Exhibit 10.3

[FORM OF SENIOR SUBORDINATED CONVERTIBLE NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

ISTA PHARMACEUTICALS, INC.

SENIOR SUBORDINATED CONVERTIBLE NOTE

 

Issuance Date: June 22, 2006

  Original Principal Amount: U.S. $_____________

FOR VALUE RECEIVED, ISTA Pharmaceuticals, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to the order of
                                 or registered assigns (“Holder”) the amount set
out above as the Original Principal Amount (as reduced pursuant to the terms
hereof pursuant to redemption, conversion or otherwise, the “Principal”) when
due, whether upon the Maturity Date (as defined below), acceleration, redemption
or otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any outstanding Principal at a rate equal to eight
percent (8.0%) per annum (the “Interest Rate”), from the date set out above as
the Issuance Date (the “Issuance Date”) until the same becomes due and payable,
whether upon an Interest Date (as defined below), the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Senior Subordinated Convertible Note (including all
Senior Subordinated Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”) is one of an issue of Senior Subordinated
Convertible Notes (collectively, the “Notes” and such other Senior Subordinated
Convertible Notes, the “Other Notes”) issued pursuant to the Securities Purchase
Agreement (as defined below). Certain capitalized terms are defined in
Section 31.

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

(1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the
Company and the Company shall pay to the Holder an amount in cash representing
all outstanding Principal, accrued and unpaid Interest and accrued and unpaid
Late Charges, if any, on such Principal and Interest. The “Maturity Date” shall
be June 22, 2011, as may be extended at the option of the Holder (i) in the
event that, and for so long as, an Event of Default (as defined in Section 4(a))
shall have occurred and be continuing on the Maturity Date (as may be extended
pursuant to this Section 1) or any event that shall have occurred and be
continuing that with the passage of time and the failure to cure would result in
an Event of Default and (ii) through the date that is ten (10) Business Days
after the consummation of a Change of Control in the event that a Change of
Control is publicly announced or a Change of Control Notice (as defined in
Section 5(b)) is delivered prior to the Maturity Date.

(2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on
the Issuance Date and shall be computed on the basis of a 365-day year and
actual days elapsed and shall be payable in arrears for each Calendar Quarter on
the first day of the succeeding Calendar Quarter during the period beginning on
the Issuance Date and ending on, and including, the Maturity Date (each, an
“Interest Date”) with the first Interest Date being October 1, 2006. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in cash. Prior to the payment of Interest on an
Interest Date, Interest on this Note shall accrue at the Interest Rate and be
payable by way of inclusion of the Interest in the Conversion Amount in
accordance with Section 3(b)(i). From and after the occurrence and during the
continuance of an Event of Default, the Interest Rate shall be increased to
fifteen percent (15.0%). In the event that such Event of Default is subsequently
cured, the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
at such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of
Default.

(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the
Company’s common stock, par value $0.001 per share (the “Common Stock”), on the
terms and conditions set forth in this Section 3.

(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or
times on or after the Issuance Date, the Holder shall be entitled to convert all
(or any portion equal to $1,000 or any integral multiple of $1,000 in excess
thereof) of the outstanding and unpaid Conversion Amount (as defined below) into
fully paid and nonassessable shares of Common Stock in accordance with
Section 3(c), at the Conversion Rate (as defined below). The Company shall not
issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount.

(b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by

 

- 2 -

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

dividing (x) such Conversion Amount by (y) the then applicable Conversion Price
(the “Conversion Rate”).

(i) “Conversion Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, (B) accrued and unpaid Interest with respect to such Principal and
(C) accrued and unpaid Late Charges with respect to such Principal and Interest.

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or
other date of determination, $7.75, subject to adjustment as provided herein.

(c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York Time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company in
accordance with Section 25(a), with a copy to the Company’s transfer agent (the
“Transfer Agent”) for the Common Stock, at (818) 502-0674, Attention: Richard
Tilton and (B) if required by Section 3(c)(iii), surrender this Note to a common
carrier for delivery to the Company as soon as practicable on or following such
date (or an indemnification undertaking with respect to this Note in the case of
its loss, theft or destruction). On or before the second (2nd) Business Day
following the date of receipt of a Conversion Notice (the “Share Delivery
Date”), the Company shall (X) provided that the Transfer Agent is participating
in the Depository Trust Company’s (“DTC”) Fast Automated Securities Transfer
Program credit such aggregate number of shares of Common Stock to which the
Holder shall be entitled to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to the address as specified in the
Conversion Notice, a certificate, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the Holder shall be
entitled. If this Note is physically surrendered for conversion as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 20(c)) representing the
outstanding Principal not converted. The Person or Persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.

(ii) Company’s Failure to Timely Convert. If the Holder shall have provided
proper notice to the Company pursuant to Section 3(c)(i) and if the Company
shall fail to issue a certificate to the Holder or credit the Holder’s balance

 

- 3 -

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

account with DTC for the number of shares of Common Stock to which the Holder is
entitled upon conversion of any Conversion Amount on or prior to the date which
is three (3) Business Days after the Conversion Date (a “Conversion Failure”),
then (A) the Company shall, unless the Holder elects to effect a Buy-In as
described below, pay damages to the Holder for each date of such Conversion
Failure in an amount equal to 1.0% of the product of (I) the sum of the number
of shares of Common Stock not issued to the Holder on or prior to the Share
Delivery Date and to which the Holder is entitled, and (II) the Closing Sale
Price of the Common Stock on the Share Delivery Date and (B) the Holder, upon
written notice to the Company, may void its Conversion Notice with respect to,
and retain or have returned, as the case may be, any portion of this Note that
has not been converted pursuant to such Conversion Notice; provided that the
voiding of a Conversion Notice shall not affect the Company’s obligations to
make any payments which have accrued prior to the date of such notice pursuant
to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within
three (3) Trading Days after the Company’s receipt of the facsimile copy of a
Conversion Notice the Company shall fail to issue and deliver a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon such holder’s
conversion of any Conversion Amount, and if on or after such Trading Day the
Holder purchases (in an open market transaction or otherwise) Common Stock to
deliver in satisfaction of a sale by the Holder of Common Stock issuable upon
such conversion that the Holder anticipated receiving from the Company (a
“Buy-In”), then the Company shall, within three (3) Business Days after the
Holder’s request and in the Holder’s discretion, either (i) pay cash to the
Holder in an amount equal to the Holder’s total purchase price (including
brokerage commissions and other out-of-pocket expenses, if any) for the shares
of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of Common Stock, times (B) the Closing Bid
Price on the Conversion Date.

(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein,
upon conversion of any portion of this Note in accordance with the terms hereof,
the Holder shall not be required to physically surrender this Note to the
Company unless (A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
this Note upon physical surrender. The Holder and the Company shall maintain
records showing the Principal, Interest and Late Charges converted and the dates
of such conversions or shall use such other method, reasonably satisfactory to
the Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company, subject to Section 3(d), shall
convert from

 

- 4 -

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

each holder of Notes electing to have Notes converted on such date a pro rata
amount of such holder’s portion of its Notes submitted for conversion based on
the principal amount of Notes submitted for conversion on such date by such
holder relative to the aggregate principal amount of all Notes submitted for
conversion on such date. In the event of a dispute as to the number of shares of
Common Stock issuable to the Holder in connection with a conversion of this
Note, the Company shall issue to the Holder the number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section 25.

(d) Limitations on Conversions.

