Exhibit 10.3

[FORM OF SENIOR CONVERTIBLE NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT (II) UNLESS SOLD OR TRANSFERRED TO A “QUALIFIED INSTITUTIONAL
BUYER” WITHIN THE MEANING OF RULE 144A UNDER THE 1933 ACT OR TO AN “ACCREDITED
INVESTOR” AS THAT TERM IS DEFINED IN RULE 501(A) OF REGULATION D OR (III) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY
TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,
INCLUDING SECTIONS 3(c)(iii) AND 17(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED
BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF
MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION
3(c)(iii) OF THIS NOTE.

I-MANY, INC.

SENIOR CONVERTIBLE NOTE

 

Issuance Date: December 31, 2007   Original Principal Amount: U.S. $[•]

FOR VALUE RECEIVED, I-MANY, INC., a Delaware corporation (the “Company”), hereby
promises to pay to [HIGHBRIDGE INTERNATIONAL LLC] [PORTSIDE GROWTH AND
OPPORTUNITY FUND] [STARBOARD VALUE AND OPPORTUNITY MASTER FUND LTD.] [PARCHE,
LLC] [OTHER BUYERS] or 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”) upon the
Maturity Date (as defined below), and to pay interest (“Interest”) on any
outstanding Principal at a rate per annum equal to the Interest Rate (as defined
below) from the date set out above as the Issuance Date (the “Issuance Date”)
until the same becomes due and payable, whether upon an Interest Date (as
defined below), the Maturity Date, acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof). This Senior
Convertible Note (including all Senior Convertible Notes issued in exchange,
transfer or replacement hereof, this “Note”) is one of an issue of Senior
Convertible Notes issued pursuant to the Securities Purchase Agreement on the
Closing Date (collectively, the “Notes” and such other Senior Convertible Notes,
the “Other Notes”). Certain capitalized terms used herein are defined in
Section 28.

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(1) MATURITY. On the Maturity Date, the Company shall pay to the Holder an
amount in cash representing all outstanding Principal and accrued and unpaid
Interest, if any. The “Maturity Date” is December 31, 2012.

(2) INTEREST; INTEREST RATE. (a) Interest on this Note shall commence accruing
on the outstanding Principal on the Issuance Date and shall be computed on the
basis of a 360-day year and twelve 30-day months and shall be payable in arrears
on March 31, June 30, September 30 and December 31 of each year (each, an
“Interest Date”) with the first Interest Date being March 31, 2008. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date in cash.

(b) Prior to the payment of Interest on an Interest Date, Interest on this Note
shall accrue at the Interest Rate and be payable in cash. From and after the
occurrence and during the continuance of an Event of Default, the Interest Rate
shall be increased to ten percent (10.0%). In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated 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 Common
Stock, on the terms and conditions set forth in this Section 3.

(a) Conversion Right. Subject to the provisions of Section 3(e), 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; provided that the Company
shall not be required to pay any tax that may be payable in respect of any
issuance of shares of Common Stock to any Person other than the Holder.

(b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
“Conversion Rate”).

(i) “Conversion Amount” means the 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, $3.8192, subject to adjustment as provided herein.

 

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(c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York Time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking and appropriate bond with respect to this Note in
the case of its loss, theft or destruction). On or before the first
(1st) Trading 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 (2nd) Trading Day following the date of receipt of a
Conversion Notice (the “Share Delivery Date”), the Company shall
(1) (x) provided that the Transfer Agent is participating in the Depository
Trust Company’s (“DTC”) Fast Automated Securities Transfer Program, credit such
aggregate number of shares of Common Stock to which the Holder shall be entitled
to the Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system or (y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock to which the Holder shall be entitled and (2) pay to the Holder
in cash, by wire transfer of immediately available funds, an amount equal to the
Additional Interest Amount, if any on the Conversion Amount subject to such
conversion. If this Note is physically surrendered for conversion as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Trading Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 17(d)) representing the
outstanding Principal not converted. The Person or Persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.

(ii) Company’s Failure to Timely Convert. If the Company is required to effect a
conversion pursuant to a Conversion Notice and the Company shall fail to issue a
certificate to the Holder or credit the Holder’s balance account with DTC, as
applicable, for the number of shares of Common Stock to which the Holder is
entitled upon conversion of any Conversion Amount on or prior to the date which
is three (3) Trading Days after the Conversion Date (a “Conversion Failure”),
then the Holder, upon written notice to the Company, may void its Conversion
Notice with respect to, and retain or have returned, as the case may be, any
portion of this Note that has not been converted pursuant to such Conversion
Notice; provided that the voiding of a Conversion Notice shall not affect the
Company’s obligations to make any payments which have accrued prior to the date
of such notice pursuant to this Section 3(c)(ii) or otherwise. In the
alternative to the voiding of the Conversion Notice, if within three (3) Trading
Days after the Company’s receipt of the facsimile copy of a Conversion Notice
the Company shall fail to issue and deliver a certificate to the Holder or
credit the Holder’s balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon the Holder’s conversion of any
Conversion Amount and if on

 

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or after such Trading Day the Holder purchases (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale to a third party by
the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then the Company shall,
within three (3) Trading Days after the Holder’s request and in the Holder’s
discretion, either (x) 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 shares of Common
Stock with respect to the applicable Conversion Amount shall terminate, or
(y) promptly honor its obligation to deliver to the Holder the shares of Common
Stock to which the Holder is entitled to have received upon the conversion of
the applicable Conversion Amount and pay cash to the Holder in an amount equal
to the excess (if any) of the Buy-In Price over the product of (I) such number
of shares of Common Stock, times (II) the Closing Bid Price on the Conversion
Date.

(iii) Registration; Book-Entry. The Company shall maintain a register (the
“Register”) for the recordation of the names and addresses of the holders of
each Note and the principal amount of the Notes held by such holders (the
“Registered Notes”). The entries in the Register shall be conclusive and binding
for all purposes absent manifest error. The Company and the holders of the Notes
shall treat each Person whose name is recorded in the Register as the owner of a
Note for all purposes, including, without limitation, the right to receive
payments of Principal and Interest hereunder, notwithstanding notice to the
contrary. A Registered Note may be assigned or sold in whole or in part only by
registration of such assignment or sale on the Register. Upon its receipt of a
request to assign or sell all or part of any Registered Note by a Holder, the
Company shall record the information contained therein in the Register and issue
one or more new Registered Notes in the same aggregate principal amount as the
principal amount of the surrendered Registered Note to the designated assignee
or transferee pursuant to Section 17. 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 Principal 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 converted and the dates of
such conversions or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes, and the Company is
required to effect conversions pursuant to such Conversion Notices, for the same
Conversion Date and the Company can convert some, but not all, of such portions
of the Notes submitted for conversion, the Company, subject to Section 3(e),
shall convert from each holder of Notes electing to have Notes converted on such
date a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all Notes
submitted for conversion on such date. In the event of a dispute as to the
number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 22.

