Exhibit 10.34

 

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 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 GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

 

CONVERTIBLE SUBORDINATED NOTE

 

Issuance Date: October 1, 2007

 

Principal: U.S. $[                    ]

 

FOR VALUE RECEIVED, LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation (the
“Company”), hereby promises to pay to the order of [INSERT HOLDER] or registered
assigns (“Holder”) the amount set out above as the Principal (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise,
the “Principal”) when due, whether upon the Maturity Date (as defined below),
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal at the
rate of interest as determined pursuant to Section 2, from the date set out
above as the Issuance Date (the “Issuance Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below), the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Convertible Subordinated Note (including all
Convertible Subordinated Notes issued in exchange, transfer or replacement
hereof, this “Note”) is one of an issue of Convertible Subordinated Notes issued
on January 3, 2007 (the “Original Date”) pursuant to the Securities Purchase
Agreement (the “Original Notes”) or issued after January 3, 2007 in satisfaction
of interest and/or other amounts owing by the Company to the holders of the
Original Notes (the “Interest Notes”) (the Original Notes and Interest Notes are
collectively referred to as the “Notes” herein, and any Notes other than this
Note are collectively referred to as the “Other Notes”). This Note is deemed to
be issued pursuant to Section 2 of the Holder’s Original Note and is subject to
the terms and provisions of the Securities Purchase Agreement. Certain
capitalized terms are defined in Section 29.

 

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(1)                                  MATURITY AND AMORTIZATION PAYMENTS.

 

(a)                                  Payment on Maturity. On January 3, 2010
(the “Maturity Date”), the Holder shall surrender this Note to the Company and
the Company shall pay to the Holder an amount in cash representing all
outstanding Principal and accrued and unpaid Interest, and following receipt of
such payment, the Holder shall mark this Note as “Cancelled” and shall surrender
such cancelled Note to the Company by courier, registered mail, or other
traceable means. Beginning on the first day of the eighteenth (18th) calendar
month following the calendar month in which the Original Date occurs, the
Company may, upon thirty (30) calendar days prior written notice to Holder and
at the sole election of the Company, prepay this Note in whole or in part for a
cash redemption price equal to One Hundred Five Percent (105%) of the the
portion of the principal amount being redeemed plus all accrued and unpaid
interest on the portion of the principal amount being redeemed, provided that
following such notice the Holder may convert all or any part of the portion of
the Note to be redeemed so long as the Company receives a duly executed
Conversion Notice pursuant to Section 3 of this Note prior to the date on which
prepayment is actually made. Notwithstanding the foregoing, in the event that
prior to the Maturity Date the Company completes a public or private equity or
debt offering or an Asset Sale pursuant to which the Company receives aggregate
cash proceeds (net of placement agent fees, underwriter’s discouns, and other
similar fees or commissions, and net of transaction fees) in excess of Five
Million Dollars ($5,000,000), but excluding financings for the purpose of
purchasing capital assets, then any net proceeds from such transaction after
payment in full of transaction expenses and the full payment of the Company’s 8%
Unsecured Subordinated Notes Due 2007 shall, within five (5) Business Days of
the Company’s receipt of such net proceeds, be paid to reduce the Principal and
accrued but unpaid interest under this Note and the other Interest Notes (and if
such net proceeds are insufficient to pay the Interest Notes in full, then such
net proceeds will be paid to the holders of the Interest Notes on a pro rata
basis in accordance with the then-outstanding Principal under the Interest Notes
held by them). For this purpose, an “Asset Sale” means any sale of assets by the
Company in a single transaction or series of related transactions, other than
(i) sales of inventory or other assets in the ordinary course of the Company’s
business, (ii) sale of obsolete equipment.

 

(b)                                 Amortization Payments. Beginning on July 31,
2008 and at the end of each month thereafter (each, an “Amortization Date”)
until there is no outstanding Principal of this Note, the Company shall redeem
$[             ] [1/36th of the original Principal amount of this Note] of this
Note (each, an “Amortization Redemption Amount”). If the Company is unable to
redeem all Principal and Interest with respect to all Amortization Redemption
Amounts on this Note and the Other Notes, 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 subject to payment of an Amortization Redemption
Amount on such Amortization Date pursuant to this Note and the Other Notes.

 

(c)                                  Payment of Amortization Redemption Amount.
The Company shall pay the Amortization Redemption Amount in cash in accordance
with the provisions of Section 12; provided, however, that if the Conditions to
Amortization Conversion (as defined

 

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below) are satisfied or waived in writing by the Holder and the Company provides
the Amortization Conversion Notice (as defined below), then the Company shall
have the right to require the Holder to convert all or any such portion of the
Amortization Redemption Amount designated in the Amortization Conversion Notice
into fully paid, validly issued and nonassessable shares of Common Stock in
accordance with the applicable provisions of Section 3(c)(i). The Company may
exercise its right to require conversion under this Section 1(c) by delivering
at least 20 Trading Days prior to such Amortization Date a written notice
thereof by facsimile and overnight courier to all, but not less than all, of the
holders of Notes and the Transfer Agent that specifically describes the portion
of the Amortization Redemption Amount for this Note and the Other Notes that
will be paid in Common Stock (the “Amortization Conversion Notice” and the date
all of the holders received such notice is referred to as the “Amortization
Conversion Notice Date”). The Amortization Conversion Notice shall be
irrevocable; provided; that if any of the Conditions to Amortization Conversion
is not satisfied on the applicable Amortization Date or waived by the Holder,
the Company will notwithstanding delivery of the Amortization Conversion Notice
be required to pay the Amortization Redemption Amount in cash. The conversion
price applicable to an Amortization Conversion (the “Amortization Price”) that
is being paid in Common Stock pursuant to this Section 1(c) shall be 90% of the
Weighted Average Price of the Common Stock for the 20 consecutive Trading Days
immediately preceding the Amortization Date. For purposes of this Section 1(c),
“Conditions to Amortization Conversion” means the following conditions: (i) the
Common Stock shall be traded on the Principal Market, the NASDAQ Gobal Market or
NASDAQ Capital Market, or the American Stock Exchange on the applicable
Amortization Date, (ii) on the Amortization Date, either (x) the Registration
Statement or Registration Statements contemplated by the Registration Rights
Agreement shall be effective and available for the sale for all of the
Registrable Securities (as defined in the Registration Rights Agreement) then
outstanding, together with the Common Stock to be issued on such Amortization
Date, in accordance with the terms of the Registration Rights Agreement or (y)
all shares of Common Stock issuable upon conversion of the Notes shall be
eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws, (iii) an Authorized Share
Failure shall not be in effect on the Amortization Date; and (iv) any such
payment of the Amortization Redemption Amount in Common Stock shall not consist
of more than 20% of the total dollar volume traded in the Common Stock for the
20 Trading Days prior to the Amortization Date.

