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Exhibit 10.2
 
EXHIBIT A
 
FORM OF SERIES A CONVERTIBLE NOTE
 
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(d)(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(d)(iii) OF THIS NOTE.
 
nCOAT, Inc.
 
Series A Convertible Note
 
Issuance Date: May       , 2007
Original Principal Amount: U.S. $_____________

FOR VALUE RECEIVED, nCOAT, Inc., a Delaware corporation (the "Company"), hereby
promises to pay to [___________] or its registered assigns ("Holder") the amount
set out above as the Original Principal Amount (as reduced pursuant to the terms
hereof pursuant to conversion or otherwise, the "Principal") when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest
("Interest") on any outstanding Principal at the Interest Rate as required by
Section 2 hereof. This Series A Convertible Note (including all Convertible
Notes issued in exchange, transfer or replacement hereof, this "Note") is one of
an issue of Convertible Notes issued pursuant to the Securities Purchase
Agreement (as defined below) on the Closing Date (collectively, the "Notes” and
such other Convertible Notes, the “Other Notes”). Certain capitalized terms used
herein are defined in Section 27. Capitalized terms used but not defined herein
shall have the meanings set forth in the Securities Purchase Agreement (as
defined below). 
 
 

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(1)        PAYMENTS OF PRINCIPAL. On the Maturity Date, the Company shall pay to
the Holder an amount in cash representing all outstanding Principal, accrued and
unpaid Interest, if any, and accrued and unpaid Late Charges, if any, on such
Principal and Interest. The "Maturity Date" shall be three years from the date
of the Initial Closing, as may be extended at the option of the Holder (i) in
the event that, and for so long as, a Trigger Event (as defined in Section 4(a))
shall have occurred and be continuing on the Maturity Date (as may be extended
pursuant to this Section 1) or any event that shall have occurred and be
continuing that with the passage of time and the failure to cure would result in
a Trigger Event, and (ii) through the date that is ten (10) Business Days after
the consummation of a Change of Control in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(b)) is
delivered prior to the Maturity Date. Other than as specifically permitted by
the Note, the Company may not prepay any portion of the outstanding Principal,
accrued and unpaid Interest or accrued and unpaid Late Charges, if any, on
Principal and Interest.
 
(2)        INTEREST; INTEREST RATE. During the term of this Note, Interest shall
accrue on outstanding Principal at an interest rate equal to six percent (6%)
per annum (the “Interest Rate”) commencing on the Issuance Date. Interest shall
be calculated on the basis of a 365-day year and the actual number of days
elapsed, to the extent permitted by applicable law. Any Interest that shall
accrue hereunder shall be payable quarterly in arrears on each January 1, April
1, July 1 and October 1 (each an “Interest Payment Due Date”), beginning on the
first such date after the Issuance Date hereof, in cash or registered shares of
Common Stock (“Interest Shares”) at the option of the Company. If the Company
elects to pay any Interest due in registered shares of the Company’s common
stock, par value $0.001 per share (the “Common Stock”): (i) the issuance price
of the Interest Shares will be 90% of the 5-day Weighted Average Price (as
defined in Section 27(hh)) of the Common Stock ending on the day prior to the
Interest payment due date, (ii) the Common Stock shall have traded an average of
at least 125,000 shares per day for each of the five trading days prior to the
applicable Interest Payment Due Date, (iii) a registration statement covering
the resale by the Holder of the Interest Shares shall be current and effective
as of the date of delivery of such Interest Shares to the Holder, and (iv) a
Trigger Event, as defined below, in accordance with Section 4(a)(v), shall not
have occurred. Interest hereunder will be paid to the Holder or its assignee in
whose name this Note is registered on the records of the Company regarding
registration and transfers of Notes.
 
(3)    CONVERSION OF NOTES. This Note shall be convertible by the Holder into
shares of the Company's Common Stock on the terms and conditions set forth in
this Section 3.
 
(a) Conversion Right. At any time or times on or after the Issuance Date, the
Holder shall be entitled to convert, at the Holder’s sole option, 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(d), at the
Conversion Rate (as defined below). The Company shall not issue any fraction of
a share of Common Stock upon any conversion. If the issuance would result in the
issuance of a fraction of a share of Common Stock, the Company shall round such
fraction of a share of Common Stock up to the nearest whole share. The Company
shall pay any and all taxes that may be payable with respect to the issuance and
delivery of Common Stock upon conversion of any Conversion Amount; provided that
the Company shall not be required to pay any tax that may be payable in respect
of any issuance of Common Stock to any Person other than the converting Holder
or with respect to any income tax due by the Holder with respect to such Common
Stock.
 
 

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(b) Forced Conversion. Upon thirty (30) days prior written notice to all of the
Holders, the Company shall have the right to call all, but not less than all, of
the Notes for Conversion at the Conversion Price (as defined below)(the call
date specified in such notice is referred to herein as the “Forced Conversion
Date”) provided that: (i) the Company’s Common Stock has closed at a price equal
to or greater than 300% of the then applicable Conversion Price for each of the
twenty (20) trading days immediately preceding the Forced Conversion Date
(“Measurement Period”); (ii) there is either an effective registration statement
providing for the resale of the shares of Common Stock underlying the Notes
during each trading day of the Measurement Period or all of the shares of Common
Stock underlying the Notes may be resold pursuant to Rule 144(k) of the
Securities Act without restriction during each trading day of the Measurement
Period; and (iii) the Common Stock has traded an average of 500,000 shares per
day during the Measurement Period. Notwithstanding the foregoing, in no event
shall the Company force the conversion of a Holder of Notes if such forced
conversion would result in such Holder beneficially owning more than Maximum
Percentage I or Maximum Percentage II (each as defined below in Section
3(e)(1)(A) and Section 3(e)(1)(A), respectively).
 
