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, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR
RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE.
 
NATURAL NUTRITION, INC.
 
SECURED CONVERTIBLE NOTE
 

Issuance Date: May 31, 2007
 Original Principal Amount:
U.S. $9,292,894.00

 
FOR VALUE RECEIVED, NATURAL NUTRITION, INC., a Nevada corporation (the
“Company”), hereby promises to pay to the order of CORNELL CAPITAL PARTNERS,
L.P. or its registered assigns (“the 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), on any Installment Date with respect to the
Installment Amount due on such Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on the 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), any Installment Date or the Maturity Date or
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Secured Convertible Note (including all convertible
notes issued in exchange, transfer or replacement hereof, this “Note”) is issued
pursuant to the Securities Purchase Agreement on the Closing Date. Certain
capitalized terms used herein are defined on Exhibit A hereto. Capitalized terms
not otherwise defined herein shall have the respective meanings ascribed to such
terms in the Securities Purchase Agreement.
 
The obligations of the Company to the Holder as evidenced by this Note are
secured by (x) the collateral identified and described as security therefor in
the Amended and Restated Security Agreement of even date herewith (the “Security
Agreement”) executed by the Company in favor of the Holder, and (y) the Guaranty
and related General Security Agreement, of even date herewith, each executed by
INII in favor of the Holder.
 

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(1)  PAYMENTS OF PRINCIPAL. (a) Beginning January 1, 2008, on each Installment
Date the Company shall pay to the Holder as a repayment of Principal hereunder
an amount in cash equal to the Installment Amount.
 
(b) 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 on such Principal and Interest. The “Maturity Date”
means, unless extended by the Holder, the earlier of (i) June 1, 2012, (ii) the
consummation of a Change of Control and (iii) the occurrence of an Event of
Default or any event that with the passage of time and the failure to cure would
result in an Event of Default.
 
(c) The Company may prepay this Note at any time upon not less than thirty (30)
days prior written notice to the Holder; provided, that any such prepayments
shall applied first to unpaid Late Charges on Principal and Interest, if any,
then to unpaid Interest and then unpaid Principal.
 
(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 compounded monthly and added
to the unpaid Principal hereunder. Unless required to be paid sooner hereunder,
accrued and unpaid Interest shall be payable at Maturity. From and after the
occurrence and during the continuance of an Event of Default, the Interest Rate
shall be increased from twelve percent (12%) to eighteen percent (18%). 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.
 
(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”).
 
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(i) “Conversion Amount” means the portion of the Principal to be converted,
redeemed or otherwise with respect to which this determination is being made.
 
(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or
other date of determination, the lesser or (x) $0.05, subject to adjustment as
provided herein, and (y) 80% of the lowest daily Weighted Average Price of the
Common Stock during the five (5) Trading Days immediately preceding the
conversion date.
 
(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) a copy of an executed notice of conversion in
the form attached hereto as Exhibit B (the “Conversion Notice”) to the Company
and (B) if required by this Section 3(c), surrender this Note to the Company (or
an indemnification undertaking with respect to this Note in the case of its
loss, theft or destruction). Promptly following (but in any event not more than
one Business Day following the date of receipt of a Conversion Notice), the
Company shall transmit by facsimile a confirmation of receipt of such Conversion
Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”). On
or before the second Business Day following the date of receipt of a Conversion
Notice (the “Share Delivery Date”), the Company shall (1) (X) if legends are not
required to be placed on certificates of Common Stock pursuant to the Securities
Purchase Agreement and provided that the Transfer Agent is participating in the
Depository Trust Company’s (“DTC”) Fast Automated Securities Transfer Program,
credit such aggregate number of shares of Common Stock to which the Holder shall
be entitled to the Holder’s or its designee’s balance account with DTC through
its Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is
not participating in the DTC Fast Automated Securities Transfer Program, issue
and deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock to which the Holder shall be entitled which certificates shall
not bear any restrictive legends unless required pursuant to the Securities
Purchase Agreement; and (2) pay to the Holder in cash an amount equal to the
accrued and unpaid Interest on the Conversion Amount up to and including the
Conversion Date. If this Note is physically surrendered for conversion as
required by this Section 3(c) 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 five
(5) Business Days after receipt of this Note and at its own expense, issue and
deliver to the holder a new Note 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.
In the event of a partial conversion of this Note pursuant hereto, the principal
amount converted shall be deducted from the Installment Amounts relating to the
Installment Dates as set forth in the Conversion Notice.
 
(ii)  Company’s Failure to Timely Convert. If within five (5) 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 (a “Conversion Failure”), and if on or after such Trading Day the Holder
purchases (in an open market transaction or otherwise) Common Stock to deliver
in satisfaction of a sale by the Holder of Common Stock issuable upon such
conversion that the Holder anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within five (5) Business Days after the Holder’s request
and in the Holder’s discretion, either (i) pay cash to the Holder in an amount
equal to the Holder’s total purchase price (including brokerage commissions and
other out of pocket expenses, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Common Stock and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of
(A) such number of shares of Common Stock, times (B) the Closing Bid Price on
the Conversion Date.
 
