holder converted such Holder's shares of Series A Convertible Preferred Stock immediately prior to such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 10(c)(4) by reference to the actual or when issued trading market for any Securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price to the extent possible.

Rights or warrants distributed by the Corporation to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Corporation's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (a “Trigger Event”): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall not be deemed to have been distributed for purposes of this Section 10(c) (and no adjustment to the Conversion Price under this Section 10(c) will be required) until the occurrence of the earliest Trigger Event. If any such rights or warrants, including any such existing rights or warrants distributed prior to the Issuance Date are subject to Trigger Events, upon the satisfaction of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such Trigger Event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants without exercise by the holder thereof) (so that, by way of illustration and not limitation, the dates of issuance of any such rights shall be deemed to be the dates on which such rights become exercisable to purchase capital stock of the Corporation, and not the date on which such rights may be issued, or may become evidenced by separate certificates, if such rights are not then so exercisable). In addition, in the event of any distribution of rights or warrants, or any Trigger Event with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 10(c) was made (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.

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For purposes of this Section 10(c)(4) and Sections 10(c)(1) and (2), any dividend or distribution to which this Section 10(c)(4) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock to which Section 10(c)(2) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which Section 10(c)(2) applies (and any Conversion Price reduction required by this Section 10(c)(4) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 10(c)(1) and (2) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as “the date fixed for the determination of stockholders entitled to receive such dividend or other distribution”, “Record Date fixed for such determination” and “Record Date” within the meaning of Section 10(c)(1) and as “the date fixed for the determination of stockholders entitled to receive such rights or warrants”, “the Record Date fixed for the determination of the stockholders entitled to receive such rights or warrants” and “such Record Date” within the meaning of Section 10(c)(2) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed “outstanding at the close of business on the Record Date fixed for such determination” within the meaning of Section 10(c)(1).

(5) Adjustments for Certain Cash Dividends. In case the Corporation shall on or after the Issuance Date, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed upon a merger or consolidation to which Section 10(d) applies or as part of a distribution referred to in Section 10(c)(4)) in an aggregate amount that, combined with (1) the aggregate amount of any other such distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 10(c)(5) has been made, and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution) of consideration payable in respect of any Tender Offer by the Corporation or any Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution, exceeds 1% of the product of (x) the Current Market Price on the Record Date with respect to such distribution times (y) the number of shares of Common Stock outstanding on such date, then, and in each such case, immediately after the close of business on such date, unless the Corporation elects to reserve such cash for distribution to the Holders upon the conversion of shares of Series A Convertible Preferred Stock (and shall have made adequate provision) so that the Holders will receive upon such conversion, in addition to the shares of Common Stock to which the Holders are entitled, the amount of cash which the Holders would have received if the Holders had, immediately prior to the Record Date for such distribution of cash, converted their shares of Series A Convertible Preferred Stock into Common Stock, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on such Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 1% and (y) the number of shares of Common Stock outstanding on such Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such Record Date; provided, however, that in the event the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on such Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that the Holders shall have the right to receive upon conversion of shares of Series A Convertible Preferred Stock the amount of cash the Holders would have received had the Holders converted all of their shares of Series A Convertible Preferred Stock immediately prior to such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared.

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(6) Adjustments for Certain Issuances of Newly Issued Shares. (A) In case at any time on or before after the Issuance Date the Corporation issues shares of Common Stock or Common Stock Equivalents (collectively, the “Newly Issued Shares”) at a price per share at which the Corporation sells such shares of Common Stock or the price per share at which the holders of such Common Stock Equivalents are entitled to acquire shares of Common Stock upon conversion or exercise thereof which is less than the Conversion Price in effect at the time of such issuance, then following such issuance the Conversion Price shall be reduced to the lowest price per share at which such shares of Common Stock are issued or at which such Common Stock Equivalents may be exercised, if the same is lower than the Conversion Price in effect immediately prior to such issuance.

(B) Notwithstanding the foregoing, no adjustment shall be made under this Section 10(c)(6) by reason of:

(i) the issuance by the Corporation of shares of Common Stock pro rata to all holders of the Common Stock so long as (i) any adjustment to the Conversion Price that is required by Section 10(c)(1) is made and (ii) the Corporation shall have given notice of such issuance thereof to the Holders pursuant to Section 10(f);

(ii) the issuance by the Corporation of the Notes or the Warrants or the issuance by the Corporation of shares of Common Stock upon conversion of the Notes or upon exercise of the Warrants in accordance with the terms thereof;

(iii) the issuance by the Corporation of shares of Series A Preferred Stock upon conversion of the Notes or Other Notes or shares of Common Stock upon conversion of the Series A Preferred Stock in accordance with the terms hereof and thereof;

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(iv) the issuance by the Corporation of Newly Issued Shares upon grant or exercise of options for employees, directors and consultants under the 2003 Stock Option Plan, 2004 Non-Employee Stock Compensation Plan and the 2005 Employee Stock Purchase Plan or any other stock compensation plan that has been duly adopted by the Board of Directors and duly approved by the Corporation’s stockholders;

(v) the issuance by the Corporation of Newly Issued Shares upon conversion of Common Stock Equivalents that are outstanding on the Issuance Date in accordance with the terms of such Common Stock Equivalents in effect on the Issuance Date; or

(vi) the issuance by the Corporation for cash of Newly Issued Shares in connection with a strategic alliance, collaboration, joint venture, partnership or similar arrangement of the Corporation with another Person which strategic alliance, collaboration, joint venture, partnership or similar arrangement relates to the Corporation’s business as conducted immediately prior thereto and which Person is engaged in a business similar or related to the business of the Corporation so long as (x) the price per Newly Issued Share is not less than 85 percent of the Current Fair Market Value of the Common Stock on the date of issuance of such Newly Issued Shares and (y) the consideration other than cash which the Corporation receives in connection with such strategic alliance, collaboration, joint venture, partnership or similar arrangement has a value, as determined by the Board of Directors in its reasonable judgment and set forth in a Board Resolution, at least equal to the amount by which (i) the product of the Newly Issued Shares so issued times the Current Fair Market Value of the Common Stock on the date such Newly issued Shares are issued exceeds (ii) the aggregate cash consideration received by the Corporation for such Newly Issued Shares at the time of issuance thereof and (z) such issuance has been duly approved by the Board of Directors as set forth in a Board Resolution.

(7) Adjustment in Connection Sales by a Designated Person. (A) If at any time on or after the Issuance Date any Designated Person, directly or indirectly, sells, transfers or disposes of shares of Common Stock or Common Stock Equivalents other than a Permitted Designated Person Sale and on the Measurement Date for such sale, transfer or disposition the Conversion Price in effect on such Measurement Date is greater than the Computed Market Price on such Measurement Date, then, subject to the next succeeding sentence, the Conversion Price shall be reduced to such Computed Market Price, such adjustment to become effective immediately after the opening of business on the day following the Measurement Date.

(B) The Corporation shall instruct the Transfer Agent to inform the Corporation immediately upon the sale, transfer or disposition of any shares of Common Stock or Common Stock Equivalents by any Designated Person. The Corporation shall inform the Holders immediately by phone and electronic transmission upon becoming aware of any sale, transfer or disposition of any shares of Common Stock or Common Stock Equivalents by any Designated Person and will follow up with formal written notice to the Holders pursuant to Section 15(a).

(8) Additional Reductions in Conversion Price. The Corporation may make such reductions in the Conversion Price, in addition to those required by Sections 10(c)(1), (2), (3), (4), (5), (6) or (7) as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.

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(9) De Minimus Adjustments. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 10(c)(9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 10 shall be made by the Corporation and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. No adjustment need be made for a change in the par value of the Common Stock or from par value to no par value or from no par value to par value.

(10) Corporation Notice of Adjustments. Whenever the Conversion Price is adjusted as herein provided, the Corporation shall promptly, but in no event later than five days thereafter, give notice to the Holders setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, but which statement shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.

(11) Effectiveness of Certain Adjustments. In any case in which this Section 10(c) provides that an adjustment shall become effective immediately after a Record Date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the Holders in connection with any conversion of shares of Series A Convertible Preferred Stock after such Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such Holders any amount in cash in lieu of any fraction pursuant to Section 10(b)(6).

(12) Outstanding Shares. For purposes of this Section 10(c), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Corporation will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation other than dividends or distributions payable only in shares of Common Stock.

(d) Effect of Reclassification, Consolidation, Merger or Sale. (1) If any of the following events occur, namely:

(A) any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination),

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(B) any consolidation, merger or combination of the Corporation with another corporation or other entity as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or

(C) any sale or conveyance of the properties and assets of the Corporation as, or substantially as, an entirety to any other corporation or other entity as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock,

then the Corporation or the successor or purchasing corporation or other entity, as the case may be, shall prior to such transaction:

(w) amend its certificate of incorporation or comparable instrument to provide that the shares of Series A Convertible Preferred Stock shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon conversion of shares of Series A Convertible Preferred Stock immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder's rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (providedthat, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 10(d) the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares);

(x) the Conversion Price shall, upon such consolidation, merger, statutory exchange, combination, sale or conveyance, thereafter be the lower of (1) the Conversion Price then in effect and (2) the price paid or deemed to have been paid for one share of Common Stock in such consolidation, merger, statutory exchange, combination, sale or conveyance (subject to further adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 10),

(y) in the case of any such successor or purchasing Person, such Person shall execute with each Holder a written agreement providing that upon such consolidation, merger, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Corporation for the performance of all of the Corporation's obligations under this Certificate of Designations and the other Transaction Documents; and

(z) if registration or qualification is required under the 1933 Act or applicable state law for the public resale by the Holder of such shares of stock and other securities so issuable upon conversion of shares of Series A Convertible Preferred Stock, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, combination or sale.

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Such amendment shall provide for, among other things, adjustments in the conversion rights of the Holders which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 10. If, in the case of any such reclassification, change, consolidation, merger, combination, sale or conveyance, the stock or other securities and assets receivable thereupon by a holder of shares of Common Stock includes shares of stock or other securities and assets of a corporation or other entity other than the successor or purchasing corporation or other entity, as the case may be, in such reclassification, change, consolidation, merger, combination, sale or conveyance, then such other corporation or other entity shall also so amend its certificate of incorporation or comparable instrumentand enter into such written agreement with each Holder. The certificate(s) of incorporation or comparable instruments so amended and such written agreement(s) of each such corporation or other entity shall also contain such additional provisions to protect the interests of the Holders as the Board of Directors shall reasonably consider necessary by reason of the foregoing, including the provisions providing for the redemption rights set forth in Section 11.

(2) The provisions of this Section 10(d) shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

(3) If this Section 10(d) applies to any event or occurrence, Section 10(c) shall not apply.

(e) Reservation of Shares; Shares to Be Fully Paid; Listing of Common Stock.

(1) The Corporation shall reserve and keep available, free from preemptive rights, out of its authorized but unissued shares of Common Stock or shares of Common Stock held in treasury, solely for issuance upon conversion of the Series A Convertible Preferred Stock, sufficient shares to provide for the conversion of the Series A Convertible Preferred Stock from time to time as shares of Series A Convertible Preferred Stock are converted.

(2) Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Series A Convertible Preferred Stock, the Corporation shall take all corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue shares of such Common Stock at such adjusted Conversion Price.

(3) The Corporation covenants that all shares of Common Stock issued upon conversion of the Series A Convertible Preferred Stock will be fully paid and non-assessable by the Corporation and free from all taxes, liens and charges with respect to the issue thereof.

(4) The Corporation covenants that if any shares of Common Stock to be provided for the purpose of conversion of the Series A Convertible Preferred Stock require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Corporation will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be.

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(5) The Corporation covenants that, so long as the Common Stock shall be listed on the AMEX, the NYSE or any other national securities exchange or Nasdaq or Nasdaq Capital Market or the OTCBB, the Corporation shall obtain and, so long as the Common Stock shall be so listed on such market or exchange, maintain approval for listing thereon of all Common Stock issuable upon conversion of the Series A Convertible Preferred Stock.

(f) Notice to Holders Prior to Certain Actions.In case on or after the Issuance Date:

(1) the Corporation shall declare a dividend (or any other distribution) on the Common Stock (other than in cash out of retained earnings); or

(2) the Corporation shall authorize the granting to the holders of the Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or

(3) the Board of Directors shall authorize any reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or any consolidation or merger or other business combination transaction to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or the sale or transfer of all or substantially all of the assets of the Corporation; or

(4) there shall be pending the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation;

the Corporation shall give the holders of record of the Series A Convertible Preferred Stock, as promptly as possible but in any event at least ten Trading Days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record who shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up shall be determined. Such notice shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. In the case of any such action of which the Corporation gives such notice to the holders of record of the Series A Convertible Preferred Stock or is required to give such notice to such holders, such holders shall be entitled to give a Conversion Notice which is contingent on the completion of such action.

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(g) Restricted Ownership Percentage Limitation.(1) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired at any time by a Holder upon conversion of shares of Series A Convertible Preferred Stock shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Notes and the Warrants) that have limitations on the holder's right to convert, exercise or purchase similar to the limitation set forth herein (the “Excluded Shares”)), together with all shares of Common Stock beneficially owned at such time (other than by virtue of the ownership of Excluded Shares) by Persons whose beneficial ownership of Common Stock would be aggregated with the beneficial ownership by such Holder for purposes of determining whether a group exists or for purposes of determining the Holder’s beneficial ownership (the “Aggregation Parties”), in either such case for purposes of Section 13(d) of the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as the same is made applicable to Section 16 of the 1934 Act and the rules promulgated thereunder), would result in beneficial ownership by such Holder or such group of more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may be modified by a particular Holder as provided herein, the “Restricted Ownership Percentage”). A Holder shall have the right (x) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Corporation in the event and only to the extent that Section 16 of the 1934 Act or the rules promulgated thereunder (or any successor statute or rules) is changed to reduce the beneficial ownership percentage threshold thereunder to a percentage less than 9.9% and (y) at any time and from time to time, to increase its Restricted Ownership Percentage unless such Holder shall have, by written instrument delivered to the Corporation, irrevocably waived its rights to so increase its Restricted Ownership Percentage. If at any time the limits in this Section 10(g) make the shares of Series A Convertible Preferred Stock held by any Holder inconvertible in whole or in part, the Corporation shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter upon conversion of such shares of Series A Convertible Preferred Stock as and when shares of Common Stock may be issued in compliance with such restrictions.

(2) For purposes of this Section 10(g), in determining the number of outstanding shares of Common Stock at any time a Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Corporation's then most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a public announcement by the Corporation that is later than any such filing referred to in the preceding clause (1) or (3) any other notice by the Corporation or its transfer agent setting forth the number of shares of Common Stock outstanding and knowledge the Holder may have about the number of shares of Common Stock issued upon conversions or exercises of Series A Convertible Preferred Stock or other Common Stock Equivalents by any Person, including such Holder, which are not reflected in the information referred to in the preceding clauses (1) through (3). Upon the written request of any Holder, the Corporation shall within three Business Days confirm in writing to such Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of Common Stock Equivalents, including the shares of Series A Convertible Preferred Stock, the Notes and the Warrants, by the Holder or its affiliates, in each such case subsequent to, the date as of which such number of outstanding shares of Common Stock was reported.

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Section 11. Redemption at Option of Holders.

(a) Redemption Right. If an Optional Redemption Event occurs, then, in addition to any other right or remedy of any holder of shares of Series A Convertible Preferred Stock, each holder of shares of Series A Convertible Preferred Stock shall have the right, at such holder's option, to require the Corporation to redeem all of such holder's shares of Series A Convertible Preferred Stock, or any portion thereof, on the date that is five Business Days after the date such holder gives the Corporation a Holder Notice with respect to such Optional Redemption Event at any time while any of such holder's shares of Series A Convertible Preferred Stock are outstanding, at a price equal to the Optional Redemption Price.

(b) Notices; Method of Exercising Optional Redemption Rights, Etc. (1) On or before the fifth Business Day after the occurrence of an Optional Redemption Event, the Corporation shall give to each Holder a Corporation Notice of the occurrence of such Optional Redemption Event and of the redemption right set forth herein arising as a result thereof. The Corporation Notice shall set forth:

(i) the date by which the optional redemption right must be exercised, and

(ii) a description of the procedure (set forth in this Section 11) which each such Holder must follow to exercise such Holder's optional redemption right,

and shall be accompanied by a Corporation Certificate with the information set forth therein being provided as of a date not more than 5 Business Days prior to the date the Corporation gives such Corporation Notice. No failure of the Corporation to give such notice or defect therein shall limit the right of any holder of shares of Series A Convertible Preferred Stock to exercise the optional redemption right or affect the validity of the proceedings for the redemption of such holder's shares of Series A Convertible Preferred Stock.

(2) To exercise its optional redemption right, a Holder shall deliver to the Corporation on or before the 30th day after the notice required by Section 11(b)(1) is given to such Holder (or if no such notice has been given by the Corporation to such Holder, within 40 days after such Holder first learns of such Optional Redemption Event) a Holder Notice to the Corporation. At the Corporation's option, a Holder Notice may be revoked by such Holder giving such Holder Notice by giving notice of such revocation to the Corporation at any time prior to the time the Corporation pays the Optional Redemption Price to such Holder.

(3) If a Holder shall have given a Holder Notice, on the date which is five Business Days after the date such Holder Notice is given (or such later date as such Holder surrenders such Holder's certificates for the shares of Series A Convertible Preferred Stock to be redeemed) the Corporation shall make payment in immediately available funds of the applicable Optional Redemption Price to such account as specified by such Holder in writing to the Corporation at least one Business Day prior to the applicable redemption date.

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(c) Other. (1) In connection with a redemption pursuant to this Section 11 of less than all of the shares of Series A Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three Business Days after surrender of such certificate to the Corporation, the Corporation shall issue and deliver to such Holder a replacement certificate for the shares of Series A Convertible Preferred Stock evidenced by such certificate which have not been redeemed.

(2) A Holder Notice given by a holder of shares of Series A Convertible Preferred Stock shall be deemed for all purposes to be in proper form unless the Corporation notifies such holder in writing within three Business Days after such Holder Notice has been given (which notice shall specify all defects in such Holder Notice), and any Holder Notice containing any such defect shall nonetheless be effective on the date given if such Holder promptly undertakes to correct all such defects. No such claim of error shall limit or delay performance of the Corporation's obligation to redeem all shares of Series A Convertible Preferred Stock not in dispute whether or not such Holder makes such undertaking.

(3) If on or before a particular Optional Redemption Date the Corporation shall have failed to pay in full the Optional Redemption Price for all shares of Series A Convertible Preferred Stock to be redeemed to the Holder entitled thereto or to deposit the same with an Eligible Bank in accordance with Section 15(c), then without in any way relieving the Corporation of its obligation to pay such amount in accordance herewith (except to the extent expressly provided in this Section 11(d)(3)), the Holder of any such share of Series A Convertible Preferred Stock shall continue to have the right to convert such share of Series A Convertible Preferred Stock into Common Stock in accordance with Section 10 at any time prior to the date on which the Corporation pays the Optional Redemption Price of such share of Series A Convertible Preferred Stock to such Holder (together with any amount due to such holder pursuant to Section 15(d)) or so deposits the same (together with any amount due to such Holder pursuant to Section 15(d)) and gives notice to such Holder of such deposit; provided, however, that the shares of Common Stock received by such Holder upon any such conversion in certain circumstances may be subject to restrictions on resale by such Holder arising under applicable securities laws to the extent not registered for resale by such Holder pursuant to the Registration Statement. If a Holder converts all or any portion of such Holder's shares of Series A Convertible Preferred Stock as permitted by this Section 11(d)(3), the amount of the Optional Redemption Price due to such Holder with respect to the number of shares of Series A Convertible Preferred Stock so converted shall be reduced by $1,000 for each share of Series A Convertible Preferred Stock so converted.

Section 12. Voting Rights; Certain Restrictions and Covenants.

(a) Voting Rights. The Holder of each share of Series A Convertible Preferred Stock shall be entitled to a number of votes per share at any time equal to (1) in any case in which the Series A Convertible Preferred Stock votes together with the Common Stock or any other class or series of stock of the Corporation, the number of shares of Common Stock issuable upon conversion of such share of Series A Convertible Preferred Stock at such time (determined without regard to the shares of Common Stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Series A Convertible Preferred Stock) and (2) in any case not covered by the immediately preceding clause (1), one vote per share of Series A Convertible Preferred Stock. Each Holder shall be entitled to notice of any shareholders’ meeting in accordance with the bylaws of the Corporation and shall vote with holders of Common Stock upon the election of directors and upon any other matter submitted to a vote of shareholders, except those matters required by law to be submitted to a vote of holders of Preferred Stock or Series A Convertible Preferred Stock voting separately as a class or series, and except as provided in this Certificate of Designations. Fractional votes shall not, however, be permitted.

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(b) Certificate of Incorporation; Certain Stock. The affirmative vote or consent of the Majority Holders, voting separately as a class, will be required for (1) any amendment, alteration, or repeal, whether by merger or consolidation or otherwise, of the Corporation's Certificate of Incorporation if the amendment, alteration, or repeal materially and adversely affects the powers, preferences, or special rights of the Series A Convertible Preferred Stock, (2) the creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock, (3) the redemption of or payment of dividends on, any class or series of capital stock of the Corporation or (4) any sale, lease or conveyance of all or substantially all of the assets of the Corporation, or any merger, consolidation, or business combination with any other Person or any liquidation, dissolution or winding up of the Corporation; provided, however, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any stock which is both Junior Dividend Stock and Junior Liquidation Stock shall not be deemed to affect materially and adversely such powers, preferences, or special rights and any such increase or creation and issuance may be made without any such vote by the holders of Series A Convertible Preferred Stock except as otherwise required by law; and provided further, however, that no such amendment, alteration or repeal shall (i) reduce the Optional Redemption Price or the amount payable to a Holder pursuant to Section 5, (ii) change the definition of Majority Holders, (iii) change the method of calculating the Conversion Price in a manner adverse to the Holders or reduce the number of shares of Common Stock issuable upon any conversion of shares of Series A Convertible Preferred Stock (other than any reduction in the number of shares of Common Stock so issuable pursuant to an amendment of the Certificate of Incorporation which effects a combination of the outstanding shares of Common Stock and results in an adjustment in the Conversion Price pursuant to Section 10(c)(3)), or (iv) amend, modify or repeal any provision of this Section 12(b), unless in each such case referred to in the preceding clauses (i) through (iv) such amendment, modification or repeal has been approved by the affirmative vote or written consent of all Holders, voting separately as a class.

(c) Repurchases of Series A Convertible Preferred Stock. The Corporation shall not repurchase or otherwise acquire any shares of Series A Convertible Preferred Stock (other than pursuant to Sections 7 or 11) unless the Corporation offers to repurchase or otherwise acquire simultaneously a pro rata portion of each holder's shares of Series A Convertible Preferred Stock for cash at the same price per share.

(d) Other. So long as any shares of Series A Convertible Preferred Stock are outstanding the Corporation shall comply with the following unless otherwise agreed in writing by the Majority Holders:

(1) Limitation on Certain Indebtedness. The Corporation will not itself, and will not permit any Subsidiary to, create, assume, incur, in any manner become liable in respect of, including, without limitation, by reason of any business combination transaction, or suffer to exist (all of which are referred to herein as “incur” or "incurring"), any Indebtedness other than Permitted Indebtedness.

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(2) Payment of Obligations. The Corporation will pay and discharge, and will cause each Subsidiary of the Corporation to pay and discharge, when due all their respective obligations and liabilities which are material to the Corporation and its subsidiaries taken as a whole, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings and the Corporation shall have established adequate reserves therefor on its books.

(3) Maintenance of Property; Insurance. (A) The Corporation will keep, and will cause each Subsidiary to keep, all material property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted.

(B) The Corporation will maintain, and will cause each Subsidiary to maintain, with financially sound and responsible insurance companies, insurance in at least such amounts and covering such risks as is reasonably adequate for the conduct of their respective businesses and the value of their respective properties.

(4) Conduct of Business and Maintenance of Existence. The Corporation will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as conducted by the Corporation and its operating subsidiaries at the time this Certificate of Designations is filed with the Secretary of State of the State of Delaware, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective corporate existence and their respective material rights, privileges and franchises necessary or desirable in the normal conduct of business except, in the case of any such matter other than maintenance of the Corporation’s corporate existence, where the failure to do so would not have a material adverse effect on (i) the business, properties, operations, condition (financial or other), results of operation or prospects of the Corporation and the Subsidiaries, taken as a whole, (ii) the ability of the Corporation to pay and perform its obligations under the Transaction Documents or (iii) the rights and remedies of the Holders or the Collateral Agent under or in connection with the Transaction Documents.

(5) Compliance with Laws. The Corporation will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, decisions, orders and requirements of governmental authorities and courts (including, without limitation, environmental laws) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non-compliance therewith could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Corporation and the Subsidiaries taken as a whole.

(6) Investment Company Act. The Corporation will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended, or any successor provision.

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(7) Limitations on Asset Sales, Liquidations, Etc.; Certain Matters. The Corporation shall not, and shall not permit any Subsidiary to:

(a) sell, convey or otherwise dispose of all or substantially all of its assets as an entirety or substantially as an entirety in a single transaction or in a series of related transactions; or

(b) sell one or more Subsidiaries, or permit any one or more Subsidiaries to sell their respective assets, if such sale individually or in the aggregate is material to the Corporation and the Subsidiaries taken as a whole, other than any such sale or sales which individually or in the aggregate could not reasonably be expected to have a material adverse effect on (i) the business, properties, operations, condition (financial or other), results of operation or financial prospects of the Corporation and the Subsidiaries, taken as a whole, (ii) the validity or enforceability of, or the ability of the Corporation to perform its obligations under, the Transaction Documents, or (iii) the rights and remedies of the Holders under the terms of the Transaction Documents; or

(c) liquidate, dissolve or otherwise wind up its affairs.

(8) Limitation on Liens. The Corporation will not itself, and will not permit any Subsidiary to create, assume or suffer to exist any Lien upon all or any part of its property of any character, whether owned at the date hereof or thereafter acquired, except Permitted Liens.

(9) Transactions with Affiliates. The Corporation will not, and will not permit any Subsidiary, directly or indirectly, to pay any funds to or for the account of, make any investment (whether by acquisition of stock or Indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement with, any Affiliate of the Corporation, except, on terms to the Corporation or such Subsidiary no less favorable than terms that could be obtained by the Corporation or such Subsidiary from a Person that is not an Affiliate of the Corporation, as determined in good faith by the Board of Directors.

(10) Rule 144A Information Requirement. Within the period prior to the expiration of the holding period applicable to sales of shares of Series A Convertible Preferred Stock under Rule 144(k) under the 1933 Act (or any successor provision), the Corporation shall, during any period in which it is not subject to Section 13 or 15(d) under the 1934 Act, make available to the Holders or any holder of shares of Common Stock issued upon conversion of shares of Series A Convertible Preferred Stock which continue to be Restricted Securities in connection with any sale thereof and any prospective purchaser of Series A Convertible Preferred Stock from any Holder, the information required pursuant to Rule 144A(d)(4) under the 1933 Act upon the request of such Holder and it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell the shares of Series A Convertible Preferred Stock held by it without registration under the 1933 Act within the limitation of the exemption provided by Rule 144A, as Rule 144A may be amended from time to time. Upon the request of any Holder, the Corporation will deliver to such Holder a written statement as to whether it has complied with such requirements.

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(11) Limitation on Certain Issuances. The Corporation shall not offer, sell or issue, or enter into any agreement, arrangement or understanding to offer, sell or issue, any Common Stock or Common Stock Equivalent (A) that is convertible into, exchangeable or exercisable for, or includes the right to receive additional shares of Common Stock either (x) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such Common Stock or Common Stock Equivalent, or (y) with a fixed conversion, exercise, exchange or purchase price that is subject to being reset at some future date after the initial issuance of such Common Stock or Common Stock Equivalent or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Corporation or the market for the Common Stock (but excluding customary stock split, reverse stock split, stock dividend and similar anti-dilution provisions substantially similar to those set forth in clauses (1) through (6) of Section 10(c)), or (B) pursuant to an “equity line” structure in which one or more Persons commits to provide capital to the Corporation by the purchase of securities of the Corporation from time to time, whether at specified times, times determined by the Corporation or by such Person(s) or by mutual agreement between the Corporation and such Person(s), at prices based on the market prices of the Common Stock at or near the time of each purchase, which securities are registered for sale or resale pursuant to the 1933 Act; provided, however, that nothing in this Section 12(c)(11) shall prohibit the Corporation from issuing shares of Common Stock for cash for the account of the Corporation in an offering that is underwritten on a firm commitment basis and registered with the SEC under the 1933 Act.

(12) Certain Obligations. The Corporation shall not enter into any agreement which would adversely affect the Collateral Agent's Lien on and Security Interest in the Collateral. The Corporation shall perform, and comply in all material respects with each agreement it enters into relating to the Collateral, the failure to comply with which could affect the Collateral Agent's lien on and security interest in the Collateral.

(13) Notice of Defaults. The Corporation shall notify the Holders promptly, but in any event not later than five days after the Corporation becomes aware of the fact, of any failure by the Corporation to comply with this Section 12 or Article III of the Notes.

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(14) Listing Eligibility Reporting. The Corporation shall notify the Holders from time to time within five Business Days after the Corporation first learns that it does not meet any of the applicable requirements for the continued listing of the Common Stock on the Principal Market and shall make appropriate public announcement thereof so that the content of such notice shall not constitute material non-public information for purposes of the 1934 Act.

(e) Concerning the Noteholders. The Corporation shall not take any action or engage in any transaction, or enter into any agreement, arrangement or understanding to take any action or engage in any transaction, which would constitute a Fundamental Change without the advance written consent of the Majority Noteholders. So long as any Notes are outstanding, in addition to any other consent required by the Certificate of Incorporation including this Certificate of Designations or required by law, the Corporation shall not amend, change, waive, discharge or terminate this Certificate of Designations if such amendment would adversely affect the rights of the holders of Notes unless such amendment, change, waiver, discharge or termination is consented to in writing signed by the Corporation and the Majority Noteholders.

Section 13. Outstanding Shares. For purposes of this Certificate of Designations, all authorized and issued shares of Series A Convertible Preferred Stock shall be deemed outstanding except (i) from the applicable Conversion Date, each share of Series A Convertible Preferred Stock converted into Common Stock, unless the Corporation shall default in its obligation to issue and deliver shares of Common Stock upon such conversion as and when required by Section 10; (ii) from the date of registration of transfer, all shares of Series A Convertible Preferred Stock held of record by the Corporation or any subsidiary or Affiliate of the Corporation (other than an Affiliate of the Corporation who is a natural person or any original holder of shares of Series A Convertible Preferred Stock) and (iii) from the applicable Mandatory Redemption Date or Optional Redemption Date, all shares of Series A Convertible Preferred Stock which are redeemed or repurchased, so long as in each case the Mandatory Redemption Price, the Optional Redemption Price or other repurchase price, as the case may be, of such shares of Series A Convertible Preferred Stock shall have been paid by the Corporation as and when due hereunder.

Section 14.  Forms of Notices. The forms of certain of the notices required or permitted under this Certificate of Designations shall be as provided in this Section 14 or as otherwise agreed by the Corporation and Majority Holders.

(a) Form of Notice of Conversion of Series A Convertible Preferred Stock.

36

NOTICE OF CONVERSION

OF

SERIES A SENIOR SECURED CONVERTIBLE PREFERRED STOCK

OF

EMAGIN CORPORATION

TO: eMagin Corporation

10500 N.E. 8th Street

Suite 1400

Seattle, Washington 98004

Attention: Chief Executive Officer

Facsimile No.: (425) 749-3601

(1) Pursuant to the terms of the Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”), of eMagin Corporation, a Delaware corporation (the “Corporation”), the undersigned (the “Holder”) hereby elects to convert shares of the Preferred Stock into shares of Common Stock, $.001 par value (the “Common Stock”), of the Corporation, at a Conversion Price per share of Common Stock of $, or such other securities into which the Preferred Stock is currently convertible. Capitalized terms used in this Notice and not otherwise defined herein have the respective meanings provided in the Certificate of Designations of Series A Convertible Preferred Stock.

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(2) The number of shares of Common Stock issuable upon the conversion of the shares of Preferred Stock to which this Notice relates is .

(3) Please issue certificates for the number of shares of Common Stock or other securities into which such number of shares of Preferred Stock is convertible in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:

Name	Name
Address	Address
SS or Tax ID Number	SS or Tax ID Number
Delivery Instructions for Common Stock:

(4) If the shares of Common Stock issuable upon conversion of the Preferred Stock have not been registered for resale under the 1933 Act and this Notice is given prior to the end of the Registration Period under the Note Purchase Agreement by which the Holder is bound, the Holder represents and warrants that (i) the shares of Common Stock not so registered are being acquired for the account of the Holder for investment, and not with a view to, or for resale in connection with, the public distribution thereof other than pursuant to registration under the 1933 Act or an exemption from registration under the 1933 Act, and that the Holder has no present intention of distributing or reselling the shares of Common Stock not so registered other than pursuant to registration under the 1933 Act or an exemption from registration under the 1933 Act and (ii) the Holder is an “accredited investor” as defined in Regulation D under the 1933 Act. If the provisions of Rule 144(k) under the 1933 Act are inapplicable to the Holder with respect to the Conversion Shares to which this Notice relates, the Holder further agrees that (A) the shares of Common Stock not so registered shall not be sold or transferred unless either (i) such shares first shall have been registered under the 1933 Act or (ii) the Corporation first shall have been furnished with an opinion of legal counsel reasonably satisfactory to the Corporation to the effect that such sale or transfer is exempt from the registration requirements of the 1933 Act and (B) until such shares are registered for resale under the 1933 Act, the Corporation may place a legend on the certificate(s) for the shares of Common Stock not so registered to that effect and place a stop-transfer restriction in its records relating to the shares of Common Stock not so registered, all in accordance with the Note Purchase Agreement by which the Holder is bound.

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Date
	Signature of Holder  (Must be signed exactly as name  appears on the Preferred Stock Certificate.)

 _________________________ ____________________________________

(b) Form of Mandatory Redemption Notice.

MANDATORY REDEMPTION NOTICE

(Section 7 of Certificate of Designations of

Series A Senior Secured Convertible Preferred Stock)

TO: 

(Name of Holder)

(1) Pursuant to the terms of the Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”), eMagin Corporation, a Delaware corporation (the “Corporation”), hereby notifies the above-named holder (the “Holder”) that the Corporation is redeeming shares of Preferred Stock held by the Holder in accordance with Section 7 of the Certificate of Designations of the Series A Senior Secured Convertible Preferred Stock (the “Certificate of Designations”).

(2) The Mandatory Redemption Date is December 21, 2008.

(3) The Mandatory Redemption Price per share of Preferred Stock is $_________.

(4) Upon surrender to the Corporation of the certificate(s) for the shares of Preferred Stock to be redeemed (but in no event earlier than the Mandatory Redemption Date), the Corporation will make payment of the Mandatory Redemption Price in accordance with the Certificate of Designations.

(5) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Certificate of Designations.

	EMAGIN CORPORATION
Date:	By:	/s/
		Title

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(c) Form of Corporation Notice.

CORPORATION NOTICE

(Section 11(b)(1) of Certificate of Designations of

Series A Senior Secured Convertible Preferred Stock)

TO: 

(Name of Holder)

(1) An Optional Redemption Event described in the Certificate of Designations (the “Certificate of Designations”) of Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”) of eMagin Corporation, a Delaware corporation (the “Corporation”), occurred on . As a result of such Optional Redemption Event, the above-named holder (the “Holder”) is entitled to exercise its optional redemption rights pursuant to Section 11(b)(2) of the Certificate of Designations.

(2) The Holder's optional redemption rights must be exercised on or before , .

(3) On or before the date set forth in the preceding paragraph (2), the Holder must deliver to the Corporation a Holder Notice, in the form set forth in Section 14(d) of the Certificate of Designations.

(4) In order to receive payment of the Optional Redemption Price of the shares of Preferred Stock to be redeemed, the Holder must deliver to the Corporation the certificates for the shares of Preferred Stock to be redeemed, duly endorsed for transfer to the Corporation of the shares to be redeemed.

(5) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Certificate of Designations.

	EMAGIN CORPORATION
Date:	By:	/s/
		Title

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(d) Form of Holder Notice.

HOLDER NOTICE

(Section 11(b)(2) of Certificate of Designations of

Series A Senior Secured Convertible Preferred Stock)

TO: EMAGIN CORPORATION

(1) Pursuant to the terms of the Series A Senior Secured Convertible Preferred Stock (the “Preferred Stock”) of eMagin Corporation, a Delaware corporation (the “Corporation”), the undersigned holder (the “Holder”) hereby elects to exercise its right to require redemption by the Corporation pursuant to Section 11 of the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock (the “Certificate of Designations”) of shares of Preferred Stock at an Optional Redemption Price per share in cash equal to the sum of (a) the Stated Value plus (b) an amount equal to $ of accrued and unpaid dividends (the Accrual Amount) on each share of Series A Convertible Preferred Stock to be redeemed to the Optional Redemption Date plus (c) an amount equal to accrued and unpaid interest, if any, on dividends in arrears on such share of Series A Convertible Preferred Stock to the Optional Redemption Date.

(2) The aggregate Optional Redemption Price of all shares of Preferred Stock to be redeemed from the Holder pursuant to this Notice is $.

(3) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Certificate of Designations.

	NAME OF HOLDER:
Date:	By:	/s/
		Signature of Registered Holder
		(Must be signed exactly as name appears on the stock certificate.)

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Section 15. Miscellaneous.

(a) Notices. Any notices required or permitted to be given under the terms of this Certificate of Designations shall be in writing and shall be delivered personally (which shall include telephone line facsimile transmission) or by courier and shall be deemed given upon receipt, if delivered personally or by courier (a) in the case of the Corporation, addressed to the Corporation at 10500 N.E. 8th Street, Suite 1400, Bellevue, Washington 98004, Attention: Chief Executive Officer (telephone line facsimile transmission number (425) 749-3601), or (b) in the case of any holder of shares of Series A Convertible Preferred Stock, at such holder's address or telephone line facsimile transmission number shown on the stock books maintained by the Corporation with respect to the Series A Convertible Preferred Stock or such other address as the Corporation shall have provided by notice to the holders of shares of Series A Convertible Preferred Stock in accordance with this Section or any holder of shares of Series A Convertible Preferred Stock shall have provided to the Corporation in accordance with this Section.

(b) Replacement of Certificates. Upon receipt by the Corporation of evidence reasonably satisfactory to the Corporation of the ownership of and the loss, theft, destruction or mutilation of any certificate for shares of Series A Convertible Preferred Stock and (1) in the case of loss, theft or destruction, of indemnity from the record holder of the certificate for such shares of Series A Convertible Preferred Stock reasonably satisfactory in form to the Corporation (and without the requirement to post any bond or other security if such holder has and agrees to maintain reasonably sufficient assets to support the indemnity) or (2) in the case of mutilation, upon surrender and cancellation of the certificate for such shares of Series A Convertible Preferred Stock, the Corporation will execute and deliver to such holder a new certificate for such shares of Series A Convertible Preferred Stock without charge to such holder.

(c) Payment on Redemption; Deposit of Redemption Price. If any share of Series A Convertible Preferred Stock is to be redeemed as provided in Section 7 or 11 and any notice required in connection therewith shall have been timely given as provided therein, the applicable redemption price of such share of Series A Convertible Preferred Stock to be so redeemed and with respect to which any such notice has been given shall become due and payable on the applicable redemption date. On and after such redemption date, provided that the Corporation shall have paid such redemption price to the respective Holders who are entitled thereto on or prior to the applicable redemption date or shall have deposited with an Eligible Bank on or prior to such redemption date, to be held in trust for the respective Holders entitled thereto, an amount sufficient to pay the applicable redemption price, then on such redemption date the dividends on such share of Series A Convertible Preferred Stock shall cease to accrue, and such share of Series A Convertible Preferred Stock shall be deemed not to be outstanding and the Holder thereof shall not be entitled to any rights of a Holder except to receive payment of the applicable redemption price and all other rights hereunder with respect to such share of Series A Convertible Preferred Stock shall cease. So long as the Corporation shall have so paid or deposited the full amount of the applicable redemption price on a timely basis, no Holder shall be entitled to interest on the amount so held by such Eligible Bank and, so long as the Corporation shall be in compliance in all material respects with its obligations to the Holders (including, without limitation, its obligations under the Transaction Documents), the Corporation shall be entitled to any interest paid by such Eligible Bank on the funds so deposited, subject to applicable abandoned property and escheat laws. On presentation and surrender of the certificate for such share of Series A Convertible Preferred Stock, such share shall be redeemed at the applicable redemption price.

(d) Overdue Amounts. Except as otherwise specifically provided in Section 5 with respect to dividends in arrears on the Series A Convertible Preferred Stock, whenever any amount which is due to any holder of shares of Series A Convertible Preferred Stock is not paid to such holder when due, such amount shall bear interest at the rate of 12% per annum (or such other rate as shall be the maximum rate allowable by applicable law) until paid in full.

Section 16. Collateral Security. The obligations of the Corporation under this Certificate of Designations, including, without limitation, the obligations under Sections 7 and 11 to redeem shares of Series A Convertible Preferred Stock, are secured pursuant to the Security Agreements.

[Signature Page Follows]

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IN WITNESS WHEREOF, eMagin Corporation has caused this Certificate of Designations to be signed by , its , and , its , as of the day of July __, 2007.

EMAGIN CORPORATION
By:	/s/
	Name:
	Title

43

 

Annex VII

Press Release

As previously reported in the Current Report on Form 8-K of eMagin Corporation (the “Company”) dated as of July 25, 2006, the Company entered into several Note Purchase Agreements (the “Original Purchase Agreements”) to sell to certain qualified institutional buyers and accredited investors $5,990,000 in principal amount 6% Senior Secured Convertible Notes convertible into common stock at $2.60 per share Due July 21, 2007 and January 21, 2008 (the “Notes’), together with warrants (the “Warrants”) to purchase 1,612,700 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at $3.60 per share.

As previously reported in the Current Report on Form 8-K dated April 13, 2007, the Company amended its Original Purchase Agreement with a certain qualified accredited investors to sell such investor $500,000 in Notes convertible into common stock at $.35 per share, together with Warrants to purchase 1,000,000 shares of the Company’s Common Stock at $.48 per share (the “Other Purchase Agreement”).

