Exhibit 10.4
 
 
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN
OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO
THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

QUEST OIL CORPORATION

Senior Secured Convertible Promissory Note
due October __, 2007

No.
CN-05-__                                                                                                                      $___________
Dated: October __, 2005

For value received, QUEST OIL CORPORATION, a Nevada corporation (the "Maker"),
hereby promises to pay to the order of _______________________ (together with
its successors, representatives, and permitted assigns, the "Holder"), in
accordance with the terms hereinafter provided, the principal amount of
________________________ ($______________), together with interest thereon.
Concurrently with the issuance of this Note, the Maker is issuing separate
senior secured convertible promissory notes (the “Other Notes”) to separate
purchasers (the “Other Holders”) pursuant to the Purchase Agreement (as defined
in Section 1.1 hereof).
 
All payments under or pursuant to this Note shall be made in United States
Dollars in immediately available funds to the Holder at the address of the
Holder first set forth above or at such other place as the Holder may designate
from time to time in writing to the Maker or by wire transfer of funds to the
Holder's account, instructions for which are attached hereto as Exhibit A. The
outstanding principal balance of this Note shall be due and payable on October
__, 2007 (the "Maturity Date") or at such earlier time as provided herein.
 
ARTICLE I
 
Section 1.1  Purchase Agreement. This Note has been executed and delivered
pursuant to the Note and Warrant Purchase Agreement dated as of September 30,
2005 (the "Purchase Agreement”) by and among the Maker and the purchasers listed
therein. Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase Agreement.
 
Section 1.2  -Interest. Beginning on the issuance date of this Note (the
“Issuance Date”), the outstanding principal balance of this Note shall bear
interest, in arrears, at a rate per annum equal to ten percent (10%), payable
annually on October 1 of each year commencing October 1, 2006 at the option of
the Maker in (A) cash, (B) additional senior secured convertible promissory
notes in a form substantially identical to this Note, or (C) in registered
shares of the Maker’s common stock, par value $0.001 per share (the “Common
Stock”), in accordance with terms of Section 1.3 below. Interest shall be
computed on the basis of a 360-day year of twelve (12) 30-day months and shall
accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an
Event of Default (as defined in Section 2.1 hereof), then to the extent
permitted by law, the Maker will pay interest to the Holder, payable on demand,
on the outstanding principal balance of the Note from the date of the Event of
Default until such Event of Default is cured at the rate of the lesser of
fifteen percent (15%) and the maximum applicable legal rate per annum. 
 
Section 1.3  Payment of Principal and Interest.
 
(a)  Commencing on the fifth (5th) month following the Issuance Date and
continuing thereafter on the first (1st) business day of each month (a
“Principal Payment Date”), the Maker shall pay an amount to the Holder equal to
1/20th of the original principal amount of this Note plus any accrued but unpaid
interest (the “Principal Installment Amount”); provided, however, if on any
Principal Payment Date, the outstanding principal amount of this Note plus any
accrued but unpaid interest is less than the Principal Installment Amount, then
the Maker shall pay to the Holder such lesser amount. The Maker may pay such
Principal Installment Amount in cash or registered shares of Common Stock. If
the Maker elects to pay the Principal Installment Amount in cash such amount
shall be wired in immediately available funds on the Principal Payment Date;
provided, however, that if the Holder has delivered a Conversion Notice to the
Maker or delivers a Conversion Notice prior to the Principal Payment Date, the
Holder shall indicate in such Conversion Notice whether the principal amount of
this Note to be so converted shall be applied against the final Principal
Installment Amount or some other Principal Installment Amount. The Maker shall
provide irrevocable written notice to the Holder of the form of payment of the
Principal Installment Amount on the tenth (10th) business day prior to the first
day of each month for which a Principal Installment Amount is required to be
made by the Maker.
 
(b)  If the Maker elects to pay the Principal Installment Amount in registered
shares of Common Stock, the number of registered shares of Common Stock to be
issued to the Holder shall be an amount equal to the Principal Installment
Amount divided by eighty-seven and one-half percent (87.5%) of the average of
the Closing Bid Price (as defined in Section 1.3(c) hereof) for the ten (10)
Trading Days immediately preceding the Principal Payment Date; provided,
however, that if the Holder has delivered a Conversion Notice to the Maker or
delivers a Conversion Notice prior to the Principal Payment Date, the Holder
shall indicate in such Conversion Notice whether the principal amount of this
Note to be so converted shall be applied against the final Principal Installment
Amount or some other Principal Installment Amount. Notwithstanding the foregoing
to the contrary, the Maker may elect to pay the Principal Installment Amount in
registered shares of Common Stock on any Principal Payment Date only if (A) the
registration statement providing for the resale of the shares of Common Stock
issuable upon conversion of this Note (the “Registration Statement”) is
effective and has been effective, without lapse or suspension of any kind, for a
period of twenty (20) consecutive calendar days, (B) trading in the Common Stock
shall not have been suspended by the Securities and Exchange Commission or the
OTC Bulletin Board (or other exchange or market on which the Common Stock is
trading), (C) the Maker is in material compliance with the terms and conditions
of this Note and the other Transaction Documents, and (D) the issuance of shares
of Common Stock on the Principal Payment Date does not violate the provisions of
Section 3.4 hereof.
 
(c)  The term "Closing Bid Price" shall mean, on any particular date (i) the
last trading price per share of the Common Stock on such date on the OTC
Bulletin Board or another registered national stock exchange on which the Common
Stock is then listed, or if there is no such price on such date, then the last
trading price on such exchange or quotation system on the date nearest preceding
such date, or (ii) if the Common Stock is not listed then on the OTC Bulletin
Board or any registered national stock exchange, the last trading price for a
share of Common Stock in the over-the-counter market, as reported by the OTC
Bulletin Board or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (iii) if the Common Stock is not then
reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the Holder, or (iv) if the Common Stock
is not then publicly traded the fair market value of a share of Common Stock as
determined by the Holder and reasonably acceptable to the Maker.
 
Section 1.4  Security Agreement. The obligations of the Maker hereunder are
secured by a continuing security interest in certain assets of the Maker
pursuant to the terms of a security agreement dated as of September 30, 2005 by
and among the Maker and the Maker’s wholly owned subsidiaries, on the one hand,
and the Holder and the Other Holders, on the other hand.
 
Section 1.5  Payment on Non-Business Days. Whenever any payment to be made shall
be due on a Saturday, Sunday or a public holiday under the laws of the State of
New York, such payment may be due on the next succeeding business day and such
next succeeding day shall be included in the calculation of the amount of
accrued interest payable on such date.
 
Section 1.6  -Transfer. This Note may be transferred or sold, subject to the
provisions of Section 4.8 of this Note, or pledged, hypothecated or otherwise
granted as security by the Holder.
 
Section 1.7  -Replacement. Upon receipt of a duly executed, notarized and
unsecured written statement from the Holder with respect to the loss, theft or
destruction of this Note (or any replacement hereof) and a standard indemnity,
or, in the case of a mutilation of this Note, upon surrender and cancellation of
such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu
of such lost, stolen, destroyed or mutilated Note.
 