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(iii)  Book-Entry. Notwithstanding anything to the contrary set forth herein,
upon conversion of any portion of this Note in accordance with the terms hereof,
the Holder shall not be required to physically surrender this Note to the
Company unless (A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
this Note upon physical surrender of this Note. The Holder and the Company shall
maintain records showing the Principal, Interest and Late Charges converted and
the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Note upon conversion.
 
(d)  Limitations on Conversions - 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, 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 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
Annual Report on Form 10-KSB, Quarterly Report on Form 10-QSB or Current Report
on Form 8-K, as the case may be (y) a more recent public announcement by the
Company or (z) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason at any
time, upon the written request of the Holder, the Company shall within one (1)
Business Day confirm in writing to the Holder the number of shares of Common
Stock then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
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.
 
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(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) calendar 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 ten (10) consecutive days (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement) or for
more than an aggregate of thirty (30) days in any 365-day period (other than
days during an Allowable Grace Period);
 
(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, 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,
other than pursuant to Section 3(d);
 
(iv) at any time following the tenth (10th) consecutive Business Day following
the Company’s failure to have a sufficient number of shares of Common Stock
authorized and available for delivery to the Holder upon a conversion of the
full Conversion Amount of this Note (without regard to any limitations on
conversion set forth in Section 3(d) or otherwise);
 
(v) the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Note, any
other indebtedness of the Company or any of its Subsidiaries to the Holder, 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 ten (10) Business Days;
 
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(vi) the occurrence of 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) which,
individually or in the aggregate, exceeds $100,000;
 
(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 $100,000 are rendered against the Company or any of its Subsidiaries
and which judgments are not, within sixty (60) calendar days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within sixty (60) calendar days after the expiration of such stay;
 
(x) the Company or any Subsidiary breaches any representation, warranty,
covenant or other term or condition of this Note, any other indebtedness or
agreement of the Company or any of its Subsidiaries with the Holder, or any
Transaction Document, which breach has or is likely to have a cost or adverse
impact on the Company or the Holder in excess of $100,000, except, in the case
of a breach of a covenant or other term or condition which is curable, only if
such breach continues for a period of at least five (5) consecutive Business
Days;
 
(xi) the Company’s breach or failure in any material respect to comply with any
covenant in this Note; or
 
(xii) any Event of Default (as defined in the Subsidiary Note) occurs with
respect to the Subsidiary Note.
 
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(b)  Redemption Right. Upon the occurrence of an Event of Default with respect
to this Note or the Subsidiary Note, the Company shall within five (5) Business
Days 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, in addition to any other rights or remedies
available to it, including enforcing its rights under the Security Agreement,
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the “Event of Default Redemption Notice”) to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this Section 4(b) shall be redeemed by the
Company at a price equal to the greater of (i) the product of (A) the sum of the
Conversion Amount to be redeemed together with accrued and unpaid Interest with
respect to such Conversion Amount and accrued and unpaid Late Charges with
respect to such Conversion Amount and Interest and (B) the Redemption Premium
and (ii) the product of (A) the Conversion Rate with respect to such sum of the
Conversion Amount together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest 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 greater of (x) the Closing Sale Price of the
Common Stock on the date immediately preceding such Event of Default, (y) the
Closing Sale Price of the Common Stock on the date immediately after such Event
of Default and (z) the Closing Sale Price of the Common Stock 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 4(c). 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. In the event of a partial
redemption of this Note pursuant hereto, the principal amount redeemed shall be
deducted from the Installment Amounts relating to the applicable Installment
Dates as set forth in the Event of Default Redemption Notice. 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.
 
(c)  Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder within five (5) Business Days after the Company’s
receipt of the Holder’s Event of Default Redemption Notice. 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 14(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 applicable Redemption Notice
shall be null and void with respect to such Conversion Amount, (y) the Company
shall immediately return this Note, or issue a new Note (in accordance with
Section 14(d)) to the Holder representing the sum of such Conversion Amount to
be redeemed together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest 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.
 
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(5)  RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL. 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
reasonably satisfactory to the Holder and approved by the Holder (which such
approval shall not be unreasonably withheld) prior to such Fundamental
Transaction, including agreements to deliver to the Holder of the Note in
exchange for such Note a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to the Note, and
reasonably satisfactory to the Holder 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 (a “Public Successor Entity”).
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 of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion of the
Note prior to such Fundamental Transaction, such shares of the publicly traded
common stock (or their equivalent) of the Successor Entity (including its Parent
Entity), as adjusted in accordance with the provisions of this Note. The
provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
on the conversion of this Note.
 