(c) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount shall be determined by dividing (x) such
Conversion Amount by (y) the then applicable Conversion Price (the "Conversion
Rate").
 
(i)   "Conversion Amount" means the sum of (A) the portion of the Principal to
be converted, redeemed or otherwise with respect to which this determination is
being made, (B) accrued and unpaid Interest with respect to such Principal, if
any, and (C) accrued and unpaid Late Charges with respect to such Principal and
Interest, if any.
 
(ii)   "Conversion Price" means, as of any Conversion Date (as defined below) or
other date of determination, an amount equal to $0.40, subject to adjustment as
provided herein.
 
(d) 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(d)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction). On or before the second (2nd) 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"). If this Note is physically
surrendered for conversion as required by Section 3(d)(iii) and the outstanding
Principal of this Note is greater than the Principal portion of the Conversion
Amount being converted, then the Company shall as soon as practicable and in no
event later than three (3) Business Days after receipt of this Note and at its
own expense, issue and deliver to the holder a new Note (in accordance with
Section 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.
 
 

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(ii)   Delivery of Certificates. On or before the third (3rd) Trading Day
following the date of receipt of a Conversion Notice (the "Share Delivery Date")
or request for removal of restrictive legends on the shares of Common Stock
issuable in connection therewith, the Company shall (X) provided that the
Transfer Agent is participating in the Depository Trust Company ("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. 
 
(A)    If such delivery is made more than two (2) additional Trading Days after
conversion or request for removal of legend (a “Conversion Failure”), as the
case may be, then the Company will compensate the Holder at a rate of $100 per
day for each of the first ten (10) Trading Days and $200 per day thereafter for
each $10,000 of securities. In such event, after the first such ten (10) Trading
Days noted above, the Holder will also have the right to rescind its Conversion
Notice for the Notes.
 
(B)    If the certificates have not been delivered by the fifth (5th) Trading
Day after conversion or request for removal of legend, as the case may be, and
the Holder has purchased (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by the Holder of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company (a "Buy-In"), then the Company shall, within three (3) Trading Days
after the Holder's request and in the Holder's discretion, either (i) pay cash
to the Holder in an amount equal to the Holder's total purchase price (including
brokerage commissions and other out-of-pocket expenses, if any) for the shares
of Common Stock so purchased (the "Buy-In Price"), at which point the Company's
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of Common Stock, times (B) the Closing Bid
Price on the Conversion Date.
 
(iii)    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 Conversion Amount represented by this
Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice) requesting
reissuance of this Note upon physical surrender of this Note. The Holder and the
Company shall maintain records showing the Principal, Interest and Late Charges,
if any, converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Company, so as not to
require physical surrender of this Note upon conversion.
 
 

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(iv)    Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company 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.
 
(e)   Limitations on Conversions.
 
(1) Beneficial Ownership. (A) The Company shall not effect the conversion of
this Note or issue Interest Shares, and the Holder shall not have the right to
convert this Note or receive Interest Shares, to the extent that after giving
effect to such conversion or issuance, such Person (together with such Person's
affiliates) would beneficially own in excess of 4.99% (the "Maximum Percentage
I") of the shares of Common Stock outstanding immediately after giving effect to
such conversion or issuance, as the case may be. For purposes of the foregoing
sentence, the aggregate number of shares of Common Stock beneficially owned by
such Person 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 shares of Common
Stock which would be issuable upon (i) conversion of the remaining, unconverted
portion of this Note beneficially owned by such Person and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by such Person and its
affiliates (including, without limitation, any convertible notes or convertible
preferred stock or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein. Except as set forth in the
preceding sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended. For purposes of this Note, 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-KSB, Form 10-Q, Form 10-QSB, Current Report on Form 8-K or
other public filing with the Securities and Exchange Commission, as the case may
be, (2) a more recent 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 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 the Notes and the Warrants, by the Holder and its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the Holder may from
time to time increase or decrease the Maximum Percentage I to any other
percentage in excess of 4.99% specified in such notice; provided that (i) any
such increase will not be effective until the sixty-first (61st) day after such
notice is delivered to the Company, and (ii) any such increase or decrease will
apply only to the Holder and not to any other holder of Warrants.
 
 

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(B) The Company shall not effect the conversion of this Note or issue Interest
Shares, and the Holder shall not have the right to convert this Note or receive
Interest Shares, to the extent that after giving effect to such conversion or
issuance, such Person (together with such Person's affiliates) would
beneficially own in excess of 9.99% (the "Maximum Percentage II") of the shares
of Common Stock outstanding immediately after giving effect to such conversion
or issuance, as the case may be. For purposes of the foregoing sentence, the
aggregate number of shares of Common Stock beneficially owned by such Person 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 shares of Common Stock which would be issuable
upon (i) conversion of the remaining, unconverted portion of this Note
beneficially owned by such Person and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company beneficially owned by such Person and its affiliates (including,
without limitation, any convertible notes or convertible preferred stock or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein. Except as set forth in the preceding sentence, for
purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Note, 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-KSB, Form 10-Q, Form 10-QSB, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission, as the case may be, (2) a
more recent 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 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 the Notes and the Warrants, by the Holder and its affiliates since the
date as of which such number of outstanding shares of Common Stock was reported.
By written notice to the Company, the Holder may from time to time increase or
decrease the Maximum Percentage II to any other percentage in excess of 9.99%
specified in such notice; provided that (i) any such increase will not be
effective until the sixty-first (61st) day after such notice is delivered to the
Company, and (ii) any such increase or decrease will apply only to the Holder
and not to any other holder of Warrants.
 
