**Exhibit10.34**

 

**NEITHER THEISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THESECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTEREDUNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED INTHE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDERTHE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN AGENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. ANYTRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTEDBY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOFMAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION3(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 theorder of [INSERT HOLDER] or registered assigns (**“Holder”**) the amount set out above as the Principal (asreduced pursuant to the terms hereof pursuant to redemption, conversion orotherwise, the **“Principal”**) whendue, whether upon the Maturity Date (as defined below), acceleration,redemption or otherwise (in each case in accordance with the terms hereof) andto pay interest (**“Interest”**) onany outstanding Principal at the rate of interest as determined pursuant toSection 2, from the date set out above as the Issuance Date (the **“Issuance Date”**) until the same becomes dueand payable, whether upon an Interest Date (as defined below), the Maturity Date,acceleration, conversion, redemption or otherwise (in each case in accordancewith the terms hereof). This Convertible Subordinated Note (including allConvertible Subordinated Notes issued in exchange, transfer or replacementhereof, this **“Note”**) is one of anissue of Convertible Subordinated Notes issued on January 3, 2007 (the “**Original Date**”) pursuant to the Securities PurchaseAgreement (the “**Original Notes**”) or issued afterJanuary 3, 2007 in satisfaction of interest and/or other amounts owing by theCompany to the holders of the Original Notes (the “**InterestNotes**”) (the Original Notes and Interest Notes are collectivelyreferred 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 toSection 2 of the Holder’s Original Note and is subject to the terms andprovisions of the Securities Purchase Agreement. Certain capitalized terms aredefined 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 shallsurrender this Note to the Company and the Company shall pay to the Holder anamount in cash representing all outstanding Principal and accrued and unpaidInterest, and following receipt of such payment, the Holder shall mark thisNote as “Cancelled” and shall surrender such cancelled Note to the Company bycourier, registered mail, or other traceable means. Beginning on the first dayof the eighteenth (18th) calendar month following the calendar monthin which the Original Date occurs, the Company may, upon thirty (30) calendardays 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 OneHundred Five Percent (105%) of the the portion of the principal amount beingredeemed plus all accrued and unpaid interest on the portion of the principalamount being redeemed, provided that following such notice the Holder mayconvert all or any part of the portion of the Note to be redeemed so long asthe Company receives a duly executed Conversion Notice pursuant to Section 3 ofthis Note prior to the date on which prepayment is actually made. Notwithstandingthe foregoing, in the event that prior to the Maturity Date the Companycompletes a public or private equity or debt offering or an Asset Sale pursuantto which the Company receives aggregate cash proceeds (net of placement agentfees, underwriter’s discouns, and other similar fees or commissions, and net oftransaction fees) in excess of Five Million Dollars ($5,000,000), but excludingfinancings for the purpose of purchasing capital assets, then any net proceedsfrom such transaction after payment in full of transaction expenses and the fullpayment of the Company’s 8% Unsecured Subordinated Notes Due 2007 shall, withinfive (5) Business Days of the Company’s receipt of such net proceeds, be paidto reduce the Principal and accrued but unpaid interest under this Note and theother Interest Notes (and if such net proceeds are insufficient to pay theInterest Notes in full, then such net proceeds will be paid to the holders ofthe Interest Notes on a pro rata basis in accordance with the then-outstandingPrincipal under the Interest Notes held by them). For this purpose, an “AssetSale” means any sale of assets by the Company in a single transaction or seriesof related transactions, other than (i) sales of inventory or other assets inthe ordinary course of the Company’s business, (ii) sale of obsolete equipment.

 

(b)                                 Amortization Payments. Beginning on July 31, 2008 and at the endof 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 thisNote*] of this Note (each, an “**Amortization RedemptionAmount**”). If the Company is unable to redeem all Principal andInterest with respect to all Amortization Redemption Amounts on this Note andthe Other Notes, then the Company shall redeem a pro rata amount from eachholder of the Notes (including the Holder) based on the principal amount of theNotes subject to payment of an Amortization Redemption Amount on suchAmortization Date pursuant to this Note and the Other Notes.

 

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

 

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below) are satisfied or waived in writing bythe Holder and the Company provides the Amortization Conversion Notice (asdefined below), then the Company shall have the right to require the Holder toconvert all or any such portion of the Amortization Redemption Amountdesignated in the Amortization Conversion Notice into fully paid, validlyissued and nonassessable shares of Common Stock in accordance with theapplicable provisions of Section 3(c)(i). The Company may exercise its right torequire conversion under this Section 1(c) by delivering at least 20 TradingDays prior to such Amortization Date a written notice thereof by facsimile andovernight courier to all, but not less than all, of the holders of Notes andthe Transfer Agent that specifically describes the portion of the AmortizationRedemption Amount for this Note and the Other Notes that will be paid in CommonStock (the **“Amortization Conversion Notice”**andthe date all of the holders received such notice is referred to as the “**Amortization Conversion Notice Date**”). TheAmortization Conversion Notice shall be irrevocable; provided; that ifany of the Conditions to Amortization Conversion is not satisfied on theapplicable Amortization Date or waived by the Holder, the Company willnotwithstanding delivery of the Amortization Conversion Notice be required topay the Amortization Redemption Amount in cash. The conversion price applicableto an Amortization Conversion (the “Amortization Price”) that is being paid inCommon Stock pursuant to this Section 1(c) shall be 90% of the Weighted AveragePrice of the Common Stock for the 20 consecutive Trading Days immediatelypreceding 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 GobalMarket or NASDAQ Capital Market, or the American Stock Exchange on theapplicable Amortization Date, (ii) on the Amortization Date, either (x) theRegistration Statement or Registration Statements contemplated by theRegistration Rights Agreement shall be effective and available for the sale forall of the Registrable Securities (as defined in the Registration RightsAgreement) then outstanding, together with the Common Stock to be issued onsuch Amortization Date, in accordance with the terms of the Registration RightsAgreement or (y) all shares of Common Stock issuable upon conversion of theNotes shall be eligible for sale without restriction and without the need forregistration under any applicable federal or state securities laws, (iii) anAuthorized Share Failure shall not be in effect on the Amortization Date; and(iv) any such payment of the Amortization Redemption Amount in Common Stockshall not consist of more than 20% of the total dollar volume traded in theCommon Stock for the 20 Trading Days prior to the Amortization Date.

 

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

 

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surrendering the Notes (if not fullyredeemed), the Holder may deliver a certification to the Company affirming thatthe requisite principal amount of Notes is being forfeited as a result of suchredemption, in which case the change in the Notes will be noted by book entryby the Company).  For purposes hereof, the term “**Qualified Transactions**” means (A) the saleof Liquidmetal Korea’s manufacturing facility in Pyong-Taek, Republic of Koreaand that the appropriate authorities or banks in the Republic of Korea approvethe 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 PurchaseAgreement or the Notes).

 

(2)                                  INTEREST; INTEREST RATE. Interest on this Note shall commenceaccruing on the Issuance Date and shall be computed on the basis of a 365-dayyear and actual days elapsed and shall be payable in arrears on the first dayof each Calendar Quarter and on the Maturity Date during the period beginningon the Issuance Date and ending on, and including, the Maturity Date (each, an **“Interest Date”**) with the first InterestDate being January 1, 2008. Interest shall be payable on each Interest Date incash at the rate of 8.00% per annum (the **“InterestRate”**). Prior to the payment of Interest on an Interest Date,Interest on this Note shall accrue at the Interest Rate and be payable by wayof inclusion of the Interest in the Conversion Amount in accordance withSection 3(b)(i). From and after the occurrence of an Event of Default, theInterest Rate shall be increased so that the Interest Rate shall be twelvepercent (12.00%) per annum. In the event that such Event of Default issubsequently cured, the adjustment referred to in the preceding sentence shallcease to be effective as of the date of such cure; provided that the Interestas calculated at such increased rate during the continuance of such Event ofDefault shall continue to apply to the extent relating to the days after theoccurrence of such Event of Default through and including the date of cure ofsuch Event of Default.

 

(3)                                  CONVERSION OF NOTES. This Note shall be convertible into sharesof the Company’s common stock, par value $0.001 per share (the **“Common Stock”**), on the terms andconditions 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 beentitled to convert any portion of the outstanding and unpaid Conversion Amount(as defined below) in increments of at least $50,000 of Principal (or suchlesser amount if such amount represents the remaining Principal amount) intofully paid and nonassessable shares of Common Stock in accordance with Section3(c), at the Conversion Rate (as defined below). The Company shall not issueany fraction of a share of Common Stock upon any conversion. If the issuancewould result in the issuance of a fraction of a share of Common Stock, theCompany shall round such fraction of a share of Common Stock up to the nearestwhole share. The Company shall pay any and all taxes that may be payable withrespect to the issuance and delivery of Common Stock upon conversion of anyConversion Amount.

 

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(b)                                 Conversion Rate. The number of shares of Common Stockissuable upon conversion of any Conversion Amount pursuant to Section 3(a)shall be determined by dividing (x) such Conversion Amount by (y) theConversion Price (as defined below) (the **“ConversionRate”**).