 

(d)                                 Special Redemption Right. Within two (2)
trading days after the closing of one or more Qualified Transactions resulting
in $25,000,000 (Twenty Five Million Dollars) in aggregate proceeds after
transaction expenses and placement agent or broker commissions or fees, the
Company will notify the Holder of said closing (a “Transaction Notice”).  Upon
the closing of the Qualified Transaction, the Holder may elect to have all or
part of the outstanding principal amount of this Note and all accrued but unpaid
interest thereunder redeemed within five (5) Trading Days of the Company’s
receipt of written notice of the Holder’s election to effect such redemption. 
In order to elect such redemption, the Holder must deliver written notice of
redemption to the Company within twenty (20) Trading Days after its receipt of
the Transaction Notice, and such written notice must be accompanied by the
surrender of the originally executed Note, which must be marked “cancelled”
(provided that in lieu of

 

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surrendering the Notes (if not fully redeemed), the Holder may deliver a
certification to the Company affirming that the requisite principal amount of
Notes is being forfeited as a result of such redemption, in which case the
change in the Notes will be noted by book entry by the Company).  For purposes
hereof, the term “Qualified Transactions” means (A) the sale of Liquidmetal
Korea’s manufacturing facility in Pyong-Taek, Republic of Korea and that the
appropriate authorities or banks in the Republic of Korea approve the transfer
of such proceeds from Liquidmetal Korea to the Company and/or (B) the raising of
capital in a debt or equity offering after the date hereof (subject to any
restrictions or limitations thereon set forth in the Purchase Agreement or the
Notes).

 

(2)                                  INTEREST; INTEREST RATE. Interest on this
Note shall commence accruing on the Issuance Date and shall be computed on the
basis of a 365-day year and actual days elapsed and shall be payable in arrears
on the first day of each Calendar Quarter and on the Maturity Date during the
period beginning on the Issuance Date and ending on, and including, the Maturity
Date (each, an “Interest Date”) with the first Interest Date being January 1,
2008. Interest shall be payable on each Interest Date in cash at the rate of
8.00% per annum (the “Interest Rate”). Prior to the payment of Interest on an
Interest Date, Interest on this Note shall accrue at the Interest Rate and be
payable by way of inclusion of the Interest in the Conversion Amount in
accordance with Section 3(b)(i). From and after the occurrence of an Event of
Default, the Interest Rate shall be increased so that the Interest Rate shall be
twelve percent (12.00%) per annum. In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest as
calculated at such increased rate during the continuance of such Event of
Default shall continue to apply to the extent relating to the days after the
occurrence of such Event of Default through and including the date of cure of
such Event of Default.

 

(3)                                  CONVERSION OF NOTES. This Note shall be
convertible into shares of the Company’s common stock, par value $0.001 per
share (the “Common Stock”), on the terms and conditions set forth in this
Section 3.

 

(a)                                  Conversion Right. Subject to the provisions
of Section 3(d), at any time or times on or after the Issuance Date, the Holder
shall be entitled to convert any portion of the outstanding and unpaid
Conversion Amount (as defined below) in increments of at least $50,000 of
Principal (or such lesser amount if such amount represents the remaining
Principal amount) into fully paid and nonassessable shares of Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. If the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up to the nearest whole share. The Company shall pay any and all
taxes that may be payable with respect to the issuance and delivery of Common
Stock upon conversion of any Conversion Amount.

 

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(b)                                 Conversion Rate. The number of shares of
Common Stock issuable upon conversion of any Conversion Amount pursuant to
Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y)
the Conversion Price (as defined below) (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, plus (B) accrued and unpaid Interest
with respect to such Principal.

 

(ii)                                  “Conversion Price” means, as of any
Conversion Date (as defined below) or other date of determination, and subject
to adjustment as provided herein, $1.10.

 

(c)                                  Mechanics of Conversion.

 

(i)                                     Optional Conversion. To convert any
Conversion Amount into shares of Common Stock on any date (a “Conversion Date”),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
on or prior to 5:00 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion
Notice”) to the Company and (B) if required by Section 3(c)(iii), surrender this
Note to a common carrier for delivery to the Company as soon as practicable on
or following such date (or an indemnification undertaking with respect to this
Note in the case of its loss, theft or destruction). On or before the first
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such Conversion Notice
to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or
before the second Business Day following the date of receipt of a Conversion
Notice (the “Share Delivery Date”), the Company shall (X) 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 Depository Trust Company (“DTC”)
through its Deposit Withdrawal At Custodian system or (Y) if the Transfer Agent
is not participating in 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. If this Note is
physically surrendered for conversion as required by Section 3(c)(iii) and the
outstanding Principal of this Note is greater than the Principal portion of the
Conversion Amount being converted, then the Company shall as soon as practicable
and in no event later than five 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 19(d)) representing the outstanding Principal not converted. The Person
or Persons entitled to receive the shares of Common Stock issuable upon a
conversion of this Note shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on the Conversion Date.

 

(ii)                                  Company’s Failure to Timely Convert. If
the Company shall fail to issue a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon conversion of any

 

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Conversion Amount on or prior to the date which is five Business Days after the
Conversion Date (a “Conversion Failure”), then (A) the Company shall pay
liquidated damages to the Holder for each day of such Conversion Failure in an
amount equal to 1.0% of the product of (I) the sum of the number of shares of
Common Stock not issued to the Holder on or prior to the Share Delivery Date and
to which the Holder is entitled, and (II) the Closing Sale Price of the Common
Stock on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have
returned, as the case may be, any portion of this Note that has not been
converted pursuant to such Conversion Notice; provided that the voiding of a
Conversion Notice shall not affect the Company’s obligations to make any
payments which have accrued prior to the date of such notice pursuant to this
Section 3(c)(ii) or otherwise. In addition to the foregoing, if within three (3)
Trading Days after the Company’s receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue and deliver a certificate to the Holder
or credit the Holder’s balance account with DTC for the number of shares of
Common Stock to which the Holder is entitled upon such holder’s conversion of
any Conversion Amount, and if on or after such Trading Day the Holder purchases
(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by the Holder of Common Stock issuable upon such
conversion that the Holder anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within five (5) Business Days after the Holder’s request
and in the Holder’s discretion, either (i) pay cash to the Holder in an amount
equal to the Holder’s total purchase price (including brokerage commissions and
other out-of-pocket expenses, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Common Stock and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on the
Conversion Date.

 

(iii)                               Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of any portion of this Note in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the
Company with prior written notice (which notice may be included in a Conversion
Notice) requesting physical surrender and reissue of this Note. The Holder and
the Company shall maintain records showing the Principal and Interest 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, subject to
Section 3(d), shall convert from each holder of Notes electing to have Notes
converted on such date a pro rata amount of such holder’s portion of its Notes
submitted for conversion based on the principal amount of Notes submitted for
conversion on such date by such holder relative to the aggregate principal
amount of all Notes submitted for conversion on such date. In the event of a
dispute as to the number of shares of Common Stock issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the Holder
the number of shares of Common Stock not in dispute and resolve such dispute in
accordance with Section 24.