 
 
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ARTICLE II
 
EVENTS OF DEFAULT; REMEDIES
 
Section 2.1  Events of Default. The occurrence of any of the following events
shall be an "Event of Default" under this Note:
 
(a)  the Maker shall fail to make the Principal Installment Amount on a
Principal Payment Date and such default is not fully cured within one (1)
business day after the occurrence thereof; or
 
(b)  the failure of the Registration Statement to be declared effective by the
Securities and Exchange Commission on or prior to the date which is one hundred
eighty (180) days after the Issuance Date; or
 
(c)  the suspension from listing, without subsequent listing on any one of, or
the failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or The New York Stock Exchange, Inc. for a period of five (5)
consecutive Trading Days; or
 
(d)  the Maker's notice to the Holder, including by way of public announcement,
at any time, of its inability to comply (including for any of the reasons
described in Section 3.8(a) hereof) or its intention not to comply with proper
requests for conversion of this Note into shares of Common Stock; or
 
(e)  the Maker shall fail to (i) timely deliver the shares of Common Stock upon
conversion of the Note or any interest accrued and unpaid, (ii) file the
Registration Statement in accordance with the terms of the Registration Rights
Agreement or (iii) make the payment of any fees and/or liquidated damages under
this Note, the Purchase Agreement or the Registration Rights Agreement, which
failure in the case of items (i) and (iii) of this Section 2.1(e) is not
remedied within three (3) business days after the incurrence thereof; or
 
(f)  while the Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of
the Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the Holder for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive Trading Days,
provided that the Maker has not exercised its rights pursuant to Section 3(n) of
the Registration Rights Agreement; or
 
(g)  default shall be made in the performance or observance of (i) any material
covenant, condition or agreement contained in this Note (other than as set forth
in clause (f) of this Section 2.1) and such default is not fully cured within
three (3) business days after the Maker receives notice from the Holder of the
occurrence thereof or (ii) any material covenant, condition or agreement
contained in the Purchase Agreement, the Other Notes, the Registration Rights
Agreement or any other Transaction Document which is not covered by any other
provisions of this Section 2.1 and such default is not fully cured within three
(3) business days after the Maker receives notice from the Holder of the
occurrence thereof; or
 
(h)  any material representation or warranty made by the Maker herein or in the
Purchase Agreement, the Registration Rights Agreement, the Other Notes or any
other Transaction Document shall prove to have been false or incorrect or
breached in a material respect on the date as of which made; or
 
(i)  the Maker shall (A) default in any payment of any amount or amounts of
principal of or interest on any Indebtedness (other than the Indebtedness
hereunder) the aggregate principal amount of which Indebtedness is in excess of
$100,000 or (B) default in the observance or performance of any other agreement
or condition relating to any Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders or beneficiary or
beneficiaries of such Indebtedness to cause with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity; or
 
(j)  the Maker shall (i) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property or assets, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the United States Bankruptcy Code (as now or hereafter in effect) or under
the comparable laws of any jurisdiction (foreign or domestic), (iv) file a
petition seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors'
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
(vi) issue a notice of bankruptcy or winding down of its operations or issue a
press release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing; or
 
(k)  a proceeding or case shall be commenced in respect of the Maker, without
its application or consent, in any court of competent jurisdiction, seeking (i)
the liquidation, reorganization, moratorium, dissolution, winding up, or
composition or readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of it or of all or any substantial
part of its assets in connection with the liquidation or dissolution of the
Maker or (iii) similar relief in respect of it under any law providing for the
relief of debtors, and such proceeding or case described in clause (i), (ii) or
(iii) shall continue undismissed, or unstayed and in effect, for a period of
thirty (30) days or any order for relief shall be entered in an involuntary case
under United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or
action under the laws of any jurisdiction (foreign or domestic) analogous to any
of the foregoing shall be taken with respect to the Maker and shall continue
undismissed, or unstayed and in effect for a period of thirty (30) days; or
 
(l)  the failure of the Maker to instruct its transfer agent to remove any
legends from shares of Common Stock eligible to be sold under Rule 144 of the
Securities Act and issue such unlegended certificates to the Holder within three
(3) business days of the Holder’s request so long as the Holder has provided
reasonable assurances to the Maker that such shares of Common Stock can be sold
pursuant to Rule 144; or
 
(m)  the failure of the Maker to pay any amounts due to the Holder herein or in
the Purchase Agreement or the Registration Rights Agreement within three (3)
business days of the date such payments are due; or
 
(n)  the occurrence of an Event of Default under the Other Notes or the Zero
Coupon Notes.
 
Section 2.2  Remedies Upon An Event of Default. If an Event of Default shall
have occurred and shall be continuing, the Holder of this Note may at any time
at its option, (a) declare the entire unpaid principal balance of this Note,
together with all interest accrued hereon, due and payable, and thereupon, the
same shall be accelerated and so due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and
irrevocably waived by the Maker; provided, however, that upon the occurrence of
an Event of Default described in (i) Sections 2.1 (j) or (k), the outstanding
principal balance and accrued interest hereunder shall be automatically due and
payable and (ii) Sections 2.1 (b)-(i), demand the prepayment of this Note
pursuant to Section 3.7 hereof, (b) demand that the principal amount of this
Note then outstanding and all accrued and unpaid interest thereon shall be
converted into shares of Common Stock at a Conversion Price per share calculated
pursuant to Section 3.1 hereof assuming that the date that the Event of Default
occurs is the Conversion Date (as defined in Section 3.1 hereof), or (c)
exercise or otherwise enforce any one or more of the Holder's rights, powers,
privileges, remedies and interests under this Note, the Purchase Agreement, the
Registration Rights Agreement or applicable law. No course of delay on the part
of the Holder shall operate as a waiver thereof or otherwise prejudice the right
of the Holder. No remedy conferred hereby shall be exclusive of any other remedy
referred to herein or now or hereafter available at law, in equity, by statute
or otherwise.
 
 
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ARTICLE III
 
CONVERSION; ANTIDILUTION; PREPAYMENT
 
          Section 3.1  Conversion Option.
 
(a)  At any time on or after the Issuance Date, this Note shall be convertible
(in whole or in part), at the option of the Holder (the "Conversion Option"),
into such number of fully paid and non-assessable shares of Common Stock (the
"Conversion Rate") as is determined by dividing (x) that portion of the
outstanding principal balance plus any accrued but unpaid interest under this
Note as of such date that the Holder elects to convert by (y) the Conversion
Price (as defined in Section 3.2(a) hereof) then in effect on the date on which
the Holder faxes a notice of conversion (the "Conversion Notice"), duly
executed, to the Maker (facsimile number (800) 608-3562, Attn.: Chief Executive
Officer) (the “Voluntary Conversion Date”), provided, however, that the
Conversion Price shall be subject to adjustment as described in Section 3.6
below. The Holder shall deliver this Note to the Maker at the address designated
in the Purchase Agreement at such time that this Note is fully converted. With
respect to partial conversions of this Note, the Maker shall keep written
records of the amount of this Note converted as of each Conversion Date.
 