(i) Notwithstanding anything in this Note to the contrary, the Company shall not
effect any conversion of this Note, and the Holder of this Note shall not have
the right to convert any portion of this Note pursuant to Section 3(a), to the
extent that after giving effect to such conversion, the Holder (together with
the Holder’s affiliates) would beneficially own in excess of 9.99% (the “Maximum
Percentage”) of the number of shares of Common Stock outstanding immediately
after giving effect to such conversion. For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Note with respect to which the determination of such sentence
is being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) conversion of the remaining, nonconverted portion of
this Note beneficially owned by the Holder or any of its affiliates and
(B) exercise or conversion of the unexercised or nonconverted portion of any
other securities of the Company (including, without limitation, any Other Notes
or warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 3(d)(i), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Section 3(d)(i), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares of Common
Stock as reflected in (x) the Company’s most recent Form 10-K, Form 10-Q or Form
8-K, as the case may be (y) a more recent public announcement by the Company or
(z) any other notice by the Company or the Transfer Agent setting forth the
number of shares of Common Stock outstanding. For any reason at any time, upon
the written or oral request of the Holder, the Company shall within three
(3) Business Days confirm orally and 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 securities of the Company, including this Note, by the Holder or
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the Holder may
increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply only
to the Holder and not to any other holder of Notes. Notwithstanding the
foregoing, the limitations in this

 

- 5 -

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

Section 3(d)(i) shall not apply if, as of the Subscription Date, the Holder
beneficially owned in excess of 9.99% of the Company’s outstanding shares of
Common Stock.

(ii) The Company shall not be obligated to issue any shares of Common Stock upon
conversion of this Note if the issuance of such shares of Common Stock would
exceed the aggregate number of shares of Common Stock which the Company may
issue upon conversion of the Notes without breaching the Company’s obligations
under the rules or regulations of the Principal Market (the “Exchange Cap”),
except that such limitation shall not apply in the event that the Company
(A) obtains the approval of its stockholders as required by the applicable rules
of the Principal Market for issuances of Common Stock in excess of such amount
or (B) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
Required Holders. Until such approval or written opinion is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the
“Purchasers”) shall be issued in the aggregate upon conversion of Notes, shares
of Common Stock in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the principal amount of
Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on
the Closing Date and the denominator of which is the aggregate principal amount
of all Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the “Exchange Cap
Allocation”). In the event that any Purchaser shall sell or otherwise transfer
any of such Purchaser’s Notes, the transferee shall be allocated a pro rata
portion of such Purchaser’s Exchange Cap Allocation, and the restrictions of the
prior sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such transferee. In the event that any
holder of Notes shall convert all of such holder’s Notes into a number of shares
of Common Stock which, in the aggregate, is less than such holder’s Exchange Cap
Allocation, then the difference between such holder’s Exchange Cap Allocation
and the number of shares of Common Stock actually issued to such holder shall be
allocated to the respective Exchange Cap Allocations of the remaining holders of
Notes on a pro rata basis in proportion to the aggregate principal amount of the
Notes then held by each such holder.

(4) RIGHTS UPON EVENT OF DEFAULT.

(a) Event of Default. Each of the following events shall constitute an “Event of
Default”:

(i) the failure of the applicable Registration Statement required to be filed
pursuant to the Registration Rights Agreement to be declared effective by the
SEC on or prior to the date that is one hundred and twenty (120) days after the
applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance

 

- 6 -

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

with the terms of the Registration Rights Agreement, and such lapse or
unavailability continues for a period of ten (10) consecutive days or for more
than an aggregate of thirty (30) days in any 365-day period (other than days
during an Allowable Grace Period (as defined in the Registration Rights
Agreement));

(ii) the suspension from trading or failure of the Common Stock to be listed on
the Principal Market or on an Eligible Market for a period of five
(5) consecutive days or for more than an aggregate of ten (10) days in any
365-day period;

(iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the
required number of shares of Common Stock within fifteen (15) Business Days
after the applicable Conversion Date or (B) notice, written or oral, to any
holder of the Notes, including by way of public announcement or through any of
its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Common Stock that is tendered in
accordance with the provisions of the Notes;

(iv) at any time following the tenth (10th) consecutive Business Day that the
Holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that the Holder would be entitled to receive upon a conversion of the full
Conversion Amount of this Note (without regard to any limitations on conversion
set forth in Section 3(d) or otherwise);

(v) the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Note
(including, without limitation, the Company’s failure to pay any redemption
payments or amounts hereunder), except, in the case of a failure to pay Interest
and Late Charges when and as due, in which case only if such failure continues
for a period of at least five (5) Business Days;

(vi) any default (which has not been cured or waived) under, redemption of or
acceleration prior to maturity of any Indebtedness of the Company in excess of
$1,000,000 or any of its Subsidiaries other than with respect to any Other
Notes;

(vii) the Company or any of its Significant Subsidiaries, pursuant to or within
the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law
for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

(viii) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against the Company or any of its
Significant Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Significant Subsidiaries or (C) orders the liquidation of
the Company or any of its Significant Subsidiaries;

 

- 7 -

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

(ix) a final judgment or judgments for the payment of money aggregating in
excess of $250,000 are rendered against the Company or any of its Significant
Subsidiaries and which judgments are not, within ninety (90) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within ninety (90) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $250,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of such judgment;

(x) the Company breaches any representation, warranty, covenant or other term or
condition of any Transaction Document in a manner that is materially adverse in
the aggregate to the Holder, except, in the case of a breach of a covenant which
is curable, only if such breach continues for a period of at least fifteen
(15) consecutive Business Days;

(xi) any breach or failure in any respect to comply with Section 16 of this
Note; or

(xii) any Event of Default (as defined in the Other Notes) occurs with respect
to any Other Notes.

(b) Redemption Right. Upon the occurrence of an Event of Default with respect to
this Note or any Other Note, the Company shall within one (1) Business Day
deliver written notice thereof via facsimile and overnight courier (an “Event of
Default Notice”) to the Holder. At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall indicate
the portion of this Note the Holder is electing to redeem. Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company at a price equal to the greater of (i) the product of
(x) the Conversion Amount to be redeemed and (y) the Redemption Premium and
(ii) the product of (A) the Conversion Rate with respect to such Conversion
Amount in effect at such time as the Holder delivers an Event of Default
Redemption Notice and (B) the Closing Sale Price of the Common Stock on the date
immediately preceding such Event of Default (the “Event of Default Redemption
Price”). Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 13. To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. The parties hereto agree that in the event of the
Company’s redemption of any portion of the Note under this Section 4(b), the
Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any Redemption Premium due under this

 

- 8 -

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

Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder’s actual loss of its investment opportunity and not as a
penalty.

(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 5(a) pursuant to written
agreements, including agreements to deliver to each holder of Notes in exchange
for such Notes a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to the Notes, including,
without limitation, having a principal amount and interest rate equal to the
principal amounts and the interest rates of the Notes held by such holder,
having similar conversion rights as the Notes and having similar ranking to the
Notes, (ii) the Successor Entity (including its Parent Entity) is a publicly
traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market and (iii) the credit risk of the Successor Entity to the Holder
in relation to this Note is no greater than that of the Company prior to the
Fundamental Transaction, as reasonably determined by the Company’s Board of
Directors in good faith based on the customary methods of evaluating credit risk
and exposure. Upon the occurrence of any Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the date
of such Fundamental Transaction, the provisions of this Note referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every
right and power of the Company and shall assume all of the obligations of the
Company under this Note with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder confirmation that
there shall be issued upon conversion or redemption of this Note at any time
after the consummation of the Fundamental Transaction, in lieu of the shares of
the Company’s Common Stock (or other securities, cash, assets or other property)
issuable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of the publicly traded common stock (or
their equivalent) of the Successor Entity (including its Parent Entity), as
adjusted in accordance with the provisions of this Note. The provisions of this
Section shall apply similarly and equally to successive Fundamental Transactions
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.