By way of Amendment Agreements dated July 23, 2007 (the “Amendment Agreements”) between the Company and each of the holders of the Notes (each a “Holder” and collectively, the “Holders”), the Company agreed to issue each Holder an amended and restated Note (the “Amended Notes”) in the principal amount equal to the principal amount outstanding as of July 23, 2007. The changes to the Amended Notes include the following:

· The maturity date for the outstanding Notes (totaling after conversions an aggregate of $6,020,000) has been extended to December 21, 2008;

· Liquidated damages of 1% per month related to the Company’s delisting from the American Stock Exchange will no longer accrue and the deferred interest balance of approximately $230,000 has been forgiven;

· The Company no longer has to maintain a minimum cash or cash equivalents balances of $600,000;

· The Amended Notes may not be prepaid without consent of The Holders;

· As of July 23, 2007 the annual interest rate was raised from 6% per annum to 8% per annum;

· The Amended Notes are convertible into (i) 8,407,612 shares of the Company’s common stock. The conversion price for $5,770,000 of principal was revised from $2.60 to $.75 per share and was unchanged for the remaining $250,000 of principal from the Other Purchase Agreement;

· In addition to the right to convert the Amended Notes into the Company's common stock, up to $3,010,000 of the Amended Notes can be converted into (ii) 3,010 shares of the Company’s newly formed Series A Convertible Preferred Stock (the “Preferred” or the “Preferred Stock”) at a stated value of $1,000 per share. The Preferred is convertible into common stock at the same rate as their Note, subject to adjustment as provided for in the Certificate of Designations (discussed below);

· Except for the Amended Note associated with the Other Purchase Agreement, the Amendment Agreements adjusts the exercise price of the amended Warrants from $3.60 to $1.03 per share for 1,553,468 shares of Common Stock and requires the issuance of Warrants exercisable for an additional 3,831,859 shares of Common Stock at $1.03 per share with an expiration date of July 21, 2011;

· The Amended Notes eliminate the requirement that the Company comply with certain covenants of management contained in Note. Specifically, among other things, the requirements to defer management compensation and to maintain a management committee were removed; and

· The Amended Notes and/or the Series A Convertible Preferred stock are subject to certain anti-dilution adjustment rights in the event the Company issues shares of its Common Stock or securities convertible into its Common Stock at a price per share that is less than the Conversion Price, in which case the Conversation Price shall be adjusted to such lower price.

1

Pursuant to the Amended Notes, the Company cannot enter into a transaction that constitutes a Fundamental Change without the consent of the Note Holders. A Fundamental Change includes the following:

· The consolidation or merger of the Company or any of its subsidiaries;

· The acquisition by a person or group of entities acting in concert of 50% or more of the combined voting power of the outstanding securities of the Company; and

· the occurrence of any transaction or event in which all or substantially all of the shares of the Company’s common stock is exchanged for converted into acquired for or constitutes the right to receive consideration which is not all or substantially all common stock which is listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting securities prices.

Pursuant to the Amendment Agreements, the Company is required to file a Certificate of Designations of Series A Senior Secured Convertible Preferred Stock (the “Certificate of Designations”). The Certificate of Designations designates 3,198 shares of the Company’s preferred stock as Series A Senior Secured Convertible Preferred Stock. The Preferred Stock has a stated value of $1,000. The Preferred Stock is entitled to cumulative dividends which accrue at a rate of 8% per annum, payable on the December 21, 2008. Each share of Preferred Stock has voting rights equal to (1) in any case in which the Preferred Stock votes together with the Company’s Common Stock or any other class or series of stock of the Company, the number of shares of Common Stock issuable upon conversion of such shares of Preferred Stock at such time (determined without regard to the shares of Common Stock so issuable upon such conversion in respect of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any case not covered by the immediately preceding clause one vote per share of Preferred Stock. The Certificate of Designations prohibits the Company from entering into a Fundamental Change without the consent of the Holders and contains antidilution adjustments rights that are comparable to the antidilution adjustments contained in the Amended Notes.

The amended Warrants are subject to certain anti-dilution adjustment rights in the event the Company issues shares of its Common Stock or securities convertible into its Common Stock at a price per share that is less than the Strike Price, in which case the Strike Price shall be adjusted to the lower of (1) 138% of the price at which such common stock is issued or issuable and (2) the exercise price of warrants, issued in such transaction."

Pursuant to the Amendment Agreements, the Company is required to file a registration statement with the Securities and Exchange Commission by August 31, 2007 covering the resale of 100% of the sum of (a) the number of shares issuable upon conversion of the Amended Notes and Preferred Stock, and (b) the number of shares issuable upon exercise of the Warrants.

Pursuant to the Amendment Agreement, the Company and the Collateral Agent, on behalf of the note holders, executed Amendment No. 1 to the Pledge and Security Agreement; Amendment No. 1 to Patent and Trademark Security Agreement; Amendment No. 1 to Lockbox Agreement. The Pledge and Security Agreement, Trademark Security Agreement and Lockbox Agreement were previously entered into on July 21, 2006 (collectively, the “Ancillary Agreements”). The Ancillary Agreements were amended to cover obligations that may become payable to the holders of the preferred stock and to delete certain definitions used in the Ancillary Agreements and substitute definitions of terms used in the Ancillary Agreeements.

The summary of amendment terms contained herein does not include all information included in the Amendment Agreement, the Amended Notes, the amended Warrants, the Certificate of Designations or the Ancillary Agreements and, consequently, is qualified in its entirety by reference to the entire text of the Amendment Agreements and the forms of the Amended Notes, amended Warrants, Certificate of Designations, Amendment No. 1 to Pledge and Security Agreement, Amendment No. 1 to Patent and Trademark Security Agreement and Amendment No. 1 to Lockbox Agreement, each of which is attached as an Exhibit to this Current Report on Form 8-K.

Two of the Company’s employees and one current board member purchased Notes pursuant to the Original Purchase Agreement. Their Notes and Warrants are as follows after the completion of the Amended Note agreement; Olivier Prache, Senior VP of Display Operations, $10,000 Note may be converted into 13,333 shares and he has 5,385 warrants exercisable at $3.60 per share and 6,641 exercisable at $1.03 per share. John Atherly, CFO’s, $40,000 Note may be converted into 53,333 shares and 37,333 warrants are exercisable at $1.03 per share. Paul Cronson, board member, through Navacorp III, LLC has a $200,000 Note which may be converted into 266,666 shares and 186,666 warrants exercisable at $1.03 per share.

Stillwater LLC, a beneficial owner of more than 5% of the Company’s common stock, purchased a Note pursuant to the Other Note Purchase Agreement. Ginola Limited and Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater LLC and its controlling shareholder is the same as Ginola Limited, both purchased Notes pursuant to the Original Note Purchase Agreement. Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.

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EX-10.53

Exhibit 10.53

SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”) is dated as of April 2, 2008, among eMagin Corporation, a Delaware corporation (the “Company”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively the “Purchasers”).

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions.  In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms have the meanings indicated in this Section 1.1:

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person as such terms are used in and construed under Rule 144 under the Securities Act. With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser.

“Business Day”means any day except Saturday, Sunday and any day which is a federal legal holiday or a day on which banking institutions in the State of New York or State of Washington are authorized or required by law or other governmental action to close.

“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1.

“Closing Date” means the Trading Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions set forth in Sections 2.3 hereof are satisfied, or such other date as the parties may agree.

“Closing Price” means on any particular date (a) the last reported closing bid price per share of Common Stock on such date on the Trading Market (as reported by Bloomberg L.P. at 4:15 PM (Eastern Time)), or (b) if there is no such price on such date, then the closing bid price on the Trading Market on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM (Eastern Time)), or (c) if the Common Stock is not then listed or quoted on the Trading Market and if prices for the Common Stock are then reported in the “pink sheets” published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) if the shares of Common Stock are not then publicly traded the fair market value of a share of Common Stock as determined by an appraiser selected in good faith by the Purchasers of a majority in interest of the Shares then outstanding.

“Commission” means the United States Securities and Exchange Commission.

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“Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter have been reclassified or changed into.

“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which entitle the holder thereof to acquire Common Stock at any time, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

“Company Counsel” means Sichenzia Ross Friedman Ference LLP.

“Disclosure Schedules” means the Disclosure Schedules of the Company delivered concurrently herewith.

“Effective Date” means the date that the initial Registration Statement filed by the Company pursuant to the Registration Rights Agreement is first declared effective by the Commission.

“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r).

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers, directors or consultants of the Company pursuant to (i) any existing stock or option plan, or (ii) any stock or option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (b) the issuance of shares of Common Stock under the Company’s existing Non-Employee Stock Compensation Plan, (c) options issued to new employees, (d) securities upon the exercise or exchange of or conversion of any Securities issued hereunder and/or securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise, exchange or conversion price of any such securities, and (e) securities issued pursuant to acquisitions or strategic transactions or in connection with a strategic alliance collaboration, joint venture, partnership, manufacturing, marketing, distributing or similar arrangement of the Company with another Person which strategic alliance, collaboration, joint venture, partnership manufacturing, marketing, distributing or similar arrangement relates to the Company’s business as conducted immediately prior thereto and which Person is engaged in a business similar or related to the business of the Company, provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).

“Investor” shall have the meaning ascribed to such term in Section 3.1(v).

“Legend Removal Date” shall have the meaning ascribed to such term in Section 4.1(c).

“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

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“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).

“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).

“Per Share Purchase Price” equals $1.04.

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“Pro Rata Share” means with respect to each capital raising transaction to which Section 4.16 applies an amount equal to the product obtained by multiplying (a) an amount equal to one-half of the securities being issued in such capital raising transaction times (b) a fraction of which the numerator is the sum of (i) the Purchaser’s Warrant Shares plus (ii) the number of outstanding Shares beneficially owned by the Purchaser at the time the Pro Rata Share is being determined, and the denominator is the sum of (iii) the number of Warrant Shares at the time of original issuance thereof plus (iv) all of the Shares issued under this Agreement, subject to adjustment of the amounts specified in the immediately preceding clauses (iii) and (iv) for stock splits, stock dividends and similar capital changes affecting the Common Stock that occur on or after the Closing Date and on or prior to the date Pro Rata Share is being determined.

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Purchaser Party” shall have the meaning ascribed to such term in Section 4.9.

“Registration Rights Agreement” means the Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in the form of Exhibit A attached hereto.

“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale by the Purchasers of the Shares and the Warrant Shares.

“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

“Securities” means the Shares, the Warrants and the Warrant Shares.

“Securities Act” means the Securities Act of 1933, as amended.

“Shares” means the shares of Common Stock issued or issuable to each Purchaser pursuant to this Agreement.

“Short Sales” shall include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, swaps and similar arrangements (including on a total return basis), and sales and other transactions through non-US broker dealers or foreign regulated brokers. 

“Subscription Amount” means, as to each Purchaser, the aggregate amount to be paid for Shares and Warrants purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount”, in United States Dollars and in immediately available funds.

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“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a).

“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market, or (ii) if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the Pink Sheets, LLC (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i) and (ii) hereof, then Trading Day shall mean a Business Day.

“Trading Market” means whichever of the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market or OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in question.

“Transaction Documents” means this Agreement, the Warrants, the Registration Rights Agreement, and any other documents or agreements executed in connection with the transactions contemplated hereunder.

“Warrants” means collectively the Common Stock purchase warrants, in the form of Exhibit C delivered to the Purchasers at the Closing in accordance with Section 2.2(a) hereof.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the Warrants.

ARTICLE II

PURCHASE AND SALE

Section 2.1 Closing.  On the Closing Date, upon the terms and subject to the conditions set forth herein, concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and each Purchaser agrees to purchase in the aggregate, severally and not jointly, up to $2,500,000 of Shares and Warrants. Subject to the terms and conditions set forth in this Agreement, each Purchaser shall deliver to the Company via wire transfer or a certified check immediately available funds equal to their Subscription Amount, subject to adjustment pursuant to Section 5.2, and the Company shall deliver to each Purchaser their respective Shares and Warrants as determined pursuant to Section 2.2(a) and the other items set forth in Section 2.2 issuable at the Closing.  Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of Sichenzia Ross Friedman Ference LLP, or such other location as the parties shall mutually agree.

Section 2.2 Deliveries.

(a) On the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:

(i) this Agreement duly executed by the Company;

(ii) a legal opinion of Company Counsel, in the form of Exhibit B attached hereto;

(iii) a copy of the irrevocable instructions to the Company’s transfer agent instructing the transfer agent to deliver, on an expedited basis, a certificate evidencing a number of Shares equal to such Purchaser’s Subscription Amount divided by the Per Share Purchase Price, registered in the name of such Purchaser;

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(iv) a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 50% of the number of Shares purchased, with an exercise price equal to $1.29per share subject to adjustment therein;

(v) the Lockup Agreement in the form of Exhibit D hereto executed by each director and each of the senior executive officers named as such on Schedule 2.2(a) attached hereto;

(vi) the Registration Rights Agreement duly executed by the Company; and

(vii) the executed waivers from all of the outstanding Holders of the Amended and Restated 8% Senior Secured Convertible Notes Due 2008 waiving Section 3.12 of the Notes, Section 12(d)(11) of the Certificate of the Designations, and Sections 5(m) and 8(a)(2) from the Note Purchase Agreement, dated July 21, 2006, as amended by the Amendment Agreement, dated July 23, 2007.

(b) On the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following:

(i) this Agreement duly executed by such Purchaser;

(ii) such Purchaser’s Subscription Amount, subject to adjustment pursuant to Section 5.2, by wire transfer to the account as specified in writing by the Company; and

(iii) the Registration Rights Agreement duly executed by such Purchaser.

Section 2.3 Closing Conditions.

(a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:

(i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchasers contained herein;

(ii) all obligations, covenants and agreements of the Purchasers required to be performed at or prior to the Closing Date shall have been performed; and

(iii) the delivery by the Purchasers of the items set forth in Section 2.2(b) of this Agreement.

(b) The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:

(i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Company contained herein;

(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;

(iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;

(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and

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(v) from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg Financial Markets shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of each Purchaser, makes it impracticable or inadvisable to purchase the Shares at the Closing.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

Section 3.1 Representations and Warranties of the Company.  Except as set forth under the corresponding section of the Disclosure Schedules which Disclosure Schedules shall be deemed a part hereof, the Company hereby makes the representations and warranties set forth below to each Purchaser:

(a) Subsidiaries.  All direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a).  Except as set forth on Schedule 3.1(a), the Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.

(b) Organization and Qualification.  The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is duly qualified to conduct its respective business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in (i) a material and adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material and adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

(c) Authorization; Enforcement.  The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its board of directors or its stockholders in connection therewith other than in connection with the Required Approvals. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws of general application affecting enforcement of creditors’ rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

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(d) No Conflicts.  The execution, delivery and performance of the Transaction Documents by the Company, the issuance and sale of the Securities and the consummation by the Company of the other transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

(e) Filings, Consents and Approvals.  The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) filings required pursuant to Section 4.4 of this Agreement, (ii) the filing with the Commission of the Registration Statement, (iii) application(s) to each applicable Trading Market for the listing of the Shares and Warrant Shares for trading thereon in the time and manner required thereby, and (iv) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “Required Approvals”).

(f) Issuance of the Securities.  The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents.  The Warrant Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company. As of the Closing, the Company will have reserved from its duly authorized capital stock the maximum number of shares of Common Stock issuable pursuant to this Agreement and the Warrants.

(g) Capitalization.  The capitalization of the Company is as set forth on Schedule 3.1(g).  The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plan, the issuance of shares of Common Stock pursuant to the Company’s existing Non-Employee Stock Compensation Plan, and pursuant to the conversion or exercise of outstanding Common Stock Equivalents.  Other than as set forth on Schedule 3.1(g), no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents.  Other than as disclosed on Schedule 3.1(g), except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents.  Except as set forth on Schedule 3.1(g), the issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities.  All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities.  There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

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(h) SEC Reports; Financial Statements.  The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension other than Current Reports on Form 8-K.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

(i) Material Changes.  Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option or stock plans. The Company does not have pending before the Commission any request for confidential treatment of information.

(j) Litigation.  There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened in writing against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty.  There has not been and, to the knowledge of the Company, is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company.  The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.

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(k) Labor Relations.  No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect.

(l) Compliance.  Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business except in each case as could not have a Material Adverse Effect.

(m) Regulatory Permits.  The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

(n) Title to Assets.  The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and the Subsidiaries are in compliance, except as could not have or reasonably be expected to result in a Material Adverse Effect.

(o) Patents and Trademarks.  The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have or reasonably be expected to result in a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Neither the Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon the rights of any Person.  All such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights of others.

(p) Insurance.  The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage at least equal to the aggregate Subscription Amount.  Such insurance contracts and policies are accurate and complete.  Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business on terms consistent with market for the Company’s and such Subsidiaries respective lines of business.

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(q) Transactions With Affiliates and Employees.  Except as set forth in the SEC Reports, none of the officers, directors or employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as officers, directors and employees), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $60,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company, and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company.

(r) Sarbanes-Oxley; Internal Accounting Controls.  Except as set forth on Schedule 3.1(r), the Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.  The Company is actively taking steps to ensure that it cures all of the items set forth on Schedule 3.1(r) and the Company agrees that such items shall be cured by no later thanDecember 31, 2008.  The Company shall thereafter comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company’s most recently filed periodic report under the Exchange Act, as the case may be, is being prepared.  The Company’s certifying officers have evaluated the effectiveness of the Company’s controls and procedures as of the date prior to the filing date of the most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no significant changes in the Company’s internal controls (as such term is defined in Item 307(b) of Regulation S-K under the Exchange Act) or, to the knowledge of the Company, in other factors that could significantly affect the Company’s internal controls.

(s) Certain Fees.  No brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents.  The Purchasers shall have no obligation with respect to any fees or with respect to any claims (other than such fees or commissions owed by an Purchaser pursuant to written agreements executed by such Purchaser which fees or commissions shall be the sole responsibility of such Purchaser) made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.

(t) Private Placement.  Assuming the accuracy of the Purchasers representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby.  The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.

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(u) Investment Company.  The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act.

(v) Registration Rights. Other than as set forth on Schedule 3.1(v) and  each of the Purchasers, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.  The Company has received valid waivers from all of the outstanding Holders of the Amended and Restated 8% Senior Secured Convertible Notes Due 2008 waiving their rights to allow for the filling of the Registration Statement before the effectiveness of their registration statement. The Company is not in default under any agreement or other arrangement related to registration rights of any investor (the “Investor”) who was a party to the Note Purchase Agreement dated as of July 21, 2006 as amended by the Amendment  Agreement dated as of July 23, 2007 and the Company does not owe any liquidated damages to any Investor related to any registration obligation.

(w) Listing and Maintenance Requirements.  The Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration.  The Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market.  The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

(x) Application of Takeover Protections.  The Company and its Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.

(y) Disclosure.  The Company confirms that, neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that the Company believes constitutes or might constitute material, non-public information, except insofar as the existence and terms of the proposed transactions hereunder may constitute such information.  The Company understands and confirms that the Purchasers will rely on the foregoing representations and covenants in effecting transactions in securities of the Company.  All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.  The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.

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(z) No Integrated Offering.  Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act, which would require the registration of any such securities under the Securities Act or under the rules and regulations of any Trading Market on which any of the securities of the Company are listed or designated, if such integration would cause this Agreement or the transactions contemplated herein to require shareholder approval.

(aa) Solvency.  Based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the Company’s fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid.  The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date.  The SEC Reports set forth as of the dates thereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments.  For the purposes of this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP.  Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.

(bb) Form S-1 Eligibility.  The Company is eligible to register the resale of the Securities for resale by the Purchaser on Form S-1 promulgated under the Securities Act.

(cc) Tax Status.  Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and each Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company or any Subsidiary.

(dd) No General Solicitation.  Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising.  The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

(ee) Foreign Corrupt Practices.  Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

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(ff) Accountants.  The Company’s accountants are set forth in the SEC Reports.  To the knowledge of the Company, such accountants, who the Company expects will express their opinion with respect to the financial statements to be included in the Company’s Annual Report on Form 10-K for the year ending December 31, 2007, are a registered public accounting firm as required by the Securities Act.

(gg) Acknowledgment Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby.  The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to the Purchasers’ purchase of the Securities.  The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

(hh) Acknowledgement Regarding Purchasers’ Trading Activity.  Anything in this Agreement or elsewhere herein to the contrary notwithstanding (except for Section 4.14 hereof), it is understood and agreed by the Company (i) that none of the Purchasers have been asked to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or derivative securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) that past or future open market or other transactions by any Purchaser, including Short Sales, and specifically including, without limitation, Short Sales or derivative transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) that any Purchaser, and counter parties in derivative transactions to which any such Purchaser is a party, directly or indirectly, presently may have a short position in the Common Stock, and (iv) that each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any derivative transaction.  The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various times during the period that the Securities are outstanding, including, without limitation, during the periods that the value of the Warrant Shares deliverable with respect to Securities are being determined and (b) such hedging activities (if any) could reduce the value of the existing stockholders’ equity interests in the Company at and after the time that the hedging activities are being conducted.  The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.

(ii) Manipulation of Price.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Securities (other than for the placement agent’s placement of the Securities), or (iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company.

Section 3.2 Representations and Warranties of the Purchasers.  Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company as follows:

(a) Organization; Authority.  Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of such Purchaser.  Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as such enforceability may be limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

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(b) Own Account.  Such Purchaser understands that the Securities are restricted securities and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no arrangement or understanding with any other persons regarding the distribution of such Securities (this representation and warranty not limiting such Purchaser’s right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws) in violation of the Securities Act or any applicable state securities law. Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.  Such Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities.

(c) Purchaser Status.  At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises any Warrants, it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.

(d) Experience of Such Purchaser.  Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.

(e) General Solicitation.  Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

(f) Access to Information.  Such Purchaser acknowledges that it has reviewed the Disclosure Schedules and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Shares and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser’s right to rely on the truth, accuracy and completeness of the Disclosure Schedules and the Company’s representations and warranties contained in the Transaction Documents.

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(g) Certain Trading Activities.  Such Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, engaged in any transactions in the securities of the Company (including, without limitations, any Short Sales involving the Company’s securities) since it was contacted by the Company in February 2008 regarding this transaction.  Such Purchaser covenants that neither it nor any Person acting on its behalf or pursuant to any understanding with it will engage in any transactions in the securities of the Company (including Short Sales) prior to the time that the transactions contemplated by this Agreement are publicly disclosed by the Company.  Such Purchaser has maintained, and covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company such Purchaser will maintain, the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).  Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser’s assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement.  Other than to other Persons party to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).

(h) Independent Investment Decision.  Such Purchaser has independently evaluated the merits of its decision to purchase Securities pursuant to the Transaction Documents, and such Purchaser confirms that it has not relied on the advice of any other Purchaser’s business and/or legal counsel in making such decision.

The Company acknowledges and agrees that each Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2.

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

Section 4.1 Transfer Restrictions.

(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of the Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act.  As a condition of such transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement.

(b) The Purchasers agree to the imprinting, so long as is required by this Section 4.1(b), of a legend on any of the Securities in the following form:

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.

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The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and the Registration Rights Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties.  Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith.  Further, no notice shall be required of such pledge.  At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including, if the Securities are subject to registration pursuant to the Registration Rights Agreement, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of Selling Stockholders thereunder.

(c) Certificates evidencing the Shares and Warrant Shares shall not contain any legend (including the legend set forth in Section 4.1(b)), (i) while a registration statement (including the Registration Statement) covering the resale of such security is effective under the Securities Act, or (ii) following any sale of such Shares or Warrant Shares pursuant to a registration statement or Rule 144 (assuming the transferor is not an Affiliate of the Company), or (iii) if such Shares or Warrant Shares are eligible for sale under Rule 144 without volume restrictions, or (iv) if such legend is not required under applicable requirements of the Securities Act and the rules and regulations promulgated thereunder (including judicial interpretations and pronouncements issued by the staff of the Commission).  The Company shall cause its counsel to issue a legal opinion to the Company’s transfer agent promptly after the Effective Date if required by the Company’s transfer agent to effect the removal of the legend hereunder.  If all or any portion of a Warrant is exercised at a time when there is an effective registration statement to cover the resale of the Warrant Shares, such Warrant Shares shall be issued free of all legends.  The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Company’s transfer agent of a certificate representing Shares or Warrant Shares, as the case may be, issued with a restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends.  The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section.  Certificates for Securities subject to legend removal hereunder shall be transmitted by the transfer agent of the Company to the Purchasers by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System.

(d) In addition to such Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, for each $1,000 of Shares or Warrant Shares (based on the Closing Price of the Common Stock on the date such Securities are submitted to the Company’s transfer agent) delivered for removal of the restrictive legend and subject to Section 4.1(c), $10 per Trading Day (increasing to $20 per Trading Day five (5) Trading Days after such damages have begun to accrue) for each Trading Day after the Legend Removal Date until such certificate is delivered without a legend.  Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Company’s failure to deliver certificates representing any Securities as required by the Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.

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(e) Each Purchaser, severally and not jointly with the other Purchasers, agrees, and represent and covenants to the Company, that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company’s reliance that the Purchaser will sell any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom.

(f) Until the six month anniversary of the date hereof, the Company shall not undertake a reverse or forward stock split or reclassification of the Common Stock without the prior written consent of the Purchasers holding a then majority in interest of the Shares.

Section 4.2 Furnishing of Information.  As long as any Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act.  As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Securities under Rule 144.  The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.

Section 4.3 Integration.  The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market such that it would require stockholder approval of the sale of the Securities to the Purchasers unless stockholder approval is obtained before the closing of such subsequent transaction.

Section 4.4 Securities Laws Disclosure; Publicity.  The Company shall, by 8:30 a.m. Eastern time on the second Trading Day following the date hereof, issue a Current Report on Form 8-K, disclosing the material terms of the transactions contemplated hereby, and shall attach the Transaction Documents thereto.  In addition, the Company will make such other filings and notices in the manner and time required by the Commission and the Trading Market on which the Common Stock is listed. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission (other than the Registration Statement and any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the Exchange Act) or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except to the extent such disclosure is required by law or Trading Market regulations.

Section 4.5 Stockholder Rights Plan.  No claim will be made or enforced by the Company or, to the knowledge of the Company, any other Person that any Purchaser is an “Acquiring Person” under any stockholder rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents.  The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act.

Section 4.6 Non-Public Information.  The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information.  The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company.

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Section 4.7 Use of Proceeds.  The Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and not for the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), to redeem any Common Stock or Common Stock Equivalents or to settle any outstanding litigation.

Section 4.8 Reimbursement.  If any Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales and similar transactions by such Purchaser to or with any current stockholder), solely as a result of such Purchaser’s acquisition of the Securities under this Agreement, the Company will reimburse such Purchaser for its reasonable legal and other expenses (including the cost of any investigation preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred.  The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person.  The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement, except to the extent that such claims are based on a breach of any representations and warranties or covenants made by the Purchasers in Transaction Documents.

Section 4.9 Indemnification of Purchasers.  Subject to the provisions of this Section 4.9, the Company will indemnify and hold the Purchasers and their directors, officers, stockholders, members, partners, employees and agents (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against a Purchaser, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing.  Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party.  The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by the Purchasers in this Agreement or in the other Transaction Documents.

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Section 4.10 Reservation of Common Stock.  As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, a sufficient number of shares of Common Stock for the purpose of enabling the Company to issue Shares pursuant to this Agreement and Warrant Shares pursuant to any exercise of the Warrants.

Section 4.11 Listing of Common Stock.  The Company hereby agrees to use best efforts to maintain the listing of the Common Stock on a Trading Market, and as soon as reasonably practicable following the Closing (but not later than the earlier of the Effective Date and the first anniversary of the Closing Date) to list all of the Shares and Warrant Shares on such Trading Market.  The Company further agrees, if the Company applies to have the Common Stock traded on any other Trading Market, it will include in such application all of the Shares and Warrant Shares, and will take such other action as is necessary to cause all of the Shares and Warrant Shares to be listed on such other Trading Market as promptly as possible.  The Company will take all action reasonably necessary to continue the listing and trading of its Common Stock on a Trading Market and will comply in all material respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Trading Market.

Section 4.12 Equal Treatment of Purchasers.  No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents.  For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended to treat for the Company the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.

Section 4.13 Subsequent Equity Sales.

(a) From the date hereof until the earlier of one year from the date hereof or 90 days after the Effective Date, neither the Company nor any Subsidiary shall issue shares of Common Stock or Common Stock Equivalents; provided, however, the period set forth in this Section 4.13 shall be extended for the number of Trading Days during such period in which (i) trading in the Common Stock is suspended by any Trading Market, or (ii) following the Effective Date, unless such Shares and Warrant Shares may be sold pursuant to Rule 144 without volume restrictions, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be used by the Purchasers for the resale of the Shares and Warrant Shares; provided, further, that such issuance shares must be registered after the registration of the Securities.

(b) From the date hereof until all the Securities become eligible for resale under the Rule 144 without volume restrictions, the Company shall be prohibited from effecting or entering into an agreement to effect any subsequent financing involving a Variable Rate Transaction.  The term “Variable Rate Transaction” shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company may sell securities at a future determined price.  Any Purchaser shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which remedy shall be in addition to any right to collect damages.

(c) Notwithstanding the foregoing, this Section 4.13 shall not apply in respect of an Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.

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Section 4.14 Short Sales and Confidentiality After The Date Hereof.  Such Such Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, engaged in any transactions in the securities of the Company (including, without limitations, any Short Sales involving the Company’s securities) since the time that such Purchaser was contacted in February 2008 by the Company or any other Person regarding an investment in the Company.  Such Purchaser has maintained, and covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company such Purchaser will maintain, the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).

Section 4.15 Delivery of Securities After Closing.  The Company shall deliver, or cause to be delivered, the respective Securities purchased by each Purchaser to such Purchaser within three (3) Trading Days of the Closing Date.

Section 4.16 Right of Purchaser to Participate in Future Transactions.  Purchaser will have a right to participate, on the terms and conditions set forth in this Section 4.16, in all sales by the Company of any of Common Stock or Common Stock Equivalents in each capital raising transaction, if any, that occurs at any time when the Warrant, or any instrument issued upon transfer or split up thereof, remains outstanding (in whole or in part), other than any such sale that is a public offering underwritten on a firm commitment basis and registered with the Commission under the Securities Act and other than a Exempt Issuance; provided, however, that if under legal requirements applicable to a particular transaction the only Persons eligible to purchase securities in such transaction are “accredited investors,” within the meaning of Rule 501 under the Securities Act, then the Purchaser must be an accredited investor in order to purchase securities in such transaction.  For any such transaction during such period, the Company shall give at least four Business Days advance written notice to the Purchaser prior to any offer or sale of any of the Company’s securities in such transaction by providing to the Purchaser a term sheet which (i) contains all significant business terms of such proposed transaction, (ii) is sufficiently detailed so as to reasonably permit the Purchaser the opportunity to determine whether or not to exercise its rights under this Section 4.16 and (iii) is at least as detailed as the term sheet or summary of such transaction as the Company shall furnish to any offeree or broker in such transaction.  The Purchaser shall have the right to participate in such proposed transaction and to purchase its Pro Rata Shareof such securities which are the subject of such proposed transaction for the same consideration and on the same terms and conditions as contemplated for sales to third parties in such transaction (or such lesser portion thereof as specified by the Purchaser).  If the Purchaser elects to exercise its rights hereunder for a particular transaction, it shall deliver written notice to the Company within four Business Days following receipt from the Company of the notice and term sheet meeting the requirements of this Section 4.16, which notice from the Purchaser shall be conditional upon (i) the Purchaser’s receipt of satisfactory definitive documents for such transaction from the Company if the Company has not furnished final, definitive documents for such transaction to the Purchaser at or before the time the Company gives such notice of such transaction to the Purchaser, and (ii) the satisfaction of the other conditions precedent to the obligations of purchasers generally in such transaction to complete such transaction.  If, subsequent to the Company giving notice to the Purchaser hereunder but prior to any of (i) the Purchaser exercising its right to participate, (ii) the expiration of the four Business Day period without response from the Purchaser or (iii) the rejection of such offer for such financing by the Purchaser, the terms and conditions of the proposed sale to third parties in such transaction are changed from those disclosed in the term sheet provided to the Purchaser, the Company shall be required to provide a new notice and term sheet meeting the requirements of this Section 4.16, reflecting such revised terms, to the Purchaser hereunder and the Purchaser shall have the right, which must be exercised within four Business Days of the date the Purchaser receives such new notice and such revised term sheet, to exercise its rights to purchase the securities on such changed terms and conditions and otherwise as provided hereunder.  If the Purchaser does not exercise its rights hereunder with respect to a proposed transaction within the period or periods provided, or affirmatively declines to engage in such proposed transaction with the Company, then the Company may proceed with such proposed transaction on the same terms and conditions as noticed to the Purchaser (assuming the Purchaser has consented to the transaction, if required, pursuant to this Agreement and such transaction does not violate any other term or provision of the Transaction Documents), provided that if such proposed transaction is not consummated within 75 days following the Company’s notice hereunder, then the rights hereunder shall again be afforded to the Purchaser for such proposed transaction.  The rights and obligations of this Section 4.16 shall in no way limit or restrict the other rights of the Purchaser pursuant to this Agreement.  Notwithstanding anything herein to the contrary, failure of the Purchaser to affirmatively elect in writing to participate in any proposed transaction within the required time frames shall be deemed to be the equivalent of Purchaser’s decision not to participate in such proposed transaction.  Notwithstanding the foregoing, this Section 4.16 shall not apply in respect of an Exempt Issuance.  The rights of the Purchaser under this Section 4.16 shall apply to all capital raising transactions described in Section 4.16 that occur during the period specified in this Section 4.16.

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Section 4.17 Limitation on Certain Transactions.  From the date of this Agreement until after the date all the Securities become eligible for resale under Rule 144 without volume restrictions or the Effective Date, without the prior written consent of the Purchaser (which consent may be withheld in the Purchaser’s sole discretion), the Company shall not issue or sell or agree to issue or sell any securities in a capital raising transaction, unless such securities will not be, and are not, registered for sale or resale under the Securities Act until on or after such Effective Date; provided, however, that the limitation of this Section 4.17 shall not apply to Exempt Issuances.

ARTICLE V

MISCELLANEOUS

Section 5.1 Termination.  This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the Closing has not been consummated on or before April 7, 2008; provided, however, that no such termination will affect the right of any party to sue for any breach by the other party (or parties).

Section 5.2 Fees and Expenses.  At the Closing, the Company has agreed to reimburse the following Purchasers the following amounts for the legal fees and expenses of its counsel:  Stillwater LLC for $30,000; Kettle Hill Partners, LP for $2,300; Kettle Hill Partners II, LP for $4,100; and Kettle Hill Offshore, Ltd. for $3,600.  Accordingly, in lieu of the foregoing payments, the Subscription Amount that each of the foregoing Purchasers is to pay at the Closing shall be reduced by the amount of such reimbursement in lieu thereof.  The Company shall deliver, prior to the Closing, a completed and executed copy of the Closing Statement, attached hereto as Annex A.  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Securities.

Section 5.3 Entire Agreement.  The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

Section 5.4 Notices.  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (Eastern Time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (Eastern Time) on any Trading Day, (c) the 2nd Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and communications shall be as set forth on the signature pages attached hereto until changed by notice given in accordance with this Section.

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Section 5.5 Amendments; Waivers.  No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

Section 5.6 Headings.  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

Section 5.7 Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser.  Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the “Purchasers”.

Section 5.8 No Third-Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.9.

Section 5.9 Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of choice of law and conflicts of law thereof.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, stockholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.  Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding has been commenced in an improper or inconvenient venue for such proceeding.  Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.  If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

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Section 5.10 Survival.  The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery of the Shares and Warrant Shares.

Section 5.11 Execution.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by electronic or facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.

Section 5.12 Severability.  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

Section 5.13 Rescission and Withdrawal Right.  Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, such demand or election in whole or in part without prejudice to its future actions and rights.

Section 5.14 Replacement of Securities.  If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested.  The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.  If a replacement certificate or instrument evidencing any Securities is requested due to a mutilation thereof, the Company may require delivery of such mutilated certificate or instrument as a condition precedent to any issuance of a replacement.

Section 5.15 Remedies.  In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents.  The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

Section 5.16 Payment Set Aside.  To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

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Section 5.17 Independent Nature of Purchasers’ Obligations and Rights.  The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document.  Nothing contained herein or in any Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents.  Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.  Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents.  The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers.

Section 5.18 Liquidated Damages.  The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled.

Section 5.19 Construction.  The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments hereto.

(Signature Pages Follow)

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

eMAGIN CORPORATION
By:	/s/ Michael D. Fowler
	Michael D. Fowler
	Interim Chief Financial Officer

Address for Notice:

2070 Route 52

Hopewell Junction, New York 12533

With a copy to:

Richard Friedman, Esq.  

Sichenzia Ross Friedman Ference LLP

61 Broadway

New York, New York  10006

(212) 930-9700 telephone

(212) 930-9725 fax

1065 Avenue of the Americas, 21st Floor

New York, New York 10018

Attn: Richard A. Friedman

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

[PURCHASER SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]

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IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

[Name of Purchaser]

____________________________________

[By:]

[Title:]

Address for Notice of Purchaser:

Address for Delivery of Securities for Purchaser (if not same as above):

Subscription Amount:

Shares:

Warrant Shares:

EIN Number:

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 ANNEX A

CLOSING STATEMENT

Pursuant to the attached Securities Purchase Agreement, dated as of the date hereto, the purchasers shall purchase up to $___________ of Common Stock and Warrants from eMagin Corporation, a Delaware corporation (the “Company”). All funds will be wired into a trust account maintained by ____________, counsel to the Company. All funds will be disbursed in accordance with this Closing Statement.

Disbursement Date: ________ ___, 2008

I.           PURCHASE PRICE
Gross Proceeds to be Received in Trust	$
II.         DISBURSEMENTS
	$
	$
	$
	$
Total Amount Disbursed:	$
WIRE INSTRUCTIONS:
To: _____________________________________
To: _____________________________________

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Schedule B

April 2, 2008

To the Investors listed on

Schedule A attached hereto

Re:           eMagin Corporation Legal Opinion

Ladies and Gentlemen:

We have acted as counsel to eMagin Corporation, a Delaware corporation (the “Company”), in connection with the Securities Purchase Agreement, dated as of April 2, 2008, between you and the Company (the “Purchase Agreement”) and the transactions contemplated therein.  Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Purchase Agreement.  The Purchase Agreement, the Registration Rights Agreement and the Warrants are hereinafter referred to collectively as the “Transaction Documents.” As to other questions of fact relevant to our opinion, we have made no independent verification of the facts and we have relied upon statements or certificates of public officials and officers of the Company.

In connection with this opinion, we have examined originals or photostatic or certified copies of (i) the Transaction Documents, (ii) the Company’s Articles of Incorporation, as amended and restated, as in effect on the date hereof (the “Articles of Incorporation”), and (iii) the Company’s Bylaws, as in effect on the date hereof (the “Bylaws”), and we have examined and considered such corporate records, certificates and matters of law as we have deemed appropriate as a basis for our opinions set forth below.

In rendering the opinions set forth in this opinion letter, we assume the following:

(a)the legal capacity of each natural person;

(b)the legal existence of all parties to the transactions referred to in the Transaction Documents;

(c)the power and authority of each person other than the Company or person(s) acting on behalf of the Company to execute, deliver and perform each document executed and delivered and to do each other act done or to be done by such person;

(d)the authorization, execution and delivery by each person other than the Company or person(s) acting on behalf of the Company of each document executed and delivered or to be executed and delivered by such person;

(e)the legality, validity, binding effect and enforceability as to each person other than the Company or person(s) acting on behalf of the Company of each document executed and delivered or to be executed or delivered and of each other act done or to be done by such person;

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(f)the transactions referred to in the Transaction Documents have been consummated;

(g)the payment of all the required documentary stamps taxes and fees imposed upon the execution, filing or recording of the Transaction Documents;

(h)that there have been no undisclosed modifications of any provision of any document reviewed by us in connection with the rendering of the opinions set forth in this opinion letter and no undisclosed prior waiver of any right or remedy contained in the Transaction Documents;

(i)the genuineness of each signature (other than the signatures of the officers of the Company), the completeness of each document submitted to us other than the Transaction Documents, the authenticity of each document reviewed by us as an original, the conformity to the original of each document reviewed by us as a copy and the authenticity of the original of each document received by us as a copy;

(j)the truthfulness of each statement as to all factual matters otherwise not known to us to be untruthful contained in any document encompassed within the due diligence review undertaken by us;

(k)the accuracy on the date of this letter as well as on the date stated in all governmental certifications of each statement as to each factual matter contained in such governmental certifications;

(l)that the addressee has acted in good faith, without notice of adverse claims, and has complied with all laws applicable to it that affect the transactions referred to in the Transaction Documents;

(m)that the transactions referred to in the Transaction Documents comply with all tests of good faith, fairness and conscionability required by law;

(n)that routine procedural matters such as service of process or qualification to do business in the relevant jurisdictions will be satisfied by the parties seeking to enforce the Transaction Documents;

(o)that all statutes, judicial and administrative decisions, and rules and regulations of governmental agencies constituting the law for which we are assuming responsibility are published (e.g., reported court decisions and the specialized reporting services of bna, cch and prentice-hall) or otherwise generally accessible (e.g., lexis or westlaw) in each case in a manner generally available (i.e., in terms of access and distribution following publication) to lawyers practicing in our judicial circuit;

(p)that agreements other than the Transaction Documents that are related to the transactions referred to in the Transaction Documents will be enforced as written;

(q)that no action, discretionary or otherwise will be taken by or on behalf of the Company in the future that might result in a violation of law;

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(r)that there are no other agreements or understandings among the parties that would modify the terms of the Transaction Documents or the respective rights or obligations of the parties to the Transaction Documents;

(s)that with respect to the Transaction Documents and to the transactions referred to therein, there has been no mutual mistake of fact and there exists no fraud or duress; and

(t)the constitutionality and validity of all relevant laws, regulations and agency actions unless a reported case has otherwise held or widespread concern has been expressed by commentators as reflected in materials which lawyers routinely consult.

Whenever a statement herein is qualified by “to our knowledge” or similar phrase, it means that, during the course of our representation of the Company for the purposes of this opinion letter, (a) no information that would give those lawyers who participated in the representation of the Company in connection with the Transaction Documents (collectively, the “Transaction Participants”) current actual knowledge of the inaccuracy of such statement has come to their attention; (b) we have not undertaken any independent investigation or inquiry to determine the accuracy of such statement; (c) any limited investigation or inquiry otherwise undertaken by the Transaction Participants during the preparation of this opinion letter should not be regarded as such an investigation or inquiry; and (d) no inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Company.  We also call to your attention to the fact that we are not general counsel to the Company and we are not familiar with all aspects of either the business affairs of the Company.  We have not conducted an independent audit of the Company or its files.  As to certain questions of fact material to this opinion, we have relied upon statements or certificates from the Company or person(s) acting on behalf of the Company.

The validity, binding effect and enforceability of the Transaction Documents may be limited or otherwise affected by (a) bankruptcy, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or other laws affecting the enforcement of creditors’ rights and remedies generally and (b) the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith.  In addition, certain remedies, waivers and other provisions contained in the Transaction Documents might not be enforceable; nevertheless, such unenforceability will not render such agreements invalid as a whole or preclude the practical realization of the benefits to the Purchasers thereunder.