 

(d)                                 Limitations on Conversions.

 

(i)                                     Beneficial Ownership. Unless waived by
the Holder upon no less than sixty one (61) days prior written notice to the
Company, the Company shall not effect any conversion of this Note pursuant to
Section 3(a) to the extent that after giving effect to such conversion the
Holder (together with the Holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after
giving effect to such conversion. Even if the Holder waives the limitation set
forth in the preceding sentence, the Company shall in no event effect any
conversion of this Note, and the Holder of this Note shall not have the right to
convert any portion of this Note pursuant to Section 3(a), to the extent that
after giving effect to such conversion, the Holder (together with the Holder’s
affiliates) would beneficially own in excess of 9.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentences, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Note with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted portion of this Note beneficially owned by the
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this Section
3(d)(i), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a more recent
public announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of the Holder, the
Company shall within two Business Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Note, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.

 

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

 

(4)                                  RIGHTS UPON EVENT OF DEFAULT.

 

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

 

(i)                                     the Company’s failure to pay to the
Holder any amount of Principal or Interest when and as due under this Note if
such failure continues for a period of at least five Business Days;

 

(ii)                                  the Company’s failure to pay to the Holder
any amounts other than Principal or Interest when and as due under this Note,
the Securities Purchase Agreement, or the Registration Rights Agreement, which
failure is not cured within five Business Days after notice of such default sent
by the Holder to the Company;

 

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(iii)                               any default under, redemption of or
acceleration prior to maturity of any Indebtedness (as defined below) of the
Company or any of its Subsidiaries (as defined in the Securities Purchase
Agreement) other than with respect to any Other Notes and the Senior
Indebtedness; provided that in the case of a payment default of such
Indebtedness, such default is not cured within applicable cure periods; further
provided that in the case of a non-payment default of such Indebtedness that has
not resulted in an acceleration or redemption of such Indebtedness prior to its
maturity, only upon acceleration or redemption of such Indebtedness;

 

(iv)                              the Company shall fail to observe or perform
any other material covenant or agreement contained in the Securities Purchase
Agreement, which failure is not cured within ten Business Days after notice of
such default sent by the Holder to the Company;

 

(v)                                 the Company or any of its Subsidiaries,
pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal
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”),  or
(D) makes a general assignment for the benefit of its creditors;

 

(vi)                              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 that remains
undismissed for a period of 90 days, (B) appoints a Custodian of the Company or
any of its Subsidiaries that remains undischarged or unstayed for a period of 90
days, or (C) orders the liquidation of the Company or any of its Subsidiaries;

 

(vii)                           a final judgment or judgments for the payment of
money aggregating in excess of $500,000 are rendered against the Company or any
of its Subsidiaries and which judgments are not, within 60 days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within 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 $500,000 amount set forth above;

 

(viii)                        any breach or failure to comply with Section 15 of
this Note; or

 

(ix)                                any Event of Default (as defined in the
Other Notes) occurs with respect to any Other Notes.

 

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(b)                                 Redemption Right. Promptly after the
occurrence of an Event of Default with respect to this Note or any Other Note,
the Company shall deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder. At any time after the
earlier of the Holder’s receipt of an Event of Default Notice and the Holder
becoming aware of an Event of Default, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof (the
“Event of Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is electing
to redeem. Each portion of this Note subject to redemption by the Company
pursuant to this Section 4(b) shall be redeemed by the Company at a price equal
to the greater of (i) the Conversion Amount to be redeemed and (ii) the product
of (A) the Conversion Rate with respect to such Conversion Amount in effect at
such time as the Holder delivers an Event of Default Redemption Notice and (B)
the Closing Sale Price of the Common Stock on the date immediately preceding
such Event of Default (the “Event of Default Redemption Price”). Redemptions
required by this Section 4(b) shall be made in accordance with the provisions of
Section 12.

 

(5)                                  RIGHTS UPON CHANGE OF CONTROL.

 

(a)                                  Change of Control. Each of the following
events shall constitute a “Change of Control”:

 

(i)                                     the consolidation, merger or other
business combination (including, without limitation, a reorganization or
recapitalization) of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination (including, without
limitation, reorganization or recapitalization) in which holders of the
Company’s voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company);

 

(ii)                                  the sale or transfer of all or
substantially all of the Company’s assets; or

 

(iii)                               a purchase, tender or exchange offer made to
and accepted by the holders of more than the 50% of the outstanding shares of
Common Stock.

 

No sooner than 15 days nor later than 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”).

 

(b)                                 Assumption. Prior to the consummation of any
Change of Control, the Company will secure from any Person purchasing the
Company’s assets or Common Stock or any successor resulting from such Change of
Control (in each case, an “Acquiring Entity”) a written agreement (in form and
substance satisfactory to the holders of Notes representing at

 

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least a majority of the aggregate principal amount of the Notes then
outstanding) to deliver to each holder of Notes in exchange for such Notes, a
security of the Acquiring Entity evidenced by a written instrument substantially
similar in form and substance to the Notes, including, without limitation,
having a principal amount and interest rate equal to the principal amounts and
the interest rates of the Notes held by such holder, and satisfactory to the
holders of Notes representing at least a majority of the principal amount of the
Notes then outstanding. In the event that an Acquiring Entity is directly or
indirectly controlled by a company or entity whose common stock or similar
equity interest is listed, designated or quoted on a securities exchange or
trading market, the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding may elect to treat such
Person as the Acquiring Entity for purposes of this Section 5(b).

 

(c)                                  Redemption Right. At any time during the
period beginning after the Holder’s receipt of a Change of Control Notice and
ending on the date of the consummation of such Change of Control (or, in the
event a Change of Control Notice is not delivered at least 10 days prior to a
Change of Control, at any time on or after the date which is 10 days prior to a
Change of Control and ending ten 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 redeem; provided,
however, that the Company shall not be under any obligation to redeem all or any
portion of this Note or to deliver the applicable Change of Control Redemption
Price unless and until the applicable Change of Control is consummated. The
portion of this Note subject to redemption pursuant to this Section 5 shall be
redeemed by the Company in cash at a price equal to the greater of (i) the sum
of (x) the product of (A) the Applicable Percentage (as defined below) and (B)
the Conversion Amount being redeemed and (y) the amount of any accrued but
unpaid Interest on such Conversion Amount being redeemed through the date of
such redemption payment and (ii) the product of (x) the Applicable Percentage
and (y) the sum of (1) the product of (A) the Conversion Amount being redeemed
multiplied by (B) the quotient determined by dividing (I) the aggregate cash
consideration and the aggregate cash value of any non-cash consideration per
Common Share to be paid to the holders of the Common Shares upon consummation of
the Change of Control (any such non-cash consideration in the form of securities
to be valued at the higher of the Closing Sale Price of such securities as of
the Trading Day immediately prior to the consummation of such Change of Control,
the Closing Sale Price on the Trading Day immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price on
the Trading Day immediately prior to the public announcement of such proposed
Change of Control) by (II) the Conversion Price plus (2) the amount of any
accrued but unpaid Interest on such Conversion Amount being redeemed through the
date of such redemption payment, (the “Change of Control Redemption Price”).
Redemptions required by this Section 5(c) shall be made in accordance with the
provisions of Section 12 and shall have priority to payments to stockholders in
connection with a Change of Control. For purposes of this Note, the term
“Applicable Percentage” means 120% if the Change of Control is consummated on or
before

 

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the first (1st) anniversary of the Original Date, 115% if the Change of Control
is consummated after the first (1st) anniversary of the Original Date but on or
before the second (2nd) anniversary of the Original Date, and 110% if the Change
of Control is consummated at any time after the second (2nd) anniversary of the
Original Date.