(b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of
Control Notice”). At any time during the period beginning after the Holder’s
receipt of a Change of Control Notice and ending twenty (20) Trading Days after
the consummation of such Change of Control, the Holder may require the Company
to redeem all or any portion of this Note by delivering written notice thereof
(“Change of Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
redeem. The portion of this Note subject to redemption pursuant to this
Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the product of (x) the Conversion Amount being redeemed and
(y) the quotient determined by dividing (A) the greater of the Closing Sale

 

- 9 -

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

Price of the Common Stock immediately prior to the consummation of the Change of
Control, the Closing Sale Price immediately following the public announcement of
such proposed Change of Control and the Closing Sale Price of the Common Stock
immediately prior to the public announcement of such proposed Change of Control
by (B) the Conversion Price and (ii) 115% of the Conversion Amount being
redeemed (the “Change of Control Redemption Price”). Redemptions required by
this Section 5 shall be made in accordance with the provisions of Section 13 and
shall have priority to payments to stockholders in connection with a Change of
Control. To the extent redemptions required by this Section 5(b) are deemed or
determined by a court of competent jurisdiction to be prepayments of the Note by
the Company, such redemptions shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5, but subject to
Section 3(d), until the Change of Control Redemption Price is paid in full, the
Conversion Amount submitted for redemption under this Section 5(c) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3. The parties hereto agree that in the event of the Company’s
redemption of any portion of the Note under this Section 5(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’
inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any redemption premium due under this Section 5(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

(a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares
of Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holders of shares of Common Stock in connection
with the consummation of

 

- 10 -

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

such Corporate Event in such amounts as the Holder would have been entitled to
receive had this Note initially been issued with conversion rights for the form
of such consideration (as opposed to shares of Common Stock) at a conversion
rate for such consideration commensurate with the Conversion Rate. The
provisions of this Section shall apply similarly and equally to successive
Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Note.

(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a) Adjustment of Conversion Price upon Issuance of Common Stock If and whenever
on or after the Subscription Date, the Company issues or sells, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by
or for the account of the Company, but excluding shares of Common Stock deemed
to have been issued or sold by the Company in connection with any Excluded
Security) for a consideration per share (the “New Issuance Price”) less than a
price (the “Applicable Price”) equal to the Conversion Price in effect
immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”),
then immediately after such Dilutive Issuance, the Conversion Price then in
effect shall be reduced to an amount equal the product of (A) the Conversion
Price in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the
Conversion Price in effect immediately prior to such Dilutive Issuance and the
number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance plus (II) the consideration, if any, received by the Company
upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the
Applicable Price in effect immediately prior to such Dilutive Issuance by
(II) the number of shares of Common Stock Deemed Outstanding immediately after
such Dilutive Issuance. For purposes of determining the adjusted Conversion
Price under this Section 7(a), the following shall be applicable:

(i) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share. For purposes of
this Section 7(a)(i), the “lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion or
exchange or exercise of any Convertible Securities issuable upon exercise of
such Option” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon granting or sale of the Option, upon exercise of the Option
and upon conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of such
Convertible Securities.

 

- 11 -

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

(ii) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 7(a)(ii), the “lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange or exercise” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the issuance or sale of the Convertible Security
and upon the conversion or exchange or exercise of such Convertible Security. No
further adjustment of the Conversion Price shall be made upon the actual
issuance of such share of Common Stock upon conversion or exchange or exercise
of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which adjustment
of the Conversion Price had been or are to be made pursuant to other provisions
of this Section 7(a), no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.

(iii) Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be adjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
Subscription Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change. No adjustment shall be
made if such adjustment would result in an increase of the Conversion Price then
in effect.

(iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options will be deemed to
have been issued for the difference of (x) the aggregate fair market value of
such Options and other securities issued or sold in such integrated transaction,
less, (y) the fair market value of the securities other than such Option, issued
or sold in such transaction, and the other securities issued or sold in such
integrated transaction will be deemed to have been issued or sold for the
balance of the consideration received by the Company. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of the

 

- 12 -

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

consideration other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the
Closing Sale Price of such securities on the date of receipt. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the Required Holders. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event requiring
valuation (the “Valuation Event”), the fair value of such consideration will be
determined, at the Company’s expense, within five (5) Business Days after the
tenth (10th) day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Required Holders. The
determination of such appraiser shall be deemed binding upon all parties absent
manifest error.

(v) Record Date. If the Company takes a record of the holders of Common Stock
for the purpose of entitling them (A) to receive a dividend or other
distribution payable in Common Stock, Options or in Convertible Securities or
(B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.

(b) Adjustment of Conversion Price upon Subdivision or Combination of Common
Stock. If the Company at any time on or after the Subscription Date subdivides
(by any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time on or after the
Subscription Date combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination will be proportionately increased.

(c) Other Events. If any event occurs of the type contemplated by the provisions
of this Section 7 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s Board of
Directors will make an appropriate adjustment in the Conversion Price so as to
protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

(8) COMPANY’S RIGHT OF OPTIONAL REDEMPTION.

(a) Optional Redemption. On the third anniversary of the Issuance Date (the
“Optional Redemption Eligibility Date”), so long as there shall have been no
Equity Conditions Failure, the Company shall have the right to redeem all or any
portion of the Conversion Amount then remaining under this Note as designated in
the Optional Redemption Notice, as of the Optional Redemption Date (an “Optional
Redemption”). The portion of this Note subject to redemption pursuant to this
Section 8 shall be redeemed by the Company in cash

 

- 13 -

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

at a price equal to the 100% of the Conversion Amount being redeemed (the
“Optional Redemption Price”) on the Optional Redemption Date (as defined below).
The Company may exercise its right to require redemption under this Section 8(a)
by delivering a written notice thereof by facsimile and overnight courier to
all, but not less than all, of the holders of Notes and the Transfer Agent (the
“Optional Redemption Notice” and the date all of the holders received such
notice is referred to as the “Optional Redemption Notice Date”) no later than
thirty (30) Trading Days prior to the Optional Redemption Eligibility Date. The
Optional Redemption Notice delivered shall be irrevocable and shall state
(A) the date on which the Optional Redemption shall occur (the “Optional
Redemption Date”) which date shall be the Optional Redemption Eligibility Date
and (B) the aggregate Conversion Amount of the Notes which the Company has
elected to be subject to Optional Redemption from all of the holders of the
Notes pursuant to this Section 8 (and analogous provisions under the Other
Notes) on the Optional Redemption Date. All Conversion Amounts converted by the
Holder after the Optional Redemption Notice Date shall reduce the Conversion
Amount of this Note required to be redeemed on the Optional Redemption Date.
Redemptions made pursuant to this Section 8 shall be made in accordance with
Section 13.

(b) Pro Rata Redemption Requirement. If the Company elects to cause a Optional
Redemption pursuant to Section 8(a), then it must simultaneously take the same
action with respect to the Other Notes. If the Company elects to cause an
Optional Redemption pursuant to Section 8(a) (or similar provisions under the
Other Notes) with respect to less than all of the Conversion Amounts of the
Notes then outstanding, then the Company shall require redemption of a
Conversion Amount from each of the holders of the Notes equal to the product of
(i) the aggregate Conversion Amount of Notes which the Company has elected to
cause to be redeemed pursuant to Section 8(a), multiplied by (ii) a fraction,
the numerator of which is the sum of the aggregate Original Principal Amount of
the Notes purchased by such holder and the denominator of which is the sum of
the aggregate Original Principal Amount of the Notes purchased by all holders
(such fraction with respect to each holder is referred to as its “Redemption
Allocation Percentage”, and such amount with respect to each holder is referred
to as its “Pro Rata Redemption Amount”). In the event that the initial holder of
any Notes shall sell or otherwise transfer any of such holder’s Notes, the
transferee shall be allocated a pro rata portion of such holder’s Redemption
Allocation Percentage and Pro Rata Redemption Amount.