We are counsel admitted to practice in the State of New York and we do not express any opinion with respect to the effect or applicability of the laws of any jurisdiction, other than the laws of the State of New York, the corporate laws of the State of Delaware and the federal laws of the United States of America.  In furnishing the opinion regarding the valid existence and good standing of the Company, we have relied solely upon a good standing of the Company from the Secretary of State of Delaware dated March 7, 2008.

Based on the foregoing, and subject to the assumptions, qualifications, limitations and exceptions stated in this letter, we are of the opinion that as of the date hereof:

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1.The Company is a corporation duly authorized, validly existing, and in good standing in Delaware, its state of incorporation.  The Company has all requisite corporate power and authority to (i) conduct its business as presently conducted as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on April 2, 2007; (ii) own and operate its property; and (iii) lease the property its leases.

2.The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations thereunder.  The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by its Board of Directors and no further consent or authorization of the Company’s Board of Directors or its stockholders are required.  Each of the Transaction Documents has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

3.To our knowledge, except as specifically disclosed in the Purchase Agreement or the SEC Reports, no shares of Common Stock are entitled to preemptive or similar rights.  To our knowledge, except as specifically disclosed in the Purchase Agreement or the SEC Reports or as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock.

4.The Shares have been duly authorized and, when paid for and issued in accordance with the terms of the Purchase Agreement shall have been validly issued, fully paid and nonassessable.  When issued by the Company in accordance with the terms of the Purchase Agreement and the Warrants, the Warrant Shares will be validly issued, fully paid and nonassessable.

5.The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated by such agreements do not and will not (i) conflict with or violate any provision of its Articles of Incorporation or Bylaws, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or other written instrument of the Company or a Subsidiary thereof or other written agreement or understanding to which the Company or a Subsidiary thereof is a party, and which is attached as an exhibit to the SEC Reports, (iii) result in a violation of any law, rule or regulation of any governmental authority, regulatory body, stock market or trading facility to which the Company is subject, or by which any property or asset of the Company is bound or affected, or (iv) result in any violation of any order, judgment, injunction, decree or other restriction of any court or governmental authority of which we have knowledge.

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6.To the best of our knowledge, other than the declaration of effectiveness by the Securities and Exchange Commission of the registration statement to be filed pursuant to the Transaction Documents, no authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization or stock exchange or market, or the stockholders of the Company or any third party is required to be obtained by the Company other than as provided in Sections 5(m) and 8(a)(2) of the Note Purchase Agreement, dated July 21, 2006, as amended by the Amendment Agreement, dated July 23, 2007; Section 12(d)(11) of the Certificate of Designations; or Section 3.12 of the Amended and Restated 8% Senior Secured Convertible Notes Due 2008, in connection with the execution, delivery and performance by the Company of the Transaction Documents or the consummation of the other transactions contemplated thereby.

7.To the best of our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body or any governmental agency or self-regulatory organization pending or threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of or the authority or ability of the Company to perform its respective obligations under the Transaction Documents.

8.The Company is not, and as a result of and immediately upon Closing will not be, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

9.Assuming the accuracy of the representations and warranties of the Company set forth in Section 3.1 of the Purchase Agreement and of the Investors set forth in Section 3.2(b)-(e) of the Purchase Agreement, the offer, issuance and sale of the Shares and Warrants and the offer, sale and issuance of the Warrant Shares to the Investors pursuant to the applicable Transaction Documents are exempt from the registration requirements of the Securities Act.

This opinion is furnished pursuant to the request of the addressees hereof and is rendered by us solely for the benefit of the addressees hereof in connection with the Transaction Documents.  We are not hereby assuming any professional responsibilities to any other person whatsoever.  This opinion may be relied upon only in connection with the Transaction Documents.  This opinion may not be used, disseminated, circulated, quoted referred to or relied upon by any other person or for any other purpose without our prior written consent.  This opinion is rendered as of the date set forth above, and we express no opinion as to circumstances or events that may occur subsequent to such date.  We assume no duty to update or supplement this opinion to reflect any fact or circumstances that may hereafter come to our attention or reflect any changes in any law that may hereafter occur or become effective.

Sincerely,

Sichenzia Ross Friedman Ference LLP

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SCHEDULE A

INVESTOR

Stillwater LLC

Ginola Limited

Crestflower Corporation

Kettle Hill Partners, LP

Kettle Hill Partners II, LP

Kettle Hill Offshore, Ltd.

Iroquois Master Fund Ltd.

Total

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Schedule D

April 2, 2008

To the Investors listed on

Schedule A attached hereto

Re:           eMagin Corporation Lockup Agreement

Ladies and Gentlemen:

The undersigned is an owner of record or a beneficial owner of shares of common stock (the “Common Stock”) of eMagin Corporation, a Delaware corporation (the “Company”) or securities convertible into or exchangeable or exercisable for shares of Common Stock.  The Company proposes to carry out a transaction involving the sale of shares of Common Stock and/or securities convertible into or exchangeable or exercisable for Common Stock (the “Transaction”).  The undersigned recognizes that the Transaction will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations.  The undersigned acknowledges that the investors in the Transaction (the “Investors”) are or will be relying on the representations and agreements of the undersigned contained in this letter agreement (the “Letter Agreement”) in carrying out the Transaction and in entering into agreements with the Company.

To induce the Investors to continue their efforts in connection with the Transaction, the undersigned hereby agrees that, without the prior written consent of the majority of the Investors (as computed by the amount invested in this Transaction, the “Majority Investors”), which consent may be withheld in their sole discretion, the undersigned will not (and will cause the undersigned’s spouse, and the immediate family of such spouse or the undersigned living in the undersigned’s household, not to), during the period commencing on the date hereof and ending 210 days after the date hereof  (such period, the “Restricted Period”), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exchangeable or exercisable for any shares of Common Stock (whether such shares or any such securities are now owned or are hereafter acquired by the undersigned, or the undersigned’s spouse or family member), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise.  The undersigned further agrees not to announce an intention to do any of the foregoing during the Restricted Period.  If (i) during the last 17 days of the Restricted Period, the Company issues an earnings release or discloses material news or a material event relating to the Company occurs or (ii) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Restricted Period, the restrictions imposed by this Letter Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

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Notwithstanding anything else herein, the restrictions contained in the foregoing paragraphs shall not apply to any of the following: (a) transfers of shares of Common Stock or any security convertible into or exchangeable or exercisable for Common Stock as a bona fide gift or gifts, by will or intestacy or to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, or (b) distributions by a trust to its beneficiaries of shares of Common Stock or any security convertible into or exchangeable or exercisable for Common Stock, or (c) the securities sold or issued in the Transaction; provided that in the case of any transfer or distribution pursuant to clauses (a) or (b), each donee, distributee, trustee or beneficiary shall sign and deliver a lock-up agreement in favor of the Investors substantially in the form of this Letter Agreement.

In addition, with respect to the Transaction only (and any registration statement to be filed in connection therewith), the undersigned waives any rights, including any and all notice rights and requirements, relating to registration under the Securities Act of 1933, as amended (the “Securities Act”), of any shares of Common Stock (or any security convertible into or exchangeable or exercisable for Common Stock) owned either of record or beneficially by the undersigned.  The undersigned further agrees that, without the prior written consent of the Majority Investors, the undersigned will not, during the Restricted Period, make any demand for or exercise any right with respect to the registration under the Securities Act of any shares of Common Stock or any security convertible into or exchangeable or exercisable for Common Stock. Notwithstanding anything to the contrary herein, the undersigned may be included as a selling shareholder in any registration statement filed by the Company on Form S-8.

During the Restricted Period only, the undersigned agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer (except those in compliance with the restrictions set forth in this Letter Agreement) of shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned, provided such instructions specifically state that they are null and void after 210 days from the date hereof.  This Letter Agreement is irrevocable and will be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned.

This letter shall be null and void on the sooner of 210 days from the date hereof of the date on which the  Investors no longer beneficially own any Shares or Warrant Shares (as defined in the Securities Purchase Agreement between the Company and the Investors dated the date hereof).

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In witness whereof, the undersigned has executed and delivered this Letter Agreement to be effective as of the date first set forth above.

Very truly yours,
	(Printed Name of Holder)
By:
	(Signature)
	(If signing on behalf of an entity, print name of person signing and indicate title or capacity, including as a custodian or trustee.)

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SCHEDULE A

INVESTOR

Stillwater LLC

Ginola Limited

Crestflower Corporation

Kettle Hill Partners, LP

Kettle Hill Partners II, LP

Kettle Hill Offshore, Ltd.   

Iroquois Master Fund Ltd. 

Total

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SCHEDULE 2.2(a)

List of Lockup Agreement Signatories

Name	Capacity
Thomas Paulsen	Interim Chief Executive Officer, Director
Michael D. Fowler	Interim Chief Financial Officer
Claude Charles	Director
Paul Cronson	Director
Irwin Engelman	Director
Jacob Goldman	Director
Stephen Seay	Director

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SCHEDULE 3.1(a)

eMagin Corporation Direct and Indirect Subsidiaries

eMagin Corporation has one direct subsidiary and no indirect subsidiaries as indicated below:

Direct Subsidiaries

Virtual Vision, Inc.                                                      A dormant subsidiary incorporated in the State of Delaware

Indirect Subsidiaries

None

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SCHEDULE 3.1(g)

Capitalization Summary

Common shares issued and outstanding	12,620,900 shares
Shares issuable upon option exercise	879,323 shares   (1)
Shares issuable upon warrant exercise	9,340,509 shares   (2), (4)
Shares issuable upon conversion of debt	8,330,689 shares   (3), (5), (6)
Total shares outstanding and issuable	31,171,421 shares

Note:  Closing price of eMagin’s common stock as of March 10, 2008 was $0.96 per share.

1.The Company has a total of 879,323 options outstanding of which approximately 640,746 of these options have an exercise price of $2.60 per share or greater.

2.The Company has a total of 9,340,509 warrants outstanding with an average strike price of $2.65 per share.  Approximately 1,107,052 of these warrants are in the money with a strike price of $0.48 per share or less.

3.The Company has convertible debt with an aggregate principal balance of $5,962,309 outstanding that is convertible into 8,330,689 shares of common stock.

4.Pursuant to anti-dilution provisions contained in warrant agreements the Company has previously issued, the purchase price associated with those warrants is be adjusted when common stock or common stock equivalents are issued at a price per share that is less than the purchase price contained in respective warrants.

5.Pursuant to Section 6.3 of the Amended and Restated 8% Senior Secured Convertible Notes Due 2008, anti-dilutive adjustments to the conversion price per share can occur in the event the Company sells common shares or issues common stock equivalents at a price per share that is less than the $0.75 per share note conversion price that is currently available to such note holders.

6.8% Senior Secured Convertible Note holders have a right of in financings of the Company.  Notice of the proposed financing was provided to all such note holders on February 29, 2008.  With the exception of one note holder (in addition to Stillwater LLC) no notification of participation was received by the Company or its counsel within the prescribed four trading day period for such notification, which expired March 6, 2008.

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SCHEDULE 3.1(r)

Sarbanes-Oxley: Internal Accounting Controls

In connection with Company management’s annual report on internal control over financial reporting now in preparation, the Company anticipates that it will disclose certain “material weaknesses” and/or “significant deficiencies”, as such terms are defined under standards established by the Public Company Accounting Oversight Board, with respect to its compliance with Section 404 of the Sarbanes-Oxley Act.  Concurrently with identification of any items of this nature, the Company expects to present detailed plans for remediating any such weaknesses or deficiencies with a timetable for completion.

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SCHEDULE 3.1(v)

Registration Rights

Pursuant to Section 8 of the Note Purchase Agreement dated July 21, 2006 and amended July 23, 2007 with respect to the 8% Senior Secured Convertible Notes and related warrants, the Company is obligated to file a registration statement with respect to 6,908,864 note conversion shares and 4,831,859 warrant shares.

Pursuant to the Warrant Issuance Agreement dated January 30, 2008 as amended February 28, 2008 between the Company and Moriah Capital, L.P., the Company is obligated to file a registration statement with respect to 1,000,000 warrant shares and 162,500 common shares no later than April 29, 2008.

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EX-10.61

Exhibit 10.61

LOAN AND SECURITY AGREEMENT

by and between

MORIAH CAPITAL, L.P.,

as Lender,

and

EMAGIN CORPORATION,

as Borrower

Dated: August 7, 2007

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LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT dated this 7th day of August 2007 by and between EMAGIN CORPORATION, a Delaware corporation, with its principal place of business located at 10500 N.E. 8th Street, Suite 1400, Bellevue, Washington 98004 (the "Borrower"), and MORIAH CAPITAL, L.P., a Delaware limited partnership with offices at 685 Fifth Avenue, New York, New York 10022 (as further defined below, the "Lender").

R E C I T A L S:

WHEREAS, Borrower desires to enter into an accounts receivable and inventory-based revolving loan credit facility with Lender pursuant to which Lender may make loans to Borrower; and

WHEREAS, Lender is willing to make such loans on the terms and conditions hereinafter set forth; and

WHEREAS, Borrower is willing to agree to the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements herein contained and other good and valuable consideration, Lender and Borrower mutually covenant, warrant and agree as follows:

SECTION 1. DEFINITIONS AND RULES OF INTERPRETATION AND CONSTRUCTION

Specific Terms Defined.  The following terms (including both the singular and plurals thereof) shall have the following meanings unless the context indicates otherwise:

1.1 "Account Debtor" or "account debtor" shall have the meaning ascribed to such term in the UCC and shall also include a Person obligated for payment of an Account.

1.2 "Accounts" shall mean all "accounts" as defined in the UCC, and, in addition, any and all obligations of any kind at any time due and/or owing to Borrower, whether now existing or hereafter arising, and all rights of Borrower to receive payment or any other consideration (whether classified under the UCC of the State of New Yorkor any other state as accounts, accounts receivable, contract rights, chattel paper, general intangibles or otherwise) including, without limitation, invoices, contract rights, accounts receivable, general intangibles, choses-in-action, notes, drafts, acceptances, instruments and all other debts, obligations and liabilities in whatever form owing to Borrower from any person, firm, governmental authority, corporation or any other entity, all security therefor, and all Borrower's rights to goods sold (whether delivered, undelivered, in transit or returned), which may be represented thereby, or with respect thereto, including, but not limited to, all rights as an unpaid vendor (including stoppage in transit, replevin or reclamation), all additional amounts due from any Account Debtor together with all Proceeds and products of any and all of the foregoing.

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1.3 “Advance” shall have the meaning as set forth inSection 2.2 hereof.

1.4 "Affiliate" shall mean, means, with respect to any Person, (a) any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with such Person or (b) any other Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above.  For the purposes of this definition, control of a Person shall mean the power (direct or indirect) to direct or cause the direction of the management or the policies of such Person whether through the ownership of any class of stock or equity of such person or by contract or otherwise.

1.5 "Agreement" shall mean this Loan and Security Agreement (including all Exhibits annexed hereto and the Borrower’s Disclosure Schedule) as originally executed or, if amended, modified, supplemented, renewed or extended from time to time, as so amended, modified, supplemented, renewed or extended.

1.6 “Base Rate” shall have the meaning as set forth in Section 3.1 hereof.

1.7 "Borrower" shall mean eMagin Corporation and its successors.

1.8 “Borrower’s Disclosure Schedule” means the Disclosure Schedule prepared by Borrower that is being delivered to Lender concurrently herewith.

1.9 “Borrowing Base” shall be calculated at any time as the sum of (i) the product obtained by multiplying the outstanding amount of Eligible Accounts, net of all taxes, discounts, allowances and credits given or claimed, by 90%, plus (ii) the lesser of (A) Six Hundred Thousand Dollars ($600,000) or (B) the product(s) obtained by multiplying 50% by the values of Eligible Inventory as determined by Lender in good faith in its reasonably commercial judgment, based on the lower of cost or market.

1.10 “Borrowing Certificate” shall have the meaning as set forth in Section 2.1 hereof.

1.11 "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which banks located in the State of New York are authorized or required to close under applicable banking laws.

1.12 "Capital Assets" shall mean, in accordance with GAAP, fixed assets, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and goodwill); provided, that Capital Assets shall not include any item depreciated or amortized over a useful life of twelve (12) months or less.

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1.13  “Chattel Paper” shall mean all “chattel paper,” as such term is defined in the UCC, including electronic chattel paper

1.14 "Collateral" shall have the meaning as set forth in Section 5.1 hereof.

1.15 “Closing Date” shall mean the date of this Agreement.

1.16 “Common Stock” shall mean the Common Stock, par value $.001 per share, of the Borrower.

1.17 “Convertible Noteholders” shall mean the holders of Convertible Notes.

1.18  “Convertible Notes” shall mean the Company’s 6% Senior Secured Convertible Notes due 2007-2008 issued by the Borrower to the Convertible Noteholders.

1.19 “Convertible Notes Documentation” shall mean all agreements and instruments entered into by the Borrower in connection with the issuance of the Convertible Notes.

1.20 “Default Rate” shall have the meaning as set forth in Section 3.1 hereof.

1.21 “Deposit Accounts” means all “deposit accounts” as such term is defined in the UCC.

1.22 “Eligible Accounts” are accounts created by Borrower in the ordinary course of its business which satisfy the following criteria:

(1)           such accounts arise from bona fide completed transactions and have not remained unpaid for more than ninety (90) days after the invoice date thereof;

(2)            the amounts of the accounts reported to Lender are absolutely owing to Borrower and do not arise from sales on consignment, guaranteed sales or other terms under which payment by the account debtors may be conditional or contingent;

(3)           the account debtor’s chief executive office or principal place of business is located in the United States, unless payment of any such account debtor’s accounts is backed by a letter of credit or credit insurance acceptable to, and approved by, Lender in its sole discretion);

(4)           such accounts do not arise from any unearned portions of fees derived from progress billings, as determined by Lender in its sole and absolute discretion, or from any retainages or bill and hold sales;

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(5)            there are no contra relationships, setoffs, counterclaims or disputes existing with respect thereto;

(6)           the goods giving rise thereto were not at the time of the sale subject to any Liens except for Permitted Encumbrances, and such accounts are free and clear of all Liens except for Permitted Encumbrances;

(7)           such accounts are not accounts with respect to which the account debtor or any officer or employee thereof is an officer, employee or agent of or is affiliated with Borrower, directly or indirectly, whether by virtue of family membership, ownership, control, management or otherwise;

(8)           such accounts are not accounts with respect to which the account debtor is the United States or any state or political subdivision thereof or any department, agency or instrumentality of the United States, any state or political subdivision, unless there has been compliance with the Assignment of Claims Act or any similar state or local law, if applicable;

(9)           Borrower has delivered to Lender or Lender’s representative such documents as Lender may have requested in connection with such accounts and Lender shall have received a verification of such account, satisfactory to it, if sent to the account debtor or any other obligor or any bailee;

(10)           there are no facts existing or threatened which might result in any material adverse change in the account debtor’s financial condition, except for the state of facts in existence on March 27, 2007 that caused Borrower’s accountants, Eisner LLP, to issue a “going concern” qualification in their opinion of that date to Borrower, as set forth in Borrower’s Annual Report on Form 10-K for the year ended December 31, 2006;

(11)           such accounts owed by a single account debtor or its affiliates do not represent more thanthirty percent (30%) of all otherwise Eligible Accounts (accounts excluded from Eligible Accounts solely by reason of this subsection (11) shall nevertheless be considered Eligible Accounts to the extent of the amount of such accounts which does not exceed such percentage of all otherwise Eligible Accounts); and

(12)           such accounts are not owed by an account debtor who is or whose affiliates are past due upon other accounts owed to Borrower comprising more than fifty percent (50%) of the accounts of such account debtor or its affiliates owed to Borrower.

1.23  “Eligible Inventory” shall mean all Inventory of the Borrower, excluding any Inventory having any of the following characteristics:

(i)           Inventory that is: in-transit; located at any warehouse or other premises not approved by Lender in writing or as to which Lender has not received a landlord or mortgagee waiver in form and substance acceptable to Lender; not subject to a duly perfected first priority security interest in Lender's favor; subject to any lien or encumbrance that is not subordinate to Lender's first priority security interest; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other  document of title; on consignment from any Person; on consignment to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with Lender;

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(ii)           Work-in-process Inventory;

(iii)           Inventory that is damaged, defective, obsolete, discontinued, tainted, slow moving or not currently saleable in the normal course of the Borrower's operations, or the amount of such Inventory that has been reduced by shrinkage;

(iv)           Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof;

(v)           Inventory manufactured by the Borrower pursuant to a license unless the applicable licensor has rights adverse to Lender that would interfere with  Lender’s  exercise of its rights and remedies against such Inventory;

(vi)           Inventory that is subject to a Lien in favor of any Person other than Lender;

(vii)           Inventory stored at locations holding less than ten (10%) of the aggregate value of Borrower’s Inventory; and

(viii)                      Inventory not covered by a casualty insurance policy acceptable to Lender and under which Lender has been named as a loss payee and additional insured.

1.24 "Environment" means all air, surface water, groundwater or land, including, without limitation, land surface or subsurface, including, without limitation, all fish, wildlife, biota and all other natural resources.

1.25 "Environmental Law" or "Environmental Laws" shall mean all federal, state and local laws, statutes, ordinances and regulations now or hereafter in effect, and in each case as amended or supplemented from time to time, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation).

1.26 "Environmental Liabilities and Costs" shall mean, as to any Person, all liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any other Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any Environmental Law, permit, order or agreement with any Governmental Authority or other Person, and which arise from any environmental, health or safety conditions, or a Release or conditions that are reasonably likely to result in a Release, and result from the past, present or future operations of such Person or any of its Affiliates.

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1.27 "Environmental Lien" shall mean any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs.

1.28 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.

1.29 "Equipment" shall mean "equipment", as such term is defined in the UCC, now owned or hereafter acquired by Borrower and, wherever located, and shall include, without limitation, all equipment, machinery, furniture, fixtures, computer equipment, telephone equipment, molds, tools, dies, partitions, tooling, transportation equipment, all other tangible assets used in connection with the manufacture, sale or lease of goods or rendition of services, and Borrower's interests in any leased equipment, and all repairs, modifications, alterations, additions, controls and operating accessories thereof or thereto, and all substitutions and replacements therefor.

1.30 "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 11 of this Agreement which is not remedied within any applicable grace or cure period.

1.31 “Financial Statements” shall have the meaning as set forth in Section 8.9 hereof.

1.32 "Financing Statements" shall mean the Uniform Commercial Code UCC-1 Financing Statements to be filed with applicable Governmental Authorities of each State or Commonwealth or political subdivisions thereof pursuant to which Lender shall perfect its security interest in the Collateral.

1.33 "Fiscal Year" shall mean that twelve (12) month period commencing on January 1 and ending on December 31.

1.34 “GAAP” means generally accepted accounting principles in effect in the United States of America at the time of any determination, and which are applied on a consistent basis.  All accounting terms used in this Agreement which are not expressly defined in this Agreement shall have the meanings given to those terms by GAAP, unless the context of this Agreement otherwise requires.

1.35 "Governmental Authority" or "Governmental Authorities" shall mean any federal, state, county or municipal governmental agency, board, commission, officer, official or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

1.36 “Indebtedness" shall mean, with respect to any Person, all of the obligations of such Person which, in accordance with GAAP, should be classified upon such Person’s balance sheet as liabilities, or to which reference should be made by footnotes thereto, including without limitation, with respect to Borrower, in any event and whether or not so classified:

(a)           all debt and similar monetary obligations of Borrower, whether direct or indirect, including, without limitation, Subordinated Debt;

(b)           all obligations of Borrower arising or incurred under or in respect of any guaranties (whether direct or indirect) by Borrower of the indebtedness, obligations or liabilities of any other Person; and

7

(c)           all obligations of Borrower arising or incurred under or in respect of any Lien upon or in any property owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations.

1.37 “Intellectual Property” shall mean 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 Borrower or any Subsidiary.

1.38 “Intercreditor Agreement" shall mean the Intercreditor Agreement, dated of even date herewith, among the Lender, Alexandra Global Master Fund Ltd., in its capacity as Collateral Agent for the Convertible Noteholders, and Borrower, in the form annexed hereto as Exhibit [_].

1.39 "Inventory" shall mean any "inventory," as such term is defined in the UCC, now owned or hereafter acquired by Borrower, wherever located, and, in any event, shall include, without limitation, all raw materials, work-in-process, finished and semi-finished Inventory including, without limitation, all materials, parts, components and supplies relating to the manufacture or assembly thereof, packaging and shipping supplies relating thereto, and all other inventory, merchandise, goods and other personal property now or hereafter owned by Borrower, which are held for sale, exchange or lease or are furnished or are to be furnished under a contract of service or an exchange arrangement or which constitute raw materials, work-in-process or materials used or consumed or to be used or consumed in Borrower's business, or the processing, packaging, delivery or shipping of the same, and all finished goods and the products of the foregoing, whatever form and wherever located; and all names or marks affixed to or to be affixed thereto for purposes of selling same by the seller, manufacturer, lessor or licensor thereof and all right, title and interest of Borrower therein and thereto.

1.40 “Interest” shall have the meaning as set forth in Section 3.1 hereof.

1.41 “Investment Property” means all “investment property”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located.

1.42 “Landlord Agreements” shall mean(i) the agreement, of even date herewith,  between Capgemeni U.S. LLC, as sublandlord, Lender and the Borrower, as tenant, as consented to by Bellevue Place Office Building Limited Partnership, with respect to the leased premises at 10500 N.E. 8th Street, Bellevue, Washington 98004, in the form of Exhibit F-1 annexed hereto, and (ii) the agreement, of even date herewith, among International Business Machines Corporation, as landlord, Lender and the Borrower, as tenant, with respect to the leased premises at 2070 Route 52, Hopewell Junction, NY 12533, in the form of Exhibit F-2 annexed hereto .

1.43 “Letter-of-Credit Rights” means “letter-of-credit rights” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including rights to payment or performance under a letter of credit, whether or not such Person, as beneficiary, has demanded or is entitled to demand payment or performance.

1.44  "Lien" or "lien" shall mean any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, lien (statutory or other), charge, or other encumbrance of any kind or nature whatsoever (including, without limitation, pursuant to any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction to evidence any of the foregoing) on personal or real property or fixtures.

1.45 "Loan" and “Loans” shall respectively mean the principal amounts outstanding from time to time respecting any and all Advances.

1.46 "Loan Documents" shall mean this Agreement and any and all other agreements, notes, documents, mortgages, financing statements, guaranties, intercreditor agreements, subordination agreements,  certificates and instruments executed and/or delivered by Borrower or any other Person to Lender pursuant to and in connection with the Loan and this Agreement, including, without limitation the Note, the Intercreditor Agreement, the Securities Issuance Agreement, the Lockbox Agreement, the Landlord Agreements, the Note Conversion Agreement and the Registration Rights Agreement.

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1.47 “Lockbox” shall have the meaning assigned to such term in the Lockbox Agreement.

1.48 “Lockbox Agent” means the person serving from time to time as the Lockbox Agent under the Lockbox Agreement.

1.49 “Lockbox Agreement” means that certain Lockbox Agreement dated as of the date hereof, among Lender, the Borrower and the Lockbox Agent.

1.50 "Material Adverse Effect" means a materially adverse effect on (a) the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower, (b) the ability of the Borrower to perform its obligations under any Loan Document to which it is a party, (c) the value of the Collateral or the rights of Lender therein, (d) the validity or enforceability of any of the Loan Documents, (e) the rights and remedies of Lender under any of such Loan Documents or (f) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith.  Except with respect to representations made or deemed made by Borrower in any of the other Loan Documents to which it is a party, all determinations of materiality shall be made by the Lender in its reasonable judgment unless expressly provided otherwise.

1.51 "Material Contract" means any contract or other arrangement (other than Loan Documents), whether written or oral, to which the Borrower is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto could have a Material Adverse Effect.

1.52 “Maturity Date” shall mean August 7, 2008, or such earlier date by which the maturity of the Obligations shall have been accelerated pursuant to the terms hereof; provided, however, that the Maturity Date may be extended by the Lender in its sole and absolute discretion for one (1) additional year to August 7, 2009 in accordance with Section 4.1 hereof.

1.53 "Maximum Credit" shall mean the amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00.)

1.54 “1934 Act” shall mean the Securities Exchange Act of 1934, as amended.

1.55 “Note” shall have the meaning as set forth in Section 2.1.

1.56 “Note Conversion Agreement” shall mean the Note Conversion Agreement, of even date herewith, between Lender and Borrower with respect to the terms of conversion of the Note.

1.57 "Obligations" shall mean any and all Loans and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower to Lender and/or its Affiliates, including, without limitation, principal, interest, repurchase obligations, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement, the other Loan Documents or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender.

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1.58 "Permitted Encumbrances" shall mean the following:  (a) security interests and Liens granted to Lender or its Affiliates; (b) purchase money security interests in favor of equipment vendors upon any Capital Assets hereafter acquired (including, without limitation, capitalized or finance leases); provided that, (i) no such purchase money or other mortgage, Lien or security interest (or capitalized or finance lease, as the case may be) with respect to specific future Capital Assets or as refinanced shall extend to or cover any other property, other than the specific Capital Assets so acquired, and the proceeds thereof, (ii) such mortgage, Lien or security interest only secures the cost or obligation to pay the purchase price of such specific Capital Assets only (or the obligations under the capitalized or finance lease) and (iii) the principal amount secured thereby shall not exceed one hundred (100%) percent of the lesser of the cost or the fair market value (at the time of the acquisition of the Capital Assets) of the Capital Assets so acquired; (c) Liens of carriers, warehousemen, artisans, bailees, mechanics and materialmen incurred in the ordinary course of business securing sums not overdue; (d) Liens incurred in the ordinary course of business in connection with worker’s compensation, unemployment insurance or other forms of governmental insurance or benefits, relating to employees, securing sums (i) not overdue or (ii) being diligently contested in good faith provided that adequate reserves with respect thereto are maintained on the books of the Borrower in conformity with GAAP; (e) Liens for taxes (i) not yet due or (ii) being diligently contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower in conformity with GAAP; and which have no effect on the priority of Liens in favor of Lender or the value of the assets in which Lender has a Lien;  (f) subject to the terms of theIntercreditor  Agreement, the Liens in favor of the Convertible Noteholders described therein  and (g) such other Liens as are set forth on Exhibit A annexed hereto and made a part hereof.

1.59 "Person" or "person" shall mean, as applicable, any individual, sole proprietorship, partnership, corporation, limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof.

1.60 "Proceeds" shall have the meaning ascribed to such term in the UCC and shall also include, but not be limited to, (a) any and all proceeds of any and all insurance (including, without limitation, life insurance, business interruption insurance and credit insurance), indemnity, warranty or guaranty payable to Borrower from time to time with respect to any of the Collateral or otherwise, (b) any and all payments (in any form whatsoever) made or due and payable to Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency or any other Person (whether or not acting under color of Governmental Authority) and (c) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral.

1.61 “Registration Rights Agreement” shall mean the Registration Rights Agreement, of even date herewith, between Borrower and Lender, in the form of ExhibitH annexed hereto.

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1.62 "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a Hazardous Substance into the Environment.

1.63 "Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of the Maximum Credit which would otherwise be available to Borrower (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may adversely affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof); or (b) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

1.64 “Responsible Officer” shall mean the Chief Executive Officer or the Chief Financial Officer of the Borrower.

1.65 “Revolving Loan Commitment” shall mean the commitment to make Revolving Loans to Borrower in the aggregate principal amount outstanding not to exceed the lesser of (a) the Maximum Credit or (b) the Borrowing Base, as such Revolving Loan Commitment may be adjusted pursuant to the terms of this Agreement.

1.66 “Revolving Loans” shall have the meaning as set forth in Section 2.1 hereof.

1.67 “SEC” shall mean the United States Securities and Exchange Commission.

1.68 “SEC Reports” shall mean the Borrower’s (1) Annual Report on Form 10-K for the year ended December 31, 2006, (2) Quarterly Report on Form 10-Q for the quarter ended March 31, 2007,and (3) all other periodic and other reports filed by the Borrower with the SEC pursuant to the 1934 Act subsequent to December 31, 2006, 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.

1.69 “Securities Issuance Agreement” shall have the meaning set forth in Section 6.9.

1.70 “Servicing Fee” shall have the meaning as set forth in Section 3.2 hereof.

1.71 "Subordinated Debt" shall mean, at any particular time, Indebtedness of Borrower that shall be expressly subordinated upon written terms and conditions, satisfactory to Lender, in right of payment to the prior payment in full of all of the Obligations.

1.72 "Subsidiary" shall mean, as to any Person, a corporation, limited liability company or other entity with respect to which more than fifty (50%) percent of the outstanding equity interests of each class having voting power is at the time owned by such Person or by one or more Subsidiaries of such Person or by such Person.

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1.73 "Term" shall have the meaning set forth in Section 4.1.

1.74 "UCC" shall mean the Uniform Commercial Code as presently enacted inNew York (or any successor legislation thereto), and as the same may be amended from time to time, and the state counterparts thereof as may be enacted in such states or jurisdictions where any of the Collateral is located or held.

1.75 Rules of Interpretation and Construction.  In this Agreement unless the context otherwise requires:

(a) All terms used herein which are defined in the UCC (as presently in effect in the State of New York) shall have the meanings given therein unless otherwise defined in this Agreement;

(b) Sections mentioned by number only are the respective Sections of this Agreement as so numbered;

(c) Words importing a particular gender shall mean and include the other gender and words importing the singular number mean and include the plural number and vice versa;

(d) Words importing persons shall mean and include firms, associations, partnerships (including limited partnerships), societies, trusts, corporations or other legal entities, including public or governmental bodies, as well as natural persons;

(e) Each reference in this Agreement to a particular person shall be deemed to include a reference to such person's successors and permitted assigns;

(f) Any headings preceding the texts of any Section of this Agreement, and any table of contents or marginal notes appended to copies hereof are intended, solely for convenience of reference and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect;

(g) If any clause, provision or section of this Agreement shall be ruled invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any of the remaining provisions thereof;

(h) The terms "herein", "hereunder", "hereby", "hereto", and any similar terms as used in this Agreement refer to this Agreement; the term "heretofore: means before the date of execution of this Agreement; and the term "hereafter" shall mean after the date of execution of this Agreement;

(i) If any clause, provision or section of this Agreement shall be determined to be apparently contrary to or conflicting with any other clause, provision or section of this Agreement, then the clause, provision or section containing the more specific provisions shall control and govern with respect to such apparent conflict;

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(j) Unless otherwise specified, (i) all accounting terms used herein or in any Loan Document shall be interpreted in accordance with GAAP, (ii) all accounting determinations and computations hereunder or thereunder shall be made in accordance with GAAP, and (iii) all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with GAAP;

(k) An Event of Default that occurs shall exist or continue or be continuing unless such Event of Default is waived by Lender in accordance with the terms of this Agreement; and

(l) The word "and" when used from time to time herein shall mean "or" or "and/or" if such meaning is expansive of the rights or interests of Lender in the given context.

SECTION 2. REVOLVING LOANS

2.1 Revolving Loans.

(a)     Lender shall, subject to the terms and conditions contained herein and the satisfaction of the closing and funding conditions set forth herein, make revolving loans to Borrower (“Revolving Loans”) during the Term in amounts requested by Borrower from time to time, provided that the requested Revolving Loan would not cause the outstanding Revolving Loans to exceed the lesser of the Maximum Credit or the Borrower Base  existing immediately prior to the making of the requested Revolving Loan.  Subject to the terms and conditions hereof, Borrower may borrow, repay and reborrow Revolving Loans, as set forth in this Agreement.

b)       Revolving Loans may be drawn in tranches of not less than Twenty-Five Thousand Dollars ($25,000) no more than 5 (five) times each month  (each drawing, an “Advance” and collectively, the “Advances”). The obligation of Borrower to repay the Advances shall be evidenced by a note (the "Note") in the form of Exhibit Bhereto and dated the date hereof.

                 (c)     Subject to mandatory payment of Advances as set forth in Section 2.1(d) below,  the principal amount of the Revolving Loans shall be payable on the Maturity Date.

                 (d)    Notwithstanding any provision herein to the contrary, Borrower shall repay the Advances immediately at any time and from time to time in an amount by which the outstanding principal balance of the Advances exceeds the Maximum Credit, as determined by Lender, based on the most recent monthly Inventory reconciliation report delivered by Borrower to Lender in accordance with Section 9.5 hereof.

                 (e)    Whenever Borrower desires an Advance, but no more frequently than  five (5) times every thirty (30) days, Borrower will notify Lender by delivery of a borrowing certificate certified by a Responsible Officer (“Borrowing Certificate”) setting forth in reasonable detail a schedule of Eligible Accounts and Eligible Inventory, and the calculation of the Advance requested in connection therewith, which shall in all respects be subject to Lender’s review and approval. Lender shall be entitled to rely on any facsimile transmission of a Borrowing Certificate given by a person who Lender reasonably believes to be a Responsible Officer, and Borrower shall indemnify and hold Lender harmless for any damages or loss suffered by Lender as a result of such reliance. The funding of each Advance shall be made in accordance with the applicable Borrowing Certificate as approved by Lender.

                          (f)      Until the Revolving Loans have been repaid and this Agreement has been terminated, remittances and all other proceeds of Borrower’s accounts receivable  shall be sent to a lockbox designated by and/or maintained in the name of Lender, and deposited into a bank account now or hereafter selected by Lender and maintained in the name of Lender under arrangements with the depository bank under which all funds deposited to such bank account are required to be transferred solely to Lender.  Once instituted, such lockbox system shall remain in effect until the sooner of the termination of this Agreement or such time as Lender directs otherwise.  Borrower shall bear all risk of loss of any funds deposited into such account except to the extent such loss is covered by the gross negligence or the willful misconduct of Lender.  In connection therewith, Borrower shall execute such lockbox and bank account agreements as Lender shall reasonably specify to effect the transactions contemplated hereby, including the Lockbox Agreement.  Until this Agreement is terminated, any collections or other proceeds received by Borrower from sales of Eligible Inventory and the proceeds from the receipt of the Borrower’s accounts receivables shall be held in trust for Lender and immediately remitted to Lender in kind.

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2.2 Maximum Credit.  The aggregate principal amount of the Revolving Loans shall not exceed the Maximum Credit.

2.3 Reserves.  Without limiting any other rights and remedies of Lender hereunder or under the other Loan Documents, the Maximum Credit shall be subject to Lender's continuing right, in its sole discretion, to withhold a Reserve from Borrower's availability under the Maximum Credit.

2.4 Use of Proceeds.  Borrower shall use the proceeds of each Advance solely for working capital purposes and such other purposes as are set forth in  Section 2.4 of the Borrower’s Disclosure Schedule, or as otherwise agreed in writing by Lender prior to the release of such Advance under Section 2.1 hereunder.

2.5 Repayment. Except as otherwise set forth herein, Borrower shall repay the aggregate outstanding principal amount of the Loans and all accrued and unpaid Interest, as calculated in Section 3.1, on or prior to the Maturity Date.

SECTION 3. INTEREST, FEES AND CHARGES

3.1 Interest.

(a)             Interest (“Interest”) on all Loans shall be computed on the basis of the actual number of days elapsed and a year of 360 days. Interest shall accrue at a rate per annum equal to the greater of (i) the sum of (A) the Base Rate plus (B) Two Percent (2.0%), or (ii) Ten Percent (10%), and shall be payable by Borrower in arrears (x) prior to the Maturity Date, on the first Business Day of each calendar month, (y) in full on the Maturity Date and (z) on demand after the Maturity Date. Should Borrower fail to fully repay the Loans and/or all accrued Interest on the Maturity Date, then interest on all outstanding Loans, including principal and Interest, shall accrue at the Default Rate, compounded quarterly.

(b)             For the purposes of this Section 3.1,

(i)             “Base Rate” means a rate per annum equal to the “Prime Rate” as reported  in the “Money Rates” column of The Wall Street Journal, adjusted as and when such Prime Rate changes.

(ii)             “Default Rate” means a rate per annum equal to fifteen percent (15%).

3.2 Servicing Fee.  Borrower shall pay Moriah Capital Partners LLC a servicing fee (“Servicing Fee”) of $82,500.00 on the date hereof. Such fee shall be deemed fully earned on the date hereof and shall not be subject to rebate or proration for any reason.

3.3 Late Charges. If the payment of any Obligation due hereunder is more than  fifteen (15)  days overdue, then, in addition to any interest charges payable by Borrower  in connection therewith, Lender may charge Borrow a late fee of two and one-half  percent (2.5%) of such overdue payment.

3.4 Fees and Expenses.  Borrower shall pay, on Lender's demand, all costs, expenses, filing fees and taxes payable in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Loan Documents, and all other existing and future agreements or documents contemplated herein or related hereto, including any amendments, waivers, supplements or consents which may now or hereafter be made or entered into in respect hereof, or in any way involving claims or defenses asserted by Lender or claims or defenses against Lender asserted by Borrower or any third party directly or indirectly arising out of or related to the relationship between Borrower and Lender, including, but not limited to the following, whether incurred before, during or after the Term or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar or successor statute: (a) all costs and expenses of filing or recording (including UCC Financing Statement and mortgage filing fees; (b) all title insurance and other insurance premiums, appraisal fees, fees incurred in connection with any environmental report and audit, survey and search fees and charges; (c) all fees relating to lockbox charges and fees, the wire transfer of loan proceeds and other funds and fees for returned checks; ; and (d) all costs, fees and disbursements of counsel to Lender; provided, however, and notwithstanding anything to the contrary herein, with respect to any due diligence conducted by the Lender in connection with the transactions contemplated by this Agreement, Borrower shall pay the Lender up to $15,000, of which $10,000 has already been paid, and with respect to any legal fees incurred by the Lender in connection with this Agreement as of the date hereof, the Borrower shall pay up to $20,000 of Lender’s actual legal fees. If any fees, costs or charges payable to Lender hereunder are not paid when due, Borrower shall thereby be deemed to have requested, and Lender is hereby authorized at its discretion to make and charge to Borrower’s account, a Loan as of such date in an amount equal to such unpaid fees, costs or charges. For the avoidance of doubt, Borrower shall not be obligated to pay Lender more than $35,000 pursuant to this Section for pre-closing due diligence of Lender and pre-closing legal fees, excluding filing and recording fees and expenses.  Notwithstanding anything to the contrary herein, unless an Event of Default shall have occurred and is continuing, Borrower shall not pay (i) any out-of-pocket expenses and costs hereinafter incurred by Lender during the course of its periodic field examinations of the Collateral and Borrower’s operations and (ii) any out-of-pocket expenses of any appraiser appointed by Lender to value the Inventory. 

3.5 Savings Clause.  The Note and the obligations of Borrower hereunder are subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the principal balance due hereunder at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay.  If by the terms hereof, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of such maximum rate, the Interest Rate or the Default Rate, as the case may be, shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of the maximum rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder.  All sums paid or agreed to be paid to Lender for the use or forbearance of the Loans, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Note until payment in full so that the rate or amount of interest on account of the Loans does not exceed the maximum lawful rate of interest from time to time in effect and applicable to the Loans for so long as any Loan is outstanding.