 

(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. Prior to the
consummation of any recapitalization, reorganization, consolidation, merger,
spin-off or other business combination (other than a Change of Control) pursuant
to which holders of Common Stock are entitled to receive securities or other
assets with respect to or in exchange for 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 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 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 holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment of Conversion Price upon
Issuance of Common Stock. If and whenever on or after the Issuance Date, the
Company issues or sells, or in accordance with this Section 7(a) is deemed to
have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company,
but excluding shares of Common Stock deemed to have been issued or sold by the

 

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Company in connection with any Excluded Security) for a consideration per share
(the “New Securities Issuance Price”) less than a price (the “Applicable Price”)
equal to the Conversion Price in effect immediately prior to such issue 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
(rounded to the nearest cent) equal to the New Securities Issuance Price. For
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:

 

(i)                                     Issuance of Options. If the Company in
any manner grants or sells any Options and the lowest price per share for which
one share of Common Stock is issuable upon the exercise of any such Option or
upon conversion or exchange or exercise of any Convertible Securities issuable
upon exercise of such Option is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been issued and
sold by the Company at the time of the granting or sale of such Option for such
price per share. For purposes of this Section 7(a)(i), the “lowest price per
share for which one share of Common Stock is issuable upon the exercise of any
such Option or upon conversion or exchange or exercise of any Convertible
Securities issuable upon exercise of such Option” shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to any one share of Common Stock upon granting or sale of
the Option, upon exercise of the Option and upon conversion or exchange or
exercise of any Convertible Security issuable upon exercise of such Option. No
further adjustment of the Conversion Price shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such Common Stock upon
conversion or exchange or exercise of such Convertible Securities.

 

(ii)                                  Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities and the lowest
price per share for which one share of Common Stock is issuable upon such
conversion or exchange or exercise thereof is less than the Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the issuance of sale of such
Convertible Securities for such price per share. For the purposes of this
Section 7(a)(ii), the “price per share for which one share of Common Stock is
issuable upon such conversion or exchange or exercise” shall be equal to the sum
of the lowest amounts of consideration (if any) received or receivable by the
Company with respect to any one share of Common Stock upon the issuance or sale
of the Convertible Security and upon the conversion or exchange or exercise of
such Convertible Security. No further adjustment of the Conversion Price shall
be made upon the actual issuance of such Common Stock upon conversion or
exchange or exercise of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the Conversion
Price shall be made by reason of such issue or sale. Notwithstanding anything in
this Note to the contrary, in the event that the Company agrees to decrease the
conversion

 

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price of any of its 7% Convertible Secured Promissory Notes due August 2007 in
connection with an agreement by the holder of any such notes to convert the
same, such decrease in the conversion price will not result in any adjustment to
the Conversion Price pursuant to this Section 7(a) of this Note.

 

(iii)                               Change in Option Price or Rate of
Conversion. If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion,  exchange or exercise
of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable or exercisable for Common Stock changes at
any time, the Conversion Price in effect at the time of such change shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.

 

(iv)                              Calculation of Consideration Received. In case
any Option is issued in connection with the issue or sale of other securities of
the Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company will be the Closing Sale Price of such securities on the
date of receipt. If any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the holders of Notes representing at least a majority of the
principal amounts of the Notes then outstanding. If such parties are unable to
reach agreement within ten days after the occurrence of an event requiring
valuation (the “Valuation Event”), the fair value of such consideration will be
determined within five Business Days after the tenth day following the Valuation
Event by an independent, reputable appraiser jointly selected by the Company and
the holders of Notes representing at least a majority of the principal amounts
of the Notes then outstanding. The determination of such appraiser shall be
deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne equally by the Company, on the hand, and the
holders of the Notes, on the other hand.

 

14

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(v)                                 Record Date. If the Company takes a record
of the holders of Common Stock for the purpose of entitling them (A) to receive
a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the 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.

 

(b)                                 Adjustment of Conversion Price upon
Subdivision or Combination of Common Stock. If the Company at any time
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 combines
(by combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.

 

(c)                                  Other Events. If any event occurs of the
type contemplated by the provisions of this Section 7 but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Note;
provided that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 7.

 

(9)                                  COMPANY’S RIGHT OF MANDATORY CONVERSION.
(a) Mandatory Conversion. If at any time from and after the Issuance Date, the
Weighted Average Price of the Common Stock exceeds 250% of the conversion price
of the Original Notes as of the Original Date (subject to appropriate
adjustments for stock splits, stock dividends, stock combinations and other
similar transactions after the Original Date) for each of any 20 consecutive
Trading Days (the “Mandatory Conversion Measuring Period”) and the Conditions to
Mandatory Conversion (as set forth in Section 9(c)) are satisfied or waived in
writing by the Holder, the Company shall have the right to require the Holder to
convert all or any such portion of the Conversion Amount of this Note designated
in the Mandatory Conversion Notice into fully paid, validly issued and
nonassessable shares of Common Stock in accordance with Section 3(c) hereof at
the Conversion Rate as of the Mandatory Conversion Date (as defined below) (a
“Mandatory Conversion”). The Company may exercise its right to require
conversion under this Section 9(a) by delivering within not more than five
Trading Days following the end of such Mandatory Conversion Measuring Period a
written notice thereof by facsimile and overnight courier to all, but not less
than all, of the holders of Notes and the Transfer Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such notice is
referred to as the “Mandatory Conversion Notice Date”). The Mandatory Conversion
Notice shall be irrevocable.