 

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(d) Mandatory Conversion.

(i) General. If at any time from and after December 31, 2009 (the “Mandatory
Conversion Eligibility Date”), (1) the Closing Sale Price of the Common Stock
exceeds 200% of the Conversion Price on the Issuance Date (subject to
appropriate adjustments for any stock dividend, stock split, stock combination,
reclassification or similar transaction after the Subscription Date) for each of
any twenty (20) Trading Days occurring following the Mandatory Conversion
Eligibility Date in any thirty (30) consecutive Trading Day period (such period,
the “Mandatory Conversion Measuring Period”) and (2) there is not then an Equity
Conditions Failure, the Company shall have the right to require the Holder to
convert all or any portion of the Conversion Amount then remaining under this
Note, in each case as designated in the Mandatory Conversion Notice (as defined
below) into fully paid, validly issued and nonassessable shares of Common Stock
in accordance with Section 3(c) hereof at the Conversion Rate as of the
Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The
Company may exercise its right to require conversion under this Section 3(d) by
delivering a written notice thereof by facsimile and overnight courier to all,
but not less than all, of the holders of Notes and the Transfer Agent (the
“Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”)
within two (2) Business Days following the end of the applicable Mandatory
Conversion Measuring Period. The Mandatory Conversion Notice shall be
irrevocable. The Mandatory Conversion Notice shall (y) state (I) the Trading Day
selected for the Mandatory Conversion, which Trading Day shall be no sooner than
twenty (20) Trading Days nor later than sixty (60) Trading Days following the
Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (II) the
aggregate Conversion Amount of the Notes subject to Mandatory Conversion from
the Holder and all of the holders of the Notes pursuant to this Section 3(d)
(and analogous provisions under the Other Notes), (III) the number of shares of
Common Stock to be issued to the Holder on the Mandatory Conversion Date and
(IV) the amount of accrued and unpaid Interest to be paid to the Holder in cash
on the Mandatory Conversion Date and (z) certify that there has been no Equity
Conditions Failure.

(ii) Pro Rata Conversion Requirement. If the Company elects to cause a
conversion of any Conversion Amount of this Note pursuant to Section 3(d)(i),
then it must simultaneously take the same action in the same proportion with
respect to the Other Notes. If the Company elects a Mandatory Conversion of this
Note pursuant to Section 3(d)(i) (or similar provisions under the Other Notes)
with respect to less than all of the Conversion Amounts of the Notes then
outstanding, then the Company shall require conversion of a Conversion Amount
from each of the holders of the Notes equal to the product of (1) the aggregate
Conversion Amount of Notes which the Company has elected to cause to be
converted pursuant to Section 3(d)(i), multiplied by (2) the fraction, the
numerator of which is the sum of the aggregate Original Principal Amount of the
Notes purchased by such holder (or the ultimate holder of a Note transferred as
set forth below with an allocation among such Notes as set forth below) of
outstanding Notes and the denominator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by all (or the ultimate holder
of a Note transferred as set forth below with an allocation among such Notes as
set forth below)

 

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holders holding outstanding Notes (such fraction with respect to each holder is
referred to as its “Conversion Allocation Percentage,” and such amount with
respect to each holder is referred to as its “Pro Rata Conversion Amount”);
provided, however, that in the event that any holder’s Pro Rata Conversion
Amount exceeds the outstanding Principal amount of such holder’s Note, then such
excess Pro Rata Conversion Amount shall be allocated amongst the remaining
holders of Notes in accordance with the foregoing formula. In the event that the
initial holder or any subsequent holder of any Notes shall sell or otherwise
transfer any of such holder’s Notes, the transferee shall be allocated a pro
rata portion of such transferring holder’s Conversion Allocation Percentage and
the Pro Rata Conversion Amount. For purposes of illustration of the foregoing,
the Conversion Allocation Percentage and Pro Rata Conversion Amount of any Note
shall be calculated by reference to its Original Principal Amount and, in
transferring any portion of the Note, or any subsequent Note evidencing some or
all of the Principal payable on this Note, the allocated Original Principal
Amount shall be indicated thereon, and shall not be reduced by any payment or
conversion thereof.

(e) Limitations on Conversions.

(i) Beneficial Ownership. Other than in connection with a Mandatory Conversion,
[INSERT ONLY IN RAMIUS NOTES: at such time as the Holder (including any of the
Holder’s affiliates) does not have a representative on the Company’s board of
directors and the beneficial ownership of the Holder (together with its
affiliates), without giving effect to Conversion Shares issuable hereunder, is
not in excess of 9.99%,]1 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%]2 [9.99%]3 (the “Maximum Percentage”)
of the number of shares of Common Stock outstanding immediately after giving
effect to such conversion. For purposes of the foregoing sentence, the number of
shares of Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of this
Note with respect to which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would be issuable upon
(A) conversion of the remaining, nonconverted portion of this Note beneficially
owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes) 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 “Exchange 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 (1) the Company’s most recent Form 10-K, Form 10-Q, Form 8-K or
other public filing with the SEC, as the case may be, (2) a more recent

 

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1

Insert additional language only into Ramius Notes.

2

Insert 4.99% blocker for Notes issued to holders other than Ramius.

3

Insert 9.99% blocker for Notes issued to Ramius.

 

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public announcement by the Company or (3) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of the Holder, the
Company shall within one (1) Business Day confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Note, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The provisions of
this paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 3(e)(i) to correct this
paragraph (or any portion hereof) which may be defective or inconsistent with
the intended beneficial ownership limitation herein contained or to make changes
or supplements necessary or desirable to properly give effect to such
limitation. By written notice to the Company, the Holder may increase or
decrease the Maximum Percentage to any other percentage not in excess of 9.99%
specified in such notice; provided that (x) any such increase or decrease will
not be effective until the sixty-first (61st) day after such notice is delivered
to the Company, and (y) any such increase or decrease will apply only to the
Holder and not to any other holder of Notes.