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SECTION 4. TERM.

4.1       Term.

(a)              This Agreement shall continue in full force and effect for a term ( as the same may hereafter be extended, the “Term”) from the Closing Date through and until August 7, 2008 (the “Initial Term”), or such earlier date by which the maturity of the Obligations shall have been accelerated pursuant to the terms hereof; provided, however, that upon the satisfaction of the conditions set forth in Section 4.1(b) below, the Term may be extended by Borrower for one (1) additional year to August 7, 2009 (the “Term Extension”) by written notice delivered to Lender no earlier than May 7, 2008 and no later than June 7, 2008, with time being of the essence with respect thereto (the date of delivery of such notice referred to as the “Extension Notice Date”).

(b)              Notwithstanding the foregoing, the Term Extension shall be subject to Borrower’s satisfaction of, and compliance with, all of the following conditions, as determined by Lender  (collectively, the “Extension Conditions”):

(i)           Representations and Warranties.  Each of the representations and warranties made by or on behalf of Borrower to Lender in this Agreement or in other Loan Documents shall be true and correct in all material respects when made at all times during the period from the Extension Notice Date through the expiration of the Initial Term (provided that any such representation or warranty that is qualified as to materiality shall be true and correct in all respects), and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

(ii)           Performance, etc.  Borrower shall have duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in this Agreement, and shall have duly and properly performed, complied with and observed in all respects its covenants, agreements and obligations in all other articles of this Agreement and any of the Loan Documents to which it is a party or by which it is bound, as of the Extension Notice Date through the expiration of the Initial Term, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

(iii)           No Default. No event shall have occurred on or prior to the Notice Extension Date or at any time thereafter and be continuing as of the Notice Extension Date through the expiration of the Initial Term, and no condition shall exist on the Notice Extension Date or at any time thereafter and be continuing as of the Notice Extension Date through the expiration of the Initial Term, which constitutes an Event of Default or which would, with notice or the lapse of time, or both, constitute an Event of Default under this Agreement or any of the Loan Documents, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

(iv)           Share Issuance. Borrower shall have issued to Lender additional shares of Common Stock valued at $195,000, in accordance with the terms of the Securities Issuance Agreement, all of which shares shall be registered in accordance with the terms of the Registration Rights Agreement.

(v)           Financial Condition.  Borrower shall have had positive earnings before interest, taxes, depreciation and amortization for the three months ended June 30, 2008, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing in form and substance satisfactory to Lender.

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(c)              In the event that the Extension Conditions are not satisfied, then  this Agreement shall terminate upon the expiration of the Initial Term, or such earlier date by which the maturity of the Obligations shall have been accelerated pursuant to the terms hereof.

4.2 Early Termination.

(a)              Lender shall have the right to terminate this Agreement at any time upon or after the occurrence of an Event of Default.

(b)              This Agreement shall not be terminable by Borrower without Lender’s prior written consent, which consent may be withheld by Lender in its sole discretion.

Notwithstanding the foregoing, if Lender accelerates the Loans due to an Event of Default, Borrower shall pay to Lender an early payment fee in an amount equal to (i) two percent (2%) of the Maximum Credit  if such acceleration occurs prior to the first anniversary of the Closing Date, and (ii) one percent (1%) of the Maximum Credit if such acceleration occurs on or after the first anniversary of the Closing Date; such fee being intended to compensate Lender for its costs and expenses incurred in initially approving this Agreement or extending same. Such early payment fee shall be due and payable by Borrower to Lender upon termination by acceleration of this Agreement by Lender due to the occurrence and continuance of an Event of Default.

4.3 Effect of Termination.  Upon termination of this Agreement by Lender upon or after the occurrence of an Event of Default, in addition to payment of all Obligations which are not contingent, Borrower shall deposit such amount of cash collateral as Lender determines is reasonably necessary to secure Lender from loss, cost, damage or expense in connection with any remittance items or other payments provisionally credited to the Obligations and/or to which Lender has not yet received final and indefeasible payment.

SECTION 5. COLLATERAL.

5.1 Security Interests in Borrower's Assets.  As collateral security for the payment and performance of the Obligations, subject to the last paragraph of this Section 5.1, Borrower hereby grants and conveys to Lender a first priority continuing security interest in and Lien upon all now owned and hereafter acquired property (including, without limitation, real property) and assets of Borrower and the Proceeds and products thereof (which property, assets together with all other collateral security for the Obligations now or hereafter granted to or otherwise acquired by Lender, are referred to herein collectively as the "Collateral"), including, without limitation, all property of Borrower now or hereafter held or possessed by Lender and including the following:

(a) All now owned and hereafter acquired:  Accounts; contract rights; chattel paper (including, but not limited to, rentals and other amounts payable under leases of equipment to customers pursuant to which Borrower is the lessor or assignee of any lessor); general intangibles (including, but not limited to, tax and duty refunds, patents, patent applications, trademarks, trademark applications, tradenames and tradestyles, copyrights, copyright applications, trade rights (whether or not registered), discoveries, improvements, processes, know-how, formulas, trade secrets, service marks, other rights in intellectual property (whether patentable or not), goodwill, customer and mailing lists, life insurance policies, licenses (whether as licensor or licensee), franchises and permits); documents (including, without limitation, all warehouse receipts); instruments; all guaranties, letters of credit, steamship guaranties, airway releases or other similar guaranties, agreements or property securing or relating to any of the items referred to above (including, but not limited to, purchase money security interests granted by Account Debtors in connection with installment sales); all cash monies, investment properties, deposits, securities, bank accounts, deposit accounts, credits and other property now or hereafter held in any capacity by Lender;

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(b) Inventory;

(c) Equipment and fixtures;

(d) All now owned and hereafter acquired right, title and interests of Borrower in, to and in respect of any real or other personal property in or upon which Lender has or may hereafter have a security interest, Lien or right of setoff;

(e) All of Borrower's existing and future leasehold interests in premises or facilities leased from third parties by Borrower;

(f) All present and future books and records relating to any of the above including, without limitation, all present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to any of the foregoing maintained with or by any other Person); and

(g) Any and all products and Proceeds of the foregoing in any form including, without limitation, all insurance claims, warranty claims and proceeds and claims against third parties for loss or destruction of or damage to any or the foregoing.

Notwithstanding the foregoing, Lender’s Lien upon Borrower’s Collateral other than Accounts and Inventory shall be subject to the prior Lien of the Convertible Noteholders in accordance with the terms of, and subject to the conditions set forth in, the Intercreditor Agreement.

5.2 Financing Statements.  Borrower hereby authorizes Lender to file Financing Statements with respect to the Collateral in form acceptable to Lender and its counsel, and hereby ratifies any actions taken by Lender prior to the date hereof to file such Financing Statements.  Borrower shall, at all times, do, make, execute, deliver and record, register or file all Financing Statements and other instruments, acts, pledges, leasehold or other mortgages, amendments, modifications, assignments and transfers (or cause the same to be done), and will deliver to Lender such instruments and/or documentation evidencing items of Collateral, as may be requested by Lender to better secure or perfect Lender's security interest in the Collateral or any security interest, mortgage or Lien with respect thereto.Borrower acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any Financing Statement without the prior written consent of Lender and agrees that it will not do so without the prior written consent of Lender, subject to Borrower’s rights under Section 9-509(d)(2) of the UCC.

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SECTION 6. CONDITIONS TO EXTENSION OF CREDIT

The obligation of Lender to make the initial Loans under this Agreement shall be subject to the satisfaction or waiver by Lender, prior thereto or concurrently therewith, of each of the following conditions precedent:

6.1 Loan Documents.  Each of the Loan Documents shall have been duly and properly authorized, executed and delivered by Borrower and the other parties thereto and shall be in full force and effect as of the date hereof and on the date of the initial Loans.

6.2 Representations and Warranties.  Each of the representations and warranties made by or on behalf of Borrower to Lender in this Agreement or in other Loan Documents shall be true and correct in all material respects as of the date hereof and on the date of the initial Loans, provided that any such representation or warranty that is qualified by materiality shall be true and correct in all respects as of the date hereof and on the date of the initial Loans.

6.3 Certified Copies of Corporate Documents.  Lender shall have received from Borrower, certified by a duly authorized officer to be true and complete on and as of a date which is not more than ten (10) Business Days prior to the date hereof, a copy of each of (a) the certificate of incorporation or such other formation documents of Borrower in effect on such date of certification, and (b) the by-laws of Borrower in effect on such date.

6.4 Proof of Corporate Action.  Lender shall have received from Borrower a copy, certified by a duly authorized officer to be true and complete on and as of the date which is not more than ten (10) Business Days prior to the date hereof, of the records of all corporate action taken by Borrower to authorize (a) its execution and delivery of each of the Loan Documents to which it is or is to become a party as contemplated or required by this Agreement, (b) its performance of all of its agreements and obligations under each of such documents, and (c) the incurring of the Obligations contemplated by this Agreement.

6.5 Legal Opinion.  Lender shall have received a written legal opinion, addressed to Lender, dated the date hereof, from counsel for Borrower.  Such legal opinion shall be acceptable to Lender and its counsel.

6.6 Collateral.

(a)           All of the Obligations of Borrower to Lender under or in respect of this Agreement shall be entitled to all of the benefits of and be secured by this Agreement and the Loan Documents, and Lender shall have obtained a first, perfected security interest in the Collateral of Borrower, subject only to the Permitted Encumbrances.

(b)           The Loan Documents and all other documents in respect thereto, which shall create and maintain a first perfected security interest in favor of Lender and the appropriate Financing Statements in respect thereto and necessary to enable Lender to perfect its security interests thereunder, shall have been duly executed and delivered by Borrower to Lender.

6.7 Insurance.  Lender shall have received evidence of insurance, additional insured and loss payee endorsements required hereunder and under the other Loan Documents, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee as required hereunder.

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6.8 Intercreditor Agreement.  Lender shall have received the Intercreditor Agreement, duly executed by or on behalf of the Convertible Noteholders.

6.9 Equity Grant.  The Borrower shall have issued to Lender Common Stock of the Borrower valued at $195,000, on the terms set forth in the Securities Issuance Agreement, of even date herewith, between the Borrower and Lender (the “Securities Issuance Agreement”) in substantially the form annexed hereto as Exhibit D.

6.10 Pay Proceeds Letter. Borrower shall have delivered to Lender a pay proceeds letter with respect to the disbursement of the proceeds of the initial Loans in form and substance satisfactory to Lender, which letter shall provide for, among other things, the payment or reimbursement of all costs and expenses incurred by Lender in connection with this Agreement and the other Loan Documents.

SECTION 7. CONDITIONS TO MAKING FURTHER LOANS.

The obligations of Lender to make further Loans to Borrower shall be subject to the satisfaction or waiver by Lender, prior thereto or concurrently therewith, of each of the following conditions precedent:

7.1 Applications and Compliance.  The application for such Loans shall have been made by Borrower to Lender in accordance with the applicable provisions of this Agreement and in compliance with all provisions of this Agreement.

7.2 Representations and Warranties.  Each of the representations and warranties made by or on behalf of Borrower to Lender in this Agreement or in other Loan Documents shall have been true and correct in all material respects when made (provided that any such representation or warranty that is qualified as to materiality shall be true and correct in all respects), shall, for all purposes of this Agreement, be deemed to be repeated on and as of the date of each Loan by Lender hereunder and shall be true and correct in all respects on and as of each such date, except to the extent that any of such representations and warranties relate, by the express terms thereof, solely to a date prior to the date of each Loan by Lender hereunder, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

7.3 Performance, etc.  Borrower shall have duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in this Agreement, and shall have duly and properly performed, complied with and observed in all respects its covenants, agreements and obligations in all other articles of this Agreement and any of the Loan Documents to which it is a party or by which it is bound on the date of each Loan by Lender hereunder, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.  No event shall have occurred on or prior to the date of each Loan by Lender hereunder and be continuing on the date of each Loan by Lender hereunder, and no condition shall exist on the date of each Loan by Lender hereunder, which constitutes an Event of Default or which would, with notice or the lapse of time, or both, constitute an Event of Default under this Agreement or any of the Loan Documents, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

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SECTION 8. REPRESENTATIONS AND WARRANTIES.

Borrower hereby represents and warrants to Lender, knowing and intending that Lender shall rely thereon in making the Loan contemplated hereby (each of which representations and warranties shall be continuing unless expressly made in relation only to a specific date), that:

8.1 Corporate Existence; Good Standing.

(a) Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) is in good standing in all other jurisdictions in which it is required to be qualified to do business as a foreign corporation, and (iii) has all requisite corporate power and authority and full legal right to own or to hold under lease its properties and to carry on the business as presently engaged. Borrower has no Subsidiaries that contain assets or conduct operations.

(b) Borrower has corporate power and authority and has full legal rights to enter into each of the Loan Documents to which it is a party, to perform, observe and comply with all of its agreements and obligations under each of such documents, and to obtain all of the Loans contemplated by this Agreement.

8.2 Corporate Authority, etc.  The execution and delivery by Borrower of the Loan Documents to which it is a party, the performance by Borrower of all of its agreements and obligations under each of such documents, and the incurring by Borrower of all of the Obligations contemplated by this Agreement, have been duly authorized by all necessary corporate actions on the part of Borrower and, if required, its shareholders, and  do not and will not (a) contravene any provision of Borrower's charter, bylaws or other governing documents or this Agreement (each as from time to time in effect), (b) conflict with, or result in a breach of the terms, conditions, or provisions of, or constitute a default under, or result in the creation of any mortgage, Lien, pledge, charge, security interest or other encumbrance upon any of the property of Borrower under, any agreement, mortgage or other instrument to which Borrower is or may become a party, including, without limitation, the Convertible Notes; (c) violate or contravene any provision of any law, regulation, order, ruling or interpretation thereunder or any decree, order or judgment or any court or governmental or regulatory authority, bureau, agency or official (all as from time to time in effect and applicable to such entity), (d) other than waivers required from the Borrower’s landlords and the consents required from the Convertible Noteholders, require any waivers, consents or approvals by any of third party, including any creditors or trustees for creditors of Borrower, or (e) require any approval, consent, order, authorization, or license by, or giving notice to, or taking any other action with respect to, any Governmental Authority.

8.3 Binding Effect of Documents, etc.  Borrower and each shareholder of Borrower has duly executed and delivered each of the Loan Documents to which it is a party, and each of the Loan Documents is valid, binding and in full force and effect. The agreements and obligations of Borrower and each shareholder of Borrower as contained in each of the Loan Documents constitutes, or upon execution and delivery thereof will constitute, legal, valid and binding obligations of Borrower or the shareholders of Borrower, as the case may be, enforceable against Borrower or the shareholders of Borrower, as the case may be, in accordance with their respective terms, subject, as to the enforcement of remedies only, to limitations imposed by federal and state laws regarding bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights and remedies generally, and by general principles of law and equity.

8.4 No Events of Default.

(a) No Event of Default has occurred and is continuing and no event has occurred and is continuing and no condition exists that would, with notice or the lapse of time, or both, constitute an Event of Default.

(b) Borrower is not in default under any material contract, agreement or instrument to which Borrower is a party or by which Borrower or any of property of Borrower is bound.

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(c) The execution, delivery and performance of and compliance with this Agreement and the other Loan Documents  will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any Lien upon any of Borrower’s  properties or assets or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to Borrower, or any of its businesses or operations or any of its assets or properties.

8.5 No Governmental Consent Necessary.  No consent or approval of, giving of notice to, registration with or taking of any other action in respect of, any Governmental Authority is required with respect to the execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which it is a party.

8.6 No Proceedings.  There are no actions, suits, or proceedings pending or, to the best of Borrower's knowledge, threatened against or affecting Borrower in any court or before any Governmental Authority which, if adversely determined, would have an adverse effect on the ability of Borrower to perform its obligations under this Agreement or the other Loan Documents to which it is a party.

8.7 No Violations of Laws.  Borrower has conducted, and is conducting, its business, so as to comply in all respects with all applicable federal, state, county and municipal statutes and regulations.  Borrower or any officer, director or shareholder of Borrower is not charged with, or so far as is known by Borrower, is not under investigation with respect to, any violation of any such statutes, regulations or orders, which could have a Material Adverse Effect.

8.8 Use of Proceeds of the Loan.  Proceeds from the Loan shall be used only for those purposes set forth in this Agreement.  No part of the proceeds of the Loan shall be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of purchasing or carrying or trading in any stock under such circumstances as to involve Borrower in a violation of any statute or regulation.  In particular, without limitation of the foregoing, no part of the proceeds from the Loans are intended to be used to acquire any publicly-held stock of any kind.

8.9 Financial Statements.

(a)           The audited and unaudited financial statements contained in the SEC Reports (collectively, the “Financial Statements”) (x) fairly present as of the respective dates thereof  the financial position of the Borrower and the results of its operations, cash flows and stockholders’ equity for each of the periods then ended in all material aspects; and (y) except for the fact that the unaudited financial statements omit notes to such statements and year-end adjustments thereto, have been prepared in accordance with GAAP in conformity with the rules and regulations of the SEC.

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(b)           Except as shown on the most recent Financial Statements, (i) Borrower has no other Indebtedness as of the date hereof which would adversely affect the financial condition of Borrower or the Collateral, and (ii) neither the Borrower 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 Borrower and the Subsidiaries, taken as a whole.

8.10 Changes in Financial Condition. Except as disclosed in the SEC Reports, since June 15, 2007, 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 Borrower.  Except as disclosed in the SEC Reports, since December 31, 2006, neither the Borrower 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.

8.11 Inventory.  Borrower's Inventory, as of the date hereof, consists of items of quality and quantity suitable for sale, lease or use in the ordinary course of its business, subject to the following sentence.  The value of obsolete items, items below standard quality and items in the process of repair have been written down to realizable market value, or adequate reserves have been provided therefore, and the values carried on Borrower's most recent balance sheet contained in the Financial Statements are set at the lower of cost or market, in accordance with GAAP.

8.12 Equipment.  Borrower shall keep its Equipment in good order and repair, and in running and marketable condition, ordinary wear and tear excepted.

8.13 Taxes and Assessments.

(a) Borrower has paid and discharged when due all taxes, assessments and other governmental charges which may lawfully be levied or assessed upon its income and profits, or upon all or any portion of any property belonging to it, whether real, personal or mixed, to the extent that such taxes, assessment and other charges have become due.  Borrower has filed all tax returns, federal, state and local, and all related information, required to be filed by it.

(b)           Borrower shall make all payments to be made by it hereunder without any Tax Deduction, unless a Tax Deduction (as defined below) is required by law. If Borrower is aware that Borrower must make a Tax Deduction(or that there is a change in the rate or the basis of a Tax Deduction), it must promptly notify Lender.  If a Tax Deduction is required by law to be made by Borrower, the amount of the payment due from Borrower will be increased to an amount which (after making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required. If Borrower is required to make a Tax Deduction, that Borrower must make the minimum Tax Deduction allowed by law and must make any payment required in connection with that Tax Deduction within the time allowed by law. Within 30 days of making either a Tax Deduction or a payment required in connection with a Tax Deduction, Borrower making that Tax Deduction must deliver to Lender evidence satisfactory to Lender that the Tax Deduction has been made or (as applicable) the appropriate payment has been paid to the relevant taxing authority.

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(c)           “Tax Deduction” means a deduction or withholding for or on account of Tax from a payment under a Loan Document. “Tax” means any tax, levy, impost, duty or other charge or withholding of a similar nature, including any income, franchise, stamp, documentary, excise or property tax, charge or levy (in each case, including any related penalty or interest).

8.14 ERISA. Borrower is in compliance in all material respects with the applicable provisions of ERISA and all regulations issued thereunder by the United States Treasury Department, the Department of Labor and the Pension Benefit Guaranty Corporation.

8.15 Environmental Matters.

(a)           Borrower has duly complied with, and its facilities, business assets, property, leaseholds and equipment are in compliance in all respects with, the provisions of all laws, regulations and orders of all Governmental Authorities.

(b)           Borrower has been issued all required federal, state and local licenses, certificates or permits relating to the operation of its business; and Borrower and its facilities, business, assets, property and equipment are in compliance in all material respects with all applicable federal, state and local laws, rules and regulations relating to air emissions, water discharge, noise emissions, solid or liquid waste disposal, hazardous waste or materials, or other environmental, health or safety matters.

8.16 United States Anti-Terrorism Laws

(a)           In this Section 8.16:

“Anti-Terrorism Law” means each of:  (i) Executive Order No. 13224 of September 23, 2001  Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten To Commit, or Support Terrorism (the “Executive Order”); (ii) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (commonly known as the USA Patriot Act); (iii) the Money Laundering Control Act of 1986, Public Law 99-570; and (iv) any similar law enacted in the United States of America subsequent to December 31, 2004.

“holding company” has the meaning given to it in the United States Public Utility Holding Company Act of 1935, and any successor legislation and rules and regulations promulgated thereunder.

“investment company” has the meaning given to it in the United States Investment Company Act of 1940.

“public utility” has the meaning given to it in the United States Federal Power Act of 1920.

“Restricted Party” means any person listed: (i) in the Annex to the Executive Order; (ii) on the Specially Designated Nationals and Blocked Persons list maintained by the Office of Foreign Assets Control of the United States Department of the Treasury; or (iii) in any successor list to either of the foregoing.

(b)           Borrower is not (i) a holding company or subject to regulation under the United States Public Utility Holding Company Act of 1935; (ii) public utility or subject to regulation under the United States Federal Power Act of 1920; (iii) required to be registered as an investment company or subject to regulation under the United States Investment Company Act of 1940; or (iv) subject to regulation under any United States Federal or State law or regulation that limits his/its ability to incur or guarantee indebtedness.

(c)           To the best of Borrower's knowledge, Borrower (i) is not, and is not controlled by, a Restricted Party; (ii) has not received funds or other property from a Restricted Party; and (iii) is not in breach of and is not the subject of any action or investigation under any Anti-Terrorism Law.

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(d)           Borrower has taken reasonable measures to ensure compliance with the Anti-Terrorism Laws.

8.17 Location of Collateral.  As of the date hereof, none of the Collateral is or will be located in or on any property other than those set forth in Section 8.17 of the Borrower’s Disclosure Schedule.

8.18 Customers and Vendors.  Section 8.18. of the Borrower’s Disclosure Schedule sets forth a complete list of all customers, suppliers, manufacturers, vendors and independent contractors of the Company and its Subsidiaries.  Any contracts or agreements with any such parties are in full force and effect.  There are no current or anticipated disputes among or between any such parties and the Company or the Subsidiaries.

8.19 Other Liens.  Borrower has good and marketable title to and owns all of the Collateral free and clear of any and all Liens except the Permitted Encumbrances and in favor of Lender.  None of the Collateral, except such Collateral as is pledged to the Convertible Noteholders,  is subject to any prohibition against encumbering, pledging, hypothecating or assigning the same or requires notice or consent to Borrower's doing of the same.

8.20 Books and Records.  Borrower maintains its chief executive office and its books and records related to its Accounts, Inventory and all other Collateral at its address set forth in Exhibit E of this Agreement.

8.21 Location of Offices.  Exhibit E hereto sets forth Borrower's chief executive office, and further sets forth a complete and accurate list of all offices and locations at or out of which Borrower conducts any of its business or operations.

8.22 SEC Reports. The SEC Reports do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.

8.23 Representations and Warranties: True, Accurate and Complete.

(a)           None of the representations, certificates, reports, warranties or statements now or hereafter made or delivered to Lender pursuant hereto or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby contains or will contain any untrue statement of a fact, or omits or will omit to state a fact necessary in order to make the statements contained herein and therein, in light of the circumstances in which they are made, not misleading.

(b)           All warranties and representations made herein or in any the Loan Documents by Borrower will be true and accurate at the time Borrower requests Lender to make a Loan to Borrower hereunder.

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8.24 Intellectual Property. Except for Permitted Encumbrances,  (1) the Borrower and each Subsidiary holds all Intellectual Property that it owns free and clear of all Liens 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 Borrower 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 Borrower or any Subsidiary does not, to the knowledge of the Borrower, violate or infringe on the rights of any other Person; (3) neither the Borrower nor any Subsidiary has received any notice of any conflict between the asserted rights of others and the Borrower or any Subsidiary with respect to any Intellectual Property; (4) the Borrower and each Subsidiary has used its commercially reasonable best efforts to protect its rights in and to all Intellectual Property; (5) the Borrower and each Subsidiary are in compliance with all material terms and conditions of its agreements relating to the Intellectual Property; (6) neither the Borrower nor any Subsidiary is, or since December 31, 2006 has been, a defendant in any action, suit, investigation or proceeding relating to infringement or misappropriation by the Borrower or any Subsidiary of any Intellectual Property nor has the Borrower or any Subsidiary been notified of any alleged claim of infringement or misappropriation by the Borrower or any Subsidiary of any Intellectual Property; (7) to the knowledge of the Borrower, none of the products or services the Borrower or any Subsidiary 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 Borrower or any Subsidiary, to the knowledge of the Borrower, infringes the trademark or service mark rights of any third party; and (9) to the Borrower’s knowledge, none of the material processes and formulae, research and development results and other know-how relating to the Borrower's or its Subsidiaries' respective businesses, the value of which to the Borrower 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.

8.25 Employees.  Neither the Borrower nor any of its Subsidiaries has any collective bargaining agreements with any of its employees.  There is no labor union organizing activity pending or, to the Borrower’s knowledge, threatened with respect to the Borrower or any of its Subsidiaries.  Except as disclosed in the SEC Reports, neither the Borrower nor any of its Subsidiaries is a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement.  To the Borrower’s knowledge, no employee of the Borrower or any of its Subsidiaries, nor any consultant with whom the Borrower or any of its Subsidiaries has contracted, is in violation of any material term of any employment contract or any other contract relating to the right of any such individual to be employed by, or to contract with, the Borrower or any of its Subsidiaries or to receive any benefits; and, to the Borrower’s knowledge, the continued employment by the Borrower or any of its Subsidiaries of its present employees, and the performance of the Borrower’s and its Subsidiaries’ contracts with its independent contractors, will not result in any such violation.  Except for employees who have a current effective employment agreement with the Borrower or any of its Subsidiaries, no employee of the Borrower or any of its Subsidiaries has been granted the right to continued employment by the Borrower or any of its Subsidiaries or to any material compensation following termination of employment with the Borrower or any of its Subsidiaries.  The Borrower is not aware that any officer, director, manager, partner, key employee or group of employees intends to terminate his, her or their employment with the Borrower or any of its Subsidiaries, nor does the Borrower or any of its Subsidiaries have a present intention to terminate any of the same.

8.26 Tax Status.  The Borrower 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 Borrower know of no basis for any such claim.

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8.27 Internal Accounting Controls.

  The Borrower 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 Borrower 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 Borrower in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Borrower'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.

8.28 Sarbanes-Oxley Act.

  The Borrower 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.

8.29 Indebtedness.  Attached hereto as Schedule 8.29 is a schedule of all Indebtedness of the Borrower, setting forth the principal amount thereof, the interest rate, the maturity date and the security therefor.

SECTION 9. AFFIRMATIVE COVENANTS.

Until payment and satisfaction in full of all Obligations and the termination of this Agreement, Borrower hereby covenants and agrees as follows:

9.1 Notify Lender.  Borrower shall promptly, and in any event within three (3) Business Days,  inform Lender (a) if any one or more of the representations and warranties made by Borrower in this Agreement or in any document related hereto shall no longer be entirely true, accurate and complete in any respect, (b) of any event or circumstance that, to its knowledge, would cause Lender to consider any then existing Inventory as no longer constituting Eligible Inventory; (c) of all material adverse information relating to the financial condition of Borrower; (d) of any material return of goods; and (e) of any loss, damage or destruction of any of the Collateral.

9.2 Pay Taxes and Liabilities; Comply with Agreement.  Borrower shall promptly pay, when due, or otherwise discharge, all indebtedness, sums and liabilities of any kind now or hereafter owing by Borrower to any party however created, incurred, evidenced, acquired, arising or payable, including without limitation the Obligations, income taxes, excise taxes, sales and use taxes, license fees, and all other taxes with respect to any of the Collateral, or any wages or salaries paid by Borrower or otherwise, unless the validity of which are being contested in good faith by Borrower by appropriate proceedings, provided that Borrower shall have maintained reasonably adequate reserves and accrued the estimated liability on Borrower's balance sheet for the payment of same.

9.3 Observe Covenants, etc.  Borrower shall observe, perform and comply with the covenants, terms and conditions of this Agreement, the Loan Documents and any other agreement or document entered into between Borrower and Lender.

9.4 Maintain Corporate Existence and Qualifications.  Borrower shall maintain and preserve in full force and effect, its corporate existence and rights, franchises, licenses and qualifications necessary to continue its business, and comply with all applicable statutes, rules and regulations pertaining to the operation, conduct and maintenance of its existence and business including, without limitation, all federal, state and local laws relating to benefit plans, environmental safety, or health matters, and hazardous or liquid waste or chemicals or other liquids (including use, sale, transport and disposal thereof).

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9.5 Information and Documents to be Furnished to Lender.  Borrower shall deliver or cause to be delivered to Lender:

(a) Annual Financial Statements and Projections.  Annual audited Financial Statements of the Borrower within ninety (90) days after the end of Borrower’s Fiscal Year (which period will be extended to one hundred five (105) days in the event that the Borrower timely and properly files for an extension with the SEC in connection with the filing of its Annual Report on From 10-K or 10-KSB) during the Term.  Such financial statements will (x) fairly present the financial position of the Borrower as of the dates thereof and the results of its operations, cash flows and stockholders’ equity for each of the periods then ended in all material aspects; and (y) be prepared in accordance with GAAP.

(b) Quarterly Financial Statements.  Quarterly Financial Statements of the Borrower no later than forty-five (45) days after the close of each calendar quarter(which period will be extended to fifty (50) days in the event that the Borrower timely and properly files for an extension with the SEC in connection with the filing of its Quarterly Report on From 10-Q or 10-QSB), the unaudited balance sheet and the related statement of income of the Borrower, prepared in accordance with GAAP, subject to year-end audit adjustments, together with such other information with respect to the business of Borrower as Lender may request.

(c) Bi-Monthly Inventory Reconciliation Report and Accounts Receivable Aging Report. Not later than the 15th day and the last day of each month of each calendar month, an Inventory reconciliation report and accounts receivable aging report, each in form and substance satisfactory to Lender.

(d) Notice of Judgments, Environmental, Health or Safety Complaints.

(i)              Within ten (10) days thereafter, written notice to Lender of the entry of any judgment or the institution of any lawsuit or of other legal or equitable proceedings or the assertion of any crossclaim or counterclaim seeking monetary damages from Borrower in an amount exceeding $25,000; and

(ii)              Within ten (10) days thereafter, notice or copies if written of all claims, complaints, orders, citations or notices, whether formal or informal, written or oral, from a governmental body or private person or entity, relating to air emissions, water discharge, noise emission, solid or liquid waste disposal, hazardous waste or materials, or any other environmental, health or safety matter, which adversely effect Borrower.  Such notices shall include, among other information, the name of the party who filed the claim, the potential amount of the claim, and the nature of the claim.

(e) Other Information.  Promptly upon demand therefor,

(i)              Certificates of insurance for all policies of insurance to be maintained by Borrower pursuant hereto;

(ii)              An estoppel certificate executed by an authorized officer of Borrower indicating that there then exists no Event of Default and no event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default;

(iii)              All information received by Borrower affecting the financial status or condition of any account debtor or the payment of any Account, including but not limited to, invoices, original orders, shipping and delivery receipts; and

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(iv)              Assignments, in form a

cceptable to Lender, of all Accounts, and of the monies due or to become due on specific contracts relating to the same.

(f) Additional Information.  From time to time, such other information as Lender may reasonably request, including financial projections and cash flow analysis.

Lender acknowledges that Borrower is a publicly traded company.  As such, Lender agrees that it will not engage in the purchase or sale of the securities of Borrower while in possession of material non-public information about the Borrower.

9.6 Access to Records and Property.  At any time and from time to time, upon reasonable notice and during normal business hours, Borrower shall give any representatives or designees of Lender reasonable access to its properties, and permit any of them to, examine, audit, copy or make extracts from, any and all books, records and documents in the possession of Borrower or any independent contractor relating to Borrower's affairs and the Collateral, and to inspect any of its properties wherever located, all at Borrower's expense. Notwithstanding the foregoing, no such prior notice shall be required to be given in the event Lender believes such access is necessary to preserve or protect the Collateral, or following the occurrence and during the continuance of an Event of Default.

9.7 Comply with Laws.  Borrower shall comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, compliance with which is necessary to maintain its corporate existence or the conduct of its business or non-compliance with which would adversely affect in any respect its ability to perform its obligations or any security given to secure its obligations.

9.8 Insurance Required.

(g) Borrower shall cause to be maintained, in full force and effect on all property of Borrower including, without limitation, all Inventory and Equipment, insurance in such amounts against such risks as is satisfactory to Lender, including, but without limitation, business interruption, fire, boiler, theft, burglary, pilferage, vandalism, malicious mischief, loss in transit, and hazard insurance and, if as of  the date hereof, any of the real property of Borrower is in an area that has been identified by the Secretary of Housing and Urban Development as having special flood or mudslide hazards, and on which the sale of flood insurance has been made available under the National Flood Insurance Act of 1968, then Borrower shall maintain flood insurance. Said policy or policies shall:

(i) Be in a form and with insurers which are satisfactory to Lender;

(ii) Be for such risks, and for such insured values as Lender or its assigns may require in order to replace the property in the event of actual or constructive total loss;

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(iii) Designate Lender and its assignees as additional insureds and loss payees as their interests may from time to time appear;

(iv) Contain a "breach of warranty clause" whereby the insurer agrees that a breach of the insuring conditions or any negligence by Borrower or any other person shall not invalidate the insurance as to Lender and its assignee;

(v) Provide that they may not be canceled or altered without thirty (30) days prior written notice to Lender and its assigns; and

(vi) Upon demand, be delivered to Lender.

(h) Borrower shall obtain such additional insurance as Lender may reasonably require.

(i) Borrower shall, in the event of loss or damage, forthwith notify Lender and file proofs of loss with the appropriate insurer.  Borrower hereby authorizes Lender to endorse any checks or drafts constituting insurance proceeds.

(j) Borrower shall forthwith upon receipt of insurance proceeds endorse and deliver the same to Lender.

(k) In no event shall Lender be required either to (i) ascertain the existence of or examine any insurance policy or (iiii) advise Borrower in the event such insurance coverage shall not comply with the requirements of this Agreement.

9.9 Condition of Collateral; No Liens.  Borrower shall maintain all Collateral in good condition and repair at all times, and preserve it against any loss, damage, or destruction of any nature whatsoever relating to said Collateral or its use, and keep said Collateral free and clear of any Liens, except for the Permitted Encumbrances.

9.10 Payment of Proceeds.  Borrower shall forthwith upon receipt of all proceeds of Collateral, pay such proceeds (insurance or otherwise) over to Lender for application against the Obligations in such order and manner as Lender may elect.

9.11 Records.  Borrower shall at all times keep accurate and complete records of its operations, of the Collateral and the status of each Account, which records shall be maintained at its executive offices as set forth on Exhibit E.

9.12 Equipment. Borrower shall maintain is Equipment in good operating condition, subject to ordinary wear and tear, and shall not permit such Equipment to become a fixture to real estate or accessions to other personal property.

9.13 Delivery of Documents.  If any proceeds of Accounts shall include, or any of the Accounts shall be evidenced by, notes, trade acceptances or instruments or documents, or if any Inventory is covered by documents of title or chattel paper, whether or not negotiable, then Borrower waives protest regardless of the form of the endorsement.  If Borrower fails to endorse any instrument or document, Lender is authorized to endorse it on Borrower's behalf.

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9.14 United States Contracts.  If any of the Accounts arise out of contracts with the United States or any of its departments, agencies or instrumentalities, Borrower will notify Lender, if requested by Lender, and execute any necessary instruments in order that all monies due or to become due under such contract shall be assigned to Lender and proper notice of the assignment given under the Federal Assignment of Claims Act.

9.15 Name Changes; Location Changes.

(a)           Borrower shall promptly notify Lender if Borrower is known by or conducting business under any names other than those set forth in this Agreement; and

(b)           Borrower shall deliver not less than thirty (30) Business Days prior written notice to Lender if Borrower intends to conduct any of its business or operations at or out of offices or locations other than those set forth in this Agreement, or if it changes the location of its chief executive office or the address at which it maintains its books and records or the location of any of the Collateral.

9.16 Further Assurances.  Borrower shall at any time or from time to time upon request of Lender take such steps and execute and deliver such Financing Statements and other documents all in the form of substance satisfactory to Lender relating to the creation, validity or perfection of the security interests provided for herein, under the UCC or other laws of the State of New Yorkor of another state or states in which the Collateral is located or which are reasonably necessary to effectuate the purposes and provisions of this Agreement. Borrower  shall defend the right, title and interest of Lender in and to the Collateral against the claims and demands of all Persons whomsoever, and take such actions, including (i) all actions necessary to grant Lender “control” of any Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by it, with any agreements establishing control to be in form and substance satisfactory to Lender, (ii) the prompt (but in no event later than five (5) Business Days following Lender’s request therefor) delivery to Lender of all original Instruments, Chattel Paper, negotiable Documents and certificated securities owned by it (in each case, accompanied by stock powers, allonges or other instruments of transfer executed in blank), (iii) notification of Lender’s interest in Collateral at Lender’s request, and (iv) the institution of litigation against third parties as shall be prudent in order to protect and preserve its and/or Lender’s respective and several interests in the Collateral.

9.17 SEC Reporting Status.  Borrower 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 Borrower 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.

9.18 Indemnification.  Borrower shall indemnify, protect, defend and save harmless Lender, as well as Lender's directors, officers, trustees, employees, agents, attorneys, members and shareholders (hereinafter referred to collectively as the "Indemnified Parties" and individually as an "Indemnified Party") from and against any and all losses, damages, expenses or liabilities of any kind or nature (collectively, “Damages”) and from any suits, claims or demands, by third parties, including reasonable counsel fees incurred in investigating or defending such claim, suffered by any of them and caused by, relating to, arising out of, resulting from, or in any way connected with the Loans and the transactions contemplated herein, provided, however, the Borrower shall not be liable to the Lender to the extent that  any such  Damages arise out of or are based on the gross negligence of the Lender.. In case any action shall be brought against an Indemnified Party based upon any of the above and in respect to which indemnity may be sought against Borrower, the Indemnified Party against whom such action was brought shall promptly notify Borrower in writing, and Borrower shall assume the defense thereof, including the employment of counsel selected by Borrower and reasonably satisfactory to the Indemnified Party, the payment of all costs and expenses and the right to negotiate and consent to settlement.  Upon reasonable determination made by the Indemnified Party, the Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof; provided, however that the Indemnified Party shall pay the costs and expenses incurred in connection with the employment of separate counsel.  Borrower shall not be liable for any settlement of any such action effected without its consent, but if settled with Borrower's consent, or if there be a final judgment for the claimant in any such action, Borrower agrees to indemnify and save harmless said Indemnified Party against whom such action was brought from and against any loss or liability by reason of such settlement or judgment, except as otherwise provided above. The provisions of this Section shall survive the termination of this Agreement and the final repayment of the Obligations.

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SECTION 10. NEGATIVE COVENANTS.

Until payment and satisfaction in full of all Obligations and the termination of this Agreement, Borrower hereby covenants and agrees as follows:

10.1 Fundamental Transactions; No Creation of  Subsidiaries.

(a) Borrower will not engage in or be a party to a Fundamental Transaction (as defined below) unless all of the following conditions are met:

(i) Lender shall have been afforded the opportunity, if Lender so elects, to convert all outstanding Indebtedness of Borrower hereunder into Common Stock of Borrower prior to, or at the closing of (such conversion date to be selected by Lender), the Fundamental Transaction in accordance with the terms of the Note Conversion Agreement; and

(ii) Lender shall have received payment in full of all outstanding Obligations no later than the date of the closing of the Fundamental Transaction, to the extent not converted into Common Stock, together with such releases and related documentation as Lender shall reasonably request.

“Fundamental Transaction” means

(i)           Any consolidation or merger of the Borrower with or into another entity where the stockholders of the Borrower 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 Borrower in a single transaction or a series of related transactions; or

(ii)           The occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, will be) listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices, including the OTC Bulletin Board; or

(iii)           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 Borrower representing 50% or  more of the combined voting power of the outstanding voting securities of the Borrower ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors.

(b) Borrower will not create or permit to exist any Subsidiary, other than Virtual Vision, Inc., which Subsidiary is dormant, unless such new Subsidiary is a wholly-owned Subsidiary and is designated by Lender as either a co-borrower or guarantor hereunder and such Subsidiary shall have entered into all such documentation required by Lender, including, without limitation, to grant to Lender a first priority perfected security interest in substantially all of such Subsidiary’s assets to secure the Obligations.

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10.2 Disposition of Assets or Collateral.  Borrower will not sell, lease, transfer, convey, or otherwise dispose of any or all of its assets or Collateral, other than (a) the sale of Inventory in the ordinary course of business, and (b) the disposition or transfer in the ordinary course of business during any fiscal year of obsolete and worn-out Equipment having an aggregate fair market value of not more than $25,000 and only to the extent that the proceeds of any such disposition are used to acquire replacement Equipment which is subject to Lender’s first priority security interest or are used to repay Loans. Notwithstanding the foregoing, Borrower shall be permitted to dispose of  assets other than Accounts and Inventory in a transaction that does not constitute a Fundamental Transaction under Section 10.1 hereof, provided that all of the following conditions are met: (i)  Borrower shall have provided Lender with not less than  fifteen (15) days’ prior written notice of such proposed asset sale, describing in reasonable detail the assets to be sold and the consideration to be received therefor, (ii) the net proceeds of such transaction are used to redeem Indebtedness represented by any outstanding and unpaid Loans, and (iii) Lender shall have determined, in its reasonable commercial judgment, that such asset sale will not impair Lender’s rights in its remaining Collateral or its prospect of repayment hereunder.

10.3 Other Liens.  Borrower will not incur, create or permit to exist any Lien on any of its property or assets, whether now owned or hereafter acquired, except (a) those Liens in favor of Lender created by this Agreement and the other Loan Documents; and (b) for the Permitted Encumbrances.

10.4 Other Liabilities.  Borrower will not incur, create, assume, or permit to exist, any Indebtedness or liability on account of either borrowed money or the deferred purchase price of property, except (a) Obligations to Lender, (b) the Convertible Notes or (c) Indebtedness constituting Subordinated Debt or incurred in connection with any of the Permitted Encumbrances.

10.5 Loans.  Borrower will not make any loans to any Person, other than advances to employees of Borrower in the ordinary course of business, with outstanding advances to any employee not to exceed  $2,500 at any time.