 

(i)                                     **“Conversion Amount”** means the sum of (A) the portion of thePrincipal to be converted, redeemed or otherwise with respect to which thisdetermination is being made, plus (B) accrued and unpaid Interest with respectto such Principal.

 

(ii)                                  **“Conversion Price”** means, as of any Conversion Date (as definedbelow) or other date of determination, and subject to adjustment as providedherein, $1.10.

 

(c)                                  Mechanics of Conversion.

 

(i)                                     Optional Conversion. To convert any Conversion Amount intoshares of Common Stock on any date (a **“ConversionDate”**), the Holder shall (A) transmit by facsimile (or otherwisedeliver), for receipt on or prior to 5:00 p.m., New York Time, on such date, acopy of an executed notice of conversion in the form attached hereto as ExhibitI (the **“Conversion Notice”**) tothe Company and (B) if required by Section 3(c)(iii), surrender this Note to acommon carrier for delivery to the Company as soon as practicable on orfollowing such date (or an indemnification undertaking with respect to thisNote in the case of its loss, theft or destruction). On or before the firstBusiness Day following the date of receipt of a Conversion Notice, the Companyshall transmit by facsimile a confirmation of receipt of such Conversion Noticeto the Holder and the Company’s transfer agent (the “**Transfer Agent**”). On or before the second Business Dayfollowing 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 Holdershall be entitled to the Holder’s or its designee’s balance account withDepository Trust Company (“**DTC**”)through its Deposit Withdrawal At Custodian system or (Y) if the Transfer Agentis not participating in DTC Fast Automated Securities Transfer Program, issueand deliver to the address as specified in the Conversion Notice, acertificate, registered in the name of the Holder or its designee, for thenumber of shares of Common Stock to which the Holder shall be entitled. If thisNote is physically surrendered for conversion as required by Section 3(c)(iii)and the outstanding Principal of this Note is greater than the Principalportion of the Conversion Amount being converted, then the Company shall assoon as practicable and in no event later than five Business Days after receiptof 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 notconverted. The Person or Persons entitled to receive the shares of Common Stockissuable upon a conversion of this Note shall be treated for all purposes asthe record holder or holders of such shares of Common Stock on the ConversionDate.

 

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

 

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Conversion Amount on orprior to the date which is five Business Days after the Conversion Date (a **“Conversion Failure”**), then (A) the Companyshall pay liquidated damages to the Holder for each day of such ConversionFailure in an amount equal to 1.0%****ofthe product of (I) the sum of the number of shares of Common Stock not issuedto the Holder on or prior to the Share Delivery Date and to which the Holder isentitled, and (II) the Closing Sale Price of the Common Stock on the ShareDelivery Date and (B) the Holder, upon written notice to the Company, may voidits Conversion Notice with respect to, and retain or have returned, as the casemay be, any portion of this Note that has not been converted pursuant to suchConversion Notice; provided that the voiding of a Conversion Notice shall notaffect the Company’s obligations to make any payments which have accrued priorto the date of such notice pursuant to this Section 3(c)(ii) or otherwise. Inaddition to the foregoing, if within three (3) Trading Days after the Company’sreceipt of the facsimile copy of a Conversion Notice the Company shall fail toissue and deliver a certificate to the Holder or credit the Holder’s balanceaccount with DTC for the number of shares of Common Stock to which the Holderis entitled upon such holder’s conversion of any Conversion Amount, and if onor after such Trading Day the Holder purchases (in an open market transactionor otherwise) Common Stock to deliver in satisfaction of a sale by the Holderof Common Stock issuable upon such conversion that the Holder anticipated receivingfrom the Company (a “**Buy-In**”),then the Company shall, within five (5) Business Days after the Holder’srequest and in the Holder’s discretion, either (i) pay cash to the Holder in anamount equal to the Holder’s total purchase price (including brokeragecommissions and other out-of-pocket expenses, if any) for the shares of CommonStock so purchased (the **“Buy-In Price”**),at which point the Company’s obligation to deliver such certificate (and toissue such Common Stock) shall terminate, or (ii) promptly honor its obligationto deliver to the Holder a certificate or certificates representing such CommonStock and pay cash to the Holder in an amount equal to the excess (if any) ofthe 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, uponconversion of any portion of this Note in accordance with the terms hereof, theHolder shall not be required to physically surrender this Note to the Companyunless (A) the full Conversion Amount represented by this Note is beingconverted or (B) the Holder has provided the Company with prior written notice(which notice may be included in a Conversion Notice) requesting physicalsurrender and reissue of this Note. The Holder and the Company shall maintainrecords showing the Principal and Interest converted and the dates of suchconversions or shall use such other method, reasonably satisfactory to theHolder and the Company, so as not to require physical surrender of this Noteupon conversion.

 

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(iv)                              Pro Rata Conversion; Disputes. In the event that the Company receives aConversion Notice from more than one holder of Notes for the same ConversionDate and the Company can convert some, but not all, of such portions of theNotes submitted for conversion, the Company, subject to Section 3(d), shallconvert from each holder of Notes electing to have Notes converted on such datea pro rata amount of such holder’s portion of its Notes submitted forconversion based on the principal amount of Notes submitted for conversion onsuch date by such holder relative to the aggregate principal amount of allNotes submitted for conversion on such date. In the event of a dispute as tothe number of shares of Common Stock issuable to the Holder in connection witha conversion of this Note, the Company shall issue to the Holder the number ofshares of Common Stock not in dispute and resolve such dispute in accordancewith Section 24.

 

(d)                                 Limitations on Conversions.

 

(i)                                     Beneficial Ownership. Unless waived by the Holder upon no lessthan sixty one (61) days prior written notice to the Company, the Company shallnot effect any conversion of this Note pursuant to Section 3(a) to the extentthat after giving effect to such conversion the Holder (together with theHolder’s affiliates) would beneficially own in excess of 4.99% of the number ofshares of Common Stock outstanding immediately after giving effect to suchconversion. Even if the Holder waives the limitation set forth in the precedingsentence, the Company shall in no event effect any conversion of this Note, andthe Holder of this Note shall not have the right to convert any portion of thisNote pursuant to Section 3(a), to the extent that after giving effect to suchconversion, the Holder (together with the Holder’s affiliates) wouldbeneficially own in excess of 9.99% of the number of shares of Common Stockoutstanding immediately after giving effect to such conversion. For purposes ofthe foregoing sentences, the number of shares of Common Stock beneficiallyowned by the Holder and its affiliates shall include the number of shares ofCommon Stock issuable upon conversion of this Note with respect to which thedetermination of such sentence is being made, but shall exclude the number ofshares of Common Stock which would be issuable upon (A) conversion of theremaining, nonconverted portion of this Note beneficially owned by the Holderor any of its affiliates and (B) exercise or conversion of the unexercised ornonconverted portion of any other securities of the Company (including, withoutlimitation, any Other Notes or warrants) subject to a limitation on conversionor exercise analogous to the limitation contained herein beneficially owned bythe Holder or any of its affiliates. Except as set forth in the precedingsentence, for purposes of this Section 3(d)(i), beneficial ownership shall becalculated in accordance with Section 13(d) of the Securities Exchange Act of1934, as amended. For purposes of this Section 3(d)(i), in determining thenumber of outstanding shares of Common Stock, the Holder may rely on the numberof outstanding shares of Common Stock as reflected in (x) the Company’s mostrecent Form 10-Q or Form 10-K, (y) a more recent public announcement by theCompany or (z) any other notice by the Company or the Transfer Agent settingforth the number of shares of Common Stock outstanding. For any reason at anytime, upon the written or oral request of the Holder, the Company shall withintwo Business Days confirm orally and in writing to the Holder the number ofshares of Common Stock then outstanding. In any case, the number of outstandingshares of Common Stock shall be determined after giving effect to the conversionor exercise of securities of the Company, including this Note, by the Holder orits affiliates since the date as of which such number of outstanding shares ofCommon Stock was reported.