(9) COMPANY’S RIGHT OF MANDATORY CONVERSION.

(a) Mandatory Conversion. If at any time from and after the third
(3rd) anniversary of the Issuance Date (the “Mandatory Conversion Eligibility
Date”), (i) the Weighted Average Price of the Common Stock exceeds for each of
any twenty (20) out of thirty (30) consecutive Trading Days following the
Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring
Period”) 175% of the Conversion Price on the Issuance Date (as adjusted for any
stock splits, stock dividends, recapitalizations, combinations, reverse stock
splits or other similar events during such period) and (ii) there has been no
Equity Conditions failure, the Company shall have the right to require the
Holder to convert all, or any portion, of the Conversion Amount then remaining
under this Note as designated in the Mandatory Conversion Notice into fully
paid, validly issued and nonassessable shares of Common Stock in accordance with
Section 3(c) hereof at the Conversion Rate as of the

 

- 14 -

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

Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The
Company may exercise its right to require conversion under this Section 9(a) by
delivering within not more than two (2) Trading Days following the end of any
such Mandatory Conversion Measuring Period a written notice thereof by facsimile
and overnight courier to all, but not less than all, of the holders of Notes and
the Transfer Agent (the “Mandatory Conversion Notice” and the date all of the
holders received such notice is referred to as the “Mandatory Conversion Notice
Date”). The Company may deliver one (1) Mandatory Conversion Notice hereunder
and the Mandatory Conversion Notice shall be irrevocable. The Mandatory
Conversion Notice shall state (i) the Trading Day selected for the Mandatory
Conversion in accordance with Section 9(a), which Trading Day shall be at least
twenty (20) Business Days but not more than sixty (60) Business Days following
the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the
aggregate Conversion Amount of the Notes subject to mandatory conversion from
all of the holders of the Notes pursuant to this Section 9 (and analogous
provisions under the Other Notes) and (iii) the number of shares of Common Stock
to be issued to such Holder on the Mandatory Conversion Date. All Conversion
Amounts converted by the Holder after the Mandatory Conversion Notice Date shall
reduce the Conversion Amount of this Note required to be converted on the
Mandatory Conversion Date. The mechanics of conversion set forth in Section 3(c)
shall apply to any Mandatory Conversion as if the Company and the Transfer Agent
had received from the Holder on the Mandatory Conversion Date a Conversion
Notice with respect to the Conversion Amount being converted pursuant to the
Mandatory Conversion.

(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion
of any Conversion Amount of this Note pursuant to Section 9(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes. If the Company elects a Mandatory Conversion of this Note pursuant
to Section 9(a) (or similar provisions under the Other Notes) with respect to
less than all of the Conversion Amounts of the Notes then outstanding, then the
Company shall require conversion of a Conversion Amount from each of the holders
of the Notes equal to the product of (I) the aggregate Conversion Amount of
Notes which the Company has elected to cause to be converted pursuant to
Section 9(a), multiplied by (II) a fraction, the numerator of which is the sum
of the aggregate Original Principal Amount of the Notes purchased by such holder
and the denominator of which is the sum of the aggregate Original Principal
Amount of the Notes purchased by all holders (such fraction with respect to each
holder is referred to as its “Conversion Allocation Percentage,” and such amount
with respect to each holder is referred to as its “Pro Rata Conversion Amount”).
In the event that the initial holder of any Notes shall sell or otherwise
transfer any of such holder’s Notes, the transferee shall be allocated a pro
rata portion of such holder’s Conversion Allocation Percentage and the Pro Rata
Conversion Amount.

(10) HOLDER’S RIGHT OF MANDATORY REDEMPTION. At any time from and after the
third (3rd) anniversary of the Issuance Date, the Holder shall have the right,
in its sole discretion to require that the Company redeem all or any portion of
the Conversion Amount then remaining under this Note (a “Holder Mandatory
Redemption”) by delivering written notice thereof (a “Holder Mandatory
Redemption Notice” and, collectively with the Event of Default Redemption
Notice, the Change of Control Redemption Notice and the Optional Redemption
Notice, the “Redemption Notices” and each a “Redemption Notice”) to the Company.
The Holder Mandatory Redemption Notice shall indicate the Conversion Amount the
Holder is electing to have redeemed (the “Holder Mandatory Redemption Amount”)
on

 

- 15 -

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

the Holder Mandatory Redemption Date (as defined in Section 13). The portion of
this Note subject to redemption pursuant to this Section 10 shall be redeemed by
the Company in cash at a price equal to the Conversion Amount being redeemed
(the “Holder Mandatory Redemption Price” and, collectively with the Event of
Default Redemption Price, the Change of Control Redemption Price and the
Optional Redemption Price, the “Redemption Prices” and, each a “Redemption
Price”). Redemptions required by this Section 10 shall be made in accordance
with the provisions of Section 13. Notwithstanding anything to the contrary in
this Section 10, but subject to Section 3(d), until the Holder receives the
Holder Mandatory Redemption Price the Holder Mandatory Redemption Amount may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3, and any such conversion shall reduce the Holder Mandatory Redemption
Amount in the manner set forth by the Holder in the applicable Conversion
Notice.

(11) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation, Bylaws or through
any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, 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
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.

(12) RESERVATION OF AUTHORIZED SHARES.

(a) Reservation. The Company shall initially reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes
equal to 130% of the Conversion Rate with respect to the Conversion Amount of
each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 130% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the “Authorized Share
Allocation”). In the event that a holder shall sell or otherwise transfer any of
such holder’s Notes, each transferee shall be allocated a pro rata portion of
such holder’s Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an

 

- 16 -

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

“Authorized Share Failure”), then the Company shall immediately take all action
necessary to increase the Company’s authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount
for the Notes then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the approval of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Company shall
provide each stockholder with a proxy statement and shall use its best efforts
to solicit its stockholders’ approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

(13) HOLDER’S REDEMPTIONS.

(a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder within five (5) Business Days after the Company’s
receipt of the Holder’s Event of Default Redemption Notice. If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 5(b),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five (5) Business Days after the Company’s receipt of such notice
otherwise. The Company shall deliver the Optional Redemption Price to the Holder
on the Optional Redemption Date. The Company shall deliver the applicable Holder
Mandatory Redemption Price to the Holder within ten (10) Business Days (the
“Holder Mandatory Redemption Date”) after the Company’s receipt of the
applicable Holder Mandatory Redemption Notice. In the event of a redemption of
less than all of the Conversion Amount of this Note, the Company shall promptly
cause to be issued and delivered to the Holder a new Note (in accordance with
Section 20(c)) representing the outstanding Principal which has not been
redeemed. In the event that the Company does not pay the applicable Redemption
Price to the Holder within the time period required, at any time thereafter and
until the Company pays such unpaid Redemption Price in full, the Holder shall
have the option, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the Conversion
Amount that was submitted for redemption and for which the applicable Redemption
Price (together with any Late Charges thereon) has not been paid. Upon the
Company’s receipt of such notice, (x) the Redemption Notice shall be null and
void with respect to such Conversion Amount, (y) the Company shall immediately
return this Note, or issue a new Note (in accordance with Section 20(c)) to the
Holder representing such Conversion Amount and (z) the Conversion Price of this
Note or such new Notes shall be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the Redemption Notice is voided and
(B) the lowest Closing Bid Price of the Common Stock during the period beginning
on and including the date on which the Redemption Notice is delivered to the
Company and ending on and including the date on which the Redemption Notice is
voided. The Holder’s delivery of a notice voiding a Redemption Notice and
exercise of its rights following such notice shall not affect the Company’s
obligations to make any payments of Late Charges which have accrued prior to the
date of such notice with respect to the Conversion Amount subject to such
notice.