 

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(2) Principal Market Regulation.
 
(a) Exchange Cap. The Company shall not be obligated to issue any shares of
Common Stock upon conversion of this Note or exercise of the Warrants and no
Buyer shall be entitled to receive any shares of Common Stock if the issuance of
such shares of Common Stock would exceed that number of shares of Common Stock
which the Company may issue upon exercise or conversion, as applicable, of the
Warrants and Notes or otherwise without breaching the Company's obligations
under the rules or regulations of any applicable Eligible Market (the "Exchange
Cap"), except that such limitation shall not apply in the event that the Company
(A) obtains the approval of its stockholders as required by the applicable rules
of the Eligible Market for issuances of shares of Common Stock in excess of such
amount or (B) obtains a written opinion from outside counsel to the Company that
such approval is not required, which opinion shall be reasonably satisfactory to
the Required Holders. Until such approval or written opinion is obtained, no
Buyer shall be issued in the aggregate, upon exercise or conversion, as
applicable, of any Warrants or 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 total number of shares of Common Stock underlying the
Notes issued to such Buyer pursuant to the Securities Purchase Agreement on the
Issuance Date and the denominator of which is the aggregate number of shares of
Common Stock underlying the Series A Notes and Series B Notes issued to the
Buyers pursuant to the Securities Purchase Agreement on the Issuance Date (with
respect to each Buyer, the "Exchange Cap Allocation"). In the event that any
Buyer shall sell or otherwise transfer any of such Buyer's Notes, the transferee
shall be allocated a pro rata portion of such Buyer's Exchange Cap Allocation,
and the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee. In the event that any holder of Notes shall convert all of such
holder's Notes into a number of shares of Common Stock which, in the aggregate,
is less than such holder's Exchange Cap Allocation, then the difference between
such holder's Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective Exchange Cap
Allocations of the remaining holders of the Series A Notes and Series B Notes on
a pro rata basis in proportion to the total number of shares of Common Stock
underlying the Series A Notes and Series B Notes then held by each such holder.
In the event that the Company is prohibited from issuing any Conversion Shares
for which a Conversion Notice has been received as a result of the operation of
this Section 3(e)(2), the Company shall pay cash in exchange for cancellation of
such Conversion Shares, at a price per Conversion Share equal to the Weighted
Average Price as of the date of the attempted conversion.
 

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(b) Redemption Upon Exchange Cap Violation. In the event that, anytime after the
Shareholder Issuance Voting Deadline (as defined in the Securities Purchase
Agreement), (A) the Shareholder Issuance Approval (as defined in the Securities
Purchase Agreement), if applicable, has not been obtained and (B) the then
Holder’s current Fully Diluted Amount (as defined below) would exceed the
Holder’s Pro-Rata Portion (as defined below) of the Exchange Cap (an “Exchange
Cap Violation”), then the Company shall be required to redeem, from time to
time, a sufficient amount of the Notes such that the Holder’s Fully Diluted
Amount after such redemption equals the Holder’s Pro-Rata Portion of the
Exchange Cap (an “Exchange Cap Redemption”). Each Exchange Cap Redemption shall
be at a redemption price, in cash, equal to the outstanding principal amount of
this Note to be redeemed, plus all accrued and unpaid Interest, Late Charges and
any other amounts when and as due under this Note (the “Exchange Cap Redemption
Amount”). The Exchange Cap Redemption Amount shall be applied first to accrued
and unpaid Interest, Late Charges and any other amounts when and as due under
this Note, and then to the principal amount of the Note.

The Exchange Cap Redemption Amount shall be due and payable to the Holder within
five (5) Business Days of the date of each applicable Exchange Cap Violation
(each, an “Exchange Redemption Payment Date”).

For purposes hereof, “Fully Diluted Amount” shall mean (i) the aggregate number
of shares of Common Stock that have been issued to the Holder upon the
conversion of Holder’s Note, plus (ii) the aggregate number of shares of Common
Stock that would be issuable to the Holder upon the full Conversion of all of
Holder’s outstanding Note, together with any accrued and unpaid Interest, Late
Charges and any other amounts when and as due under this Note and the full
exercise of Holders Warrants (in each case, without regard to any limitations on
conversion herein or elsewhere, including but not limited to the Exchange Cap,
Maximum Percentage I or Maximum Percentage II, and without regard to whether or
not a sufficient number of shares are authorized and reserved to effect any such
exercise and issuance).

“Holder’s Pro-Rata Portion” shall mean the purchase price of the Note purchased
by the Holder in this offering, divided by the aggregate purchase price of all
Notes sold by the Company in this offering.

 

(4)
RIGHTS UPON TRIGGER EVENT.

 
(a) Trigger Event. Each of the following events shall constitute a "Trigger
Event":
 
 

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(i)   the failure of the applicable Registration Statement (as defined in the
Registration Rights Agreement) required to be filed pursuant to the Registration
Rights Agreement to be declared effective by the SEC on or prior to the date
that is sixty (60) days after the applicable Effectiveness Date (as defined in
the Registration Rights Agreement), or, while the applicable Registration
Statement is required to be maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the applicable Registration
Statement lapses for any reason (including, without limitation, the issuance of
a stop order) or is unavailable to any holder of the Notes for sale of all of
such holder's Registrable Securities (as defined in the Registration Rights
Agreement) in accordance with the terms of the Registration Rights Agreement,
and such lapse or unavailability continues for a period of ten (10) consecutive
days or for more than an aggregate of thirty (30) days in any 365-day period
(other than days during an Allowable Grace Period (as defined in the
Registration Rights Agreement)). Notwithstanding the foregoing, the parties
acknowledge that there may occur, from time to time, lapses of an effective
Registration Statement in the event that there is a post-effective amendment of
a Registration Statement filed, as required by the SEC’s rules and regulations,
and pending the SEC’s review such lapse in effectiveness of such Registration
Statement shall continue until the SEC subsequently declares such Registration
Statement effective. In such case or cases during the course of this Agreement,
such lapse shall not be considered a Trigger Event, provided that the Company
shall respond to any SEC comments within seven days and the total time of the
lapse during such period does not exceed forty-five days;
 