(b)  On the Mandatory Conversion Date (as defined below), the Maker may cause
the principal amount of this Note plus all accrued and unpaid interest to
convert into a number of fully paid and nonassessable shares of Common Stock
equal to the quotient of (i) the principal amount of this Note plus all accrued
and unpaid interest outstanding on the Mandatory Conversion Date divided by (ii)
the Conversion Price in effect on the Mandatory Conversion Date by providing
five business (5) days prior written notice of such Mandatory Conversion Date;
provided, that, the Maker shall not convert, during any fifteen day period, this
Note into such number of registered shares of Common Stock in excess of an
amount equal to the greater of (1) twenty-five percent (25%) of the aggregate
trading volume for the prior fifteen (15) days or (2) twenty percent (20%) of
the original principal amount of this Note. As used herein, a "Mandatory
Conversion Date" shall be a date following the effective date of the
Registration Statement in which the Closing Bid Price exceeds $0.80 for a period
of ten (10) consecutive Trading Days and the average daily trading volume for
such ten (10) consecutive Trading Day period exceeds 250,000 shares of Common
Stock; provided, that (A) the Registration Statement is effective and has been
effective, without lapse or suspension of any kind, for a period of twenty (20)
consecutive calendar days immediately preceding the Mandatory Conversion Date,
(B) trading in the Common Stock shall not have been suspended by the Securities
and Exchange Commission or the OTC Bulletin Board (or other exchange or market
on which the Common Stock is trading), (C) the Maker is in material compliance
with the terms and conditions of this Note and the other Transaction Documents,
(D) the issuance of shares of Common Stock on the Mandatory Conversion Date
pursuant to such mandatory conversion does not violate the provisions of Section
3.4 hereof, and (E) the Maker is not in possession of any material non-public
information. Notwithstanding the foregoing to the contrary, the Mandatory
Conversion Date shall be extended for as long as a Triggering Event (as defined
in Section 3.7(f) hereof) shall have occurred and be continuing. The Mandatory
Conversion Date and the Voluntary Conversion Date collectively are referred to
in this Note as the "Conversion Date."
 
(c)  So long as the Registration Statement is effective, in the event that the
Closing Bid Price of the Common Stock is greater than $0.40 and less than $1.25,
the maximum number of shares of Common Stock that may be issued upon conversion
of this Note shall not exceed the greater of (1) twenty-five percent (25%) of
the aggregate trading volume for the prior fifteen (15) days or (2) twenty
percent (20%) of the original principal amount of this Note.
 
                 Section 3.2  Conversion Price.
 
(a)  The term "Conversion Price" shall mean $0.40, subject to adjustment under
Section 3.6 hereof.
 
(b)  Notwithstanding any of the foregoing to the contrary, if during any period
(a "Black-out Period"), a Holder is unable to trade any Common Stock issued or
issuable upon conversion of this Note immediately due to the postponement of
filing or delay or suspension of effectiveness of the Registration Statement or
because the Maker has otherwise informed such Holder that an existing prospectus
cannot be used at that time in the sale or transfer of such Common Stock
(provided that such postponement, delay, suspension or fact that the prospectus
cannot be used is not due to factors solely within the control of the Holder of
this Note or due to the Maker exercising its rights under Section 3(n) of the
Registration Rights Agreement), such Holder shall have the option but not the
obligation on any Conversion Date within ten (10) Trading Days following the
expiration of the Black-out Period of using the Conversion Price applicable on
such Conversion Date or any Conversion Price selected by such Holder that would
have been applicable had such Conversion Date been at any earlier time during
the Black-out Period or within the ten (10) Trading Days thereafter. In no event
shall the Black-out Period have any effect on the Maturity Date of this Note.
 
                       Section 3.3  Mechanics of Conversion.
 
(a)  Not later than three (3) Trading Days after any Conversion Date, the Maker
or its designated transfer agent, as applicable, shall issue and deliver to the
Depository Trust Company (“DTC”) account on the Holder’s behalf via the Deposit
Withdrawal Agent Commission System (“DWAC”) as specified in the Conversion
Notice, 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. In the
alternative, not later than three (3) Trading Days after any Conversion Date,
the Maker shall deliver to the applicable Holder by express courier a
certificate or certificates which shall be free of restrictive legends and
trading restrictions (other than those required by Section 5.1 of the Purchase
Agreement) representing the number of shares of Common Stock being acquired upon
the conversion of this Note (the “Delivery Date”). Notwithstanding the foregoing
to the contrary, the Maker or its transfer agent shall only be obligated to
issue and deliver the shares to the DTC on the Holder’s behalf via DWAC (or
certificates free of restrictive legends) if such conversion is in connection
with a sale and the Holder has complied with the applicable prospectus delivery
requirements (as evidenced by documentation furnished to and reasonably
satisfactory to the Maker). If in the case of any Conversion Notice such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the Delivery Date, the Holder shall be entitled by written
notice to the Maker at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the Maker
shall immediately return this Note tendered for conversion, whereupon the Maker
and the Holder shall each be restored to their respective positions immediately
prior to the delivery of such notice of revocation, except that any amounts
described in Sections 3.3(b) and (c) shall be payable through the date notice of
rescission is given to the Maker.
 
(b)  The Maker understands that a delay in the delivery of the shares of Common
Stock upon conversion of this Note beyond the Delivery Date could result in
economic loss to the Holder. If the Maker fails to deliver to the Holder such
shares via DWAC or a certificate or certificates pursuant to this Section
hereunder by the Delivery Date, the Maker shall pay to such Holder, in cash, an
amount per Trading Day for each Trading Day until such shares are delivered via
DWAC or certificates are delivered, together with interest on such amount at a
rate of 10% per annum, accruing until such amount and any accrued interest
thereon is paid in full, equal to the greater of (A) (i) 1% of the aggregate
principal amount of the Notes requested to be converted for the first five (5)
Trading Days after the Delivery Date and (ii) 2% of the aggregate principal
amount of the Notes requested to be converted for each Trading Day thereafter
and (B) $2,000 per day (which amount shall be paid as liquidated damages and not
as a penalty). Nothing herein shall limit a Holder's right to pursue actual
damages for the Maker's failure to deliver certificates representing shares of
Common Stock upon conversion within the period specified herein and such Holder
shall have the right to pursue all remedies available to it at law or in equity
(including, without limitation, a decree of specific performance and/or
injunctive relief). Notwithstanding anything to the contrary contained herein,
the Holder shall be entitled to withdraw a Conversion Notice, and upon such
withdrawal the Maker shall only be obligated to pay the liquidated damages
accrued in accordance with this Section 3.3(b) through the date the Conversion
Notice is withdrawn.
 
(c)  In addition to any other rights available to the Holder, if the Maker fails
to cause its transfer agent to transmit to the Holder a certificate or
certificates representing the shares of Common Stock issuable upon conversion of
this Note on or before the Delivery Date, and if after such date the Holder is
required by its broker to purchase (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of the
shares of Common Stock issuable upon conversion of this Note which the Holder
anticipated receiving upon such exercise (a “Buy-In”), then the Maker shall (1)
pay in cash to the Holder the amount by which (x) the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the amount obtained by multiplying (A) the number of
shares of Common Stock issuable upon conversion of this Note that the Maker was
required to deliver to the Holder in connection with the conversion at issue
times (B) the price at which the sell order giving rise to such purchase
obligation was executed, and (2) at the option of the Holder, either reinstate
the portion of the Note and equivalent number of shares of Common Stock for
which such conversion was not honored or deliver to the Holder the number of
shares of Common Stock that would have been issued had the Maker timely complied
with its conversion and delivery obligations hereunder. For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of shares of Common Stock with
an aggregate sale price giving rise to such purchase obligation of $10,000,
under clause (1) of the immediately preceding sentence the Maker shall be
required to pay the Holder $1,000. The Holder shall provide the Maker written
notice indicating the amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence reasonably requested
by the Maker. Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Maker’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant to the
terms hereof.
 
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Section 3.4  Ownership Cap and Certain Conversion Restrictions.
 