 

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(ii)                                  Principal Market Regulation. The Company shall not be obligated to issueany shares of Common Stock upon conversion of this Note if the issuance of suchshares of Common Stock would exceed that number of shares of Common Stock thatthe Company may issue upon conversion of the Notes without breaching theCompany’s obligations under the rules or regulations of the Principal Market(the **“Exchange Cap”**), except thatsuch limitation shall not apply in the event that the Company (A) obtains theapproval of its stockholders as required by the applicable rules of thePrincipal Market for issuances of Common Stock in excess of such amount or (B)obtains a written opinion from outside counsel to the Company that suchapproval is not required, which opinion shall be reasonably satisfactory to theholders of the Notes representing at least a majority of the principal amountsof the Notes then outstanding. Until such approval or written opinion isobtained, no holders of Notes (the **“Purchasers”**)shall be issued, upon conversion of Notes, shares of Common Stock in an amountgreater than the product of the Exchange Cap multiplied by a fraction, thenumerator of which is the principal amount of Original Notes issued to suchPurchaser pursuant to the Securities Purchase Agreement on the Issuance Dateand the denominator of which is the aggregate principal amount of all OriginalNotes issued to the Purchasers pursuant to the Securities Purchase Agreement onthe Issuance Date (with respect to each Purchaser, the **“Exchange Cap Allocation”**). In the eventthat any Purchaser shall sell or otherwise transfer any of such Purchaser’sNotes, the transferee shall be allocated a pro rata portion of such Purchaser’sExchange Cap Allocation, and the restrictions of the prior sentence shall applyto such transferee with respect to the portion of the Exchange Cap Allocationallocated to such transferee. In the event that any holder of Notes shallconvert all of such holder’s Notes into a number of shares of Common Stockwhich, in the aggregate, is less than such holder’s Exchange Cap Allocation,then the difference between such holder’s Exchange Cap Allocation and thenumber of shares of Common Stock actually issued to such holder shall beallocated to the respective Exchange Cap Allocations of the remaining holdersof Notes on a pro rata basis in proportion to the aggregate principal amount ofthe Notes then held by each such holder.

 

(4)                                  RIGHTS UPON EVENT OF DEFAULT.

 

(a)                                  Event of Default. Each of the following events shallconstitute an **“Event of Default”**:

 

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

 

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

 

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(iii)                               any default under, redemption of oracceleration prior to maturity of any Indebtedness (as defined below) of theCompany or any of its Subsidiaries (as defined in the Securities PurchaseAgreement) other than with respect to any Other Notes and the SeniorIndebtedness; provided that in the case of a payment default of suchIndebtedness, such default is not cured within applicable cure periods; furtherprovided that in the case of a non-payment default of such Indebtedness thathas not resulted in an acceleration or redemption of such Indebtedness prior toits maturity, only upon acceleration or redemption of such Indebtedness;

 

(iv)                              the Company shall fail to observe or performany other material covenant or agreement contained in the Securities PurchaseAgreement, which failure is not cured within ten Business Days after notice ofsuch 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 similarFederal or state law for the relief of debtors (collectively, **“Bankruptcy Law”**), (A) commences avoluntary case, (B) consents to the entry of an order for relief against it inan 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 thebenefit of its creditors;

 

(vi)                              a court of competent jurisdiction enters an orderor decree under any Bankruptcy Law that (A) is for relief against the Companyor any of its Subsidiaries in an involuntary case that remains undismissed fora period of 90 days, (B) appoints a Custodian of the Company or any of itsSubsidiaries 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 paymentof money aggregating in excess of $500,000 are rendered against the Company orany of its Subsidiaries and which judgments are not, within 60 days after theentry thereof, bonded, discharged or stayed pending appeal, or are notdischarged within 60 days after the expiration of such stay; provided, however,that any judgment which is covered by insurance or an indemnity from a creditworthy party shall not be included in calculating the $500,000 amount set forthabove;

 

(viii)                        any breach or failure to comply with Section15 of this Note; or

 

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

 

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(b)                                 Redemption Right. Promptly after the occurrence of an Eventof Default with respect to this Note or any Other Note, the Company shall deliverwritten notice thereof via facsimile and overnight courier (an **“Event of Default Notice”**) to the Holder. Atany time after the earlier of the Holder’s receipt of an Event of DefaultNotice and the Holder becoming aware of an Event of Default, the Holder mayrequire the Company to redeem all or any portion of this Note by deliveringwritten notice thereof (the **“Event of DefaultRedemption Notice”**) to the Company, which Event of DefaultRedemption Notice shall indicate the portion of this Note the Holder iselecting to redeem. Each portion of this Note subject to redemption by theCompany pursuant to this Section 4(b) shall be redeemed by the Company at aprice 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 Amountin effect at such time as the Holder delivers an Event of Default RedemptionNotice and (B) the Closing Sale Price of the Common Stock on the dateimmediately preceding such Event of Default (the **“Event of Default Redemption Price”**). Redemptions required bythis Section 4(b) shall be made in accordance with the provisions of Section12.

 

(5)                                  RIGHTS UPON CHANGE OF CONTROL.

 

(a)                                  Change of Control. Each of the following events shallconstitute a **“Change of Control”**:

 

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

 

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

 

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

 

No sooner than 15 days nor later than 10 daysprior to the consummation of a Change of Control, but not prior to the publicannouncement of such Change of Control, the Company shall deliver writtennotice 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 willsecure from any Person purchasing the Company’s assets or Common Stock or anysuccessor resulting from such Change of Control (in each case, an **“Acquiring Entity”**) a written agreement (inform and substance satisfactory to the holders of Notes representing at

 

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least a majority of the aggregate principalamount of the Notes then outstanding) to deliver to each holder of Notes inexchange for such Notes, a security of the Acquiring Entity evidenced by awritten instrument substantially similar in form and substance to the Notes,including, without limitation, having a principal amount and interest rateequal to the principal amounts and the interest rates of the Notes held by suchholder, and satisfactory to the holders of Notes representing at least amajority of the principal amount of the Notes then outstanding. In the eventthat an Acquiring Entity is directly or indirectly controlled by a company orentity whose common stock or similar equity interest is listed, designated orquoted on a securities exchange or trading market, the holders of Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding may elect to treat such Person as the Acquiring Entity forpurposes of this Section 5(b).

 

(c)                                  Redemption Right. At any time during the period beginningafter the Holder’s receipt of a Change of Control Notice and ending on the dateof the consummation of such Change of Control (or, in the event a Change ofControl 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 Controland ending ten days after the consummation of such Change of Control), theHolder may require the Company to redeem all or any portion of this Note bydelivering written notice thereof (**“Change ofControl Redemption Notice”**) to the Company, which Change of ControlRedemption Notice shall indicate the Conversion Amount the Holder is electingto redeem; provided, however, that the Company shall not be under anyobligation to redeem all or any portion of this Note or to deliver the applicableChange of Control Redemption Price unless and until the applicable Change ofControl is consummated. The portion of this Note subject to redemption pursuantto this Section 5 shall be redeemed by the Company in cash at a price equal tothe 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) theamount of any accrued but unpaid Interest on such Conversion Amount beingredeemed 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) theConversion Amount being redeemed multiplied by (B) the quotient determined bydividing (I) the aggregate cash consideration and the aggregate cash value ofany non-cash consideration per Common Share to be paid to the holders of theCommon Shares upon consummation of the Change of Control (any such non-cashconsideration in the form of securities to be valued at the higher of theClosing Sale Price of such securities as of the Trading Day immediately priorto the consummation of such Change of Control, the Closing Sale Price on theTrading Day immediately following the public announcement of such proposedChange of Control and the Closing Sale Price on the Trading Day immediatelyprior 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 onsuch Conversion Amount being redeemed through the date of such redemptionpayment, (the “**Change of Control RedemptionPrice**”). Redemptions required by this Section 5(c) shall be made inaccordance with the provisions of Section 12 and shall have priority topayments to stockholders in connection with a Change of Control. For purposesof 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 theOriginal 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 isconsummated at any time after the second (2nd) anniversary of theOriginal Date.

 

(6)                                  RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS ANDOTHER CORPORATE EVENTS.

 

(a)                                  Purchase Rights. If at any time the Company grants, issuesor sells any Options, Convertible Securities or rights to purchase stock,warrants, securities or other property pro rata to the record holders of anyclass of Common Stock (the **“Purchase Rights”**),then the Holder will be entitled to acquire, upon the terms applicable to suchPurchase Rights, the aggregate Purchase Rights which the Holder could haveacquired if the Holder had held the number of shares of Common Stock acquirableupon complete conversion of this Note (without taking into account anylimitations or restrictions on the convertibility of this Note) immediatelybefore the date on which a record is taken for the grant, issuance or sale ofsuch Purchase Rights, or, if no such record is taken, the date as of which therecord holders of Common Stock are to be determined for the grant, issue orsale of such Purchase Rights.

 

(b)                                 Other Corporate Events. Prior to the consummation of anyrecapitalization, reorganization, consolidation, merger, spin-off or otherbusiness combination (other than a Change of Control) pursuant to which holdersof Common Stock are entitled to receive securities or other assets with respectto or in exchange for Common Stock (a **“CorporateEvent”**), the Company shall make appropriate provision to insure thatthe Holder will thereafter have the right to receive upon a conversion of thisNote, (i) in addition to the shares of Common Stock receivable upon suchconversion, such securities or other assets to which the Holder would have beenentitled with respect to such shares of Common Stock had such shares of CommonStock 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 suchconversion, such securities or other assets received by the holders of CommonStock in connection with the consummation of such Corporate Event in suchamounts as the Holder would have been entitled to receive had this Noteinitially been issued with conversion rights for the form of such consideration(as opposed to shares of Common Stock) at a conversion rate for suchconsideration commensurate with the Conversion Rate. Provision made pursuant tothe preceding sentence shall be in a form and substance satisfactory to theholders of Notes representing at least a majority of the aggregate principalamount of the Notes then outstanding.