10.6 Guaranties.  Borrower will not assume, guaranty, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any Person, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business.

10.7 Remove Property.  Borrower will not remove, or cause or permit to be removed, without Lender's prior written consent, any of its Collateral or assets from those locations set forth on Exhibit E annexed hereto, except for sales of Inventory in the ordinary course of Borrower's business.

10.8 Transfers of Notes or Accounts.  Borrower will not sell, assign, transfer, discount or otherwise dispose of any Accounts or any promissory note payable to it, with or without recourse, except for the Lien of Lender therein.

10.9 Dividends.  Borrower will not declare or pay any cash dividend, make any distribution on, redeem, retire or otherwise acquire directly or indirectly, any shares of its stock or other equity interests without the prior written consent of Lender, except as set forth in Section 10.9 of Borrower’s Disclosure Schedule.

10.10 Payments to Affiliates. Except as set forth in Section 10.10 of the Borrower’s Disclosure Schedule,  or as otherwise approved by Lender in writing in advance, Borrower shall not make any payments of cash or other property to any Affiliate.

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10.11 Modification of Documents.  Borrower will not change, alter or modify, or permit any change, alteration or modification of its certificate of incorporation, by-laws or other governing documents without Lender's prior written consent.

10.12 Change Business or Name.  Borrower will not change or alter the nature of its business, or change its name as it appears in the official filings of its state of organization.

10.13 Settlements.  Other than in the ordinary course of its business, Borrower will not comprise, settle or adjust any claims in any amount relating to any of the Collateral, without the prior written consent of Lender.

10.14 Bank Accounts.  Section 10.14 of the Borrower’s Disclosure Schedule lists all banks and other financial institutions at which Borrower maintains deposits and/or other accounts, and correctly identifies the name, address and telephone number of each such depository, the name in which the account is held, a description of the purpose of the account, and the complete account number.  Borrower shall not establish any depository or other bank account with any financial institution (other than the accounts set forth in Section 10.14 of the Borrower’s Disclosure Schedule) without Lender’s prior written consent.

10.15 Convertible Note Documentation.  Without the prior written consent of Lender, Borrower shall not (a) amend, modify or in any way alter the terms of any of the Convertible Note Documentation, other than with respect to changes or corrections solely of a ministerial nature that have no adverse effect on Lender’s rights or obligations hereunder and no adverse effect on the status or priority of lender’s Lien hereunder, or (b) make any payments in respect of the indebtedness evidenced by the Convertible Note Documentation.

SECTION 11. EVENTS OF DEFAULT.

The occurrence of any of the following shall constitute an event of default (hereinafter referred to as an "Event of Default"):

11.1 Failure to Pay.  The failure by Borrower to pay, when due, (a) any payment of principal, interest or other charges due and owing to Lender pursuant to any obligations of Borrower to Lender including, without limitation, those Obligations arising pursuant to this Agreement or any Loan Document, or under any other agreement for the payment of monies then due and payable to Lender, or (b) any taxes due to any Governmental Authority.

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11.2 Failure of Insurance.  Failure of one or more of the insurance policies required hereunder to remain in full force and effect; failure on the part of Borrower to pay or cause to be paid all premiums when due on the insurance policies pursuant to this Agreement; failure on the part of Borrower to take such other action as may be requested by Lender in order to keep said policies of insurance in full force and effect until the entire indebtedness represented by the Loan Documents, and interest thereon, has been paid in full; and failure on the part of Borrower to execute any and all documentation required by the insurance companies issuing said policies to effectuate said assignments.

11.3 Failure to Perform.  Borrower's failure to perform or observe any covenant, term or condition of Section 9 of this Agreement (Affirmative Covenants) to be performed or observed by Borrower, and such failure shall continue unremedied for a period of ten (10) Business Days from the date of such failure (irrespective of whether Lender delivers written notice thereof to Borrower), provided, however, that such cure period shall not apply to a breach which is incapable of cure within said 10-Business Day period; and provided further, that such cure period shall be five (5) Business Days for a breach of Section 9.5(c) (Monthly Inventory Reconciliation Report); and provided further, that such cure period shall not apply to any payment of principal, interest or other charges due and owing to Lender.

11.4 Cross Default. The occurrence of any Event of Default on any of the Obligations or an Event of Default under any Loan Document, or an event of default under the Convertible Notes which has not been waived or cured.

11.5 False Representation or Warranty.  Borrower shall have made any statement, representation or warranty in this Agreement or in any of the other Loan Documents to which it is a party or in a certificate executed by Borrower incident to this Agreement, which is at any time found to have been false in any respect at the time such representation or warranty was made.

11.6 Liquidation, Voluntary Bankruptcy, Dissolution, Assignment to Creditors.  Any resolution shall be passed or any action (including a meeting of creditors) shall be taken by Borrower for the termination, winding up, liquidation or dissolution of Borrower, or Borrower shall make an assignment for the benefit of creditors, become insolvent or be unable to pay its debts as they mature, or Borrower shall file a petition in voluntary liquidation or bankruptcy, or Borrower shall file a petition or answer or consent seeking, or consenting to, the reorganization of Borrower or the readjustment of any of the indebtedness of Borrower under any applicable insolvency or bankruptcy laws now or hereafter existing (including the United States Bankruptcy Code), or Borrower shall consent to the appointment of any receiver, administrator, liquidator, custodian or trustee of all or any part of the property or assets of Borrower or any corporate action shall be taken by Borrower for the purposes of effecting any of the foregoing.

11.7 Involuntary Petition Against Borrower .  Any petition or application for any relief is filed against Borrower under applicable insolvency or bankruptcy laws now or hereafter existing (including the United States Bankruptcy Code) or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity), and is not discharged or stayed within thirty (30) days of the filing thereof.

11.8 Judgments; Levies.  Any judgment or judgments aggregating in excess of $25,000 or any injunction or attachment is obtained against Borrower which remains unstayed or unsatisfied  for a period of  fifteen (15) days or is enforced.

11.9 Change in Condition.  There occurs any event or a change in the condition or affairs, financial or otherwise, of Borrower which, in the reasonable opinion of Lender, impairs Lender's security or ability of Borrower to discharge its obligations hereunder or which impairs the rights of Lender in such Collateral.

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11.10 [RESERVED]

11.11 Failure to Notify.  If at any time Borrower fails to provide Lender immediately with notice or copies, if written, of all complaints, orders, citations or notices with respect to environmental, health or safety complaints.

11.12 Failure to Deliver Documentation.  Borrower shall fail to obtain and deliver to Lender any other documentation required to be signed or obtained as part of this Agreement, or shall have failed to take any reasonable action requested by Lender to perfect, protect, preserve and maintain the security interests and Lien on the Collateral provided for herein.

            11.13 Non-Payment of Debts.  Any default by Borrower under any agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in any case in an amount in excess of $50,000, which default continues unwaived for more than the applicable cure period, if any, with respect thereto, or any default by Borrower under any contract, lease, license or other obligation to any Person other than Lender, which affects its business or the Collateral or other property which is security for the Obligations and which default continues for more than the applicable cure period, if any, with respect thereto.

11.14 Dissolution; Maintenance of Existence.  Borrower is dissolved, or Borrower fails to maintain its corporate existence in good standing, or the usual business of Borrower ceases or is suspended in any respect.

11.15 Indictment.  The indictment of Borrower or any director or Responsible Officer of Borrower under any criminal statute, or commencement of criminal or civil proceedings against Borrower, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any portion of the property of Borrower.

11.16 Tax Liens.  The filing of a Lien for any unpaid taxes filed by any Governmental Authority against Borrower or any of its assets.

11.17 Challenge to Validity of Loan Documents.  Borrower attempts to terminate, challenges the validity of, or its liability under this Agreement or any other Loan Document, or any proceeding shall be brought to challenge the validity, binding effect of Loan Document, or any Loan Document ceases to be a valid, binding and enforceable obligation of the Borrower (to the extent such Person is a party thereto).

11.18 Trading of Common Stock.

(a)           Sales of Common Stock owned by Lender cannot be made pursuant to the Borrower’s Registration Statement of Form S-1, to be filed with the SEC 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 Borrower’s failure to update such Registration Statement, or otherwise on account of Borrower’s noncompliance with the terms of the Registration Rights Agreement, unless such Common Stock may be publicly resold by Lender without restriction under Rule 144 promulgated under the Securities Act of 1933, as amended, and Lender shall have received an opinion of counsel to Borrower as may be necessary or requested by Lender to allow such resales, provided the Borrower and its counsel receive reasonably requested representations from Lender and its broker, if any; or

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(b)           The Common Stock ceases to be included for quotation on the OTC Bulletin Board.

SECTION 12. REMEDIES.

12.1 Acceleration; Other Remedies.  Upon the occurrence of an Event of Default and at any time thereafter:

(a) Lender shall have all rights and remedies provided in this Agreement, any of the other Loan Documents, the UCC or other applicable law, all of which rights and remedies may be exercised without notice to Borrower, all such notices being hereby waived, except such notice as is expressly provided for hereunder or is not waivable under applicable law.  All rights and remedies of Lender are cumulative and not exclusive and are enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions and in any order Lender may determine.  Without limiting the foregoing, Lender may (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender, (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, subject to the rights of the Convertible Noteholders in accordance with the terms of the Intercreditor Agreement, (v) extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all Accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, by public or private sales at any exchange, broker's board, any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower.  If any of the Collateral or other security the Obligations is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender.  If notice of disposition of Collateral is required by law, ten (10) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice.  In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required.

(b) Lender may apply the cash proceeds of Collateral or other security for the Obligations actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of any of the Obligations, in whole or in part (including attorneys' fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to Borrower) and in such order as Lender may elect, whether or not then due.  Borrower shall remain liable to Lender for the payment on demand of any deficiency together with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses.

(c) If Borrower shall default in the performance of any of the provisions of this Agreement or any other Loan Document to which it is a party, Lender may (but without any obligation to do so) perform same for Borrower's account and any monies expended in doing so shall be chargeable with interest to Borrower, repayable by Borrower on demand and added to the Obligations.

(d) Lender may, at its option, cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, discharge taxes, Liens at any time levied on or existing with respect to the Collateral and pay any amount, incur any expense or perform any act which, in Lender's sole judgment, is necessary or appropriate to preserve, protect, insure, maintain, or realize upon the Collateral.  Lender may charge Borrower's loan account for any amounts so expended, such amounts to be repayable by Borrower on demand.  Lender shall be under no obligation to effect such cure, payment, bonding or discharge, and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower.

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(e) Borrower hereby grants to Lender an irrevocable, non-exclusive license, to the extent not prohibited by Convertible Notes Documentation and subject to the rights of the Convertible Noteholders in accordance with the terms of the Intercreditor Agreement, exercisable due to an occurrence and during the continuance of an Event of Default without payment of royalty or other compensation to Borrower, to use, transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by Borrower, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer and automatic machinery software and programs used for the compilation or printout thereof, and represents, promises and agrees that any such license or sublicense is not and will not be in conflict with the contractual or commercial rights of any third Person; provided, that such license will terminate upon the payment in full of all Obligations.

12.2 Set-off.  Lender shall have the right, immediately and without notice of other action, to set-off against any of Borrower's liabilities to Lender any money or other liability owed by Lender or any Affiliate of Lender (and such Affiliate of Lender is hereby authorized to effect such set-off) in any capacity to Borrower, whether or not due, and Lender or such Affiliate shall be deemed to have exercised such right of set-off and to have made a charge against any such money or other liability immediately upon the occurrence of such Event of Default even though the actual book entries may be made at a time subsequent thereto.  The right of set-off granted hereunder shall be effective irrespective of whether Lender shall have made demand under or in connection with the Loan.  Lender is hereby granted a security interest in all money and property of Borrower being held by it or any Affiliate of Lender, which security interest shall be a first priority perfected security interest in favor of Lender as a result of Lender's or Affiliates of Lender's possession thereof.  None of the rights of Lender described in this Section 12.2 are intended to diminish or limit in any way Lender's or Affiliates of Lender's common-law set-off rights.

12.3 Costs and Expenses.  Borrower shall be liable for all reasonable costs, charges and expenses, including attorney's fees and disbursements, incurred by Lender by reason of the occurrence of any Event of Default or the exercise of Lender's remedies with respect thereto, each of which shall be repayable by Borrower on demand with interest, and added to the Obligations.

12.4 No Marshalling.  Lender shall be under no obligation whatsoever to proceed first against any of the Collateral or other property which is security for the Obligations before proceeding against any other of the Collateral.  It is expressly understood and agreed that all of the Collateral or other property which is security for the Obligations stands as equal security for all Obligations, and that Lender shall have the right to proceed against any or all of the Collateral or other property which is security for the Obligations in any order, or simultaneously, as in its sole and absolute discretion it shall determine.  It is further understood and agreed that Lender shall have the right, as it in its sole and absolute discretion shall determine, to sell any or all of the Collateral or other property which is security for the Obligations in any order or simultaneously, as Lender shall determine in its sole and absolute discretion.

12.5 No Implied Waivers; Rights Cumulative.  No delay on the part of Lender in exercising any right, remedy, power or privilege hereunder or under any of the Loan Documents or provided by statute or at law or in equity or otherwise shall impair, prejudice or constitute a waiver of any such right, remedy, power or privilege or be construed as a waiver of any Event of Default or as an acquiescence therein.  No right, remedy, power or privilege conferred on or reserved to Lender hereunder or under any of the Loan Documents or otherwise is intended to be exclusive of any other right, remedy, power or privilege.  Each and every right, remedy, power or privilege conferred on or reserved to Lender under this Agreement or under any of the other Loan Documents or otherwise shall be cumulative and in addition to each and every other right, remedy, power or privilege so conferred on or reserved to Lender and may be exercised by Lender at such time or times and in such order and manner as Lender shall (in its sole and complete discretion) deem expedient.

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SECTION 13. OTHER RIGHTS OF LENDER.

13.1 Collections.  Subject to the rights of the Convertible Noteholders under the Intercreditor Agreement, Borrower is authorized to collect the Accounts and any other monetary obligations included in, or proceeds of, the Collateral on behalf of and in trust for Lender, at Borrower's expense, but such authority shall, at Lender's option, automatically terminate upon the occurrence of an Event of Default.  Lender may modify or terminate such authority at any time whether or not an Event of Default has occurred and directly collect the Accounts and other monetary obligations included in the Collateral.  Borrower shall, at Borrower's expense and in the manner requested by Lender from time to time, direct that remittances and all other proceeds of accounts and other Collateral shall be (a) remitted in kind to Lender,  (b) sent to a post office box designated by and/or in the name of Lender, or in the name of Borrower, but as to which access is limited to Lender and/or (c) deposited into a bank account maintained in the name of Lender and/or a blocked bank account under arrangements with the depository bank under which all funds deposited to such blocked bank account are required to be transferred solely to Lender.  In connection therewith, Borrower shall execute such post office box and/or blocked bank account agreements as Lender shall specify.

13.2 Repayment of Obligations.  All Obligations shall be payable at Lender's office set forth below or at a bank or such other place as Lender may expressly designate from time to time for purposes of this Section.  Lender shall apply all proceeds of Accounts or other Collateral received by Lender and all other payments in respect of the Obligations to the Loans whether or not then due or to any other Obligations then due, in whatever order or manner Lender shall determine.

13.3 Lender Appointed Attorney-in-Fact.

(a)           Borrower hereby irrevocably constitutes and appoints Lender, with full power of substitution, as its true and lawful attorney-in-fact, with full irrevocable power and authority in its place and stead and in its name or otherwise, from time to time in Lender's discretion, at Borrower's sole cost and expense, to take any and all appropriate action and to execute and deliver any and all documents and instruments which Lender may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limiting the generality of the foregoing, (i) at any time any of the Obligations are outstanding, (A) to transmit to account debtors, other obligors or any bailees notice of the interest of Lender in the Collateral or request from account debtors or such other obligors or bailees at any time, in the name of Borrower or Lender or any designee of Lender, information concerning the Collateral and any amounts owing with respect thereto; (B) to execute in the name of Borrower and file against Borrower in favor of Lender Financing Statements or amendments with respect to the Collateral, or record a copy or an excerpt hereof in the United States Copyright Office or the United States Patent and Trademark Office and to take all other steps as are necessary in the reasonable opinion of Lender under applicable law to perfect the security interests granted herein; (C) to obtain and adjust insurance required pursuant to this Agreement and to pay all or any part of the premiums therefor and the costs thereof, and (D) to pay or discharge taxes, Liens, security interests or other encumbrances levied or placed on or threatened against the Collateral; (ii) after and during the continuation of an Event of Default, (A) to receive, take, endorse, assign, deliver, accept and deposit, in the name of Lender or Borrower, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof, (B) to notify account debtors or other obligors to make payment directly to Lender, or notify bailees as to the disposition of Collateral, (C) to change the address for delivery of mail to Borrower and to receive and open mail addressed to Borrower, (D) take or bring, in the name of Lender or Borrower, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of or other realization upon the Collateral; and (E) to extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations.

(b)           Borrower hereby ratifies, to the extent permitted by law, all that Lender shall lawfully and in good faith do or cause to be done by virtue of and in compliance with this Agreement.  The powers of attorney granted pursuant to this Agreement are each a power coupled with an interest and shall be irrevocable until the Obligations are paid indefeasibly in fully.

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13.4 Release of Lender.    In no event will Lender have any liability to Borrower for lost profits or other special or consequential damages.

13.5 Uniform Commercial Code.  At all times prior and subsequent to an Event of Default hereinafter, Lender shall be entitled to all the rights and remedies of a secured party under the UCC with respect to all Collateral.

13.6 Preservation of Collateral.  At all times prior and subsequent to an Event of Default hereinafter, Lender may (but without any obligation to do so) take any and all action which in its sole and absolute discretion is necessary and proper to preserve its interest in the Collateral, including without limitation the payment of debts of Borrower which might, in Lender's sole and absolute discretion, impair the Collateral or Lender's security interest therein, purchasing insurance on the Collateral, repairing the Collateral, or paying taxes or assessments thereon, and the sums so expended by Lender shall be secured by the Collateral, shall be added to the amount of the Obligations due Lender and shall be payable on demand with interest at the rate set forth in Section 3.1 hereof from the date expended by Lender until repaid by Borrower.  After written notice by Lender to Borrower and automatically, without notice, after an Event of Default, Borrower shall not, without the prior written consent of Lender in each instance, (a) grant any extension of time of payment of any of the accounts or any other Collateral which includes a monetary obligation, (b) compromise or settle any of the accounts or any such other Collateral for less than the full amount thereof, (c) release in whole or in part any account debtor or other person liable for the payment of any of the accounts or any such other Collateral, or (d) grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any of the accounts or any such other Collateral.

13.7 Lender's Right to Cure.  In the event Borrower shall fail to perform any of its Obligations hereunder or under any of the Loan Documents, then Lender, in addition to all of its rights and remedies hereunder, may perform the same, but shall not be obligated to do so, at the cost and expense of Borrower.  In any such event, Borrower shall promptly reimburse Lender together with interest at the rate set forth in Section 3.1  hereof from the date such sums are expended until repaid by Borrower.

13.8 Inspection of Collateral.  From time to time as requested by Lender, at the sole expense of Borrower in accordance with Section 3.4, Lender or its designee shall have access, prior to an Event of Default during reasonable business hours and on or after an Event of Default at any time, to all of the premises where Collateral is located for the purposes of inspecting, disposing and realizing upon the Collateral, and all Borrower's books and records, and Borrower shall permit Lender or its designee to make such copies of such books and records or extracts therefrom as Lender may request.  Without expense to Lender, Lender may use such of Borrower's personnel, equipment, including computer equipment, programs, printed output and computer readable media, supplies and premises for the collection of Accounts and realization on other Collateral as Lender, in its sole discretion, deems appropriate.  Borrower hereby irrevocably authorizes all accountants and third parties to disclose and deliver to Lender at Borrower's expense all financial information, books and records, work papers, management reports and other information in their possession regarding Borrower.

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SECTION 14. PROVISIONS OF GENERAL APPLICATION.

14.1 Waivers.  Borrower waives demand, presentment, notice of dishonor  protest and notice of protest of any instrument either of Borrower or others which may be included in the Collateral.

14.2 Survival.  All covenants, agreements, representations and warranties made by Borrower herein or in any of the Loan Documents or in any certificate, report or instrument contemplated hereby shall survive any independent investigation made by Lender and the execution and delivery of this Agreement, and such certificates, reports or instruments and shall continue so long as any Obligations are outstanding and unsatisfied, applicable statutes of limitations to the contrary notwithstanding.

14.3 Notices.  All notices, requests and demands to or upon the respective parties hereto shall be given in writing and shall be deemed to have been duly given or made upon receipt by the receiving party.  All notices, requests and demands are to be given or made to the respective parties at the following addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph):

If to Borrower:	eMagin Corporation.
	10500 N.E. 8th Street
	Suite 1400
	Bellevue, Washington 12533
	Attention: John Atherly
With a copy to:	Sichenzia Ross Friedman Ference LLP
	61 Broadway
	New York, New York 10006
	Attention:  Richard A. Friedman, Esq.
If to Lender:	Moriah Capital, L.P.
	685 Fifth Avenue
	New York, New York 10022
	Attention: Greg Zilberstein
With a copy to:	Cohen Tauber Spievack & Wagner LLP
	420 Lexington Avenue, Suite 2400
	New York, New York 10170
	Attention:  Adam Stein, Esq.

Notwithstanding the foregoing, that parties expressly acknowledge and agree that foregoing provisions of notice by Lender to Borrower’s counsel is an accommodation  only, and that Lender shall have fulfilled its notice obligation hereunder if notice shall have been received by  Borrower at its address set forth above, irrespective of whether such notice is received by Borrower’s counsel.

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14.4 Amendments; Waiver of Defaults.  The terms of this Agreement shall not be amended, waived, altered, modified, supplemented or terminated in any manner whatsoever except by a written instrument signed by Lender and Borrower.  Any default or Event of Default by a party hereto may only be waived by a written instrument specifically describing such default or Event of Default and signed by the other party hereto.

14.5 Binding on Successors.

(a)              This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that, Borrower may not assign any of its rights under this Agreement or the other Loan Documents to any Person without the prior written consent of Lender.

(b)              Lender may assign any or all of the Obligations together with any or all of the security therefor to any Person and any such assignee shall succeed to all of Lender’s rights with respect thereto.  Upon such assignment, Lender shall be released from all responsibility for the Collateral to the extent same is assigned to any transferee.  Lender may from time to time sell or otherwise grant participations in any of the Obligations and the holder of any such participation shall, subject to the terms of any agreement between Lender and such holder, be entitled to the same benefits as Lender with respect to any security for the Obligations in which such holder is a participant.  Borrower agrees that each such holder may exercise any and all rights of set-off and counterclaim with respect to its participation in the Obligations as fully as though Borrower were directly indebted to such holder in the amount of such participation.

14.6 Invalidity.  Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

14.7 Publicity.  Borrower hereby consents to the issuance by Lender of (a) a public announcement or press release relating to the financial arrangement entered into between the Borrower and Lender in substantially the form annexed hereto as Exhibit G, as well as (b) other announcements which are commonly known as tombstones, in such publications and to such selected parties as Lender shall in its sole and absolute discretion deem appropriate, or as required by applicable law.

14.8 Section or Paragraph Headings. Section and paragraph headings are for convenience only and shall not be construed as part of this Agreement.

14.9 Governing Law.  This Agreement shall be construed in accordance with, and shall be governed by, the laws of the State of New York including, without limitation, Section 5-1401 of the New York General Obligations Law (without giving effect to conflict of law rules).

14.10 Waiver of Jury Trial.  THE PARTIES HERETO HEREBY WAIVE ANY AND ALL RIGHTS THAT THEY MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN BORROWER, LENDER OR ITS SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR THE COLLATERAL.  IT IS INTENDED THAT SAID WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDINGS BETWEEN BORROWER AND LENDER.  BORROWER WAIVES ALL RIGHTS TO INTERPOSE ANY CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND, NATURE OR DESCRIPTION IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL OR ANY MATTER ARISING THEREFROM OR RELATING THERETO, EXCEPT COMPULSORY COUNTERCLAIMS.

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14.11 Consent to Jurisdiction.  Borrower and Lender each hereby (a) irrevocably submits and consents to the exclusive jurisdiction of the Supreme Court for New York County, State of New York, and the United State District Court for the Southern District of New York with respect to any action or proceeding arising out of this Agreement, the Note, the other Obligations, the other Loan Documents, the Collateral or any matter arising therefrom or relating thereto and (b) waives any objection based on venue or forum non conveniens with respect thereto.  In any such action or proceeding, Borrower waives personal service of the summons and complaint or other process and papers therein and agrees that the service thereof may be made by certified mail, return receipt requested, directed to Borrower at its chief executive office set forth herein or other address thereof of which Lender has received notice as provided herein, service to be deemed complete as permitted under the rules of either of said Courts.  Any such action or proceeding commenced by Borrower against Lender will be litigated only in the New York Supreme Court for New York County, State of New York, and the United States District Court for the Southern District of New York.

14.12 Entire Agreement.  This Agreement, the other Loan Documents, any supplements or amendments hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written.  In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern.

14.13 Counterparts.  This Agreement may be executed in counterparts, each of which when so executed, shall be deemed an original, but all of which shall constitute but one and the same instrument.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written.

EMAGIN CORPORATION
By:	/s/
	Name
	Title

MORIAH CAPITAL L.P.
By:	Moriah Capital Management, L.P., General Partner
By:	Moriah Capital Management, GP, LLC, General Partner

By:	/s/
	Name
	Title

[SIGNATURE PAGE OF LOAN AND SECURITY AGREEMENT]

43

SCHEDULE 2.4

TO

LOAN AND SECURITY AGREEMENT

The Company shall use the loans for working capital purposes and not to redeem any Common Stock or Common Stock Equivalents or to settle any outstanding litigation. 

44

SCHEDULE 8.17

TO

LOAN AND SECURITY AGREEMENT

LOCATION OF COLLATERAL

eMagin Corporation

2070 Route 52

Hopewell Junction, NY 12533

eMagin Corporation

10500 N.E. 8th Street

Suite 1400

Bellevue, WA  98004

ASTERIA MANUFACTURING SDN BHD

WISMA AIC LOT 3

SELANGOR DARU EHASN

MALAYSIA

45

SCHEDULE 8.18

TO

LOAN AND SECURITY AGREEMENT

CUSTOMERS AND VENDORS

46

SCHEDULE 8.29

TO

LOAN AND SECURITY AGREEMENT

INDEBTEDNESS

Great Plains	$	(15,340	)
6% Debentures		(6,020,000	)
Empire State (NY Urban Development)		(115,717	)
	$	(6,151,057	)

47

SCHEDULE 10.9

TO

LOAN AND SECURITY AGREEMENT

DIVIDENDS

Holders of $6.02 million of convertible notes have the option to convert 50% of their notes into Series A Preferred Stock.  Notes converted into Series A Preferred Stock would be paid an annual dividend of 8%.

SCHEDULE 10.10

TO

LOAN AND SECURITY AGREEMENT

PAYMENTS TO AFFILIATES

Paul Cronson, a member of eMagin’s Board of Directors, is the Managing Director of Larkspur Capital.  Larkspur has been engaged to represent the Company if approached by a third party interested in merging or acquiring the Company.  His firm would be entitled to fees if a transaction were completed that resulted in a merger, acquisition or sale of eMagin’s assets.  Larkspur would also be entitled to fees if capital were raised from a firm introduced by them to the Company and to compensation fo expenses incurred.

Paul Cronson (Director) is a representative of Navicorp III a holder of $200,000 of our convertible notes.

John Atherly (Officer) is a holder of $40,000 of our convertible notes.

Olivier Prache (VP) is a holder of $10,000 of our convertible notes.

48

SCHEDULE 10.14

TO

LOAN AND SECURITY AGREEMENT

BANK ACCOUNTS

49

EXHIBIT A

TO

LOAN AND SECURITY AGREEMENT

Permitted Encumbrances

None other than the convertible notes due December 21, 2008

EXHIBIT B

TO

LOAN AND SECURITY AGREEMENT

Form of Revolving Loan Note

SECURED CONVERTIBLE REVOLVING LOAN NOTE

Up to $2,500,000

Dated: August 7, 2007

FOR VALUE RECEIVED, the undersigned, EMAGIN CORPORATION, a Delaware corporation, with its principal place of business located at 10500 N.E. 8th Street, Suite 1400 Bellevue, Washington 12533 (“eMagin” and “Borrower”) promises to pay to the order of MORIAH CAPITAL, L.P., a Delaware limited partnership with offices at 685 Fifth Avenue, New York, New York 10022, and its successors and assigns (“Lender”), on or before the Maturity Date, the principal sum of up to Two Million Five Hundred Thousand Dollars ($2,500,000) in accordance with the Loan and Security Agreement, of even date herewith, entered into by and between Borrower and Lender (as amended from time to time, the “Agreement”).  Capitalized terms used herein and not defined herein shall have their respective meanings as set forth in the Agreement.

INTEREST; DUE DATE:  Interest shall be due and payable as provided in the Agreement.  The Loan and all other Indebtedness evidenced hereby not paid before the Maturity Date shall be due and payable on the Maturity Date.

MAXIMUM RATE OF INTEREST:  It is intended that the rate of interest herein shall never exceed the maximum rate, if any, which may be legally charged on the Loans evidenced by this Note (the “Maximum Rate”), and if the provisions for interest contained in this Note would result in a rate higher than the Maximum Rate, interest shall nevertheless be limited to the Maximum Rate, and any amounts which may be paid toward interest in excess of the Maximum Rate shall be applied to the reduction of principal, or, at the option of Lender, returned to Borrower.

PLACE OF PAYMENT:  All payments hereon shall be made, and all notices to Lender required or authorized hereby shall be given, at the office of Lender at the address designated in the Agreement, or to such other place as Lender may from time to time direct by written notice to Borrower.

APPLICATION OF PAYMENTS:  All payments received hereunder shall be applied in accordance with the provisions of the Agreement.

PAYMENT AND COLLECTION:  All amounts payable hereunder are payable by check or wire transfer in immediately available funds to the account number specified by Lender, in lawful money of the United States.  Borrower agrees to perform and comply with each of the covenants, conditions, provisions and agreements contained in every instrument now evidencing or securing said Indebtedness.

SECURITY:  This Note is issued pursuant to the Agreement and is secured by a pledge of the Collateral as described in the Loan Documents.  Notwithstanding the pledge of the Collateral described above, Borrower hereby acknowledges, admits and agrees that Borrower’s obligations under this Note are recourse obligations of Borrower to which Borrower pledges its full faith and credit.

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DEFAULTS:  Upon the happening of an Event of Default, Lender shall have all of the rights and remedies set forth in the Agreement.

The failure to exercise any of the rights and remedies set forth in the Agreement shall not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect of the same event or any other event.  The acceptance by Lender of any payment which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing rights and remedies at that time or at any subsequent time or nullify any prior exercise of any such rights or remedies without the express consent of Lender, except as and to the extent otherwise provided by law.

WAIVERS:  Borrower waives diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note.

TERMINOLOGY:  Any reference herein to Lender shall be deemed to include and apply to every subsequent holder of this Note.  Any reference herein to Borrower shall mean eMagin and any of its Subsidiaries that may be bound under any of the Loan Documents.

AGREEMENT:  Reference is made to the Agreement for provisions as to the Loan, rates of interest, Collateral, acceleration and release matters.  If there is any conflict between the terms of this Note and the terms of the Agreement, the terms of the Agreement shall control.

APPLICABLE LAW:  This Note shall be governed by and construed and interpreted in accordance under the laws of the State of New York, the laws of which Borrower hereby expressly elects to apply to this Note, without giving effect to provisions for choice of law thereunder.  Borrowers agree that any action or proceeding brought to enforce or arising out of this Note shall be commenced in accordance with the provisions of the Agreement.

SIGNATURE PAGE TO FOLLOW

51

IN WITNESS WHEREOF, this Secured Convertible Revolving Loan Note has been duly executed and delivered as of the day and year first above written.

EMAGIN CORPORATION
By:	/s/
	Name
	Title

52

EXHIBIT C

TO

LOAN AND SECURITY AGREEMENT

Form of Intercreditor Agreement

 

EXHIBIT C

INTERCREDITOR AGREEMENT

INTERCREDITOR AGREEMENT, dated  August 7, 2007, by and among MORIAH CAPITAL, L.P., a Delaware limited partnership with offices at 685 Fifth Avenue, New York, New York 10022 (“Moriah”), ALEXANDRA GLOBAL MASTER FUND LTD., a British Virgin Islands international business company with the offices of its investment advisor at 767 Third Avenue, 39th Floor, New York, New York 10017 (“Alexandra”), in its capacity as collateral agent pursuant to the Noteholder Agreements (such capitalized term and all other capitalized terms used herein having the respective meanings provided in this Agreement) acting for and on behalf of the holders of Notes (in such capacity, the “Notes Collateral Agent” as hereinafter further defined) and EMAGIN CORPORATION, a Delaware corporation, with its principal place of business located at 10500 N.E. 8th Street, Suite 1400, Bellevue, Washington 98004 (the “Borrower”).

R E C I T A L S:

A.              The Notes Collateral Agent is the collateral agent under the Pledge and Security Agreement, dated as of July 21, 2006, made by the Borrower to the Notes Collateral Agent, as amended by Amendment No. 1 to Pledge and Security Agreement, dated as of July 23, 2007 by and between the Borrower and the Notes Collateral Agent (the “Note Pledge Agreement”) for the benefit of the holders (the “Noteholders”) from time to time of the Amended and Restated 8% Senior Secured Convertible Notes Due 2008 issued by the Borrower (the “Notes”) pursuant to the several Note Purchase Agreements, dated as of July 21, 2006, by and between the Borrower and the several investors named therein, as amended by the several Amendment Agreements, dated as of July 23, 2007, by and between the Borrower and the several investors named therein (the “Note Purchase Agreements”) and, to secure the Borrower’s obligations to the Noteholders, the Notes Collateral Agent and the holders of Series A Senior Secured Convertible Preferred Stock, par value $0.001 per share, of the Borrower issued or issuable upon conversion of the Notes, the Borrower granted to the Notes Collateral Agent a security interest in and to the property of the Borrower described on Schedule 2 annexed hereto (collectively, the “Notes Collateral”).

B.              Pursuant to a Loan and Security Agreement, of even date herewith, between Moriah and Borrower (as the same may hereafter be amended, the “Moriah Loan Agreement;” the term “Moriah Loan Agreements” shall include all of the Loan Documents, as that term is defined in the Moriah Loan Agreement), Moriah is providing an accounts receivable and inventory based credit facility to Borrower that is secured by all now owned and hereafter acquired property (including, without limitation, real property) and assets of Borrower and the proceeds and products thereof, as more particularly described in Schedule 1 annexed hereto (collectively, the “Moriah Collateral”).

C.              It is a condition to the consummation of the transactions contemplated by the Moriah Loan Agreements that the Notes Collateral Agent subordinate its liens in the Accounts and Inventory as the same may be included in the Notes Collateral on terms satisfactory to Moriah.

D.              The Notes Collateral Agent and Moriah have each filed or may hereafter file financing statements under the Uniform Commercial Code, as may be amended from time to time (“UCC”) with respect to the Notes Collateral and the Moriah Collateral, respectively, in connection with the foregoing.

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E.              The Notes Collateral Agent and Moriah desire to agree on the relative priority of their respective security interests in, and liens on, their respective collateral.

In consideration of the foregoing, the mutual covenants and agreements herein contained and other good and valuable consideration, the Notes Collateral Agent and Moriah mutually covenant, warrant and agree as follows:

1.           Definitions.  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.  The following terms (including both the singular and plurals thereof) shall have the following meanings unless the context indicates otherwise:

1.1 “Bankruptcy Code” means the United States Bankruptcy Code (11 U.S.C. §§101 et seq.).

1.2 “Claim” or “Claims” means, as applicable, the Moriah Claim and/or the Noteholder Claim.

1.3 “Collateral” means all property and interests in property now owned or hereafter acquired by any Loan Party in or upon which a security interest or mortgage lien is granted to Moriah or the Notes Collateral Agent under the Security Documents.

1.4 “Creditors” shall mean Moriah, the Noteholders and the Notes Collateral Agent and their respective successors and assigns.

1.5 “Enforcement Action” means with respect to a Claim, the demand for payment or acceleration of such Claim, the repossession of any Collateral, the commencement or prosecution of enforcement of any of the rights and remedies under, as applicable, the Noteholder Agreements, the Moriah Loan Agreements, or applicable law with respect to such Claim, including, but not limited to, judicial or UCC foreclosure, provided that Enforcement Action shall not include the filing of a claim in an Insolvency Proceeding.

1.6 “Enforcement Notice” means a written notice delivered by the Enforcing Party to the other Party stating that an "Event of Default" (as defined in the Noteholder Agreements or the Moriah Loan Agreements, respectively) has occurred and is continuing and that an Enforcement Period has commenced.

1.7 “Enforcement  Period” means the period of time following the receipt by either the Notes Collateral Agent or Moriah of an Enforcement Notice until (a) the Noteholder Claim is Paid in Full (if the Notes Collateral Agent is the Enforcing Party) or the Moriah Claim is Paid in Full (if Moriah is the Enforcing Party), or (b) the Creditors agree in writing to terminate such Enforcement Period.

1.8 “Enforcing Party” means Moriah in the case of an Enforcement Action with respect to the Moriah Claim, and the Notes Collateral Agent in the case of an Enforcement Action with respect to the Noteholder Claim.

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1.9 “Insolvency Proceeding” means any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of any Loan Party.

1.10“Loan Party”means Borrower and each subsidiary of Borrower which is now or may hereafter become a party to the Noteholder Agreements or the Moriah Loan Agreements.

1.10A “Lockbox Agreement” means the Lockbox Agreement, dated as of July 21, 2006, by and between the Borrower and the Notes Collateral Agent, as amended by Amendment No. 1 to Lockbox Agreement, dated as of July 23, 2007, by and between the Borrower and the Notes Collateral Agent.

1.11 “Maximum Moriah Debt” means the sum of (a) $2,500,000, plus (b) such other indebtedness that may be permitted to be incurred from time to time on or after the date hereof under the terms of the Notes as Permitted Indebtedness as such term is defined in the Notes.

1.12 “Moriah Claim” means all of the obligations of the Loan Parties to Moriah as set forth in the Moriah Loan Agreements.

1.13 “Moriah Senior Collateral” means the Collateral described in Section 2.1(a) in which Moriah has a senior lien or security interest.

1.14 “Noteholder Agreements” means the Note Purchase Agreements, the Notes, the Note Pledge Agreement, the Patent and Trademark Security Agreement, dated as of July 21, 2006, by and between the Borrower and the Notes Collateral Agent, as amended by Amendment No. 1 to Patent and Trademark Security Agreement dated as of July 23, 2007, by and between the Borrower and the Notes Collateral Agent, the Lockbox Agreement, the Certificate of Designations of Series A Senior Secured Convertible Preferred Stock of the Borrower, the Amended and Restated Common Stock Purchase Warrants issued by the Borrower to the holders of Notes pursuant to the Note Purchase Agreements and the other agreements, instruments and documents contemplated thereby.

1.15 “Noteholder Claim” means all obligations of the Loan Parties to the Notes Collateral Agent and the Noteholders as set forth in the Noteholder Agreements.

1.16 “Noteholder Senior Collateral” means the Collateral described in Section 2.1(b) in which the Notes Collateral Agent has a senior lien or security interest.

1.17 “Notes Collateral Agent” means Alexandra in its capacity as collateral agent pursuant to the Note Pledge Agreement and the other applicable Noteholder Agreements, and its successors and assigns including any replacement or successor trustee or agent or any additional trustee or agent.

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1.18 “Paid in Full” means, in the case of the Moriah Claim, the aggregate outstanding, unpaid amount of the Moriah Claim has been paid in full in cash and all commitments to make loans or extend other financial accommodations have terminated and, in the case of the Noteholder Claim, the aggregate outstanding unpaid amount of the Noteholder Claim has been paid in full in cash and all commitments to make loans or extend other financial accommodations have terminated.  If after receipt of any payment of, or proceeds of collateral applied to the payment of, either any Moriah Claim or Noteholder Claim, as the case may be, any of the Creditors is required to surrender or return such payment or proceeds to any person for any reason, then the Moriah Claim or Noteholder Claim as applicable, intended to be satisfied by such payment or proceeds shall be reinstated and continue as if such payment or proceeds had not been received by such Creditor, as the case may be.  Notwithstanding anything to the contrary contained herein, for purposes of this definition, the Moriah Claim shall not include any amount of the Moriah Claim in excess of the Maximum Moriah Debt.

1.19 “Party” means Moriah or the Notes Collateral Agent.

1.20 “Person” or “person” means, as applicable, any individual, sole proprietorship, partnership, corporation, limited liability company, limited liability partnership, partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof.

1.21 “Post-Petition Interest” means interest at the contract rate under the Moriah Loan Agreements or the Noteholder Agreements, as applicable, accruing subsequent to the filing of any Insolvency Proceeding as to any Loan Party whether or not such interest is an allowable claim in any such Insolvency Proceeding.

1.22 “Security Documents” means, collectively, the Noteholder Agreements and the Moriah Loan Agreements.

2.           Intercreditor Agreement.

2.1.           Lien Priorities.  Notwithstanding (a) the date, manner or order of filing, recordation, or perfection of the security interests or liens granted in favor of Moriah and the Notes Collateral Agent, (b) any provisions of the UCC, or any applicable law or decision, (c) the provisions of the Moriah Loan Agreements, Noteholder Agreements or any contract between any of the Creditors on one hand, and the Borrower or any affiliate thereof, on the other hand, or (d) whether either Moriah or the Notes Collateral Agent holds possession of all or any part of the Collateral, the following, as between Moriah and the Notes Collateral Agent, shall be the relative priority of the security interests and liens of Moriah and the Notes Collateral Agent in the Collateral:

(a)           Moriah shall have a first and prior security interest to the extent set forth herein in all Accounts and Inventory as defined in the Section 9-102 of the UCC.  The Notes Collateral Agent shall have a second and subordinate security interest in the foregoing property and interests in such property; provided, that, any amount of the Moriah Claim in excess of the Maximum Moriah Debt at any time outstanding (together with the interest on such excess) shall not be entitled to the benefit of the priority of the security interest of Moriah provided for in this Section 2.1(a).

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(b)           The Notes Collateral Agent shall have a first and prior security interest in the remainder of the Collateral that is the subject of the Noteholder Agreements and Moriah shall have a second and subordinate security interest in such Notes Collateral whether now owned or hereafter created by any Loan Party.

Neither Moriah nor the Notes Collateral Agent shall contest the validity, perfection, priority or enforceability of any lien or security interest heretofore granted to the other Party or granted in connection herewith or contemplated hereby.  Notwithstanding any failure of a Party to perfect its security interests in any Collateral or any other defect in any security interests or obligations owing to such Party, the priority and rights as between the parties hereto shall be as set forth herein.