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(6)  RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
 
(a)  Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
 
(b)  Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, 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. The provisions of this Section shall apply similarly and
equally to successive Corporate Events and shall be applied without regard to
any limitations on the conversion or redemption of this Note.
 
(7)  RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
 
(a)  Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Subscription Date, the Company issues or sells, or in
accordance with this Section 7(a) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company, but excluding shares of Common
Stock deemed to have been issued or sold by the Company in connection with any
Excluded Security) for a consideration per share less than a price equal to the
Conversion Price in effect immediately prior to such issue or sale (such price
the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately
after such Dilutive Issuance the Conversion Price for purposes of
Section 3(b)(ii)(x) then in effect shall be reduced to an amount equal to the
product of (A) the Conversion Price for purposes of Section 3(b)(ii)(x) in
effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1)  the sum of (I) the product derived by multiplying
the Conversion Price for purposes of Section 3(b)(ii)(x) in effect immediately
prior to such Dilutive Issuance and the number of shares of Common Stock Deemed
Outstanding immediately prior to such Dilutive Issuance plus (II) the
consideration, if any, received by the Company upon such Dilutive Issuance, by
(2) the product derived by multiplying (I) the Conversion Price for purposes of
Section 3(b)(ii)(x) in effect immediately prior to such Dilutive Issuance by
(II) the number of shares of Common Stock Deemed Outstanding immediately after
such Dilutive Issuance. For purposes of determining the adjusted Conversion
Price under this Section 7(a), the following shall be applicable:
 
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(i)  Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share. For purposes of
this Section 7(a)(i), the “lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion or
exchange or exercise of any Convertible Securities issuable upon exercise of
such Option” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon granting or sale of the Option, upon exercise of the Option
and upon conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of such
Convertible Securities.
 
(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.
 
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(iii)  Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be adjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
Subscription Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change. No adjustment shall be
made if such adjustment would result in an increase of the Conversion Price then
in effect.
 
(iv)  Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for the difference of (x) the aggregate fair market value of
such Options and other securities issued or sold in such integrated transaction,
less (y) the fair market value of the securities other than such Option, issued
or sold in such transaction and the other securities issued or sold in such
integrated transaction will be deemed to have been issued or sold for the
balance of the consideration received by the Company. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the gross amount raised by the Company; provided, however, that such gross
amount is not greater than 110% of 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 Holder. If such parties are unable to reach
agreement within ten (10) calendar 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) calendar day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Holder. 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.
 
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(v)  Record Date. If the Company takes a record of the holders of Common Stock
for the purpose of entitling them (A) to receive a dividend or other
distribution payable in Common Stock, Options or in Convertible Securities or
(B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
 
(b)  Adjustment of Conversion Price upon Subdivision or Combination of Common
Stock. If the Company at any time on or after the Subscription Date subdivides
(by any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time on or after the
Subscription Date combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination will be proportionately increased.
 
(c)  Other Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company’s
Board of Directors (the “Board”) 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)  NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles 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.
 
(9)  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 equal to 130% of the
Conversion Rate with respect to the Conversion Amount of the Note as of the
Issuance Date. So long as the Note is 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
Note, 130% of the number of shares of Common Stock as shall from time to time be
necessary to effect the conversion of the Note; 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”).
 
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(b)  Insufficient Authorized Shares. If at any time while the Note remains
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 Note 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. 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 ninety (90) calendar
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
“Authorized Share Failure Deadline”), 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 the Board to recommend to the stockholders that they approve such
proposal.
 
(10)  COVENANTS.
 
(a)  Rank. All payments due under this Note shall be senior to all other
Indebtedness of the Company and its Subsidiaries other than Permitted
Indebtedness of the type described in clause (iii) of the definition thereof.
 
(b)  Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and the
Subsidiary Note and (ii) other Permitted Indebtedness.
 
(c)  Existence of Liens. So long as this Note is outstanding, the Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, “Liens”) other than Permitted Liens.
 
(d)  Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, (i) 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
Permitted Indebtedness, 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, (i) an
event constituting an Event of Default has occurred and is continuing or (ii) an
event that with the passage of time and without being cured would constitute an
Event of Default has occurred and is continuing, or (iii) make any payments to
Turnaround Partners, Inc. (“TAP”), Corporate Strategies, Inc. (“CSI”) or any of
their members, partners, employees, stockholders, or any of their respective
affiliates, except (1) with the prior consent of the Holder, (2) pursuant to
either that certain Employment Agreement, dated as of the date hereof, by and
among the Company and Fred S. Zeidman or that certain Agreement, dated as of the
date hereof, by and among the Company, Timothy J. Connolly on behalf of CSI, and
the Holder (relating to the payment to Turnaround Partners, Inc., an affiliate
of the Company, of shares of common stock of INII representing ten percent (10%)
of the common stock of INII outstanding as of the date hereof), in each case as
in effect on the date hereof, (3) reasonable rent and overhead charges allocable
to the Company in respect of shared space with CSI, (4) so long as Mr. Connolly
is serving as CEO of the Company, the reimbursement to Mr. Connolly for all
direct expenses incurred by Mr. Connolly in connection with such service and
(5) payments by CSI Business Finance, Inc. (“CSIBF”) to Mr. Connolly for
compensation payable to Mr. Connolly solely out of cash generated from CSIBF’s
operations.
 