 

(7)                                  RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

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

 

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Company in connection with any ExcludedSecurity) for a consideration per share (the **“NewSecurities Issuance Price”**) less than a price (the **“Applicable Price”**) equal to the ConversionPrice in effect immediately prior to such issue or sale (the foregoing a **“Dilutive Issuance”**), then immediatelyafter such Dilutive Issuance, the Conversion Price then in effect shall bereduced to an amount (rounded to the nearest cent) equal to the New SecuritiesIssuance Price. For purposes of determining the adjusted Conversion Price underthis Section 7(a), the following shall be applicable:

 

(i)                                     Issuance of Options. If the Company in any manner grants orsells any Options and the lowest price per share for which one share of CommonStock is issuable upon the exercise of any such Option or upon conversion orexchange or exercise of any Convertible Securities issuable upon exercise ofsuch Option is less than the Applicable Price, then such share of Common Stockshall be deemed to be outstanding and to have been issued and sold by theCompany at the time of the granting or sale of such Option for such price pershare. For purposes of this Section 7(a)(i), the “lowest price per share forwhich one share of Common Stock is issuable upon the exercise of any suchOption or upon conversion or exchange or exercise of any Convertible Securitiesissuable upon exercise of such Option” shall be equal to the sum of the lowestamounts of consideration (if any) received or receivable by the Company withrespect 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 anyConvertible Security issuable upon exercise of such Option. No furtheradjustment of the Conversion Price shall be made upon the actual issuance ofsuch Common Stock or of such Convertible Securities upon the exercise of suchOptions or upon the actual issuance of such Common Stock upon conversion orexchange or exercise of such Convertible Securities.

 

(ii)                                  Issuance of Convertible Securities. If the Company in any manner issues orsells any Convertible Securities and the lowest price per share for which oneshare of Common Stock is issuable upon such conversion or exchange or exercisethereof is less than the Applicable Price, then such share of Common Stockshall be deemed to be outstanding and to have been issued and sold by theCompany at the time of the issuance of sale of such Convertible Securities forsuch price per share. For the purposes of this Section 7(a)(ii), the “price pershare for which one share of Common Stock is issuable upon such conversion orexchange or exercise” shall be equal to the sum of the lowest amounts ofconsideration (if any) received or receivable by the Company with respect toany one share of Common Stock upon the issuance or sale of the ConvertibleSecurity and upon the conversion or exchange or exercise of such ConvertibleSecurity. No further adjustment of the Conversion Price shall be made upon theactual issuance of such Common Stock upon conversion or exchange or exercise ofsuch Convertible Securities, and if any such issue or sale of such ConvertibleSecurities is made upon exercise of any Options for which adjustment of theConversion Price had been or are to be made pursuant to other provisions ofthis Section 7(a), no further adjustment of the Conversion Price shall be madeby reason of such issue or sale. Notwithstanding anything in this Note to thecontrary, 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 anagreement by the holder of any such notes to convert the same, such decrease inthe conversion price will not result in any adjustment to the Conversion Pricepursuant to this Section 7(a) of this Note.

 

(iii)                               Change in Option Price or Rate of Conversion.If the purchase priceprovided for in any Options, the additional consideration, if any, payable uponthe issue, conversion,  exchange orexercise of any Convertible Securities, or the rate at which any ConvertibleSecurities are convertible into or exchangeable or exercisable for Common Stockchanges at any time, the Conversion Price in effect at the time of such changeshall be adjusted to the Conversion Price which would have been in effect atsuch time had such Options or Convertible Securities provided for such changedpurchase price, additional consideration or changed conversion rate, as thecase may be, at the time initially granted, issued or sold.

 

(iv)                              Calculation of Consideration Received. In case any Option is issued in connectionwith the issue or sale of other securities of the Company, together comprisingone integrated transaction in which no specific consideration is allocated tosuch Options by the parties thereto, the Options will be deemed to have beenissued for a consideration of $.01. If any Common Stock, Options or ConvertibleSecurities 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 amountreceived by the Company therefor. If any Common Stock, Options or ConvertibleSecurities are issued or sold for a consideration other than cash, the amountof the consideration other than cash received by the Company will be the fairvalue of such consideration, except where such consideration consists ofsecurities, in which case the amount of consideration received by the Companywill be the Closing Sale Price of such securities on the date of receipt. Ifany Common Stock, Options or Convertible Securities are issued to the owners ofthe non-surviving entity in connection with any merger in which the Company isthe surviving entity, the amount of consideration therefor will be deemed to bethe fair value of such portion of the net assets and business of thenon-surviving entity as is attributable to such Common Stock, Options orConvertible Securities, as the case may be. The fair value of any considerationother than cash or securities will be determined jointly by the Company and theholders of Notes representing at least a majority of the principal amounts ofthe Notes then outstanding. If such parties are unable to reach agreementwithin ten days after the occurrence of an event requiring valuation (the **“Valuation Event”**), the fair value of suchconsideration will be determined within five Business Days after the tenth dayfollowing the Valuation Event by an independent, reputable appraiser jointlyselected by the Company and the holders of Notes representing at least a majorityof the principal amounts of the Notes then outstanding. The determination ofsuch appraiser shall be deemed binding upon all parties absent manifest errorand the fees and expenses of such appraiser shall be borne equally by theCompany, on the hand, and the holders of the Notes, on the other hand.

 

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(v)                                 Record Date. If the Company takes a record of the holders of Common Stock for thepurpose of entitling them (A) to receive a dividend or other distributionpayable in Common Stock, Options or in Convertible Securities or (B) tosubscribe for or purchase Common Stock, Options or Convertible Securities, thensuch record date will be deemed to be the date of the issue or sale of theshares of Common Stock deemed to have been issued or sold upon the declarationof such dividend or the making of such other distribution or the date of thegranting of such right of subscription or purchase, as the case may be.

 

(b)                                 Adjustment of Conversion Price uponSubdivision 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 ofCommon Stock into a greater number of shares, the Conversion Price in effectimmediately prior to such subdivision will be proportionately reduced. If theCompany at any time combines (by combination, reverse stock split or otherwise)one or more classes of its outstanding shares of Common Stock into a smallernumber of shares, the Conversion Price in effect immediately prior to suchcombination will be proportionately increased.

 

(c)                                  Other Events. If any event occurs of the typecontemplated by the provisions of this Section 7 but not expressly provided forby such provisions (including, without limitation, the granting of stockappreciation rights, phantom stock rights or other rights with equityfeatures), then the Company’s Board of Directors will make an appropriateadjustment in the Conversion Price so as to protect the rights of the Holderunder this Note; provided that no such adjustment will increase the ConversionPrice as otherwise determined pursuant to this Section 7.

 

(9)                                  COMPANY’S RIGHT OF MANDATORY CONVERSION. (a) Mandatory Conversion. If at anytime from and after the Issuance Date, the Weighted Average Price of the CommonStock exceeds 250% of the conversion price of the Original Notes as of theOriginal Date (subject to appropriate adjustments for stock splits, stockdividends, stock combinations and other similar transactions after the OriginalDate) 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)) aresatisfied or waived in writing by the Holder, the Company shall have the rightto require the Holder to convert all or any such portion of the ConversionAmount of this Note designated in the Mandatory Conversion Notice into fullypaid, validly issued and nonassessable shares of Common Stock in accordancewith Section 3(c) hereof at the Conversion Rate as of the Mandatory ConversionDate (as defined below) (a “**MandatoryConversion**”). The Company may exercise its right to requireconversion under this Section 9(a) by delivering within not more than fiveTrading Days following the end of such Mandatory Conversion Measuring Period awritten notice thereof by facsimile and overnight courier to all, but not lessthan all, of the holders of Notes and the Transfer Agent (the **“Mandatory Conversion Notice”** and the dateall of the holders received such notice is referred to as the “**Mandatory Conversion Notice Date**”). TheMandatory Conversion Notice shall be irrevocable.

