**Exhibit 10.43**

 

**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 FORSALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVEREGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, ASAMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLYREVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTEAND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BELESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OFTHIS NOTE.**

 

**CONVERTIBLE SUBORDINATED NOTE**

 
| Issuance Date:  October 1, 2008 | Principal:  U.S. $ [                     ] |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

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(1)                                  MATURITY ANDAMORTIZATION PAYMENTS.

 

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

 

(b)                                 AmortizationPayments.  Beginningon October 31, 2008 and at the end of each month thereafter (each, an “**Amortization Date**”) until there is no outstanding Principalof this Note, the Company shall redeem $[            ] [*1/36th ofthe original Principal amount of this Note*] of this Note (each, an “**Amortization Redemption Amount**”).  If the Company is unable to redeem allPrincipal and Interest with respect to all Amortization Redemption Amounts onthis Note and the Other Notes, then the Company shall redeem a pro rata amountfrom each holder of the Notes (including the Holder) based on the principalamount of the Notes subject to payment of an Amortization Redemption Amount onsuch Amortization Date pursuant to this Note and the Other Notes.

 

(c)                                  Payment ofAmortization 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 (as defined

 

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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 to require conversion under this Section 1(c) bydelivering at least 20 Trading Days prior to such Amortization Date a writtennotice thereof by facsimile and overnight courier to all, but not less thanall, of the holders of Notes and the Transfer Agent that specifically describesthe portion of the Amortization Redemption Amount for this Note and the OtherNotes that will be paid in Common Stock (the **“AmortizationConversion Notice”**and the date all of the holders received suchnotice is referred to as the “**AmortizationConversion 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 applicable to an Amortization Conversion (the “AmortizationPrice”) that is being paid in Common Stock pursuant to this Section 1(c) shallbe 90% of the Weighted Average Price of the Common Stock for the 20 consecutiveTrading Days immediately preceding the Amortization Date.  For purposes of this Section 1(c), “**Conditions to Amortization Conversion**”means****the following conditions: (i) theCommon Stock shall be traded on the Principal Market, the NASDAQ Gobal Marketor NASDAQ Capital Market, or the American Stock Exchange on the applicableAmortization 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 ofthe Notes shall be eligible for sale without restriction and without the needfor registration under any applicable federal or state securities laws, (iii) anAuthorized Share Failure shall not be in effect on the Amortization Date; and (iv) anysuch payment of the Amortization Redemption Amount in Common Stock shall notconsist of more than 20% of the total dollar volume traded in the Common Stockfor the 20 Trading Days prior to the Amortization Date.

 

(d)                                 SpecialRedemption Right.  Within two (2) tradingdays after the closing of one or more Qualified Transactions resulting in$25,000,000 (Twenty Five Million Dollars) in aggregate proceeds aftertransaction expenses and placement agent or broker commissions or fees, theCompany will notify the Holder of said closing (a “**Transaction Notice**”).  Upon the closing of the QualifiedTransaction, the Holder may elect to have all or part of the outstandingprincipal amount of this Note and all accrued but unpaid interest thereunderredeemed within five (5) Trading Days of the Company’s receipt of writtennotice of the Holder’s election to effect such redemption.  In order toelect such redemption, the Holder must deliver written notice of redemption tothe Company within twenty (20) Trading Days after its receipt of theTransaction Notice, and such written notice must be accompanied by thesurrender of the originally executed Note, which must be marked “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) thesale of Liquidmetal Korea’s manufacturing facility in Pyong-Taek, Republic ofKorea and that the appropriate authorities or banks in the Republic of Koreaapprove the transfer of such proceeds from Liquidmetal Korea to the Companyand/or (B) the raising of capital in a debt or equity offering after thedate hereof (subject to any restrictions or limitations thereon set forth inthe Purchase Agreement or the Notes).

 

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

 

(3)                                  CONVERSION OFNOTES.  This Note shall be convertibleinto shares of the Company’s common stock, par value $0.001 per share (the **“Common Stock”**), on the terms and conditionsset forth in this Section 3.

 

(a)                                  ConversionRight.  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 Section 3(c),at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock uponany conversion.  If the issuance wouldresult in the issuance of a fraction of a share of Common Stock, the Companyshall round such fraction of a share of Common Stock up to the nearest wholeshare.  The Company shall pay any and alltaxes that may be payable with respect to the issuance and delivery of CommonStock upon conversion of any Conversion Amount.

 

(b)                                 Conversion Rate.  The number of shares of Common Stock 

 

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issuable upon conversion of any ConversionAmount pursuant to Section 3(a) shall be determined by dividing (x) suchConversion Amount by (y) the Conversion Price (as defined below) (the **“Conversion Rate”**).

 

(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 withrespect to 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 ofConversion.

 

(i)                                     OptionalConversion.  To convertany Conversion Amount into shares of Common Stock on any date (a **“Conversion Date”**), the Holder shall (A) transmitby facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m.,New York Time, on such date, a copy of an executed notice of conversion in theform attached hereto as Exhibit I (the **“Conversion Notice”**) to the Company and (B) if requiredby Section 3(c)(iii), surrender this Note to a common carrier for deliveryto the Company as soon as practicable on or following such date (or anindemnification undertaking with respect to this Note in the case of its loss,theft or destruction).  On or before thefirst Business Day following the date of receipt of a Conversion Notice, theCompany shall transmit by facsimile a confirmation of receipt of suchConversion Notice to 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) creditsuch aggregate number of shares of Common Stock to which the Holder shall beentitled to the Holder’s or its designee’s balance account with DepositoryTrust Company (“**DTC**”) through itsDeposit Withdrawal At Custodian system or (Y) if the Transfer Agent is notparticipating in DTC Fast Automated Securities Transfer Program, issue anddeliver to the address as specified in the Conversion Notice, a certificate,registered in the name of the Holder or its designee, for the number of sharesof Common Stock to which the Holder shall be entitled.  If this Note is physically surrendered forconversion as required by Section 3(c)(iii) and the outstandingPrincipal of this Note is greater than the Principal portion of the ConversionAmount being converted, then the Company shall as soon as practicable and in noevent later than five Business Days after receipt of this Note and at its ownexpense, issue and deliver to the holder a new Note (in accordance with Section 19(d))representing the outstanding Principal not converted.  The Person or Persons entitled to receive theshares of Common Stock issuable upon a conversion of this Note shall be treatedfor all purposes as the record holder or holders of such shares of Common Stockon the Conversion Date.

 

(ii)                                  Company’sFailure to Timely Convert.  Ifthe Company shall fail to issue a certificate to the Holder or credit theHolder’s balance account with DTC for the number of shares of Common Stock towhich the Holder is entitled upon conversion 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) theCompany shall pay liquidated damages to the Holder for each day of suchConversion Failure in an amount equal to 1.0%****of the product of (I) the sum of the number of shares of CommonStock not issued to the Holder on or prior to the Share Delivery Date and towhich the Holder is entitled, and (II) the Closing Sale Price of theCommon Stock on the Share Delivery Date and (B) the Holder, upon writtennotice to the Company, may void its Conversion Notice with respect to, andretain or have returned, as the case may be, any portion of this Note that hasnot been converted pursuant to such Conversion Notice; provided that thevoiding of a Conversion Notice shall not affect the Company’s obligations tomake any payments which have accrued prior to the date of such notice pursuantto this Section 3(c)(ii) or otherwise.  In addition to the foregoing, if within three(3) Trading Days after the Company’s receipt of the facsimile copy of aConversion Notice the Company shall fail to issue and deliver a certificate tothe Holder or credit the Holder’s balance account with DTC for the number ofshares of Common Stock to which the Holder is entitled upon such holder’sconversion of any Conversion Amount, and if on or after such Trading Day theHolder purchases (in an open market transaction or otherwise) Common Stock todeliver in satisfaction of a sale by the Holder of Common Stock issuable uponsuch conversion that the Holder anticipated receiving from the Company (a “**Buy-In**”), then the Company shall, withinfive (5) Business Days after the Holder’s request and in the Holder’sdiscretion, either (i) pay cash to the Holder in an amount equal to theHolder’s total purchase price (including brokerage commissions and otherout-of-pocket expenses, if any) for the shares of Common Stock so purchased(the **“Buy-In Price”**), at whichpoint the Company’s obligation to deliver such certificate (and to issue such CommonStock) shall terminate, or (ii) promptly honor its obligation to deliverto the Holder a certificate or certificates representing such Common Stock andpay cash to the Holder in an amount equal to the excess (if any) of the Buy-InPrice over the product of (A) such number of shares of Common Stock, times(B) the Closing Bid Price on the Conversion Date.