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(e)  Restriction on Redemption and Cash Dividends. Until the Note has been
converted, redeemed or otherwise satisfied in full in accordance with its 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 Holder.
 
(f)  Restriction on Mergers, Etc.. Until the Note has been converted, redeemed
or otherwise satisfied in full in accordance with its terms, the Company shall
not, directly or indirectly, (i) subject to Section 5 of this Note, merge,
dissolve, liquidate, consolidate with or into another person, or dispose of or
otherwise transfer (whether in one transaction or in a series of transactions)
all or substantially all of its assets (whether now owned or hereafter acquired)
to or in favor of any person, or (ii) acquire any assets or business or any
interest in any person or entity in excess of $100,000, except for purchases of
inventory, raw materials and equipment in the ordinary course of business.
 
(g)  Financial Covenants.
 
(i)  EBITDA Test. So long as this Note is outstanding, for each accounting
period identified on Exhibit C hereto, the Company shall maintain EBITDA for
such accounting period which equals or exceeds the applicable EBITDA Threshold
for such accounting period (the “EBITDA Test”).
 
(ii)  Operating Results Announcement. The Company shall announce its operating
results (the “Operating Results”) from which compliance with the EBITDA Test can
be determined for each accounting period no later than the forty-fifth (45th)
calendar day after the end of the applicable accounting period or, with respect
to any fiscal year, the ninetieth (90th) calendar day after the end of such
fiscal year (the “Announcement Date”) and, in the event the Company shall have
satisfied the EBITDA Test at all times during the applicable accounting period,
such announcement shall include a statement to the effect that the Company
satisfied the EBITDA Test at all times throughout such accounting period;
provided, however, that in the event the Company is delayed in announcing its
Operating Results for any accounting period, by the Announcement Date the
Company shall, in lieu of the foregoing, (A) make a statement to the effect that
it has complied with all of its covenants under the Note, including, without
limitation, the EBITDA Test, and (B) provide to the Holder a certification, in
accordance with terms of the next sentence, certifying the same. On the
Announcement Date, the Company shall also provide to the Holder a certification,
executed on behalf of the Company by the Chief Financial Officer of the Company,
certifying that the Company satisfied the EBITDA Test at all times throughout
the applicable accounting period.
 
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Until the Note has been converted, redeemed or otherwise satisfied in full in
accordance with its 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 Holder.
 
(11)  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.
 
(12)  AMENDMENT. No provision of this Note or the Subsidiary Note shall be
altered, amended or waived without the prior written consent of the Holder.
 
(13)  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 applicable
securities laws.
 
(14)  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, subject to the
satisfaction of the transfer provisions of applicable securities laws, forthwith
issue and deliver upon the order of the Holder a new Note (in accordance with
subsection (d) of this Section), registered in the name of the registered
transferee or assignee, 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 subsection (d) of this Section) to
the Holder representing the outstanding Principal not being transferred.
 
(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
subsection (d) of this Section) 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 subsection (d) of this Section)
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.
 
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(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 subsection (a) or (c) of this Section), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.
 
(15)  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.
 
(16)  PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys’ fees and disbursements.
 
(17)  CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and the Holder 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.
 
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(18)  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.
 
(19)  DISPUTE RESOLUTION. In the case of a dispute as to the determination of
the Closing Bid Price, the Closing Sale Price or the Weighted Average Price or
the arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within five (5) Business Days 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 five (5) Business
Days of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within two (2) Business Days submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or the Weighted Average Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or any Redemption Price to the
Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five (5) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.
 
(20)  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 the
Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore. Without
limiting the generality of the foregoing, the Company will give written notice
to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.
 
(b)  Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing; 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, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of twenty percent (20%) per annum from the date such amount
was due until the same is paid in full (“Late Charge”).
 
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(21)  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.
 
(22)  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.
 
(23)  GOVERNING LAW. This Note shall be construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the internal laws of the
State of New Jersey, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New Jersey or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New Jersey. The Company hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of Jersey City, New Jersey for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Company
in any other jurisdiction to collect on the Company’s obligations to the Holder,
to realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court ruling in favor of the Holder. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.
 