 

- 17 -

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

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 4(b), Section 5(b) or Section 10 (each, an “Other Redemption
Notice”), the Company shall immediately forward to the Holder by facsimile a
copy of such notice. If the Company receives a Redemption Notice and one or more
Other Redemption Notices, during the period beginning on and including the date
which is three (3) Business Days prior to the Company’s receipt of the Holder’s
Redemption Notice and ending on and including the date which is three
(3) Business Days after the Company’s receipt of the Holder’s Redemption Notice
and the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.

(14) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders, except for repurchases of
securities pursuant to, and in accordance with, the Company’s equity
compensation plans.

(15) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to the General
Corporate Law of the State of Delaware, and as expressly provided in this Note.

(16) COVENANTS.

(a) Rank. All payments due under this Note (i) shall rank pari passu with all
Other Notes and (ii) shall be senior to all other Indebtedness of the Company
and its Subsidiaries other than Permitted Senior Indebtedness as provided in
Section 30 hereof.

(b) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Note and the Other Notes and
(ii) Permitted Indebtedness.

(c) Existence of Liens. So long as this Note is outstanding, the Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, “Liens”) other than Permitted Liens.

(d) Restricted Payments. The Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase,
repay or make any payments in respect of, by the payment of cash or cash
equivalents (in whole or in

 

- 18 -

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

part, whether by way of open market purchases, tender offers, private
transactions or otherwise), all or any portion of any Permitted Indebtedness
other than (i) Permitted Senior Indebtedness and (ii) Indebtedness to trade
creditors incurred in the ordinary course of business, whether by way of payment
in respect of principal of (or premium, if any) or interest on, such
Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage
of time and without being cured would constitute, an Event of Default has
occurred and is continuing.

(17) PARTICIPATION. The Holder, as the holder of this Note, shall be entitled to
receive such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.

(18) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders shall be required for any change or amendment to this Note
or the Other Notes.

(19) TRANSFER. This Note may be offered, sold, assigned or transferred by the
Holder without the consent of the Company, subject only to the provisions of
Section 2(f) of the Securities Purchase Agreement. In addition, the Notes may
not be transferred in increments of less than $2,000,000.

(20) REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred, the Holder shall surrender this
Note to the Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new Note (in accordance with Section 20(c)),
registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 20(c)) to
the Holder representing the outstanding Principal not being transferred. The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(c)(iii) and this Section 20(a),
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.

(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 20(c)) representing the outstanding Principal.

 

- 19 -

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

(c) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 20(a) or Section 20(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, if any,
from the Issuance Date.

(21) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder’s right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

(22) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys’ fees and disbursements.

(23) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.

(24) FAILURE OR INDULGENCE 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 privilege.

 

- 20 -

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

(25) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the arithmetic calculation of the
Conversion Rate or Weighted Average Price or any Redemption Price, the Company
shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation within three (3) Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within three (3) Business Days submit via facsimile (a) the
disputed determination of the Closing Bid Price, the Closing Sale Price or the
Weighted Average Price to an independent, reputable investment bank selected by
the Company and approved by the Holder or (b) the disputed arithmetic
calculation of the Conversion Rate or any Redemption Price to the Company’s
independent, outside accountant. The Company, at the Company’s expense, shall
cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.

(26) NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty (20) days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

(b) Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder’s wire transfer instructions. 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 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

 

- 21 -

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

purposes of determining the amount of Interest due on such date. Any amount of
Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of fifteen percent (15.0%) per annum from the date such
amount was due until the same is paid in full (“Late Charge”).

(27) CANCELLATION. After all Principal, accrued Interest and other amounts at
any time owed on this Note has been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.

(28) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.

(29) GOVERNING LAW. This Note shall be construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York. The Company 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 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 is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Company
in any other jurisdiction to collect on the Company’s obligations to the Holder,
to realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court ruling in favor of the Holder. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

(30) SUBORDINATION.

(a) The Company covenants and agrees, and the Holder, by the Holder’s acceptance
of this Note, likewise covenants and agrees, that: (1) the Indebtedness
represented by this Note and the payment of the principal of and interest on
this Note is hereby

 

- 22 -

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

expressly subordinated and junior, to the extent and in the manner set forth and
as set forth in this Section 30, in right of payment to the prior payment in
full of all Permitted Senior Indebtedness; and (2) this Note and the
Indebtedness of the Company thereunder shall remain at all times unsecured and
the Company shall not grant, and the Holders shall not accept, a lien on any
asset of the Company to secure such Indebtedness, other than the “Escrowed
Funds” (as defined in the Securities Purchase Agreement), which Escrowed Funds
may be applied to any amount due and payable pursuant to the terms of this Note
in accordance with the terms of Securities Purchase Agreement, notwithstanding
any contrary provision of this Section 30.

(i) In the event of any distribution of assets of the Company upon any
dissolution, winding up, liquidation or reorganization of the Company, whether
in bankruptcy, insolvency, reorganization or receivership proceedings or upon an
assignment for the benefit of creditors or any other marshalling of the assets
and liabilities of the Company or otherwise, the holders of all Permitted Senior
Indebtedness shall first be entitled to receive payment of the full amount due
thereon in respect of all such Permitted Senior Indebtedness, in cash or other
form of payment satisfactory to the holders of Permitted Senior Indebtedness,
before the Holder is entitled to receive any payment or distribution of any
character, whether in cash, securities or other property, on account of the
principal of or interest on the Indebtedness evidenced by this Note.

(ii) In the event of any mandatory redemption of this Note upon the occurrence
of an Event of Default, unless and until the full amount then due and payable in
respect of all Permitted Senior Indebtedness is paid in cash or other form of
payment satisfactory to the holders of Permitted Senior Indebtedness (which
amount may be paid by one or more of the Holders, in their sole and absolute
discretion), no payment shall be made by the Company with respect to the
principal of or interest on this Note, or to redeem or otherwise acquire all or
any portion of this Note (including any prepayment or repurchase), and the
Company shall give prompt written notice of such acceleration or redemption to
such holders of Permitted Senior Indebtedness.