 

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(b)                                 Pro Rata Conversion Requirement. If the Company elects to cause a conversionof all or any portion of the Conversion Amount of this Note pursuant to Section9(a), then it must simultaneously take the same action with respect to theOther Notes (except that the Company is not required to take the same actionwith respect to the Other Notes to the extent limited by Section 3(d) in this Noteor similar provisions under the Other Notes). If the Company elects to causethe conversion of this Note pursuant to Section 9(a) (or similar provisionsunder the Other Notes) with respect to less than all of the Conversion Amountsof the Notes then outstanding, then the Company shall require conversion of aConversion 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 tocause to be converted pursuant to Section 9(a), multiplied by (II) thefraction, the numerator of which is the sum of the aggregate principal amountof the Original Notes purchased by such holder pursuant to the SecuritiesPurchase Agreement and the denominator of which is the sum of the aggregateprincipal amount of the Original Notes purchased by all holders pursuant to theSecurities Purchase Agreement (except to the extent limited by Section 3(d) inthis Note or similar provisions under the Other Notes) (such fraction withrespect to each holder is referred to as its “**AllocationPercentage**,” and such amount with respect to each holder is referredto as its “**Pro Rata Conversion Amount**”).In the event that the initial holder of any Notes shall sell or otherwisetransfer any of such holder’s Notes, the transferee shall be allocated a prorata portion of such holder’s Allocation Percentage. The Mandatory ConversionNotice shall state (i) the Trading Day selected for the Mandatory Conversion inaccordance with Section 9(a), which Trading Day shall be at least 10 BusinessDays but not more than 60 Business Days following the Mandatory ConversionNotice Date (the “**Mandatory Conversion Date**”),(ii) the aggregate Conversion Amount of the Notes which the Company has electedto be subject to mandatory conversion from all of the holders of the Notespursuant to this Section 9 (and analogous provisions under the Other Notes),(iii) each holder’s Pro Rata Conversion Amount of the Conversion Amount of theNotes the Company has elected to cause to be converted pursuant to this Section9 (and analogous provisions under the Other Notes) and (iv) the number ofshares of Common Stock to be issued to such Holder as of the MandatoryConversion Date. All Conversion Amounts converted by the Holder after theMandatory Conversion Notice Date shall reduce the Conversion Amount of thisNote required to be converted on the Mandatory Conversion Date. If the Companyhas elected a Mandatory Conversion, the mechanics of conversion set forth inSection 3(c) shall apply, to the extent applicable, as if the Company and theTransfer Agent had received from the Holder on the Mandatory Conversion Date aConversion Notice with respect to the Conversion Amount being convertedpursuant 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 theperiod beginning on the date that is six months prior to the MandatoryConversion Date and ending on and including the Mandatory Conversion Date, theCompany shall have delivered shares of Common Stock upon any conversion ofConversion Amounts as set forth in Section 3(c)(i); (ii) on each day during theperiod beginning on the first Trading Day of the Mandatory Conversion MeasuringPeriod and ending on and including the Mandatory Conversion Date, the

 

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Common Stock shall be traded on the PrincipalMarket, the NASDAQ Global Market or Global Select Market, the NASDAQ CapitalMarket, the New York Stock Exchange, or the American Stock Exchange; (iii) onthe Mandatory Conversion Date either (x) the Registration Statement orRegistration Statements contemplated by the Registration Rights Agreement shallbe effective and available for the sale for all of the Registrable Securitiesin accordance with the terms of the Registration Rights Agreement or (y) allshares of Common Stock issuable upon conversion of the Notes shall be eligiblefor sale without restriction and without the need for registration under anyapplicable federal or state securities laws; (iv) on the Mandatory ConversionDate, an Authorized Share Failure shall not be in effect; and (v) any suchpayment of the Conversion Amount in Common Stock shall not consist of more than20% of the total dollar volume traded in the Common Stock for the 20 TradingDays prior to the Mandatory Conversion Date.

 

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

 

(11)                            RESERVATION OF AUTHORIZED SHARES.

 

(a)                                  Reservation. The Company shall initially reserve out of its authorized andunissued Common Stock a number of shares of Common Stock for each of the Notesequal to 100% of the Conversion Rate with respect to the Conversion Amount ofeach such Note as of the Issuance Date. Thereafter, the Company, so long as anyof the Notes are outstanding, shall use commercially reasonable efforts toreserve and keep available out of its authorized and unissued Common Stock,solely for the purpose of effecting the conversion of the Notes, 100% of thenumber of shares of Common Stock as shall from time to time be necessary toeffect the conversion of all of the Notes then outstanding (without regard toany limitations on conversions) (the **“RequiredReserve Amount”**). The number of shares of Common Stock reserved forconversions of the Notes shall be allocated pro rata among the holders of theNotes based on the principal amount of the Notes held by each holder at thetime of Issuance Date or increase in the number of reserved shares, as the casemay be (the **“Authorized Share Allocation”**).In the event that a holder shall sell or otherwise transfer any of such holder’sNotes, each transferee shall be allocated a pro rata portion of such holder’sAuthorized Share Allocation. Any shares of Common Stock reserved and allocatedto any Person which ceases to hold any Notes shall be allocated to theremaining holders of Notes, pro rata based on the principal amount of the Notesthen held by such holders.

 

(b)                                 Insufficient Authorized Shares. If at any time while any of the Notesremain outstanding the Company does not have a sufficient number of authorizedand unreserved shares of Common Stock to satisfy its obligation to reserve forissuance upon conversion of the Notes at least a number of shares of CommonStock equal to the Required Reserve Amount (an **“Authorized Share Failure”**), then the Company shall as soon aspracticable use commercially reasonable efforts to increase the Company’sauthorized shares of Common Stock to an amount sufficient to allow the Companyto 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 RedemptionNotice or a Change of Control Redemption Notice to the Company pursuant toSection 4(b) or Section 5(c), respectively (each, a **“Redemption Notice”**), the Holder shall promptly submit thisNote to the Company. If the Holder has submitted an Event of Default RedemptionNotice in accordance with Section 4(b), the Company shall deliver theapplicable Event of Default Redemption Price to the Holder within five BusinessDays after the Company’s receipt of the Holder’s Event of Default RedemptionNotice. If the Holder has submitted a Change of Control Redemption Notice inaccordance with Section 5(c), the Company shall deliver the applicable Changeof Control Redemption Price to the Holder concurrently with the consummation ofsuch Change of Control if such notice is received prior to the consummation ofsuch Change of Control and within five Business Days after the Company’sreceipt of such notice if such notice is received after the consummation ofsuch Change of Control. With respect to an Amortization Redemption, the Companyshall deliver the applicable Amortization Redemption Amount to the Holderwithin five Business Days after the end of the applicable month for suchAmortization Redemption. In the event of a redemption of less than all of theConversion Amount of this Note, the Company shall promptly cause to be issuedand delivered to the Holder, at the Holder’s request, a new Note (in accordancewith Section 19(d)) representing the outstanding Principal which has not beenredeemed. In the event that the Company does not pay the Event of DefaultRedemption Price, the Change of Control Redemption Price, or the AmortizationRedemption Amount (each, the **“RedemptionPrice”**), as applicable, to the Holder (or deliver any Common Stockto 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 Companyto promptly return to the Holder all or any portion of this Note representingthe Conversion Amount that was submitted for redemption and for which theapplicable Redemption Price (or any Common Stock required to be issued pursuantto a Redemption Notice) has not been paid. Upon the Company’s receipt of suchnotice, (x) the Redemption Notice shall be null and void with respect to suchConversion Amount, (y) the Company shall immediately return this Note, or issuea new Note (in accordance with Section 19(d)) to the Holder representing suchConversion Amount and (z) the Conversion Price of this Note or such new Notesshall be adjusted to the lesser of (A) the Conversion Price as in effect on thedate on which the Redemption Notice is voided and (B) the Closing Bid Price onthe date on which the Redemption Notice is voided.

 

(b)                                 Redemption by Other Holders. Upon the Company’s receipt of notice fromany of the holders of the Other Notes for redemption or repayment as a resultof an event or occurrence substantially similar to the events or occurrencesdescribed in Section 4(b) or Section 5(c) (each, an **“Other Redemption Notice”**), the Company shall immediatelyforward 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 RedemptionNotices during the seven Business Day period beginning on and including thedate which is three Business Days prior to the Company’s receipt of the Holder’sRedemption Notice and ending on and including the date which is three BusinessDays after the Company’s receipt of the Holder’s Redemption Notice and theCompany is unable to redeem all principal, interest and other amountsdesignated in such Redemption Notice and such Other Redemption Notices receivedduring such seven Business Day period, then the Company shall redeem a pro rataamount from each holder of the Notes (including the Holder) based on theprincipal amount of the Notes submitted for redemption pursuant to suchRedemption Notice and such Other Redemption Notices received by the Companyduring such seven Business Day period.

 

(13)                            SUBORDINATION TO SENIOR INDEBTEDNESS.

 

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

 

(b)                                 No Payment if Default Under SeniorIndebtedness.