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(24)  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 four (4) Business Days after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its Subsidiaries, the
Company so shall indicate to 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. In the event
of a breach of the foregoing covenant by the Company, any of its Subsidiaries,
or any of its or their respective officers, directors, employees and agents, in
addition to any other remedy provided herein or in the Transaction Documents,
the Holder shall have the right to make a public disclosure, in the form of a
press release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any
of its or their respective officers, directors, employees or agents. The Holder
shall have no liability to the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees, stockholders or agents for any such
disclosure.
 
[Signature Page Follows]
 
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IN WITNESS WHEREOF, the Company has caused this Secured Convertible Note to be
duly executed as of the Issuance Date set out above.
 

       
NATURAL NUTRITION, INC.
 
   
   
    By:   /s/ Timothy J. Connolly  

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Name: Timothy J. Connolly
Title: Chief Executive Officer

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Exhibit A - Certain Definitions
 
For purposes of the Secured Convertible Note dated May 31, 2007 issued by
Natural Nutrition, Inc. to Cornell Capital Partners, L.P., the following terms
shall have the following meanings:
 
(a) “Approved Stock Plan” means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, consultant, officer or
director for services provided to the Company; provided, that, as a condition to
any issuances thereunder, each grantee shall enter into an agreement
substantially in the form of the Lock-Up Agreements. The foregoing lock-up shall
not apply to grantees who are independent directors, employees or consultants
provided they are not affiliated with TAP, CSI, or any of their members,
partners, stockholders, or any of their respective affiliates.
 
(b) “Bloomberg” means Bloomberg Financial Markets.
 
(c) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in the City of Newark, New Jersey are authorized or
required by law to remain closed.
 
(d) “Change of Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock or
business combination in which the Company is the publicly traded surviving
entity in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification or business combination
continue after such reorganization, recapitalization or reclassification or
business combination to hold publicly traded securities and, directly or
indirectly, the voting power of the surviving entity or entities necessary to
elect a majority of the members of the board of directors (or their equivalent
if other than a corporation) of such entity or entities, or (ii) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company.
 
(e) “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 19. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.
 
-21-

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(f) “Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued the Note pursuant
to the terms of the Securities Purchase Agreement.
 
(g) “Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock outstanding at such time, plus the number of shares of
Common Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii)
hereof regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any Common Stock owned or held by or for
the account of the Company or issuable upon conversion or exercise, as
applicable, of the Note and the Warrant.
 
(h) “Consolidated Net Income” means, for any applicable period, the net income
(loss) of the Company and its Subsidiaries for such period, determined on a
consolidated basis and in accordance with GAAP, but excluding from the
determination of Consolidated Net Income (without duplication) (a) any
extraordinary or non recurring gains or losses or gains or losses from
Dispositions, (b) restructuring charges, (c) any tax refunds, net operating
losses or other net tax benefits, (d) effects of discontinued operations and
(e) interest income (including interest paid-in-kind).
 
(i) “Consolidated Net Interest Expense” means, for any applicable period, gross
interest expense of the Company and its Subsidiaries for such period determined
on a consolidated basis and in accordance with GAAP, less (i) the sum of
(A) interest income for such period and (B) gains for such period on Hedging
Agreements (to the extent not included in interest income above and to the
extent not deducted in the calculation of gross interest expense), plus (ii) the
sum of (A) losses for such period on Hedging Agreements (to the extent not
included in gross interest expense) and (B) the upfront costs or fees for such
period associated with Hedging Agreements (to the extent not included in gross
interest expense), in each case, determined on a consolidated basis and in
accordance with GAAP.
 
(j) “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.
 
(k) “Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.
 
-22-

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(l) “EBITDA” means, with respect to any Person and its Subsidiaries for any
accounting period, the Consolidated Net Income of such Person and its
Subsidiaries as set forth in the financial statements of the Company contained
in the Company’s Quarterly Report on Form 10-QSB or Company’s Annual Report on
Form 10-KSB of the Company for the applicable accounting period, plus without
duplication, the sum of the following amounts of the Company and its
Subsidiaries for such accounting period to the extent deducted in determining
Consolidated Net Income of such Persons for such accounting period:
(i) Consolidated Net Interest Expense, (ii) income tax expense,
(iii) depreciation expense and (iv) amortization expense.
 
(m) “EBITDA Threshold” means, (x) for each annual accounting period set forth on
Exhibit C hereto, 90% of the projected EBITDA target for such annual accounting
period as set forth on such Exhibit, and (y) for each three, six and nine month
accounting period set forth on Exhibit C hereto, 80% of the projected EBITDA
target for each such three, six and nine month accounting period set forth on
such Exhibit.
 
(n) “Eligible Market” means the Principal Market, The New York Stock Exchange,
Inc., the American Stock Exchange, the Nasdaq National Market, the Nasdaq
Capital Market or the pink sheets (as reported by Pink Sheets LLC).
 
(o) “Equity Value Redemption Premium” means 120%.
 