 

(iii)                               Book-Entry.Notwithstanding anything to the contrary set forth herein, upon conversion ofany portion of this Note in accordance with the terms hereof, the Holder shallnot be required to physically surrender this Note to the Company unless (A) thefull Conversion Amount represented by this Note is being converted or (B) theHolder has provided the Company with prior written notice (which notice may beincluded in a Conversion Notice) requesting physical surrender and reissue ofthis Note.  The Holder and the Companyshall maintain records showing the Principal and Interest converted and thedates of such conversions or shall use such other method, reasonablysatisfactory to the Holder and the Company, so as not to require physicalsurrender of this Note upon conversion.

 

(iv)                              Pro RataConversion; Disputes.  In theevent that the Company receives a Conversion Notice from more than one holderof Notes for the same Conversion Date and the Company can convert some, but notall, of such portions of the Notes submitted

 

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for conversion, the Company,subject to Section 3(d), shall convert from each holder of Notes electingto have Notes converted on such date a pro rata amount of such holder’s portionof its Notes submitted for conversion based on the principal amount of Notessubmitted for conversion on such date by such holder relative to the aggregateprincipal amount of all Notes submitted for conversion on such date.  In the event of a dispute as to the number ofshares of Common Stock issuable to the Holder in connection with a conversionof this Note, the Company shall issue to the Holder the number of shares ofCommon Stock not in dispute and resolve such dispute in accordance with Section 24.

 

(d)                                 Limitations onConversions.

 

(i)                                     BeneficialOwnership.  Unlesswaived by the Holder upon no less than sixty one (61) days prior written noticeto the Company, the Company shall not effect any conversion of this Notepursuant to Section 3(a) to the extent that after giving effect tosuch conversion the Holder (together with the Holder’s affiliates) wouldbeneficially own in excess of 4.99% of the number of shares of Common Stockoutstanding immediately after giving effect to such conversion.  Even if the Holder waives the limitation setforth in the preceding sentence, the Company shall in no event effect anyconversion of this Note, and the Holder of this Note shall not have the rightto convert any portion of this Note pursuant to Section 3(a), to theextent that after giving effect to such conversion, the Holder (together withthe Holder’s affiliates) would beneficially own in excess of 9.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion.  For purposes of theforegoing sentences, the number of shares of Common Stock beneficially owned bythe Holder and its affiliates shall include the number of shares of CommonStock 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 unexercisedor nonconverted portion of any other securities of the Company (including,without limitation, any Other Notes or warrants) subject to a limitation onconversion or exercise analogous to the limitation contained hereinbeneficially owned by the Holder or any of its affiliates.  Except as set forth in the precedingsentence, for purposes of this Section 3(d)(i), beneficial ownership shallbe calculated in accordance with Section 13(d) of the SecuritiesExchange Act of 1934, as amended.  Forpurposes of this Section 3(d)(i), in determining the number of outstandingshares of Common Stock, the Holder may rely on the number of outstanding sharesof Common Stock as reflected in (x) the Company’s most recent Form 10-Qor Form 10-K, (y) a more recent public announcement by the Company or(z) any other notice by the Company or the Transfer Agent setting forththe number of shares of Common Stock outstanding.  For any reason at any time, upon the writtenor oral request of the Holder, the Company shall within two Business Daysconfirm orally and in writing to the Holder the number of shares of Common Stockthen outstanding.  In any case, the numberof outstanding shares of Common Stock shall be determined after giving effectto the conversion or exercise of securities of the Company, including thisNote, by the Holder

 

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or its affiliates since thedate as of which such number of outstanding shares of Common Stock wasreported. 

 

(ii)                                  PrincipalMarket Regulation.  The Companyshall not be obligated to issue any shares of Common Stock upon conversion ofthis Note if the issuance of such shares of Common Stock would exceed thatnumber of shares of Common Stock that the Company may issue upon conversion ofthe Notes without breaching the Company’s obligations under the rules orregulations of the Principal Market (the **“ExchangeCap”**), except that such limitation shall not apply in the event thatthe Company (A) obtains the approval of its stockholders as required bythe applicable rules of the Principal Market for issuances of Common Stockin excess of such amount or (B) obtains a written opinion from outsidecounsel to the Company that such approval is not required, which opinion shallbe reasonably satisfactory to the holders of the Notes representing at least amajority of the principal amounts of 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 event that any Purchaser shall sell orotherwise transfer any of such Purchaser’s Notes, the transferee shall beallocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, andthe restrictions of the prior sentence shall apply to such transferee withrespect to the portion of the Exchange Cap Allocation allocated to suchtransferee.  In the event that any holderof Notes shall convert all of such holder’s Notes into a number of shares ofCommon Stock which, in the aggregate, is less than such holder’s Exchange CapAllocation, then the difference between such holder’s Exchange Cap Allocationand the number of shares of Common Stock actually issued to such holder shallbe allocated to the respective Exchange Cap Allocations of the remainingholders of Notes on a pro rata basis in proportion to the aggregate principalamount of the Notes then held by each such holder.

 

(4)                                  RIGHTS UPON EVENTOF DEFAULT.

 

(a)                                  Event ofDefault.  Each of the following eventsshall constitute an **“Event of Default”**:

 

(i)                                     the Company’sfailure to pay to the Holder any amount of Principal or Interest when and asdue under this Note if such failure continues for a period of at least fiveBusiness Days;

 

(ii)                                  the Company’sfailure to pay to the Holder any amounts other than Principal or Interest whenand as due under this Note, the Securities Purchase Agreement, or the

 

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RegistrationRights Agreement, which failure is not cured within five Business Days afternotice of such default sent by the Holder to the Company;

 

(iii)                               any defaultunder, redemption of or acceleration prior to maturity of any Indebtedness (asdefined below) of the Company or any of its Subsidiaries (as defined in theSecurities Purchase Agreement) other than with respect to any Other Notes andthe Senior Indebtedness; 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 Companyshall fail to observe or perform any other material covenant or agreementcontained in the Securities Purchase Agreement, which failure is not curedwithin ten Business Days after notice of such default sent by the Holder to theCompany;

 

(v)                                 the Company orany of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S.Code, or any similar Federal or state law for the relief of debtors(collectively, **“Bankruptcy Law”**), (A) commencesa voluntary case, (B) consents to the entry of an order for relief againstit in an involuntary case, (C) consents to the appointment of a receiver,trustee, assignee, liquidator or similar official (a **“Custodian”**),  or (D) makesa general assignment for the benefit of its creditors;

 

(vi)                              a court ofcompetent jurisdiction enters an order or decree under any Bankruptcy Law that (A) isfor relief against the Company or any of its Subsidiaries in an involuntarycase that remains undismissed for a period of 90 days, (B) appoints aCustodian of the Company or any of its Subsidiaries that remains undischargedor unstayed for a period of 90 days, or (C) orders the liquidation of theCompany or any of its Subsidiaries;

 