 

(i)                                     [Intentionally left blank]

 

(ii)                                  No cash payment on account of Principal orRedemption Price of, or Interest on, this Note or any other payment payablewith respect to this Note shall be made, and no portion of this Note shall beredeemed or purchased directly or indirectly by the Company, if at the time ofsuch payment or purchase or immediately after giving effect thereto, (A) adefault in the payment of principal, premium, if any, interest or otherobligations in respect of any Senior Indebtedness having either an outstandingprincipal balance or a commitment to lend greater than $500,000 (“**Designated Senior Debt**”) occurs and is continuing (or, inthe case of Senior Indebtedness for which there is a period of grace, in theevent 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 Defaultshall have been cured or waived or shall have ceased to exist or (B) theCompany shall have received notice (a “**Payment Blockage Notice**”)from the holder or holders of Designated Senior Debt that there exists undersuch Designated Senior Debt a default, which shall not have been cured orwaived, permitting the holder or holders thereof to declare such DesignatedSenior Debt due and payable, but only for the period (the “**PaymentBlockage Period**”) commencing on the date of receipt of the PaymentBlockage Notice and ending on the earlier of (a) the date such default shallhave been cured or waived, or (b) the 180th day immediately following

 

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the Company’s receipt ofsuch Payment Blockage Notice. The Company shall resume payments on anddistributions in respect of this Note, including any past scheduled payments ofthe principal of (and premium, if any) and interest on this Note to which theHolder would have been entitled but for the provisions of this Section13(b)(ii) in the case of a Payment Default, within five (5) Business Days ofthe 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 withrespect to such nonpayment shall be cured). In addition, notwithstanding clauses(A) and (B) of this subsection (ii), unless the holders of Designated SeniorDebt shall have accelerated the maturity of such Designated Senior Debt orthere is a Payment Default, the Company shall resume payments on this Notewithin (5) Business Days after the end of each Payment Blockage Period. In anyconsecutive 365-day period, there shall be (i) no more than three PaymentBlockage Notices given in the aggregate on this Note and the Other Notes,irrespective of the number of defaults with respect to Designated Senior Debtduring such period, and (ii) at least 90 days during which no Payment BlockagePeriod shall be in effect.

 

(c)                                  Payment upon Dissolution, Etc. In the event of any bankruptcy, insolvency,reorganization, receivership, composition, assignment for benefit of creditorsor other similar proceeding initiated by or against the Company or anydissolution or winding up or total or partial liquidation or reorganization ofthe Company (being hereinafter referred to as a “**Proceeding**”), the Holder agrees that such Holder shall, uponrequest of a holder of Senior Indebtedness, and at such holder of SeniorIndebtedness’ own expense, take all reasonable actions (including but notlimited to the execution and filing of documents and the giving of testimony inany Proceeding, whether or not such testimony could have been compelled byprocess) necessary to prove the full amount of all its claims in anyProceeding, and the Holder shall not waive any claim in any Proceeding withoutthe written consent of such holder. If the Holder does not file a proper proofof claim or proof of debt in the form required in any Proceeding at leastthirty (30) days before the expiration of the time to file such claim, theholders of any Senior Indebtedness are hereby authorized to file an appropriateclaim for and on behalf of the Holder.

 

The Holder shall retain the right to vote andotherwise act with respect to the claims under this Note (including, withoutlimitation, the right to vote to accept or reject any plan of partial orcomplete liquidation, reorganization, arrangement, composition or extension); provided that the Holder shall not vote withrespect 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 orguaranties thereof, (ii) contest the relative rights and duties of any of thelenders under the Senior Indebtedness established in any instruments oragreement creating or evidencing the Senior Indebtedness with respect to any ofsuch collateral or guaranties, or (iii) contest the Holders’ obligations andagreements set forth in this Section 13.

 

Upon payment or distribution to creditors ina Proceeding of assets of the Company of any kind or character, whether incash, property or securities, all principal and interest due upon any SeniorIndebtedness shall first be paid in full before the Holder shall be entitled toreceive or, if

 

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received, to retain any payment ordistribution on account of this Note, and upon any such Proceeding, any paymentor distribution of assets of the Company of any kind or character, whether incash, property or securities, to which the Holder would be entitled except forthe provisions of this Section 13 shall be paid by the Company or by anyreceiver, trustee in bankruptcy, liquidating trustee, agent or other Personmaking such payment or distribution, or by the Holder who shall have receivedsuch payment or distribution, directly to the holders of the SeniorIndebtedness (pro rata to each such holder on the basis of the respectiveamounts of such Senior Indebtedness held by such holder) or theirrepresentatives to the extent necessary to pay all such Senior Indebtedness infull after giving effect to any concurrent payment or distribution to or forthe holders of such Senior Indebtedness, before any payment or distribution ismade to the Holder or any holders of the Notes.

 

(d)                                 Payments on Notes. Subject to Sections 13(b) and 13(c), theCompany may make regularly scheduled payments of the Principal of, or Intereston, this Note or any other payment payable with respect to this Note, if at thetime of payment, and immediately after giving effect thereto, there exists noPayment Default or a Payment Blockage Period.

 

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

 

(f)                                    Subrogation. Subject to payment in full in cash of all Senior Indebtedness, therights of the Holder shall be subrogated to the rights of the holders of SeniorIndebtedness to receive payments or distributions of the assets of the Companymade on such Senior Indebtedness until all principal and interest on this Noteshall be paid in full in cash; and for purposes of such subrogation, nopayments or distributions to the holders of Senior Indebtedness of any cash,property or securities to which the Holder would be entitled except for thesubordination provisions of this Section 13 shall, as between the Holder andthe Company and/or its creditors other than the holders of the SeniorIndebtedness, be deemed to be a payment on account of the Senior Indebtedness.

 

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

 

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

 

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obligees under such provisions to the sameextent as if they were named therein, and they or any of them may proceed toenforce such subordination and no amendment or modification of the provisionscontained herein shall diminish the rights of such holders unless such holdershave agreed in writing thereto. The holders of Senior Indebtedness may, at anytime and from time to time, without the consent of or notice to the Holder,without incurring responsibility to the Holder and without impairing orreleasing the subordination provisions of this Section 13, (i) subject to thelimitations set forth herein, increase the amount of, change the manner, termsor place of payment of, or renew or alter, any Senior Indebtedness, orotherwise amend, modify, restate or supplement the same (provided that any suchmodified indebtedness continues to be constitute Senior Indebedness within themeaning of this Agreement), (ii) sell, exchange or release any collateralmortgaged, pledged or otherwise securing the Senior Indebtedness, (iii) releaseany Person liable in any manner for the Senior Indebtedness and (iv) exerciseor refrain from exercising any rights against the Company or any other Person.

 

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

 

(j)                                     Blockage of Remedies. During any Payment Default or any PaymentBlockage Period, if an Event of Default has occurred and is continuing underthis Note, the Holder will not commence or join with any creditor of theCompany in asserting or commencing any proceedings to collect or enforce itsrights hereunder or take any action to foreclose or realize upon theindebtedness hereunder for a period beginning on the date of such Event ofDefault and ending on the first to occur of (i) the date that is 180 daysfollowing the date that the holders of the Senior Indebtedness are notified ofsuch Event of Default or (ii) the date such Payment Default is cured, waived orceases to exist or the date such Payment Blockage Period ends, as the case maybe; provided, however, that until all of the Senior Indebtednessshall have been paid in full in cash, any payments, distributions or proceedsreceived by the Holder resulting from the exercise of any action to collect orenforce any right or remedy available to the Holder shall be subject to theterms of this Note.

 

(k)                                  Subsequent Senior Indebtedness RequestedModifications. In connectionwith the incurrence of any future Senior Indebtedness, the Holder agrees thatit shall act reasonably and negotiate in good faith any modifications to theprovisions of this Section 13 reasonably requested by the holder of such SeniorIndebtedness; provided that nothing in this section shall restrict the holdersof Notes representing at least a majority of the aggregate principal amount ofthe Notes then outstanding from changing or amending this Section 13 pursuantto Section 17 hereof.

 

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(l)                                     Failure to Make Payment. In the event that the Company is prohibitedor restricted from making any payment required under under this Note by reasonof the provisions of this Section 13, such prohibition or restriction shall notpreclude the failure to make such payment from being an Event of Default underSection 4(a) of this Note.

 

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

 

(15)                            RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

## (a)                                  Rank.                  All payments due under thisNote (a) shall rank *pari passu*with all Other Notes (**“Pari PassuIndebtedness”**), (b) shall be subordinate in right of payment to theprior payment of all existing and future Senior Indebtedness and (c) shall besenior to all other Indebtedness of the Company and its Subsidiaries, otherthan Senior Indebtedness and Pari Passu Indebtedness.

##  

## (b)                                 Incurrence ofSenior Indebtedness. So long as this Note is outstanding, the Companyshall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, incur or guarantee, assume or suffer to exist anyIndebtedness which shall rank senior to the Notes other than SeniorIndebtedness.

##  

## (c)                                  Existence ofLiens. So long as this Note is outstanding, the Company shall not, and theCompany shall not permit any of its Subsidiaries to, directly or indirectly,allow or suffer to exist any mortgage, lien, pledge, charge, security interestor other encumbrance upon or in any property or assets (including accounts andcontract rights) owned by the Company or any of its Subsidiaries (collectively,“**Liens**”) other than PermittedLiens. As used herein, “**Permitted Liens**”means (i) Liens incurred to secure Senior Indebtedness, (ii) Liens on fixed orcapital assets acquired, constructed or improved by the Company or anySubsidiary, to the extent of Indebtedness incurred within thirty days for suchacquisition, construction or improvement and incurred within thirty days ofsuch acquisition, construction or improvement, (iii) purchase money Liens, or(iv) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s andother similar Liens imposed by law.