(iii) In the event of and during the continuance of any “event of default” under
(and as defined in) any agreement evidencing Permitted Senior Indebtedness
(after the lapse of any applicable grace or notice and cure periods provided
therein), whether in payment of the principal of or premium, if any, or interest
on, rent or other payment obligation in respect of Permitted Senior Indebtedness
(each, a “Payment Default”), or any other default in respect of any Permitted
Senior Indebtedness (each, a “Non-Payment Default”), then, upon receipt by the
Holder of written notice thereof from the holder of such defaulted Permitted
Senior Indebtedness, no payment of principal of or interest on this Note may be
made by the Company, and no redemption or other acquisition of all or any
portion of this Note (including any prepayment or repurchase) may be made by the
Company, (A) in case of a Payment Default, unless and until such Payment Default
is cured or waived, or (B) in the case of a Non-Payment Default, for a period
(each, a “Payment Blockage Period”) commencing on the date of receipt of such
notice and ending 179 days thereafter (unless and until, in each case, such
Payment Blockage Period shall otherwise be terminated by (I) written notice to
the Holder from such representatives for such holder of Permitted Senior
Indebtedness, or (II) payment in full of such Permitted Senior Indebtedness in
cash or other form of payment satisfactory

 

- 23 -

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

to the holders of Permitted Senior Indebtedness (which amount may be paid by one
or more of the Holders, in their sole and absolute discretion), (III) such
Non-Payment Default is otherwise cured or waived) or (III) such Non-Payment
Default shall give rise to a Payment Default, in which case such payment
blockage shall continue until such Payment Default is cured or waived). Not more
than one such Payment Blockage Period may be commenced with respect to the
payment of principal of or interest on or redemption of this Note during any
period of 360 consecutive days. Notwithstanding anything in this Note to the
contrary, there must be 180 consecutive days in any 360-day period in which no
Payment Blockage Period is in effect. No Non-Payment Default that existed or was
continuing (it being acknowledged that any subsequent action that would give
rise to a Non-Payment Default pursuant to any provision under which a
Non-Payment Default previously existed or was continuing shall constitute a new
Non-Payment Default for this purpose) on the date of the commencement of any
Payment Blockage Period with respect to holder(s) of the Permitted Senior
Indebtedness initiating such Payment Blockage Period shall be, or shall be made,
the basis for the commencement of a second Payment Blockage Period by the
representative for, or the holders of, such Permitted Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such Non-Payment
Default shall have been cured or waived for a period of not less than 90
consecutive days.

(b) In the event that, notwithstanding the foregoing provisions of Section 30(a)
hereof, any payment on account of principal or interest on this Note shall be
made by the Company and received by the Holder:

(i) after the occurrence of an event specified in Section 30(a)(i) or 30(a)(ii),
then, unless all Permitted Senior Indebtedness is paid in full in cash, or
provision shall be made therefor reasonably satisfactory to the holders of the
Permitted Senior Indebtedness, or

(ii) after the happening of an event of default of the type specified in
Section 30(a)(iii) above, then, unless the amount of such Permitted Senior
Indebtedness then due shall have been paid in full, or provision made therefor
satisfactory to the holders of the Permitted Senior Indebtedness or such other
event of default shall have been cured or waived;

in each such case, such payment shall be held in trust for the benefit of, and
shall be paid over upon the Holder’s receipt of written demand therefor to, the
holders of Permitted Senior Indebtedness or their representative or
representatives or the trustee or trustees under any indenture under which any
instruments evidencing any of the Permitted Senior Indebtedness may have been
issued, as their interests may appear.

(c) All or any portion of the Permitted Senior Indebtedness may, at any time, be
paid by one or more of the Holders, in their sole and absolute discretion.
Subject to the payment in full in cash or other form of payment satisfactory to
the holders of Permitted Senior Indebtedness of all Permitted Senior
Indebtedness to which the Indebtedness evidenced by this Note is in the
circumstances subordinated as provided in Section 30(a) hereof, the Holder shall
be subrogated to the rights of the holders of such Permitted Senior Indebtedness
to receive

 

- 24 -

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

payments or distributions of cash, property or securities of the Company
applicable to such Permitted Senior Indebtedness until all amounts owing on this
Note shall be paid in full and, as between the Company, its creditors (other
than holders of such Permitted Senior Indebtedness) and the Holder, no such
payment or distribution made to the holders of Permitted Senior Indebtedness by
virtue of this Section 30 which otherwise would have been made to the holder of
this Note shall be deemed to be a payment by the Company on account of such
Permitted Senior Indebtedness, provided that the provisions of this Section 30
are and are intended solely for the purpose of defining the relative rights of
the Holder, on the one hand, and the holders of Permitted Senior Indebtedness,
on the other hand.

(d) Nothing contained in this Section 30 or elsewhere in this Note is intended
to or shall impair, as between the Company, its creditors (other than the
holders of Permitted Senior Indebtedness) and the Holder, the obligation of the
Company, which obligation are absolute and unconditional, to pay to the Holder
the principal of and interest on this Note as and when the same shall become due
and payable in accordance with the terms hereof, or is intended to or shall
affect the relative rights of the Holder and creditors of the Company (other
than the holders of Permitted Senior Indebtedness), nor shall anything contained
herein or therein prevent the Holder from exercising all remedies otherwise
permitted by applicable law upon the occurrence of an Event of Default under
this Note, subject to the rights, if any, under this Section 30 of the holders
of Permitted Senior Indebtedness in respect of cash, property or securities of
the Company received upon the exercise of any such remedy.

(e) Upon the maturity of any Permitted Senior Indebtedness by lapse of time,
acceleration or otherwise, all principal of or premium, if any, or interest on,
rent or other payment obligations in respect of, all such matured Permitted
Senior Indebtedness shall first be paid in full, or such payment shall have been
duly provided for to the reasonable satisfaction of the holders of the Permitted
Senior Indebtedness, before any payment on account of principal or interest is
made upon this Note.

(f) Except as expressly provided in this Section 30, nothing contained in this
Section 30 shall affect the obligation of the Company to make, or prevent the
Company from making, payments of the principal of or interest on this Note, or
redeeming this Note, in accordance with the provisions hereof.

(g) No right of any present or future holder of any Permitted Senior
Indebtedness to enforce the subordination herein shall at any time or in any way
be prejudiced or impaired by any act or failure to act on the part of the
Company or by any noncompliance by the Company with the terms, provisions and
covenants of this Note, regardless of any knowledge thereof any such holder may
have or be otherwise charged with.

(h) For the purposes of this Section 30 only:

(i) notwithstanding any contrary provision of this Section 30, the issuance and
delivery of shares of Common Stock issuable upon conversion of any Conversion
Amount pursuant to Section 3 hereof shall not be deemed to constitute a payment
or distribution on account of the principal of or interest on this Note or on
account of the purchase or other acquisition of all or any portion of this Note,
and

 

- 25 -

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

(ii) the payment, issuance or delivery of cash, property or securities (other
than Common Stock) upon conversion of all or any portion of this Note shall be
deemed to constitute payment on account of the principal of or interest on this
Note or portion thereof.

(i) Nothing contained in this Section 30 or elsewhere in this Note is intended
to or shall impair, as among the Company, its creditors (other than holders of
Permitted Senior Indebtedness) and the Holder, the right, which is absolute and
unconditional, to convert this Note in accordance with the terms hereof.

(j) No provision of Section 30 of this Note, or any other provisions related to
the cash payment of interest or principal or the redemption in cash of the
Conversion Amount may be amended, in whole or in part, (in the case of such
other provisions, in a manner that is materially adverse to the holders of the
Permitted Senior Indebtedness) without the prior written consent of holders of
the Permitted Senior Indebtedness.

(31) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:

(a) “Approved Stock Plan” means any employee benefit plan or agreement which has
been approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued in the ordinary course of business to any
consultant, employee, officer or director for services provided to the Company.

(b) “Bloomberg” means Bloomberg Financial Markets.

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

(d) “Calendar Quarter” means each of: the period beginning on and including
January 1 and ending on and including March 31; the period beginning on and
including April 1 and ending on and including June 30; the period beginning on
and including July 1 and ending on and including September 30; and the period
beginning on and including October 1 and ending on and including December 31.

(e) “Change of Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Shares in
which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

(f) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for

 

- 26 -

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

such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 25. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

(g) “Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued Notes pursuant to
the terms of the Securities Purchase Agreement.