(a)  Notwithstanding anything to the contrary set forth in Section 3 of this
Note, at no time may the Holder convert all or a portion of this Note if the
number of shares of Common Stock to be issued pursuant to such conversion would
exceed, when aggregated with all other shares of Common Stock owned by the
Holder at such time, the number of shares of Common Stock which would result in
the Holder beneficially owning (as determined in accordance with Section 13(d)
of the Exchange Act and the rules thereunder) more than 4.9% of all of the
Common Stock outstanding at such time; provided, however, that upon the Holder
providing the Maker with sixty-one (61) days notice (pursuant to Section 4.1
hereof) (the "Waiver Notice") that the Holder would like to waive this Section
3.4(a) with regard to any or all shares of Common Stock issuable upon conversion
of this Note, this Section 3.4(a) will be of no force or effect with regard to
all or a portion of the Note referenced in the Waiver Notice.
 
(b)  Notwithstanding anything to the contrary set forth in Section 3 of this
Note, at no time may the Holder convert all or a portion of this Note if the
number of shares of Common Stock to be issued pursuant to such conversion, when
aggregated with all other shares of Common Stock owned by the Holder at such
time, would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 9.9% of the then issued and outstanding shares of Common Stock
outstanding at such time; provided, however, that upon the Holder providing the
Maker with a Waiver Notice that the Holder would like to waive Section 3.4(b) of
this Note with regard to any or all shares of Common Stock issuable upon
conversion of this Note, this Section 3.4(b) shall be of no force or effect with
regard to all or a portion of the Note referenced in the Waiver Notice.
 
          Section 3.5  Intentionally Omitted.
 
          Section 3.6  Adjustment of Conversion Price.
 
(a)  The Conversion Price shall be subject to adjustment from time to time as
follows:
 
(i)  Adjustments for Stock Splits and Combinations. If the Maker shall at any
time or from time to time after the Issuance Date, effect a stock split of the
outstanding Common Stock, the applicable Conversion Price in effect immediately
prior to the stock split shall be proportionately decreased. If the Maker shall
at any time or from time to time after the Issuance Date, combine the
outstanding shares of Common Stock, the applicable Conversion Price in effect
immediately prior to the combination shall be proportionately increased. Any
adjustments under this Section 3.6(a)(i) shall be effective at the close of
business on the date the stock split or combination occurs.
 
(ii)  Adjustments for Certain Dividends and Distributions. If the Maker shall at
any time or from time to time after the Issuance Date, make or issue or set a
record date for the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in shares of Common Stock, then, and in
each event, the applicable Conversion Price in effect immediately prior to such
event shall be decreased as of the time of such issuance or, in the event such
record date shall have been fixed, as of the close of business on such record
date, by multiplying, the applicable Conversion Price then in effect by a
fraction:
 
(1)  the numerator of which shall be the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date; and
 
(2)  the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution.
 
(iii)  Adjustment for Other Dividends and Distributions. If the Maker shall at
any time or from time to time after the Issuance Date, make or issue or set a
record date for the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in other than shares of Common Stock,
then, and in each event, an appropriate revision to the applicable Conversion
Price shall be made and provision shall be made (by adjustments of the
Conversion Price or otherwise) so that the holders of this Note shall receive
upon conversions thereof, in addition to the number of shares of Common Stock
receivable thereon, the number of securities of the Maker which they would have
received had this Note been converted into Common Stock on the date of such
event and had thereafter, during the period from the date of such event to and
including the Conversion Date, retained such securities (together with any
distributions payable thereon during such period), giving application to all
adjustments called for during such period under this Section 3.6(a)(iii) with
respect to the rights of the holders of this Note and the Other Notes; provided,
however, that if such record date shall have been fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed therefor,
the Conversion Price shall be adjusted pursuant to this paragraph as of the time
of actual payment of such dividends or distributions.
 
(iv)  Adjustments for Reclassification, Exchange or Substitution. If the Common
Stock issuable upon conversion of this Note at any time or from time to time
after the Issuance Date shall be changed to the same or different number of
shares of any class or classes of stock, whether by reclassification, exchange,
substitution or otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 3.6(a)(i), (ii) and (iii), or
a reorganization, merger, consolidation, or sale of assets provided for in
Section 3.6(a)(v)), then, and in each event, an appropriate revision to the
Conversion Price shall be made and provisions shall be made (by adjustments of
the Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock and
other securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of shares of Common Stock into which such
Note might have been converted immediately prior to such reclassification,
exchange, substitution or other change, all subject to further adjustment as
provided herein.
 
(v)  Adjustments for Reorganization, Merger, Consolidation or Sales of Assets.
If at any time or from time to time after the Issuance Date there shall be a
capital reorganization of the Maker (other than by way of a stock split or
combination of shares or stock dividends or distributions provided for in
Section 3.6(a)(i), (ii) and (iii), or a reclassification, exchange or
substitution of shares provided for in Section 3.6(a)(iv)), or a merger or
consolidation of the Maker with or into another corporation where the holders of
outstanding voting securities prior to such merger or consolidation do not own
over fifty percent (50%) of the outstanding voting securities of the merged or
consolidated entity, immediately after such merger or consolidation, or the sale
of all or substantially all of the Maker's properties or assets to any other
person (an "Organic Change"), then as a part of such Organic Change, (A) if the
surviving entity in any such Organic Change is a public company that is
registered pursuant to the Securities Exchange Act of 1934, as amended, and its
common stock is listed or quoted on a national exchange or the OTC Bulletin
Board, an appropriate revision to the Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so
that the Holder shall have the right thereafter to convert such Note into the
kind and amount of shares of stock and other securities or property of the Maker
or any successor corporation resulting from Organic Change, and (B) if the
surviving entity in any such Organic Change is not a public company that is
registered pursuant to the Securities Exchange Act of 1934, as amended, or its
common stock is not listed or quoted on a national exchange or the OTC Bulletin
Board, the Holder shall have the right to demand prepayment pursuant to Section
3.7(b) hereof. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.6(a)(v) with respect to the
rights of the Holder after the Organic Change to the end that the provisions of
this Section 3.6(a)(v) (including any adjustment in the applicable Conversion
Price then in effect and the number of shares of stock or other securities
deliverable upon conversion of this Note and the Other Notes) shall be applied
after that event in as nearly an equivalent manner as may be practicable.
 
(vi)  Adjustments for Issuance of Additional Shares of Common Stock. In the
event the Maker, shall, at any time, from time to time, issue or sell any
additional shares of common stock (otherwise than as provided in the foregoing
subsections (i) through (v) of this Section 3.6(a) or pursuant to Common Stock
Equivalents (hereafter defined) granted or issued prior to the Issuance Date)
(“Additional Shares of Common Stock”), at a price per share less than the
Conversion Price then in effect or without consideration, then the Conversion
Price upon each such issuance shall be reduced to a price equal to the
consideration per share paid for such Additional Shares of Common Stock.
 
(vii)  Issuance of Common Stock Equivalents. The provisions of this Section
3.6(a)(vii) shall apply if (a) the Maker, at any time after the Issuance Date,
shall issue any securities convertible into or exchangeable for, directly or
indirectly, Common Stock ("Convertible Securities"), other than the Notes, or
(b) any rights or warrants or options to purchase any such Common Stock or
Convertible Securities (collectively, the "Common Stock Equivalents") shall be
issued or sold. If the price per share for which Additional Shares of Common
Stock may be issuable pursuant to any such Common Stock Equivalent shall be less
than the applicable Conversion Price then in effect, or if, after any such
issuance of Common Stock Equivalents, the price per share for which Additional
Shares of Common Stock may be issuable thereafter is amended or adjusted, and
such price as so amended shall be less than the applicable Conversion Price in
effect at the time of such amendment or adjustment, then the applicable
Conversion Price upon each such issuance or amendment shall be adjusted as
provided in the first sentence of subsection (vi) of this Section 3.6(a). No
adjustment shall be made to the Conversion Price upon the issuance of Common
Stock pursuant to the exercise, conversion or exchange of any Convertible
Security or Common Stock Equivalent where an adjustment to the Conversion Price
was made as a result of the issuance or purchase of any Convertible Security or
Common Stock Equivalent.
 