##  

## (d)                                 RestrictedPayments. The Company shall not, and the Company shall notpermit any of its Subsidiaries to, directly or indirectly, redeem, defease,repurchase, repay or make any payments in respect of, by the payment of cash orcash equivalents (in whole or in part, whether by way of open market purchases,tender offers, private transactions or otherwise), all or any portion of anyIndebtedness, other than Senior Indebtedness or Pari Passu Indebtedness,whether by way of payment in respect of principal of (or premium, if any) orinterest on, such Indebtedness if at the time such payment is due or isotherwise made or, after giving effect to such payment, an event constitutingan 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 holdersof Common Stock (each, a **“Distribution”**),in each such case to the extent of the Distribution as if the Holder hadconverted this Note into Common Stock (without regard to any limitations onconversion herein or elsewhere) and had held such shares of Common Stock on therecord date for such dividends and distributions. Payments (if any) under thepreceding sentence shall be made concurrently with the dividend or distributionto the holders of Common Stock.

 

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

 

(18)                            TRANSFER. This Note may be offered, sold, assigned or transferred by the Holderwithout the consent of the Company, subject only to the provisions of Section2(f) of the Securities Purchase Agreement.

 

(19)                            REISSUANCE OF THIS NOTE.

 

(a)                                  Transfer. If this Note is to be transferred, the Holder shall surrender thisNote to the Company, whereupon the Company will forthwith issue and deliverupon the order of the Holder a new Note (in accordance with Section 19(d)),registered as the Holder may request, representing the outstanding Principalbeing transferred by the Holder and, if less then the entire outstandingPrincipal is being transferred, a new Note (in accordance with Section 19(d))to the Holder representing the outstanding Principal not being transferred. TheHolder and any assignee, by acceptance of this Note, acknowledge and agreethat, 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 outstandingPrincipal represented by this Note may be less than the Principal stated on theface of this Note.

 

(b)                                 Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidencereasonably satisfactory to the Company of the loss, theft, destruction ormutilation of this Note, and, in the case of loss, theft or destruction, of anyindemnification undertaking by the Holder to the Company in customary form and,in the case of mutilation, upon surrender and cancellation of this Note, theCompany shall execute and deliver to the Holder a new Note (in accordance withSection 19(d)) representing the outstanding Principal.

 

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(c)                                  Note Exchangeable for Different Denominations. This Note is exchangeable, upon thesurrender hereof by the Holder at the principal office of the Company, for anew Note or Notes (in accordance with Section 19(d) and in principal amounts ofat least $100,000) representing in the aggregate the outstanding Principal ofthis Note, and each such new Note will represent such portion of such outstandingPrincipal as is designated by the Holder at the time of such surrender.

 

(d)                                 Issuance of New Notes. Whenever the Company is required to issue anew Note pursuant to the terms of this Note, such new Note (i) shall be of liketenor with this Note, (ii) shall represent, as indicated on the face of suchnew Note, the Principal remaining outstanding (or in the case of a new Notebeing issued pursuant to Section 19(a) or Section 19(c), the Principaldesignated by the Holder which, when added to the principal represented by theother new Notes issued in connection with such issuance, does not exceed thePrincipal remaining outstanding under this Note immediately prior to suchissuance of new Notes), (iii) shall have an issuance date, as indicated on theface 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) shallrepresent accrued Interest on the Principal and Interest of this Note, from theIssuance Date.

 

(20)                            REMEDIES, CHARACTERIZATIONS, OTHEROBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and inaddition to all other remedies available under this Note, the SecuritiesPurchase 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 andconsequential damages for any failure by the Company to comply with the terms ofthis Note. Amounts set forth or provided for herein with respect to payments,conversion and the like (and the computation thereof) shall be the amounts tobe 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 willcause irreparable harm to the Holder and that the remedy at law for any suchbreach may be inadequate. The Company therefore agrees that, in the event ofany such breach or threatened breach, the Holder shall be entitled, in additionto all other available remedies, to an injunction restraining any breach,without the necessity of showing economic loss and without any bond or othersecurity being required.

 

(21)                            PAYMENT OF COLLECTION, ENFORCEMENT AND OTHERCOSTS. If (a) this Note isplaced in the hands of an attorney for collection or enforcement or iscollected or enforced through any legal proceeding or the Holder otherwisetakes action to collect amounts due under this Note or to enforce theprovisions 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 thecosts incurred by the Holder for such collection, enforcement or action or inconnection with such bankruptcy, reorganization, receivership or otherproceeding, including, but not limited to, attorneys’ fees and disbursements.

 

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(22)                            CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointlydrafted by the Company and all the Purchasers and shall not be construedagainst any person as the drafter hereof. The headings of this Note are forconvenience of reference and shall not form part of, or affect theinterpretation of, this Note.

 

(23)                            FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of theHolder in the exercise of any power, right or privilege hereunder shall operateas a waiver thereof, nor shall any single or partial exercise of any suchpower, right or privilege preclude other or further exercise thereof or of anyother right, power or privilege.

 

(24)                            DISPUTE RESOLUTION. In the case of a dispute as to thedetermination of the Redemption Price or the arithmetic calculation of theConversion Rate or the Redemption Price, the Company shall submit the disputeddeterminations or arithmetic calculations via facsimile within one Business Dayof receipt of the Conversion Notice or Redemption Notice or other event givingrise to such dispute, as the case may be, to the Holder. If the Holder and theCompany are unable to agree upon such determination or calculation within oneBusiness Day of such disputed determination or arithmetic calculation beingsubmitted to the Holder, then the Company shall, within one Business Day submitvia facsimile (a) the disputed determination of the Closing Bid Price or theClosing Sale Price to an independent, reputable investment bank selected by theCompany and approved by the Holder or (b) the disputed arithmetic calculationof the Conversion Rate or the Redemption Price to the Company’s independent,outside accountant. The Company, at the Company’s expense, shall cause theinvestment bank or the accountant, as the case may be, to perform thedeterminations or calculations and notify the Company and the Holder of theresults no later than five Business Days from the time it receives the disputeddeterminations or calculations. Such investment bank’s or accountant’sdetermination or calculation, as the case may be, shall be binding upon allparties absent demonstrable error.

 

(25)                            NOTICES; PAYMENTS.

 

(a)                                  Notices. Whenever notice is required to be given under this Note, unlessotherwise provided herein, such notice shall be given in accordance withSection 9(f) of the Securities Purchase Agreement. The Company shall providethe Holder with prompt written notice of all actions taken pursuant to thisNote, including in reasonable detail a description of such action and thereason therefore. Without limiting the generality of the foregoing, the Companywill give written notice to the Holder (i) immediately upon any adjustment ofthe Conversion Price, setting forth in reasonable detail, and certifying, thecalculation of such adjustment and (ii) at least twenty days prior to the dateon which the Company closes its books or takes a record (A) with respect to anydividend or distribution upon the Common Stock, (B) with respect to any prorata subscription offer to holders of Common Stock or (C) for determiningrights to vote with respect to any Change of Control, dissolution orliquidation, provided in each case that such information shall be made known tothe public prior to or in conjunction with such notice being provided to theHolder. Notwithstanding the foregoing, Section 4(i) of the Securities PurchaseAgreement 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 anyPerson pursuant to this Note, such payment shall be made in lawful money of theUnited States of America by a check drawn on the account of the Company andsent via overnight courier service to such Person at such address as previouslyprovided to the Company in writing (which address, in the case of each of thePurchasers, shall initially be as set forth on the Schedule of Buyers attachedto the Securities Purchase Agreement); provided that the Holder may elect toreceive a payment of cash via wire transfer of immediately available funds byproviding the Company with prior written notice setting out such request andthe Holder’s wire transfer instructions. Whenever any amount expressed to bedue 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 BusinessDay and, in the case of any Interest Date which is not the date on which thisNote is paid in full, the extension of the due date thereof shall not be takeninto account for purposes of determining the amount of Interest due on suchdate.

 

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

 

(27)                            WAIVER OF NOTICE. To the extent permitted by law, the Companyhereby waives demand, notice, protest and all other demands and notices inconnection with the delivery, acceptance, performance, default or enforcementof this Note and the Securities Purchase Agreement.

 

(28)                            GOVERNING LAW. This Note shall be construed and enforcedin accordance with, and all questions concerning the construction, validity,interpretation and performance of this Note shall be governed by, the internallaws of the State of New York, without giving effect to any choice of law orconflict of law provision or rule (whether of the State of New York or anyother jurisdictions) that would cause the application of the laws of anyjurisdictions other than the State of New York.

 

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

 

(a)                                  **“Approved Stock Plan”** means any employee benefit, option orincentive plan which has been approved by the Board of Directors of theCompany, pursuant to which the Company’s securities may be issued to anyemployee, 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 orother day on which commercial banks in The City of New York are authorized orrequired by law to remain closed.