(h) “Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock outstanding at such time, plus the number of shares of
Common Stock deemed to be outstanding pursuant to Sections 6(a)(i) and 6(a)(ii)
hereof regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any Common Stock owned or held by or for
the account of the Company or issuable upon conversion of the Notes.

(i) “Contingent Obligation” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

(j) “Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.

(k) “EBITDA” means the Net Income of the applicable Acquired Business for the
most recent twelve month period or such shorter period as then available for
which financials are, or are made, publicly available (the “Applicable
Financials”), plus without

 

- 27 -

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

duplication, the sum of the following amounts of such Acquired Business for such
period and to the extent deducted in determining Net Income of such Acquired
Business for such period: (i) Net Interest Expense, (ii) income tax expense,
(iii) depreciation expense, (iv) amortization expense, and minus, onetime or
non-cash gains, including but not limited to (A) gains generated from
disposition of assets, (B) gains resulted from reversal of charges, (C) gains
resulted from change of estimates, (D) gains resulted from change of actuarial
assumptions, or (E) extraordinary gains.

(l) “Eligible Market” means the Principal Market, The New York Stock Exchange,
Inc., the American Stock Exchange or The Nasdaq Capital Market.

(m) “Equity Conditions” means each of the following conditions: (i) on each day
during the period beginning three (3) months prior to the applicable date of
determination and ending on and including the applicable date of determination
(the “Equity Conditions Measuring Period”), either (x) the Registration
Statement filed pursuant to the Registration Rights Agreement shall be effective
and available for the resale of all remaining Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall
not have been any Grace Periods (as defined in the Registration Rights
Agreement) or (y) all shares of Common Stock issuable upon conversion of the
Notes shall be eligible for sale without restriction and without the need for
registration under any applicable federal or state securities laws; (ii) during
the Equity Conditions Measuring Period, the Common Stock is designated for
quotation on the Principal Market or any other Eligible Market and shall not
have been suspended from trading on such exchange or market (other than
suspensions of not more than two (2) days and occurring prior to the applicable
date of determination due to business announcements by the Company) nor shall
delisting or suspension by such exchange or market been threatened or pending
either (A) in writing by such exchange or market or (B) by falling below the
then effective minimum listing maintenance requirements of such exchange or
market; (iii) during the Equity Conditions Measuring Period, the Company shall
have delivered Conversion Shares upon conversion of the Notes to the holders on
a timely basis as set forth in Section 2(c)(ii) hereof (and analogous provisions
under the Other Notes); (iv) any applicable shares of Common Stock to be issued
in connection with the event requiring determination may be issued in full
without violating the rules or regulations of the Principal Market or any
applicable Eligible Market; (v) during the Equity Conditions Measuring Period,
the Company shall not have failed to make any payments within five (5) Business
Days of when such payment is due pursuant to any Transaction Document;
(vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended
Fundamental Transaction which has not been abandoned, terminated or consummated
or (B) an Event of Default or an event that with the passage of time or giving
of notice would constitute an Event of Default; (vii) the Company shall have no
knowledge of any fact that would cause (x) the Registration Statements required
pursuant to the Registration Rights Agreement not to be effective and available
for the resale of all remaining Registrable Securities in accordance with the
terms of the Registration Rights Agreement or (y) any shares of Common Stock
issuable upon conversion of the Notes not to be eligible for sale without
restriction pursuant to Rule 144(k) and any applicable state securities laws;
and (viii) the Company otherwise shall have been in material compliance with and
shall not have materially breached any provision, covenant, representation or
warranty of any Transaction Document.

 

- 28 -

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

(n) “Equity Conditions Failure” means that (i) on any day during the period
commencing ten (10) Trading Days prior to the Optional Redemption Notice Date
through the Optional Redemption Date or (ii) on any day during the period
commencing ten (10) Trading Days prior to the Mandatory Conversion Notice Date
through the Mandatory Conversion Date, the Equity Conditions have not been
satisfied (or waived in writing by the Holder).

(o) “Excluded Securities” means any Common Stock issued or issuable (pursuant to
any issued Convertible Securities): (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the Notes; (iii) pursuant to any bona fide firm
commitment underwritten public offering with a nationally recognized
underwriter, which generates gross proceeds to the Company in excess of
$15,000,000 (other than an “at-the-market offering” as defined in Rule 415(a)(4)
under the 1933 Act and “equity lines”); (iv) upon conversion of any Options or
Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not materially amended, modified or changed on or after the
Subscription Date in a manner adverse to the Holder; (v) directly on an
arm’s-length basis to an unrelated third party that is a counterparty, such
counterparty’s affiliates or their respective stockholders, in connection with
bona fide, strategic transactions, stock acquisitions, mergers, asset
acquisitions, joint ventures, collaborations, licenses of products or
technology, or similar transactions approved by the Company’s Board of
Directors; provided that such issuance is made at a price equal to or greater
than the arithmetic average of the Weighted Average Price of the Common Stock
for the five (5) consecutive Trading Days immediately prior to the date of such
issuance and the primary purpose of which is not to raise equity capital; and
(vi) in connection with any financing transaction (including, without
limitation, private placements), the primary purpose of such issuance is to
finance bona fide strategic transactions, stock acquisitions, mergers, asset
acquisitions, joint ventures, collaborations, licenses of products or
technology, or similar transactions approved by the Company’s Board of
Directors; provided that in the case of (vi), in amounts not to exceed in the
aggregate 20% of the outstanding shares of Common Stock as of the beginning of
any calendar year (the “20% Threshold”), in which case only those shares of
Common Stock (or Common Stock underlying any Convertible Securities so issued)
in excess of the 20% Threshold shall not be Excluded Securities.

(p) “Fundamental Transaction” means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of the outstanding shares of
Common Stock (not including any shares of Common Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of either the outstanding shares of Common Stock or the outstanding
shares of Common Stock (not including any shares of Common Stock held by the
other Person or other Persons making or party to, or associated or affiliated
with the other Persons making or party to, such stock

 

- 29 -

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

purchase agreement or other business combination), (v) reorganize, recapitalize
or reclassify its Common Stock or (vi) any “person” or “group” (as these terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of more than 50% of the aggregate Voting Stock of
the Company.

(q) “GAAP” means United States generally accepted accounting principles,
consistently applied.

(r) “Indebtedness” of any Person means, without duplication (i) all indebtedness
for borrowed money, (ii) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services, including (without limitation)
“capital leases” in accordance with generally accepted accounting principles
(other than trade payables entered into in the ordinary course of business),
(iii) all reimbursement or payment obligations with respect to letters of
credit, surety bonds and other similar instruments, (iv) all obligations
evidenced by notes, bonds, debentures or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement, whether or not classified as a capital lease in
accordance with generally accepted accounting principles, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness,
and (viii) all Contingent Obligations in respect of indebtedness or obligations
of others of the kinds referred to in clauses (i) through (vii) above.

(s) “Net Income” means, with respect for any applicable period, the net income
of the applicable Acquired Business and its consolidated subsidiaries for such
period, determined on a consolidated basis and in accordance with GAAP.

(t) “Net Interest Expense” means, with respect to any applicable period, gross
interest expense of the applicable Acquired Business and its subsidiaries for
such period determined on a non-consolidated basis and in accordance with GAAP,
plus any amount of interest capitalization as an asset during the same period.

(u) “Options” means any rights, warrants or options to subscribe for or purchase
Common Stock or Convertible Securities.

(v) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent

 

- 30 -

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

Entity, the Person or Parent Entity with the largest public market
capitalization as of the date of consummation of the Fundamental Transaction.