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

 

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(f) Conversion Upon Fundamental Change. The conversion by the Holder following
its receipt of a Change of Control Notice during the Change of Control
Conversion/Redemption Period shall be a “Change of Control Conversion”. In
connection with a Change of Control Conversion, the Holder shall be entitled to
receive the Make-Whole Premium with respect to any Conversion Amount converted
in accordance with Section 3(c).

(4) RIGHTS UPON EVENT OF DEFAULT.

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

(i) 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;

(ii) the Company’s (A) failure to cure a Conversion Failure by delivery of the
required number of shares of Common Stock or Make-Whole Premium within ten
(10) Business Days after the applicable Conversion Date or Change of Control
Settlement Date (as defined in Section 9(a)), as the case may be, or (B) notice,
written or oral, to any holder of the Notes, including by way of public
announcement or through any of its agents, at any time, of its intention not to
comply with a request for conversion of any Notes into shares of Common Stock
that is tendered in accordance with the provisions of the Notes, other than
pursuant to Section 3(e);

(iii) at any time following an Authorized Share Failure Deadline if there has
been an Authorized Share Failure;

(iv) the Company’s failure to pay to the Holder any amount of Principal,
Interest or other amounts when and as due under this Note (including, without
limitation, the Company’s failure to pay any redemption amounts hereunder) or
any other Transaction Document (as defined in the Securities Purchase Agreement)
or any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, except, in the case of a failure to pay Interest when and as
due, in which case only if such failure continues for a period of at least seven
(7) Business Days;

(v) any redemption of or acceleration prior to maturity of any Indebtedness
exceeding $1,000,000 individually or in the aggregate of the Company or any of
its Subsidiaries other than with respect to any Other Notes;

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

 

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

(viii) a final judgment or judgments for the payment of money aggregating in
excess of $2,000,000 are rendered against the Company or any of its Subsidiaries
and which judgments are not, within sixty (60) days after the entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within sixty
(60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $2,000,000 amount set forth above
so long as the Company provides the Holder a written statement from such insurer
or indemnity provider (which written statement shall be reasonably satisfactory
to the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within thirty (30) days of the issuance of such judgment;

(ix) other than as specifically set forth in another clause of this
Section 4(a), the Company breaches, in any material respect, any material
representation, warranty, covenant or agreement in any Transaction Document,
except, in the case of a breach of a covenant or agreement in any Transaction
Document which is curable, only if such breach continues for a period of at
least thirty (30) consecutive days;

(x) any breach or failure in any respect to comply with either of Sections 8 or
13 of this Note; or

(xi) any Event of Default (as defined in the Other Notes) occurs with respect to
any Other Notes, unless such Event of Default is waived or cured.

(b) Acceleration and Redemption. Upon the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall within one
(1) Business Day deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder and the Other Holders. If
an Event of Default other than an Event of Default specified in Section 4(a)(vi)
or (vii) occurs, the Required Holders, at any time after the earlier of the
Holder’s or any Other Holder’s receipt of an Event of Default Notice and the
Holder or any Other Holder’s becoming aware of an Event of Default, by one or
more written notices to the Company, may declare the entire Conversion Amount of
all of the Notes plus accrued and unpaid Interest thereon due and payable
immediately and upon any such declaration such Conversion Amount of all the
Notes plus accrued and unpaid Interest thereon shall become immediately due and
payable. Notwithstanding the foregoing, in the case of an Event of Default
specified in Section 4(a)(vi) or (vii), the Conversion Amount of all of the
Notes plus accrued and unpaid Interest thereon will ipso facto become due and
payable without any declaration or other act on the part of the Holder or any of
the Other Holders. Upon an acceleration in accordance with the preceding
sentence or upon an Event of Default specified

 

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in Section 4(a)(vi) or (vii) occurs, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof (the
“Event of Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the Conversion Amount of this Note the Holder
is electing to require the Company 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 (the “Event of Default Redemption Price”) equal to the
sum of (i) the Conversion Amount to be redeemed and (ii) any accrued and unpaid
Interest thereon. Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 9. 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.

(c) Waiver of Past Defaults. The Majority Holders may on behalf of the Holders
of all the Notes waive any past Event of Default hereunder and its consequences,
except an Event of Default (i) specified in Section 4(a)(vi) or (vii); or
(ii) in respect of a covenant or provision hereof which cannot be modified or
amended without the consent of the Holder of each Note affected. Upon any such
waiver, such Event of Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured, for every purpose of the
Notes; but no such waiver shall extend to any subsequent or other Event of
Default or impair any right consequent thereon.

(d) Recission and Annulment. At any time after such a declaration of
acceleration has been made and before a judgment or decree for payment of the
money due has been obtained by the Holder or any of the Other Holders, the
Majority Holders, by written notice to the Company, may rescind and annul such
declaration and its consequences if such rescission and annulment will not
conflict with any judgment or decree of a court of competent jurisdiction and
(i) the Company has paid to the Holder and each Other Holder a sum sufficient to
pay (A) all overdue Interest on the Notes, and (B) the Principal Amount plus
accrued and unpaid Interest, if any, any Redemption Price on any Notes which
have become due otherwise than by such declaration of acceleration; and (ii) all
Events of Default, other than the non-payment of Principal plus accrued and
unpaid interest on Securities which have become due solely by such declaration
of acceleration, have been cured or waived as provided in Section 4(c) above .
No such rescission shall affect any subsequent default or impair any right
consequent thereon.

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

(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless the Successor Entity expressly assumes in writing, executed
and delivered to the Holder concurrently with the consummation of the
Fundamental Transaction, 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) prior to such Fundamental Transaction, including agreements to
deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form
and substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts and the interest rates
of the Notes then outstanding held by such holder, having similar conversion
rights, with the Conversion Rate adjusted to reflect the consideration received
by the Company’s stockholders in such Fundamental Transaction, and having
similar ranking to the Notes. In furtherance of and not in limitation of the
foregoing, prior to the consummation of any Fundamental Transaction pursuant to

 

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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, the shares of Common Stock receivable upon such conversion or 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).
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. If 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”) and the
consideration paid to holders of Common Stock in such Fundamental Transaction
consists of stock in such Public Successor Entity (a “Public Fundamental
Transaction”), then upon consummation of the Fundamental Transaction, the
Successor Entity shall deliver to the Holder confirmation that there shall be
issued upon conversion or redemption of this Note at any time after the
consummation of the Fundamental Transaction, in lieu of the shares of the
Company’s Common Stock issuable upon the conversion or redemption of the Notes
prior to such Fundamental Transaction, such shares of the publicly traded common
stock (or their equivalent) of the Successor Entity (including its Parent
Entity), as adjusted in accordance with the provisions of this Note. The
provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
on the conversion or redemption of this Note.

