Exhibit 10.2


 


NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS.  THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.  ANY TRANSFEREE OF THIS
NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND
19(a) HEREOF.  THE PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE
HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.


 


8% SENIOR SECURED CONVERTIBLE NOTE


 


	
  Issuance
  Date: May 1, 2009

  	
  Principal: U.S.
  $[                      ]

  



 


 


FOR VALUE RECEIVED, LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation (the “Company”), hereby promises to pay to the
order of [INSERT HOLDER] or registered assigns (“Holder”) the amount set out above as the Principal (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when
due, whether upon the Maturity Date (as defined below), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on
any outstanding Principal at the rate of interest as determined pursuant to Section 2,
from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due
and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof).  This
8% Senior Secured Convertible Note (including all 8% Senior Secured Convertible
Notes issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of 8% Senior
Secured Convertible Notes (collectively, the “Notes”
and such other 8% Senior Secured Convertible Notes, the “Other Notes”) issued on the Issuance Date
pursuant to the Securities Purchase and Exchange Agreement (as defined
below).  Certain capitalized terms are
defined in Section 29.


 


(1)           MATURITY.  On January 3, 2011 (the “Maturity Date”), the Company shall pay to
the Holder an amount in cash representing all outstanding Principal and accrued
and unpaid Interest, and following receipt of such payment, the Holder shall
mark this Note as “Cancelled” and shall surrender such cancelled Note to the
Company by courier, registered mail, or other traceable means.  The Company may, upon thirty (30) calendar
days prior written notice to Holder and at the sole election of the Company,
prepay this Note in whole or in part for a cash


 

















 


redemption
price equal to: (i) if the cash redemption price is being paid, in whole
or in part, from the proceeds of sales of the Company’s assets, which shall
include fees received from licensing the Company’s intellectual property
assets, One Hundred Percent (100%) of the portion of the principal amount being
redeemed plus all accrued and unpaid interest on the portion of the principal
amount being redeemed or (ii) if the cash redemption price is being paid
solely from the Company’s income from continuing operations, One Hundred Three
Percent (103%) of the portion of the principal amount being redeemed plus all
accrued and unpaid interest on the portion of the principal amount being
redeemed; provided that (as to both clauses (i) and (ii) above)
following such notice the Holder may convert all or any part of the portion of
the Note to be redeemed so long as the Company receives a duly executed Conversion
Notice pursuant to Section 3 of this Note prior to the date on which
prepayment is actually made.


 


(2)           INTEREST; INTEREST RATE.  Interest on this Note shall commence accruing
on the Issuance Date and shall be computed on the basis of a 365-day year and
actual days elapsed and shall be payable in arrears on the first Business Day
of October and April during the period beginning on the Issuance Date
and ending on, and including, the Maturity Date (each, an “Interest Date”).  Interest shall be payable on each Interest
Date at the option of the Company (i) in cash at the rate of 8.00% per
annum (the “Cash Interest Rate”)
or (ii) at the rate of 10.00% per annum (the “Note Interest Rate”, and together with the Cash Interest
Rate, referred to sometimes herein as the “Interest
Rate”) in the form of one or more additional 8% Senior Secured
Convertible Notes, upon the same terms and conditions of the form of this Note,
in the principal amount of such Interest. 
Prior to the payment of Interest on an Interest Date, Interest on this
Note shall accrue at the Cash Interest Rate and be payable by way of inclusion
of the Interest in the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event of
Default, the Interest Rate shall be increased so that the Cash Interest Rate
shall be twelve percent (12.00%) per annum and the Note Interest Rate per annum
shall be fifteen percent (15%) per annum. 
In the event that such Event of Default is subsequently cured, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated at such
increased rate during the continuance of such Event of Default shall continue
to apply to the extent relating to the days after the occurrence of such Event
of Default through and including the date of cure of such Event of Default.


 


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


 


(a)           Conversion Right.  Subject to the provisions of Section 3(d),
at any time or times on or after the Issuance Date, the Holder shall be
entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined below) into fully paid and nonassessable shares of Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined
below).  The Company shall not issue any
fraction of a share of Common Stock upon any conversion.  If the issuance would result in the issuance
of a fraction of a share of Common Stock, the Company shall round such fraction
of a share of Common Stock up to the nearest


 


2

















 


whole
share.  The Company shall pay any and all
taxes that may be payable with respect to the issuance and delivery of Common
Stock upon conversion of any Conversion Amount.