(ii)   the suspension from trading or failure of the Common Stock to be listed
on the Principal Market or an Eligible Market for a period of five (5)
consecutive Trading Days or for more than an aggregate of ten (10) Trading Days
in any 365-day period;
 
(iii)        the Company's (A) failure to cure a Conversion Failure by delivery
of the required number of shares of Common Stock within ten (10) Trading Days
after the applicable Conversion Date or (B) notice, written or oral, to any
holder of the Notes, including by way of public announcement or through any of
its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Common Stock that is tendered in
accordance with the provisions of the Notes;
 
(iv)     at any time following the tenth (10th) consecutive Business Day that
the Holder's Authorized Share Allocation is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion of
the full Conversion Amount of this Note (without regard to any limitations on
conversion);
 
(v)   the Company's failure to pay to the Holder any amount of Principal
(including, without limitation, any redemption payments), Interest, Late Charges
or other amounts when and as due under this Note 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 any Interest and Late Charges
when and as due, in which case only if such failure continues for a period of at
least five (5) Business Days;
 
 

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(vi)       (A) any payment default or other default occurs under any
Indebtedness of the Company or any of its Subsidiaries (as defined in Section
3(a) of the Securities Purchase Agreement) that results in a redemption of or
acceleration prior to maturity of $100,000 or more of such Indebtedness in the
aggregate, or (B) any material default occurs under any Indebtedness of the
Company or any of its Subsidiaries having an aggregate outstanding balance in
excess of $100,000 and such default continues uncured for more than ten (10)
Business Days, other than, in each case (A) or (B) above, or a default with
respect to any Other Notes;
 
(vii)       the Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for
the relief of debtors (collectively, "Bankruptcy Law"), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a "Custodian"), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;
 
(viii)      a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (A) is for relief against the Company or any of its
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries or (C) orders the liquidation of the Company or any of
its Subsidiaries;
 
(ix)       a final judgment or judgments for the payment of money aggregating in
excess of $250,000 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 $250,000 amount set forth above
so long as the Company provides the Holder a written statement from such insurer
or indemnity provider (which written statement shall be reasonably satisfactory
to the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within thirty (30) days of the issuance of such judgment;
 
(x)        the Company breaches any representation, warranty, covenant or other
term or condition of any Transaction Document, except, in the case of a breach
of a covenant which is curable, only if such breach continues for a period of at
least ten (10) consecutive Business Days;
 
(xi)        any breach or failure in any respect to comply with Section 12 of
this Note;
 
(xii)      the Company’s failure to engage the services of a transfer agent for
its Common Stock that is a participant in the Depository Trust Company’s Full
Fast Program prior to the date on which the Registration Statement is declared
effective by the SEC;
 
(xiii)       any Trigger Event (as defined in the Notes) occurs with respect to
any Notes; or
 

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(xiv)      the Company has failed to comply in good faith with the Dispute
Resolution Procedures (as defined herein) or has failed to adjust the Conversion
Price as required hereunder following a Dilutive Issuance, or otherwise (after
any applicable Dispute Resolution Procedure required herein).
 
(b) Redemption Right. Upon the occurrence of a Trigger Event with respect to
this Note or any Other Note, the Company shall within (1) Business Day deliver
written notice thereof via facsimile or e-mail and overnight courier (a "Trigger
Event Notice") to the Holder. At any time after the earlier of the Holder's
receipt of a Trigger Event Notice and the Holder becoming aware of a Trigger
Event, the Holder may require the Company to redeem all or any portion of this
Note by delivering written notice thereof (the "Trigger Event Redemption
Notice") to the Company, which Trigger Event Redemption Notice shall indicate
the portion of this Note the Holder is electing to have redeemed. Each portion
of this Note subject to redemption by the Company pursuant to this Section 4(b)
shall be redeemed by the Company at an amount equal to any accrued and unpaid
liquidated damages, plus the greater of (A) the Conversion Amount to be redeemed
multiplied by the Redemption Premium, or (B) the Conversion Amount to be
redeemed multiplied by the quotient of (i) the Closing Sale Price at the time of
the Triggering Event (or at the time of payment of the redemption price, if
greater) divided by (ii) the Conversion Price (the "Trigger Event Redemption
Price"), provided, however, (B) shall be applicable only in the event that a
Trigger Event of the type specified in Section 4(a)(i), (ii), (iii) or (iv)
hereof has occurred and remains uncured or the Conversion Shares otherwise could
not be received or sold by the Holder without any resale restrictions (or
pursuant to an effective Registration Statement). After a Trigger Event occurs,
the Conversion Price shall be permanently decreased (but not increased) on the
first Business Day of each calendar month thereafter (each a “Trigger Adjustment
Date”) until either the Trigger Event is cured or the Trigger Event Redemption
Price is paid in full, to a price (the “Trigger Event Reset Price”) equal to the
lesser of (i) the Conversion Price then in effect, or (ii) the lowest Weighted
Average Price that has occurred on any Trigger Adjustment Date since the date of
occurrence of the Trigger Event. Redemptions required by this Section 4(b) shall
be made in accordance with the provisions of Section 11. To the extent
redemptions required by this Section 4(b) are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company, such
redemptions shall be deemed to be voluntary prepayments. The parties hereto
agree that in the event of the Company's redemption of any portion of the Note
under this Section 4(b), the Holder's damages would be uncertain and difficult
to estimate because of the parties' inability to predict future interest rates
and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any Triggering Event Redemption Price
due under this Section 4(b) is intended by the parties to be, and shall be
deemed, a reasonable estimate of the Holder's actual loss of its investment
opportunity and not as a penalty.
 