(b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of
Control Notice”) which shall state:

(i) the events causing a Change of Control and the anticipated Effective Date;

(ii) the last date of the Change of Control Conversion/Redemption Period (as
defined below) by which the Holder must deliver a Change of Control Redemption
Notice to elect the redemption option pursuant to this Section 5(b) or deliver a
Conversion Notice requesting conversion upon a Change of Control in accordance
with Section 3(c);

(iii) the Change of Control Settlement Date;

(iv) the Change of Control Redemption Price;

(v) the Conversion Price applicable on the date of the Change of Control Notice;

(vi) that Notes may be converted in connection with the Change of Control;

 

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(vii) that the Change of Control Redemption Price for any Convertible Note as to
which a Change of Control Redemption Notice has been duly given will be paid
promptly on the Change of Control Settlement Date; and

(viii) if the Holder is entitled to receive a Make-Whole Premium upon any
conversion occurring within the Change of Control Conversion/Redemption Period.

At any time during the period beginning after the Holder’s receipt of a Change
of Control Notice and ending twenty (20) Business Days after the Effective Date
(such period, the “Change of Control Conversion/Redemption Period”), the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (“Change of Control Redemption Notice”) to the Company,
which Change of Control Redemption Notice shall indicate the Conversion Amount
the Holder is electing to require the Company to redeem. The portion of this
Note subject to redemption pursuant to this Section 5(b) shall be redeemed by
the Company in cash at a price (the “Change of Control Redemption Price”) equal
to the sum of (i) the Conversion Amount and (ii) any accrued and unpaid Interest
thereon. Redemptions required by this Section 5 shall be made in accordance with
the provisions of Section 9 and shall have priority to payments to stockholders
in connection with a Change of Control. To the extent redemptions required by
this Section 5(b) are deemed or determined by a court of competent jurisdiction
to be prepayments of the Note by the Company, such redemptions shall be deemed
to be voluntary prepayments. Notwithstanding anything to the contrary in this
Section 5, but subject to Section 3(e), until the Change of Control Redemption
Price (together with any interest thereon) is paid in full, the Conversion
Amount submitted for redemption under this Section 5(c) (together with any
Interest thereon) may be converted, in whole or in part, by the Holder into
Common Stock pursuant to Section 3 (and any such conversions shall be deemed to
be a withdrawal of the Change of Control Redemption Notice to the extent of such
conversion) and shall be entitled to receive the Make-Whole Premium upon any
such conversion.

(c) Make-Whole Premium. (i) If a Change of Control occurs, the Company shall pay
the Make-Whole Premium to the holders of the Notes who effect a Change of
Control Conversion at any time during the Change of Control
Conversion/Redemption Period.

(A) The Make-Whole Premium shall be equal to an additional number of shares of
Common Stock calculated in accordance with this Section 5(c). The Make-Whole
Premium will be in addition to, and not in substitution for, any cash,
securities or other assets otherwise due to the Holder upon conversion as
described in this Note.

(B) The “Make-Whole Premium” shall be equal to the Conversion Amount of the
Notes to be converted divided by $1,000 and multiplied by the applicable number
of shares of Common Stock determined by reference to the table below (the
“Make-Whole Premium Table”) and is based on the Effective Date and the Stock
Price.

 

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Additional Shares Required to be Issued

(per $1,000 Conversion Amount of Notes)

Effective Date

Stock
Price    12/31/2007    6/30/2008    12/31/2008    6/30/2009    12/31/2009   
6/30/2010    12/31/2010 2.25    182.608    182.608    182.608    182.608   
182.608    182.608    182.608 2.48    152.578    148.633    145.164    142.204
   142.204    142.204    142.204 2.70    130.593    125.870    121.352   
116.575    109.678    108.534    108.534 2.93    112.896    107.640    102.372
   96.833    88.220    80.272    80.044 3.15    98.471    92.868    87.090   
81.070    71.238    61.085    55.624 3.38    86.581    80.774    74.669   
68.394    57.791    46.099    34.459 3.60    76.684    70.776    64.487   
58.123    47.142    34.568    15.941 3.83    68.371    62.441    56.072   
49.737    38.704    25.831    2.036 4.05    61.332    55.435    49.062    42.834
   32.006    19.308    0.000 4.28    55.327    49.502    43.180    37.100   
26.674    14.504    0.000 4.50    50.170    44.445    38.208    32.295    22.409
   11.006    0.000 4.73    45.714    40.105    33.978    28.232    18.971   
8.480    0.000 4.95    41.840    36.359    30.358    24.764    16.170    6.663
   0.000 5.18    38.455    33.108    27.240    21.780    13.856    5.352   
0.000 5.40    35.482    30.273    24.541    19.194    11.909    4.394    0.000
5.63    32.859    27.788    22.194    16.939    10.236    3.673    0.000 5.85   
30.536    25.600    20.144    14.963    8.765    3.107    0.000 6.08    28.468
   23.667    18.346    13.226    7.443    2.638    0.000 6.30    26.622   
21.952    16.763    11.696    6.230    2.225    0.000 6.53    24.968    20.425
   15.367    10.347    5.100    1.844    0.000 6.75    23.480    19.060   
14.130    9.158    4.039    1.480    0.000 6.98    22.139    17.838    13.032   
8.112    3.037    1.127    0.000 7.20    20.924    16.739    12.055    7.192   
2.092    0.785    0.000 7.43    19.823    15.749    11.185    6.386    1.221   
0.462    0.000 7.65    18.821    14.854    10.407    5.680    0.287    0.113   
0.000 7.88    17.906    14.044    9.711    5.065    0.000    0.000    0.000 8.10
   17.070    13.307    9.087    4.529    0.000    0.000    0.000 8.33    16.304
   12.637    8.527    4.064    0.000    0.000    0.000 8.55    15.599    12.026
   8.023    3.661    0.000    0.000    0.000 8.78    14.950    11.467    7.569
   3.312    0.000    0.000    0.000 9.00    14.352    10.955    7.159    3.012
   0.000    0.000    0.000

 

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(C) The exact Stock Price and Effective Date may not be set forth on the
Make-Whole Premium Table, in which case, if the Stock Price is between two Stock
Prices on the Make-Whole Premium Table or the Effective Date is between two
Effective Dates on the Make-Whole Premium Table, the Make-Whole Premium shall be
determined by straight-line interpolation between Make-Whole Premium amounts set
forth for the higher and lower Stock Prices and the two Effective Dates, as
applicable, based on a 365-day year (or a 366-day year if the Effective Date
occurs in a leap year). The Stock Prices set forth in the column headers are
subject to adjustment pursuant to Section 5(c)(iii).