(viii)  Consideration for Stock. In case any shares of Common Stock or any
Common Stock Equivalents shall be issued or sold:
 
(1)  in connection with any merger or consolidation in which the Maker is the
surviving corporation (other than any consolidation or merger in which the
previously outstanding shares of Common Stock of the Maker shall be changed to
or exchanged for the stock or other securities of another corporation), the
amount of consideration therefor shall be, deemed to be the fair value, as
determined reasonably and in good faith by the Board of Directors of the Maker,
of such portion of the assets and business of the nonsurviving corporation as
such Board may determine to be attributable to such shares of Common Stock,
Convertible Securities, rights or warrants or options, as the case may be; or
 
(2)  in the event of any consolidation or merger of the Maker in which the Maker
is not the surviving corporation or in which the previously outstanding shares
of Common Stock of the Maker shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of
any corporation, the Maker shall be deemed to have issued a number of shares of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation. If any such calculation results in adjustment
of the applicable Conversion Price, or the number of shares of Common Stock
issuable upon conversion of the Notes, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Notes immediately prior to such merger, consolidation or sale,
shall be made after giving effect to such adjustment of the number of shares of
Common Stock issuable upon conversion of the Notes. In the event Common Stock is
issued with other shares or securities or other assets of the Maker for
consideration which covers both, the consideration computed as provided in this
Section 3.6(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Maker.
 
(b)  Record Date. In case the Maker shall take record of the holders of its
Common Stock for the purpose of entitling them to subscribe for or purchase
Common Stock or Convertible Securities, then the date of the issue or sale of
the shares of Common Stock shall be deemed to be such record date.
 
(c)  Certain Issues Excepted. Anything herein to the contrary notwithstanding,
the Maker shall not be required to make any adjustment to the Conversion Price
in connection with (i) securities issued (other than for cash) in connection
with a merger, acquisition, or consolidation, (ii) securities issued pursuant to
a bona fide firm underwritten public offering of the Maker’s securities, (iii)
securities issued pursuant to the conversion or exercise of convertible or
excercisable securities issued or outstanding on or prior to the date hereof or
issued pursuant to the Purchase Agreement, (iv) the shares of Common Stock
issuable upon the exercise of Warrants, (v) securities issued in connection with
strategic license agreements or other partnering arrangements so long as such
issuances are not for the purpose of raising capital, (vi) Common Stock issued
or options to purchase Common Stock granted or issued pursuant to the Maker’s
employee stock purchase plans as they now exist and stock incentive plans as
they now exist or as may be amended so long as the aggregate number of shares of
Common Stock issued pursuant to such stock incentive plans does not exceed
8,000,000, (vii) any warrants issued to the placement agent and its designees
for the transactions contemplated by the Purchase Agreement, and (viii) the
payment of any principal and accrued interest in shares of Common Stock pursuant
to this Note or the Other Notes.

(d)  No Impairment. The Maker shall not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Maker, but will at all times in good
faith, assist in the carrying out of all the provisions of this Section 3.6 and
in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the Holder against impairment. In the event a
Holder shall elect to convert any Notes as provided herein, the Maker cannot
refuse conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law, violation
of an agreement to which such Holder is a party or for any reason whatsoever,
unless, an injunction from a court, or notice, restraining and or adjoining
conversion of all or of said Notes shall have issued and the Maker posts a
surety bond for the benefit of such Holder in an amount equal to one hundred
thirty percent (130%) of the amount of the Notes the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder (as liquidated damages) in the event it obtains judgment.

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(e)  Certificates as to Adjustments. Upon occurrence of each adjustment or
readjustment of the Conversion Price or number of shares of Common Stock
issuable upon conversion of this Note pursuant to this Section 3.6, the Maker at
its expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to the Holder a certificate setting forth such
adjustment and readjustment, showing in detail the facts upon which such
adjustment or readjustment is based. The Maker shall, upon written request of
the Holder, at any time, furnish or cause to be furnished to the Holder a like
certificate setting forth such adjustments and readjustments, the applicable
Conversion Price in effect at the time, and the number of shares of Common Stock
and the amount, if any, of other securities or property which at the time would
be received upon the conversion of this Note. Notwithstanding the foregoing, the
Maker shall not be obligated to deliver a certificate unless such certificate
would reflect an increase or decrease of at least one percent (1%) of such
adjusted amount.
 
(f)  Issue Taxes. The Maker shall pay any and all issue and other taxes,
excluding federal, state or local income taxes, that may be payable in respect
of any issue or delivery of shares of Common Stock on conversion of this Note
pursuant thereto; provided, however, that the Maker shall not be obligated to
pay any transfer taxes resulting from any transfer requested by the Holder in
connection with any such conversion.
 
(g)  Fractional Shares. No fractional shares of Common Stock shall be issued
upon conversion of this Note. In lieu of any fractional shares to which the
Holder would otherwise be entitled, the Maker shall pay cash equal to the
product of such fraction multiplied by the average of the Closing Bid Prices of
the Common Stock for the five (5) consecutive Trading Days immediately preceding
the Conversion Date.
 
(h)  Reservation of Common Stock. The Maker shall at all times when this Note
shall be outstanding, reserve and keep available out of its authorized but
unissued Common Stock, such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of this Note and all interest
accrued thereon; provided that the number of shares of Common Stock so reserved
shall at no time be less than one hundred twenty percent (120%) of the number of
shares of Common Stock for which this Note and all interest accrued thereon are
at any time convertible. The Maker shall, from time to time in accordance with
the Nevada Revised Business Corporation Act, increase the authorized number of
shares of Common Stock if at any time the unissued number of authorized shares
shall not be sufficient to satisfy the Maker’s obligations under this Section
3.6(h).
 
(i)  Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of this Note or any interest accrued thereon require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Maker shall, at its sole cost and expense, in good faith and as
expeditiously as possible, endeavor to secure such registration, listing or
approval, as the case may be.
Section 3.7 Prepayment.
 
(a)  Prepayment Upon an Event of Default. Notwithstanding anything to the
contrary contained herein, upon the occurrence of an Event of Default described
in Sections 2.1(b)-(k) hereof, the Holder shall have the right, at such Holder's
option, to require the Maker to prepay in cash all or a portion of this Note at
a price equal to one hundred ten percent (110%) of the aggregate principal
amount of this Note plus all accrued and unpaid interest applicable at the time
of such request. Nothing in this Section 3.7(a) shall limit the Holder's rights
under Section 2.2 hereof.
 
(b)  Prepayment Option Upon Major Transaction. In addition to all other rights
of the Holder contained herein, simultaneous with the occurrence of a Major
Transaction (as defined below), the Holder shall have the right, at the Holder's
option, to require the Maker to prepay all or a portion of the Holder's Notes at
a price equal to one hundred percent (100%) of the aggregate principal amount of
this Note plus all accrued and unpaid interest (the "Major Transaction
Prepayment Price"); provided that the Maker shall have the sole option to make
payment of the Major Transaction Prepayment Price in cash or shares of Common
Stock. If the Maker elects to make payment of the Major Transaction Prepayment
Price in shares of Common Stock, the price per share shall be based upon the
Conversion Price then in effect on the day preceding the date of delivery of the
Notice of Prepayment at Option of Holder Upon Major Transaction (as hereafter
defined) and the Holder shall have demand registration rights with respect to
such shares.
 