(vii)                           a finaljudgment or judgments for the payment of money aggregating in excess of$500,000 are rendered against the Company or any of its Subsidiaries and whichjudgments are not, within 60 days after the entry thereof, bonded, dischargedor stayed pending appeal, or are not discharged within 60 days after the expirationof such stay; provided, however, that any judgment which is covered byinsurance or an indemnity from a credit worthy party shall not be included incalculating the $500,000 amount set forth above;

 

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

 

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

 

(b)                                 RedemptionRight.  Promptly after the occurrenceof an Event of Default with respect to this Note or any Other Note, the Companyshall deliver written notice 

 

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thereofvia facsimile and overnight courier (an **“Eventof Default Notice”**) to the Holder. At any time after the earlier of the Holder’s receipt of an Event ofDefault Notice and the Holder becoming aware of an Event of Default, the Holdermay require 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 Default RedemptionNotice shall indicate the portion of this Note the Holder is electing toredeem.  Each portion of this Notesubject to redemption by the Company pursuant to this Section 4(b) shallbe redeemed by the Company at a price equal to the greater of (i) theConversion Amount to be redeemed and (ii) the product of (A) theConversion Rate with respect to such Conversion Amount in effect at such timeas the Holder delivers an Event of Default Redemption Notice and (B) theClosing Sale Price of the Common Stock on the date immediately preceding suchEvent of Default (the **“Event of DefaultRedemption Price”**). Redemptions required by this Section 4(b) shall be made inaccordance with the provisions of Section 12.

 

(5)                                  RIGHTS UPONCHANGE OF CONTROL.

 

(a)                                  Change ofControl.  Each of the following eventsshall constitute a **“Change of Control”**:

 

(i)                                     theconsolidation, merger or other business combination (including, withoutlimitation, a reorganization or recapitalization) of the Company with or intoanother Person (other than (A) a consolidation, merger or other businesscombination (including, without limitation, reorganization or recapitalization)in which holders of the Company’s voting power immediately prior to thetransaction continue after the transaction to hold, directly or indirectly, thevoting power of the surviving entity or entities necessary to elect a majorityof the members of the board of directors (or their equivalent if other than acorporation) of such entity or entities, or (B) pursuant to a migratorymerger effected solely for the purpose of changing the jurisdiction ofincorporation of the Company);

 

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

 

(iii)                               a purchase,tender or exchange offer made to and accepted by the holders of more than the50% of the outstanding shares of Common Stock.

 

Nosooner than 15 days nor later than 10 days prior to the consummation of aChange of Control, but not prior to the public announcement of such Change ofControl, the Company shall deliver written notice thereof via facsimile andovernight courier to the Holder (a **“Change ofControl Notice”**).

 

(b)                                 Assumption.  Prior to the consummation of any Change ofControl, the Company will secure from any Person purchasing the Company’s assetsor Common Stock or any successor resulting from such Change of Control (in eachcase, an **“Acquiring Entity”**) awritten agreement (in form and substance satisfactory to the holders of Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding) to deliver to

 

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eachholder of Notes in exchange for such Notes, a security of the Acquiring Entityevidenced by a written instrument substantially similar in form and substanceto the Notes, including, without limitation, having a principal amount andinterest rate equal to the principal amounts and the interest rates of theNotes held by such holder, and satisfactory to the holders of Notesrepresenting at least a majority of the principal amount of the Notes thenoutstanding.  In the event that anAcquiring Entity is directly or indirectly controlled by a company or entitywhose common stock or similar equity interest is listed, designated or quotedon a securities exchange or trading market, the holders of Notes representingat least a majority of the aggregate principal amount of the Notes thenoutstanding may elect to treat such Person as the Acquiring Entity for purposesof this Section 5(b).

 

(c)                                  RedemptionRight.  At any time during the periodbeginning after the Holder’s receipt of a Change of Control Notice and endingon the date of the consummation of such Change of Control (or, in the event aChange of Control Notice is not delivered at least 10 days prior to a Change ofControl, at any time on or after the date which is 10 days prior to a Change ofControl and ending ten days after the consummation of such Change of Control),the Holder may require the Company to redeem all or any portion of this Note 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 any obligationto redeem all or any portion of this Note or to deliver the applicable Changeof Control Redemption Price unless and until the applicable Change of Controlis consummated.  The portion of this Notesubject to redemption pursuant to this Section 5 shall be redeemed by theCompany in cash at a price equal to the greater of (i) the sum of (x) theproduct of (A) the Applicable Percentage (as defined below) and (B) theConversion Amount being redeemed and (y) the amount of any accrued butunpaid Interest on such Conversion Amount being redeemed through the date ofsuch redemption payment and (ii) the product of (x) the ApplicablePercentage and (y) the sum of (1) the product of (A) theConversion Amount being redeemed multiplied by (B) the quotient determinedby dividing (I) the aggregate cash consideration and the aggregate cashvalue of any non-cash consideration per Common Share to be paid to the holdersof the Common Shares upon consummation of the Change of Control (any suchnon-cash consideration in the form of securities to be valued at the higher ofthe Closing Sale Price of such securities as of the Trading Day immediatelyprior to the consummation of such Change of Control, the Closing Sale Price onthe Trading 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) theConversion 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 thisSection 5(c) shall be made in accordance with the provisions of Section 12and shall have priority to payments to stockholders in connection with a Changeof Control.  For purposes of this Note,the term “**Applicable Percentage**” means 120% ifthe Change of Control is consummated on or before the first (1st) anniversary of theOriginal Date, 115% if the Change of Control is consummated after the first (1st) anniversary of theOriginal Date but on or before the second (2nd) anniversary of the Original Date, and 110% if theChange

 

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ofControl is consummated at any time after the second (2nd) anniversary of theOriginal Date.

 

(6)                                  RIGHTS UPONISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

 

(a)                                  Purchase Rights.  If at any time the Company grants, issues orsells 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 CorporateEvents. Prior to the consummation of any recapitalization, reorganization,consolidation, merger, spin-off or other business combination (other than aChange of Control) pursuant to which holders of Common Stock are entitled toreceive securities or other assets with respect to or in exchange for CommonStock (a **“Corporate Event”**), theCompany shall make appropriate provision to insure that the Holder willthereafter have the right to receive upon a conversion of this Note, (i) inaddition to the shares of Common Stock receivable upon such conversion, suchsecurities or other assets to which the Holder would have been entitled withrespect to such shares of Common Stock had such shares of Common Stock beenheld by the Holder upon the consummation of such Corporate Event or (ii) inlieu of the shares of Common Stock otherwise receivable upon such conversion,such securities or other assets received by the holders of Common Stock inconnection with the consummation of such Corporate Event in such amounts as theHolder would have been entitled to receive had this Note initially been issuedwith conversion rights for the form of such consideration (as opposed to sharesof Common Stock) at a conversion rate for such consideration commensurate withthe Conversion Rate.  Provision madepursuant to the preceding sentence shall be in a form and substancesatisfactory to the holders of Notes representing at least a majority of theaggregate principal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPONISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment ofConversion Price upon Issuance of Common Stock.  If and whenever on or after the IssuanceDate, the Company issues or sells, or in accordance with this Section 7(a) isdeemed to have issued or sold, any shares of Common Stock (including theissuance or sale of shares of Common Stock owned or held by or for the accountof the Company, but excluding shares of Common Stock deemed to have been issuedor sold by the Company in connection with any Excluded Security) for aconsideration per share (the **“New SecuritiesIssuance Price”**) less than a price (the **“Applicable Price”**) equal to the Conversion Price in effectimmediately prior to such issue or sale (the foregoing a **“Dilutive Issuance”**),

 

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thenimmediately after such Dilutive Issuance, the Conversion Price then in effectshall be reduced to an amount (rounded to the nearest cent) equal to the NewSecurities Issuance Price.  For purposesof determining the adjusted Conversion Price under this Section 7(a), thefollowing shall be applicable:

 

(i)                                     Issuance ofOptions.  If the Company in any mannergrants or sells any Options and the lowest price per share for which one shareof Common Stock is issuable upon the exercise of any such Option or uponconversion or exchange or exercise of any Convertible Securities issuable uponexercise of such Option is less than the Applicable Price, then such share ofCommon Stock shall be deemed to be outstanding and to have been issued and soldby the Company at the time of the granting or sale of such Option for suchprice per share.  For purposes of this Section 7(a)(i),the “lowest price per share for which one share of Common Stock is issuableupon the exercise of any such Option or upon conversion or exchange or exerciseof any Convertible Securities issuable upon exercise of such Option” shall beequal to the sum of the lowest amounts of consideration (if any) received orreceivable by the Company with respect to any one share of Common Stock upongranting or sale of the Option, upon exercise of the Option and upon conversionor exchange or exercise of any Convertible Security issuable upon exercise ofsuch Option.  No further adjustment of theConversion Price shall be made upon the actual issuance of such Common Stock orof such Convertible Securities upon the exercise of such Options or upon theactual issuance of such Common Stock upon conversion or exchange or exercise ofsuch Convertible Securities.

 

(ii)                                  Issuance ofConvertible Securities.  Ifthe Company in any manner issues or sells any Convertible Securities and thelowest price per share for which one share of Common Stock is issuable uponsuch conversion or exchange or exercise thereof is less than the ApplicablePrice, then such share of Common Stock shall be deemed to be outstanding and tohave been issued and sold by the Company at the time of the issuance of sale ofsuch Convertible Securities for such price per share.  For the purposes of this Section 7(a)(ii),the “price per share for which one share of Common Stock is issuable upon suchconversion or exchange or exercise” 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 the issuance or sale of theConvertible Security and upon the conversion or exchange or exercise of suchConvertible Security.  No furtheradjustment of the Conversion Price shall be made upon the actual issuance ofsuch Common Stock upon conversion or exchange or exercise of such ConvertibleSecurities, and if any such issue or sale of such Convertible Securities ismade upon exercise of any Options for which adjustment of the Conversion Pricehad been or are to be made pursuant to other provisions of this Section 7(a),no further adjustment of the Conversion Price shall be made by reason of suchissue or sale.  Notwithstanding anythingin this Note to the contrary, in the event that the Company agrees to decreasethe conversion price of any of its 7% Convertible Secured Promissory Notes due August 2007in connection with an agreement by the holder of any such notes to convert thesame, such decrease in the conversion price will not result in any adjustmentto the Conversion Price

 

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pursuantto this Section 7(a) of this Note.

 

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

 

(iv)                              Calculation ofConsideration Received.  Incase any Option is issued in connection with the issue or sale of othersecurities of the Company, together comprising one integrated transaction inwhich no specific consideration is allocated to such Options by the partiesthereto, the Options will be deemed to have been issued 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 anyCommon Stock, Options or Convertible Securities are issued or sold for aconsideration other than cash, the amount of the consideration other than cashreceived by the Company will be the fair value of such consideration, exceptwhere such consideration consists of securities, in which case the amount ofconsideration received by the Company will be the Closing Sale Price of suchsecurities 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 consideration other than cash or securities willbe determined jointly by the Company and the holders of Notes representing atleast a majority of the principal amounts of the 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 amajority of the principal amounts of the Notes then outstanding.  The determination of such appraiser shall bedeemed binding upon all parties absent manifest error and the fees and expensesof such appraiser shall be borne equally by the Company, on the hand, and theholders of the Notes, on the other hand.

 

(v)                                 Record Date.  If the Company takes a record of the holdersof Common Stock for the purpose of entitling them (A) to receive adividend or other distribution payable in Common Stock, Options or inConvertible Securities or (B) to subscribe for or purchase

 

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CommonStock, Options or Convertible Securities, then such record date will be deemedto be the date of the issue or sale of the shares of Common Stock deemed tohave been issued or sold upon the declaration of such dividend or the making ofsuch other distribution or the date of the granting of such right of subscriptionor purchase, as the case may be.

 

(b)                                 Adjustment ofConversion Price upon Subdivision or Combination of Common Stock.  If the Company at any time subdivides (by anystock split, stock dividend, recapitalization or otherwise) one or more classesof its outstanding shares of Common Stock into a greater number of shares, theConversion Price in effect immediately prior to such subdivision will beproportionately reduced.  If the Companyat any time combines (by combination, reverse stock split or otherwise) one ormore classes of its outstanding shares of Common Stock into a smaller number ofshares, the Conversion Price in effect immediately prior to such combinationwill be proportionately increased.

 

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

 

(9)                                  COMPANY’S RIGHTOF MANDATORY CONVERSION.  (a) MandatoryConversion.  If at any time from andafter the Issuance Date, the Weighted Average Price of the Common Stock exceeds250% of the conversion price of the Original Notes as of the Original Date(subject to appropriate adjustments for stock splits, stock dividends, stockcombinations and other similar transactions after the Original Date) for eachof any 20 consecutive Trading Days (the **“MandatoryConversion Measuring Period”**) and the Conditions to MandatoryConversion (as set forth in Section 9(c)) are satisfied or waived inwriting by the Holder, the Company shall have the right to require the Holderto convert all or any such portion of the Conversion Amount of this Notedesignated in the Mandatory Conversion Notice into fully paid, validly issuedand nonassessable shares of Common Stock in accordance with Section 3(c) hereofat the Conversion Rate as of the Mandatory Conversion Date (as defined below)(a “**Mandatory Conversion**”).  The Company may exercise its right to requireconversion under this Section 9(a) by delivering within not more thanfive Trading Days following the end of such Mandatory Conversion MeasuringPeriod a written notice thereof by facsimile and overnight courier to all, but notless than 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**”).  The Mandatory Conversion Notice shall be irrevocable.

 

(b)                                 Pro RataConversion Requirement.  Ifthe Company elects to cause a conversion of all or any portion of theConversion Amount of this Note pursuant to Section 9(a),

 

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thenit must simultaneously take the same action with respect to the Other Notes(except that the Company is not required to take the same action with respectto 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 cause the conversion of this Note pursuant to Section 9(a) (orsimilar provisions under the Other Notes) with respect to less than all of theConversion Amounts of the Notes then outstanding, then the Company shallrequire conversion of a Conversion Amount from each of the holders of the Notesequal to the product of (I) the aggregate Conversion Amount of Notes whichthe Company has elected to cause to be converted pursuant to Section 9(a),multiplied by (II) the fraction, the numerator of which is the sum of theaggregate principal amount of the Original Notes purchased by such holderpursuant to the Securities Purchase Agreement and the denominator of which isthe sum of the aggregate principal amount of the Original Notes purchased byall holders pursuant to the Securities Purchase Agreement (except to the extentlimited by Section 3(d) in this Note or similar provisions under theOther Notes) (such fraction with respect to each holder is referred to as its “**Allocation Percentage**,” and such amountwith respect to each holder is referred to as its “**Pro Rata Conversion Amount**”). In the event that the initial holder of any Notes shall sell orotherwise transfer any of such holder’s Notes, the transferee shall beallocated a pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state (i) theTrading Day selected for the Mandatory Conversion in accordance with Section 9(a),which Trading Day shall be at least 10 Business Days but not more than 60 BusinessDays following the Mandatory Conversion Notice Date (the “**Mandatory Conversion Date**”), (ii) theaggregate Conversion Amount of the Notes which the Company has elected to besubject to mandatory conversion from all of the holders of the Notes pursuantto this Section 9 (and analogous provisions under the Other Notes), (iii) eachholder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes theCompany has elected to cause to be converted pursuant to this Section 9(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 Amountsconverted by the Holder after the Mandatory Conversion Notice Date shall reducethe Conversion Amount of this Note required to be converted on the MandatoryConversion Date.  If the Company haselected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shallapply, to the extent applicable, as if the Company and the Transfer Agent hadreceived from the Holder on the Mandatory Conversion Date a Conversion Noticewith respect to the Conversion Amount being converted pursuant to the MandatoryConversion.

 

(c)                                  Conditions toMandatory Conversion.  Forpurposes of this Section 9, “**Conditionsto Mandatory Conversion**” means****thefollowing conditions: (i) during the period beginning on the date that issix months prior to the Mandatory Conversion Date and ending on and includingthe Mandatory Conversion Date, the Company shall have delivered shares ofCommon Stock upon any conversion of Conversion Amounts as set forth in Section 3(c)(i);(ii) on each day during the period beginning on the first Trading Day ofthe Mandatory Conversion Measuring Period and ending on and including the MandatoryConversion Date, the Common Stock shall be traded on the Principal Market, theNASDAQ Global Market or Global Select Market, the NASDAQ Capital Market, theNew York Stock Exchange, or the American Stock Exchange; (iii) on theMandatory Conversion Date either (x) the Registration Statement or

 

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RegistrationStatements contemplated by the Registration Rights Agreement shall be effectiveand available for the sale for all of the Registrable Securities in accordancewith the terms of the Registration Rights Agreement or (y) all shares ofCommon Stock issuable upon conversion of the Notes shall be eligible for salewithout restriction and without the need for registration under any applicablefederal or state securities laws; (iv) on the Mandatory Conversion Date,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 agrees thatthe 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 OFAUTHORIZED SHARES.

 

(a)                                  Reservation.  The Company shall initially reserve out ofits authorized and unissued Common Stock a number of shares of Common Stock foreach of the Notes equal to 100% of the Conversion Rate with respect to theConversion Amount of each such Note as of the Issuance Date.  Thereafter, the Company, so long as any ofthe Notes are outstanding, shall use commercially reasonable efforts to reserveand keep available out of its authorized and unissued Common Stock, solely forthe purpose of effecting the conversion of the Notes, 100% of the number ofshares of Common Stock as shall from time to time be necessary to effect theconversion of all of the Notes then outstanding (without regard to anylimitations on conversions) (the **“RequiredReserve Amount”**).  The numberof shares of Common Stock reserved for conversions of the Notes shall beallocated pro rata among the holders of the Notes based on the principal amountof the Notes held by each holder at the time of Issuance Date or increase inthe number of reserved shares, as the case may be (the **“Authorized Share Allocation”**).  In the event that a holder shall sell orotherwise transfer any of such holder’s Notes, each transferee shall beallocated a pro rata portion of such holder’s Authorized Share Allocation.  Any shares of Common Stock reserved andallocated to any Person which ceases to hold any Notes shall be allocated tothe remaining holders of Notes, pro rata based on the principal amount of theNotes then held by such holders.

 

(b)                                 InsufficientAuthorized Shares.  If at anytime while any of the Notes remain outstanding the Company does not have asufficient number of authorized and unreserved shares of Common Stock tosatisfy its obligation to reserve for issuance upon conversion of the Notes atleast a number of shares of Common Stock equal to the Required Reserve Amount(an **“Authorized Share Failure”**),then the Company shall as soon as practicable use commercially reasonableefforts to increase the Company’s authorized shares of Common Stock to anamount sufficient to allow the Company to reserve the Required Reserve Amountfor the Notes then outstanding.

 

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(12)                            HOLDER’SREDEMPTIONS.

 

(a)                                  Mechanics.  In the event that the Holder has sent anEvent of Default Redemption Notice or a Change of Control Redemption Notice tothe Company pursuant to Section 4(b) or Section 5(c),respectively (each, a **“Redemption Notice”**),the Holder shall promptly submit this Note to the Company.  If the Holder has submitted an Event ofDefault Redemption Notice in accordance with Section 4(b), the Companyshall deliver the applicable Event of Default Redemption Price to the Holder withinfive Business Days after the Company’s receipt of the Holder’s Event of DefaultRedemption Notice.  If the Holder hassubmitted a Change of Control Redemption Notice in accordance with Section 5(c),the Company shall deliver the applicable Change of Control Redemption Price tothe Holder concurrently with the consummation of such Change of Control if suchnotice is received prior to the consummation of such Change of Control andwithin five Business Days after the Company’s receipt of such notice if suchnotice is received after the consummation of such Change of Control.  With respect to an Amortization Redemption,the Company shall deliver the applicable Amortization Redemption Amount to theHolder within five Business Days after the end of the applicable month for suchAmortization Redemption.  In the event ofa redemption of less than all of the Conversion Amount of this Note, theCompany shall promptly cause to be issued and delivered to the Holder, at theHolder’s request, a new Note (in accordance with Section 19(d))representing the outstanding Principal which has not been redeemed.  In the event that the Company does not paythe Event of Default Redemption Price, the Change of Control Redemption Price,or the Amortization Redemption Amount (each, the **“Redemption Price”**), as applicable, to the Holder (or deliverany Common Stock to be issued pursuant to a Redemption Notice) within the timeperiod required, at any time thereafter and until the Company pays such unpaidRedemption Price (and issues any Common Stock required pursuant to a RedemptionNotice) in full, the Holder shall have the option, in lieu of redemption, torequire the Company to promptly return to the Holder all or any portion of thisNote representing the Conversion Amount that was submitted for redemption andfor which the applicable Redemption Price (or any Common Stock required to beissued pursuant to a Redemption Notice) has not been paid.  Upon the Company’s receipt of such notice, (x) theRedemption Notice shall be null and void with respect to such ConversionAmount, (y) the Company shall immediately return this Note, or issue a newNote (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 effecton the date on which the Redemption Notice is voided and (B) the ClosingBid Price on the date on which the Redemption Notice is voided.

 

(b)                                 Redemption byOther Holders.  Upon theCompany’s receipt of notice from any of the holders of the Other Notes forredemption or repayment as a result of an event or occurrence substantiallysimilar to the events or occurrences described in Section 4(b) or Section 5(c) (each,an **“Other Redemption Notice”**), theCompany shall immediately forward to the Holder by facsimile a copy of suchnotice.  If the Company receives aRedemption Notice and one or more Other Redemption Notices during the sevenBusiness Day period beginning on and including the date which is three BusinessDays prior to the Company’s receipt of the

 

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

 

(13)                            SUBORDINATIONTO SENIOR INDEBTEDNESS.

 

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

 

(b)                                 No Payment ifDefault Under Senior Indebtedness.

 

(i)                                     [Intentionallyleft blank]

 

(ii)                                  No cash paymenton account of Principal or Redemption Price of, or Interest on, this Note orany other payment payable with respect to this Note shall be made, and noportion of this Note shall be redeemed or purchased directly or indirectly bythe Company, if at the time of such payment or purchase or immediately aftergiving effect thereto, (A) a default in the payment of principal, premium,if any, interest or other obligations in respect of any Senior Indebtednesshaving either an outstanding principal balance or a commitment to lend greaterthan $500,000 (“**Designated Senior Debt**”) occursand is continuing (or, in the case of Senior Indebtedness for which there is aperiod of grace, in the event of such a default that continues beyond theperiod of grace, if any, specified in the instrument evidencing such SeniorIndebtedness) (a “**Payment Default**”),unless and until such Payment Default shall have been cured or waived or shallhave ceased to exist or (B) the Company shall have received notice (a “**Payment Blockage Notice**”) from the holder or holders ofDesignated Senior Debt that there exists under such Designated Senior Debt adefault, which shall not have been cured or waived, permitting the holder orholders thereof to declare such Designated Senior Debt due and payable, butonly for the period (the “**Payment Blockage Period**”)commencing on the date of receipt of the Payment Blockage Notice and ending onthe earlier of (a) the date such default shall have been cured or waived,or (b) the 180th day immediately following the Company’s receipt of suchPayment Blockage Notice.  The Companyshall resume payments on and distributions in respect of this Note, includingany past scheduled payments of the principal of (and premium, if any) andinterest on this Note to which the

 

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Holder would have beenentitled but for the provisions of this Section 13(b)(ii) in the caseof a Payment Default, within five (5) Business Days of the date upon whichsuch Payment Default is cured or waived or ceases to exist (and if payment ismade within such time period, any Event of Default with respect to suchnonpayment shall be cured).  In addition,notwithstanding clauses (A) and (B) of this subsection (ii), unlessthe holders of Designated Senior Debt shall have accelerated the maturity ofsuch Designated Senior Debt or there is a Payment Default, the Company shallresume payments on this Note within (5) Business Days after the end ofeach 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 PaymentBlockage Period shall be in effect.

 

(c)                                  Payment uponDissolution, Etc.  In the eventof any bankruptcy, insolvency, reorganization, receivership, composition,assignment for benefit of creditors or other similar proceeding initiated by oragainst the Company or any dissolution or winding up or total or partialliquidation or reorganization of the Company (being hereinafter referred to asa “**Proceeding**”), the Holder agreesthat such Holder shall, upon request of a holder of Senior Indebtedness, and atsuch holder of Senior Indebtedness’ own expense, take all reasonable actions(including but not limited to the execution and filing of documents and thegiving of testimony in any Proceeding, whether or not such testimony could havebeen compelled by process) necessary to prove the full amount of all its claimsin any Proceeding, and the Holder shall not waive any claim in any Proceedingwithout the written consent of such holder. If the Holder does not file a proper proof of claim or proof of debt inthe form required in any Proceeding at least thirty (30) days before theexpiration of the time to file such claim, the holders of any SeniorIndebtedness are hereby authorized to file an appropriate claim for and onbehalf 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) contestthe validity of any Senior Indebtedness or any collateral therefor orguaranties thereof, (ii) contest the relative rights and duties of any ofthe lenders 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’ obligationsand agreements 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 received, to retain any payment or distribution on account ofthis Note, and upon any such Proceeding, any payment or distribution of assetsof the Company of any kind or character, whether in cash, property orsecurities, to which the Holder would be entitled except for the

 

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provisions of this Section 13 shall bepaid by the Company or by any receiver, trustee in bankruptcy, liquidatingtrustee, agent or other Person making such payment or distribution, or by theHolder who shall have received such payment or distribution, directly to theholders of the Senior Indebtedness (pro rata to each such holder on the basisof the respective amounts of such Senior Indebtedness held by such holder) ortheir representatives to the extent necessary to pay all such SeniorIndebtedness in full after giving effect to any concurrent payment ordistribution to or for the holders of such Senior Indebtedness, before anypayment or distribution is made to the Holder or any holders of the Notes.

 

(d)                                 Payments onNotes.  Subject to Sections 13(b) and13(c), the Company may make regularly scheduled payments of the Principal of,or Interest on, this Note or any other payment payable with respect to thisNote, if at the time of payment, and immediately after giving effect thereto,there exists no Payment Default or a Payment Blockage Period.

 

(e)                                  Certain Rights.  Nothing contained in this Section 13 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 allSenior Indebtedness, the rights of the Holder shall be subrogated to the rightsof the holders of Senior Indebtedness to receive payments or distributions ofthe assets of the Company made on such Senior Indebtedness until all principaland interest on this Note shall be paid in full in cash; and for purposes ofsuch subrogation, no payments or distributions to the holders of SeniorIndebtedness of any cash, property or securities to which the Holder would beentitled except for the subordination provisions of this Section 13 shall,as between the Holder and the Company and/or its creditors other than theholders of the Senior Indebtedness, be deemed to be a payment on account of theSenior Indebtedness.

 

(g)                                 Rights ofHolders Unimpaired.  Theprovisions of this Section 13 are and are intended solely for the purposesof defining the relative rights of the Holder and the holders of SeniorIndebtedness and nothing in this Section 13 shall impair, as between theCompany and the Holder, the obligation of the Company, which is unconditionaland absolute, to pay to the Holder the principal thereof (and premium, if any)and interest thereon, in accordance with the terms of this Note.

 

(h)                                 Holders of SeniorIndebtedness.  Theseprovisions regarding subordination will constitute a continuing offer to allPersons who, in reliance upon such provisions, become holders of, or continueto hold, Senior Indebtedness; such provisions are made for the benefit of theholders of Senior Indebtedness, and such holders are hereby made obligees undersuch provisions to the same extent as if they were named therein, and they orany of them may proceed to enforce such subordination and no amendment ormodification of the provisions contained herein shall diminish the rights ofsuch holders unless such holders have

 

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agreed in writing thereto.  The holders of Senior Indebtedness may, atany time 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) subjectto the limitations set forth herein, increase the amount of, change the manner,terms or place of payment of, or renew or alter, any Senior Indebtedness, 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 Heldin Trust.  In theevent that notwithstanding the foregoing, any payment or distribution of assetsof the Company of any kind or character, whether in cash, property orsecurities (including, without limitation, by way of setoff or otherwise)prohibited by the provisions hereof shall be received by the Holder before allSenior Indebtedness if paid in full in cash, such payment or distribution shallbe held in trust for the benefit of and shall be paid over or delivered to theholders of Senior Indebtedness, as their respective interests may appear, ascalculated by the Company, for application to, or to be held as collateral for,the payment of any Senior Indebtedness remaining unpaid to the extent necessaryto pay all Senior Indebtedness in full in cash after giving effect to anyconcurrent payment or distribution to or for the holders of such SeniorIndebtedness.

 

(j)                                     Blockage ofRemedies.  During anyPayment Default or any Payment Blockage Period, if an Event of Default hasoccurred and is continuing under this Note, the Holder will not commence orjoin with any creditor of the Company in asserting or commencing anyproceedings to collect or enforce its rights hereunder or take any action toforeclose or realize upon the indebtedness hereunder for a period beginning onthe date of such Event of Default and ending on the first to occur of (i) thedate that is 180 days following the date that the holders of the SeniorIndebtedness are notified of such Event of Default or (ii) the date suchPayment Default is cured, waived or ceases to exist or the date such PaymentBlockage Period ends, as the case may be; provided, however, thatuntil all of the Senior Indebtedness shall have been paid in full in cash, anypayments, distributions or proceeds received by the Holder resulting from theexercise of any action to collect or enforce any right or remedy available tothe Holder shall be subject to the terms of this Note.

 

(k)                                  SubsequentSenior Indebtedness Requested Modifications.  In connection with the incurrence of anyfuture Senior Indebtedness, the Holder agrees that it shall act reasonably andnegotiate in good faith any modifications to the provisions of this Section 13reasonably requested by the holder of such Senior Indebtedness; provided thatnothing in this section shall restrict the holders of Notes representing atleast a majority of the aggregate principal amount of the Notes thenoutstanding from changing or amending this Section 13 pursuant to Section 17hereof.

 

(l)                                     Failure to MakePayment.  In the event that the Companyis

 

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prohibited or restricted from making anypayment required under under this Note by reason of the provisions of this Section 13,such prohibition or restriction shall not preclude the failure to make suchpayment from being an Event of Default under Section 4(a) of thisNote.

 

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

 

(15)                            RANK;ADDITIONAL INDEBTEDNESS; LIENS.

 

## (a)                                  Rank.  All payments due under this Note (a) shallrank *pari passu* with all OtherNotes (**“Pari Passu Indebtedness”**),(b) shall be subordinate in right of payment to the prior payment of allexisting and future Senior Indebtedness and (c) shall be senior to allother Indebtedness of the Company and its Subsidiaries, other than SeniorIndebtedness and Pari Passu Indebtedness.

##  

## (b)                                 Incurrence of SeniorIndebtedness.  So long asthis Note is outstanding, the Company shall not, and the Company shall notpermit any of its Subsidiaries to, directly or indirectly, incur or guarantee,assume or suffer to exist any Indebtedness which shall rank senior to the Notesother than Senior Indebtedness.