(1) If the Stock Price is less than or equal to $2.25 (subject to adjustment
pursuant to Section 5(c)(iii), the “Stock Price Threshold”), the Make-Whole
Premium shall be equal to zero shares of Common Stock.

(2) If the Stock Price is equal to or greater than $9.00 (subject to adjustment
pursuant to Section 5(c)(iii), the “Stock Price Cap”), the Make-Whole Premium
shall be equal to zero shares of Common Stock.

(3) “Stock Price” means the price paid per share of Common Stock in the
transaction constituting the Change of Control, determined as follows: (i) if
holders of Common Stock receive only cash in the transaction constituting the
Change of Control, the Stock Price shall equal the cash amount paid per share of
Common Stock; and (ii) in all other cases, the Stock Price shall equal the
arithmetic average of the Weighted Average Price of a share of Common Stock over
the five Trading Day period ending on the Trading Day immediately preceding the
Effective Date; and “Effective Date” means the date that a Change of Control
becomes effective.

(ii) The Company shall pay the Make-Whole Premium solely in shares of Common
Stock (with any fractional shares rounded up to the nearest whole share) or in
the same form of consideration into which all or substantially all of the shares
of Common Stock have been converted or exchanged in connection with the Change
of Control. If holders of the Common Stock receive or have the right to receive
more than one form of consideration in connection with such Change of Control,
then, for purposes of the foregoing, the forms of consideration in which the
Make-Whole Premium shall be paid shall be in proportion to the different forms
of consideration paid to holders of Common Stock in connection with such Change
of Control.

(iii) Whenever the Conversion Price shall be adjusted from time to time by the
Company pursuant to Section 7, the Stock Price Threshold and the Stock Price Cap
shall be adjusted and each of the Stock Prices set forth in the Make-Whole
Premium Table shall be adjusted (rounded to the nearest cent) in the same manner
and at the same time. Each of the share amounts set forth in the body of the
Make-Whole Premium Table shall also be adjusted at the same time by multiplying
the share amounts set forth in the body of the Make-Whole Premium Table by a
fraction, the numerator of which is the Conversion Price immediately prior to
such adjustment and the denominator of which is the Conversion Price as so
adjusted.

(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS. If at any time the Company grants,
issues or sells any Options, Convertible Securities or rights to purchase stock,

 

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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.

(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a) 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 dividend, stock split, 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.

(b) Voluntary Decrease. The Company may at any time during the term of this Note
reduce the then current Conversion Price to any amount and for any period of
time deemed appropriate by the Company’s board of directors.

(8) OPTIONAL REDEMPTION BY COMPANY OR HOLDER.

(a) Optional Redemption by the Company. On and after December 31, 2010 (such
date, the “Triggering Optional Redemption Date”), the Company shall have the
right, in its sole discretion, to redeem all or any portion of the Note (a
“Company Optional Redemption”). In order for the Company to exercise the Company
Optional Redemption at any time on or after the Triggering Optional Redemption
Date, the Company shall deliver written notice by confirmed facsimile and
overnight courier to all, but not less than all, of the holders of the Notes
(the “Company Optional Redemption Notice” and the date such notice is delivered
to all the holders is referred to as the “Company Optional Redemption Notice
Date”) no later than twenty (20) Trading Days prior to the Company Optional
Redemption Date (as hereafter defined) which shall (w) state the date on which
the Company Optional Redemption shall occur (such date, the “Company Optional
Redemption Date”), the (x) describe the redemption rights provided in this
Section 8, (y) set forth the Optional Redemption Price, and (z) state the
aggregate Principal of the Notes which the Company has elected to be subject to
such Company Optional Redemption from all of the holders of the Notes pursuant
to this Section 8(b) (and analogous provisions under the Other Notes) plus
accrued and unpaid Interest thereon (the “Company Redemption Amount”). The
portion of this Note subject to redemption pursuant to this Section 8(a) shall
be redeemed by the Company in cash at a price (the “Optional Redemption Price”)
equal to the sum of (x) the Conversion Amount being redeemed and (y) any accrued
and unpaid Interest on the Conversion Amount. The Company Optional Redemption
Notice shall be irrevocable. Notwithstanding anything to the contrary in this
Section 8, but subject to Section 3(e), until the Holder receives the Optional
Redemption Price, the Conversion Amount reflected in such Optional Redemption
Notice may be converted, in whole or in part, by the Holder into Common

 

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Stock pursuant to Section 3 (and any such conversions shall be deemed to be a
withdrawal of the Company Optional Redemption Notice to the extent of such
conversion), and any such conversion shall reduce the Conversion Amount
reflected in such Optional Redemption Notice. The Company Redemption Amount
which is to be paid to the Holder on the applicable Company Optional Redemption
Date shall be redeemed by the Company, and the Company shall pay to the Holder
on such Company Optional Redemption Date by wire transfer of immediately
available funds, the Optional Redemption Price.

(b) Optional Redemption by the Holder. No later than twenty (20) Trading Days
prior to the Triggering Optional Redemption Date, the Company shall deliver
written notice by confirmed facsimile and overnight courier to all, but not less
than all, of the holders of the Notes (the “Company Notice”) which shall
describe the redemption rights provided in this Section 8. On the Triggering
Optional Redemption Date, the Holder shall have the right, in its sole
discretion, to require that the Company redeem all or any portion of the Note (a
“Holder Optional Redemption”). In order for the Holder to exercise its Holder
Optional Redemption Right, the Holder must deliver written notice (the “Holder
Optional Redemption Notice”) to the Company no later than five (5) Business Days
prior to the later of (x) the Triggering Optional Redemption Date and (y) twenty
(20) Trading Days following the receipt of the Company Notice (such later date,
the “Holder Optional Redemption Date”). The Holder Optional Redemption Notice
shall indicate the Conversion Amount the Holder is electing to have redeemed
(the “Holder Optional Redemption Amount”) on the Holder Optional Redemption
Date, which date shall be no earlier than the Triggering Optional Redemption
Date and no later than twenty (20) Trading Days following receipt of the Company
Notice. The portion of this Note subject to redemption pursuant to this
Section 8 shall be redeemed by the Company in cash at the Optional Redemption
Price. Notwithstanding anything to the contrary in this Section 8, but subject
to Section 3(e), until the Holder receives the Optional Redemption Price, the
Holder Optional Redemption Amount may be converted, in whole or in part, by the
Holder into Common Stock pursuant to Section 3 (and any such conversions shall
be deemed to be a withdrawal of the Holder Optional Redemption Notice to the
extent of such conversion), and any such conversion shall reduce the Conversion
Amount reflected in such Optional Redemption Notice. The Holder Optional
Redemption Amount which is to be paid to the Holder on the applicable Holder
Optional Redemption Date shall be redeemed by the Company, and the Company shall
pay to the Holder on such Holder Optional Redemption Date by wire transfer of
immediately available funds, the Optional Redemption Price.