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

 
 

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(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 5(a) pursuant to written
agreements in form and substance satisfactory to the Required Holders and
approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts then outstanding and the interest rates of the Notes held by such
holder, having similar conversion rights as the Notes and having similar ranking
to the Notes, and satisfactory to the Required Holders and (ii) the Successor
Entity (including its Parent Entity) is a publicly traded corporation whose
common stock is quoted on or listed for trading on an Eligible Market and has
"Substantially Similar Trading Characteristics" (as defined below) as the
Company. For purposes hereof, an entity shall have Substantially Similar Trading
Characteristics as the Company if the average daily dollar trading volume of the
common stock of such entity is equal to or in excess of $500,000 for the 60th
through the 16th day prior to the public announcement of such transaction. Upon
the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note referring to the "Company"
shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company
under this Note with the same effect as if such Successor Entity had been named
as the Company herein. Upon consummation of the Fundamental Transaction, the
Successor Entity shall deliver to the Holder confirmation that there shall be
issued upon conversion or redemption of this Note at any time after the
consummation of the Fundamental Transaction, in lieu of the shares of the
Company's Common Stock (or other securities, cash, assets or other property)
issuable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of the publicly traded common stock (or
their equivalent) of the Successor Entity (including its Parent Entity), as
adjusted in accordance with the provisions of this Note. The provisions of this
Section shall apply similarly and equally to successive Fundamental Transactions
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.
 
(b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10)
days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a "Change of
Control Notice"). At any time during the period beginning on the date of the
Holder's receipt of a Change of Control Notice and ending twenty (20) Trading
Days after the consummation of such Change of Control, the Holder may require
the Company to redeem all or any portion of this Note by delivering written
notice thereof ("Change of Control Redemption Notice") to the Company, which
Change of Control Redemption Notice shall indicate the Conversion Amount the
Holder is electing to have redeemed. The portion of this Note subject to
redemption pursuant to this Section 5 shall be redeemed by the Company in cash
for an amount equal to any accrued and unpaid liquidated damages, plus the
greater of (i) the product of (x) the Conversion Amount being redeemed and (y)
the quotient determined by dividing (A) the greater of the Closing Sale Price of
the Common Stock immediately prior to the consummation of the Change of Control,
the Closing Sale Price immediately following the public announcement of such
proposed Change of Control and the Closing Sale Price of the Common Stock
immediately prior to the public announcement of such proposed Change of Control
by (B) the Conversion Price and (ii) 110% of the Conversion Amount being
redeemed (the "Change of Control Redemption Price"). Redemptions required by
this Section 5 shall be made in accordance with the provisions of Section 11 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, until the Change of
Control Redemption Price is paid in full, the Conversion Amount submitted for
redemption under this Section 5(b) may be converted, in whole or in part, by the
Holder into Common Stock pursuant to Section 3. The parties hereto agree that in
the event of the Company's redemption of any portion of the Note under this
Section 5(b), the Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any redemption premium due under this Section 5(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder's actual loss of its investment opportunity and not as a penalty.
 
 

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

 
(a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
 
(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "Corporate Event"), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares
of Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as the Holder
would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of
Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the Required Holders. The provisions of this
Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or
redemption of this Note.
 
 

 

 

 

 

 

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(7)       ADJUSTMENT OF CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF
COMMON STOCK. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.
 
(8)    ADJUSTMENT UPON ISSUANCE OF SHARES OF COMMON STOCK. If the Company issues
or sells, or in accordance with this Section 8 is deemed to have issued or sold,
any shares of Common Stock (including the issuance or sale of shares of Common
Stock owned or held by or for the account of the Company, but excluding shares
of Common Stock deemed to have been issued by the Company in connection with any
Excluded Securities for a consideration per share (the "New Issuance Price")
less than a price (the "Applicable Price") equal to the Conversion Price in
effect immediately prior to such issue or sale or deemed issuance or sale (the
foregoing a "Dilutive Issuance"), then immediately after such Dilutive Issuance,
the Conversion Price then in effect shall be reduced to an amount equal to the
New Issuance Price. Upon each such adjustment of the Conversion Price hereunder,
the number of Conversion Shares shall be adjusted to the number of shares of
Common Stock determined by multiplying the Conversion Price in effect
immediately prior to such adjustment by the number of Conversion Shares
acquirable upon conversion of this Note immediately prior to such adjustment and
dividing the product thereof by the Conversion Price resulting from such
adjustment. For purposes of determining the adjusted Conversion Price under this
Section 8, the following shall be applicable:
 
(a)   Issuance of Options. If the Company in any manner grants any Options and
the lowest price per share for which one share of Common Stock is issuable upon
the exercise of any such Option or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option is less than
the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 8(a), the "lowest price per share for which one share of Common Stock is
issuable upon exercise of such Options or upon conversion, exercise or exchange
of such Convertible Securities" shall be equal to the sum of the lowest amounts
of consideration (if any) received or receivable by the Company with respect to
any one share of Common Stock upon the granting or sale of the Option, upon
exercise of the Option and upon conversion, exercise or exchange of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Conversion Price or number of Conversion Shares shall be made
upon the actual issuance of such shares of Common Stock or of such Convertible
Securities upon the exercise of such Options or upon the actual issuance of such
shares of Common Stock upon conversion, exercise or exchange of such Convertible
Securities.
 