2.2.           Distribution of Proceeds of Collateral.

(a)           No Enforcement Period:  Except as provided in Section 2.2(b) below (with respect to distribution of proceeds of Collateral during an Enforcement Period):

(i)           All realizations upon and proceeds of Moriah Senior Collateral shall be paid to Moriah for application to the Moriah Claim, with any residual proceeds after satisfaction of the Moriah Claim being paid to the Notes Collateral Agent for the benefit of the Noteholders.

(ii)           All realizations upon and proceeds of Noteholder Senior Collateral shall be paid to the Notes Collateral Agent for application to the Noteholder Claim, with any residual proceeds after satisfaction of the Noteholder Claim being paid to Moriah.

(b)           During Enforcement Period:  During any Enforcement Period, all proceeds of Collateral shall be distributed in accordance with the following procedure:

(i)           All realizations upon and proceeds of Moriah Senior Collateral shall be applied to the Moriah Claim.  After the Moriah Claim is Paid in Full and the Moriah Loan Agreements are terminated and fully paid or otherwise satisfied, any remaining proceeds of the Moriah Senior Collateral shall be applied to the Noteholder Claim.

(ii)           All realizations upon and proceeds of Noteholder Senior Collateral shall be applied to the Noteholder Claim.  After the Noteholder Claim is Paid in Full and the Noteholder Agreements are terminated and fully paid or otherwise satisfied, any remaining proceeds of the Noteholder Senior Collateral shall be applied to the Moriah Claim.

(iii)           After the Moriah Claim and the Noteholder Claim have been paid in full in cash and all commitments to make loans or extend other financial accommodations have terminated, the balance of the realizations upon and proceeds of the Collateral, if any, shall be paid to the respective Loan Party or as otherwise required by applicable law.

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(c)           Payments Held in Trust.  Should any payment or distribution be received by a Party that is not permitted to receive and retain such payment or distribution pursuant to the terms hereof, such Party shall receive and hold the same in trust, as trustee, for the Party entitled to receive and retain such payment, and shall forthwith deliver the same to such Party in precisely the form received (except for endorsement or assignment where necessary), for application to the Claim of such Party and, until so delivered, the recipient shall hold the same in trust as the property of such Party entitled to the same.  If a Party obligated to make an endorsement or assignment pursuant to the provisions of this Section fails to make any such endorsement or assignment, the permitted recipient of such payment or distribution, or any of its officers or employees, is hereby irrevocably authorized to make the same.

2.3.           Enforcement Actions.  Each of Moriah and the Notes Collateral Agent agrees not to commence or take any Enforcement Action until an Enforcement Notice has been given by such Enforcing Party to the other Party.  Subject to the foregoing, Moriah and the Notes Collateral Agent agree that during an Enforcement Period:

(a) Moriah may, at its option, take and continue any Enforcement Action with respect to Moriah Senior Collateral and realize thereon, without the prior written consent of the Notes Collateral Agent, provided that during any Enforcement Period with respect to the Noteholder Senior Collateral, Moriah shall not commence or take any Enforcement Action or realize upon the Noteholder Senior Collateral without the Notes Collateral Agent's prior written consent.

(b) Subject to the standstill period described in Section 2.3(e) below, the Notes Collateral Agent may, at its option, take and continue any Enforcement Action with respect to the Noteholder Senior Collateral and realize thereon without the prior written consent of Moriah, provided that during any Enforcement Period with respect to the Moriah Senior Collateral, the Notes Collateral Agent shall not commence or take any Enforcement Action or realize upon any of the Moriah Senior Collateral without Moriah's prior written consent. In furtherance and not in limitation of the foregoing, during an Enforcement Period, the Notes Collateral Agent shall not take any action to enforce its rights under the Lockbox Agreement, whether pursuant to Section 2 thereof or otherwise.

(c) If both Moriah and the Notes Collateral Agent elect to proceed with Enforcement Actions, then each shall proceed with the Enforcement Action of any security interests in or liens on any Collateral in which it has a senior lien or security interest, as described in and provided by Section 2.1, without prejudice to the other Party to join in any proceedings.

(d) Each Enforcing Party shall so notify the other Party at such time as the Enforcing Party's Claim is Paid in Full.

(e) Notwithstanding anything herein to the contrary, but subject to the proviso at the end of this paragraph, the Notes Collateral Agent agrees that, during the first five (5) days of an Enforcement Period (the “Standstill Period”), it shall not take any action to realize on the Noteholder Senior Collateral, so as not to impair the collection by Moriah of Borrower’s outstanding accounts receivable during that period; provided, however, that the Notes Collateral Agent shall be entitled to take such action as it deems necessary in its sole discretion to (i) protect its secured position during the Standstill Period, (ii) protect its interest from claims or liens of third parties or governmental authorities, or (iii) preserve the Noteholder Senior Collateral from deterioration or diminishment.

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2.4.           Accountings.  Each of Moriah and the Notes Collateral Agent agree upon the occurrence of any Enforcement Action, to render accountings to the other, upon reasonable request of the other, giving effect to the application of realizations upon and proceeds of Collateral as hereinbefore provided.

2.5.           Notices of Defaults.  Moriah and the Notes Collateral Agent agree to give to the other copies of any notice of the occurrence of an Event of Default, respectively, simultaneously with the sending of such notice to the applicable Loan Party, but the failure to give or forward any such notice shall not affect the validity of such notice, create a cause of action against the Party failing to give such notice, or create any claim or right on behalf of the other Party or any third party.  The sending or receipt of such notice shall not obligate the recipient to cure such Event of Default.

2.6.           Agency for Perfection.  Moriah and the Notes Collateral Agent each hereby appoint each other as agent for purposes of perfecting their respective security interests and liens in the Collateral.  To the extent that either Party obtains possession of Collateral in which the other Party has a senior priority under the terms hereof, the Party having possession shall notify the other Party of such fact and shall deliver such Collateral to the Party having the senior priority upon request of such Party.  Each Party shall be a bailee for the other Party with respect to Collateral in such Party's possession.  If directed by a Loan Party, the bailee Party shall, after the Claim of such bailee Party has been Paid in Full, deliver the Collateral in its possession to the other Party.

2.7.           UCC Notices.  In the event that Moriah or the Notes Collateral Agent shall be required by the UCC or any other applicable law to give notice to the other of intended disposition of Collateral, such notice shall be given in accordance with Section 3.8 hereof, and five (5) days' notice shall be deemed to be commercially reasonable.

2.8.           Information Sharing. Upon the occurrence and continuance of an Enforcement Period, in the event that either Moriah or the Notes Collateral Agent shall, in connection with any Enforcement Action, receive possession or control of any books and records which contain information identifying or pertaining to any of the property of any Loan Party in which the other Party has been granted a lien, it shall notify the other Party that it has received such books and records and shall, as promptly as practicable thereafter, make available to the other Party duplicate copies of such books and records in the same form as the original.  All reasonable expenses incurred by either Moriah or the Notes Collateral Agent in performing its obligations under this paragraph shall be borne by the Loan Parties and shall constitute indebtedness under the respective Party's agreements with the Loan Parties.  The failure of either Party to share information shall not create a cause of action against the Party failing to share information or create any claim on behalf of any Loan Party or any third party.

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2.9.           Obligations of the Loan Parties Unconditional.  Nothing contained herein is intended to or shall increase or impair the obligations, liabilities and indebtedness of the Loan Parties to pay the Claims as and when the same shall become due and payable in accordance with the terms of the Moriah Loan Agreements and the Noteholder Agreements, as applicable, or to affect the relative rights of the Loan Parties and creditors of the Loan Parties other than the Creditors.

2.10.         Continuing Obligations.  This Agreement shall be irrevocable and shall continue in effect until each Claim has been Paid In Full.  This is a continuing agreement and each Party may continue, at any time and without notice to the other Party, to extend credit to or for the benefit of the Loan Parties on the faith hereof.

2.11.         Certain Waivers.

(a)           The Notes Collateral Agent acknowledges that Moriah has not made any warranties or representations with respect to the due execution, legality, validity, completeness or enforceability of the Moriah Loan Agreements or the collectibility of the Moriah Claim.

(b)           Each of the Notes Collateral Agent and Moriah shall be entitled to manage and supervise its financial arrangements with each Loan Party in accordance with its usual practices, modified from time to time as it deems appropriate under the circumstances, without affecting the validity or enforceability of this Agreement.

(c)           Moriah shall have no liability to the Notes Collateral Agent for, and the Notes Collateral Agent hereby waives any claim which the Notes Collateral Agent may now or hereafter have against Moriah arising out of any and all actions which Moriah, in good faith, takes or omits to take (including, without limitation, actions with respect to the creation, perfection or continuation of liens or security interests in any existing or future Collateral, actions with respect to the occurrence of a default or event of default, actions with respect to the foreclosure upon, sale, release, or depreciation of, or failure to realize upon, any of the Collateral and actions with respect to the collection of any claim for all or any part of the Noteholder Claim from any account debtor, guarantor or any other person) with respect to and in accordance with any Moriah Loan Agreements or any other agreement related thereto or to the collection of the Moriah Claim or the valuation, use, protection or release of the Collateral, so long as any such actions are taken in a manner consistent with the terms of this Agreement or any election of the application of Section 1111(b)(2) of the Bankruptcy Code.

(d)           Moriah acknowledges that the Notes Collateral Agent has made no warranties or representations with respect to the due execution, legality, validity, completeness or enforceability of the Noteholder Agreements or the collectibility of the Noteholder Claim.

(e)           The Notes Collateral Agent shall have no liability to Moriah for, and Moriah hereby waives any claim which Moriah may now or hereafter have against the Notes Collateral Agent arising out of any and all actions which the Notes Collateral Agent, in good faith, takes or omits to take (including, without limitation, actions with respect to the creation, perfection or continuation of liens or security interests in any existing or future Collateral, actions with respect to the occurrence of a default or event of default, actions with respect to the foreclosure upon, sale, release, or depreciation of, or failure to realize upon, any of the Collateral and actions with respect to the collection of any claim for all or any part of the Moriah Claim from any account debtor, guarantor or any other person) with respect to and in accordance with the Noteholder Agreements or  any other agreement related thereto or to the collection of the Noteholder Claim or the valuation, use, protection or release of the Collateral, so long as any such actions are taken in a manner consistent with the terms of this Agreement or any election of the application of Section 1111(b)(2) of the Bankruptcy Code.

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2.12.         Modifications and Waivers.  Any modification or waiver of any provision of this Agreement, or any consent to any departure by either Party from the terms hereof, shall not be effective in any event unless the same is in writing and signed by Moriah and the Notes Collateral Agent, and then such modification, waiver or consent shall be effective only in the specific instance and for the specific purpose given.  Any notice to or demand on any Party in any event not specifically required hereunder shall not entitle the Party receiving such notice or demand to any other or further notice or demand in the same, similar or other circumstances unless specifically required hereunder.  Each Loan Party hereby acknowledges and agrees that this Agreement may be amended or otherwise modified without notice to or consent by any Loan Party.

2.13.         Insurance.  The Party having a senior security interest or lien in the Collateral shall have, subject to such Party’s rights under its agreements with the Loan Parties, the sole and exclusive right, as against the other Party, to adjust settlement of such insurance policy in the event of any loss.

2.14          Effect of Bankruptcy.  This Agreement shall be and remain enforceable notwithstanding any Insolvency Proceeding by or against the Borrower.

3.           Miscellaneous.

3.1.           Representations, Warranties and Covenants.  Each Party represents, warrants and covenants to the other that:

(a)           except as set forth herein, it has not subordinated, and agrees that it will not subordinate at any time while this Agreement remain in effect, any right, claim or interest of any kind in or to the Collateral as to which such Party has a senior lien or security interest, and any subordination in violation of this sub-paragraph shall be null and void;

(b)           it has not assigned or transferred any right, claim or interest of any kind in or to its Claim; and

(c)           the execution, delivery and performance by or on behalf of such Party has been duly authorized by all necessary action, corporate or otherwise, does not violate any provision of law, governmental regulation, or any agreement or instrument by which such Party is bound, and requires no governmental or other consent that has not been obtained.

3.2.           No Benefit to Third Parties.  The terms and provisions of this Agreement shall be for the sole benefit of the Creditors and their respective successors and assigns, and no other Person shall have any right, benefit, priority or interest under or because of this Agreement.

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3.3.           Independent Credit Investigations.  Neither Party nor any of their respective directors, officers, agents or employees shall be responsible to any other person for the solvency, financial condition or ability of any Loan Party to repay the Moriah Claim or the Noteholder Claim, or for statements of any Loan Party, oral or written, or for the validity, sufficiency or enforceability of the Moriah Claim or the Noteholder Claim, the Moriah Loan Agreements, the Noteholder Agreements, or any liens or security interests granted by any Loan Party in connection therewith.  Each of the Creditors has entered into its respective financing agreements with Loan Parties based upon its own independent investigation and makes no warranty or representation to the other Party with respect to matters identified or referred to in this paragraph.  If either Party, in its sole discretion, undertakes, at any time or from time to time, to provide any such information to the other Party, such information shall be given with no representation or warranty of any kind from such Person and such Person shall be under no obligation (a) to provide any such information to any other Person at that time or to any Person on any subsequent occasion or (b) to undertake any investigation not a part of its regular business routine.

3.4           Amendments to Financing Arrangements or to this Agreement.  Moriah and the Notes Collateral Agent shall each endeavor to notify the other Party of any material amendment or modification of the Moriah Loan Agreement or the Noteholder Agreements, respectively, but the failure to do so shall not create a cause of action against the Party failing to give such notice or create any claim or right on behalf of the other Party.  Moriah and the Notes Collateral Agent shall, upon request of the other Party, provide copies of all such modifications or amendments and copies of all other documentation relevant to the Collateral.

3.5.           Marshaling of Assets.  The Notes Collateral Agent hereby waives any and all rights to have the Moriah Senior Collateral, or any part thereof, marshaled upon any foreclosure of any of Moriah's liens thereon or with respect to any other Enforcement Action by Moriah.  Moriah hereby waives any and all rights to have the Noteholder Senior Collateral, or any part thereof, marshaled upon any foreclosure of the Notes Collateral Agent's liens thereon or with respect to any other Enforcement Action by the Notes Collateral Agent.  If any Claim is now or hereafter secured by collateral other than the Collateral described hereunder, the Party holding such collateral shall have no obligation to marshal such collateral before enforcing its rights in the Collateral hereunder, and the other Party shall have no rights hereunder to share or participate in any proceeds of such other collateral.  Each Party shall have the right, subject to Section 2.3, to take Enforcement Action against Collateral in such order, or in whole or in part, and subject to such conditions as such Enforcing Party determines in its sole discretion.

3.6.           Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of each of the Parties, but does not otherwise create, and shall not be construed as creating, any rights enforceable by any Loan Party or any other person not a party to this Agreement.

3.7.           Agreement Absolute.  This Agreement shall be and remain absolute and unconditional under any and all circumstances, and no act or omission on the part of any Party to this Agreement shall affect or impair the agreement of the other Party hereunder.  Each of the Parties hereby authorizes the other Party to (a) change any terms relating to such obligations of and Loan Party to such Party or the loan agreements relating thereto as such other Party in its discretion may deem advisable and with Borrower’s agreement; (b) grant renewals, increases or extensions of the time for payment of the Claim of such Party; (c) receive notes or other evidences of the obligations of the Loan Parties to such other Party or renewals, increases or extensions thereof; and (d) take or omit to take any action for the enforcement of, or waive any rights with respect to, any obligation of the Loan Parties to such other Party without invalidating or impairing any provision hereof.  The Parties hereby acknowledge and agree that this Agreement does not increase or expand the obligations of Borrower under the respective Security Documents to which the Parties are party.  Further, the Parties acknowledge that if Borrower, in good faith, shall make a payment of Claims in a manner that is inconsistent with the terms hereof, it shall have no liability to either Party therefor as long as Borrower cooperates with the Parties to rectify such mistake.

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3.8.           Notice.  All notices, requests and demands to or upon the respective parties shall be given in writing and shall be deemed to have been duly given or made upon receipt by the receiving party.  All notices, requests and demands are to be given or made to the respective parties at the following addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph):

If to Moriah:	Moriah Capital, L.P.
	685 Fifth Avenue
	New York, New York 10022
	Attention: Greg Zilberstein
With a copy to:
	Cohen Tauber Spievack & Wagner LLP
	420 Lexington Avenue
	Suite 2400
	New York, New York 10170
	Attention: Adam Stein, Esq.
	If to the Notes
Collateral Agent:	Alexandra Global Master Fund Ltd.
	c/o Alexandra Investment Management, LLC
	767 Third Avenue
	39th Floor
	New York, New York 10017
	Attention: Chief Legal Officer

3.9.           Relationship of Parties.  This Agreement is entered into solely for the purposes set forth herein, and except as expressly provided herein, neither Party assumes any other duties or responsibilities to the other regarding the financial condition of the Borrower or any other Party, or regarding any collateral, or regarding any other circumstance bearing upon the risk of nonpayment of the obligations of the Borrower under any of the agreements hereinabove referred to.  Each Party shall be responsible for managing its banking investments and/or business relationships with the Borrower, and neither Party shall be deemed to be the agent of the other for any purpose (except for the limited purpose set forth in Section 2.6) nor shall any party hereto be deemed to be acting in concert with, or at the direction of, any other party.

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3.10.          Governing Law.  This Agreement shall be construed in accordance with, and shall be governed by, the laws of the State of New York (without giving effect to choice of law or conflict of law rules).

3.11.          Consent to Jurisdiction.  Each Party hereby (a) irrevocably submits and consents to the exclusive jurisdiction of the Supreme Court for New York County, State of New York, and the United State District Court for the Southern District of New York with respect to any action or proceeding arising out of this Agreement or any matter arising therefrom or relating thereto and (b) waives any objection based on venue or forum non conveniens with respect thereto.

3.12.          Counterparts.  This Agreement may be executed in counterparts and by facsimile or other electronic transmission, each of which when so executed, shall be deemed an original, but all of which together shall constitute but one and the same instrument.

3.13           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.

3.14           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.

3.15           Entire Agreement; Benefit.  This Agreement 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.  This Agreement 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 Notes Collateral Agent, for the benefit of the Noteholders, and Moriah and their respective successors and permitted assigns.

3.16           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.

3.17           Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

[Remainder of this Page Intentionally Left Blank]

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IN WITNESS WHEREOF, this Intercreditor Agreement has been duly executed as of the day and year first above written.

ALEXANDRA GLOBAL MASTER FUND LTD.,
As Notes Collateral Agent
By:	ALEXANDRA INVESTMENT
	MANAGEMENT, LLC,
	As Investment Advisor

By:	/s/
	Name
	Title

MORIAH CAPITAL, L.P.
By:	Moriah Capital Management, L.P.,
	General Partner

By:	Moriah Capital Management, GP, LLC,
	General Partner

By:	/s/
	Name
	Title

Acknowledged and agreed to by:

EMAGIN CORPORATION

By:	/s/
	Name
	Title

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ACKNOWLEDGMENT

The undersigned hereby acknowledges and agrees to the foregoing terms and provisions.  By executing this Agreement, the undersigned agrees that it will, together with its successors and assigns, be bound by the provisions hereof as they relate to the relative rights of the Notes Collateral Agent and Moriah as between them. The undersigned further agrees that: (i) the terms of this Agreement shall not give the undersigned any substantive rights vis-a-vis either the Notes Collateral Agent, the Noteholders or Moriah, (ii) it does not and will not receive any right, benefit, priority or interest under or because of the existence of this Agreement, (iii) it will execute and deliver such additional documents and take such additional action as may be necessary or desirable in the opinion of any Creditor to effectuate the provisions and purposes of this Agreement and (iv) this Agreement may be amended or supplemented from time to time without notice to, or the consent of, the undersigned.

If either Moriah or the Notes Collateral Agent shall enforce its rights or remedies in violation of the terms of this Agreement, the undersigned agrees that it shall not use such violation as a defense to any Enforcement Action by either Moriah or the Notes Collateral Agent nor assert such violation as a counterclaim or basis for set-off or recoupment against either Moriah, the Noteholders or the Notes Collateral Agent.

	EMAGIN CORPORATION
August7, 2007	By:	/s/
		Name
		Title

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Schedule 1

Moriah Collateral

All now owned and hereafter acquired property (including, without limitation, real property) and assets of Borrower and the Proceeds and products thereof (which property, assets together with all other collateral security for the Obligations now or hereafter granted to or otherwise acquired by Lender, are referred to herein collectively as the "Collateral"), including, without limitation, all property of Borrower now or hereafter held or possessed by Lender and including the following (capitalized terms used but not defined herein have the meanings given to them in the Moriah Loan Agreement):

(a)All now owned and hereafter acquired:  Accounts; contract rights; chattel paper (including, but not limited to, rentals and other amounts payable under leases of equipment to customers pursuant to which Borrower is the lessor or assignee of any lessor); general intangibles (including, but not limited to, tax and duty refunds, patents, patent applications, trademarks, trademark applications, tradenames and tradestyles, copyrights, copyright applications, trade rights (whether or not registered), discoveries, improvements, processes, know-how, formulas, trade secrets, service marks, other rights in intellectual property (whether patentable or not), goodwill, customer and mailing lists, life insurance policies, licenses (whether as licensor or licensee), franchises and permits); documents (including, without limitation, all warehouse receipts); instruments; all guaranties, letters of credit, steamship guaranties, airway releases or other similar guaranties, agreements or property securing or relating to any of the items referred to above (including, but not limited to, purchase money security interests granted by Account Debtors in connection with installment sales); all cash monies, investment properties, deposits, securities, bank accounts, deposit accounts, credits and other property now or hereafter held in any capacity by Lender;

(b)Inventory;

(c)Equipment and fixtures;

(d)All now owned and hereafter acquired right, title and interests of Borrower in, to and in respect of any real or other personal property in or upon which Lender has or may hereafter have a security interest, Lien or right of setoff;

(e)All of Borrower's existing and future leasehold interests in premises or facilities leased from third parties by Borrower;

(f)All present and future books and records relating to any of the above including, without limitation, all present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to any of the foregoing maintained with or by any other Person); and

(g)Any and all products and Proceeds of the foregoing in any form including, without limitation, all insurance claims, warranty claims and proceeds and claims against third parties for loss or destruction of or damage to any or the foregoing.

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Schedule 2

Notes Collateral

The Notes Collateral includes each of the following, whether now existing or hereafter arising:

(1)           all Accounts of eMagin Corporation, a Delaware Corporation, (the “Borrower”) and, if the Collateral Agent exercises its rights under Section 3(b) of the Pledge and Security Agreement, dated as of July 21, 2006, by the Borrower, to Alexandra Global Master Fund Ltd., as Collateral Agent (the “Note Pledge Agreement”), the Lockbox and each and every General Intangible relating thereto;

(2)           all Inventory of the Borrower;

(3)           all Equipment of the Borrower;

(4)           all Proprietary Information owned or licensed by the Borrower, whether existing on the date hereof or developed or acquired hereafter;

(5)           all of the Borrower’s right, title and interest in and to all Contracts, Documents, Chattel Paper, Instruments, Investment Property and General Intangibles, whether existing on the date hereof or hereafter arising;

(6)           all cash, securities, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of the Collateral, including, without limitation in respect of the cash or other property held in the Lockbox or the Collateral Account;

(7)           all Patents, Patent Licenses, Trademarks and Trademark Licenses;

(8)           all insurance policies to the extent they relate to items (1) through (7) above;

(9)           all books, ledgers, books of account, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating, or referring to any of the foregoing; and

(10)           to the extent not otherwise included, all Proceeds, products, rents, issues, profits and returns of and from any and all of the foregoing, which Proceeds may be in the form of Accounts, Chattel Paper, Inventory or otherwise;  all as provided in the Note Pledge Agreement.  Capitalized terms used herein but not defined herein shall have the meanings provided for such terms in the Note Pledge Agreement.

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EXHIBIT D

TO

LOAN AND SECURITY AGREEMENT

Form of Securities Issuance Agreement

EXHIBIT D

SECURITIES ISSUANCE AGREEMENT

THIS SECURITIES ISSUANCE AGREEMENT (this “Agreement”) is made and entered into as of August 7, 2007, by and between eMagin Corporation, a Delaware corporation (the “Company”), and Moriah Capital, L.P., a Delaware limited partnership (the “Lender”).

Capitalized terms not otherwise defined herein have the meaning set forth in that certain Loan and Security Agreement by and between Lender, as lender, and the Company, as borrower, of even date herewith (the “Loan Agreement”).

RECITALS

WHEREAS, the Company has authorized the issuance to Lender on the date hereof of shares of the Company’s common stock, $0.001 par value per share (“Common Stock”), with an aggregate market value on the Closing Date of $195,000, based on the closing price of the Common Stock on the OTC Bulletin Board on the Closing Date (the “Initial Issued Shares”);

WHEREAS, the Company wishes to issue the Issued Shares (as defined below) to Lender;

WHEREAS, the Company has authorized the issuance to Lender, pursuant to the terms of the Loan Agreement, on the effective date of extension of the initial term of the Loan (if so extended), Common Stock with an aggregate market value of $195,000 based on the average closing price of the Common Stock on the OTC Bulletin Board or such other trading market which such Common Stock is then listed or traded, for the ten (10) trading days preceding such effective date(the “Contingent Issued Shares”) (the Contingent Shares, together with the Initial Issued Shares, are referred to herein as the “Issued Shares”); and

WHEREAS, the issuances and other obligations and transactions described and contemplated hereby are in partial consideration for Lender agreeing to enter into, perform or accept, as applicable, the Loan Agreement and the other Loan Documents;

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Issuance.

1.1   On the date of execution of this Agreement, also known as the Closing Date, the Company agrees to issue to Lender, and Lender agrees to acquire from the Company, the Initial Issued Shares.

1.2   On the date of extension of the initial term of the Loan, also known as the Extension Date, the Company agrees to issue to Lender, and Lender agrees to acquire from the Company, the Contingent Issued Shares, the certificate for which shares shall be delivered to Lender within five (5) days of such date.

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2.Closing; Delivery.  (a) Closing Obligations of Company. At the Closing Date, except as set forth below, the Company shall have taken and shall take all actions necessary to issue the Issued Shares to Lender and to consummate the transactions contemplated hereby, including, without limitation, delivery or causing to be delivered to Lender the following:

(a)   A certificate for the Initial Issued Shares within five (5) days of the Closing Date;

(b)   executed originals, and delivery of, all of the Loan Documents; and

(c)   such other certificates, documents, receipts and instruments as Lender or its legal counsel may request.

(b) Closing Obligations of Lender.  At the Closing Date, Lender shall have taken and shall take all actions necessary for its acquisition of the Initial Issued Shares, and to consummate the transactions contemplated hereby.

3.Representations and Warranties of the Company.  The Company hereby represents and warrants to Lender as follows:

3.1Organization, Good Standing and Qualification.  Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization.  Each of the Company and its Subsidiaries has the corporate power and authority to own and operate its properties and assets; to execute, deliver and perform or cause to be executed, delivered and performed this Agreement ; and to carry on its business as presently conducted.

3.2   Capitalization; Voting Rights.

(a)The authorized and issued capital stock of the Company as of the date hereof is as disclosed in the Company’s filings that are required by the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) (the “SEC Reports”) to be filed with the Securities and Exchange Commission (“SEC”).

(b)Except as disclosed in the SEC Reports, other than: (i) Common Stock reserved for issuance under the Company’s stock option plans and (ii) the Issued Shares, there are no outstanding options, warrants, rights (including, but not limited to, conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or other arrangements or agreements of any kind for the purchase or acquisition from the Company or its Subsidiaries, of any of their securities.  Neither the offer, issuance or sale of any of, or the issuance of any of, the Issued Shares, nor the consummation of any transactions contemplated hereby, will result in a change in the price or number of any securities of the Company or its Subsidiaries authorized or issued.

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(c)All issued and outstanding securities: (i) have been duly authorized and validly issued and are fully paid and nonassessable and (ii) were issued in compliance with all applicable state and federal laws.

(d)The Issued Shares have been duly and validly reserved for issuance.  When issued in compliance with the provisions of this Agreement, the Issued Shares will be validly issued, fully paid and nonassessable, and will be free of any liens, charges, encumbrances, options, rights of first refusal, security interests, claims, mortgages, pledges, charges, easements, covenants, restrictions, (except as contained herein) obligations, or any other encumbrances (including, without limitation, any conditional sale or other title retention agreement or any lease in the nature thereof and any agreement to grant or to permit or suffer to exist any of the foregoing) or third party rights or equitable interests of any nature whatsoever or any Liens all of the above shall be referred to herein as a “Lien”.

3.3Authorization; Binding Obligations.  All corporate action on the part of the Company necessary for the authorization of the Loan Documents, and the performance of the same, has been taken or will be taken prior to the Closing Date.  The Loan Documents, when executed and delivered, will be valid and binding obligations of the Company, enforceable against it in accordance with their terms.

3.4Title to Properties and Assets; Liens, Etc.  Except for Permitted Encumbrances, each of the Company and each of its Subsidiaries has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case not subject to any Liens.

3.5No Conflicts.  Neither the Company nor any of its Subsidiaries is in violation or default of (a) any term of its formation documents or by-laws or (b) of any provision of any indebtedness for borrowed money, Contract any mortgage, indenture, lease, license, agreement or contract (collectively, “Contracts”) or judgment, order, writ, injunction, or decree (“Orders”).  The execution, delivery and performance of this Agreement and the Loan Documents will not, with or without the passage of time or giving of notice, result in any violation, or be in conflict with, or constitute a default under, any such term or provision of indebtedness for borrowed money, Contract or Order, or result in the creation of any Lien upon any of the securities, properties or assets of the Company or any of its Subsidiaries, or the suspension, revocation, impairment, forfeiture or nonrenewal of any licenses, permits, franchises, approvals, consents, waiver, notices, authorizations, qualifications, concessions, or the like.

3.6Registration Rights and Voting Rights.  Except as disclosed in the Registration Rights Agreement, neither the Company nor any of its Subsidiaries is presently under any obligation, and neither the Company nor any of its Subsidiaries has granted any rights, to register any of the Company’s or its Subsidiaries’ securities.  Except as disclosed in any SEC Reports, to the Company’s best knowledge, no stockholder of the Company or any of its Subsidiaries has entered into any agreement with respect to the voting of equity securities of the Company or any of its Subsidiaries.

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3.7Valid Offering.  Assuming the accuracy of the representations and warranties of Lender contained in this Agreement, the offer, sale and issuance of the Issued Shares will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws.

3.8SEC Reports.  The Company’s SEC Reports do not  contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading.

3.9Fees; Brokers; Finders.  There are no fees, commissions or other compensation due to any third party in connection with the Loan Documents.  All negotiations relative to the Loan Documents, and the transactions contemplated thereby, have been carried on by the Company with Lender and without the intervention of any other person or entity acting on behalf of the Company, and in such manner as not to give rise to any claim against the Company or Lender for any finder's fee, brokerage commission or like payment, and if any such fee, commission or payment is payable, it shall be the sole responsibility of the Company and the Company shall pay, and indemnify Lender for, the same.

4.Representations and Warranties of Lender.  The Lender hereby represents and warrants to the Company that (a) the Lender has the power and authority to execute, deliver and perform this Agreement, (b) all partnership or corporate action on Lender’s part required for the execution, delivery and performance of this Agreement has been or will be taken on or prior to the Closing Date, (c) upon execution and delivery, this Agreement will be valid and binding obligations of Lender, enforceable in accordance with its terms, and (d) the Lender will not engage in “short sales” of the issued and outstanding Common Stock during the Term.

5.Covenants of the Company.  The Company covenants and agrees with Lender as follows:

5.1Reporting Requirements.  The Company and its Subsidiaries will timely file with the SEC and state regulatory authorities all reports, documents, information and other material required to be filed or disclosed thereto.

5.2Confidentiality.  The Company agrees that it will not disclose, and will not include in any public announcement, the name of Lender or the terms of this Agreement other than as permitted under the Loan Agreement or as required by law.

5.3SEC Reporting.  The Company shall comply with all reporting requirements under the Securities Exchange Act, including, but not limited to, making available all required current information regarding the Company under Rule 144(c) under the Securities Act, so as to enable Lender to effect resales of the Issued Shares under Rule 144.  The Company shall cooperate with Lender in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales, provided the Company and its counsel receive reasonably requested representations from Lender and broker, if any.

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5.4Indemnification.  The Company and its Subsidiaries agree, jointly and severally, to indemnify, hold harmless, reimburse and defend Lender, and Lender’s partners, officers, directors, agents, representatives, affiliates, members, managers, and employees, against any claim, cost, expense, liability, obligation, loss or damage (including, without limitations, reasonable legal fees) of any nature, incurred by or imposed upon them which results, arises out of, or is based upon: (a) any misrepresentation by the Company or any of its Subsidiaries, or breach of any warranty by the Company or any of its Subsidiaries in this Agreement, or in any exhibits or schedules attached hereto, and (b) any breach or default in performance by Company or any of its Subsidiaries of the their obligations hereunder.

6.Put Option.  The Company hereby grants to Lender an option (the “Put Option”) to sell all or any portion of the Issued Shares (the “Put Shares”) to the Company for a total purchase price of $195,000, pro-rated for any portion thereof (the “Put Price”).  The Put Option may be exercised with respect to any amount that is equal to or less than the entire balance of the outstanding Put Shares, at any time during the earlier to occur of the following Put Option exercise periods (the “Put Period”): (a) the ten (10) Business Day period commencing on the first anniversary hereof,  or (b)  the ten (10) Business Day period commencing on the date which is nine (9) months after the date that the registration statement for the registration of the Issued Shares is declared effective by the SEC .  If not exercised during the Put Period, the Put Option shall terminate and shall be of no further force or effect.  The Put Option shall be exercisable by Lender’s delivery of written notice to the Company (the “Put Notice”).  The Put Notice shall specify the date on which the closing of the purchase of the Put Shares shall take place (the “Put Closing Date”), which such date shall be no earlier than ten (10) days but no later than thirty (30) days from the date of the Put Notice.  On or before the Put Closing Date, Lender will deliver to the Company the certificate(s) representing the Put Shares (duly endorsed for transfer by Lender or accompanied by duly executed stock powers in blank) and the Company shall tender to Lender the Put Price in cash by wire transfer of immediately available funds to an account at a bank designated by Lender.  The Company and Lender acknowledge and agree that the Company’s obligation to purchase the Issued Shares from Lender pursuant to the Put Option is an Obligation secured by the Collateral and any related guarantees under the Loan Documents, and for so long as the Put Option is outstanding and, if exercised, the Put Price is not yet tendered, the Lender’s right to receive the Put Price shall be secured by the Collateral  and any related guarantees under the Loan Documents. Lender’s right to exercise the Put Option shall not be transferred or assigned to any third party.

6.1           Notwithstanding the foregoing, Lender shall have the right, but not the obligation, to accelerate the exercise of the Put Option upon a  Fundamental Transaction (as defined in the Loan Agreement), as follows: The Company shall send written notice of the proposed Fundamental Transaction (“Fundamental Transaction Notice”) no later than thirty (30) days prior to the date of the proposed consummation of the Fundamental Transaction, together with all relevant information relating thereto, in form sufficient to enable Lender to make an informed decision as to whether it should accelerate the Put Option.  Within fifteen (15) days of Lender’s receipt of the Fundamental Transaction Notice, Lender shall advise the Company whether the Lender has elected to accelerate the exercise of the Put Option.  Lender’s failure to timely notify the Company of Lender’s intention to accelerate the Put Option shall be deemed an intention to decline to accelerate the Put Option.

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6.2           In addition, notwithstanding the foregoing, Lender shall have the right, but not the obligation, to accelerate the exercise of the Put Option following an Event of Default under the Loan Documents (which acceleration right shall not be waived if not exercised following a prior Event of Default), in which event the Put Price shall be added to the Obligations under the Loan Agreement and secured by the Collateral thereunder, and shall be immediately due and payable to Lender.

6.3           If any portion of the Note is converted into Common Stock pursuant to the Loan Documents, the Put Option set forth hereinabove, if not terminated by its terms herein, shall terminate.

7.           Miscellaneous.

7.1           Notices.  All notices, requests and demands to or upon the respective parties hereto shall be given in writing and shall be deemed to have been duly given or made upon receipt by the receiving party.  All notices, requests and demands are to be given or made to the respective parties at the following addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph):

If to the Company:

10500 N.E. 8th Street

Suite 1400

Bellevue, Washington 12533

Attention: John Atherly

With a copy to:

Sichenzia Ross Friedman Ference LLP

61 Broadway

New York, New York 10006

Attention:  Richard A. Friedman, Esq.

If to Lender:

685 Fifth Avenue

New York, New York 10022

Attention: Greg Zilberstein

With a copy to:

Cohen Tauber Spievack & Wagner LLP

420 Lexington Avenue, Suite 2400

New York, New York 10170

Attention:  Adam Stein, Esq.

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7.2           Amendment.  Any modification or amendment shall be in writing and signed by the parties hereto, and any waiver of, or consent to any departure from, any representation, warranty, covenant or other term or provision shall be in writing and signed by each affected party hereto or thereto, as applicable.

7.3           Construction.  No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by reason of such party or its counsel having, or being deemed to have, structured or drafted such provision.

7.4           Entire Agreement.  This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all other negotiations, representations, warranties, agreements and understandings, oral or otherwise, between the parties with respect to the matters contained herein.

7.5           Headings.  Section and paragraph headings are for convenience only and shall not be construed as part of this Agreement.

7.6           Severability.  Every provision of this Agreement is intended to be severable.  If, in any jurisdiction, any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such term or provision in any other jurisdiction, and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision.  If a court of competent jurisdiction determines that any covenant or restriction, by the length of time or any other restriction, or portion thereof, set forth in this Agreement is unreasonable or unenforceable, the court shall reduce or modify such covenants or restrictions to those which it deems reasonable and enforceable under the circumstances and, as so reduced or modified, the parties hereto agree that such covenants and restrictions shall remain in full force and effect as so modified.  In the event a court of competent jurisdiction determines that any provision of this Agreement is invalid or against public policy and cannot be so reduced or modified so as to be made enforceable, the remaining provisions of this Agreement shall not be affected thereby, and shall remain in full force and effect.

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7.7           Successors and Assigns.  All covenants, promises and agreements by or on behalf of the parties contained in this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that nothing in this Agreement, express or implied, shall confer on the Company the right to assign any of its rights or obligations hereunder at any time.

7.8           Survival.  All covenants, agreements, representations and warranties made by the Company herein or in any certificate, report or instrument contemplated hereby shall survive any independent investigation made by Lender and the execution and delivery of this Agreement, and such certificates, reports or instruments and shall continue so long as any Obligations are outstanding and unsatisfied, applicable statutes of limitations to the contrary notwithstanding.

7.9           No Waiver; Rights and Remedies.  A waiver of a breach of any term, covenant or condition of this Agreement shall not operate or be construed as a continuing waiver of such term, covenant or condition, or breach, or of any other term, covenant or condition, or breach by such party.  No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall preclude any other or further exercise of any other right, remedy or power provided herein or by law or in equity.  Lender is entitled to exercise all rights and remedies available to it at law or in equity in connection with this Agreement.  The rights and remedies of Lender hereunder are several and cumulative at Lender’s discretion and may be exercised at Lender’s discretion.

7.10           Governing Law; Jurisdiction.  This Agreement shall be governed by and construed in accordance with the applicable laws pertaining in the State of New York (without giving effect to New York's principles of conflicts of law).  The parties hereby (a) irrevocably submit and consent to the exclusive jurisdiction of the Supreme Court for New York County, State of New York, and the United State District Court for the Southern District of New York with respect to any action or proceeding arising out of this Agreement and (b) waive any objection based on venue or forum non conveniens with respect hereto.  In any such action or proceeding, the Company waives personal service of the summons and complaint or other process and papers therein and agrees that the service thereof may be made by mail directed to the Company at its office set forth herein or other address thereof of which Lender has received notice as provided herein, service to be deemed complete as permitted under the rules of either of said Courts.  Any such action or proceeding commenced by the Company against Lender will be litigated only in the New York Supreme Court for New York County, State of New York, and the United States District Court for the Southern District of New York.

7.11           Counterparts.  This Agreement may be executed in counterparts and by facsimile or electronic signature, each of which when so executed, shall be deemed an original, but all of which shall constitute but one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

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                IN WITNESS WHEREOF, the parties hereto have executed this Securities Issuance Agreement as of the date set forth in the first paragraph hereof.

EMAGIN CORPORATION
By:	/s/
	Name
	Title

MORIAH CAPITAL, L.P.
By:	Moriah Capital Management, L.P.,
	General Partner

By:	Moriah Capital Management, GP, LLC,
	General Partner

By:	/s/
	Name
	Title

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EXHIBIT E

TO

LOAN AND SECURITY AGREEMENT

Chief Executive Office

eMagin Corporation

10500 N.E. 8th Street

Suite 1400

Bellevue, WA  98004

Principal Place of Business

eMagin Corporation

10500 N.E. 8th Street

Suite 1400

Bellevue, WA  98004

Locations of Collateral

eMagin Corporation

2070 Route 52

Hopewell Junction, NY 12533

eMagin Corporation

10500 N.E. 8th Street

Suite 1400

Bellevue, WA  98004

ASTERIA MANUFACTURING SDN BHD

WISMA AIC LOT 3

SELANGOR DARU EHASN

MALAYSIA

Locations of Books and Records

eMagin Corporation

10500 N.E. 8th Street

Suite 1400

Bellevue, WA  98004

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 EXHIBIT F

TO

LOAN AND SECURITY AGREEMENT

Forms of Landlord Agreements

SUBLEASE AGREEMENT

This Sublease Agreement (the 'Sublease") is made as of July , 2005 by and between CAPGEMINI U.S. LLC, a Delaware limited liability company, (the 'Sublessor"), and EMAGIN CORPORATION, a Delaware corporation (the 'Sublessee").

RECITALS

A.Bellevue Place Office Building Limited Partnership, a Washington limited partnership (the 'Landlord") and Ernst & Young U.S. LLP, a Delaware limited liability partnership ("E&Y"), entered into that certain Bank of America Office Lease and First Lease Addendum, both dated April 20, 2000 (the Office Lease"), for certain space on the fourteenth (14h) floor in the Bank of America Building at Bellevue Place, 10500 NE gh Street, Bellevue, Washington (the "Building"), which leased space is more specifically described in the Office Lease. The Office Lease was subsequently assigned to Sublessor, formerly known as Cap Gemini Ernst & Young U.S. LLC, pursuant to that certain Assignment of Lease dated February 26, 2002 (the "Assignment").

B.The Office Lease was further amended by that certain Second Lease Addendum dated October 23, 2003 (the 'Second Addendum"). The Office Lease, as amended by the Second Addendum, is hereinafter referred to as the 'Prime Lease".