(c) Pro Rata Redemption Requirement. If the Company elects to cause a Company
Optional Redemption pursuant to Section 8, then it must simultaneously take the
same action with respect to the Other Notes. If the Company elects to cause a
Company Optional Redemption pursuant to this Section 8 (or similar provisions
under the Other Notes) with respect to less than all of the principal amount of
the Notes then outstanding, then the Company shall require redemption of a
Principal amount from the Holder and each holder of the Other Notes equal to the
product of (i) the aggregate principal amount of Notes which the Company has
elected to cause to be redeemed pursuant to Section 8, multiplied by (ii) the
fraction, the numerator of which is the sum of the initial principal amount of
Notes purchased by such holder (or the ultimate holder of a Note transferred as
set forth below with an allocation among such Notes as set forth below) and the
denominator of which is the initial principal amounts of Notes purchased by all
holders (or the ultimate holder of a Note transferred as set forth below with an
allocation among such Notes as set forth below) holding outstanding Notes (such
fraction with respect to each holder is referred to as its “Redemption

 

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Allocation Percentage”, and such amount with respect to each holder is referred
to as its “Pro Rata Redemption Amount”); provided that in the event that the
initial holder of any Notes has sold or otherwise transferred any of such
holder’s Notes, the transferee shall be allocated a pro rata portion of such
transferring holder’s Redemption Allocation Percentage and Pro Rata Redemption
Amount; and provided further, that in the event any holder’s Pro Rata Redemption
Amount exceeds the outstanding principal amount of such holder’s Note, any
excess redemption amount shall be applied to the principal amount of all
remaining Notes on a pro rata basis pursuant to this subsection (b).

(d) Redemptions Generally. Any redemptions made pursuant to this Section 8 shall
be made in accordance with Section 9. No later than one (1) Trading Day
following any Optional Redemption Date or Holder Optional Redemption Date, the
Company shall file a Current Report on Form 8-K describing the terms of such
Holder Optional Redemption or Company Optional Redemption, as the case may be.
To the extent redemptions required by this Section 8 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.

(9) REDEMPTIONS.

(a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder within five (5) Business Days after the Company’s
receipt of the Holder’s Event of Default Redemption Notice. If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 5(b),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder (i) concurrently with the consummation of such Change of Control if
such notice is received prior to the consummation of such Change of Control and
(ii) within five (5) Business Days after the Company’s receipt of such notice
otherwise (the “Change of Control Settlement Date”). The Company shall deliver
the applicable Optional Redemption Price on the Optional Redemption Date or
Holder Optional Redemption Date, as applicable. 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 17(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 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 and (y) the Company shall immediately return this Note, or
issue a new Note (in accordance with Section 17(d)) to the Holder representing
such Conversion Amount.

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence described in Section 4(b), Section 5(b) or Section 8 (each,
an “Other Redemption Notice”), the Company shall immediately, but no later than
one (1) Business Day of its receipt thereof, forward to the Holder by facsimile
a copy of such notice. If there has been an Acceleration to the extent required
and the Company receives a Holder’s Redemption Notice and one or more Other
Redemption Notices, during the seven (7) Business Day period beginning on and
including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s Redemption Notice

 

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and ending on and including the date which is three (3) Business Days after the
Company’s receipt of the Holder’s Redemption Notice and the Company is unable to
redeem all principal, interest and other amounts designated in such Redemption
Notice and such Other Redemption Notices received during such seven (7) Business
Day period, then the Company shall redeem a pro rata amount from each holder of
the Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.

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

(11) RESERVATION OF AUTHORIZED SHARES.

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

(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to

 

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reserve the Required Reserve Amount for the Notes then outstanding. Without
limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event later
than thirty (30) days after the occurrence of such Authorized Share Failure, the
Company shall file a proxy statement with respect to a meeting of its
stockholders for the approval of an increase in the number of authorized shares
of Common Stock and the Company shall be required to increase the number of
authorized shares no later than ninety (90) days after the occurrence of the
Authorized Share Failure (the “Authorized Share Failure Deadline”). In
connection with such meeting, the Company shall provide each stockholder with
such proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal.

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

(13) COVENANTS.

(a) Ranking. All obligations evidenced by this Note and the Other Notes shall
constitute senior obligations of the Company and are senior in right of payment
to any existing or future subordinated indebtedness or other subordinated
obligations of the Company.

(b) Incurrence of Indebtedness. So long as this Note is outstanding, (i) the
Company shall not, directly or indirectly, incur or guarantee, assume or suffer
to exist any Indebtedness, other than Permitted Indebtedness and (ii) 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
Permitted Pari Passu Indebtedness and Indebtedness secured by Permitted Liens.

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

(d) Restricted Payments. The Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase,
repay or make any payments in respect of, by the payment of cash or cash
equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness described in clause (ii) of the definition of “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, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.

(e) Restriction on Redemption and Cash Dividends. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution

 

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on its capital stock without the prior express written consent of the Majority
Holders other than pursuant to the terms of any securities issued pursuant to an
Approved Stock Plan, provided, that the redemption or repurchase price shall not
exceed the purchase price paid and such purchase price reflects no more than the
fair market value as determined in good faith by the Company’s board of
directors.

(14) PARTICIPATION. Without duplication of the provisions of Section 6 hereof,
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.