 

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(b)   Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 8(b), the "lowest price per share
for which one share of Common Stock is issuable upon the conversion, exercise or
exchange" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion,
exercise or exchange of such Convertible Security. No further adjustment of the
Conversion Price or number of Conversion Shares shall be made upon the actual
issuance of such shares of Common Stock upon conversion, exercise or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of this
Note has been or is to be made pursuant to other provisions of this Section 8,
no further adjustment of the Conversion Price or number of Conversion Shares
shall be made by reason of such issue or sale.
 
(c)   Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exercise or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or exercisable
or exchangeable for shares of Common Stock increases or decreases at any time,
the Conversion Price and the number of Conversion Shares in effect at the time
of such increase or decrease shall be adjusted to the Conversion Price and the
number of Conversion Shares which would have been in effect at such time had
such Options or Convertible Securities provided for such increased or decreased
purchase price, additional consideration or increased or decreased conversion
rate, as the case may be, at the time initially granted, issued or sold. For
purposes of this Section 8(c), if the terms of any Option or Convertible
Security that was outstanding as of the date of issuance of this Note are
increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 8 shall be made if such adjustment would
result in an increase of the Conversion Price then in effect or a decrease in
the number of Conversion Shares.
 
(d)   Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction, the Options will be deemed to have been
issued for the difference of (i) the aggregate fair market value of such Options
and other securities issued or sold in such integrated transaction, less (ii)
the fair market value of the securities other than such Option, issued or sold
in such transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company. If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any shares of Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Weighted Average Price of such security on the date of receipt. If
any shares of Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which the
Company is the surviving entity, the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such shares of Common Stock,
Options or Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Required Holders. If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation (the
"Valuation Event"), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders. The determination of such appraiser shall be final and binding
upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne by the Company.
 
 

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(e)   Record Date. If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them (i) to receive a dividend or
other distribution payable in shares of Common Stock, Options or in Convertible
Securities or (ii) to subscribe for or purchase shares of Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
 
(9)    NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation, Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
 

(10)
RESERVATION OF AUTHORIZED SHARES.

 
(a) Reservation. 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, 120% of the number of shares of Common Stock as shall from time to
time be necessary to effect the conversion of all of the Notes then outstanding;
provided that at no time shall the number of shares of Common Stock so reserved
be less than the number of shares required to be reserved by the previous
sentence (without regard to any limitations on conversions) (the "Required
Reserve Amount"). The number of shares of Common Stock reserved for conversions
of the Notes and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Notes based on the principal amount
of the Notes held by each holder at the Closing (as defined in the Securities
Purchase Agreement) or increase in the number of reserved shares, as the case
may be (the "Authorized Share Allocation"). In the event that a holder shall
sell or otherwise transfer any of such holder's Notes, each transferee shall be
allocated a pro rata portion of such holder's Authorized Share Allocation. Any
shares of Common Stock reserved and allocated to any Person which ceases to hold
any Notes shall be allocated to the remaining holders of Notes, pro rata based
on the principal amount of the Notes then held by such holders.
 
 

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(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "Authorized Share Failure"), then
the Company shall immediately take all action necessary to increase the
Company's authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but
in no event later than sixty (60) days after the occurrence of such Authorized
Share Failure, the Company shall hold a meeting of its stockholders for the
approval of an increase in the number of authorized shares of Common Stock. In
connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders'
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal.
 

(11)
HOLDER'S REDEMPTIONS.

 
(a) The Company shall deliver the applicable Trigger Event Redemption Price to
the Holder within five (5) Business Days after the Company's receipt of the
Holder's Trigger Event Redemption Notice. If the Holder has submitted a Change
of Control Redemption Notice in accordance with Section 5(b), the Company shall
deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five (5)
Business Days after the Company's receipt of such notice otherwise. 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 (together with any Late Charges thereon) has not been paid.
Upon the Company's receipt of such notice, (x) the Redemption Notice shall be
null and void with respect to such Conversion Amount, (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with Section
17(d)) to the Holder representing such Conversion Amount and (z) the Conversion
Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is
voided and (B) the lowest Closing Bid Price of the Common Stock during the
period beginning on and including the date on which the Redemption Notice is
delivered to the Company and ending on and including the date on which the
Redemption Notice is voided. The Holder's delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company's obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount
subject to such notice.
 

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(b) Redemption by Other Holders. Upon the Company's receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 4(b) or Section 5(b) (each, an "Other Redemption Notice"), the
Company shall immediately, but no later than one (1) Business Day of its receipt
thereof, forward to the Holder by facsimile a copy of such notice. If the
Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Business Day period beginning on and including the date
which is three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.
 
(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, Delaware
General Corporation Law, Title 8, Chapter 1, and as expressly provided in this
Note.
 
(13)   COVENANTS.
 
(a) Rank. All payments due under this Note (A) shall rank pari passu with all of
the Series A Notes and the Series B Notes, and (B) shall rank senior to all
other unsecured Indebtedness of the Company and its Subsidiaries incurred on or
after the date of this Note.
 
(b) Incurrence of Indebtedness. So long as there remains fifteen percent (15%)
or more of the original Notes outstanding, the Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly,
incur or guarantee, assume or suffer to exist any Indebtedness, other than (i)
the Indebtedness evidenced by this Note and the Other Notes, and (ii) other
Permitted Indebtedness, without the prior written consent of the Holders of 75%
of the then outstanding Notes.
 
(c) Existence of Liens. So long as there remains fifteen percent (15%) or more
of the original Notes 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, without the prior written consent of the Holders of
75% of the then outstanding Notes.
 