(p) “Excluded Securities” means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion, adjustment or
redemption of the Note or the exercise of the Warrant; (iii) pursuant to a bona
fide firm commitment underwritten public offering with a nationally recognized
underwriter which generates gross proceeds to the Company in excess of
$50,000,000 (other than an “at-the-market offering” as defined in Rule 415(a)(4)
under the 1933 Act and “equity lines”); (iv) in connection with any acquisition
by the Company, whether through an acquisition of stock or a merger of any
business, assets or technologies the primary purpose of which is not to raise
equity capital; (v) in connection with any other strategic transaction or
alliance the primary purpose of which is not to raise equity capital, and
(vi) upon conversion or exercise of any Options or Convertible Securities which
are outstanding on the day immediately preceding the Subscription Date, provided
that the conversion or exercise price of such Options or Convertible Securities
is not amended, modified or changed on or after the Subscription Date.
 
(q) “Fundamental Transaction” means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another Person
or Persons, or (ii) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than 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 (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of 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), or (v) reorganize,
recapitalize or reclassify its Common Stock, or (vi) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act)
is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of 50% of the aggregate Voting Stock of the
Company.
 
-23-

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(r) “GAAP” means United States generally accepted accounting principles,
consistently applied.
 
(s) “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.
 
(t) “INII” means Interactive Nutrition International, Inc., a company
incorporated under the laws of Canada and wholly-owned subsidiary of the
Company.
 
(u) “Installment Amount” means with respect to any Installment Date, Cdn
$375,000, together with and accrued and unpaid Late Charges, if any, with
respect to such Principal amount and any interest thereon.
 
(v) “Installment Date” means each January 1, April 1, July 1 and October 1 of
each calendar year while this Note is outstanding from and after (and including)
January 1, 2008.
 
(w) “Interest Rate” means, initially twelve percent (12%) per annum, subject to
adjustment as provided herein.
 
-24-

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(x) “Options” means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.
 
(y) “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.
 
(z) “Permitted Indebtedness” means (i) the Indebtedness evidenced by this Note,
(ii) the Cornell Debenture (as such term is defined in the Securities Purchase
Agreement) and the related transactions in connection therewith, (iii) the INII
Vendor Debt (as such term is defined in the Securities Purchase Agreement), and
(iv) total Indebtedness of the Company not to exceed $500,000 in the aggregate
outstanding at any one time; provided such Indebtedness permitted pursuant to
clause (iv) hereof shall be made expressly subordinate in right of payment to
the Indebtedness evidenced by this Note, as reflected in a written agreement
approved by the Holder in writing.
 
(aa) “Permitted Liens” means (i) other than the INII Tax Liens, any Lien for
taxes not yet due or delinquent or being contested in good faith by appropriate
proceedings for which adequate reserves have been established in accordance with
GAAP, (ii) any statutory Lien arising in the ordinary course of business by
operation of law with respect to a liability that is not yet due or delinquent,
(iii) any Lien created by operation of law, such as materialmen’s liens,
mechanics’ liens and other similar liens, arising in the ordinary course of
business with respect to a liability that is not yet due or delinquent or that
are being contested in good faith by appropriate proceedings, (iv) Liens
(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) 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 and (vi) the INII Tax Liens (as such term is defined in the Securities
Purchase Agreement).
 
(bb) “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.
 
(cc) “Principal Market” means the OTC Bulletin Board.
 
(dd) “Redemption Premium” means 120%.
 
(ee) “Registration Rights Agreement” means that certain registration rights
agreement dated as of the Subscription Date by and among the Company and the
initial Holder of the Note relating to, among other things, the registration of
the resale of the Common Stock issuable upon conversion of the Note and exercise
of the Warrant.
 
-25-

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

(ff) “SEC” means the United States Securities and Exchange Commission.
 
(gg) “Securities Purchase Agreement” means that certain securities purchase
agreement, dated as of the Subscription Date, by and between the Company and the
initial Holder of the Note pursuant to which the Company issued the Note and
Warrant.
 
(hh) “Subsidiary Note” means the Convertible Promissory Note, dated March 31,
2004, originally issued to Nesracorp Inc. (under its former name Interactive
Nutrition, Inc.) jointly by Bio-One Corporation and INII in the principal amount
of $15,000,000, as such note may be amended from time to time. Such note has
since been purchased by the Company.
 
(ii) “Subscription Date” means the original issue date of this Note.
 
(jj) “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.
 
(kk) “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).
 
(ll) “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).
 
(mm) “Warrant” has the meaning ascribed to such term in the Securities Purchase
Agreement, and shall include all warrants issued in exchange therefor or
replacement thereof.
 
-26-

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

(nn) “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 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 19. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination or other similar transaction
during the applicable calculation period.
 
-27-

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EXHIBIT B
 
NATURAL NUTRITION, INC.
 