(c)  Prepayment Option Upon Triggering Event. In addition to all other rights of
the Holder contained herein, after a Triggering Event (as defined below), the
Holder shall have the right, at the Holder's option, to require the Maker to
prepay all or a portion of this Note in cash at a price equal to the sum of (i)
the greater of (A) one hundred twenty percent (120%) of the aggregate principal
amount of this Note plus all accrued and unpaid interest and (B) in the event at
such time the Holder is unable to obtain the benefit of its conversion rights
through the conversion of this Note and resale of the shares of Common Stock
issuable upon conversion hereof in accordance with the terms of this Note and
the other Transaction Documents, the aggregate principal amount of this Note
plus all accrued but unpaid interest hereon, divided by the Conversion Price on
(x) the date the Prepayment Price (as defined below) is demanded or otherwise
due or (y) the date the Prepayment Price is paid in full, whichever is less,
multiplied by the VWAP (as defined below) on (x) the date the Prepayment Price
is demanded or otherwise due, and (y) the date the Prepayment Price is paid in
full, whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of this Note and the other Transaction
Documents (the "Triggering Event Prepayment Price," and, collectively with the
Major Transaction Prepayment Price, the "Prepayment Price"). For purposes
hereof, “VWAP” means, for any date, (i) the daily volume weighted average price
of the Common Stock for such date on the OTC Bulletin Board as reported by
Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to
4:02 p.m. Eastern Time); (ii) if the Common Stock is not then listed or quoted
on the OTC Bulletin Board and if prices for the Common Stock are then reported
in the “Pink Sheets” published by the Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (iii) in all
other cases, the fair market value of a share of Common Stock as determined by
an independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Maker.
 
(d)  Intentionally Omitted.
 
(e)  "Major Transaction." A "Major Transaction" shall be deemed to have occurred
at such time as any of the following events:
 
(i)  the consolidation, merger or other business combination of the Maker with
or into another Person (as defined in Section 4.13 hereof) (other than (A)
pursuant to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Maker or (B) a consolidation, merger or
other business combination in which holders of the Maker's voting power
immediately prior to the transaction continue after the transaction to hold,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities).
 
(ii)  the sale or transfer of more than fifty percent (50%) of the Maker’s
assets (based on the fair market value as determined in good faith by the
Maker’s Board of Directors) other than inventory in the ordinary course of
business in one or a related series of transactions; or
 
(iii)  closing of a purchase, tender or exchange offer made to the holders of
more than fifty percent (50%) of the outstanding shares of Common Stock in which
more than fifty percent (50%) of the outstanding shares of Common Stock were
tendered and accepted.
 
(f)  "Triggering Event." A "Triggering Event" shall be deemed to have occurred
at such time as any of the following events:
 
(i)  so long as any Notes are outstanding, the effectiveness of the Registration
Statement, after it becomes effective, (i) lapses for any reason (including,
without limitation, the issuance of a stop order) or (ii) is unavailable to the
Holder for sale of the shares of Common Stock, and such lapse or unavailability
continues for a period of twenty (20) consecutive Trading Days, and the shares
of Common Stock into which the Holder's Notes can be converted cannot be sold in
the public securities market pursuant to Rule 144(k), provided that the cause of
such lapse or unavailability is not due to factors primarily within the control
of the Holder of the Notes; and provided further that a Triggering Event shall
not have occurred if and to the extent the Maker exercised its rights set forth
in Section 3(n) of the Registration Rights Agreement; 
 
(ii)  the suspension from listing, without subsequent listing on any one of, or
the failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or The New York Stock Exchange, Inc., for a period of five (5)
consecutive Trading Days;
 
(iii)  the Maker's notice to any holder of the Notes, including by way of public
announcement, at any time, of its inability to comply (including for any of the
reasons described in Section 3.8) or its intention not to comply with proper
requests for conversion of any Notes into shares of Common Stock; or
 
(iv)  the Maker's failure to comply with a Conversion Notice tendered in
accordance with the provisions of this Note within ten (10) business days after
the receipt by the Maker of the Conversion Notice; or
 
(v)  the Maker deregisters its shares of Common Stock and as a result such
shares of Common Stock are no longer publicly traded; or
 
(vi)  the Maker consummates a “going private” transaction and as a result the
Common Stock is no longer registered under Sections 12(b) or 12(g) of the
Exchange Act.
 
(g)  Intentionally Omitted.

(h)  Mechanics of Prepayment at Option of Holder Upon Major Transaction. No
sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Maker shall deliver written notice thereof via
facsimile and overnight courier ("Notice of Major Transaction") to the Holder of
this Note. At any time after receipt of a Notice of Major Transaction (or, in
the event a Notice of Major Transaction is not delivered at least ten (10) days
prior to a Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of the Notes then outstanding may require the Maker to
prepay, effective immediately prior to the consummation of such Major
Transaction, all of the holder's Notes then outstanding by delivering written
notice thereof via facsimile and overnight courier ("Notice of Prepayment at
Option of Holder Upon Major Transaction") to the Maker, which Notice of
Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the
principal amount of the Notes that such holder is electing to have prepaid and
(ii) the applicable Major Transaction Prepayment Price, as calculated pursuant
to Section 3.7(b) above.
 
(i)  Mechanics of Prepayment at Option of Holder Upon Triggering Event. Within
one (1) business day after the occurrence of a Triggering Event, the Maker shall
deliver written notice thereof via facsimile and overnight courier ("Notice of
Triggering Event") to each holder of the Notes. At any time after the earlier of
a holder's receipt of a Notice of Triggering Event and such holder becoming
aware of a Triggering Event, any holder of this Note and the Other Notes then
outstanding may require the Maker to prepay all of the Notes on a pro rata basis
by delivering written notice thereof via facsimile and overnight courier
("Notice of Prepayment at Option of Holder Upon Triggering Event") to the Maker,
which Notice of Prepayment at Option of Holder Upon Triggering Event shall
indicate (i) the amount of the Note that such holder is electing to have prepaid
and (ii) the applicable Triggering Event Prepayment Price, as calculated
pursuant to Section 3.7(c) above. A holder shall only be permitted to require
the Maker to prepay the Note pursuant to Section 3.7 hereof for the greater of a
period of ten (10) days after receipt by such holder of a Notice of Triggering
Event or for so long as such Triggering Event is continuing.
 