 


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


 


(i)            “Conversion
Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, plus (B) accrued and unpaid Interest with respect to such
Principal, plus (C) any fees and penalties (if any) that become due under
this Note and that are not paid by the Company within three (3) days of
written demand therefor.


 


(ii)           “Conversion
Price” means, as of any Conversion Date (as defined below) or other
date of determination, and subject to adjustment as provided herein, $0.60.


 


(c)           Mechanics of Conversion.


 


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


 


3

















 


Stock
issuable upon a conversion of this Note shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the Conversion
Date.


 


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


 


(iii)          Book-Entry. Notwithstanding
anything to the contrary set forth herein, upon conversion of any portion of
this Note in accordance with the terms hereof, the Holder shall not be required
to physically surrender this Note to the Company unless (A) the full
Conversion Amount represented by this Note is being converted or (B) the
Holder has provided the Company with prior written notice (which notice may be
included in a Conversion Notice) requesting physical surrender and reissue of
this Note.  The Holder and the Company
shall maintain records showing the Principal and Interest converted and the
dates of such conversions or shall use such other method, reasonably
satisfactory to 


 


4

















 


the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.


 


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


 


(d)           Limitations on Conversions.


 


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


 


5

















 


Company
or the Transfer Agent setting forth the number of shares of Common Stock
outstanding.  For any reason at any time,
upon the written or oral request of the Holder, the Company shall within two Business
Days confirm orally and in writing to the Holder the number of shares of Common
Stock then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Note, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.  Notwithstanding the foregoing, the
limitations of this paragraph shall not apply to any Holder who is an
Affiliated Investor (as that term is defined in the Securities Purchase and
Exchange Agreement).


 


(ii)           Additional Conversion Limitation.  Until the Charter Amendment (as defined in
the Securities Purchase and Exchange Agreement) has been filed with, and
accepted by, the Delaware Secretary of State, no Buyer (as defined in the
Securities Purchase and Exchange Agreement) shall be issued, upon conversion or
exercise of such Buyer’s Notes, Preferred Shares (as defined in the
Securities Purchase and Exchange Agreement), or Warrants, a number of shares of Common Stock in the aggregate for
all such conversions or exercises greater than the product of the Conversion
Cap (as defined below) multiplied by a fraction, the numerator of which
is the aggregate purchase price paid by the Buyer for all of the Notes,
Preferred Shares, and Warrants purchased by the Buyer pursuant to the
Securities Purchase and Exchange Agreement and the denominator of which is
$23,124,933.33, which is the aggregate purchase price paid by all of the Buyers
for all of the Notes, Preferred Shares, and Warrants purchased pursuant to the
Securities Purchase and Exchange Agreement
(with respect to each Buyer, the “Conversion
Cap Allocation”).  In the
event that any Buyer shall sell or otherwise transfer any of such Buyer’s
Notes, the transferee shall be allocated a pro rata portion of such Buyer’s
Conversion Cap Allocation based on the principal amount of the Notes purchased
by the Buyer, and the restrictions of the prior sentence shall apply to such
transferee with respect to the portion of the Conversion Cap Allocation
allocated to such transferee. The term “Conversion Cap”
shall mean 32,985,406 shares of
Common Stock, which represents all shares of authorized but unissued Common
Stock as of the date of the Securities Purchase and Exchange Agreement to the
extent not previously reserved for issuance pursuant to Convertible Securities
and Options existing prior to such date.


 


(4)           RIGHTS
UPON EVENT OF DEFAULT.


 


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


 


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


 


6

















 


(ii)           the
Company’s failure to pay to the Holder any amounts other than Principal or
Interest when and as due under this Note, the Securities Purchase and Exchange 


 


Agreement, or the Registration Rights Agreement,
which failure is not cured within five Business Days after notice of such
default sent by the Holder to the Company;


 


(iii)          any default under, redemption prior to
maturity of, or acceleration prior to maturity of any Indebtedness (as defined
below) of the Company or any of its Subsidiaries (as defined in the Securities
Purchase and Exchange Agreement) other than with respect to (A) the Other
Notes and (B) the default by Liquidmetal Korea Co. Ltd., the Company’s
subsidiary organized under the laws of the Republic of Korea, in existence as
of the Original Issuance Date under its loan from Kookmin Bank; provided that
in the case of a payment default of such Indebtedness, such default is not
cured within applicable cure periods; further provided that in the case of a
non-payment default of such Indebtedness that has not resulted in an
acceleration or redemption of such Indebtedness prior to its maturity, only
upon acceleration or redemption of such Indebtedness;