(w) “Permitted Indebtedness” means (i) Permitted Senior Indebtedness,
(ii) Indebtedness incurred by the Company that is made expressly subordinate in
right of payment to the Indebtedness evidenced by this Note, as reflected in a
written agreement acceptable to the Holder and approved by the Holder in
writing, (iii) Indebtedness secured by Permitted Liens, (iv) Indebtedness to
trade creditors incurred in the ordinary course of business, (v) Indebtedness
not otherwise included as Permitted Indebtedness under any other clause of this
Section 31(t) (which Indebtedness for purposes hereof may not be extended,
renewed or refinanced in amounts greater than the amounts outstanding
immediately prior to the Subscription Date) (A) set forth in Schedule 3(r) of
the Securities Purchase Agreement and (B) below the thresholds required for such
Schedule 3(r) that is outstanding immediately prior to the Subscription Date;
provided that the aggregate amount of such Indebtedness set forth in clauses
(v)(A) and (v)(B) does not exceed $5,000,000 as of the Subscription Date,
(vi) additional unsecured Indebtedness not to exceed $750,000 in aggregate
principal amount at any time outstanding, (vii) the Letter of Credit
contemplated pursuant to Section 4(p) of the Securities Purchase Agreement and
(viii) extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms
modified to impose more burdensome terms upon the Company or its Subsidiary, as
the case may be.

(x) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens securing the Company’s obligations under
Permitted Senior Indebtedness, (v) Liens (A) upon or in any equipment acquired
or held by the Company or any of its Subsidiaries to secure the purchase price
of such equipment or indebtedness incurred solely for the purpose of financing
the acquisition or lease of such equipment, or (B) existing on such equipment at
the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment, (vi) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (i) and (v) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien,
(vii) leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company’s business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(viii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods and (ix) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(ix).

(y) “Permitted Senior Indebtedness” means: (i) the principal of (and premium, if
any), interest on, and all fees and other amounts (including, without
limitation, any reasonable out-of-pocket costs, enforcement expenses (including
reasonable out-of-pocket legal

 

- 31 -

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

fees and disbursements), collateral protection expenses and other reimbursement
or indemnity obligations relating thereto) payable by Company and/or its
Subsidiaries under or in connection with the Loan and Security Agreement, dated
December 22, 2005, between the Company and Silicon Valley Bank, with respect to
revolving loans in a maximum principal amount not to exceed at any time such
Indebtedness is incurred, the greater of (x) (1) prior to January 1, 2007,
$10,000,000 and (2) from and after January 1, 2007, the lesser of
(A) $15,000,000 and (B) the amount committed to be loaned to the Company as of
the time of the incurrence of the applicable Permitted Senior Indebtedness
hereunder by a commercial bank, a savings and loan association or savings bank
organized under the laws of the United States or any state thereof and (y) a
dollar amount equal to 150% of all accounts receivable of the Company (excluding
any accounts receivable which are not paid by the earlier of 60 days following
the invoice due date and 90 days following the invoice date, the “Receivables
Threshold”) (together with any amendments, restatements, renewals, refundings,
refinancings or other extensions thereof with a commercial bank, a savings and
loan association or savings bank organized under the laws of the United States
or any state thereof), which Receivables Threshold shall be determined by the
Company no less frequently than once every Calendar Quarter; (ii) Indebtedness
incurred pursuant to the Agreement No. 001, dated April 28, 2006, between
General Electric Capital Corporation and the Company (together with any
amendments, restatements, renewals, refundings, refinancings or other extensions
thereof with General Electric Capital Corporation or any other lender); and
(iii) Indebtedness incurred, assumed or guaranteed by the Company or any of its
Subsidiaries in respect of the purchase price for, or in connection with a bona
fide arm’s-length purchase of, any assets, business or securities (an “Acquired
Business”); provided, however, that the amount of any such Permitted Senior
Indebtedness in clause (iii) hereof incurred as a result of and at the time of
such transaction does not exceed three and one half (3.5) times the amount of
the EBITDA of the Acquired Business (the “EBITDA Threshold”). In the event the
Applicable Financials are not made publicly available in connection with the
purchase of the Acquired Business, the Company shall deliver to the Holder at
the time of the public announcement of the purchase of the Acquired Business
(which the Company covenants and agrees it will publicly announce) a compliance
certificate (the “Compliance Certificate”) from a nationally recognized
independent public accountant certifying that the Company is in compliance with
the EBITDA Threshold and shall within four (4) Business Day after any such
delivery publicly disclose any material nonpublic information, if any, contained
in the Compliance Certificate on a Current Report on Form 8-K or otherwise;
provided, that in the event no such public disclosure is made, the Holder shall
be entitled to presume that the Compliance Certificate contains no material
nonpublic information.

(z) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

(aa) “Principal Market” means the Nasdaq National Market.

(bb) “Redemption Premium” means (i) in the case of the Events of Default
described in Section 4(a)(i) - (vi) and (x) - (xiii), 115% or (ii) in the case
of the Events of Default described in Section 4(a)(vii) - (viii), 100%.

 

- 32 -

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

(cc) “Registration Rights Agreement” means that certain registration rights
agreement between the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable
upon conversion of the Notes.

(dd) “Required Holders” means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.

(ee) “SEC” means the United States Securities and Exchange Commission.

(ff) “Securities Purchase Agreement” means that certain securities purchase
agreement dated the Subscription Date by and among the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes.

(gg) “Significant Subsidiaries” means the “significant subsidiaries” as such
term is used under Regulation S-X significant subsidiaries under the Securities
Exchange Act of 1934, as amended.

(hh) “Subscription Date” means June 22, 2006.

(ii) “Successor Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common stock or equivalent equity security
is quoted or listed for trading on an Eligible Market, Successor Entity shall
mean such Person’s Parent Entity.

(jj) “Trading Day” means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).

(kk) “Voting Stock” of a Person means capital stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time capital stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).

(ll) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York Time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as the Principal Market
publicly announces is the official close of trading) as

 

- 33 -

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

reported by Bloomberg through its “Volume at Price” functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 25. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

(32) DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its Subsidiaries, the
Company so shall indicate to such Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

 

- 34 -

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

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

 

ISTA PHARMACEUTICALS, INC.

By:

      

Name:

   

Title:

 

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

EXHIBIT I

ISTA PHARMACEUTICALS, INC.

CONVERSION NOTICE

Reference is made to the Convertible Note (the “Note”) issued to the undersigned
by ISTA Pharmaceuticals, Inc., (the “Company”). In accordance with and pursuant
to the Note, the undersigned hereby elects to convert the Conversion Amount (as
defined in the Note) of the Note indicated below into shares of Common Stock,
par value $0.001 per share (the “Common Stock”), as of the date specified below.

 

Date of Conversion: ______________________________________________________

Aggregate Conversion Amount to be converted: ________________________________

Please confirm the following information:

Conversion Price: ________________________________________________________

Number of shares of Common Stock to be issued: _______________________________

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

Issue to: _________________________________________________________________

      _________________________________________________________________

      _________________________________________________________________

Facsimile Number: _________________________________________________________

Authorization: _____________________________________________________________

By: __________________________________________________________________

Title: ____________________________________________________________

Dated: ________________________________________________________________________

Account Number: ___________________________________________________________

    (if electronic book entry transfer)

Transaction Code Number: ____________________________________________________

    (if electronic book entry transfer)

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

ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs U.S.
Stock Transfer Corporation to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated June __,
2006 from the Company and acknowledged and agreed to by U.S. Stock Transfer
Corporation.

 

ISTA PHARMACEUTICALS, INC.

By:

      

Name:

   

Title: