[FORM OF SENIOR SECURED 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 (THE "1933 ACT"), 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 1933 ACT, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT (II) UNLESS SOLD OR TRANSFERRED TO A "QUALIFIED INSTITUTIONAL
BUYER" WITHIN THE MEANING OF RULE 144A UNDER THE 1933 ACT OR TO AN "ACCREDITED
INVESTOR" AS THAT TERM IS DEFINED IN RULE 501(A) OF REGULATION D OR (III) 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 18(a) HEREOF.  THE HOLDER OF THIS NOTE AGREES
TO THE TERMS AND PROVISIONS SET FORTH IN SECTION 4(o) OF THE SECURITIES PURCHASE
AGREEMENT REGARDING THE COLLATERAL AGENT (AS DEFINED IN THE SECURITIES PURCHASE
AGREEMENT).  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.

CHINA VOIP & DIGITAL TELECOM INC.

SENIOR SECURED CONVERTIBLE NOTE

Issuance Date:  December [●], 2007

Original Principal Amount: $$5,000,000

FOR VALUE RECEIVED, China VoIP & Digital Telecom Inc., a Nevada corporation (the
"Company"), hereby promises to pay to the order of ______________("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 the
applicable 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) or the Maturity Date, acceleration, conversion,
redemption or otherwise (in each case in accordance with the terms hereof).
 This Senior Secured Convertible Note (including all Senior Secured Convertible
Notes issued in exchange, transfer or

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replacement hereof, this "Note") is one of an issue of Senior Secured
Convertible Notes issued pursuant to the Securities Purchase Agreement (as
defined below) on the Closing Date (collectively, the "Notes" and such other
Senior Secured Convertible Notes, the "Other Notes").  Certain capitalized terms
used herein are defined in Section 28.

(1)

PAYMENTS OF PRINCIPAL.  On the Maturity Date, 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 December [●], 20101, 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.  Notwithstanding any provision of this Section 1 to the
contrary, the Holder may, at its option and in its sole discretion, deliver a
written notice to the Company at least two (2) days prior to the Maturity Date
electing to have the payment of all or any portion of the Principal and Interest
payable on the Maturity Date deferred (such amount deferred, the "Deferral
Amount") up to a date that is two (2) years after the Maturity Date, which date
shall thereafter be the "Maturity Date" for all purposes hereunder.  Any notice
delivered by the Holder pursuant to this Section 1 shall set forth (i) the
Deferral Amount and (ii) the date that such Deferral Amount shall now be
payable.  Other than as specifically permitted by this Note, the Company may not
prepay any portion of the outstanding Principal, accrued and unpaid Interest or
accrued and unpaid Late Charges on Principal and Interest, if any.

(2)

INTEREST; INTEREST RATE.  Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 360-day year comprised of
twelve (12) thirty (30) day months and shall be payable in arrears for each
Calendar Quarter on the first (1st) 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
April 1, 2008.  Interest shall be payable on each Interest Date, to the record
holder of this Note on the applicable Interest Date, in shares of Common Stock
("Interest Shares") so long as there has been no Equity Conditions Failure;
provided however, that the Company may, at its option following notice to the
Holder, pay Interest on any Interest Date in cash ("Cash Interest") or in a
combination of Cash Interest and Interest Shares.  The Company shall deliver a
written notice (each, an "Interest Election Notice") to each holder of the Notes
on or prior to the Interest Notice Due Date (the date such notice is delivered
to all of the holders, the "Interest Notice Date") which notice (a) either (i)
confirms that Interest to be paid on such Interest Date shall be paid entirely
in Interest Shares or (ii) elects to pay Interest as Cash Interest or a
combination of Cash Interest and Interest Shares and specifies the amount of
Interest that shall be paid as Cash Interest and the amount of Interest, if any,
that shall be paid in Interest Shares and (b) if any Interest is to be paid in
Interest Shares, certifies that there has been no Equity Conditions Failure;
provided, however, that the Company shall not be entitled to pay any

1   Insert date that is 3 year anniversary of Closing Date.

 

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portion of Interest on an Interest Date in Interest Shares in excess of the
Holder Pro Rata Amount of the applicable Volume Limitation.  If any portion of
Interest for a particular Interest Date shall be paid in Interest Shares, then
the Company shall pay to the Holder, in accordance with Section 2(b), a number
of shares of Common Stock equal to (x) the amount of Interest payable on the
applicable Interest Date in Interest Shares divided by (y) the applicable
Interest Conversion Price.  Interest to be paid on an Interest Date in Interest
Shares shall be paid in a number of fully paid and nonassessable shares of
Common Stock (rounded to the nearest whole share).  If the Equity Conditions are
not satisfied as of the Interest Notice Date, then unless the Company has
elected to pay such Interest in cash, the Interest Notice shall indicate that
unless the Holder waives the Equity Conditions, the Interest shall be paid in
cash.  If the Equity Conditions were satisfied as of the Interest Notice Date
but the Equity Conditions are no longer satisfied at any time prior to the
Interest Date, the Company shall provide the Holder a subsequent notice to that
effect indicating that unless the Holder waives the Equity Conditions, the
Interest shall be paid in cash.

(a)

When any Interest Shares are to be paid on an Interest Date, the Company shall
(i) (A) provided that the Company's transfer agent (the "Transfer Agent") is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer Program and such action is not prohibited by applicable law or
regulation or any applicable policy of DTC, credit such aggregate number of
Interest Shares 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 (B) if the foregoing shall not apply, issue and deliver on
the applicable Interest Date, to the address set forth in the register
maintained by the Company for such purpose pursuant to the Securities Purchase
Agreement or to such address as specified by the Holder in writing to the
Company at least two (2) Trading Days prior to the applicable Interest Date, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled and (ii) with
respect to each Interest Date, pay to the Holder, in cash by wire transfer of
immediately available funds, the amount of any Cash Interest.  Notwithstanding
the foregoing, the Company shall not be entitled to pay Interest in Interest
Shares and shall be required to pay such Interest in cash as Cash Interest on
the applicable Interest Date if, unless waived in writing by the Holder, there
has been an Equity Conditions Failure.  If an Event of Default or Equity
Conditions Failure occurs during the Interest Measuring Period, then on the
Interest Date, at the Holder's option, the Holder may require the Company to pay
all or any specified portion of the Interest due on the applicable Interest Date
as Cash Interest.

(b)

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%) per annum.  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 and unpaid 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.  The Company
shall pay any and all taxes that may be payable with respect to the issuance and
delivery of Interest Shares.

 

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(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 any
portion 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 transfer, stamp and similar
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
dividing (x) such Conversion Amount by (y) the 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, $[●]1 , 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 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 first (1st) Business Day following the
date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation (the “Conversion Confirmation”) of receipt of such Conversion
Notice to the Holder and the Transfer Agent.  On or before the (2nd) second
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 DTC's Fast Automated Securities Transfer Program, credit
such aggregate number of shares of Common Stock (including any Interest Shares)
to which the Holder shall be entitled to

1 Insert price equal to the Average Market Price of the Common Stock as of the
Trading Day immediately preceding the Subscription Date.

 

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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 (including any Interest Shares) 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 18(d)) 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 Company shall fail to issue a
certificate to the Holder or credit the Holder's balance account with DTC, as
applicable, 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) Trading Days after the Conversion Date (a "Conversion Failure"),
then (A) the Company shall pay damages to the Holder for each Trading Day of
such Conversion Failure in an amount equal to 1.5% 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") or on any date of the Company's obligation to deliver
shares of Common Stock as contemplated pursuant to clause (B) below, then the
Company shall, within three (3) Business Days after the Holder's request and in
the Holder's discretion, either (A) 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 issue and deliver
such certificate or to 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 shall terminate, or (B) 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 (1) such number of
shares of Common Stock, times (2) the Closing Bid Price on the Conversion Date.

 

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(iii)

Registration; Book-Entry.  The Company shall maintain a register (the
"Register") for the recordation of the names and addresses of the holders of
each Note and the principal amount of the Notes held by such holders (the
"Registered Notes").  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the holders of
the Notes shall treat each Person whose name is recorded in the Register as the
owner of a Note for all purposes, including, without limitation, the right to
receive payments of Principal and Interest hereunder, notwithstanding notice to
the contrary.  A Registered Note may be assigned or sold in whole or in part
only by registration of such assignment or sale on the Register.  Upon its
receipt of a request to assign or sell all or part of any Registered Note by a
Holder, the Company shall record the information contained therein in the
Register and issue one or more new Registered Notes in the same aggregate
principal amount as the principal amount of the surrendered Registered Note to
the designated assignee or transferee pursuant to Section 18.  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
of this Note.  The Holder and the Company shall maintain records showing the
Principal, Interest and Late Charges, if any, 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 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 23.

(d)

Limitations on Conversions.  

(i)

Beneficial Ownership.  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 4.99% (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,

 

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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
(the "1934 Act").  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-KSB, Form 10-Q, Form 10-QSB, Form 8-K or other public
filing with the Securities Exchange Commission, 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 one (1) Business Day 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.  The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this Section 3(d)(i) to correct this paragraph (or any portion hereof) which may
be defective or inconsistent with the intended beneficial ownership limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation.

(ii)

Principal Market Regulation.  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 or exercise, as applicable, of
the Notes and Warrants without breaching the Company's obligations under the
rules or regulations of any applicable Eligible 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
such Eligible 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 (each, a
"Purchaser" and collectively the "Purchasers") shall be issued in the aggregate,
upon conversion or exercise or otherwise, as applicable, of Notes or Warrants,
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 any 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 all of the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the

 

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"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 sixty (60) 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 with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of five (5) consecutive days or for more than an
aggregate of twenty (20) 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 an
Eligible Market for a period of five (5) consecutive Trading Days or for more
than an aggregate of ten (10) Trading 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 ten (10) 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);

 

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(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) or any other Transaction Document (as defined in the
Securities Purchase Agreement) or any other agreement, document, certificate or
other instrument delivered in connection with the transactions contemplated
hereby and thereby to which the Holder is a party, 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 under, redemption of or acceleration prior to maturity of any
Indebtedness of the Company or any of its Subsidiaries (as defined in Section
3(a) of the Securities Purchase Agreement) other than with respect to any Other
Notes;

(vii)

the Company or any of its 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 Subsidiaries  in an
involuntary case, (B) appoints a Custodian of the Company or any of its
Subsidiaries or (C) orders the liquidation of the Company or any of its
Subsidiaries;

(ix)

a final judgment or judgments for the payment of money aggregating in excess of
(A) $100,000 are rendered against the Company or any of its Subsidiaries or (B)
$50,000 are rendered against any of the officers or directors of the Company or
any of its Subsidiaries, and which judgments are not, within sixty (60) days
after the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) 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 amounts 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, except, in the case of a breach of a
covenant or other term or condition of any Transaction Document which is
curable, only if such breach continues for a period of at least ten (10)
consecutive Business Days;

(xi)

any breach or failure in any respect to comply with Section 14 of this Note;

 

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(xii)

the Company or any Subsidiary shall fail to perform or comply with any covenant
or agreement contained in any Security Agreement (as defined in the Securities
Purchase Agreement) to which it is a party or any Pledge Agreement (as defined
in the Securities Purchase Agreement) to which it is a party;

(xiii)

any material provision of any Security Document (as determined by the Collateral
Agent) shall at any time for any reason (other than pursuant to the express
terms thereof) cease to be valid and binding on or enforceable against the
Company or any Subsidiary intended to be a party thereto, or the validity or
enforceability thereof shall be contested by any party thereto, or a proceeding
shall be commenced by the Company or any Subsidiary or any governmental
authority having jurisdiction over any of them, seeking to establish the
invalidity or unenforceability thereof, or the Company or any Subsidiary shall
deny in writing that it has any liability or obligation purported to be created
under any Security Document;

(xiv)

any Security Agreement, any Pledge Agreement or any other security document,
after delivery thereof pursuant hereto, shall for any reason fail or cease to
create a valid and perfected and, except to the extent permitted by the terms
hereof or thereof, first priority Lien in favor of the Collateral Agent for the
benefit of the holders of the Notes on any Collateral (as defined in the
Security Documents) purported to be covered thereby;

(xv)

any bank at which any deposit account, blocked account, or lockbox account of
the Company or any Subsidiary is maintained shall fail to comply with any
material term of any deposit account, blocked account, lockbox account or
similar agreement to which such bank is a party or any securities intermediary,
commodity intermediary or other financial institution at any time in custody,
control or possession of any investment property of the Company or any
Subsidiary shall fail to comply with any of the terms of any investment property
control agreement to which such Person is a party (it being understood that only
accounts pursuant to which the Collateral Agent has requested account control
agreements should be subject to this clause (xv));

(xvi)

any material damage to, or loss, theft or destruction of, any Collateral,
whether or not insured, or any strike, lockout, labor dispute, embargo,
condemnation, act of God or public enemy, or other casualty which causes, for
more than fifteen (15) consecutive days, the cessation or substantial
curtailment of revenue producing activities at any facility of the Company or
any Subsidiary, if any such event or circumstance could reasonably be expected
to have a Material Adverse Effect (as defined in the Securities Purchase
Agreement); or

(xvii)

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, 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,

 

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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 (A) the Conversion
Amount to be redeemed and (B) 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
product of (1) the Equity Value Redemption Premium and (2) the greatest Closing
Sale Price of the Common Stock during the period beginning on the date
immediately preceding such Event of Default and ending on the date the Holder
delivers the Event of Default Redemption Notice (the "Event of Default
Redemption Price").  Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12.  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 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 in form and substance satisfactory to the Required Holders and
approved by the Required Holders prior to such Fundamental Transaction,
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 then outstanding 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, and satisfactory to the Required Holders and (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.  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),

 

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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) Trading Days nor later than ten
(10) Trading 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 date of 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) 125% of the Conversion Amount being
redeemed and (ii) the product of (x) the Equity Value Redemption Premium and (y)
the product of (1) the Conversion Amount being redeemed multiplied by (2) the
quotient determined by dividing (A) the aggregate cash consideration and the
aggregate cash value of any non-cash consideration per Common Share to be paid
to the holders of the Common Shares upon consummation of the Change of Control
(any such non-cash consideration consisting of marketable securities to be
valued at the higher of the Closing Sale Price of such securities as of the
Trading Day immediately prior to, the Closing Sale Price as of the Trading Day
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
(the "Change of Control Redemption Price").  Redemptions required by this
Section 5 shall be made in accordance with the provisions of Section 12 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 (together with any
interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(b) (together with any interest thereon) 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 Change of Control 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

 

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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, at the Holder's option, (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 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.  Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Required Holders.  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
Securities) 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 or deemed issuance 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 to the
New Issuance Price.  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

 

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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.

(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 increases or decreases at any time, the Conversion
Price in effect at the time of such increase or decrease 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 increased or decreased
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 increased or decreased 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
increase or decrease.  No adjustment shall be made if such adjustment would
result in an increase of the Conversion Price then in effect.  

 

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(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, the Options will be deemed to
have been issued for a consideration of $.01.  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 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.  If
any Common Stock, Options or Convertible Securities are issued to the owners of
the non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor will be deemed to be
the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be.  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 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 and the fees and expenses of such
appraiser shall be borne by the Company.

(b)

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.

(c)

Voluntary Adjustment By Company. The Company may at any time during the term of
this Note reduce the then current  Conversion Price to any amount and for any
period of time deemed appropriate by the Board of Directors of the Company.

(d)

Milestone Adjustment.  If the Company fails to meet any of the Financial
Milestones (as defined below) (each a "Milestone Failure"), then upon such
Milestone Failure, the then current Conversion Price hereunder shall be reset on
the tenth (10th) Trading Date after the earlier to occur of the applicable
Announcement Date (as defined below) or Announcement Date Deadline (as defined
below) to the lower of (i) the then existing Conversion Price and (ii) the
Average Market Price as of the date that is ten (10) Trading Days after such
Announcement Date or Announcement Date Deadline, as applicable.

"Financial Milestones" means minimum Net Revenue and EBITDA as follows:

 

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(i)

$6.0 million of Net Revenue and $1.625 million of EBITDA reported for the six
month period ending June 30, 2008;

(ii)

$16.5 million of Net Revenue and $4.575 million of EBITDA reported for the
twelve month period ending December 31, 2008;

(iii)

$26.4 million of Net Revenue and $7.3 million of EBITDA reported for the twelve
month period ending December 31, 2009.

(e)

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.

(f)

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)

SECURITY.  This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Securities
Purchase Agreement).

(9)

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.

(10)

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

 

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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 "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.

(11)

REDEMPTION RIGHTS.

(a)

Holder's Right of Optional Redemption.  Following each of the one (1) year
anniversary of the Issuance Date (the "First Redemption Triggering Date") and
the two (2) year anniversary of the Issuance Date (the "Second Redemption
Triggering Date" and together with the First Redemption Date, a "Triggering
Date"), the Holder shall have the right (each a "Holder Optional Redemption"),
in its sole discretion, to require that the Company redeem a Principal amount of
this Note in an amount up to the Available Redemption Amount plus accrued and
unpaid Interest on such Available Redemption Amount plus accrued and unpaid Late
Charges with respect to such Principal and Interest (the "Redemption Amount") by
delivering written notice thereof to the Company within five (5) Business Days
following the applicable Triggering Date (a "Holder Optional Redemption Notice"
and the date the Holder delivers such notice, the "Holder Optional Redemption
Notice Date).  The Company shall redeem any Redemption Amounts within five (5)
Business Days of the Holder Optional Redemption Notice Date (the "Optional
Redemption Date") in cash at a price equal to the applicable Redemption Amount
(the "Holder Optional Redemption Price").  Redemptions made pursuant to this
Section 11 shall be made in accordance with Section 12.  No later than one

 

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(1) Trading Day following any Optional Redemption Date, the Company shall file a
Current Report on Form 8-K describing the terms of the applicable Holder
Optional Redemption.  Notwithstanding the foregoing provisions of this Section
11(a), if the Company meets the applicable Holder Optional Redemption Test and
the Company has previously delivered a written notice certifying that the
applicable Holder Optional Redemption Test has been met and the calculations in
the determination thereof, the Holder shall no longer be entitled to its
redemption rights with respect to the applicable Triggering Date.

"Holder Optional Redemption Test" will be deemed to have been met if there has
been no Equity Conditions Failure and the following conditions are met:

(i)

With respect to the First Triggering Date, if the arithmetic average of the
Weighted Average Price of the Common Stock for each Trading Day during each
consecutive thirty (30) day period following the Initial Effective Date (as
defined in the Registration Rights Agreement) until the First Triggering Date is
greater than 125% 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 the aggregate
dollar trading volume (as reported on Bloomberg) of the Common Stock on the
Principal Market over each such 30 day period is greater than $3.0 million; and

(ii)

With respect to the Second Triggering Date, if the arithmetic average of the
Weighted Average Price of the Common Stock each Trading Day during each of the
two (2) six (6) month periods following the First Triggering Date until the
Second Triggering Date is greater than 125% 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 the aggregate dollar trading volume (as reported on
Bloomberg) of the Common Stock on the Principal Market over such six (6) month
period is greater than $3.0 million.

(b)

Company's Right of Optional Redemption.  

(i)

General.  At any time after the one year anniversary of the Initial Effective
Date and provided there is not an Equity Conditions Failure, the Company shall
have the right to redeem up to 100% of the Conversion Amount of this Note (a
"Company Optional Redemption").  The portion of this Note subject to redemption
pursuant to this Section 11(b) shall be redeemed by the Company in cash at a
price (the "Company Optional Redemption Price") equal to the greater of (i) 125%
of the Conversion Amount being redeemed and (ii) 125% of the product of (x) the
Conversion Amount being redeemed multiplied by (y) the quotient determined by
dividing (1) the greatest Closing Sale Price of the Common Stock during the
period beginning on the date immediately preceding the Company Optional
Redemption Notice Date and ending on the Company Optional Redemption Date, by
(2) the Conversion Price.  The Company may exercise its redemption right under
this Section 11(b) by delivering a written notice thereof by confirmed facsimile
and overnight courier to all, but not less than all, of the holders of the Notes
(the "Company Optional Redemption Notice" and the date such notice is delivered
to all the holders is referred to as the "Company Optional Redemption Notice

 

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Date").  A Company Optional Redemption Notice shall be irrevocable.  Each
Company Optional Redemption Notice shall state the aggregate Principal of the
Notes which the Company has elected to be subject to such Company Optional
Redemption from all of the holders of the Notes pursuant to this Section 11(b)
(and analogous provisions under the Other Notes) on the Company Optional
Redemption Date plus accrued and unpaid Late Charges with respect to such
Principal and Interest (the "Company Redemption Amount").  Upon receipt of a
Company Optional Redemption Notice, the Holder shall deliver to the Company a
written notice no later than three (3) Business Days prior to the date on which
the Company Optional Redemption shall occur (the "Company Optional Redemption
Date") which date shall not be more than seventy-five (75) Business Days after
the Company Optional Redemption Notice Date.

(ii)

Pro Rata Redemption Requirement.  If the Company elects to cause a Company
Optional Redemption pursuant to Section 11(b), then it must simultaneously take
the same action with respect to the Other Notes.  If the Company elects to cause
a Company Optional Redemption pursuant to this Section 11(b) (or similar
provisions under the Other Notes) with respect to less than all of the principal
amount of the Notes then outstanding, then the Company shall require redemption
of a Principal amount from the Holder and each holder of the Other Notes equal
to the product of (A) the aggregate principal amount of Notes which the Company
has elected to cause to be redeemed pursuant to Section 11(b), multiplied by (B)
the fraction, the numerator of which is the sum of the initial principal amount
of Notes purchased by such holder and the denominator of which is the initial
principal amounts of Notes purchased by all holders holding outstanding Notes
(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"); provided that in the event that the
initial holder of any Notes has sold or otherwise transferred 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.

(c)

Redemptions Generally.  Any redemptions made pursuant to this Section 11 shall
be made in accordance with Section 12.  No later than one (1) Trading Day
following any Optional Redemption Date or Company Optional Redemption Date, the
Company shall file a Current Report on Form 8-K describing the terms of such
Holder Optional Redemption or Company Optional Redemption, as the case may be.
To the extent redemptions required by this Section 11 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 11, 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 11 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.

(12)

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

 

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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 applicable Holder Optional Redemption
Price on the applicable Optional Redemption Date and the applicable Company
Optional Redemption Price on the applicable Company Optional Redemption Date.
 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 18(d)) 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 or reinstate this Note, or
issue a new Note (in accordance with Section 18(d)) 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 applicable 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 applicable Redemption Notice is delivered to the
Company and ending on and including the date on which the applicable 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.

(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 11(a) (each, an "Other Redemption
Notice"), the Company shall immediately, but no later than one (1) Business Day
of its receipt thereof, 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 seven (7) Business Day 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 Business Day period.

 

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(13)

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
Corporation Law of the State of Nevada and as expressly provided in this Note.

(14)

COVENANTS.  So long as this Note is outstanding:

(a)

Rank.

All payments due under this Note (A) shall rank pari passu with all Other Notes
and (B) shall be senior to all other Indebtedness of the Company and its
Subsidiaries.

(b)

Incurrence of Indebtedness.  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) other Permitted
Indebtedness.

(c)

Existence of Liens.  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 part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness (other than this Note and the Other Notes), 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; provided that notwithstanding the foregoing, no
principal (or any portion thereof) of any Subordinated Indebtedness may be paid
(whether upon maturity, redemption, acceleration or otherwise) so long as this
Note is outstanding.

(e)

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.

(f)

Creation of New Subsidiaries.  So long as the obligations of the Company under
this Note are outstanding, if the Company shall create or acquire any
Subsidiary, simultaneous with the creation or acquisition of such Subsidiary,
the Company shall (i) promptly cause such Subsidiary to become a guarantor by
executing a guaranty in favor of the Holder in form and substance reasonably
acceptable to the Company, the Subsidiary and the Holder, (ii) promptly cause
such Subsidiary to become a grantor under the Security Agreement by executing a
joinder to the Security Agreement in form and substance reasonably acceptable to
the

 

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Company, the Subsidiary and the Holder, (iii) promptly cause such Subsidiary to
become a pledgor by the Company and such Subsidiary executing a pledge agreement
in form and substance reasonably acceptable to the Company, the Subsidiary and
the Holder, and (iv) promptly cause such Subsidiary to duly execute and/or
deliver such opinions of counsel and other documents, in form and substance
reasonable acceptable to the Holder, as the Holder shall reasonably request with
respect thereto.

(g)

Intellectual Property.  So long as the obligations of the Company under this
Note are outstanding, the Company shall not, and shall not permit any Subsidiary
to, directly or indirectly, (i) assign, transfer or otherwise encumber or allow
any other Person to have any rights or license to any of the Intellectual
Property Rights (as defined in the Securities Purchase Agreement) of the Company
or its Subsidiaries or (ii) take any action or inaction to impair the value of
their Intellectual Property Rights.

(h)

Change in Collateral; Collateral Records.  The Company shall (i)  give the
Collateral Agent (as defined in the Securities Purchase Agreement) not less than
thirty (30) days' prior written notice of any change in the location of any
Collateral (as defined in the Security Documents (as defined in the Securities
Purchase Agreement)), other than to locations set forth on Schedule 14(h) hereto
and with respect to which the Collateral Agent has filed financing statements
and otherwise fully perfected its Liens thereon, (ii) advise the Collateral
Agent promptly, in sufficient detail, of any material adverse change relating to
the type, quantity or quality of the Collateral or the Lien granted thereon and
(iii) execute and deliver, and cause each of its Subsidiaries to execute and
deliver, to the Collateral Agent for the benefit of the Holder and holders of
the Other Notes from time to time, solely for the Collateral Agent's convenience
in maintaining a record of Collateral, such written statements and schedules as
the Collateral Agent may reasonably require, designating, identifying or
describing the Collateral.

(i)

Transactions with Affiliates.  The Company shall not, nor shall it permit any of
its Subsidiaries to, enter into, renew, extend or be a party to, any transaction
or series of related transactions (including, without limitation, the purchase,
sale, lease, transfer or exchange of property or assets of any kind or the
rendering of services of any kind) with any Affiliate, except (i) in the
ordinary course of business in a manner and to an extent consistent with past
practice and necessary or desirable for the prudent operation of its business,
for fair consideration and on terms no less favorable to it or its Subsidiaries
than would be obtainable in a comparable arm's length transaction with a Person
that is not an Affiliate thereof.

(j)

Change in Nature of Business.  The Company shall not make, or permit any of its
Subsidiaries to make, any change in the nature of its business as described in
the Company's most recent annual report filed on Form 10-K or Form 10-KSB with
the SEC.  The Company shall not modify its corporate structure or purpose.

(k)

Preservation of Existence, Etc.  The Company shall maintain and preserve, and
cause each of its Subsidiaries to maintain and preserve, its existence, rights
and privileges, and become or remain, and cause each of its Subsidiaries to
become or remain, duly qualified and in good standing in each jurisdiction in
which the character of the properties owned or leased by it or in which the
transaction of its business makes such qualification necessary.

 

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(l)

Maintenance of Properties, Etc.  The Company shall maintain and preserve, and
cause each of its Subsidiaries to maintain and preserve, all of its properties
which are necessary or useful in the proper conduct of its business in good
working order and condition, ordinary wear and tear excepted, and comply, and
cause each of its Subsidiaries to comply, at all times with the provisions of
all leases to which it is a party as lessee or under which it occupies property,
so as to prevent any loss or forfeiture thereof or thereunder.

(m)

Maintenance of Insurance.  The Company shall maintain, and cause each of its
Subsidiaries to maintain, insurance with responsible and reputable insurance
companies or associations (including, without limitation, comprehensive general
liability, hazard, rent and business interruption insurance) with respect to its
properties (including all real properties leased or owned by it) and business,
in such amounts and covering such risks as is required by any governmental
authority having jurisdiction with respect thereto or as is carried generally in
accordance with sound business practice by companies in similar businesses
similarly situated and in any event in amount, adequacy and scope reasonably
satisfactory to the Collateral Agent.  All policies covering the Collateral are
to be made payable to the Collateral Agent for the benefit of the Holder and the
holder of the Other Notes, as its interests may appear, in case of loss, under a
standard non-contributory "lender" or "secured party" clause and are to contain
such other provisions as the Collateral Agent may require to fully protect the
interest of the Holder and the holder of the Other Notes in the Collateral and
to any payments to be made under such policies.  All certificates of insurance
are to be delivered to the Collateral Agent and the policies are to be premium
prepaid, with the loss payable and additional insured endorsement in favor of
the Collateral Agent and such other Persons as the Collateral Agent may
designate from time to time, and shall provide for not less than 30 days' prior
written notice to the Collateral Agent of the exercise of any right of
cancellation.  If the Company or any of its Subsidiaries fails to maintain such
insurance, the Collateral Agent may arrange for such insurance, but at the
Company's expense and without any responsibility on the Collateral Agent's part
for obtaining the insurance, the solvency of the insurance companies, the
adequacy of the coverage, or the collection of claims.  Upon the occurrence and
during the continuance of an Event of Default, the Collateral Agent shall have
the sole right, in the name of the Holder and the holders of the Other Notes,
the Company and its Subsidiaries, to file claims under any insurance policies,
to receive, receipt and give acquittance for any payments that may be payable
thereunder, and to execute any and all endorsements, receipts, releases,
assignments, reassignments or other documents that may be necessary to effect
the collection, compromise or settlement of any claims under any such insurance
policies.

(n)

Operating Results Announcement.  The Company shall announce (the date of such
announcement, the "Announcement Date") its operating results (the "Operating
Results") from which achievement of each Financial Milestone can be determined
no later than (x) with respect to a Financial Milestone for a six month period
ended June 30th (the "LSM Period"), the forty-fifth (45th) day after the end of
such Fiscal Quarter ended June 30th or, (y) with respect to a Financial
Milestone for the twelve month period ended December 31st (the "LTM Period", and
together with the LSM Period, the "Milestone Periods"), the ninetieth (90th) day
after the last Fiscal Quarter of such fiscal year (each such date, the
"Announcement Date Deadline"), including, without limitation, the EBITDA and Net
Revenue for such Milestone Period, and, in the event the Company shall have
achieved the Financial Milestone, such announcement shall include a statement to
the effect that the Company has

 

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achieved the Financial Milestone for such Milestone Period ended as of such
Fiscal Quarter; provided, however, that in the event the Company is delayed in
announcing its Operating Results for any such Fiscal Quarter, the Company shall,
in lieu of the foregoing, (i) publicly disclose (the "Interim Announcement") on
a Current Report on Form 8-K on or prior to the applicable Announcement Date
Deadline that it has complied with all of its covenants under the Notes,
including, without limitation, the achievement of the Financial Milestone for
such Milestone Period ended as of such Fiscal Quarter and (ii) provide to the
Holders a certification, in accordance with terms of the next sentence,
certifying the same; provided, further, that if (A) the Company does not make
the Interim Announcement by the applicable deadline or (B) subsequently, at the
time of announcement of its Operating Results for such Fiscal Quarter, such
Operating Results report EBITDA and Net Revenue for the applicable Milestone
Period which are less than those set forth in the Interim Announcement, then, in
each case, the Company shall be deemed to have failed to achieve the applicable
Financial Milestone.  On each Announcement Date or Interim Announcement Date,
the Company shall also provide to the Holders a certification, executed on
behalf of the Company by the Chief Financial Officer of the Company, certifying
that the Company achieved the applicable Financial Milestone and, in the case of
the Interim Announcement Date, setting for the EBITDA and Net Revenue for the
applicable Milestone Period required by the foregoing sentence.

(15)

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.

(16)

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.  No consideration shall be offered or paid to any holder of
Notes to amend or consent to a waiver or modification of the Notes unless the
same consideration also is offered to all of the holders of Notes.

(17)

TRANSFER.  This Note and any shares of Common Stock issued upon conversion of
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.

(18)

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 18(d)),
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 18(d)) to
the Holder representing the outstanding Principal not being transferred.  The

 

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Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
i) by reason of the provisions of Section 3(c)(iii) 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 and ii)
it will be bound by the appointment of the Collateral Agent (as defined in the
Securities Purchase Agreement) and collateral agency provisions regarding such
appointment as set forth in Section 4(o) of the Securities Purchase Agreement.

(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 18(d)) representing the outstanding Principal.

(c)

Note Exchangeable for Different Denominations.  This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a
new Note or Notes (in accordance with Section 18(d)) representing in the
aggregate the outstanding Principal of this Note, and each such new Note will
represent such portion of such outstanding Principal as is designated by the
Holder at the time of such surrender.

(d)

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 18(a) or Section 18(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, if any, on the Principal and Interest of this Note
from the Issuance Date.

(19)

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.

 

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(20)

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,
financial advisory fees and attorneys' fees and disbursements.

(21)

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.

(22)

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.

(23)

DISPUTE RESOLUTION.  In the case of a dispute as to the determination of (a) the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or (b)
the arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt, or deemed 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 one (1) Business
Day of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within one (1) Business Day 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.

(24)

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

 

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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 purposes of determining the amount of Interest due on such date.  Any amount
of Principal or other amounts due under the Transaction Documents 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 eighteen
percent (18%) per annum from the date such amount was due until the same is paid
in full ("Late Charge").