CONVERSION NOTICE
 
Reference is made to the Secured Convertible Note (the “Note”) issued to the
undersigned by Natural Nutrition, 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:___________________________________________
              Name:
          Title:
          Dated: ___________________________________
 
Account Number:
(if electronic book entry transfer)___________________________
 
Transaction Code Number:
(if electronic book entry transfer)___________________________
 
Installment Amounts to be reduced and amount of
reduction:____________________________________________
 
-28-

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ACKNOWLEDGMENT
 
The Company hereby acknowledges this Conversion Notice and hereby directs
______________________ (the “Transfer Agent”) to issue the above indicated
number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated _______ __, 200_ from the Company and acknowledged and agreed
to by the Transfer Agent.
 
 

       
NATURAL NUTRITION, INC.
 
   
   
    By:      

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

Name: 
Title: 

 
-30-

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

EXHIBIT C
 
EBITDA THRESHOLDS
 

       
 Interactive Nutrition International Inc.
                 
 Income Statement (CDN)
                 
 Actual and projected
                 
 For the years ended
                       
 
                                                                       
Actual
 
Projected
 
Projected
 
Projected
 
Projected
 
Projected
     
2006
 
2007
 
2008
 
2009
 
2010
 
2011
                             
Revenue
 
$
15,324,645
 
$
15,324,645
 
$
16,857,110
 
$
20,228,531
   
24,274,238
   
29,129,085
 
Cost of Sales
   
11,226,298
   
11,173,302
   
12,308,132
   
14,769,758
   
17,723,710
   
21,268,452
 
Gross Profit
   
4,098,347
   
4,151,343
   
4,548,978
   
5,458,773
   
6,550,528
   
7,860,634
 
   (gross margin)
   
26.74
%
 
27.09
%
 
26.99
%
 
26.99
%
 
26.99
%
 
26.99
%
                                       
Operating expenses
                                     
  Selling
   
499,043
   
394,730
   
410,519
   
426,940
   
444,018
   
461,779
 
  General and Administrative
   
918,066
   
1,213,743
   
1,321,198
   
1,374,046
   
1,429,008
   
1,486,168
 
  Legal & accounting
   
120,000
   
400,000
   
220,000
   
245,000
   
275,000
   
310,000
 
  Amortization
   
253,150
   
250,000
   
250,000
   
250,000
   
250,000
   
250,000
 
  Interest expense
   
981,011
   
1,029,008
   
1,666,000
   
1,666,000
   
1,666,000
   
1,666,000
 
  Contingency
   
-
   
263,636
   
285,197
   
336,315
   
397,435
   
470,528
 
Total Expense
   
2,771,270
   
3,551,117
   
4,152,914
   
4,298,301
   
4,461,460
   
4,644,474
                                         
Income before unusual item
   
1,327,077
   
600,226
   
396,064
   
1,160,473
   
2,089,068
   
3,216,159
 
Trustee in bankruptcy fees
   
141,070
   
50,000
   
-
   
-
   
-
   
-
 
Net income before income taxes
   
1,186,007
   
550,226
   
396,064
   
1,160,473
   
2,089,068
   
3,216,159
                                         
Income taxes
   
489,496
   
227,078
   
163,455
   
478,927
   
862,158
   
1,327,309
 
Net income
 
$
696,511
 
$
323,148
 
$
232,608
 
$
681,546
 
$
1,226,910
 
$
1,888,850
                                         
EBITDA
                                     
  Amortization
   
253,150
   
250,000
   
250,000
   
250,000
   
250,000
   
250,000
 
  Interest expense
   
981,011
   
1,029,008
   
1,666,000
   
1,666,000
   
1,666,000
   
1,666,000
 
  Corporate Taxes
   
489,496
   
227,078
   
163,455
   
478,927
   
862,158
   
1,327,309
 
  EBITDA*
 
$
2,420,168
 
$
1,829,234
 
$
2,312,064
 
$
3,076,473
 
$
4,005,068
 
$
5,132,159
                                         
Assumed sale at 8 times EBITDA
                               
$
41,057,274
                                         
* Annual EBITDA targets are shown; quarterly EBITDA targets shall be 3/12ths,
6/12ths and 9/12th of the annual targets for each of the first three quarterly
periods of each year.
                                                                               
                                       
Adjustments to P&L beginning in July 2007:
                                     
  Cost of sales
                                     
    Joe Nesrallah elimination
         
(89,996
)
 
(179,993
)
 
(359,986
)
           
    Trevo Holroyd salary increase
         
12,000
   
24,000
   
24,001
             
  Total adjustments
         
(77,996
)
 
(155,993
)
 
(335,985
)
                                                   
  Selling expenses
                                     
    Eli Nesrallah elimination
         
(179,993
)
 
(359,986
)
 
(359,986
)
           