 


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


 


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


 


(vi)          a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that (A) is for relief
against the Company or any of its Subsidiaries in an involuntary case that
remains undismissed for a period of 90 days, (B) appoints a Custodian of
the Company or any of its Subsidiaries that remains undischarged or unstayed
for a period of 90 days, or (C) orders the liquidation of the Company or
any of its Subsidiaries;


 


(vii)         a final judgment or judgments for the
payment of money aggregating in excess of $250,000 are rendered against the
Company or any of its Subsidiaries and which judgments are not, within 60 days
after the entry thereof, bonded, discharged or stayed pending appeal, or are
not discharged within 60 days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $250,000 amount
set forth above;


 


7

















 


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


 


(ix)           the failure of the Charter Amendment
to be filed with, and accepted for filing by, the Delaware Secretary of State
by August 31, 2009;


 


(x)            any security interest created by the
Security Agreement shall at any time not constitute a valid and perfected first
priority security interest on the collateral intended to be covered thereby (to
the extent perfection by filing, registration, recordation or possession is
required herein or therein) in favor of the Holder, or any of the security
interests granted pursuant to the Security Agreement shall be determined to be
void, voidable, invalid or unperfected, are subordinated or are ineffective to
provide the Holder with a perfected, first priority security interest in the
collateral covered by the Security Agreement (except to the extent expressly
subordinated under the terms of the Security Agreement),  or, except for expiration or termination in
accordance with its terms, the Security Agreement shall for whatever reason be
terminated or cease to be in full force and effect, or the enforceability
thereof shall be contested by the Company;


 


(xi)           the Company or any Subsidiary commits
a default under any material contract to which it is a party and as a result of
which default the Company or its Subsidiaries will be legally obligated to pay
damages in an aggregate amount in excess of $250,000 for such default; or


 


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


 


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


 


8






 












 


(5)           RIGHTS UPON CHANGE OF CONTROL.


 


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


 


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


 


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


 


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


 


No
sooner than 15 days nor later than 10 days prior to the consummation of a
Change of Control, but not prior to the public announcement of such Change of
Control, the Company shall deliver written notice thereof via facsimile and
overnight courier to the Holder (a “Change of
Control Notice”).  The
transactions contemplated by the Securities Purchase and Exchange Agreement
shall not be deemed to constitute a Change of Control for purposes of this
Agreement.


 


(b)           Assumption. 
Prior to the consummation of any Change of Control, the Company will
secure from any Person purchasing the Company’s assets or Common Stock or any
successor resulting from such Change of Control (in each case, an “Acquiring Entity”) a written agreement (in
form and substance satisfactory to the Holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding) to deliver
to each Holder of Notes in exchange for such Notes, a security of the Acquiring
Entity evidenced by a written instrument substantially similar in form and
substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts and the interest rates
of the Notes held by such Holder, and satisfactory to the Holders of Notes
representing at least a majority of the principal amount of the Notes then
outstanding.  In the event that an
Acquiring Entity is directly or indirectly controlled by a company or entity
whose common stock or similar equity interest is listed, designated or quoted
on a securities exchange or trading market, the Holders of Notes representing
at least a majority of the aggregate principal amount of the Notes then
outstanding may elect to treat such Person as the Acquiring Entity for purposes
of this Section 5(b).


 


(c)           Redemption Right.  At any time during the period beginning after
the Holder’s receipt of a Change of Control Notice and ending on the date of
the consummation


 


9

















 


of
such Change of Control (or, in the event a Change of Control Notice is not
delivered at least 10 days prior to a Change of Control, at any time on or after
the date which is 10 days prior to a Change of Control and ending ten days
after the consummation of such Change of Control), the Holder may require the
Company to redeem all or any portion of this Note by delivering written notice
thereof (“Change of Control Redemption Notice”)
to the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem; provided, however, that the
Company shall not be under any obligation to redeem all or any portion of this
Note or to deliver the applicable Change of Control Redemption Price unless and
until the applicable Change of Control is consummated.  The portion of this Note subject to
redemption pursuant to this Section 5 shall be redeemed by the Company in
cash at a price equal to the sum of (i) the Conversion Amount of the
portion to be redeemed, plus (ii) the Black Scholes Value, as of the date
immediately preceding the date the Change of Control is consummated, of the
Holder’s right to convert the Conversion Amount hereunder upon the terms set
forth herein (the “Change of Control
Redemption Price”).  For the
purpose of this Note, “Black Scholes Value”
means the value, as reasonably calculated by the Company, of this Note, which
shall be determined by use of the Black Scholes Option Pricing Model reflecting
(i) a risk-free interest rate corresponding to the U.S. Treasury rate for
a period equal to the remaining term of this Note as of such date of request
and (ii) an expected volatility equal to the greater of 60% and the 100
day volatility obtained from the HVT function on Bloomberg; provided that the Black Scholes Value of
this Note shall not for this purpose exceed an amount equal to $2.50 multiplied
by the number of shares of Common Stock for which this Note may be converted at
the time the Change of Control is consummated (with such $2.50 cap being
subject to adjustment for stock dividends, stock splits, reverse stock splits,
and the like).


 


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


 


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


 


(b)           Other Corporate Events. Prior
to the consummation of any recapitalization, reorganization, consolidation,
merger, spin-off or other business combination (other than a Change of Control)
pursuant to which holders of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon a conversion of this Note, (i) in addition to the 


 


10

















 


shares
of Common Stock receivable upon such conversion, such securities or other
assets to which the Holder would have been entitled with respect to such shares
of Common Stock had such shares of Common Stock been held by the Holder upon
the consummation of such Corporate Event or (ii) in lieu of the shares of
Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holders of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion
rights for the form of such consideration (as opposed to shares of Common
Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate.  Provision made pursuant
to the preceding sentence shall be in a form and substance satisfactory to the
Holders of Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding.


 


(7)           RIGHTS
UPON ISSUANCE OF OTHER SECURITIES.


 


(a)           Adjustment
of Conversion Price upon Issuance of Common Stock.  If and whenever on or after the Issuance
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
or sold by the Company in connection with any Excluded Security) for a
consideration per share (the “New Securities Issuance
Price”) less than the Conversion Price in effect immediately prior
to such issue or sale (the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the
Conversion Price then in effect shall be reduced effective concurrently with
such Dilutive Issuance to an amount equal to the New Securities Issuance
Price.  For purposes of determining the
adjusted Conversion Price under this Section 7(a), the following shall be
applicable:


 


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


 


(ii)           Calculation of Consideration
Received.  In case any Option is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01.  If any Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the net amount
received by the Company therefor.  If any
Common Stock, 


 


11

















 


Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the Company
will be the fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration received by
the Company will be the Closing Sale Price of such securities on the date of
receipt.  If any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be.  The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Holders of Notes representing at least a majority of the
principal amounts of the Notes then outstanding.  If such parties are unable to reach agreement
within ten days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five Business Days after the tenth day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Holders of Notes representing at least a majority
of the principal amounts of the Notes then outstanding.  The determination of such appraiser shall be
deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne equally by the Company, on the hand, and the
Holders of the Notes, on the other hand.


 


(iii)          Record Date.  If the Company takes a record of the holders
of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.


 


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


 


(c)           Other Events.  If any event occurs of the type contemplated
by the provisions of this Section 7 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company’s Board of Directors will make an appropriate adjustment in 


 


12

















 


the
Conversion Price so as to protect the rights of the Holder under this Note;
provided that no  such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.


 


(8)           INTENTIONALLY OMITTED.


 


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


 


(b)           Pro Rata Conversion Requirement.  If the Company elects to cause a conversion
of all or any portion of the Conversion Amount of this Note pursuant to Section 9(a),
then it must simultaneously take the same action with respect to the Other
Notes (except that the Company is not required to take the same action with
respect to the Other Notes to the extent limited by Section 3(d) in
this Note or similar provisions under the Other Notes).  If the Company elects to cause the conversion
of this Note pursuant to Section 9(a) (or similar provisions under
the Other Notes) with respect to less than all of the Conversion Amounts of the
Notes then outstanding, then the Company shall require conversion of a
Conversion Amount from each of the Holders of the Notes equal to the product of
(I) the aggregate Conversion Amount of Notes which the Company has elected
to cause to be converted pursuant to Section 9(a), multiplied by (II) the
fraction, the numerator of which is the sum of the aggregate principal amount
of the Notes purchased by such Holder pursuant to the Securities Purchase and
Exchange Agreement and the denominator of which is the sum of the aggregate
principal amount of the Notes and purchased by all Holders pursuant to the
Securities Purchase and Exchange Agreement (except to the extent limited by Section 3(d) in
this Note or similar provisions under the Other Notes) (such fraction with
respect to each Holder is referred to as its “Allocation
Percentage,” and such amount with respect to each Holder is referred
to as its “Pro Rata Conversion Amount”).  In the event that the initial Holder of any
Notes shall sell or otherwise transfer any of such Holder’s Notes, the
transferee shall be allocated a pro rata portion of such 


 


13

















 


Holder’s
Allocation Percentage.  The Mandatory
Conversion Notice shall state (i) the Trading Day selected for the
Mandatory Conversion in accordance with Section 9(a), which Trading Day
shall be at least 10 Business Days but not more than 60 Business Days following
the Mandatory Conversion Notice Date (the “Mandatory
Conversion Date”), (ii) the aggregate Conversion Amount of the
Notes which the Company has elected to be subject to mandatory conversion from
all of the Holders of the Notes pursuant to this Section 9 (and analogous
provisions under the Other Notes), (iii) each Holder’s Pro Rata Conversion
Amount of the Conversion Amount of the Notes the Company has elected to cause
to be converted pursuant to this Section 9 (and analogous provisions under
the Other Notes) and (iv) the number of shares of Common Stock to be
issued to such Holder as of the Mandatory Conversion Date.  All Conversion Amounts converted by the
Holder after the Mandatory Conversion Notice Date shall reduce the Conversion
Amount of this Note required to be converted on the Mandatory Conversion Date.  If the Company has elected a Mandatory
Conversion, the mechanics of conversion set forth in Section 3(c) shall
apply, to the extent applicable, as if the Company and the Transfer Agent had
received from the Holder on the Mandatory Conversion Date a Conversion Notice
with respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.


 


(c)           Conditions to Mandatory Conversion.  For purposes of this Section 9, “Conditions to Mandatory Conversion” means  the following conditions: (i) during
the period beginning on the date that is six months prior to the Mandatory
Conversion Date and ending on and including the Mandatory Conversion Date, the
Company shall have delivered shares of Common Stock upon any conversion of
Conversion Amounts as set forth in Section 3(c)(i); (ii) on each day
during the period beginning on the first Trading Day of the Mandatory
Conversion Measuring Period and ending on and including the Mandatory
Conversion Date, the Common Stock shall be traded, listed, or quoted (as
applicable) on the Principal Market, the NASDAQ Global Market or Global Select
Market, the NASDAQ Capital Market, the New York Stock Exchange, or the American
Stock Exchange; (iii) on the Mandatory Conversion Date either (x) the
Registration Statement or Registration Statements required pursuant to the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable
upon conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; (iv) on the Mandatory Conversion Date, an Authorized
Share Failure shall not be in effect; and (v) the average number of shares
of Common Stock traded on the Principal Market for the  20 Trading Days prior to the Mandatory
Conversion Date shall equal or exceed 200,000 shares per day.


 


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


 


14

















 


(11)         RESERVATION OF AUTHORIZED SHARES.


 


(a)           Reservation.  Upon the filing of the Charter Amendment (as
defined in the Securities Purchase and Exchange Agreement) with the Delaware
Secretary of State, the Company shall initially reserve out of its authorized
and unissued Common Stock a number of shares of Common Stock for each of the
Notes equal to 125% of the Conversion Rate with respect to the Conversion
Amount of each such Note as of the Issuance Date.  Thereafter, the Company, so long as any of
the Notes are outstanding, shall use commercially reasonable efforts to reserve
and keep available out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Notes, 125% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
conversion of all of the Notes then outstanding (without regard to any
limitations on conversions) (the “Required
Reserve Amount”).  The number
of shares of Common Stock reserved for conversions of the Notes shall be
allocated pro rata among the Holders of the Notes based on the principal amount
of the Notes held by each Holder at the time of Issuance Date or increase in
the number of reserved shares, as the case may be (the “Authorized Share Allocation”).  In the event that a Holder shall sell or
otherwise transfer any of such Holder’s Notes, each transferee shall be
allocated a pro rata portion of such Holder’s Authorized Share Allocation.  Any shares of Common Stock reserved and
allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining Holders of Notes, pro rata based on the principal amount of the
Notes then held by such Holders.


 


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


 


(12)         HOLDER’S REDEMPTIONS.


 


(a)           Mechanics.  In the event that the Holder has sent an Event
of Default Redemption Notice or a Change of Control Redemption Notice to the
Company pursuant to Section 4(b) or Section 5(c), respectively
(each, a “Redemption Notice”), the
Holder shall promptly submit this Note to the Company.  If the Holder has submitted an Event of
Default Redemption Notice in accordance with Section 4(b), the Company
shall deliver the applicable Event of Default Redemption Price to the Holder
within five Business Days after the Company’s receipt of the Holder’s Event of
Default Redemption Notice.  If the Holder
has submitted a Change of Control Redemption Notice in accordance with Section 5(c),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five Business Days after the Company’s receipt of such 


 


15

















 


notice
if such notice is received after the consummation of such Change of
Control.  In the event of a redemption of
less than all of the Conversion Amount of this Note, the Company shall promptly
cause to be issued and delivered to the Holder, at the Holder’s request, a new
Note (in accordance with Section 19(d)) representing the outstanding
Principal which has not been redeemed. 
In the event that the Company does not pay the Event of Default
Redemption Price or the Change of Control Redemption Price (each, the “Redemption Price”), as applicable, to the
Holder (or deliver any Common Stock to be issued pursuant to a Redemption
Notice) within the time period required, at any time thereafter and until the
Company pays such unpaid Redemption Price (and issues any Common Stock required
pursuant to a Redemption Notice) in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (or any
Common Stock required to be issued pursuant to a Redemption Notice) has not
been paid.  Upon the Company’s receipt of
such notice, (x) the Redemption Notice shall be null and void with respect
to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 19(d)) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this
Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is
voided and (B) the Closing Bid Price on the date on which the Redemption
Notice is voided.


 


(b)           Redemption by Other Holders.  Upon the Company’s receipt of notice from any
of the Holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences
described in Section 4(b) or Section 5(c) (each, an “Other Redemption Notice”), the Company
shall immediately forward to the Holder by facsimile a copy of such
notice.  If the Company receives a
Redemption Notice and one or more Other Redemption Notices during the seven
Business Day period beginning on and including the date which is three Business
Days prior to the Company’s receipt of the Holder’s Redemption Notice and
ending on and including the date which is three Business Days after the Company’s
receipt of the Holder’s Redemption Notice and the Company is unable to redeem
all principal, interest and other amounts designated in such Redemption Notice
and such Other Redemption Notices received during such seven Business Day
period, then the Company shall redeem a pro rata amount from each Holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.


 


(13)         SUBORDINATION TO SENIOR INDEBTEDNESS.


 


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


 


16

















 


Indebtedness of the Company now outstanding or hereinafter
incurred.  However, notwithstanding anything to the contrary set
forth in this Note, the provisions of this Section 13 shall apply only to
Senior Indebedness described in clause (ii) of Section 29(q) of
this Note.


 


(b)           No Payment if Default in Senior
Indebtedness.


 


(i)            no cash payment on account of
Principal or Redemption Price of, or Interest on, this Note or any other
payment payable with respect to this Note shall be made, and no portion of this
Note shall be redeemed or purchased directly or indirectly by the Company, if
at the time of such payment or purchase or immediately after giving effect
thereto, (A) a default in the payment of principal, premium, if any,
interest or other obligations in respect of any Senior Indebtedness occurs and
is continuing (or, in the case of Senior Indebtedness for which there is a
period of grace, in the event of such a default that continues beyond the
period of grace, if any, specified in the instrument evidencing such Senior
Indebtedness) (a “Payment Default”),
unless and until such Payment Default shall have been cured or waived or shall
have ceased to exist or (B) the Company shall have received notice (a “Payment Blockage Notice”) from the holder or holders of
Senior Indebtedness that there exists under such Senior Indebtedness a default,
which shall not have been cured or waived, permitting the holder or holders
thereof to declare such Senior Indebtedness due and payable, but in the case of
this clause (B), only for the period (the “Payment Blockage Period”)
commencing on the date of receipt of the Payment Blockage Notice and ending on
the date such default shall have been cured or waived.  The Company shall resume payments on and
distributions in respect of this Note, including any past scheduled payments of
the principal of (and premium, if any) and interest on this Note to which the
Holder would have been entitled but for the provisions of this Section 13(b)(ii),
within five (5) Business Days of the date upon which such Payment Default
is cured or waived or ceases to exist or the date on which the Payment Blockage
Period ends (and if payment is made within such time period, any Event of
Default with respect to such nonpayment shall be cured).


 


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


 


17

















 


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


 


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


 


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


 


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


 


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


 


18

















 


and/or
its creditors other than the holders of the Senior Indebtedness, be deemed to
be a payment  on account
of the Senior Indebtedness.


 


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


 


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


 


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


 


(j)            Blockage of Remedies.  In addition to any restrictions included in
the Security Agreement, during any Payment Default or any Payment Blockage
Period, if an Event of Default has occurred and is continuing under this Note,
the Holder will not commence or join with any creditor of the Company in
asserting or commencing any proceedings to collect or enforce its rights hereunder
or take any action to foreclose or realize upon the indebtedness 


 


19

















 


hereunder
for a period beginning on the date of such Event of Default and ending on the
date  such Payment Default
is cured, waived or ceases to exist or the date such Payment Blockage Period
ends, as the case may be.


 


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


 


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


 


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


 


(15)         RANK; SECURITY; ADDITIONAL INDEBTEDNESS;
LIENS.


 


(a)           Rank.      All
payments due under this Note (a) shall rank pari passu in right of payment with all Other Notes (“Pari Passu Indebtedness”), (b) shall
be subordinate in right of payment to the prior payment of all existing and
future Senior Indebtedness upon the terms set forth in Section 13 above,
and (c) shall be senior in right of payment to all other Indebtedness of
the Company, other than Senior Indebtedness and Pari Passu Indebtedness.


 


(b)           Security. 
This Note is secured by assets of the Company under that certain
Security Agreement, dated May 1, 2009, among the Company and the initial
purchasers of the Notes (the “Security Agreement”).


 


(c)           Incurrence of Certain Indebtedness.  So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness which shall rank senior to the Notes, other than Senior
Indebtedness and Qualified Subsidiary Indebtedness.  “Qualified Subsidiary
Indebtedness” means: (i) Indebtedness incurred by Liquidmetal
Coatings, LLC or its Subsidiaries, but only to the extent not guaranteed by, or
secured by the assets of, the Company or any other Company Subsidiary, and (ii) Indebtedness
incurred by the Company’s foreign subsidiaries, but only to the extent not
guaranteed by, or secured by the assets of, the Company or any Company
Subsidiary incorporated in the United States. 
“Qualified Subsidiary Indebtedness”
shall not include any Indebtedness incurred by Liquidmetal Korea Co. Ltd., a
subsidiary of the Company organized under the laws of the 


 


20





















 


Republic of Korea (“LMK”),
after the date of the Securities Purchase and Exchange Agreement except to the
extent that such Indebtedness is incurred to refinance Indebtedness existing
prior to the date of the Securities Purchase and Exchange Agreement on terms
than are more favorable or the same to LMK as the terms of such existing
Indebtedness.


 


(d)           Restricted Payments.  The Company shall not, and the Company shall
not permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness, other than Senior Indebtedness, Pari Passu Indebtedness, or
Qualified Subsidiary Indebtedness, whether by way of payment in respect of
principal of (or premium, if any) or interest on, such Indebtedness if at the
time such payment is due or is otherwise made or, after giving effect to such
payment, an event constituting an Event of Default has occurred and is continuing.


 


(16)         PARTICIPATION.  The Holder, as the holder of this Note, shall
be entitled to such dividends paid and distributions made to the holders of
Common Stock (each, a “Distribution”),
in each such case to the extent of the Distribution as if the Holder had
converted this Note into Common Stock (without regard to any limitations on
conversion herein or elsewhere) and had held such shares of Common Stock on the
record date for such dividends and distributions.  Payments (if any) under the preceding sentence
shall be made concurrently with the dividend or distribution to the holders of
Common Stock.


 


(17)         AMENDMENT TO THE TERMS OF NOTES;
LIKE TREATMENT OF NOTES.  This Note
shall not be modified, amended, changed, terminated, supplemented, or any term or
condition hereof waived except in writing signed by the Company and
Holder.  In addition, neither the Company
nor any of its affiliates shall, directly or indirectly, pay or cause to be
paid any consideration (immediate or contingent), whether by way of interest,
fee, payment for the redemption or conversion of the Notes, or otherwise, to
any Holder of Notes, for or as an inducement to, or in connection with the
solicitation of, any consent, waiver or amendment of any terms or provisions of
the Notes, unless such consideration is required to be paid to all Holders of
Notes.  The Company shall not, directly
or indirectly, redeem any Notes unless such offer of redemption is made pro
rata to all Holders of Notes on identical terms.  For clarification purposes, this provision
constitutes a separate right granted by the Company to each Holder of Notes and
negotiated separately by each Holder of Notes, is intended for the Company to
treat the Holders of Notes as a class, and shall not in any way be construed as
the Holders of Notes acting in concert or as a group with respect to the
purchase, disposition or voting of Notes or otherwise.