 

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

 

(e)                                  **“Closing Bid Price”** and **“ClosingSale Price”** means, for any security as of any date, the last closingbid price and last closing trade price, respectively, for such security on thePrincipal Market, as reported by Bloomberg, or, if the Principal Market beginsto operate on an extended hours basis and does not designate the closing bidprice or the closing trade price, as the case may be, then the last bid priceor last trade price, respectively, of such security prior to 4:00 p.m., NewYork Time, as reported by Bloomberg, or, if the Principal Market is not theprincipal securities exchange or trading market for such security, the lastclosing bid price or last trade price, respectively, of such security on theprincipal securities exchange or trading market where such security is listedor traded as reported by Bloomberg, or if the foregoing do not apply, the lastclosing bid price or last trade price, respectively, of such security in theover-the-counter market on the electronic bulletin board for such security asreported by Bloomberg, or, if no closing bid price or last trade price,respectively, is reported for such security by Bloomberg, the average of thebid prices, or the ask prices, respectively, of any market makers for suchsecurity as reported in the “pink sheets” by Pink Sheets LLC (formerly the NationalQuotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Pricecannot be calculated for a security on a particular date on any of theforegoing bases, the Closing Bid Price or the Closing Sale Price, as the casemay be, of such security on such date shall be the fair market value asmutually determined by the Company and the Holder. If the Company and theHolder are unable to agree upon the fair market value of such security, thensuch dispute shall be resolved pursuant to Section 24. All such determinationsto be appropriately adjusted for any stock dividend, stock split, stockcombination or other similar transaction during the applicable calculationperiod.

 

(f)                                    [Intentionally left blank]

 

(g)                                 **“Contingent Obligation”** means, as to any Person, any direct orindirect liability, contingent or otherwise, of that Person with respect to anyindebtedness, lease, dividend or other obligation of another Person if theprimary purpose or intent of the Person incurring such liability, or the primaryeffect thereof, is to provide assurance to the obligee of such liability thatsuch liability will be paid or discharged, or that any agreements relatingthereto will be complied with, or that the holders of such liability will beprotected (in whole or in part) against loss with respect thereto.

 

(h)                                 “**ConvertibleSecurities**” means any stock or securities (other than Options)directly or indirectly convertible into or exercisable or exchangeable forCommon Stock.

 

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(i)                                     **“Excluded Securities”** means any shares of Common Stock issued orissuable: (i) in connection with any Approved Stock Plan; (ii) upon conversionof the Notes and the Other Notes; (iii) upon conversion of any Options orConvertible Securities which are outstanding on the Issuance Date, (iv)pursuant to or in connection with commercial credit arrangements, equipmentlease financings, acquisitions of other assets or businesses, strategictransactions not primarily for financing purposes, or similar transactions intowhich 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 orassumed as the deferred purchase price of property or services (other thantrade payables entered into in the ordinary course of business), (C) allreimbursement or payment obligations with respect to letters of credit, suretybonds and other similar instruments, (D) all obligations evidenced by notes,bonds, debentures or similar instruments, including obligations so evidencedincurred in connection with the acquisition of property, assets or businesses,(E) all indebtedness created or arising under any conditional sale or othertitle retention agreement, or incurred as financing, in either case withrespect to any property or assets acquired with the proceeds of suchindebtedness (even though the rights and remedies of the seller or bank undersuch agreement in the event of default are limited to repossession or sale ofsuch property), (F) all monetary obligations under any leasing or similararrangement which, in connection with generally accepted accounting principles,consistently applied for the periods covered thereby, is classified as a capitallease, (G) off-balance sheet liabilities retained in connection with assetsecuritization programs, synthetic leases, sale and leaseback transactions orother similar obligations arising with respect to any other transaction whichis the functional equivalent of or takes the place of borrowing but which doesnot constitute a liability on the consolidated balance sheet of such Person andits subsidiaries, and (H) all indebtedness referred to in clauses (A) through(G) above secured by (or for which the holder of such Indebtedness has anexisting right, contingent or otherwise, to be secured by) any mortgage, lien,pledge, charge, security interest or other encumbrance upon or in any propertyor assets (including accounts and contract rights) owned by any Person, eventhough the Person which owns such assets or property has not assumed or becomeliable for the payment of such indebtedness, and (I) all Contingent Obligationsin respect of indebtedness or obligations of others of the kinds referred to inclauses (A) through (H) above.

 

(k)                                  **“Issuance Date”** means                ,2007.

 

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

 

(m)                               **“Person”** means an individual, a limited liability company,a partnership, a joint venture, a corporation, a trust, an unincorporatedorganization, any other entity and a government or any department or agencythereof.

 

(n)                                 “**PrincipalMarket**” means the OTC Bulletin Board.

 

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

 

(p)                                 **“SEC”** means the United States Securities andExchange Commission.

 

(q)                                 **“Securities PurchaseAgreement”** means thatcertain Securities Purchase Agreement, dated January 3, 2007, between theCompany and the initial holders of the Original Notes pursuant to which theCompany issued the Original Notes.

 

(r)                                    **“Senior Indebtedness”** means the principal of (and premium, ifany), interest on, and all fees and other amounts (including, withoutlimitation, any reasonable costs, enforcement expenses (including reasonablelegal fees and disbursements, collateral protection expenses and otherreimbursement or indemnity obligations relating thereto)), and all otherobligations of the Company under (i) any of the agreements or instrumentsevidencing any Indebtedness of the Company and its Subsidiaries arising afterthe Original Date to an unaffiliated, third-party commercial lender (togetherwith any renewals, refundings, refinancings or other extensions thereof) forpurposes of purchasing equipment (which debt shall be secured only by theassets purchased with such financing), and (ii) Indebtedness secured by up to amaximum of eighty five percent (85%) of the Company’s accounts receivableand/or up to sixty percent (60%) of the value of the Company’s inventory. Forthe avoidance of doubt, Senior Indebtedness shall not include the debt which isrequired to be paid by the Company pursuant to Section 4(i) of the SecuritiesPurchase Agreement.

 

(s)                                  [Intentionally left blank]

 

(t)                                    **“Trading Day”** means any day on which the Common Stock istraded on the Principal Market, or, if the Principal Market is not theprincipal trading market for the Common Stock, then on the principal securitiesexchange or securities market on which the Common Stock is then traded;provided that “Trading Day” shall not include any day on which the Common Stockis scheduled to trade on such exchange or market for less than 4.5 hours or anyday that the Common Stock is suspended from trading during the final hour oftrading on such exchange or market (or if such exchange or market does notdesignate 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, thedollar volume-weighted average price for such security on the Principal Marketduring the period beginning at 9:30:01 a.m., New York Time (or such other timeas 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 PrincipalMarket publicly announces is the official close of trading) as reported byBloomberg through its “Volume at Price” functions, or, if the foregoing doesnot

 

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apply, the dollar volume-weighted averageprice of such security in the over-the-counter market on the electronicbulletin 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 theofficial open of trading), and ending at 4:00:00 p.m., New York Time (or suchother time as such market publicly announces is the official close of trading)as reported by Bloomberg, or, if no dollar volume-weighted average price isreported for such security by Bloomberg for such hours, the average of thehighest closing bid price and the lowest closing ask price of any of the marketmakers for such security as reported in the “pink sheets” by Pink Sheets LLC(formerly the National Quotation Bureau, Inc.). If the Weighted Average Pricecannot be calculated for a security on a particular date on any of theforegoing bases, the Weighted Average Price of such security on such date shallbe the fair market value as mutually determined by the Company and the Holder. Ifthe Company and the Holder are unable to agree upon the fair market value ofsuch security, then such dispute shall be resolved pursuant to Section 24. Allsuch determinations to be appropriately adjusted for any stock dividend, stocksplit, stock combination or other similar transaction during the applicablecalculation period.

 

**[Signature Page Follows]**

 

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**IN WITNESS WHEREOF,** the Company has caused this Note to be duly executed as of theIssuance 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 ConvertibleSubordinated Note (the **“Note”**)issued to the undersigned by Liquidmetal Technologies, Inc. (the **“Company”**). In accordance with and pursuantto the Note, the undersigned hereby elects to convert the Conversion Amount (asdefined 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 theCompany that the undersigned’s conversion of the amount set forth above inaccordance with Section 3(a) of the Note will not directly result in theundersigned (together with the undersigned’s affiliates) beneficially owning inexcess of 4.99% of the number of shares of Common Stock outstanding immediatelyafter giving effect to such conversion, calculated in accordance with Section3(d)(i) of the Note; provided that if the undersigned has previously waived the4.99% beneficial ownership limitation upon no less than sixty one (61) daysprior written notice, the undersigned certifies to the Company that theundersigned’s conversion of the amount set forth above will not directly resultin the undersigned (together with the undersigned’s affiliates) beneficiallyowning in excess of 9.99% of the number of shares of Common Stock outstandingimmediately after giving effect to such conversion, calculated in accordancewith 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 theNote 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 herebyacknowledges this Conversion Notice and hereby directs American Stock Transfer& Trust Co. to issue the above indicated number of shares of Common Stockin accordance with the Transfer Agent Instructions dated January 3, 2007 fromthe Company.

 
|   | **LIQUIDMETAL  TECHNOLOGIES, INC.** |
|--------|-------------------------------------|
|   | ** **                          |
|   | ** **                          |
|   | By:                                 |   |   |
|   | Name:                               |
|   | Title:                              |

 

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