(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
Permitted Indebtedness (other than this Note and the Other Notes), whether by
way of payment in respect of principal of (or premium, if any) or interest on
such Indebtedness, if at the time such payment is due or is otherwise made or
after giving effect to such payment, an event constituting, or that with the
passage of time and without being cured would constitute, a Trigger Event has
occurred and is continuing.
 
 

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(e) Restriction on Redemption and Cash Dividends. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.
 
(14)      PARTICIPATION. The Holder, as the holder of this Note, shall be
entitled to receive such dividends paid and distributions made to the holders of
Common Stock to the same extent as if the Holder had converted this Note into
Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such shares of Common Stock on the record date for such
dividends and distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.
 
(15)      VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote of
the Required Holders at a meeting duly called for such purpose or the written
consent without a meeting of the Required Holders shall be required for any
change or amendment to this Note or the Other Notes. No consideration shall be
offered or paid to any holder of Notes to amend or consent to a waiver or
modification of the Notes unless the same consideration also is offered to all
of the holders of Notes.
 
(16)      TRANSFER. This Note may be offered, sold, assigned or transferred by
the Holder without the consent of the Company, subject only to the provisions of
Section 2(f) of the Securities Purchase Agreement.
 
(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 acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(d)(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 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.
 
 

19

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(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)) 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 and Late Charges on the Principal and Interest of this Note, if any,
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, specifically
including but not limited to the Company’s failure to adjust the Conversion
Price as required hereunder following a Dilutive Issuance, 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 under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including,
but not limited to, financial advisory fees and attorneys' fees and
disbursements.
 
 

20

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(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,
the determination of the occurrence of a Dilutive Issuance which would trigger a
reset of the Conversion Price, the determination of the Company entering into an
agreement to issue securities pursuant to an Equity Line (as defined in the
Securities Purchase Agreement), the determination of the Company entering into
an agreement to issue Variable Equity Securities (as defined in the Securities
Purchase Agreement) or the arithmetic calculation of the Conversion Rate or any
Redemption Price, or the determination of the Company entering into a
transaction that would violate any of the Additional Issuance Restrictions (as
defined in the Securities Purchase Agreement) 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 (which is ranked in
the top 10 investment banks nationally, by revenue) selected by the Company and
approved by the Holder, or (b) a copy of the disputed agreement or other
documentation pursuant to which the Holder believes securities may be issued
pursuant to an Equity Line or as Variable Equity Securities, or which Holder
believes may be a Dilutive Issuance which would trigger a reset of the
Conversion Price, or which Holder believes may violate the Additional Issuance
Restrictions, to an independent law firm selected by the Company and approved by
Holder or (c) the disputed arithmetic calculation of the Conversion Rate or any
Redemption Price to the Company's independent, outside accountant (which is
ranked in the top 10 accounting firms nationally, by revenue). The Company, at
the Company's expense, shall cause the investment bank, the law firm or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holder of the results no later than five (5)
Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's, law firm’s or accountant's determination
or calculation, as the case may be, shall be binding upon all parties absent
demonstrable error. The procedures required by this Section 22 are collectively
referred to herein as the “Dispute Resolution Procedures.”
 
 

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(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. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Conversion
Price, setting forth in reasonable detail, and certifying, the calculation of
such adjustment and (ii) at least twenty (20) days prior to the date on which
the Company closes its books or takes a record (A) with respect to any dividend
or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.
 
(b) Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents which is not
paid when due shall result in a late charge being incurred and payable by the
Company in an amount equal to interest on such amount at the rate of eighteen
percent (18.0%) per annum from the date such amount was due until the same is
paid in full ("Late Charge").
 
(24)      CANCELLATION. After all Principal, accrued Interest and other amounts
at any time owed on this Note have been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
 
(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.
 
 

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(26)      GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL. This Note shall
be construed and enforced in accordance with, and all questions concerning the
construction, validity, interpretation and performance of this Note shall be
governed by, the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. The Company hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of this Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company's obligations to the Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.
 
(27)      CERTAIN DEFINITIONS. For purposes of this Note, the following terms
shall have the following meanings:
 
(a) "Approved Stock Plan" means any employee benefit plan which has been or
hereafter is approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer or
director for services provided to the Company.
 
(b) "Bloomberg" means Bloomberg Financial Markets.
 
(c) "Business Day" means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
 
(d) "Change of Control" means any Fundamental Transaction other than (A) any
reorganization, recapitalization or reclassification of Common Stock, in which
holders of the Company's voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities, or (B)
pursuant to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company.
 
 

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(e) "Closing Bid Price" and "Closing Sale Price" means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 22. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.
 
(f) "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.
 
(g) "Contingent Obligation" means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
 
(h) “Convertible Notes” has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all notes issued in exchange thereof or
replacement thereof.
 
(i) "Convertible Securities" means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.
 
(j) "Eligible Market" means The New York Stock Exchange, Inc., the American
Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market, The
NASDAQ Capital Market, or the NASD’s OTC Bulletin Board.
 
 

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(k) "Effective Date" has the meaning ascribed to such term in the Registration
Rights Agreement.
 
(l) "Excluded Securities" means any Common Stock issued or issuable: (i) issued
in connection with Securities Purchase Agreement (ii) in connection with any
Approved Stock Plan; (iii) upon conversion of the Series A Notes or Series B
Notes or the exercise of the Series A Warrants or the Series B Warrants; (iv)
upon conversion of any Options or Convertible Securities which are outstanding
on the day immediately preceding the Subscription Date, provided that the terms
of such Options or Convertible Securities are not amended, modified or changed
on or after the Subscription Date; (v) in connection with mergers, acquisitions,
strategic business partnerships or joint ventures, in each case with
non-affiliated third parties and otherwise on an arm's-length basis, the primary
purpose of which is not to raise additional capital; and (vi) upon the issuance
of Options or the exercise of any Options issued to financial institutions in
connection with commercial credit agreements or issuance of non-convertible debt
by the Company, each of which the primary purpose is not to raise additional
capital.
 