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(j)  Payment of Prepayment Price. Upon the Maker's receipt of a Notice(s) of
Prepayment at Option of Holder Upon Triggering Event or a Notice(s) of
Prepayment at Option of Holder Upon Major Transaction from any holder of the
Notes, the Maker shall immediately notify each holder of the Notes by facsimile
of the Maker's receipt of such Notice(s) of Prepayment at Option of Holder Upon
Triggering Event or Notice(s) of Prepayment at Option of Holder Upon Major
Transaction and each holder which has sent such a notice shall promptly submit
to the Maker such holder's certificates representing the Notes which such holder
has elected to have prepaid. The Maker shall deliver the applicable Triggering
Event Prepayment Price, in the case of a prepayment pursuant to Section 3.7(i),
to such holder within five (5) business days after the Maker's receipt of a
Notice of Prepayment at Option of Holder Upon Triggering Event and, in the case
of a prepayment pursuant to Section 3.7(h), the Maker shall deliver the
applicable Major Transaction Prepayment Price immediately prior to the
consummation of the Major Transaction; provided that a holder's original Note
shall have been so delivered to the Maker; provided further that if the Maker is
unable to prepay all of the Notes to be prepaid, the Maker shall prepay an
amount from each holder of the Notes being prepaid equal to such holder's
pro-rata amount (based on the number of Notes held by such holder relative to
the number of Notes outstanding) of all Notes being prepaid. If the Maker shall
fail to prepay all of the Notes submitted for prepayment (other than pursuant to
a dispute as to the arithmetic calculation of the Prepayment Price), in addition
to any remedy such holder of the Notes may have under this Note and the Purchase
Agreement, the applicable Prepayment Price payable in respect of such Notes not
prepaid shall bear interest at the rate of two percent (2%) per month (prorated
for partial months) until paid in full. Until the Maker pays such unpaid
applicable Prepayment Price in full to a holder of the Notes submitted for
prepayment, such holder shall have the option (the "Void Optional Prepayment
Option") to, in lieu of prepayment, require the Maker to promptly return to such
holder(s) all of the Notes that were submitted for prepayment by such holder(s)
under this Section 3.7 and for which the applicable Prepayment Price has not
been paid, by sending written notice thereof to the Maker via facsimile (the
"Void Optional Prepayment Notice"). Upon the Maker's receipt of such Void
Optional Prepayment Notice(s) and prior to payment of the full applicable
Prepayment Price to such holder, (i) the Notice(s) of Prepayment at Option of
Holder Upon Triggering Event or the Notice(s) of Prepayment at Option of Holder
Upon Major Transaction, as the case may be, shall be null and void with respect
to those Notes submitted for prepayment and for which the applicable Prepayment
Price has not been paid, (ii) the Maker shall immediately return any Notes
submitted to the Maker by each holder for prepayment under this Section 3.7(j)
and for which the applicable Prepayment Price has not been paid and (iii) the
Conversion Price of such returned Notes shall be adjusted to the lesser of (A)
the Conversion Price as in effect on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker and (B) the lowest Closing Bid
Price during the period beginning on the date on which the Notice(s) of
Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
Prepayment at Option of Holder Upon Triggering Event, as the case may be, is
delivered to the Maker and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder's delivery of a Void Optional Prepayment Notice
and exercise of its rights following such notice shall not effect the Maker's
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3.7 shall have priority to
payments to other stockholders in connection with a Major Transaction.
 
(k)  Maker Prepayment Option. So long as less than ten percent (10%) of the
original principal amount of this Note is outstanding, the Maker may prepay in
cash all or any portion of the outstanding principal amount of this Note
together with all accrued and unpaid interest thereon upon thirty (30) days
prior written notice to the Holder (the "Maker's Prepayment Notice") at a price
equal to one hundred twenty-five percent (125%) of the aggregate principal
amount of this Note plus any accrued but unpaid interest (the "Maker's
Prepayment Price"); provided, however, that if a holder has delivered a
Conversion Notice to the Maker or delivers a Conversion Notice within such
thirty (30) day period following delivery of the Maker’s Prepayment Notice, the
principal amount of the Notes plus any accrued but unpaid interest designated to
be converted may not be prepaid by the Maker and shall be converted in
accordance with Section 3.3 hereof; provided further that if during the period
between delivery of the Maker's Prepayment Notice and the Maker's Prepayment
Date (as defined below), a holder shall become entitled to deliver a Notice of
Prepayment at Option of Holder Upon Major Transaction or Notice of Prepayment at
Option of Holder upon Triggering Event, then the such rights of the holders
shall take precedence over the previously delivered Maker Prepayment Notice. The
Maker's Prepayment Notice shall state the date of prepayment which date shall be
the thirty-first (31st) day after the Maker has delivered the Maker's Prepayment
Notice (the "Maker's Prepayment Date"), the Maker’s Prepayment Price and the
principal amount of Notes plus any accrued but unpaid interest to be prepaid by
the Maker. The Maker shall deliver the Maker's Prepayment Price on the Maker’s
Prepayment Date, provided, that if the holder(s) delivers a Conversion Notice
before the Maker's Prepayment Date, then the portion of the Maker's Prepayment
Price which would be paid to prepay the Notes covered by such Conversion Notice
shall be returned to the Maker upon delivery of the Common Stock issuable in
connection with such Conversion Notice to the holder(s). On the Maker's
Prepayment Date, the Maker shall pay the Maker's Prepayment Price, subject to
any adjustment pursuant to the immediately preceding sentence, to the holder(s)
on a pro rata basis. If the Maker fails to pay the Maker's Prepayment Price by
the thirty-first (31st) day after the Maker has delivered the Maker's Prepayment
Notice, the prepayment will be declared null and void and the Maker shall lose
its right to serve a Maker 's Prepayment Notice pursuant to this Section 3.7(k)
in the future. Notwithstanding the foregoing to the contrary, the Maker may
effect a prepayment pursuant to this Section 3.7(k) only if (A) the Registration
Statement is effective and has been effective, without lapse or suspension of
any kind, for a period sixty (60) consecutive calendar days immediately
preceding the Maker’s Prepayment Notice through the Maker’s Prepayment Date, (B)
trading in the Common Stock shall not have been suspended by the Securities and
Exchange Commission or the OTC Bulletin Board (or other exchange or market on
which the Common Stock is trading), (C) the Maker is in material compliance with
the terms and conditions of this Note and the other Transaction Documents, and
(D) the Maker is not in possession of any material non-public information.
 
Section 3.8  Inability to Fully Convert.
 
(a) Holder's Option if Maker Cannot Fully Convert. If, upon the Maker's receipt
of a Conversion Notice, the Maker cannot issue shares of Common Stock registered
for resale under the Registration Statement for any reason, including, without
limitation, because the Maker (w) does not have a sufficient number of shares of
Common Stock authorized and available, (x) is otherwise prohibited by applicable
law or by the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the Maker or
any of its securities from issuing all of the Common Stock which is to be issued
to the Holder pursuant to a Conversion Notice or (y) fails to have a sufficient
number of shares of Common Stock registered for resale under the Registration
Statement, then the Maker shall issue as many shares of Common Stock as it is
able to issue in accordance with the Holder's Conversion Notice and, with
respect to the unconverted portion of this Note, the Holder, solely at Holder's
option, can elect to:
 
(i)  require the Maker to prepay that portion of this Note for which the Maker
is unable to issue Common Stock in accordance with the Holder's Conversion
Notice (the "Mandatory Prepayment") at a price per share equal to the Triggering
Event Prepayment Price as of such Conversion Date (the "Mandatory Prepayment
Price");
 
(ii)  if the Maker's inability to fully convert is pursuant to Section 3.8(a)(x)
above, require the Maker to issue restricted shares of Common Stock in
accordance with such holder's Conversion Notice;
 
(iii)  void its Conversion Notice and retain or have returned, as the case may
be, this Note that was to be converted pursuant to the Conversion Notice
(provided that the Holder's voiding its Conversion Notice shall not effect the
Maker's obligations to make any payments which have accrued prior to the date of
such notice);
 
(iv)  exercise its Buy-In rights pursuant to and in accordance with the terms
and provisions of Section 3.3(c) of this Note.
 
In the event a Holder shall elect to convert any portion of its Notes as
provided herein, the Maker cannot refuse conversion based on any claim that such
Holder or any one associated or affiliated with such Holder has been engaged in
any violation of law, violation of an agreement to which such Holder is a party
or for any reason whatsoever, unless, an injunction from a court, on notice,
restraining and or adjoining conversion of all or of said Notes shall have been
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to 130% of the principal amount of the Notes the Holder has elected
to convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.