 

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(b)                                 Pro Rata Conversion Requirement. If the
Company elects to cause a conversion of all or any portion of the Conversion
Amount of this Note pursuant to Section 9(a), then it must simultaneously take
the same action with respect to the Other Notes (except that the Company is not
required to take the same action with respect to the Other Notes to the extent
limited by Section 3(d) in this Note or similar provisions under the Other
Notes). If the Company elects to cause the conversion of this Note pursuant to
Section 9(a) (or similar provisions under the Other Notes) with respect to less
than all of the Conversion Amounts of the Notes then outstanding, then the
Company shall require conversion of a Conversion Amount from each of the holders
of the Notes equal to the product of (I) the aggregate Conversion Amount of
Notes which the Company has elected to cause to be converted pursuant to Section
9(a), multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Original Notes purchased by such holder
pursuant to the Securities Purchase Agreement and the denominator of which is
the sum of the aggregate principal amount of the Original Notes purchased by all
holders pursuant to the Securities Purchase Agreement (except to the extent
limited by Section 3(d) in this Note or similar provisions under the Other
Notes) (such fraction with respect to each holder is referred to as its
“Allocation Percentage,” and such amount with respect to each holder is referred
to as its “Pro Rata Conversion Amount”). In the event that the initial holder of
any Notes shall sell or otherwise transfer any of such holder’s Notes, the
transferee shall be allocated a pro rata portion of such holder’s Allocation
Percentage. The Mandatory Conversion Notice shall state (i) the Trading Day
selected for the Mandatory Conversion in accordance with Section 9(a), which
Trading Day shall be at least 10 Business Days but not more than 60 Business
Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion
Date”), (ii) the aggregate Conversion Amount of the Notes which the Company has
elected to be subject to mandatory conversion from all of the holders of the
Notes pursuant to this Section 9 (and analogous provisions under the Other
Notes), (iii) each holder’s Pro Rata Conversion Amount of the Conversion Amount
of the Notes the Company has elected to cause to be converted pursuant to this
Section 9 (and analogous provisions under the Other Notes) and (iv) the number
of shares of Common Stock to be issued to such Holder as of the Mandatory
Conversion Date. All Conversion Amounts converted by the Holder after the
Mandatory Conversion Notice Date shall reduce the Conversion Amount of this Note
required to be converted on the Mandatory Conversion Date. If the Company has
elected a Mandatory Conversion, the mechanics of conversion set forth in Section
3(c) shall apply, to the extent applicable, as if the Company and the Transfer
Agent had received from the Holder on the Mandatory Conversion Date a Conversion
Notice with respect to the Conversion Amount being converted pursuant to the
Mandatory Conversion.

 

(c)                                  Conditions to Mandatory Conversion. For
purposes of this Section 9, “Conditions to Mandatory Conversion” means the
following conditions: (i) during the period beginning on the date that is six
months prior to the Mandatory Conversion Date and ending on and including the
Mandatory Conversion Date, the Company shall have delivered shares of Common
Stock upon any conversion of Conversion Amounts as set forth in Section 3(c)(i);
(ii) on each day during the period beginning on the first Trading Day of the
Mandatory Conversion Measuring Period and ending on and including the Mandatory
Conversion Date, the

 

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Common Stock shall be traded on the Principal Market, the NASDAQ Global Market
or Global Select Market, the NASDAQ Capital Market, the New York Stock Exchange,
or the American Stock Exchange; (iii) on the Mandatory Conversion Date either
(x) the Registration Statement or Registration Statements contemplated by the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; (iv) on the Mandatory Conversion Date, an Authorized Share
Failure shall not be in effect; and (v) any such payment of the Conversion
Amount in Common Stock shall not consist of more than 20% of the total dollar
volume traded in the Common Stock for the 20 Trading Days prior to the Mandatory
Conversion Date.

 

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

 

(11)                            RESERVATION OF AUTHORIZED SHARES.

 

(a)                                  Reservation. The Company shall initially
reserve out of its authorized and unissued Common Stock a number of shares of
Common Stock for each of the Notes equal to 100% of the Conversion Rate with
respect to the Conversion Amount of each such Note as of the Issuance Date.
Thereafter, the Company, so long as any of the Notes are outstanding, shall use
commercially reasonable efforts to reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Notes, 100% 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 (without regard to any limitations on conversions) (the “Required
Reserve Amount”). The number of shares of Common Stock reserved for conversions
of the Notes 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 time of Issuance
Date or increase in the number of reserved shares, as the case may be (the
“Authorized Share Allocation”). In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation. Any
shares of Common Stock reserved and allocated to any Person which ceases to hold
any Notes shall be allocated to the remaining holders of Notes, pro rata based
on the principal amount of the Notes then held by such holders.

 

(b)                                 Insufficient Authorized Shares. If at any
time while any of the Notes remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to satisfy
its obligation to reserve for issuance upon conversion of the Notes at least a
number of shares of Common Stock equal to the Required Reserve Amount (an
“Authorized Share Failure”), then the Company shall as soon as practicable use
commercially reasonable efforts 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.

 

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(12)                            HOLDER’S REDEMPTIONS.

 

(a)                                  Mechanics. In the event that the Holder has
sent an Event of Default Redemption Notice or a Change of Control Redemption
Notice to the Company pursuant to Section 4(b) or Section 5(c), respectively
(each, a “Redemption Notice”), the Holder shall promptly submit this Note to the
Company. If the Holder has submitted an Event of Default Redemption Notice in
accordance with Section 4(b), the Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(c), 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 Business Days after the Company’s receipt of such
notice if such notice is received after the consummation of such Change of
Control. With respect to an Amortization Redemption, the Company shall deliver
the applicable Amortization Redemption Amount to the Holder within five Business
Days after the end of the applicable month for such Amortization Redemption. 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,
at the Holder’s request, a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the Event of Default Redemption Price, the Change
of Control Redemption Price, or the Amortization Redemption Amount (each, the
“Redemption Price”), as applicable, to the Holder (or deliver any Common Stock
to be issued pursuant to a Redemption Notice) within the time period required,
at any time thereafter and until the Company pays such unpaid Redemption Price
(and issues any Common Stock required pursuant to a Redemption Notice) 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 (or any Common Stock required to be issued pursuant
to a Redemption Notice) 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 19(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 Closing Bid Price on
the date on which the Redemption Notice is voided.

 

(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(c)
(each, an “Other Redemption Notice”), the Company shall immediately forward to

 

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

 

(13)                            SUBORDINATION TO SENIOR INDEBTEDNESS.

 

(a)                                  General. The Company and the Holder
covenant and agree that this Note shall be subject to the provisions of this
Section 13 and to the extent and in the manner set forth in this Section 13, the
indebtedness represented by this Note and the payment of Principal, Interest,
the Redemption Price, and any redemption amount, liquidated damages, fees,
expenses, or any other amounts in respect of this Note are hereby expressly made
subordinate and junior and subject in right of payment to the prior payment in
full in cash of all Senior Indebtedness of the Company now outstanding or
hereinafter incurred.

 

(b)                                 No Payment if Default Under Senior
Indebtedness.