(m) "Fundamental Transaction" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another Person
or Persons, or (ii) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (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), (v) reorganize, recapitalize
or reclassify its Common Stock or (vi) any "person" or "group" (as these terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock.
 
(n) "GAAP" means United States generally accepted accounting principles,
consistently applied.
 
 
 
 
 
 
 
 

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(o) "Indebtedness" of any Person means, without duplication (i) all indebtedness
for borrowed money, (ii) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services, including (without limitation)
"capital leases" in accordance with generally accepted accounting principles
(other than trade payables entered into in the ordinary course of business),
(iii) all reimbursement or payment obligations with respect to letters of
credit, surety bonds and other similar instruments, (iv) all obligations
evidenced by notes, bonds, debentures or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the Trigger Event are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, 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. Indebtedness shall not, however,
include any Indebtedness incurred in the ordinary course of the Company’s
business, unless otherwise referred to in this Section 27(o).
 
(p) "Options" means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.
 
(q) "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.
 
(r) "Permitted Indebtedness" means (i) the Indebtedness evidenced by this Note
and the Other Notes, and (ii) bonds required to be posted by the company to
obtain regulatory permits, licenses or insurance as part of conducting its
business.
 
(s) "Permitted Liens" means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen’s liens, mechanics' liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens (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
clauses (i) and (iv) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien and the
principal amount of the Indebtedness being extended, renewed or refinanced does
not increase, (vi) 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) 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 (viii) Liens arising from judgments, decrees or
attachments in circumstances not constituting a Trigger Event under Section
4(a)(vii).
 
 

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(t) "Person" means an individual or legal entity, including but not limited to a
corporation, a limited liability company, a partnership, a joint venture, a
trust, an unincorporated organization and a government or any department or
agency thereof.
 
(u) "Principal Market" means the NASD OTC Bulletin Board.
 
(v) "Redemption Notices" means, collectively, the Trigger Event Redemption
Notices and the Change of Control Redemption Notices, each of the foregoing,
individually, a Redemption Notice.
 
(w) "Redemption Premium" means (i) in the case of the Trigger Events described
in Section 4(a)(i) - (vi) and (ix) - (xiv), 125% during the first twelve months
that this Note is outstanding and 115% thereafter or (ii) in the case of the
Trigger Events described in Section 4(a)(vii) - (viii), 100%.
 
(x) "Redemption Prices" means, collectively, the Trigger Event Redemption Price
and the Change of Control Redemption Price, each of the foregoing, individually,
a Redemption Price.
 
(y) "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 and
exercise of the Warrants.
 
(z) "Required Holders" means, in the event that there remains fifteen percent
(15%) or more of the original dollar amount of the Notes issued still
outstanding, holders of Notes representing at least seventy-five percent (75%)
of the aggregate principal amount of the Notes then outstanding.
 
(aa) "SEC" means the United States Securities and Exchange Commission. 
 
(bb) "Securities Purchase Agreement" means that certain securities purchase
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes and
the Warrants.
 
(cc) "Subscription Date" means May __, 2007.
 
(dd) "Subsidiary" means any entity in which the Company, directly or indirectly,
owns any of the capital stock or holds an equity or similar interest.
 
 

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(ee) "Successor Entity" means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common stock or equivalent equity security
is quoted or listed for trading on an Eligible Market, Successor Entity shall
mean such Person's Parent Entity.
 
(ff)  "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).
 
(gg) "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).
 
(hh) "Warrants" has the meaning ascribed to such term in the Securities Purchase
Agreement, and shall include all warrants issued in exchange therefor or
replacement thereof.
 
(ii)  "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 or other similar transaction
during the applicable calculation period.
 
 

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(28)      DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within four (4) Business Days after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.
 
 
 
[Signature Page Follows]
 

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

 
nCOAT, INC.
     
By:
                                                                               
Name:
   
Title:
 

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EXHIBIT I
 
nCOAT, INC.
 
CONVERSION NOTICE
 
Reference is made to the Series A Convertible Note (the "Series A Note") issued
to the undersigned by nCOAT, Inc. (the "Company"). In accordance with and
pursuant to the Note, the undersigned hereby elects to convert the Conversion
Amount (as defined in the Note) of the Note indicated below into shares of
Common Stock par value $0.0001 per share (the "Common Stock") of the Company, as
of the date specified below.
 
 
Date of Conversion: 
______________________________________________________________________________________________
 
Aggregate Conversion Amount to be converted: 
_________________________________________________________________________
 
Please confirm the following information:
 
Conversion Price: 
________________________________________________________________________________________________
 
Number of shares of Common Stock to be
issued: ________________________________________________________________________
 
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
 
Issue to: 
_______________________________________________________________________________________________________
                    
_______________________________________________________________________________________________________
                    
_______________________________________________________________________________________________________

 
Facsimile Number: 
_______________________________________________________________________________________________
 
Authorization: 
___________________________________________________________________________________________________
 
By: 
________________________________________________________________________________________________________
 
Title: 
____________________________________________________________________________________________________
 
Dated: ____________________________________________________________________________________________________________
 
Account Number: 
________________________________________________________________________________________________
(if electronic book entry transfer)
 
Transaction Code Number: 
_________________________________________________________________________________________
(if electronic book entry transfer)
 

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ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby directs Nevada
Agency & Trust Company to issue the above-indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated May __, 2007 from
the Company and acknowledged and agreed to by Nevada Agency & Trust Company.

 
nCOAT, INC.
     
By:
                                                                                      
 
Name:
   
Title:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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