    New sales position
         
-
   
150,000
   
150,000
             
    Increased marketing budget
         
73,680
   
147,360
   
147,360
             
  Total adjustments
         
(106,313
)
 
(62,626
)
 
(62,626
)
                                                   
  G&A expenses
                                     
    Pam Nesrallah elimination
         
(119,995
)
 
(239,990
)
 
(239,990
)
           
    Rachel (current controller elimination)
         
(32,994
)
 
(65,988
)
 
(65,988
)
           
    New controller
         
48,000
   
96,000
   
96,000
             
    Severance to controller
         
16,667
   
8,333
   
-
             
    New CEO
         
144,000
   
288,000
   
288,000
             
    TAP fee
         
120,000
   
240,000
   
240,000
             
    Systems licensing (June)
         
5,000
   
5,000
   
5,000
             
    Systems upgrades (August)
         
7,500
   
50,000
   
25,000
             
    IP valuation (May)
         
25,000
   
-
   
-
             
    Transaction fees - closing & foreclosure (May - Aug)
         
200,000
   
-
   
-
             
    Travel expenses
         
80,000
   
80,000
   
80,000
             
    Public company accounting fees (Qtrly)
         
80,000
   
100,000
   
125,000
             
  Total adjustments
         
573,177
   
561,355
   
553,022
                                                     
Bonus pool:
                                     
  Production
         
25,000
   
17,500
                   
  Selling
         
2,000
   
2,000
                   
  G&A
         
2,500
   
2,500
                   

-31-

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

 

                   
INII
                                             
 Cash flow projections
                                             
2007
                                                                               
     
Jan. 2007
 
Feb. 2007
 
Mar. 2007
 
Apr. 2007
 
May. 2007
 
June. 2007
 
July. 2007
 
Aug. 2007
 
Sept. 2007
 
Oct. 2007
 
Nov. 2007
 
Dec. 2007
                                                     
Cash at beginning of period
   
408,837
   
790,268
   
350,609
   
480,551
   
209,636
   
1,446,114
   
1,152,576
   
1,410,359
   
1,353,325
   
1,435,420
   
1,630,106
   
2,133,791
                                                                             
Net Profit for Month
   
47,674
   
66,176
   
176,670
   
(35,268
)
 
74,351
   
(54,226
)
 
(23,261
)
 
(51,226
)
 
88,626
   
259,709
   
281,451
   
(507,528
)
                                                                           
Prepaid Expenses Disbursed
   
(58,782
)
 
(2,975
)
 
3,533
   
(2,172
)
 
1,086
   
(541
)
 
184
   
290
   
(233
)
 
(2,088
)
 
3,489
   
(654
)
                                                                           
(Investment)-Reduction in Inventory
   
(54,900
)
 
(174,500
)
 
292,300
   
(242,540
)
 
101,450
   
(70,290
)
 
12,870
   
(16,890
)
 
(63,950
)
 
(32,500
)
 
318,150
   
(230,100
)
                                                                           
(Investment)-Reduction in AR
   
305,596
   
(470,000
)
 
(380,000
)
 
270,000
   
139,000
   
(217,000
)
 
106,000
   
(60,000
)
 
40,000
   
(103,000
)
 
(130,000
)
 
580,000
                                                                             
Use of Trade Credit (AP) and Other Liab.
   
53,346
   
63,163
   
188,981
   
(357,872
)
 
247,674
   
(123,377
)
 
64,614
   
(26,563
)
 
3,069
   
58,003
   
16,050
   
(361,046
)
                                                                           
Payment to Securied Creditor
               
(250,000
)
                                                     
Capital Leases
   
(2,984
)
 
(3,004
)
 
(3,023
)
 
(3,044
)
 
(3,064
)
 
71,915
   
(4,105
)
 
(4,126
)
 
(4,147
)
 
(4,168
)
 
(4,189
)
 
(4,211
)
Working capital proceeds from Cornell
                           
600,000
                                           
Noncash interest accrual for taxes
   
81,751
   
81,751
   
81,751
   
81,751
   
81,751
   
81,751
   
81,751
   
81,751
                         
Capital Purchases
   
(11,103
)
 
(21,103
)
 
(1,103
)
 
(2,603
)
 
(26,603
)
 
(2,603
)
 
(1,103
)
 
(1,103
)
 
(2,103
)
 
(2,103
)
 
(2,103
)
 
(1,103
)
Amortization
   
20,833
   
20,833
   
20,833
   
20,833
   
20,833
   
20,833
   
20,833
   
20,833
   
20,833
   
20,833
   
20,837
   
20,833
                                                                             
Cash at end of period
   
790,268
   
350,609
   
480,551
   
209,636
   
1,446,114
   
1,152,576
   
1,410,359
   
1,353,325
   
1,435,420
   
1,630,106
   
2,133,791
   
1,629,982
 

 
-32-

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