 

(i)                                     [Intentionally left blank]

 

(ii)                                  No cash payment on account of Principal or
Redemption Price of, or Interest on, this Note or any other payment payable with
respect to this Note shall be made, and no portion of this Note shall be
redeemed or purchased directly or indirectly by the Company, if at the time of
such payment or purchase or immediately after giving effect thereto, (A) a
default in the payment of principal, premium, if any, interest or other
obligations in respect of any Senior Indebtedness having either an outstanding
principal balance or a commitment to lend greater than $500,000 (“Designated
Senior Debt”) occurs and is continuing (or, in the case of Senior Indebtedness
for which there is a period of grace, in the event of such a default that
continues beyond the period of grace, if any, specified in the instrument
evidencing such Senior Indebtedness) (a “Payment Default”), unless and until
such Payment Default shall have been cured or waived or shall have ceased to
exist or (B) the Company shall have received notice (a “Payment Blockage
Notice”) from the holder or holders of Designated Senior Debt that there exists
under such Designated Senior Debt a default, which shall not have been cured or
waived, permitting the holder or holders thereof to declare such Designated
Senior Debt due and payable, but only for the period (the “Payment Blockage
Period”) commencing on the date of receipt of the Payment Blockage Notice and
ending on the earlier of (a) the date such default shall have been cured or
waived, or (b) the 180th day immediately following

 

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the Company’s receipt of such Payment Blockage Notice. The Company shall resume
payments on and distributions in respect of this Note, including any past
scheduled payments of the principal of (and premium, if any) and interest on
this Note to which the Holder would have been entitled but for the provisions of
this Section 13(b)(ii) in the case of a Payment Default, within five (5)
Business Days of the date upon which such Payment Default is cured or waived or
ceases to exist (and if payment is made within such time period, any Event of
Default with respect to such nonpayment shall be cured). In addition,
notwithstanding clauses (A) and (B) of this subsection (ii), unless the holders
of Designated Senior Debt shall have accelerated the maturity of such Designated
Senior Debt or there is a Payment Default, the Company shall resume payments on
this Note within (5) Business Days after the end of each Payment Blockage
Period. In any consecutive 365-day period, there shall be (i) no more than three
Payment Blockage Notices given in the aggregate on this Note and the Other
Notes, irrespective of the number of defaults with respect to Designated Senior
Debt during such period, and (ii) at least 90 days during which no Payment
Blockage Period shall be in effect.

 

(c)                                  Payment upon Dissolution, Etc. In the event
of any bankruptcy, insolvency, reorganization, receivership, composition,
assignment for benefit of creditors or other similar proceeding initiated by or
against the Company or any dissolution or winding up or total or partial
liquidation or reorganization of the Company (being hereinafter referred to as a
“Proceeding”), the Holder agrees that such Holder shall, upon request of a
holder of Senior Indebtedness, and at such holder of Senior Indebtedness’ own
expense, take all reasonable actions (including but not limited to the execution
and filing of documents and the giving of testimony in any Proceeding, whether
or not such testimony could have been compelled by process) necessary to prove
the full amount of all its claims in any Proceeding, and the Holder shall not
waive any claim in any Proceeding without the written consent of such holder. If
the Holder does not file a proper proof of claim or proof of debt in the form
required in any Proceeding at least thirty (30) days before the expiration of
the time to file such claim, the holders of any Senior Indebtedness are hereby
authorized to file an appropriate claim for and on behalf of the Holder.

 

The Holder shall retain the right to vote and otherwise act with respect to the
claims under this Note (including, without limitation, the right to vote to
accept or reject any plan of partial or complete liquidation, reorganization,
arrangement, composition or extension); provided that the Holder shall not vote
with respect to any such plan or take any other action in any way so as to (i)
contest the validity of any Senior Indebtedness or any collateral therefor or
guaranties thereof, (ii) contest the relative rights and duties of any of the
lenders under the Senior Indebtedness established in any instruments or
agreement creating or evidencing the Senior Indebtedness with respect to any of
such collateral or guaranties, or (iii) contest the Holders’ obligations and
agreements set forth in this Section 13.

 

Upon payment or distribution to creditors in a Proceeding of assets of the
Company of any kind or character, whether in cash, property or securities, all
principal and interest due upon any Senior Indebtedness shall first be paid in
full before the Holder shall be entitled to receive or, if

 

20

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received, to retain any payment or distribution on account of this Note, and
upon any such Proceeding, any payment or distribution of assets of the Company
of any kind or character, whether in cash, property or securities, to which the
Holder would be entitled except for the provisions of this Section 13 shall be
paid by the Company or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other Person making such payment or distribution, or by the
Holder who shall have received such payment or distribution, directly to the
holders of the Senior Indebtedness (pro rata to each such holder on the basis of
the respective amounts of such Senior Indebtedness held by such holder) or their
representatives to the extent necessary to pay all such Senior Indebtedness in
full after giving effect to any concurrent payment or distribution to or for the
holders of such Senior Indebtedness, before any payment or distribution is made
to the Holder or any holders of the Notes.

 

(d)                                 Payments on Notes. Subject to Sections 13(b)
and 13(c), the Company may make regularly scheduled payments of the Principal
of, or Interest on, this Note or any other payment payable with respect to this
Note, if at the time of payment, and immediately after giving effect thereto,
there exists no Payment Default or a Payment Blockage Period.

 

(e)                                  Certain Rights. Nothing contained in this
Section 13 or elsewhere in this Note is intended to or shall impair, as among
the Company, its creditors including the holders of Senior Indebtedness and the
Holder, the right, which is absolute and unconditional, of the Holder to convert
this Note in accordance herewith.

 

(f)                                    Subrogation. Subject to payment in full
in cash of all Senior Indebtedness, the rights of the Holder shall be subrogated
to the rights of the holders of Senior Indebtedness to receive payments or
distributions of the assets of the Company made on such Senior Indebtedness
until all principal and interest on this Note shall be paid in full in cash; and
for purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness of any cash, property or securities to which the Holder
would be entitled except for the subordination provisions of this Section 13
shall, as between the Holder and the Company and/or its creditors other than the
holders of the Senior Indebtedness, be deemed to be a payment on account of the
Senior Indebtedness.

 

(g)                                 Rights of Holders Unimpaired. The provisions
of this Section 13 are and are intended solely for the purposes of defining the
relative rights of the Holder and the holders of Senior Indebtedness and nothing
in this Section 13 shall impair, as between the Company and the Holder, the
obligation of the Company, which is unconditional and absolute, to pay to the
Holder the principal thereof (and premium, if any) and interest thereon, in
accordance with the terms of this Note.

 

(h)                                 Holders of Senior Indebtedness. These
provisions regarding subordination will constitute a continuing offer to all
Persons who, in reliance upon such provisions, become holders of, or continue to
hold, Senior Indebtedness; such provisions are made for the benefit of the
holders of Senior Indebtedness, and such holders are hereby made

 

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obligees under such provisions to the same extent as if they were named therein,
and they or any of them may proceed to enforce such subordination and no
amendment or modification of the provisions contained herein shall diminish the
rights of such holders unless such holders have agreed in writing thereto. The
holders of Senior Indebtedness may, at any time and from time to time, without
the consent of or notice to the Holder, without incurring responsibility to the
Holder and without impairing or releasing the subordination provisions of this
Section 13, (i) subject to the limitations set forth herein, increase the amount
of, change the manner, terms or place of payment of, or renew or alter, any
Senior Indebtedness, or otherwise amend, modify, restate or supplement the same
(provided that any such modified indebtedness continues to be constitute Senior
Indebedness within the meaning of this Agreement), (ii) sell, exchange or
release any collateral mortgaged, pledged or otherwise securing the Senior
Indebtedness, (iii) release any Person liable in any manner for the Senior
Indebtedness and (iv) exercise or refrain from exercising any rights against the
Company or any other Person.