C. Sublessor desires to sublet the Subleased Premises (as defined herein) located in the Building to Sublessee, and Sublessee desires to sublease the Subleased Premises from Sublessor, for the term and upon the conditions set forth herein.

NOW, THEREFORE, in consideration of the rent and other payments hereinafter set forth, the covenants and agreements of the parties contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

1.            Demise. Subject to Section 23 hereof, Sub lessor does hereby agree to sublease the Subleased Premises to Sublessee, and Sublessee does hereby accept and sublease the Subleased Premises from Sublessor, for the term and upon the conditions set forth herein.

2.Term Provided Landlord has consented to this Sublease pursuant to Section 23 the term of the sublease of the Subleased Premises shall commence on July 1, 2005 (the "Commencement Date"). This Sublease shall expire at 11:59 p.m. on August 31, 2009, but in no event later than the expiration date of the Prime Lease, unless sooner terminated in accordance with the provisions of this Sublease.

Notwithstanding the foregoing, if the Landlord has not consented to this Sublease on or before July 1, 2005, then Sublessor and Sublessee agree that the Commencement Date may be moved forward for up to an additional 31 days (i.e. August 1, 2005) in order to further pursue such request and to accommodate the Landlord's requirements in connection with its review and approval thereof; whereupon the Rent Commencenemt Date and the Base Rent adjustment dates referenced in Section 5 (a) below shall also be moved forward by the same number of days.

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Sublessor and Sublessee agree to use their best efforts to obtain the Landlord's consent as soon as reasonably possible following the date of execution of this Sublease.

Notwithstanding the Commencement Date, upon execution of this Sublease, and Landlord's consent to the Sublease, Sublessee shall have the right to access the Subleased Premises prior to the Commencement Date, rent-free and without any other consideration to Sublessor, for the purpose of installing Tenant's fixtures and equipment.

3.            Subleased Premises. The 'Subleased Premises" shall mean approximately -18;961 rentable square feet on the 141h floor of the Building, as more specifically depicted on Exhibit A attached hereto and made a part hereof. The Subleased Premises include all of the Leased Premises identified in the Prime Lease.

4.Use. The Sublessee may use the Subleased Premises under the trade name "eMagin" solely for general office purposes (including incidental light assembly of electronic equipment, if and to the extent permitted in the Prime Lease or consented to by the Landlord), in accordance with all applicable laws, ordinances and regulations aid subject to the Incorporated Provisions (defined in Section 6 below) of the Prime Lease and this Sublease.

5.           Payment of Rent.

(a)           Beginning on September 1, 2005 (the "Rent Commencement Date'),

Sublessee shall pay base rent as follows (the 'Base Rent"):

Dates	Montly Base Rent		Annual Base Rent Per RSF
Rent Commencement Date — June 30, 2006	$	22,561.39	$14.28 / RSF
July 1, 2006 — June 30, 2007	$	39,028.06	$24.70 / RSF
July 1, 2007 — August 31, 2009	$	40,608.14	$25.70 / RSF

Sublessor hereby directs Sublessee, and Sublessee does hereby agree, that such payment of Base Rent and payment of all other amounts due and payable to Sublessor under this Sublease shall be made to (and to the order of) Capgemini U.S. LLC, Corporate Real Estate Services, One Panorama Center, 7701 Las Colinas Ridge, Suite 600, Irving, Texas 75063 (or at such other place as the Sublessor subsequently shall designate in writing) and shall be paid in lawful money of the United States of America without notice or demand, and without abatement, deduction, counter-claim or setoff. Any installment of Base Rent that is received by Sublessor after the fifth (5th) day of the calendar month shall, at Sublessor's option, be subject to a late charge of ten percent (10%) of the amount thereof and such charge shall be paid by Sublessee upon demand by Sublessor, it being understood that the late fee described herein shall not be deemed a liquidated damages calculation and shall not preclude any other remedy of Sublessor under this Sublease or at law. To he extent that this Sublease shall commence on a day other than the first day of any calendar month, or terminate on a day other than the last day of any calendar month, the Base Rent under this Sublease shall be prorated on a per diem basis for that particular month.

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(b)In addition to payment of Base Rent as aforesaid, Sublessee shall pay to Sublessor Operating Costs and Maintenance Expenses, as such term is defined in the Prime Lease, with respect to the Subleased Premises, to the extent that such Operating Costs and Maintenance Expenses exceed that which Sublessor must pay for the calendar year 2005 (the "Base Year"). For example, if the Operating Costs and Maintenance Expenses required to be paid by Sublessor for the Base Year are determined to be $9.70 per foot (the "Base Year Rate"), and the Operating Costs and Maintenance Expenses required to be paid by Sublessor for calendar year 2006 are estimated by the Landlord to be $10.70 per foot as determined pursuant to the Prime Lease, then Sublessee shall pay said $1.00 increase in the Base Year Rate to Sublessor as additional rent at the same times and in the same manner as specified in the Prime Lease. Furthermore, to the extent that Landlord charges Sublessor for any service, act or utility provided to the Subleased Premises beyond the basic services, acts and utilities that are required to be supplied by the Prime Lease without charge, including, without limitation, heating, air conditioning, utilities and additional cleaning, Sublessee shall pay for such charges as additional rent, immediately upon demand therefor to the extent such charges relate to the Subleased Premises (the "Additional Rent").

(c)All payments referenced in this Section 5, including, without limitation, Base Rent and Additional Rent are hereinafter referred to collectively as 'Rent".

(d) Notwithstanding the provisions of this Section 5 regarding Sublessee's, obligation to pay Rent to Sublessor, Sublessor and Sublessee understand, acknowledge and agree that the Base Rent and Additional Rent required to be paid by Sublessor to Landlord under the Prime Lease is more than the Rent required to be paid by Sublessee pursuant to this Sublease, and that Sublessor shall continue to be obligated to pay such Base Rent and Additional Rent (except to the extent that Sublessee is required to pay the excess Operating Costs and Maintenance Expenses as provided in Section 5 (b) above) to the Landlord at the times and in the manner specified in the Prime Lease.

6. Certain Provisions of Lease Incorporated. The following provisions of the Prime Lease (the 'Incorporated Provisions  ") are explicitly incorporated herein by reference and made a part hereof: Paragraphs 2.2, 6.5, Article 9, Paragraphs 10.2, 10.3, 11.2, 11.3, 12.1, 12.2, Article 13, Article 14, Article 15, Article 16, Article 19, Article 21, Article 22, Article 23, Article 26, Paragraph 34.2, Article 37 (excluding Paragraphs 37.7 and 37.14). No consent, waiver, amendment, or other change by Landlord as permitted under the Prime Lease of Sublessor's obligations and liabilities as tenant under the Prime Lease shall reduce or limit Sublessee's obligations and liabilities to Sublessor hereunder unless Sublessor shall have agreed in writing that such consent, waiver, amendment or change shall be effective hereunder. Unless the context requires otherwise, for the period during the term of this Sublease only, (i) references in the Incorporated Provisions to Landlord shall refer to Sublessor (subject to the provisions of this Sublease which relieve Sublessor of any obligation or responsibility for the performance of the obligations of Landlord under the Prime Lease), (ii) references in such provisions to Tenant shall refer to Sublessee, and (iii) references in such provisions to the Premises shall refer to the Subleased Premises hereunder. Sublessee expressly assumes toward Sublessor and agrees to perform all of the obligations, responsibilities and covenants that Sublessor has assumed as Tenant under the Incorporated Provisions in respect of the Subleased Premises. Sublessee acknowledges that it has received a copy of the Prime Lease, and agrees not to do, or cause to be done, any act (whether of omission or commission) which would result in a default under or breach of any term, covenant, provision or condition of the Prime Lease. Sublessee shall not have any expansion, contraction or similar rights (including without limitation any rights of first offer or rights of first refusal) under the Prime Lease, or any rights to cancel, terminate, extend or renew the term of the Prime Lease.

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Notwithstanding the incorporation herein of the Incorporated Provisions or anything otherwise contained in this Sublease to the contrary,

(a)Sublessor shall not be obligated to render or provide any of the services required to be provided by Landlord under the Prime Lease or the Incorporated Provisions, respectively, and Sublessor shall not be obligated to satisfy any obligations of the Landlord thereunder; and

(b)Sublessor shall not have any responsibility or liability to Sublessee (i) on account of any act or omission of Landlord, any default by Landlord, or breach by Landlord of any term, covenant or condition of the Prime Lease, or any failure by Landlord to perform any of its obligations under the Prime Lease, or (ii) by reason of any condition of or in the Building or the Subleased Premises now or hereafter existing;

provided, however, that Sublessor shall, at Sublessee's request and expense, take all such reasonable actions as Sublessee shall direct to enforce Sublessor's rights and remedies under the Prime Lease with respect to the Subleased Premises or, at Sublessor's option, authorize Sublessee to enforce the same in Sublessor's name. Sublessee shall indemnify and hold harmless Sublessor against any loss, liability, claim, cost or expense arising out of or in connection with any actions taken pursuant to the preceding sentence, and Sublessee shall be entitled to receive and retain any recovery allocable to the Subleased Premises during the term of this Sublease resulting from such actions, after recovery by Sublessor of all loss, liability, claim, cost and expense due to Sublessor by Sublessee hereunder.

7. Net Return The payments of Sublessee hereunder to Sublessor are intended to constitute an absolutely net return to Sublessor with respect to the Subleased Premises, and except to the extent of (i) the difference between the Base Rent payable hereunder and the Base Rent payable under the Prime Lease, and (ii) excluding the cost of Operating Costs and Maintenance Expenses to be paid by Sublessor for the Subleased Premises, all costs of any kind relating to the Incorporated Provisions (with respect to the Subleased Premises), this Sublease, or the use and operation of the Subleased Premises shall be the responsibility of the Sublessee. Without limiting the generality of the foregoing, (i) whenever Sublessee requires Landlord to furnish any service or perform any act for which Landlord is entitled to make a separate charge under the Prime Lease, including, without limitation, heating, air conditioning and utilities, Sublessee shall pay the same, and (ii) Sublessee shall pay to Sublessor any charges billed to Sublessor from time to time, to the extent any such charges are allocable, as determined by Sublessor, for services provided to the Subleased Premises.

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8.            Property Located in or about the Subleased Premises. All improvements, fixtures, equipment and personal property in or about the Subleased Premises shall be in or about the Subleased Premises at the sole risk of Sublessee. The improvements, fixtures, equipment and personal property in or about the Subleased Premises as of the Commencement Date (as more particularly described on Exhibit B attached hereto and made a part hereof, the "Sublessor's  Property"), other than the equipment, trade fixtures and personal property of Sublessee or anyone claiming by, through or under Sublessee shall be and remain the property of Sublessor and shall be kept by Sublessee in good condition and repair (subject to normal wear and tear) and shall not be removed from the Subleased Premises. Sublessor makes no warranties of any kind or nature, `Whether express or implied (including without limitation warranties of merchantability or fitness for a particular purpose), with respect to the Sublessor's Property, and Sublessee accepts the Sublessor's Property for use during the term hereof in its "as is" and "where is" condition. Sublessee shall insure the Sublessor's Property in the name of Sublessor as part of the property insurance required hereunder. Sublessor shall have the right to enter the Subleased Premises at all reasonable times and after giving Sublessee reasonable notice, for the purpose of, among other things, inspecting the Subleased Premises and the Sublessor's Property. In consideration of the Rent payable to Sublessor, and provided that Sublessee shall not then be in default under this Sublease, upon the end of the term of this Sublease (or if, this Sublease is terminated by Landlord on account of Sublessor's default of its obligations under the Prime Lease excluding any such termination on account of Sublessee's default of its obligations under this Sublease) Sublessor shall transfer the Sublessor's Property to Sublessee in its "as is" and "where is" condition, with all representations and warranties (including without limitation warranties of merchantability or fitness for a particular purpose) hereby waived by Sublessee. Any applicable sales, use or similar tax or charge which may be imposed or due by reason of such use or transfer of Sublessor's Property shall be the sole responsibility of Sublessee, and Sublessee agrees to pay such taxes or charges to Sublessor at any, time upon demand (including after the termination or expiration of this Sublease). Sublessee hereby acknowledges that it has inspected the Sublessor's Property and waives any and all claims against Sublessor arising out of any damage, defect or condition relating to the Sublessor's Property.

9.           Surrender. At the termination of this Sublease, by lapse of time or otherwise, Sublessee shall surrender possession of the Subleased Premises to Sublessor and deliver all keys to the Subleased Premises and all locks therein to Sublessor and make known to Sublessor the combination of all combination locks in the Subleased Premises and shall return the Subleased Premises and the Sublessor's Property (to the extent the Sublessor's Property has not been transferred to Sublessee pursuant to the terms of Section 8 of this Sublease) to Sublessor in broom clean condition and in as good condition as Sublessee originally took possession, normal wear and tear excepted, failing which Sublessor may restore the Subleased Premises and the Sublessor's Property to such condition and the Sublessee shall pay the cost thereof to Sublessor on demand. Upon or prior to such termination of this Sublease, Sublessee shall remove all of Sublessee's personal property (but not Landlord's personal property) and only those improvements, alterations and additions, which as a condition to Sublessor's or Landlord's consent to the installation thereof, are required to be removed and restored upon termination hereof.

10. Assignment and Subletting. Sublessee shall have no right to sublet the Subleased Premises or any portion thereof or assign or otherwise transfer its interest in this Sublease, whether expressly or by operation of law, without the prior written consent of Sublessor and all other consents and approvals that may be required under the Prime Lease.

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11.           Representations and Warranties of Sublessor. As of the date hereof, Sublessor represents and warrants to Sublessee, and agrees, as follows: (i) the Prime Lease which is identified by the documents referenced above in Recital Paragraphs A and B represents a true, correct and complete copy of the Prime Lease; (ii) the Prime Lease has not been modified or amended except as set forth in the documents referenced above in Rectal Paragraphs A and B; (iii) Sublessor has received no written notice from Landbrd of default still outstanding; (iv) Sublessor will not, from the date hereof through the date of termination of this Sublease, trigger an Event of Default (as defined in the Prime Lease) (excluding those caused by breach of this Sublease by Sublessee or any acts or omissions of Sublessee) which results in Landlord rightfully terminating "and retaking possession of the Subleased Premises from Sublessee prior to the end of the term of this Sublease; (v) no liens exist, nor will be permitted by Sublessor to exist, against the Subleased Premises in violation of Section 22 of the Prime Lease for work performed, materials furnished, equipment supplied or obligations incurred by or on behalf of Sublessor; (vi) if any rent is abated pursuant to paragraph 16 of the Prime Lease, the Rent owed by Sublessee pursuant to this Sublease shall also be abated proportionately and for the same time, and (vi) any award which may be sought by Sublessor pursuant to Section 28.4 of the Prime Lease will be prorated between Sublessor and Sublessee based upon their respective interests in the Subleased Premises..

12.           Indemnification By Sublessee. Sublessee agrees, to the extent not expressly prohibited by law, to pay, and to protect, defend, indemnify and save harmless Sublessor and Landlord and their respective past, present and future employees, officers and agents (each an "Indemnified Party" and collectively, the Indemnified Parties"), from and against any liabilities, losses, damages, costs or expenses (including, but not limited to, attorneys' fees and expenses) of any nature whatsoever which may be imposed upon, incurred by, or asserted against any Indemnified Party by reason of or in connection with (i) any accident, injury to, or death of any person or any damage to property or any other events occurring on or about the Subleased Premises, or (ii) any breach by Sublessee (excluding any breach caused by Sublessor) of any term or condition of the Incorporated Provisions or the Prime Lease, with respect to the Subleased Premises, or this Sublease or any failure by Sublessee to perform or comply with (x) any of the terms of the Incorporated Provisions, with respect to the Subleased Premises or (y) this Sublease, or (z) any restrictions, statutes, laws, ordinances or regulations affecting the Subleased Premises or any part thereof or Sublessee's use of the Subleased Premises.

13.            Indemnification by Sublessor. Subject to the limitations on Sublessor's liabilities as specified in Section 24 below, Sublessor agrees, to the extent not expressly prohibited by law, to pay, and to protect, defend, indemnify and save harmless Sublessee and Sublessee's past, present and future employees, officers and agents (each an "Indemnified Party" and collectively, the "Indemnified Parties"), from and against any liabilities, losses, damages, costs or expenses (including, but not limited to, attorneys' fees and expenses) of any nature whatsoever which may be imposed upon, incurred by, or asserted against any Indemnified Party which result from Sublessor's breach of the Prime Lease (except to the extent such breach arises out of Sublessee's breach of this Sublease).

14.            Insurance. As pursuant to the Incorporated Provisions, Sublessee shall obtain all insurance policies (and in such amounts) required under the Prime Lease, including, but not limited to, personal property insurance covering the Sublessee's personal property. Sublessee shall include Sublessor and Landlord as additional insureds under all liability-related insurance policies required under the terms of the Prime Lease and under all liability related insurance policies which Sublessee may carry with respect to the Subleased Premises, any property located thereon, or with respect to any claim or accident arising on or about the Subleased Premises. Prior to the commencement of the term of this Sublease or any occupancy of or access to the Subleased Premises by Sublessee, Sublessee shall deliver to Sublessor certificates of insurance showing such policies to be valid and in effect. Any rights of settlement allocated to Sublessor as Tenant under the Prime Lease shall continue to be the rights of Sublessor hereunder.

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Sublessee hereby releases Sublessor and Landlord; and their respective officers, - -employees, agents and representatives, from any and all claims or demands of damage, liability, loss, expense or injury to the Subleased Premises or to the furnishings, fixtures, equipment, inventory or other property of Sublessee in, about or upon the Subleased Premises, which is caused by or results from perils, events or happenings which are the subject of insurance carried by Sublessee which is required under this Sublease or otherwise in force at the time of any such loss, whether or not due to the negligence of Sublessor or Landlord or their respective officers, employees, agents and representatives, and regardless of cause or origin. Any insurance carried by Sublessee with respect to the Buildings or the Subleased Premises (or property therein or occurrences thereon) shall include a clause or endorsement denying to the insurer rights of subrogation against Sublessor and Landlord and their respective officers, employees, agents and representatives.

15.Defaults. It shall be an Event of Default hereunder

(a)Sublessee shall fail to pay Rent when due; or

(b)Sublessee shall fail to pay when due any payments required to be made by Sublessee as described in this Sublease other than Rent (after, in the case of the first such failure, ten (10) business days' written notice from Sublessor, and thereafter without requirement of such notice and grace period; or

(c)Sublessee shall fail to keep or perform any one or more of the other terms, conditions, covenants or agreements of this Sublease or the Incorporated Provisions, and such failure shall continue for ten (10) days after notice of such failure to Sublessee; or

(d)Sublessee shall cause or permit to occur a default under the Incorporated Provisions which is not cured prior to five (5) days before the expiration of any cure period applicable thereto pursuant to the Incorporated Provisions or the Prime Lease.

16. Remedies. In the event of an Event of Default by Sublessee hereunder, Sublessor may exercise any remedies available to Landlord under the Incorporated Provisions, and, in addition to or, at its option, in lieu of, any or all other remedies provided for herein or in the Incorporated Provisions or available to Sublessor at law or in equity, Sublessor shall be entitled to enjoin such breach or a threatened breach, or to perform such obligation or cure such breach an behalf of Sublessee and recover the cost of such performance or cure from Sublessee upon demand. Notwithstanding anything to the contrary contained in the Prime Lease, Sublessor shall have the right to terminate this Sublease immediately upon an Event of Default by Sublessee and, at

Sublessor's sole option, Sublessor shall have the right to retain all equipment and fixtures located on the Subleased Premises as security for the outstanding obligations of Sublessee.

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17.           Tenant Improvements. Sublessor has not made any warranty or representation as to the condition of the Subleased Premises or any agreement or promise to decorate, alter, repair or improve the Subleased Premises and Sublessee hereby waives any and all rights it may have, express or implied, against Sublessor in connection therewith. The Subleased Premises are to be leased to Sublessee in "as-is" condition.

18.           Alterations. Sublessee shall make no alterations or improvements to the Subleased Premises except in accordance with the requirements of the Prime Lease and with the prior written consent of Sublessor which consent shall not be unreasonably withheld or delayed, and, to the extent such consent is required under the Prime Lease, the prior written consent of Landlord. Such alteration shall be completed in accordance with a schedule and plans and specifications submitted to and approved by the Landlord and Sublessor. Sublessee hereby indemnifies and holds harmless Sublessor against any loss, liability, cost, damage or claim arising out of or elating to any alteration or improvements made by or on behalf of Sublessee to the Subleased Premises, whether or not approved by Sublessor.

19. Notices. All notices and demands hereunder shall be in writing and shall be served in person, by prepaid certified United States Mail, return receipt requested, or by nationally recognized overnight courier, as follows:

If to Sublessor:

Corporate Real Estate Services

Capgemini U.S. LLC

One Panorama Center

7701 Las Colinas Ridge, Suite 600

Irving, Texas 75063

With a copy to:

Office of the General Counsel

Capgemini U.S. LLC

750 Seventh Avenue, 18th Floor

New York, New York 10019

If to Sublessee:

eMagin Corporation Bellevue Place

10500 NE 8th Street, 14th Floor

Bellevue, Washington

Tel: (425) 882-7878

Fax: (425) 882-7373

Attn: John Atherly

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Such notices shall be deemed served when delivered, if served in person, or by certified mail, or on the next business day after delivery to a nationally recognized overnight courier service. Any party may change the address for notices to it by a notice given as described herein.

20.           Brokers. Sublessor and Sublessee represent and warrant that they have not dealt with any brokers in connection with the sublease of the Subleased Premises other than Trammell Crow Company and Washington Partners Corporate Real Estate. Sublessor and Sublessee do hereby indemnify, defend and agree to hold each other harmless from and against any and all loss, cost, liability or obligations (including reasonable attorneys' fees) related to any fees or commissions claimed by any parties, to the extent such claims are based on the acts or agreements of the indemnifying party.

21.            Security Deposit. In order to secure Sublessee's performance hereunder, Sublessee hereby agrees that within three days of the Sublease Approval date, it shall deposit with Sublessor a security deposit in the amount of EIGHTY-ONE THOUSAND TWO HUNDRED SIXTEEN Dollars and 00/100 Dollars ($81,216.00) (the "Security Deposit"). Such Security Deposit shall be held by Sublessor, without interest, and upon the occurrence of any default of the Sublessee's obligations hereunder, may be applied or retained for the payment or performance of such obligations. The use, application or retention of the Security Deposit, or any portion thereof, by Sublessor shall not prevent Sublessor from exercising any other right or remedy provided by this Sublease or by law (it being intended that Sublessor shall not first be required to proceed against the Security Deposit) and shall not operate as a limitation on any recovery to which Sublessor may otherwise be entitled. If any portion of the Security Deposit is used, applied or retained by Sublessor for the purposes set forth above, Sublessee agrees, within ten (10) days after the written demand therefor is made by Sublessor, to deposit cash with the Sublessor in an amount sufficient to restore the Security Deposit to its original amount. Notwithstanding the foregoing, provided no Sublessee default has occurred, Sublessor will apply two (2) months of such deposit toward Sublessee's Base Rent otherwise due for the last two months of the Sublease Term.

22.Miscellaneous.

(a)Sublessor and Landlord and their agents shall have the right of access to the Subleased Premises at all reasonable times on reasonable notice to Sublessee (except in the event of an emergency, in which case no notice is necessary) in order to inspect or exhibit the Subleased Premises.

(b)This Sublease contains the entire agreement between the parties hereto, and shall not be modified in any manner except by a writing signed by the party against which such modification is sought to be enforced.

(c) The agreements, terms, covenants, and conditions herein shall bind and inure to the benefit of Sublessor and Sublessee and their respective heirs, personal representatives, successors, and permitted assigns.

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(d)Each of the indemnifications contained in this Sublease shall survive the expiration or earlier termination of this Sublease. . In addition, Section 24  shall survive the expiration or earlier termination of this Sublease.

(e)The Recitals to this Agreement are incorporated herein by this reference as if set forth in full including, but not limited to, the terms, conditions and provisions of the Office Lease and the Prime Lease as described in Recital Paragraphs A and B.

23.            Landlord's Consent. Sublessor and Sublessee acknowledge that this Sublease is subject to Sublessor's receipt of the written approval of and consent by the Landlord to the sublease transaction described herein.

24.            Limitation on Liability of Sublessor. In no event will Sublessor be liable for consequential, incidental, indirect, punitive or special damages (including loss of profits or business) regardless of whether such liability is based on breach of contract, tort, strict liability, breach of warranties, failure of essential purpose or otherwise, and even if advised of the likelihood of such damages.

25.            Security. Sublessee shall contract directly with security providers for any services it deems reasonably appropriate, and Sublessee acknowledges•that Sublessor shall have no liability or responsibility for security of the Subleased Premises.

26.Parkin. Subject to the terms of the Prime Sublease, Sublessor hereby assigns to Sublessee effective upon the Commencement Date any and all rights which the Sublessor has under the Prime Lease to the number of parking spaces in the parking lot(s) in or adjacent to the Building equal to the ratio allocated to Sublessor under the Prime Lease, provided that (i) Sublessor shall not be a party to any lease of parking spaces by Sublessee, as any lease shall be solely between Sublessee and Landlord (or its parking garage operators), and Sublessor shall not have any responsibility (or make any warranty) to Sublessee with respect to such spaces, (ii) any such lease of parking spaces shall be at Sublessee's sole cost and expense, which shall be paid in accordance with the prevailing parking rates charged by the Landlord (or its parking garage operators), and (iii) this assignment of rights to any parking spaces shall be conditioned on Sublessee's agreement to lease such spaces from Landlord (or its parking garage operators), and (iv) Sublessor shall not be required to assign any parking spaces to the extent Sublessor would continue to have any payment or other obligations to the Landlord (or its parking garage operators) relating to any such spaces.). Sublessee agrees to indemnify and save harmless Sublessor from and against any liabilities, losses, damages, costs or expenses (including, but not limited to, attorneys' fees and expenses) of any nature whatsoever which may be imposed upon, incurred by, or asserted against Sublessor by reason of or in connection with Sublessee's use of the parking garage or such parking spaces.

27. Subordination and Attornment. This Sublease shall be subject and subordinate to the Prime Lease and all mortgages, deeds of trust, ground leases and security agreements now or hereafter encumbering the Building. In the event of termination of the Prime Lease for any reason, or in the event of any reentry or repossession of the Subleased Premises by Landlord, Landlord may at its option, either (i) terminate this Sublease, or (ii) take over all of the right, title and interests of Sublessor under this Sublease, in which case the Sublessee will attom to Landlord, but nevertheless Landlord will not (1) be liable for any previous act or omission of Sublessor under this Sublease, (2) be subject to any defense or offset previously accrued in favor of the Sublessee against Sublessor, or (3) be bound by any previous modification of this Sublease made without Landlord's written consent, or by any previous prepayment by Sublessee of more than one month's rent.

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28. No Presumption Against Draftor. Sublessor and Sublessee acknowledge that both parties have been represented by counsel and are fully aware of the contents of this Sublease. Therefore, Sublessee hereby waives any presumption that may exist under law or equity against the Sublessor by virtue of Sublessor creating the initial draft of this Sublease.

IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written.

SUBLESSOR:	SUBLESSEE:
CAPGEMINI U.S. LLC, a	EMAGIN CORPORATION, a
Delaware limited liability company	Delaware corporation
By	By
Its	Its

STATE OF	)
	) ss )
COUNTY OF	)

I certify that I know or have satisfactory evidence that_______________________________  is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath statedthat he was authorized to execute the instrument as the _____________________________________ on behalf of Capgemini U.S. LLC, a Delaware limited liability company, pursuant to the provisions of the Limited Liability Company Agreement of said company, and acknowledged it to be the free and voluntary act of said company for the uses and purposes mentioned in the instrument.

DATED:
NAME:
	(Print Name)
Notary Public in and for the State of___________ Commission Expires: ______________________

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STATE OF WASHINGTON	)
	) SS
COUNTY OF KING	)

I certify that I know or have satisfactory evidence that John Atherly is the person who appeared before me, and said person acknowledged that he signed this instrument, and acknowledged it as the Chief Financial Officer of eMagin Corporation, a Washington corporation to be the free and voluntary act of such entity for the uses and purposes mentioned in the instrument.

DATED:
NAME:
	(Print Name)
Notary Public in and for the State of___________ Commission Expires: ______________________

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EXHIBIT A

SUBLEASED PREMISES

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EXHIBIT B

SUBLESSOR'S PROPERTY

Exhibit B	SubIessors Property		(to best of our knowledge)	(to best of our knowledge)
AssetGroup	Category	Count	Brand	Model
Accessory	Coat Rack	4		Unknown
Appliance	Dishwasher	1	Whirlpool	Quiet Wash/DU912DFGGO
Appliance	Ice Machine	1	Whir]pool	Gold/GI1500XHWO
Appliance	Microwave	I	Sanyo	Unknown Sanyo
Appliance	Microwave	1	General Electric	Spacemaker II JEM25WYOOI
Appliance	Refrigerator	1	General Electric	TAX65NXARWH
Appliance	Refrigerator	1	A-U LINE	ULN-75RB-OO
Appliance	Refrigerator	1	General Electric	TBXI8JJCARWW
Art	Artwork	19		Untitled
AV Equipment	Camera	2	Toshiba Security	Cybershot
AV Equipment	Other	2	AMX	<T-MCA 0897
AV Equipment	Projector	1	Barco Graphics	Unknown lnFocus
AV Equipment	VCR	2	Samsung-including 1 Sony	SV-300W
Chairs	Chair - Aeron	94	Herman Miller	Aeron
Chairs	Chair - Guest	8	Alexzandria Designs	Unknown Alexzandria Designs
Chairs	Chair- Lounge	6	Haworth	WR9376777RC8944
Chairs	Chair - Stacking	71	Steelcase	4754 12M
Chairs	Chair - Task	39	Haworth	MHP 152031
Chairs	Chair	2
Filing Cabinets	File Cabinet - 2 Drawer Lateral	1	Artelite	Unknown Artelite
Filing Cabinets	File Cabinet -2 Drawer Lateral	11
Filing Cabinets	File Cabinet - 2 Drawer Vertical	62	Hawoith	Unknown Haworth
Filing Cabinets	File Cabinet - 3 Drawer Lateral	26	Meridian	Unknown Meridian
Filing Cabinets	File Cabinet - 4 Drawer Lateral	1		Unknown
Filing Cabinets	File Cabinet - 5 Drawer Vertical	4	Meridian	Unknown Meridian
Filing Cabinets	File Cabinet - 5 Drawer '/ortical Lateral	2	8 in conference rooms	Unknown
Furniture	Bookcase - Wood	7		Unknown

Exhibit B	S u blessor's Property		(to best of our knowledge)	(to best of our knowledge)
AssetGroup -	Category	Count	Brand	Model
Furniture	Bookcase - Misc.	3		Unknown
Furniture	Desk	4	Artelite	Unknown Artelite
Furniture	Mailroom - Mail Slots	I	Hamilton	FSM481676-L
Furniture	Miscellaneous Workstations	68	Haworth	Unknown Haworth
Furniture	Sofa	3	Brattrud	Unknown Branching Out
Furniture	Sofa	I
Furniture	Special Cabinet	I	Quartet Ovonics	Unknown Quaret Ovonics
Tables	Table - Boomerang	69	Knoll	Boomerang Knoll
Tables	Table - Conference Room	I	Haworth.	Unknown Haworth
Tables	Table - Conference Room	8	Vecta	Unknown Vecta
Tables	Table - Conference Room	5	Versteel	Unknown Versteel
Tables	Table - Conference Room	27	Versteel	Unknown Versteel
Tables	Table - Conference Room	4	Round-small	Unknown
Tables	Table - Elliptical	4	Artelite	Unknown Artelite
Tables	Table - Reception Area	I	Fleischmanri	A21-MAM9
Tables	Table - Reception Area	4	Ivan Allen	Unknown Ivan Allen
Television	TV Monitors	3	Mitsubishi	Mitsubishi AM2752A
Whiteboards	Whiteboard - Electronic	3	Steelase Microfield	Egan Team Board/203
Whiteboards	Whiteboard - Free Standing	13	Bretford	Unknown Bretford
Whiteboards	Whiteboard - Mobile (Large Curved)	4	KnowWhere	Unknown KnowWhere
Whiteboards	Whiteboard - Wall Mounted with	17		Unknown
Whiteboards	Whitebcard - Workstation	68	Haworth	Unknown Haworth
Chairs	Leather	12	Haworth Boardroom
Phone Room	Equipment Racks	8
Phone Room	Metal Storage Units wlDoors	I
Phone Room	Metal Storage Shelf	1
AV Equipment	Projector	1	Proxima
AV Equipment	Projector	1	Sanyo
Computer Room	Server Racks	6	Compaq (empty)
Computer Room	Server Racks	2

92

Exhibit B	Sub lessor's Property		(to best of our knowledge)	(to best of our knowledge)
AssetGroup.	Category	Count	Brand	Model
Storage Rooms in Common Corridor
	Metai Storage Sheff	5
	Wood Storage Shelf	2
	4-Drawer Vertical	3

Sublessor makes no warranties of any kind or nature, whether express or implied (including without limitation warranties of merchantability or fitness for a particular purpose), with respect to the Sublessor's Property, and Sublessee accepts the Sublessor's Property for use during the term hereof in its "as is" and "where is" condition.

93

International Business Machines Corporation	2070 Route 52
	Hopewell Junction, NY 12533

November 29, 2004

Mr. Gary W. Jones

President/ CEO

eMagin Corporation

2070 Route 52

Hopewell Junction, NY 12533

Subject: Lease dated May 28, 1999, as amended by First Amend­ment to Lease dated July 09, 1999, Second Amendment to Lease dated January 29, 2001, Third Amendment to Lease dated May 28, 2002 between International Business Machines Corporation, as Landlord, and eMagin Corporation, as Tenant, (collectively, the "Lease") for the premises located at the Hudson Valley Research Park, 2070 Route 52, Hopewell Junction, NY 12533, as such prem­ises are more particularly described in the Lease.

Fourth Amendment to Lease effective as of June 1, 2004 Dear Mr. Jones,

The letter, upon your signed acceptance, amends the above referenced Lease between IBM and eMagin Corporation for the Premises located at the Hudson Valley Research Park in Hopewell Junction, NY. The Lease shall be amended as follows (" Amend­ment 4") and shall be effective as of June 1, 2004:

Replace "Exhibit Al" dated 6-01-02 in its entirety with "Ex­hibit Al".

Replace "Exhibit A2" dated 6-01-02 in its entirety with "Ex­hibit A2".

Replace "Exhibit A3" dated 6-01-02 in its entirety with "Ex­hibit A3".

Replace "Exhibit Er dated 9-15-99 in its entirety with "Exhibit

Replace "Schedule A" dated 6-01-02 in its entirety with "Sched­ule A".

Replace "Schedule B" dated 6-01-02 in its entirety with "Sched­ule B".

Replace "Schedule D" dated 6-01-99 in its entirety with "Sched­ule D".

Paragraph 4(a): Shall be amended by changing the expiration date from May 31, 2004 to May 31, 2009. The term of this Lease (herein called the "Term") shall be for a period of five (5) years, to commence on June 1, 2004 (the "Commencement Date"), and shall expire on May 31, 2009 unless sooner terminated as hereinafter provided.

Paragraph 4(c): The first sentence shall be deleted in its en­tirety and replaced with "After May 31, 2007 the Landlord at its sole discretion may grant the Tenant an option to extend the Term for all or any part of the Premises for one (1), two (2) year period subject to and upon the provisions set forth in this subparagraph and subject to a Rent to be determined by the Landlord in its sole discretion.

Paragraph 28 (a): The first sentence shall be deleted in it entirety and replaced with "Commencing  as of June 1, 2004 and continuing thereafter throughout the Term the landlord shall provide the tenant with 3 (three) received parking spaces and unreserved parking (the "Tenants Parking Spaces" )as outlined on EXHIBIT B.

Paragraph 35, Security Deposit shall be added to the Lease as follows:

(a) The Tenant has deposited with the Landlord the sum of One Hundred Fifty Thousand and 00/100 Dollars ($150,000.00) as security for the faithful performance and observance by the Tendant of the provisions of this Lease on its part to be performed. If the Tenant defaults in respect of any of these provisions, including the payment of rent, the Landlord may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent for which the Tenant is in default or for any sum which the Landlord may expend or may be required to expend by reason of the Tenant's default in respect of any of these provisions, including any damages or deficiency in the reletting of the Premises, whether such damages or deficiency accrued before or after summary proceedings or other reentry by the Landlord. If the Tendant shall fully and faithfully comply with all provisions of this Lease on the Tenant's part to be performed, the security shall be credited toward the payment of rent as described in paragraph (b) hereof.If the Landlord sells or leases the Building, the Landlord shall have the right to transfer the security to the vendee or lessee and the Landlord shall thereupon be released by the Tenant from all liability for the return of such security. The Tenant agrees to look solely to the new landlord for the return of said security. It is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new landlord_The Tenant further covenants that it will not assign, pledge or encumber or attempt to assign, pledge or encumber the monies deposited herein as security and that neither the Landlord nor its successors or assigns shall be bound by any such assignment, pledge or encumbrance, or attempted assignment, attempted pledge or attempted encumbrance.

94

(b) If Tenant is not in Default on March 31, 2009 the security deposit will be credited toward the April 1, 2009 and May 1, 2009 rent payments as shown in Schedule A, Table 1.

Paragraph 36, Use of Rec Center shall be added to the Lease as follows:

A maximum of four (4) of Tenant's employees will be authorized access to the Landlord's Rec Center located on Schenandoah Road, Hopewell Junction, NY, for the sole purpose of use of the parking, locker rooms, exercise rooms, running track, basketball, tennis courts and common areas. Tenant's employees are not authorized to participate in any other activities or sports organized by the Landlord or its employees, guests or invitees.

 Please indicate eMagin's acceptance of this Fourth Amendment to Lease by having an authorized representative sign four (4) copies of this letter on behalf of eMagin and return two (2) copies to IBM, Route 100, Somers, NY 10589, Attention: Program Manager, Real Estate Services.

 Except as amended herein of this Fourth Amendment to Lease, all the terms and conditions of the Lease shall remain in full force and effect.

 Persons signing below certify that they are authorized representatives of their company and empowered to execute this document on behalf of their company.

Very truly yours,

INTERNATIONAL BUSINESS MACHINES CORPORATION

/s/ David W. Pfirman

David W. Pfirman

Senior Program Manager, Real Estate Operations

Accepted and Agreed to:

eMagin Corporation

/s/ Gary W. Jones

Gary W. Jones

President/ CEO

CC:

Mr. Sujit Ramchand, IBM Area Counsel

Ms. Maureen Duffy, IBM General Counsel, Real Estate Services

Ms. Debra Durstewitz, Site Operations, East Fishkill

File

95

SCHEDULE A

eMagin CORPORATION

BASE RENT COMPUTATION SCHEDULE-- AMEND. 4

Effective Date 06/01/2004

Effective Date		Amend. 3 June 1, 2002 NPSF	Amend. 4 June 1, 2004 NPSF	Rate/SF	Annual Rent	Monthly Rent
B310	Storage	10,352	56881	$7.00	$39,816.00	$3,318.00
B334	Office	8,604	8, 604	$17.00	$146,268.00	$12,189.00
B3300	Office	608	608	$17.00	$10,336.00	$861.33
	Dry	7,691	7,691	$18.00	$138,438.00	$11,536.50
	Clean	16,316	16,316	$35.00	$571,060.00	$47,588.33
	1Storage	4.376	4.376	$7.00	$30.632.00	$2,552.67
Total		47,947	43,283		$936,550.00	$78,045.83
Average Rent/NPSF					$21.64
Average Rent/NRSF					$15.45
December 1, 2004
B310	Storage		0	$7.00	$0.00	$0.00
6334	Office		6,554	$17.00	$111,418.00	$9,284.83
B3300	Office		1,606	$17.00	$27,302.00	$2,275.17
	Dry		5,850	$18.00	$105,300.00	$8,775.00
	Clean		16,3161	$35.00	$571,060.00	$47,588.33
	Storge		6,524	$7.00	$45,668.00	$3,805.67
Total			36,850		$860,748.00	$71,729.00
Average Rent/NPSF					$23.36	$1.03
Average Rent/NRSF					$16.30	$0.23

Deriving Net Rentable Basis

	Building  Number	Net Productive Sq. Ft. June 1, 2004		NP to NR Factor	Net Rentable Sq. Ft. June 1, 04	Net Productive Sq. Ft. Dec 1, 2004		Net Rentable Sq. Ft. Dec 1, 04
	310	5,688		1.26	7,167			0
	330	8,604	1.26		10,841		6,554	8,258
	334	28,991		1.47	42,617		30,296	44,535
Total		43,283			60,625	36,850		52,793

BOMA Formula for Net Productive to Net Rentable
Building Rentable	= Building Net Rentable	Example	475000 +1.55
Building NET Productive			306,300

96

SCHEDULE B

eMagin CORPORATION

BASE RENT COMPUTATION SCHEDULE— AMEND.

Effective Date	Lease End Date
06/01/2004	May 31, 2009

  Table 1                                                                               

	2004	2005	2006	2007	2008	2009
January	$73,914.15	$71,729.00	$73,880.87	$76,097.30	$78,380.21	$80,731.62
February	$73,914.15	$71,729.00	$73,880.87	$76,097.30	$78,380.21	$80,731.62
March	$73,914.15	$71,729.00	$73,880.87	$76,097.30	$78,380.21	$80,731.62
April	$0.00	$71,729.00	$73,880.87	$76,097.30	$78,380.21	$11,463.24
May	$0.00	$71,729.00	$73,880.87	$76,097.30	$78,380.21	$0.00
June             4	$78,045.831	$73,880.871	$76,097.30	$78,380.211	$80,731.62
July	$78,045.83!	$73,880.871	$76,097.30	$78,380.21	$80,731.62
Aug	$78,045.83	$73,880.871	$76,097.30	$78,380.21	$80,731.62
September	$75,860.681	$73,880.87	$76,097.30	$78,380.21	$80,731.62
October	$75,860.68	$73,880.87	$76,097.30	$78,380.21	$80,731.62
November	$69,987.15	$73,880.87	$76,097.30	$78,380.21	$80,731.62
December	$71,729.00	$73,880.87	$76,097.30	$78,380.21	$80,731.62
Total	$749,317.47	$875,811.09	$902,085.42	$929,147.99	$957,022.421	$253,658.10

Notes: Amendments

 1 May 1999 $8,525.67 Per Mo. credit for 6,254 S/F in 6/310, under construction & unavailable

 2 June 2001 Reclassified office and lab (5,000 s.f.) to storage space

 3 May 2002 Space Givebacks in Bldgs. 310, 3300

 4 June 2004 Space Givebacks in Bldgs. 310, 330C and B334, 5 year renewal with initial increase

  3% per year thereafter effective June 1.