(15) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Majority Holders shall be required and sufficient for any change or
amendment to this Note or the Other Notes; provided, however, that the approval
of the Holder shall be required for any change or amendment that would
(i) reduce the rate of or extend the time for payment of Interest, (ii) reduce
the Principal amount of, or extend the Maturity Date, (iii) make any change that
impairs or adversely affects the conversion rights of the Note, (iv) reduce any
Redemption Price or amend or modify in any manner adverse to the Holder the
Company’s obligation to make such payments, whether through an amendment or
waiver of provisions in the covenants, definitions or otherwise, (v) modify the
provisions in respect of the right of the Holder to cause the Company to redeem
or to repurchase pursuant to the terms of this Note in a manner adverse to the
Holder, (vi) impair the right to receive payment of the Principal amount of or
Interest, on this Note on or after the due dates therefor or to institute suit
for the enforcement of any payment on or in respect of this Note, (vii) reduce
the quorum or voting requirements under the Notes, or (viii) change the ranking
of the Notes in a manner adverse to the Holder, (ix) modify the Conversion
Limitation with respect to the Holder, or (x) modify any of the provisions of
this Section 15, except to increase any such percentage or to provide that
certain other provisions of this Note cannot be modified or waived without the
consent of the Holder. No consideration shall be offered or paid to any holder
of Notes to amend or consent to a waiver or modification of the Notes unless the
same consideration also is offered to all of the holders of Notes who agree to
such amendment, waiver or modification.

(16) TRANSFER. This Note and any shares of Common Stock issued upon conversion
of this Note may be offered, sold, assigned or transferred by the Holder without
the consent of the Company, subject only to the provisions of Section 2(f) of
the Securities Purchase Agreement.

(17) REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred, the Holder shall surrender this
Note to the Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new Note (in accordance with Section 17(d)),
registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 17(d)) to
the Holder representing the outstanding Principal not being transferred. The
Holder and any assignee, by

 

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acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) following conversion or redemption of any portion of this
Note, the outstanding Principal represented by this Note may be less than the
Principal stated on the face of this Note.

(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 and bonding by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Note, the Company shall execute and deliver to the Holder a new Note (in
accordance with Section 17(d)) representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Note or Notes (in accordance with Section 17(d) and in principal
amounts of at least $250,000) representing in the aggregate the outstanding
Principal of this Note, and each such new Note will represent such portion of
such outstanding Principal as is designated by the Holder at the time of such
surrender.

(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 17(a) or Section 17(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest from the Issuance Date.

(18) 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.

(19) 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

 

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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.

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

(21) 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.

(22) 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, the Conversion Price or any
Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within one (1) Business Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder. If the Holder
and the Company are unable to agree upon such determination or calculation
within one (1) Business Day of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within one
(1) Business Day submit via facsimile (a) the disputed determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price to an
independent, reputable investment bank selected by the Company and approved by
the Holder or (b) the disputed arithmetic calculation of the Conversion Rate,
Conversion Price 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
seven (7) 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.

(23) NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. 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, in which case the requirements of
clause (ii) shall be deemed satisfied if such notice to the Holder is made
promptly following notice to the public.

 

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(b) Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder’s wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents which is not
paid when due shall continue to accrue Interest on such amount at the applicable
Interest Rate from the date such amount is due until paid in full.

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

(25) 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, except as for notices otherwise expressly
provided for in the Note and the Securities Purchase Agreement.

(26) GOVERNING LAW; JURISDICTION; JURY. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Nothing contained herein shall be deemed to limit in any
way any right to serve process in any manner permitted by law. The Company
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address as provided in Section 23 hereof and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed or operate to preclude the
Holder from bringing suit or taking other

 

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legal action against the Company in any other jurisdiction to collect on the
Company’s obligations to the Holder, or to enforce a judgment or other court
ruling in favor of the Holder. EACH OF THE COMPANY AND THE HOLDER 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.

(27) SEVERABILITY. If any provision of this Note is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or
unenforceable shall be deemed amended to apply to the broadest extent that it
would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this Note
so long as this Note as so modified continues to express, without material
change, the original intentions of the parties as to the subject matter hereof
and the prohibited nature, invalidity or unenforceability of the provision(s) in
question does not substantially impair the respective expectations or reciprocal
obligations of the parties or the practical realization of the benefits that
would otherwise be conferred upon the parties. The parties will endeavor in good
faith negotiations to replace the prohibited, invalid or unenforceable
provision(s) with a valid provision(s), the effect of which comes as close as
possible to that of the prohibited, invalid or unenforceable provision(s).

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

(a) “Additional Interest Amount” means, as to any Conversion Amount being
converted pursuant to Section 3 hereof, an amount equal to the difference
between (A) an amount of Interest that, but for the applicable conversion, would
have been paid to the Holder on such Conversion Amount from the Issuance Date
through the next succeeding Interest Date after the Conversion Date and (B) the
amount of Interest already paid to the Holder through the applicable Conversion
Date.

(b) “Approved Stock Plan” means any employee benefit plan which has been
approved by the Company’s board of directors, pursuant to which the Company’s
securities may be issued to any employee, consultant, officer or director for
services provided to the Company.

(c) “Bloomberg” means Bloomberg Financial Markets.

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

(e) “Change of Control” means any Fundamental Transaction other than (i) any
merger, consolidation, reorganization, recapitalization or reclassification of
the Common Stock in which holders of the Company’s voting power immediately
prior to such merger, consolidation, reorganization, recapitalization or
reclassification continue after such merger, consolidation, reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, a majority of the voting power of the surviving entity
or entities that elects 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.

 

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(f) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for 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 22. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction during the applicable calculation
period.

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

(h) “Common Stock” means the shares of the Company’s common stock, par value
$0.0001 per share, or any other shares of capital stock of the Company into
which the Common Stock shall be reclassified or changed or, in the event of a
merger, consolidation or other similar transaction involving the Company that is
permitted hereunder in which the Company is not the Successor Entity, the common
stock, common equity interests, ordinary shares or depositary shares or other
certificates representing common equity interests of such Successor Entity or
its direct or indirect parent corporation.

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

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

 

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(k) “Director Change” means, at any time the following persons cease for any
reason to constitute a majority of the Company’s board of directors:
(i) individuals who on the date hereof constituted the Company’s board of
directors and (ii) any other new directors whose appointment to the Company’s
board of directors or whose nomination for election by the Company’s
stockholders was approved by at least a majority of the directors of the Company
then still in office either (A) who were directors of the Company on the date
hereof, or (B) whose appointment or nomination for election was previously so
approved.

(l) “Effective Date” means the date that a Change of Control becomes effective.

(m) “Eligible Market” means the Principal Market, The New York Stock Exchange,
Inc., the American Stock Exchange, The NASDAQ Global Select Market, or The
NASDAQ Capital Market.