##  

## (c)                                  Existence of Liens.  So long as this Note is outstanding, theCompany shall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, allow or suffer to exist any mortgage, lien, pledge,charge, security interest or other encumbrance upon or in any property orassets (including accounts and contract rights) owned by the Company or any ofits Subsidiaries (collectively, “**Liens**”)other than Permitted Liens.  As usedherein, “**Permitted Liens**” means (i) Liensincurred to secure Senior Indebtedness, (ii) Liens on fixed or capitalassets acquired, constructed or improved by the Company or any Subsidiary, tothe extent of Indebtedness incurred within thirty days for such acquisition,construction or improvement and incurred within thirty days of suchacquisition, construction or improvement, (iii) purchase money Liens, or (iv) carriers’,warehousemen’s, mechanics’, materialmen’s, repairmen’s and other similar Liensimposed by law.

##  

## (d)                                 Restricted Payments.  The Company shall not, and the Company shallnot permit any of its Subsidiaries to, directly or indirectly, redeem, defease,repurchase, repay or make any payments in respect of, by the payment of cash 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, whetherby way of payment in respect of principal of (or premium, if any) or intereston, such Indebtedness if at the time such payment is due or is otherwise madeor, after giving effect to such payment, an event constituting an Event ofDefault has occurred and is continuing.

##  

(16)                            PARTICIPATION.  The Holder, as the holder of this Note, shallbe

 

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entitled to such dividends paid anddistributions made to the holders of Common Stock (each, a **“Distribution”**), in each such case to theextent of the Distribution as if the Holder had converted this Note into CommonStock (without regard to any limitations on conversion herein or elsewhere) andhad held such shares of Common Stock on the record date for such dividends anddistributions.  Payments (if any) underthe preceding sentence shall be made concurrently with the dividend ordistribution to the holders of Common Stock.

 

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

 

(18)                            TRANSFER.  This Note may be offered, sold, assigned ortransferred by the Holder without the consent of the Company, subject only tothe provisions of Section 2(f) of the Securities Purchase Agreement.

 

(19)                            REISSUANCE OFTHIS NOTE.

 

(a)                                  Transfer.  If this Note is to be transferred, the Holdershall surrender this Note to the Company, whereupon the Company will forthwithissue and deliver upon the order of the Holder a new Note (in accordance with Section 19(d)),registered as the Holder may request, representing the outstanding 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 beingtransferred.  The Holder and anyassignee, by acceptance of this Note, acknowledge and agree that, by reason ofthe 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 orMutilated Note.  Uponreceipt by the Company of evidence reasonably satisfactory to the Company ofthe loss, theft, destruction or mutilation of this Note, and, in the case ofloss, theft or destruction, of any indemnification undertaking by the Holder tothe Company in customary form and, in the case of mutilation, upon surrenderand cancellation of this Note, the Company shall execute and deliver to theHolder a new Note (in accordance with Section 19(d)) representing theoutstanding Principal.

 

(c)                                  NoteExchangeable for Different Denominations.  This Note is exchangeable, upon the surrenderhereof by the Holder at the principal office of the Company, for a new Note orNotes (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 suchoutstanding Principal as is designated by the Holder at the time of suchsurrender.

 

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(d)                                 Issuance of NewNotes.  Whenever the Company isrequired to issue a new Note pursuant to the terms of this Note, such new Note (i) shallbe of like tenor with this Note, (ii) shall represent, as indicated on theface of such new Note, the Principal remaining outstanding (or in the case of anew Note being issued pursuant to Section 19(a) or Section 19(c),the Principal designated by the Holder which, when added to the principalrepresented by the other new Notes issued in connection with such issuance,does not exceed the Principal remaining outstanding under this Note immediatelyprior to such issuance of new Notes), (iii) shall have an issuance date,as indicated on the face of such new Note, which is the same as the IssuanceDate of this Note, (iv) shall have the same rights and conditions as thisNote, and (v) shall represent accrued Interest on the Principal andInterest of this Note, from the Issuance Date.

 

(20)                            REMEDIES,CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall becumulative and in addition to all other remedies available under this Note, theSecurities Purchase Agreement and the Registration Rights Agreement, at law orin equity (including a decree of specific performance and/or other injunctiverelief), and nothing herein shall limit the Holder’s right to pursue actual andconsequential damages for any failure by the Company to comply with the termsof this Note.  Amounts set forth orprovided for herein with respect to payments, conversion and the like (and thecomputation thereof) shall be the amounts to be received by the Holder andshall not, except as expressly provided herein, be subject to any otherobligation of the Company (or the performance thereof).  The Company acknowledges that a breach by itof its obligations hereunder will cause irreparable harm to the Holder and thatthe remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in theevent of any such breach or threatened breach, the Holder shall be entitled, inaddition to all other available remedies, to an injunction restraining anybreach, without the necessity of showing economic loss and without any bond orother security being required.

 

(21)                            PAYMENT OFCOLLECTION, ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in the handsof an attorney for collection or enforcement or is collected or enforcedthrough any legal proceeding or the Holder otherwise takes action to collectamounts due under this Note or to enforce the provisions of this Note or (b) thereoccurs any bankruptcy, reorganization, receivership of the Company or otherproceedings affecting Company creditors’ rights and involving a claim underthis Note, then the Company shall pay the costs incurred by the Holder for suchcollection, enforcement or action or in connection with such bankruptcy,reorganization, receivership or other proceeding, including, but not limitedto, attorneys’ fees and disbursements.

 

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

 

(23)                            FAILURE ORINDULGENCE NOT WAIVER.  Nofailure or delay on

 

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the part of the Holder in the exercise of anypower, right or privilege hereunder shall operate as a waiver thereof, nor shallany single or partial exercise of any such power, right or privilege precludeother or further exercise thereof or of any other right, power or privilege.

 

(24)                            DISPUTERESOLUTION.  In the caseof a dispute as to the determination of the Redemption Price or the arithmeticcalculation of the Conversion Rate or the Redemption Price, the Company shallsubmit the disputed determinations or arithmetic calculations via facsimilewithin one Business Day of receipt of the Conversion Notice or RedemptionNotice or other event giving rise to such dispute, as the case may be, to theHolder.  If the Holder and the Companyare unable to agree upon such determination or calculation within one BusinessDay of such disputed determination or arithmetic calculation being submitted tothe Holder, then the Company shall, within one Business Day submit viafacsimile (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 arithmeticcalculation of the Conversion Rate or the Redemption Price to the Company’sindependent, outside accountant.  TheCompany, at the Company’s expense, shall cause the investment bank or theaccountant, as the case may be, to perform the determinations or calculationsand notify the Company and the Holder of the results no later than fiveBusiness Days from the time it receives the disputed determinations orcalculations.  Such investment bank’s oraccountant’s determination or calculation, as the case may be, shall be bindingupon all parties absent demonstrable error.

 

(25)                            NOTICES;PAYMENTS.

 

(a)                                  Notices.  Whenever notice is required to be given underthis Note, unless otherwise provided herein, such notice shall be given inaccordance with Section 9(f) of the Securities PurchaseAgreement.  The Company shall provide theHolder with prompt written notice of all actions taken pursuant to this Note,including in reasonable detail a description of such action and the reasontherefore.  Without limiting thegenerality of the foregoing, the Company will give written notice to the Holder(i) immediately upon any adjustment of the Conversion Price, setting forthin reasonable detail, and certifying, the calculation of such adjustment and (ii) atleast twenty  days prior to the date onwhich the Company closes its books or takes a record (A) with respect toany dividend or distribution upon the Common Stock, (B) with respect toany pro rata subscription offer to holders of Common Stock or (C) fordetermining rights to vote with respect to any Change of Control, dissolutionor liquidation, provided in each case that such information shall be made knownto the public prior to or in conjunction with such notice being provided to theHolder.  Notwithstanding the foregoing, Section 4(i) ofthe Securities Purchase Agreement shall apply to all notices given pursuant tothis Note.