  At IBM's sole discretion two, (2) year renewal options will be offered after the 3rd year.  

  at the same terms

2004 Payment Reconcilliation

Table 2

		2004  Base Rent		Loan Amoritization		Total Rent Due		Total Payments		Delta (due IBM) due eMagin
January	$	69,978.171	$	3,935.98	$	73,914.15	$	73,914.15	$	0.00
February	$	69,978.17	$	3,935.98	$	73,914.15	$	73,914.15	$	0.00
March	$	69,978.17	$	0.00	$	69,978.17	$	73,914.151	$	3,935.98
April	$	0.00	$	0.00 ;	$	0.001	$	73,914.151	$	73,914.15
May	$	0.00	$0.00'		$0.00		$	73,914.15	$	73,914.15
June	$	78,045.83	$	0.001	$	78,045.83	$	73,914.151	$	(4,131.69	)
July	$	78,045.83	$	0.001	$	78,045.83	$	73,914.151	$	(4,131.69	)
Aug	$	78,045.83	$	0.00	$	78,045.83	$	73,914.15	$	(4,131.69	)
September	$	78,045.83	$	0.00	$	78,045.83	$	71,729.00	$	(6,316.84	)
October	$	78,045.83 ;	$	0.00	$	78,045.83	$	71,729.00	$	(6,316.84	)
November	$	78,045.831	$	0.00	$	78,045.83	$	69,978.15	$	(8,067.68	)
Subtotal due Magin									$118,667.86 :
Security Dlepoit									$	(150,000.00	)
December	$	71,729.001	$	0.00	$	71,729.00	$	103,061.14	$	(31,332.14	)
Total	$	749,843.83;	$	7,871.96	$	757,715.79	$	757,715.80	$	0.00

97

SCHEDULE D

Computed Utilities Schedule

eMagin CORPORATION

            Effective Date 6/1/04

Maximum Available Capacities
Utilities	Peak Allowable Usage		Total Annual Allowable
Electricity		N/A
Chilled Water	350 Tons		1,401,600 Ton-Hrs
Low Temp Chilled Wate	130 Tons		569,400 Ton-Hrs
High Temp Hot Water	5 MBH		19,251 M MBTU
Deionized Water	30 gpm		13,220 1K Gal
Compressed Air	10 scfm		550,000 SCF
UHP Nitrogen	scfm		6,000,000 SCF
Std. Oxygen	scfm		100,000 SCF
Std. Argon	scfm		100,000 SCF
Std. Forming Gas	15 scfm		150,000 SCF

98

99

100

101

SCHEDULE D

Computed Utilities Schedule

eMagin CORPORATION

               Effective Date 6/1/04

Maximum Available Capacities
Utilities	Peak Allowable Usage		Total Annual Allowable
Electricity		N/A
Chilled Water	350 Tons		1,401,600 Ton-Hrs
Low Temp Chilled Wate	130 Tons		569,400 Ton-Hrs
High Temp Hot Water	5 MBH		19,251 M MBTU
Deionized Water	30 gpm		13,220 1K Gal
Compressed Air	10 scfm		550,000 SCF
UHP Nitrogen	scfm		6,000,000 SCF
Std. Oxygen	scfm		100,000 SCF
Std. Argon	scfm		100,000 SCF
Std. Forming Gas	15 scfm		150,000 SCF

102

103

EXHIBIT G

TO

LOAN AND SECURITY AGREEMENT

Form of Press Release

eMagin Corporation (the “Company”) has entered into agreements, effective as of August 7, 2007 (the “Closing Date”), with Moriah Capital, L.P. (“Moriah”), pursuant to which the Company may borrow an amount not to exceed $2,500,000.  Such funds may be drawn down by the Company in tranches of at least $25,000 up to five times each month. In connection with the transaction, the Company issued, executed and delivered to Moriah the following:

· A Loan and Security Agreement;

· A Secured Convertible Revolving Loan Note with a principal amount not to exceed $2,500,000;

· A Loan Conversion Agreement;

· A Securities Issuance Agreement pursuant to which the Company issued 162,500 shares of its common stock, which shares have an aggregate market value on the Closing Date of $195,000;

· A Registration Rights Agreement;

· An Intercreditor Agreement;  and

· A Post-Closing Agreement.

Pursuant to the Loan and Security Agreement, the Company is permitted to borrow an amount not to exceed 90% of its eligible accounts (as defined in the agreements), net of all taxes, discounts, allowances and credits given or claimed, plus 50% of its eligible inventory capped at $600,000. As of  August  9, 2007, pursuant to the Loan and Security Agreement,  the Company has borrowed $607,500. The Company's obligations under the loans are secured by all of the assets of the Company, including but not limited to inventory and accounts receivable; provided, however, that Moriah’s lien on the collateral other than Accounts and Inventory (as such terms are defined in the agreements) are subject to the prior lien of the holders of the Company’s outstanding Amended and Restated 8% Senior Secured Convertible Notes Due 2008 in accordance with the terms of, and subject to the conditions set forth in the Intercreditor Agreement.

The Loan and Security Agreement expires on August 7, 2008, but may be extended at the Company’s option for an additional one year period with the Company issuing additional shares of common stock to Moriah having an aggregate market value of $195,000 based on the average closing price of the Common Stock on the OTC Bulletin Board or such other trading market which such common stock is then listed or traded for the ten (10) trading days preceding the effective date of the extension of the initial term of the loan. Annual interest on the loans  is equal to the greater of (i) the sum of (A) the Prime Rate as reported in the “Money Rates” column of The Wall Street Journal, adjusted as and when such Prime Rate changes plus (B) 2% or (ii) 10%, and shall be payable in arrears prior to the Maturity Date, on the first Business Day of each calendar month, and in full on the Maturity Date.

As part of the transaction, up to $2,000,000 of the amount of the loan that the Company actually borrows may be converted to shares of the Company's common stock pursuant to the terms of the Loan Conversion Agreement. The conversion price is $1.50, subject to adjustment as provided in the Conversion Agreement.

104

Notwithstanding the foregoing, Moriah has contractually agreed to restrict its ability to convert the convertible notes  evidencing the loans made to the Company pursuant to the Loan Agreement if such conversion would result in Moriah’s share ownership exceeding the difference between 4.99% of the outstanding shares of common stock of the Company and the number of shares of common stock beneficially owned by Moriah.

The Company has also agreed to file a registration statement to register the resale of shares of the Company's common stock issuable under the Securities Issuance Agreement and the shares issuable upon conversion of the convertible note, although the Company is not subject to penalties for failure to register such shares.

In the event that Moriah accelerates the Loans due to an event of default, the Company shall pay to Moriah an early payment fee in an amount equal to (i) two percent (2%) of the maximum credit if such acceleration occurs prior to the first anniversary of the Closing Date, and (ii) one percent (1%) of the maximum credit if such acceleration occurs on or after the first anniversary of the Closing Date.

As part of the transaction, the Company is paying Moriah a servicing fee of $82,500.

The Company has also granted Moriah a put option pursuant to the Securities Issuance Agreement pursuant to which Moriah can sell the shares issued to Moriah under the Securities Issuance Agreement back to the Company for $195,000 at any time during the earlier to occur of the following Put Option exercise periods (the “Put Period”): (a) the ten (10) Business Day period commencing on the first anniversary of the Closing Date,  or (b)  the ten (10) Business Day period commencing on the date which is nine (9) months after the date that the registration statement for the registration of the Issued Shares is declared effective by the Securities and Exchange Commission.

In addition to the foregoing, as part of the transaction, the Intercreditor Agreement was entered into between Moriah and Alexandra Global Master Fund Ltd.

In connection with the transaction, the parties executed a Post-Closing Agreement pursuant to which the parties agreed to enter into certain agreements and exchange certain documents after the closing for the transaction.  Pursuant to the Post-Closing Agreement, the Company shall (i) provide to Moriah certain landlord consents, (ii) execute patent and trademark security and pledge agreements in form and substance not inconsistent with the existing security and pledge agreements executed by the Company in favor of Alexandra Global Master Fund Ltd. (with the sole exception that such agreements shall be subordinate to the existing pledge and security agreements executed by the Company in favor of Alexandra Global Master Fund Ltd.) and (iii) execute a Depository Account Agreement (“Lockbox Agreement.) Pursuant to the Lockbox Agreement, until the revolving loan is repaid and the Loan and Security Agreement is terminated, remittances and all other proceeds of the Company’s accounts receivables shall be deposited into a bank account controlled by Moriah.

105

EXHIBIT H

TO

LOAN AND SECURITY AGREEMENT

Form of Registration Rights Agreement

EXHIBIT H
 

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is made and entered into as of August 7, 2007, by and between eMagin Corporation, a Delaware corporation (the “Company”), and Moriah Capital, L.P. (the “Lender”).

This Agreement is made pursuant to the Securities Issuance Agreement, dated as of the date hereof, by and between the Lender and the Company (as amended, modified or supplemented from time to time, the “Securities Issuance Agreement”), and pursuant to the Loan and Security Agreement (the “Loan Agreement”) referred to therein.

The Company and the Lender hereby agree as follows:

1.Definitions.  Capitalized terms used and not otherwise defined herein that are defined in the Securities Issuance Agreement, shall have the meanings given such terms in the Securities Issuance Agreement.  Capitalized terms not defined herein or in the Securities Issuance Agreement shall have the meaning set forth in the Loan Agreement.  As used in this Agreement, the following terms shall have the following meanings:

“Commission” means the Securities and Exchange Commission.

“Common Stock” means shares of the Company’s common stock, par value $0.001 per share.

“Effectiveness Date” means, with respect to the Registration Statement required to be filed hereunder, a date no later than one hundred and twenty (120) days following the date hereof.

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor statute.

“Filing Date” means with respect to the Registration Statement required to be filed hereunder, a date no later than thirty (30) days following the date hereof.

“Holder” or “Holders” means the Lender or any of its affiliates or transferees to the extent any of them hold Registrable Securities.

“Indemnified Party” shall have the meaning set forth in Section 5(c).

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

“Note” shall have the meaning set forth in the Securities Issuance Agreement.

106

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Prospectus” means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

“Registrable Securities” means the shares of Common Stock (i) issued to the Lender pursuant to the Stock Issuance Agreement (including shares to be issued to the Lender on the date hereof and shares to be issued to the Lender upon an extension of the original term of the Loan Agreement, if so extended), and (ii) issuable upon the conversion of the Note.

“Registration Statement” means each registration statement required to be filed hereunder, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“Securities Act” means the Securities Act of 1933, as amended, and any successor statute.

“Securities Issuance Agreement” shall have the meaning provided above.

“Trading Market” means any of the OTC Bulletin Board, NASDAQ Capital Market, the Nasdaq National Market, the American Stock Exchange or the New York Stock Exchange.

107

2.Registration.

(a)On or prior to the applicable Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities  for an offering to be made on a continuous basis pursuant to Rule 415.  The Company shall use good faith efforts to include the Registrable Securities in the Company’s Registration Statement on Form S-1 as filed with the Commission on July 25, 2007. If such inclusion is not permitted by the selling security holders thereunder, or is otherwise impractical, then the Registrable Securities shall be included in the Company’s next succeeding registration statement.   The Registration Statement shall be on Form S-1 or SB-2.  The Company shall cause such Registration Statement to become effective and remain effective as provided herein.  The Company shall use its reasonable commercial efforts to cause such Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date.  The Company shall use its reasonable commercial efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities have been sold or (ii) all Registrable Securities may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the  “Effectiveness Period”).  Notwithstanding anything contained herein to the contrary, in the event that the Commission limits the amount of Registrable Securities that may be sold by selling security holders in a particular Registration Statement, or the Commission takes the position that the all or a portion of the Registrable Securities cannot be registered, the Company may exclude from such registration statement the minimum number of Registrable Securities on behalf of the Lender as is necessary to comply with such limitation by the Commission. In such event the Company shall give the Lender prompt notice of the number of the Registrable Securities so excluded. Further, and in addition to the foregoing, the Company will not be liable for payment of any damages or penalties for any delay in registration of the Registrable Securities in the event that such delay is due to the fact that the SEC has limited the amount of Registrable Securities that may be included and sold by selling security holders in the Registration Statement pursuant to Rule 415 promulgated under the 1933 Act or any other basis.

(c)           Within 3 business days of the Effectiveness Date, the Company shall cause its counsel to issue a blanket opinion in the form attached hereto as Exhibit A, to the transfer agent stating that the shares are subject to an effective registration statement and can be reissued free of restrictive legend upon notice of a sale by the Lender and confirmation by the Lender that it has complied with the prospectus delivery requirements, provided that the Company has not advised the transfer agent orally or in writing that the opinion has been withdrawn. Copies of the blanket opinion required by this Section 2(c) shall be delivered to the Lender within the time frame set forth above.

3.Registration Procedures.  If and whenever the Company is required by the provisions hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible:

(a)prepare and file with the Commission the Registration Statement with respect to such Registrable Securities, respond as promptly as possible to any comments received from the Commission, and use its best efforts to cause the Registration Statement to become and remain effective for the Effectiveness Period with respect thereto, and promptly provide to the Lender copies of all filings and correspondence relating thereto;

108

(b)prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by the Registration Statement and to keep such Registration Statement effective until the expiration of the Effectiveness Period;

(c)furnish to the Lender such number of copies of the Registration Statement and the Prospectus included therein (including each preliminary Prospectus) as the Lender may reasonably request to facilitate the public sale or disposition of the Registrable Securities covered by the Registration Statement;

(d)use its commercially reasonable efforts to register or qualify the Lender’s Registrable Securities covered by the Registration Statement under the securities or “blue sky” laws of such jurisdictions within the United States as the Lender may reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;

(e)list the Registrable Securities covered by the Registration Statement with any securities exchange/Trading Market on which the Common Stock of the Company is then listed;

(f)immediately notify the Lender, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge, or has reason to know, as a result of which the Prospectus contained in such Registration Statement, 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 not misleading in light of the circumstances then existing; and

(g)make available for inspection by the Lender and any attorney, accountant or other representative retained by the Lender, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or representative of the Lender.

4.Registration Expenses.  All expenses relating to the Company’s compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, counsel fees and disbursements and independent public accountants for the Company, fees and expenses incurred in connection with complying with state securities or “blue sky” laws, fees of any Trading Market, transfer taxes, fees of transfer agents and registrars, fees of, and disbursements incurred by, one counsel for the Holders to the extent such counsel is required due to Company’s failure to meet any of its obligations hereunder, are called “Registration Expenses.” All selling commissions applicable to the sale of Registrable Securities, including, without limitation, any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called “Selling Expenses.”  The Company shall only be responsible for all Registration Expenses.

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5.Indemnification.

(a)In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Lender, and its officers, directors, partners, managers and members and each other person or entity, if any, who controls the Lender within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Lender, or such persons or entities may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or Proceedings in respect thereof) arising out of or are based upon any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon any document, information or material in connection therewith, and will reimburse the Lender, and each such person or entity for any and all reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or proceedings; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of the Lender or any such person or entity in writing specifically for use in any such document.

(b)In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Lender will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Lender to the Company expressly for use in (and such information is contained in) the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon 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, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Lender will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by or on behalf of the Lender specifically for use in any such document.  Notwithstanding the provisions of this paragraph, the Lender shall not be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by the Lender in respect of Registrable Securities in connection with any such registration under the Securities Act.

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(c)Promptly after receipt by a party entitled to claim indemnification hereunder (an “Indemnified Party”) of notice of the commencement of any Proceeding, such Indemnified Party shall, if a claim for indemnification in respect thereof is to be made against a party hereto obligated to indemnify such Indemnified Party (an “Indemnifying Party”), notify the Indemnifying Party in writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to such Indemnified Party other than under this Section and shall only relieve it from any liability which it may have to such Indemnified Party under this Section if and to the extent the Indemnifying Party is prejudiced by such omission. In case any such action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume and undertake the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; if the Indemnified Party retains its own counsel, then the Indemnified Party shall pay all reasonable fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred.

(d)In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Lender, or any officer, director, partner, member, manager or controlling person or entity of the Lender, makes a claim for indemnification pursuant to this Section but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Lender or such officer, director, partner, member, manager or controlling person or entity of the Lender in circumstances for which indemnification is provided under this Section; then, and in each such case, the Company and the Lender will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Lender is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the Registration Statement bears to the public offering price of all securities offered by such Registration Statement, provided, however, that, in any such case, (A) the Lender will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such Registration Statement and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.

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6.Representations and Warranties.

(a)The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except with respect to certain matters which the Company has disclosed to the Loan Agreement or the Securities Issuance Agreement, the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act.  Each Financial Statement was, at the time of its filing, in compliance with the requirements of its respective form and none of the Financial Statements, nor the financial statements (and the notes thereto) included in the Financial Statements, as of their respective filing dates, contained any untrue statement of a material fact or omitted 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.  The financial statements of the Company included in the Financial Statements comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto.  Such financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such Financial Statements.

(b)The Common Stock is listed for trading on the OTC Bulletin Boardand satisfies all requirements for the continuation of such listing.  The Company has not received any notice that its Common Stock will be delisted from the OTC Bulletin Board (except for prior notices which have been fully remedied) or that the Common Stock does not meet all requirements for the continuation of such listing.

(c)Neither the Company, nor any of its affiliates, nor any person or entity acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to the Securities Issuance Agreement and the Loan Documents to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates take any action or steps that would cause the offering of such Securities to be integrated with other offerings.

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(d)The Notes and the shares of Common Stock which the Lender may acquire pursuant to the Notes are all restricted securities under the Securities Act as of the date of this Agreement.  The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Registrable Securities at such time as such Registrable Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws.

(e)The Company understands the nature of the Registrable Securities issuable upon the conversion of the Notes and recognizes that the issuance of such Registrable Securities may have a potential dilutive effect.  The Company specifically acknowledges that its obligation to issue the Registrable Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company.

(f)           Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the Commission as an exhibit to a registration statement or to a form required to be filed by the Company under the Exchange Act, the breach of which could reasonably be expected to have a material and adverse effect on the Company or subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect.

(g)           The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for the full conversion of the Notes.

7.Miscellaneous.

(a)Remedies.  In the event of a breach by the Company of any of its obligations under this Agreement, each Holder will be entitled to specific performance of its rights under this Agreement.

(b) Existing Registration Rights.  Except as and to the extent specified in Schedule 7(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been fully satisfied.

(c)Compliance.  Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.

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(d)Discontinued Disposition.  Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable Securities under the applicable Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.  For purposes of this Section, a “Discontinuation Event” shall mean (i) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (ii) any request by the Commission or any other Governmental Authority for amendments or supplements to such Registration Statement or Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and/or (v) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any 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.

(e)Piggy-Back Registrations.  If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within 15 days after receipt of such notice, any such Holder shall so request in writing, the Company shall use its best efforts to include in such registration statement all or any part of such Registrable Securities such holder requests to be registered to the extent the Company may do so without violating registration rights of others which exist as of the date of this Agreement, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to obtaining any required the consent of any selling stockholder(s) to such inclusion under such registration statement.

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(f)Amendments and Waivers.  The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented unless the same shall be in writing and signed by the Company and the Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

(g)Notices.  Any notice or request hereunder may be given to the Company or the Lender at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section.  Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal Express or other national overnight next day carrier (collectively, “Courier”).  Notices and requests shall be deemed delivered upon receipt.  The address for such notices and communications shall be as follows:

If to the Company:	10500 N.E. 8th Street Suite 1400 Bellevue, Washington 12533 Attention:  John Atherly
with a copy to:
	Sichenzia Ross Friedman Ference LLP 61 Broadway New York, New York 10006 Attention:  Richard A. Friedman, Esq.
If to Lender:	685 Fifth Avenue New York, New York 10022 Attention: Greg Zilberstein
with a copy to:
	Cohen Tauber Spievack & Wagner LLP 420 Lexington Avenue Suite 2400 New York, New York 10170 Attention: Adam Stein, Esq.
If to any other Person who is then the registered Holder:	To the address of such Holder as it appears in the stock transfer books of the Company

or such other address as may be designated in writing hereafter in accordance with this Section by such Person.

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(h)           Successors and Assigns.  This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder.  Each Holder may assign their respective rights hereunder in the manner and to Persons as permitted under the Loan Documents.

(i)           Execution and Counterparts.  This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile or electronic transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile or electronic signature were the original thereof.

(j)           Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such Proceeding is improper.  Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.  (k)Cumulative Remedies.  The remedies provided herein are cumulative and not exclusive of any remedies provided by law or in equity.

(l)           Severability.  If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

(j)           Headings.  The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

EMAGIN CORPORATION
By:	/s/
	Name
	Title

MORIAH CAPITAL, L.P.
By:	Moriah Capital Management, L.P.,
	General Partner

By:	Moriah Capital Management, GP, LLC,
	General Partner

By:	/s/
	Name
	Title

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EXHIBIT A

[DATE]

[TRANSFER AGENT]

[ADDRESS]

Attn: [_________________]

Ladies and Gentlemen:

As counsel to eMagin Corporation, a Delaware corporation (the “Company”), we have been requested to render our opinion to you in connection with the resale by [____________] (the “Selling Stockholder”), of an aggregate of [__________] shares (the “Shares”) of the Company’s Common Stock.

A Registration Statement on Form [___] under the Securities Act of 1933, as amended (the “Act”), with respect to the resale of the Shares was declared effective by the Securities and Exchange Commission on [DATE].  Enclosed is the Prospectus dated [DATE].  We understand that the Shares are to be offered and sold in the manner described in the Prospectus.

Based upon the foregoing, upon request by the Selling Stockholder at any time while the registration statement remains effective, it is our opinion that the Shares have been registered for resale under the Act and new certificates evidencing the Shares upon their transfer or re-registration by the Selling Stockholder may be issued without restrictive legend.  We will advise you if the registration statement is not available or effective at any point in the future.

Very truly yours,

[COMPANY COUNSEL]

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SCHEDULE 7(B)

Pursuant to Section 8 of the Note Purchase Agreement dated July 21, 2006 and amended July 23, 2007 with respect to the 8% Senior Secured Notes and related warrants, the Company is obligated to file a registration statement with respect to 6,908,864 note conversion shares and 4,831,859 warrant shares.

 

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EXHIBIT I

TO

LOAN AND SECURITY AGREEMENT

Form of Conversion Agreement

EXHIBIT I
 

LOAN CONVERSION AGREEMENT

LOAN CONVERSION AGREEMENT, dated as of August 7, 2007 (this “Agreement”), between eMagin Corporation, a Delaware corporation (the “Company”), and Moriah Capital, L.P., a Delaware limited partnership (together with its successors and any assignees, “Lender”).

WHEREAS, Lender has contemporaneously entered into a Loan and Security Agreement, dated as of the date hereof (as the same may be amended, the “Loan Agreement”), between Lender, as lender, and the Company, as borrower;

WHEREAS, pursuant to the Loan Agreement, the outstanding principal and accrued and unpaid interest due to Lender (“Loan Indebtedness”) under the Note is convertible into such number of fully paid and nonassessable shares (as may be adjusted pursuant to Section 4 hereof, the “Shares”) of Common Stock, par value $0.001 per share (“Common Stock”), of the Company, as equals (i) that portion of the Loan Indebtedness under the Loan Agreement that Lender elects to convert into Common Stock divided by (ii) the Conversion Price (as defined below);

NOW, THEREFORE, the parties agree as follows:

1.           Conversion Right; Term.  Subject to the terms hereof, commencing on the date hereof and until the first to occur of (a) the date that the Loan Indebtedness is repaid in full in accordance with the terms of the Loan Agreement or (b) the date that the Loan Indebtedness is converted into Common Stock upon a Mandatory Conversion (as defined in Section 12 below) (the “Expiration Date”), Lender shall have the right, at any time and from time to time, to convert (the “Conversion Right”) any amount of the Loan Indebtedness into such number of shares of Common Stock that shall be obtained by dividing the then-outstanding Loan Indebtedness by the Conversion Price; provided, however, the total Loan Indebtedness that is convertible hereunder shall not exceed Two Million Dollars ($2,000,000.00) (the “Conversion Limit”).  To the extent not exercised by 5:00 P.M., New York City time, on the Expiration Date, this Agreement shall completely and automatically terminate and expire, and thereafter it shall be of no force or effect whatsoever.

1A.           Conversion Limitations.  Notwithstanding anything contained herein to the contrary, Lender shall not be entitled to convert pursuant to the hereof an amount that would be convertible into that number of shares of Common Stock that would exceed the difference between 4.99% of the issued and outstanding shares of Common Stock and the number of shares of Common Stock beneficially owned by Lender (the “4.99% Limitation”).  For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Lender may void the 4.99% Limitation upon 75 days prior notice to the Company or without any notice requirement upon an Event of Default.

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In the event that Lender voids the 4.99% Limitation, Lender shall not be entitled to convert pursuant to the hereof an amount that would be convertible into that number of shares of Common Stock that would exceed the difference between 9.99% of the issued and outstanding shares of Common Stock and the number of shares of Common Stock beneficially owned by Lender (the “9.99% Limitation”).  For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Lender may void the 9.99% Limitation upon 75 days prior notice to the Company or without any notice requirement upon an Event of Default.

2.           Certain Definitions.  The terms set forth below shall have the following meanings. Capitalized terms used but not defined herein have the meanings given to them in the Loan Agreement.

“Conversion Price” means an amount per share of Common Stock equal to $1.50, which Conversion Price shall be subject to adjustment as provided herein.

“Common Stock Equivalent” means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security or property rights 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.

“Current Fair Market Value” when used with respect to the Common Stock as of a specified date means, with respect to a share of Common Stock, the average of the closing prices of the Common Stock sold on all securities exchanges including the NASD OTCBB, NASDAQ Capital Market, the Nasdaq National Market, the American Stock Exchange or the New York Stock Exchange (each a “Trading Market”) on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of regular trading such day, or, if on such day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on such day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the Pink Sheets, LLC, or any similar successor organization, in each such case averaged over a period of five Trading Days consisting of the day as of which the Current Fair Market Value of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day.  If on the date for which Current Fair Market Value is to be determined the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the Current Fair Market Value of Common Stock shall be the highest price per share of Common Stock at which the Company has sold shares of Common Stock or Common Stock Equivalents to one or more unaffiliated third parties in a bona fide financing round during the 365 days prior to the date of such determination.  If no such sales were made during the 365 days prior to the date of such determination,  the Current Fair Market Value of Common Stock shall be the price per share which the Company could then obtain from a willing buyer on an arms’-length basis (not an affiliate, 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 by an independent appraiser mutually acceptable to, and unaffiliated with, the Company and Lender, whose appraisal costs shall be paid by the Company.

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“Trading Day” means at any time a day on which the Trading Market on which the Common Stock may be listed is open for general trading of securities.

3.           Deficiency in Shares Available for Issuance. If at any time the Conversion Right is exercised 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 Lender made by notice from Lender to the Company, the Conversion Right, 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 which the Company is unable to issue, payment in an amount equal to the product obtained by multiplying (a) the number of shares of Common Stock which the Company is unable to issue times(b) the Current Market Value of the Common Stock as of the Conversion Date. Such amount shall further be deemed to be an Obligation under the Loan Agreement secured by the Collateral thereunder. Any payment of such amount shall be deemed to be a payment of principal plus a premium equal to the total amount payable less the principal portion of the Loan 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.

4.           Conversion Procedure.

(a)           In order to exercise the conversion privilege hereunder, Lender shall give a Conversion Notice in the form of Annex A (or such other notice which is acceptable to the Company) to the Company.

(b)           As promptly as practicable, but in no event later than three (3) Business Days after a Conversion Notice is given, the Company shall issue and shall deliver to Lender the number of full shares of Common Stock issuable upon such conversion.

(c)           (1)           If Lender shall have given a Conversion Notice in accordance with the terms hereof, the Company's obligation to issue and deliver the shares of Common Stock upon such conversion shall be absolute and unconditional up to the amount of the outstanding Loan Indebtedness (but not to exceed the Conversion Limit), irrespective of any action or inaction by Lender to enforce the same, any waiver or consent with respect to any provision hereof or of the Loan Agreement, 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 Lender, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by Lender or any other person or entity of any obligation to the Company or any violation or alleged violation of law by Lender or any other person or entity, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to Lender 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.

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(2)           If in any case the Company shall fail to issue and deliver the shares of Common Stock to Lender upon Lender’s exercise of the Conversion Right in accordance with the terms of this Agreement and the Loan Agreement within five (5) Business Days after Lender gives the Conversion Notice, in addition to any other liabilities the Company may have hereunder and under applicable law (A) the Company shall pay or reimburse Lender on demand for all out-of-pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by Lender as a result of such failure, (B) if as a result of such failure Lender shall suffer any damages or liabilities (including, without limitation, margin interest and the cost of purchasing securities to cover a sale (whether by Lender or Lender's securities broker) or borrowing of shares of Common Stock by Lender for purposes of settling any trade involving a sale of shares of Common Stock made by Lender, then the Company shall upon demand of Lender pay to Lender an amount equal to the damages and liabilities suffered by Lender by reason thereof which Lender documents to the reasonable satisfaction of the Company, and (C) Lender may by written notice given at any time prior to delivery to Lender of the shares of Common Stock issuable in connection with such exercise of Lender's Conversion Right, rescind such exercise and the Conversion Notice relating thereto.

5.           Notices of Certain Company Actions. In case on or after the date of this Agreement:

(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;

the Company shall give Lender, as promptly as possible but in any event at least ten (10) Business Days prior to the applicable date hereinafter specified, a notice stating  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. Such notice shall not include any information which would be material non-public information for purposes of the Securities Exchange Act of 1934, as amended. 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 Lender or is required to give such notice to Lender, Lender shall be entitled to give a Conversion Notice which is contingent on the completion of such action.

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6.           Stock Fully Paid, Reservation of Shares.  All Shares that may be issued upon the exercise of the rights represented by this Agreement will, upon issuance, be duly authorized, fully paid and nonassessable, and will be free from all Liens with respect to the issue thereof.  During the period within which the Conversion Right may be exercised, the Company will at all times have authorized, and reserved for the exercise of the Conversion Right a sufficient number of shares of its Common Stock to enable the Company to fulfill its obligation hereunder.

7.           Adjustment of Conversion Price and Number of Shares.  The number and kind of securities purchasable upon conversion, and the Conversion Price, shall be subject to the adjustment from time to time upon the occurrence of certain events, as follows:

               (a)Adjustment for Common Stock Dividends and Distributions.  If the Company makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock or Common Stock Equivalents, in each such event the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock and Common Stock Equivalents issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the total number of shares of Common Stock and Common Stock Equivalents issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock or Common Stock Equivalents issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 4(a) to reflect the actual payment of such dividend or distribution.

(b)           Adjustments for Stock Splits, Stock Subdivisions and Combinations.  If the Company subdivides or combines the Common Stock, (1) in the case of a subdivision (including a stock split), the Conversion Price in effect immediately prior to such event shall be proportionately decreased and the number of shares of Common Stock purchasable thereunder shall be proportionately increased, and (2) in the case of a combination (including a reverse stock split), the Conversion Price in effect immediately prior to such event shall be proportionately increased and the number of shares of Common Stock purchasable thereunder shall be proportionately decreased.  Any adjustment under this Section shall become effective at the close of business on the date the subdivision or combination becomes effective.

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(c)           Adjustments for Reclassification, Reorganization and Consolidation.  In case of (1) any reclassification, reorganization, change or conversion of securities of the Common Stock (other than a change in par value) into other shares or securities of the Company, (2) any merger or consolidation of the Company with or into another entity (other than a merger or consolidation with another entity in which the Company is the acquiring and the surviving entity and that does not result in any reclassification or change of the Common Stock), or (3) any sale of all or substantially all the assets of the Company, Lender shall have the right to receive, in lieu of the shares of Common Stock into which the Loan Indebtedness is convertible, the kind and amount of shares of stock and other securities, money and property receivable upon such reclassification, reorganization, change, merger or consolidation or sale upon conversion by Lender of the maximum number of shares of Common Stock into which the Loan Indebtedness could have been converted immediately prior to such reclassification, reorganization, change, merger or consolidation or sale, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof.  The provisions of this Section shall similarly attach to successive reclassifications, reorganizations, changes, mergers or consolidations.

  (d)           Recapitalizations.  If at any time there occurs a recapitalization of the Common Stock (other than a subdivision, combination, or merger or sale of assets otherwise provided for in Section 7(c), Lender shall be entitled to receive, upon exercise of the Conversion Right and the giving of the Conversion Notice, the number of shares of capital stock or other securities or property of the Company or otherwise to which a holder of the Common Stock deliverable upon conversion would have been entitled on such recapitalization.  In any such case, appropriate adjustment shall be made in the application of the provisions of this Section (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon exercise of the Conversion Right hereunder) with respect to the rights of Lender after the recapitalization so that the provisions of this Section  shall be applicable after that event as nearly equivalent as may be practicable.

  (e)           No Impairment.  The Company shall not, by amendment of its Certificate of Incorporation or bylaws, or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Agreement and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of Lender against impairment.

  (f)           Notice of Adjustments.  Whenever the consideration issuable upon a conversion hereunder shall be changed pursuant to this Agreement, the Company shall prepare a certificate setting forth, in reasonable detail, the event requiring the change and the kind and amount of shares of stock and other securities, money and property subsequently issuable upon a conversion hereof.  Such certificate shall be signed by its chief financial officer and shall be delivered to Lender or such other person as Lender or any successor notice recipient may designate.

  (g)           Fractional Shares.  No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall round up the number of shares issuable in connection with such exercise to the next whole share.

  (h)           Mandatory Conversion. If the following conditions are met, then the Company may, on not less than  fifteen (15) days prior written notice (“Mandatory Conversion Notice”) to Lender (“Mandatory Conversion Notice Date”), demand that all, but not less than all, of the outstanding Loan Indebtedness be converted into Common Stock on the terms set forth herein (a “Mandatory Conversion”):

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    (1)           The Company’s Common Stock, trading on any Trading Market, has a Current Market Value equal to $3.50 (as adjusted in accordance with the terms hereof) or more for ten (10) consecutive Trading Days (the “Mandatory Conversion Measurement Period”).

    (2)           All of the shares of Common Stock into which the Loan Indebtedness is convertible are then freely tradable under an effective registration statement filed with the Securities and Exchange Commission or pursuant to Rule 144 of the Rules and Regulations promulgated under the Securities Act of 1933, as amended, and Lender shall have received an opinion of counsel to the Company as may be necessary or requested by Lender to allow such resales, provided the Company and its counsel receive reasonably requested representations from Lender and its broker, if any.

(3)              Each of the representations and warranties made by or on behalf of the Company to Lender in this Agreement and in other Loan Documents shall be true and correct in all material respects as of the Mandatory Conversion Notice Date (provided that any such representation or warranty that is qualified as to materiality shall be true and correct in all respects), and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

(4)              The Company shall have duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in this Agreement and the other Loan Documents as of the Mandatory Conversion Notice Date, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

(5)              No event shall have occurred on or prior to the Mandatory Conversion Notice Date or at any time thereafter and be continuing as of the date of the Mandatory Conversion, and no condition shall exist on the Mandatory Conversion Notice Date or at any time thereafter and be continuing as of the date of the Mandatory Conversion, which constitutes an Event of Default or which would, with notice or the lapse of time, or both, constitute an Event of Default under this Agreement or any of the other Loan Documents, and Lender shall have received a certification from a Responsible Officer with respect to the foregoing  in form and substance satisfactory to Lender.

The Mandatory Conversion Notice shall be accompanied by a certificate of the Company setting forth, in reasonable detail, the calculation of the Current Fair Market Value of the Common Stock and the number of Shares issuable upon the Mandatory Conversion. Such certificate shall be signed by the Company’s chief financial officer and shall be delivered to Lender or such other person as Lender or any successor notice recipient may designate.

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Notwithstanding the foregoing, the Company may not effect a Mandatory Conversion in the event that the number of shares of Common Stock issuable upon such Mandatory Conversion would exceed the number of shares of Common Stock that could be sold over a period of twenty (20) Trading Days based on twenty five percent (25%) of the average daily trading volume of the Common Stock on the Trading Market during the Mandatory Conversion Measurement Period.

8.           Compliance with Securities Act; Disposition of Shares of Stock.  The Company is obligated to register the shares to be issued upon conversion under the Securities Act of 1933, as amended, pursuant to the Registration Rights Agreement. Until such shares are duly registered, Lender will not offer, sell or otherwise dispose of any such Shares except under circumstances which will not result in a violation of applicable securities laws.

9.           Rights as Shareholder.  Lender shall not be entitled to vote or, subject to Section 4(a), receive dividends with respect to, or be deemed the holder of, Shares issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon Lender, as such, any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise, until the Conversion Right shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein.

10.           Representations and Warranties of Company.  The Company represents and warrants to Lender as follows:

(a)           This Agreement has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms.

(b)           The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable.

(c)           The execution and delivery of this Agreement are not, and the issuance of the Shares upon conversion under this Agreement in accordance with the terms hereof will not be, inconsistent with the Company’s charter or bylaws, as amended, and do not and will not constitute a default under, any indenture, mortgage, contract or other agreement or instrument of which the Company is a party or by which it is otherwise bound.

11.           Miscellaneous.

(a)           Notices.  All notices, requests and demands to or upon the respective parties hereto shall be given in writing and shall be deemed to have been duly given or made upon receipt by the receiving party.  All notices, requests and demands are to be given or made to the respective parties at the following addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph):

If to the Company:	10500 N.E. 8th Street
	Suite 1400
	Bellevue, Washington 12533
	Attention: John Atherly
With a copy to:	Sichenzia Ross Friedman Ference LLP
	61 Broadway
	New York, New York 10006
	Attention:  Richard A. Friedman, Esq.
If to Lender:	Moriah Capital, L.P.
	685 Fifth Avenue
	New York, New York 10022
	Attention: Greg Zilberstein
With a copy to:	Cohen Tauber Spievack & Wagner LLP
	420 Lexington Avenue, Suite 2400
	New York, New York 10170
	Attention:  Adam Stein, Esq.

(b)           Amendments.  The terms of this Agreement shall not be amended, altered, modified, supplemented or terminated in any manner whatsoever except by a written instrument signed by the parties hereto.  The terms of this Agreement shall not be waived except by a written instrument signed by the party to be charged with such waiver.

(c)           Binding on Successors.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns in accordance with, and subject to, the terms of the Loan Agreement.

(d)           Invalidity.  Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

(d)           Section or Paragraph Headings.  Section and paragraph headings are for convenience only and shall not be construed as part of this Agreement.

(e)           Governing Law.  This Agreement shall be construed in accordance with, and shall be governed by, the laws of the State of New York (without giving effect to conflict of law rules.

(f)           Counterparts.  This Agreement may be executed in counterparts and by facsimile or electronic signature, each of which when so executed, shall be deemed an original, but all of which shall constitute but one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the parties have executed this Loan Conversion Agreement as of the date set forth below.

EMAGIN CORPORATION
By:	/s/
	Name
	Title

MORIAH CAPITAL, L.P.
By:	Moriah Capital Management, L.P.,
	General Partner

By:	Moriah Capital Management, GP, LLC,
	General Partner

By:	/s/
	Name
	Title

128

Annex A

NOTICE OF CONVERSION

To:           eMagin Corporation

1.           The undersigned hereby elects to purchase _____ shares of Common Stock of eMagin Corporation in accordance with the terms of the attached Agreement, and tenders herewith a certificate of an executive officer of Moriah Capital, L.P. setting forth the amount of Loan Indebtedness to be cancelled, which amount is equal to the then applicable Conversion Price per share multiplied by the number of Shares being purchased, which represents full payment of the purchase price of such shares.

2.           Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below:

Name:

Address:

3.           The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.

Signature:__________________________

Name:_____________________________

Address:___________________________

  _________________________________

  _________________________________

Social Security or Taxpayer Identification No.:

129

EXHIBIT J

TO

LOAN AND SECURITY AGREEMENT

POST-CLOSING AGREEMENT

POST-CLOSING AGREEMENT ("Agreement") dated this 7th day of August, 2007, with respect to the Loan and Security Agreement, dated this 7th day of August, 2007 ("Loan Agreement") by and between EMAGIN CORPORATION,a Delaware corporation, with its principal place of business located at 10500 N.E. 8th Street, Suite 1400, Bellevue, Washington 98004 ("Borrower"), and MORIAH CAPITAL, L.P., a Delaware limited partnership with offices at 685 Fifth Avenue, New York, New York 10022 ("Lender").  Capitalized terms used but not defined herein have the meanings given to them in the Loan Agreement.

R E C I T A L S:

WHEREAS, the parties have entered into the Loan Agreement on the date hereof, and

WHEREAS, to facilitate the closing of the transactions contemplated by the Loan Agreement, Lender has entered into the Loan Agreement in reliance on Borrower�s undertaking to satisfy the conditions set forth herein; and

WHEREAS, Borrower has agreed to satisfy the conditions set forth herein within the time periods set forth herein;

NOW, THEREFORE, the parties agree as follows:

1)Landlord Agreements.  Within thirty (30) days of the date hereof, Borrower shall provide Lender with (a) that certain landlord agreement in the form attached hereto executed by Borrower, CapGemeni U.S. LLC, and Bellevue Place Office Building Limited Partnership and (b) that certain landlord agreement in the form attached hereto executed by Borrower and International Business Machines Corporation.

2)Intellectual Property Security and Pledge Agreements  Within ten (10) Business Days of being provided with patent and trademark security and pledge agreements in form and substance not inconsistent with the existing security and pledge agreements executed by Borrower in favor of Alexandra Global Master Fund Ltd. (with the sole exception that such agreements shall be subordinate to the existing assignment agreements executed by Borrower in favor of Alexandra Global Master Fund Ltd.), Borrower shall execute and deliver such agreements to Lender.

3)Lockbox Agreement.  Within thirty (30) days of the date hereof, Borrower shall provide Lender with that certain lockbox agreement substantially in the form attached hereto executed by Borrower and HSBC Bank USA, National Association.

4)Event of Default; No Other Waiver; Counterparts.  Borrower's failure to timely comply with any of the foregoing covenants shall constitute an Event of Default under the Loan Agreement.  Except as expressly set forth herein, nothing contained herein shall act as a waiver or excuse of performance of any Obligations.  This Agreement may be executed in counterparts, including facsimile or electronic signature, each of which when so executed, shall be deemed an original, but all of which shall constitute but one and the same instrument.

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IN WITNESS WHEREOF, this Post-Closing Agreement has been duly executed as of the day and year first above written.

EMAGIN CORPORATION
By:	/s/
	Name
	Title

MORIAH CAPITAL L.P.
By:	Moriah Capital Management, L.P.,
	General Partner

By:	Moriah Capital Management, GP, LLC,
	General Partner

By:	/s/
	Name
	Title

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EX-23.2

  Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the inclusion in the Registration Statement on Form S-1/A, (File No. 333-144865) of our report dated April 9, 2008 on the audits of the financial statements of eMagin Corporation (the “Company”) as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, which report includes an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern. In addition, we consent to the reference to our firm as “Experts” in the prospectus.

New York, New York

November 6, 2008