 

(i)                                     Proceeds Held in Trust. In the event
that notwithstanding the foregoing, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities
(including, without limitation, by way of setoff or otherwise) prohibited by the
provisions hereof shall be received by the Holder before all Senior Indebtedness
if paid in full in cash, such payment or distribution shall be held in trust for
the benefit of and shall be paid over or delivered to the holders of Senior
Indebtedness, as their respective interests may appear, as calculated by the
Company, for application to, or to be held as collateral for, the payment of any
Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in cash after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness.

 

(j)                                     Blockage of Remedies. During any Payment
Default or any Payment Blockage Period, if an Event of Default has occurred and
is continuing under this Note, the Holder will not commence or join with any
creditor of the Company in asserting or commencing any proceedings to collect or
enforce its rights hereunder or take any action to foreclose or realize upon the
indebtedness hereunder for a period beginning on the date of such Event of
Default and ending on the first to occur of (i) the date that is 180 days
following the date that the holders of the Senior Indebtedness are notified of
such Event of Default or (ii) the date such Payment Default is cured, waived or
ceases to exist or the date such Payment Blockage Period ends, as the case may
be; provided, however, that until all of the Senior Indebtedness shall have been
paid in full in cash, any payments, distributions or proceeds received by the
Holder resulting from the exercise of any action to collect or enforce any right
or remedy available to the Holder shall be subject to the terms of this Note.

 

(k)                                  Subsequent Senior Indebtedness Requested
Modifications. In connection with the incurrence of any future Senior
Indebtedness, the Holder agrees that it shall act reasonably and negotiate in
good faith any modifications to the provisions of this Section 13 reasonably
requested by the holder of such Senior Indebtedness; provided that nothing in
this section shall restrict the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding from
changing or amending this Section 13 pursuant to Section 17 hereof.

 

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(l)                                     Failure to Make Payment. In the event
that the Company is prohibited or restricted from making any payment required
under under this Note by reason of the provisions of this Section 13, such
prohibition or restriction shall not preclude the failure to make such payment
from being an Event of Default under Section 4(a) of this Note.

 

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

 

(15)                            RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

(A)                                  RANK.                  ALL PAYMENTS DUE
UNDER THIS NOTE (A) SHALL RANK PARI PASSU WITH ALL OTHER NOTES (“PARI PASSU
INDEBTEDNESS”), (B) SHALL BE SUBORDINATE IN RIGHT OF PAYMENT TO THE PRIOR
PAYMENT OF ALL EXISTING AND FUTURE SENIOR INDEBTEDNESS AND (C) SHALL BE SENIOR
TO ALL OTHER INDEBTEDNESS OF THE COMPANY AND ITS SUBSIDIARIES, OTHER THAN SENIOR
INDEBTEDNESS AND PARI PASSU INDEBTEDNESS.

 

(B)                                 INCURRENCE OF SENIOR INDEBTEDNESS. SO LONG
AS THIS NOTE IS OUTSTANDING, THE COMPANY SHALL NOT, AND THE COMPANY SHALL NOT
PERMIT ANY OF ITS SUBSIDIARIES TO, DIRECTLY OR INDIRECTLY, INCUR OR GUARANTEE,
ASSUME OR SUFFER TO EXIST ANY INDEBTEDNESS WHICH SHALL RANK SENIOR TO THE NOTES
OTHER THAN SENIOR INDEBTEDNESS.

 

(C)                                  EXISTENCE OF LIENS. SO LONG AS THIS NOTE IS
OUTSTANDING, THE COMPANY SHALL NOT, AND THE COMPANY SHALL NOT PERMIT ANY OF ITS
SUBSIDIARIES TO, DIRECTLY OR INDIRECTLY, ALLOW OR SUFFER TO EXIST ANY MORTGAGE,
LIEN, PLEDGE, CHARGE, SECURITY INTEREST OR OTHER ENCUMBRANCE UPON OR IN ANY
PROPERTY OR ASSETS (INCLUDING ACCOUNTS AND CONTRACT RIGHTS) OWNED BY THE COMPANY
OR ANY OF ITS SUBSIDIARIES (COLLECTIVELY, “LIENS”) OTHER THAN PERMITTED LIENS.
AS USED HEREIN, “PERMITTED LIENS” MEANS (I) LIENS INCURRED TO SECURE SENIOR
INDEBTEDNESS, (II) LIENS ON FIXED OR CAPITAL ASSETS ACQUIRED, CONSTRUCTED OR
IMPROVED BY THE COMPANY OR ANY SUBSIDIARY, TO THE EXTENT OF INDEBTEDNESS
INCURRED WITHIN THIRTY DAYS FOR SUCH ACQUISITION, CONSTRUCTION OR IMPROVEMENT
AND INCURRED WITHIN THIRTY DAYS OF SUCH ACQUISITION, CONSTRUCTION OR
IMPROVEMENT, (III) PURCHASE MONEY LIENS, OR (IV) CARRIERS’, WAREHOUSEMEN’S,
MECHANICS’, MATERIALMEN’S, REPAIRMEN’S AND OTHER SIMILAR LIENS IMPOSED BY LAW.

 

(D)                                 RESTRICTED PAYMENTS. THE COMPANY SHALL NOT,
AND THE COMPANY SHALL NOT PERMIT ANY OF ITS SUBSIDIARIES TO, DIRECTLY OR
INDIRECTLY, REDEEM, DEFEASE, REPURCHASE, REPAY OR MAKE ANY PAYMENTS IN RESPECT
OF, BY THE PAYMENT OF CASH OR CASH EQUIVALENTS (IN WHOLE OR IN PART, WHETHER BY
WAY OF OPEN MARKET PURCHASES, TENDER OFFERS, PRIVATE TRANSACTIONS OR OTHERWISE),
ALL OR ANY PORTION OF ANY INDEBTEDNESS, OTHER THAN SENIOR INDEBTEDNESS OR PARI
PASSU INDEBTEDNESS, WHETHER BY WAY OF PAYMENT IN RESPECT OF PRINCIPAL OF (OR
PREMIUM, IF ANY) OR INTEREST ON, SUCH INDEBTEDNESS IF AT THE TIME SUCH PAYMENT
IS DUE OR IS OTHERWISE MADE OR, AFTER GIVING EFFECT TO SUCH PAYMENT, AN EVENT
CONSTITUTING AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING.

 

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(16)                            PARTICIPATION. The Holder, as the holder of this
Note, shall be entitled to such dividends paid and distributions made to the
holders of Common Stock (each, a “Distribution”), in each such case to the
extent of the Distribution 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 (if any) under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.