 

(b)                                 Payments.  Whenever any payment of cash is to be made bythe Company to any Person pursuant to this Note, such payment shall be made inlawful money of the United States of America by a check drawn on the account ofthe Company and sent via overnight courier service to such Person at suchaddress as previously provided to the Company

 

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in writing (which address, in the case ofeach of the Purchasers, shall initially be as set forth on the Schedule ofBuyers attached to the Securities Purchase Agreement); provided that the Holdermay elect to receive a payment of cash via wire transfer of immediatelyavailable funds by providing the Company with prior written notice setting outsuch request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due bythe terms of this Note is due on any day which is not a Business Day, the sameshall instead be due on the next succeeding day which is a Business Day and, inthe case of any Interest Date which is not the date on which this Note is paidin full, the extension of the due date thereof shall not be taken into accountfor purposes of determining the amount of Interest due on such date.

 

(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 OFNOTICE.  To the extent permitted bylaw, the Company hereby waives demand, notice, protest and all other demandsand notices in connection with the delivery, acceptance, performance, defaultor enforcement of this Note and the Securities Purchase Agreement.

 

(28)                            GOVERNING LAW.  This Note shall be construed and enforced inaccordance 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)                            CERTAINDEFINITIONS.  Forpurposes of this Note, the following terms shall have the following meanings:

 

(a)                                  **“Approved Stock Plan”** means any employee benefit,option or incentive plan which has been approved by the Board of Directors ofthe Company, 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 FinancialMarkets.

 

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

 

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

 

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October 1 and ending on and including December 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.,New York 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 theNational Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculatedfor a security on a particular date on any of the foregoing bases, the ClosingBid Price or the Closing Sale Price, as the case may be, of such security onsuch date shall be the fair market value as mutually determined by the Companyand 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 determinations to be appropriatelyadjusted for any stock dividend, stock split, stock combination or othersimilar transaction during the applicable calculation period.

 

(f)                                    [Intentionallyleft blank]

 

(g)                                 **“Contingent Obligation”** means, as to any Person,any direct or indirect liability, contingent or otherwise, of that Person withrespect to any indebtedness, lease, dividend or other obligation of anotherPerson if the primary purpose or intent of the Person incurring such liability,or the primary effect thereof, is to provide assurance to the obligee of suchliability that such liability will be paid or discharged, or that anyagreements relating thereto will be complied with, or that the holders of suchliability will be protected (in whole or in part) against loss with respectthereto.

 

(h)                                 “**Convertible Securities**” means any stock orsecurities (other than Options) directly or indirectly convertible into orexercisable or exchangeable for Common Stock.

 

(i)                                     **“Excluded Securities”** means any shares of CommonStock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) uponconversion of the Notes and the Other Notes; (iii) upon conversion of anyOptions or Convertible Securities which are outstanding on the Issuance Date, (iv) pursuantto or in connection with commercial credit arrangements, equipment leasefinancings, acquisitions of other assets or businesses, strategic

 

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transactions not primarily for financingpurposes, or similar transactions into which the Company may enter with anon-affiliate.

 

(j)                                     **“Indebtedness”** of any Person means, without duplication (A) allindebtedness 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 bynotes, bonds, debentures or similar instruments, including obligations soevidenced incurred in connection with the acquisition of property, assets orbusinesses, (E) all indebtedness created or arising under any conditionalsale or other title retention agreement, or incurred as financing, in eithercase with respect 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 acapital lease, (G) off-balance sheet liabilities retained in connectionwith asset securitization programs, synthetic leases, sale and leasebacktransactions or other similar obligations arising with respect to any othertransaction which is the functional equivalent of or takes the place ofborrowing but which does not constitute a liability on the consolidated balancesheet of such Person and its subsidiaries, and (H) all indebtednessreferred to in clauses (A) through (G) above secured by (or for whichthe holder of such Indebtedness has an existing right, contingent or otherwise,to be secured by) any mortgage, lien, pledge, charge, security interest orother encumbrance upon or in any property or assets (including accounts andcontract rights) owned by any Person, even though the Person which owns suchassets or property has not assumed or become liable for the payment of suchindebtedness, and (I) all Contingent Obligations in respect ofindebtedness or obligations of others of the kinds referred to in clauses (A) through(H) above.

 

(k)                                  **“Issuance Date”** means October 1, 2007.

 

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

 

(m)                               **“Person”** means an individual, a limited liability company, apartnership, a joint venture, a corporation, a trust, an unincorporatedorganization, any other entity  and agovernment or any department or agency thereof.

 

(n)                                 “**Principal Market**” means the OTC BulletinBoard.

 

(o)                                 “**Registration Rights Agreement”** means thatcertain Registration Rights Agreement, dated January 3, 2007, between theCompany and the initial holders of the Interest Notes.

 

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

 

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Commission.

 

(q)                                 **“Securities Purchase Agreement”** means that certainSecurities Purchase Agreement, dated January 3, 2007, between the Companyand the initial holders of the Original Notes pursuant to which the Companyissued the Original Notes.

 

(r)                                    **“Senior Indebtedness”** means the principal of (andpremium, if any), interest on, and all fees and other amounts (including,without limitation, any reasonable costs, enforcement expenses (includingreasonable legal fees and disbursements, collateral protection expenses andother reimbursement 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 upto a maximum 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.  For the avoidance of doubt, SeniorIndebtedness shall not include the debt which is required to be paid by theCompany pursuant to Section 4(i) of the Securities PurchaseAgreement.

 

(s)                                  [Intentionallyleft blank]

 

(t)                                    **“Trading Day”** means any day on which the Common Stock is tradedon the Principal Market, or, if the Principal Market is not the principaltrading market for the Common Stock, then on the principal securities exchangeor securities market on which the Common Stock is then traded; provided that “TradingDay” shall not include any day on which the Common Stock is scheduled to tradeon such exchange or market for less than 4.5 hours or any day that the CommonStock is suspended from trading during the final hour of trading on suchexchange or market (or if such exchange or market does not designate in advancethe closing time of trading on such exchange or market, then during the hourending at 4:00:00 p.m., New York Time).

 

(u)                                 [intentionallyleft blank]

 

(v)                                 **“Weighted Average Price”** means, for any security asof any date, the dollar volume-weighted average price for such security on thePrincipal Market during the period beginning at 9:30:01 a.m., New YorkTime (or such other time as the Principal Market publicly announces is theofficial open of trading), and ending at 4:00:00 p.m., New York Time (orsuch other time as the Principal Market publicly announces is the officialclose of trading) as reported by Bloomberg through its “Volume at Price”functions, or, if the foregoing does not apply, the dollar volume-weightedaverage price 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 (orsuch other time as such market publicly

 

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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 Price cannot becalculated for a security on a particular date on any of the foregoing bases,the Weighted Average Price of such security on such date shall be the fairmarket value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable toagree upon the fair market value of such security, then such dispute shall beresolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stockdividend, stock split, stock combination or other similar transaction duringthe applicable calculation period.

 

**[Signature Page Follows]**

 

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

 
| ** ** | **LIQUIDMETAL  TECHNOLOGIES, INC.** |
|------------|-------------------------------------|
|       |                                |
|       |                                |
|       | By:                                 |   |
|       |                                | Name: | Gerald E. Morrow |
|       |                                | Title: | Chief Financial 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 pursuant to the Note, the undersigned herebyelects to convert the Conversion Amount (as defined in the Note) of the Noteindicated below into shares of Common Stock, par value $0.001 per share (the **“Common Stock”**), of the Company as of thedate specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount to be converted:

 

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

 

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Account Number:

 (if electronic bookentry transfer)

 

Transaction Code Number:

 (if electronic bookentry 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 Stock inaccordance with the Transfer Agent Instructions dated January 3, 2007 fromthe Company.

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

 

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