(25)

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

(26)

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.

(27)

GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL.  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

 

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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.

(28)

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

(a)

"Approved Stock Plan" means any employee benefit plan which has been or
hereafter is approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer or
director for services provided to the Company.

(b)

"Available Redemption Amount" means on each Triggering Date, an amount equal to
one-third (1/3rd) of the original Principal amount of this Note on the Issuance
Date.

(c)

"Average Market Price" means, for any given date, the lesser of (i) the
arithmetic average of the lowest Weighted Average Price of the Common Stock
during the twenty-five (25) consecutive Trading Days ending on the Trading Day
immediately prior to such given date (the "Measuring Period") and (ii) the
arithmetic average of the Weighted Average Price of the Common Stock of the
three (3) Trading Days with the lowest Weighted Average Price of the Common
Stock during the Measuring Period; provided, that all such determinations shall
be appropriately adjusted for any stock split, stock dividend, stock combination
or other similar transaction that proportionately decreases or increases the
Common Stock during such periods.

(d)

"Bloomberg" means Bloomberg Financial Markets.

(e)

"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.

(f)

"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

 

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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.

(g)

"Capital Lease" means, with respect to any Person, any lease of (or other
agreement conveying the right to use) any real or personal property by such
Person that, in conformity with GAAP, is accounted for as a capital lease on the
balance sheet of such Person.

(h)

"Change of Control" means any Fundamental Transaction other than iii) any
reorganization, recapitalization or reclassification of the Common Stock, 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 iv) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company, or v) any
Fundamental Transaction in which the Holder is the Person or part of the group
of Persons described in clauses (i)(A) - (D) or clause (ii) of the definition
thereof.

(i)

"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
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 23.  All such determinations
to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation
period.

(j)

"Closing Date" shall have the meaning set forth in the Securities Purchase
Agreement which corresponds to the date this Note and the Other Notes were
initially issued pursuant to the terms of the Securities Purchase Agreement.

(k)

"Consolidated Net Income" means, for any applicable period, the net income
(loss) of the Company and its Subsidiaries for such period, determined on a

 

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consolidated basis and in accordance with GAAP, but excluding from the
determination of Consolidated Net Income (without duplication) vi) any
extraordinary or non recurring gains or losses, vii) any gains or losses from
dispositions, viii) restructuring charges, ix) any tax refunds, net operating
losses or other net tax benefits and x) effects of discontinued operations.

(l)

"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.

(m)

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

(n)

"EBITDA" means, for any period, Consolidated Net Income for such period plus, to
the extent deducted in determining such Consolidated Net Income, Net Interest
Expense, income tax expense, depreciation, amortization and any non-cash
extraordinary charges for such period, minus the sum of extraordinary cash
losses and cash losses from discontinued operations to the extent such sum is in
excess of the sum of extraordinary cash gains and cash gains from discontinued
operations.

(o)

"Eligible Market" means the Principal Market, The New York Stock Exchange, Inc.,
the American Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global
Market or The NASDAQ Capital Market, or any market that is a successor to any of
the foregoing.

(p)

"Equity Conditions" means that each of the following conditions is satisfied:
 (i) on each day during the period beginning six (6) month 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 and exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; (ii) on each day 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 one (1)
year period ending on and including the date immediately preceding the
applicable date of determination, the Company shall have delivered shares of
Common Stock upon conversion of the Notes and upon

 

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exercise of the Warrants to the holders on a timely basis as set forth in
Section 3(c)(ii) hereof (and analogous provisions under the Other Notes) and
Section 1(a) of the Warrants; (iv) any applicable shares of Common Stock to be
issued in connection with the event requiring determination may be issued in
full without violating (A) Section 3(d)(i) hereof, (B) Section 3(d)(ii) and (C)
the rules or regulations of the Principal Market or any applicable Eligible
Market; (v) the Company shall not have failed to timely 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 (C) 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 and shares of
Common Stock issuable upon exercise of the Warrants 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 compliance with and
shall not have breached any provision, covenant, representation or warranty of
any Transaction Document.

(q)

"Equity Conditions Failure" means that xi) on any day during the period
commencing ten (10) Trading Days prior to the applicable Interest Notice Date
through the applicable Interest Date or xii) on any day during the period
commencing ten (10) Trading Days prior to the applicable Company Optional
Redemption Notice Date through the applicable Company Optional Redemption Date,
the Equity Conditions have not been satisfied (or waived in writing by the
Holder).

(r)

"Equity Value Redemption Premium" means for any Change of Control Notice or
Event of Default Notice, as applicable, delivered or required to be delivered in
connection with a Change of Control or Event of Default, as applicable, 125%.

(s)

"Excluded Securities" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion of the Notes or
the exercise of the Warrants; and (iii) in connection with any stock split,
stock dividend, recapitalization or similar transaction by the Company for which
adjustment is made pursuant to Section 7(b).

(t)

"Fiscal Quarters" means each of the fiscal quarters adopted by the Company for
financial reporting purposes that correspond to the Company's fiscal year that
ends on December 31, or such other fiscal quarter adopted by the Company for
financial reporting purposes in accordance with GAAP.

(u)

"Fundamental Transaction" means that (i) the Company shall, directly or
indirectly, in one or more related transactions, (A) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another Person
or Persons, if the holders of the Voting Stock (not including any shares of
Voting Stock held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such

 

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consolidation or merger) immediately prior to such consolidation or merger shall
hold or have the right to direct the voting of less than 50% of the Voting Stock
or such voting securities of such other surviving Person immediately following
such transaction, or (B) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the Company to another
Person, or (C) 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 Voting Stock (not including any shares of Voting 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 (D) 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 the
outstanding shares of Voting Stock (not including any shares of Voting 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 purchase
agreement or other business combination), (E) reorganize, recapitalize or
reclassify its Common Stock or (ii) 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 50% of the aggregate Voting Stock of the Company.