(b)  Mechanics of Fulfilling Holder's Election. The Maker shall immediately send
via facsimile to the Holder, upon receipt of a facsimile copy of a Conversion
Notice from the Holder which cannot be fully satisfied as described in Section
3.8(a) above, a notice of the Maker's inability to fully satisfy the Conversion
Notice (the "Inability to Fully Convert Notice"). Such Inability to Fully
Convert Notice shall indicate (i) the reason why the Maker is unable to fully
satisfy such holder's Conversion Notice, (ii) the amount of this Note which
cannot be converted and (iii) the applicable Mandatory Prepayment Price. The
Holder shall notify the Maker of its election pursuant to Section 3.8(a) above
by delivering written notice via facsimile to the Maker ("Notice in Response to
Inability to Convert").
 
(c)  Payment of Prepayment Price. If the Holder shall elect to have its Notes
prepaid pursuant to Section 3.8(a)(i) above, the Maker shall pay the Mandatory
Prepayment Price to the Holder within thirty (30) days of the Maker's receipt of
the Holder's Notice in Response to Inability to Convert, provided that prior to
the Maker's receipt of the Holder's Notice in Response to Inability to Convert
the Maker has not delivered a notice to the Holder stating, to the satisfaction
of the Holder, that the event or condition resulting in the Mandatory Prepayment
has been cured and all Conversion Shares issuable to the Holder can and will be
delivered to the Holder in accordance with the terms of this Note. If the Maker
shall fail to pay the applicable Mandatory Prepayment Price to the Holder on the
date that is one (1) business day following the Maker's receipt of the Holder's
Notice in Response to Inability to Convert (other than pursuant to a dispute as
to the determination of the arithmetic calculation of the Prepayment Price), in
addition to any remedy the Holder may have under this Note and the Purchase
Agreement, such unpaid amount shall bear interest at the rate of two percent
(2%) per month (prorated for partial months) until paid in full. Until the full
Mandatory Prepayment Price is paid in full to the Holder, the Holder may (i)
void the Mandatory Prepayment with respect to that portion of the Note for which
the full Mandatory Prepayment Price has not been paid, (ii) receive back such
Note, and (iii) require that the Conversion Price of such returned Note be
adjusted to the lesser of (A) the Conversion Price as in effect on the date on
which the Holder voided the Mandatory Prepayment and (B) the lowest Closing Bid
Price during the period beginning on the Conversion Date and ending on the date
the Holder voided the Mandatory Prepayment.
 
(d)  Pro-rata Conversion and Prepayment. In the event the Maker receives a
Conversion Notice from more than one holder of the Notes on the same day and the
Maker can convert and prepay some, but not all, of the Notes pursuant to this
Section 3.8, the Maker shall convert and prepay from each holder of the Notes
electing to have its Notes converted and prepaid at such time an amount equal to
such holder's pro-rata amount (based on the principal amount of the Notes held
by such holder relative to the principal amount of the Notes outstanding) of all
the Notes being converted and prepaid at such time.
 
Section 3.9  No Rights as Shareholder.  Nothing contained in this Note shall be
construed as conferring upon the Holder, prior to the conversion of this Note,
the right to vote or to receive dividends or to consent or to receive notice as
a shareholder in respect of any meeting of shareholders for the election of
directors of the Maker or of any other matter, or any other rights as a
shareholder of the Maker.
 
 
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ARTICLE IV
 
MISCELLANEOUS
 
Section 4.1  Notices.  Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery, telecopy or facsimile at the
address or number designated in the Purchase Agreement (if delivered on a
business day during normal business hours where such notice is to be received),
or the first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The Maker will give
written notice to the Holder at least ten (10) days prior to the date on which
the Maker takes a record (x) with respect to any dividend or distribution upon
the Common Stock, (y) with respect to any pro rata subscription offer to holders
of Common Stock or (z) for determining rights to vote with respect to any
Organic Change, dissolution, liquidation or winding-up and in no event shall
such notice be provided to such holder prior to such information being made
known to the public. The Maker will also give written notice to the Holder at
least ten (10) days prior to the date on which any Organic Change, dissolution,
liquidation or winding-up will take place and in no event shall such notice be
provided to the Holder prior to such information being made known to the public.
The Maker shall promptly notify the Holder of this Note of any notices sent or
received, or any actions taken with respect to the Other Notes.
 
Section 4.2  Governing Law. This Note shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to any of the conflicts of law principles which would result in the
application of the substantive law of another jurisdiction. This Note shall not
be interpreted or construed with any presumption against the party causing this
Note to be drafted.
 
Section 4.3  Headings. Article and section headings in this Note are included
herein for purposes of convenience of reference only and shall not constitute a
part of this Note for any other purpose.
 
Section 4.4  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, at law or in equity
(including, without limitation, a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Maker 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 thereof and shall
not, except as expressly provided herein, be subject to any other obligation of
the Maker (or the performance thereof). The Maker acknowledges that a breach by
it of its obligations hereunder will cause irreparable and material harm to the
Holder and that the remedy at law for any such breach may be inadequate.
Therefore the Maker agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available rights
and remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.
 
Section 4.5  Enforcement Expenses. The Maker agrees to pay all costs and
expenses of enforcement of this Note, including, without limitation, reasonable
attorneys' fees and expenses.
 
Section 4.6  Binding Effect. The obligations of the Maker and the Holder set
forth herein shall be binding upon the successors and assigns of each such
party, whether or not such successors or assigns are permitted by the terms
hereof.
 
Section 4.7  Amendments. This Note may not be modified or amended in any manner
except in writing executed by the Maker and the Holder.
 
Section 4.8  Compliance with Securities Laws. The Holder of this Note
acknowledges that this Note is being acquired solely for the Holder's own
account and not as a nominee for any other party, and for investment, and that
the Holder shall not offer, sell or otherwise dispose of this Note. This Note
and any Note issued in substitution or replacement therefor shall be stamped or
imprinted with a legend in substantially the following form:
 
"THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN
THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS."

Section 4.9  Consent to Jurisdiction. Each of the Maker and the Holder (i)
hereby irrevocably submits to the exclusive jurisdiction of the United States
District Court sitting in the Southern District of New York and the courts of
the State of New York located in New York county for the purposes of any suit,
action or proceeding arising out of or relating to this Note and (ii) hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for notices to
it under the Purchase Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing in this
Section 4.9 shall affect or limit any right to serve process in any other manner
permitted by law. Each of the Maker and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to
this Note shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party.
 
Section 4.10  Parties in Interest. This Note shall be binding upon, inure to the
benefit of and be enforceable by the Maker, the Holder and their respective
successors and permitted assigns.
 
Section 4.11  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.
 
Section 4.12  Maker Waivers. Except as otherwise specifically provided herein,
the Maker and all others that may become liable for all or any part of the
obligations evidenced by this Note, hereby waive presentment, demand, notice of
nonpayment, protest and all other demands' and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon, all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.
 
(a)  No delay or omission on the part of the Holder in exercising its rights
under this Note, or course of conduct relating hereto, shall operate as a waiver
of such rights or any other right of the Holder, nor shall any waiver by the
Holder of any such right or rights on any one occasion be deemed a waiver of the
same right or rights on any future occasion.
 
(b)  THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS
A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
 
Section 4.13  Definitions. For the purposes hereof, the following terms shall
have the following meanings:

"Person" means an individual or a corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or political subdivision thereof) or
other entity of any kind.
 
“Trading Day” means (a) a day on which the Common Stock is traded on the OTC
Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday,
Sunday and any day which shall be a legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
government action to close.

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QUEST OIL CORPORATION

By: ______________________________
Name:
Title:

8
 

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