 

(17)                            VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES.
The affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of Notes representing not less than a
majority of the aggregate principal amount of the then outstanding Notes, shall
be required for any change or amendment to this Note or the Other Notes provided
such change or amendment is consented to by the Company, which such consent may
be granted or withheld in the sole discretion of the Company.

 

(18)                            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.

 

(19)                            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 19(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 19(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(c)(iii) and this Section 19(a), 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 19(d)) representing the outstanding
Principal.

 

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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 19(d) and in principal amounts of at least $100,000)
representing in the aggregate the outstanding Principal of this Note, and each
such new Note will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

 

(d)                                 Issuance of New Notes. Whenever the Company
is required to issue a new Note pursuant to the terms of this Note, such new
Note (i) shall be of like tenor with this Note, (ii) shall represent, as
indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 19(a) or Section
19(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 Interest on the Principal and Interest of this Note, from the
Issuance Date.

 

(20)                            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, the
Securities Purchase Agreement and the Registration Rights Agreement, at law or
in equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder’s right to pursue actual and
consequential damages for any failure by the Company to comply with the terms of
this Note. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the Holder and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

 

(21)                            PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER
COSTS. If (a) this Note is placed in the hands of an attorney for collection or
enforcement or is collected or enforced through any legal proceeding or the
Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Note, then the
Company shall pay the costs incurred by the Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’ fees
and disbursements.

 

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(22)                            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.

 

(23)                            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.

 

(24)                            DISPUTE RESOLUTION. In the case of a dispute as
to the determination of the Redemption Price or the arithmetic calculation of
the Conversion Rate or the Redemption Price, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within one
Business Day of 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 Business Day of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within one
Business Day submit via facsimile (a) the disputed determination of the Closing
Bid Price or the Closing Sale Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or the Redemption Price to the
Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five Business Days from the time it receives
the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

 

(25)                            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 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 Change of Control, 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. Notwithstanding the foregoing, Section 4(i) of the Securities Purchase
Agreement shall apply to all notices given pursuant to this Note.

 

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

 

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

 

(27)                            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.

 

(28)                            GOVERNING LAW. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New 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.

 

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

 

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

 

(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.

 

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(d)                                 “Calendar Quarter” means each of: the period
beginning on and including January 1 and ending on and including March 31; the
period beginning on and including April 1 and ending on and including June 30;
the period beginning on and including July 1 and ending on and including
September 30; and the period beginning on and including October 1 and ending on
and including December 31.

 

(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 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 24. 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)                                    [Intentionally left blank]

 

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

 

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(i)                                     “Excluded Securities” means any shares
of Common Stock issued or issuable: (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the Notes and the Other Notes; (iii) upon
conversion of any Options or Convertible Securities which are outstanding on the
Issuance Date, (iv) pursuant to or in connection with commercial credit
arrangements, equipment lease financings, acquisitions of other assets or
businesses, strategic transactions not primarily for financing purposes, or
similar transactions into which the Company may enter with a non-affiliate.

 

(j)                                     “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary course of
business), (C) all reimbursement or payment obligations with respect to letters
of credit, surety bonds and other similar instruments, (D) 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, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) 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, (G) off-balance sheet liabilities retained in
connection with asset securitization programs, synthetic leases, sale and
leaseback transactions or other similar obligations arising with respect to any
other transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheet of such Person and its subsidiaries, and (H) all indebtedness referred to
in clauses (A) through (G) 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 (I) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (H) above.

 

(k)                                  “Issuance Date” means                ,
2007.

 

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

 

(m)                               “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any department
or agency thereof.

 

(n)                                 “Principal Market” means the OTC Bulletin
Board.

 

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(o)                                 “Registration Rights Agreement” means that
certain Registration Rights Agreement, dated        , 2007, between the Company
and the initial holders of the Interest Notes.

 

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

 

(q)                                 “Securities Purchase Agreement” means that
certain Securities Purchase Agreement, dated January 3, 2007, between the
Company and the initial holders of the Original Notes pursuant to which the
Company issued the Original Notes.

 

(r)                                    “Senior Indebtedness” means the principal
of (and premium, if any), interest on, and all fees and other amounts
(including, without limitation, any reasonable costs, enforcement expenses
(including reasonable legal fees and disbursements, collateral protection
expenses and other reimbursement or indemnity obligations relating thereto)),
and all other obligations of the Company under (i) any of the agreements or
instruments evidencing any Indebtedness of the Company and its Subsidiaries
arising after the Original Date to an unaffiliated, third-party commercial
lender (together with any renewals, refundings, refinancings or other extensions
thereof) for purposes of purchasing equipment (which debt shall be secured only
by the assets purchased with such financing), and (ii) Indebtedness secured by
up to a maximum of eighty five percent (85%) of the Company’s accounts
receivable and/or up to sixty percent (60%) of the value of the Company’s
inventory. For the avoidance of doubt, Senior Indebtedness shall not include the
debt which is required to be paid by the Company pursuant to Section 4(i) of the
Securities Purchase Agreement.

 

(s)                                  [Intentionally left blank]

 

(t)                                    “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).

 

(u)                                 [intentionally left blank]

 

(v)                                 “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

 

30

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

 

[Signature Page Follows]

 

31

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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.

 

 

LIQUIDMETAL TECHNOLOGIES, INC.

 

 

 

 

 

By:

 

 

 

 

Name:

Larry E. Buffington

 

 

Title:

President / Chief Executive Officer

 

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EXHIBIT I

 

LIQUIDMETAL TECHNOLOGIES, INC.

CONVERSION NOTICE

 

Reference is made to the Convertible Subordinated Note (the “Note”) issued to
the undersigned by Liquidmetal Technologies, Inc. (the “Company”). In accordance
with and pursuant to the Note, the undersigned hereby elects to convert the
Conversion Amount (as defined in the Note) of the Note indicated below into
shares of Common Stock, par value $0.001 per share (the “Common Stock”), of the
Company as of the date specified below.

 

Date of Conversion:

 

 

 

Aggregate Conversion Amount to be converted:

 

 

The undersigned hereby certifies to the Company that the undersigned’s
conversion of the amount set forth above in accordance with Section 3(a) of the
Note will not directly result in the undersigned (together with the
undersigned’s affiliates) beneficially owning in excess of 4.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion, calculated in accordance with Section 3(d)(i) of the Note; provided
that if the undersigned has previously waived the 4.99% beneficial ownership
limitation upon no less than sixty one (61) days prior written notice, the
undersigned certifies to the Company that the undersigned’s conversion of the
amount set forth above will not directly result in the undersigned (together
with the undersigned’s affiliates) beneficially owning in excess of 9.99% of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion, calculated in accordance with Section 3(d)(i) of the Note.

 

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
American Stock Transfer & Trust Co. to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
January 3, 2007 from the Company.

 

 

LIQUIDMETAL TECHNOLOGIES, INC.

 

 

 

 

 

By:

 

 

 

Name:

 

Title:

 

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