(n) “Equity Conditions” means that each of the following conditions is
satisfied: (i) on each applicable date of determination, either (x) the
Registration Statement filed pursuant to the Registration Rights Agreement shall
be effective and available for the resale of all remaining Registrable
Securities in accordance with the terms of the Registration Rights Agreement and
there shall not have been any Grace Period (as defined in the Registration
Rights Agreement) on such day or (y) all shares of Common Stock issuable upon
conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; (ii) on each applicable date of determination, the Common Stock
is designated for quotation on the Principal Market or any other Eligible Market
and shall not have been suspended from trading on such exchange or market nor
shall delisting or suspension by such exchange or market been threatened or
pending either (A) in writing by such exchange or market or (B) by falling below
the then effective minimum listing maintenance requirements of such exchange or
market; (iii) on each applicable date of determination, the Company shall have
delivered shares of Common Stock upon conversion of the Notes to the holders on
a timely basis as set forth in Section 3(c)(ii) hereof (and analogous provisions
under the Other Notes); (iv) any applicable shares of Common Stock to be issued
in connection with the event requiring determination may be issued in full
without violating Section 3(e) hereof and the rules or regulations of the
Principal Market or any applicable Eligible Market; and (v) on each applicable
date of determination, there shall not have occurred either (A) the public
announcement of a pending, proposed or intended Fundamental Transaction which
has not been abandoned, terminated or consummated or (B) an Event of Default or
(C) an event that solely with the passage of time or giving of notice would
constitute an Event of Default.

(o) “Equity Conditions Failure” means that on any Trading Day during the period
commencing on the first Trading Day of the applicable Mandatory Conversion
Measuring Period through and including the applicable Mandatory Conversion Date,
the Equity Conditions have not been satisfied (or waived in writing by the
Holder).

(p) “Fundamental Transaction” means (A) 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

 

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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 (B) (i) the holders of the
Company’s Voting Stock of any plan or proposal for the liquidation or
dissolution of the Company or (ii) a Director Change or (iii) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company.

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

(r) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the
Principal amount of this Note on the Closing Date and (ii) the denominator of
which is the aggregate principal amount of all Notes issued to the initial
purchasers pursuant to the Securities Purchase Agreement on the Closing Date.

(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, (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) “Interest Rate” means six and one-half percent (6.50%) per annum, subject to
adjustment as set forth in Section 2.

 

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

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

(w) “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.

(x) “Permitted Indebtedness” means (i) the Indebtedness evidenced by this Note
and the Other Notes, (ii) unsecured Indebtedness incurred by the Company that is
made expressly subordinate in right of payment to the Indebtedness evidenced by
this Note, as reflected in a written agreement reasonably acceptable to the
Majority Holders in writing, and which Indebtedness does not provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon until ninety-one
(91) days after the Maturity Date or later and (2) total interest and fees at a
rate in excess of twelve and one-half percent (12.50%) per annum,
(iii) Indebtedness secured by Permitted Liens and (iv) Permitted Pari Passu
Indebtedness.

(y) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (iii) any Lien created by operation of law, such as
materialmen’s liens, mechanics’ liens, landlord’s liens, carrier’s 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 (including Liens with respect
to capital leases) (A) upon or in any equipment acquired or held by the Company
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment, (v) Liens
incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clause (iv) above,
provided that any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase,
(vi) 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,
(vii) zoning restrictions, easements, licenses, reservations, title defects,
rights of others for rights-of-way, utilities, sewers, electrical lines,
telephone lines, telegraph wires, restrictions and other similar charges or
encumbrances not interfering in any material respect with the Company or any
Subsidiary’s business, incurred in the ordinary course of business, that do not
(x) secure obligations for the payment of money or (y) interfere in any material
respect with the Company or any Subsidiary’s business, (viii) Liens incurred or
deposits made in the ordinary course of business in connection with workers’
compensation, unemployment insurance and other types of social security

 

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or other insurance (including unemployment insurance); (ix) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payments of
custom duties in connection with the importation of goods, and (x) Liens arising
from judgments, decrees or attachments (including surety and appeal bonds) in
circumstances not constituting an Event of Default under Section 4(a)(viii).

(z) “Permitted Pari Passu Indebtedness” means unsecured Indebtedness to trade
creditors of the Company and its Subsidiaries, incurred in the ordinary course
of business and that is not outstanding for more than 120 days after the date
such payable was created; provided however, that Permitted Pari Passu
Indebtedness shall include payables outstanding for more than 120 days after the
date such payable was created (i) that are contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, or (ii) if not contested, that do not, individually or in
the aggregate, exceed the greater of (a) $1,000,000 and (b) 25% of aggregate of
all of such unsecured Indebtedness to trade creditors.

(aa) “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.

(bb) “Principal Market” means The NASDAQ Global Market.

(cc) “Redemption Notices” means, collectively, the Event of Default Redemption
Notices, the Change of Control Redemption Notices, the Company Notice, each of
the foregoing, individually, a Redemption Notice.

(dd) “Redemption Prices” means, collectively, the Event of Default Redemption
Price, Change of Control Redemption Price, the Holder Optional Redemption Price,
and the Company Optional Redemption Price, each of the foregoing, individually,
a Redemption Price.

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

(ff) “Required Holders” means the holders of Notes representing at least
twenty-five percent (25%) of the aggregate principal amount of the Notes then
outstanding.

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

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

(ii) “Subscription Date” means December [•], 2007.

(jj) “Subsidiary” means, in respect of any Person, (a) any corporation,
association or other business entity of which 50% or more of the total voting
power of shares of capital stock or other equity interest entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or

 

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indirectly, by such Person or one or more of the other subsidiaries of that
Person (or a combination thereof) and (b) any partnership (i) the sole general
partner or managing general partner of which is such Person or a subsidiary of
such Person or (ii) the only general partners of which are (a) such Person or
(b) one or more subsidiaries of such Person (or any combination thereof).

(kk) “Significant Subsidiary” means a Subsidiary of the Company that is a
“significant subsidiary” as those terms are defined in Regulation S-X under the
Securities Act.

(ll) “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, and such Person has a
Parent Entity, Successor Entity shall mean such Person’s Parent Entity.

(mm) “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).

(nn) “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).

(oo) “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 22. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination, reclassification or similar
transaction during the applicable calculation period.

 

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(29) DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within two (2) 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 such Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

 

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

 

I-MANY, INC. By:  

/s/ John A. Rade

Name:   John A. Rade Title:   Chief Executive Officer

[Signature Page to Senior Convertible Note]