(v)

"GAAP" means United States generally accepted accounting principles,
consistently applied.

(w)

"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 GAAP (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 which, in connection with
GAAP, consistently applied for the periods covered thereby, is classified as a
capital lease, (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.

(x)

"Interest Conversion Price" means, with respect to any Interest Date that price
which shall be the price computed as 85% of the Average Market Price immediately
preceding the applicable Interest Date (an "Interest Measuring Period").  All
such

 

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determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction that proportionately decreases or
increases the Common Stock during the applicable Interest Measuring Period.

(y)

"Interest Rate" means, eight and three-quarters percent (8.75%) per annum,
subject to adjustment as set forth in Section 2 hereof.

(z)

"Net Interest Expense" means, for any period, the consolidated interest expense
of the Company and its Subsidiaries for such period (including all imputed
interest on Capital Leases, but excluding payment-in-kind interest) net of any
interest income..

(aa)

"Net Revenue" means, the amount set forth in the line item entitled "Net
Revenue" for the twelve (12) month period ended on the last day of that Fiscal
Quarter in the Company's publicly available financial statements filed with the
SEC in a Quarterly Report on Form 10-Q or Form 10-QSB or an Annual Report on
Form 10-K or Form 10- KSB, in each case as prepared in accordance with GAAP.

(bb)

"Options" means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.

(cc)

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

(dd)

"Permitted Indebtedness" means xiii) 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, and which Indebtedness does not provide at
any time for (1) the payment, prepayment, repayment, repurchase or defeasance,
directly or indirectly, of any principal or premium, if any, thereon until
ninety-one (91) days after the Maturity Date or later and (2) total interest and
fees at a rate in excess of the initial Interest Rate per annum (such
Indebtedness, the "Subordinated Indebtedness"); provided, however, that any
Subordinated Indebtedness incurred in connection with the repayment of the Notes
in full shall not be limited by clause (B) of the foregoing, xiv) Indebtedness
secured by Permitted Liens, xv) Indebtedness under this Note and the Other
Notes, and xvi) extensions, refinancings and renewals of any items in clauses
(i) and (ii) above, provided that the principal amount is not increased or the
terms modified to impose more burdensome terms upon the Company or its
Subsidiaries, as the case may be.

(ee)

"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

 

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proceedings, (iv) Liens (A) upon or in any equipment (as defined in the Security
Agreement) 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, (v) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (i) and (iv) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the Indebtedness being extended, renewed or
refinanced does not increase, (vi) Liens securing the Company's obligations
under the Notes; (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)(viii).

(ff)

"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.

(gg)

"Principal Market" means the OTC Bulletin Board.

(hh)

"Redemption Notices" means, collectively, any Event of Default Redemption
Notices, any Change of Control Redemption Notices, any Holder Optional
Redemption Notices and Company Optional Redemption Notices, each of the
foregoing, individually, a Redemption Notice.

(ii)

"Redemption Premium" means (i) in the case of the Events of Default described in
Section 4(a)(i) - (vi) and (ix) - (xvii), 125% or (ii) in the case of the Events
of Default described in Section 4(a)(vii) - (viii), 100%.

(jj)

"Redemption Prices" means, collectively, the Event of Default Redemption Price,
Change of Control Redemption Price, the Holder Optional Redemption Price and the
Company Optional Redemption Price each of the foregoing, individually, a
Redemption Price.

(kk)

"Registration Statement" means the registration statements required to be filed
pursuant to the Registration Rights Agreement.

(ll)

"Registration Rights Agreement" means that certain Registration Rights Agreement
dated as of the Subscription Date by and among the Company and the initial
holders of the Notes.

(mm)

"Required Holders" means the holders of Notes representing at least majority of
the aggregate principal amount of the Notes then outstanding.

 

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(nn)

"SEC" means the United States Securities and Exchange Commission.

(oo)

"Securities Purchase Agreement" means that certain securities purchase agreement
dated as of the Subscription Date by and among the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes and
Warrants.

(pp)

"Subscription Date" means December [●], 2007.

(qq)

"Subsidiary" means any entity in which the Company, directly or indirectly, owns
any of the capital stock or holds an equity or similar interest.  

(rr)

"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.

(ss)

"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).

(tt)

"Volume Limitation" means 20% of the aggregate dollar trading volume (as
reported on Bloomberg) of the Common Stock on the Principal Market over the
twenty (20) consecutive Trading Day period immediately prior to the applicable
Interest Notice Date.

(uu)

"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).

(vv)

"Warrants" has the meaning ascribed to such term in the Securities Purchase
Agreement, and shall include all warrants issued in exchange therefor or
replacement thereof.

(ww)

"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

 

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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 23.  All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

(29)

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 shall indicate to the 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]

 

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

CHINA VOIP & DIGITAL TELECOM INC.

By:

Name:

Title:

 

 

 

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EXHIBIT I

CHINA VOIP & DIGITAL TELECOM INC.

CONVERSION NOTICE

Reference is made to the Senior Secured Convertible Note (the "Note") issued to
the undersigned by CHINA VOIP & DIGITAL TELECOM 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") of the Company, 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
Integrity Stock Transfer to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated December [●],
2007 from the Company and acknowledged and agreed to by Integrity Stock
Transfer.

CHINA VOIP & DIGITAL TELECOM INC.

By:

Name:

Title:

10573169.3

 

 

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SCHEDULE 14(h)

Change in Collateral

10573169.3