 


21
















 


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


 


(19)         REISSUANCE OF
THIS NOTE.


 


(a)           Transfer.  If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Note (in accordance with Section 19(d)),
registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 19(d))
to the Holder representing the outstanding Principal not being
transferred.  The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that, by reason of
the provisions of Section 3(c)(iii) and this Section 19(a),
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.


 


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


 


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


 


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


 


22

















 


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


 


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


 


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


 


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


 


(24)         DISPUTE RESOLUTION.  In the case of a dispute as to the
determination of the Redemption Price or the arithmetic calculation of the
Conversion Rate or the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one Business Day
of receipt of the Conversion Notice or Redemption Notice or other event giving
rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to agree
upon such determination or calculation within one Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one Business Day submit via facsimile (a) the
disputed determination of


 


23

















 


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


 


(25)         NOTICES;
PAYMENTS.


 


(a)           Notices.  Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase and Exchange
Agreement.  The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore.  Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) immediately upon any adjustment of the Conversion Price, setting forth
in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty  days prior to the date on
which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to
any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Change of Control, dissolution
or liquidation, provided in each case that such information shall be made known
to the public prior to or in conjunction with such notice being provided to the
Holder.  Notwithstanding the foregoing, Section 4(i) of
the Securities Purchase and Exchange Agreement shall apply to all notices given
pursuant to this Note.


 


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


 


24

















 


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


 


(27)         WAIVER OF
NOTICE.  To the extent permitted by
law, the Company hereby waives demand, notice, protest and all other demands
and notices in connection with the delivery, acceptance, performance, default
or enforcement of this Note and the Securities Purchase and Exchange Agreement.


 


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


 


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


 


(a)           “Approved
Stock Plan” means any employee benefit, option or incentive plan
which has been approved by the Board of Directors and shareholders of the
Company, pursuant to which the Company’s securities may be issued to any
employee, consultant, officer or director for services provided to the Company;
provided that the number of shares of the Company’s Common Stock issuable
pursuant to such plans, in the aggregate, shall not exceed 10% of the shares of
the Company’s Common Stock outstanding on a fully-diluted basis on the date of the First Closing (as
defined in the Securities Purchase and Exchange Agreement) after giving effect
to the First Closing and the full exercise of the Series A-1 Option (as
defined in the Securities Purchase and Exchange Agreement), as adjusted for
stock splits, reverse stock splits, and the like, unless such increased
amount of shares is approved by the holders of the Company’s Common Stock and
the holders of the Company’s Series A-1 Preferred Stock and Series A-2
Preferred Stock voting together as a single class.  For purposes of this definition, “fully-diluted
basis” shall take into account all outstanding shares of Common Stock as well
as all shares of Common Stock issuable upon the conversion of all outstanding
convertible securities of the Company, including all options and warrants
granted.


 


(b)           “Bloomberg” means Bloomberg Financial
Markets.


 


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


 


(d)           “Closing Bid Price” and “Closing
Sale Price” means, for any security as of any date, the last closing
bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market


 


25

















 


begins
to operate on an extended hours basis and does not designate the closing bid
price or the closing trade price, as the case may be, then the last bid price
or last trade price, respectively, of such security prior to 4:00 p.m.,
New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing bid price or last trade price, respectively, of such security on the
principal securities exchange or trading market where such security is listed
or traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). 
If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on
such date shall be the fair market value as mutually determined by the Company
and the Holder.  If the Company and the
Holder are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.


 


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


 


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


 


(g)           “Excluded Security” means any share of Common Stock issued or
issuable: (i) in connection with any Approved Stock Plan; (ii) upon
conversion or exercise of any Notes, Other Notes, warrants or shares of Series A-1
Preferred Stock or Series A-2 Preferred Stock of the Company issued (A) pursuant
to the Securities Purchase and Exchange Agreement, (B) as dividends on the
Series A Preferred Stock, or (C) as interest under the Notes or Other
Notes; (iii) upon conversion or exercise of any Options or Convertible
Securities which are outstanding on the Issuance Date, (iv) pursuant to or
in connection with commercial credit arrangements, equipment lease financings,
acquisitions of other assets or businesses, and strategic transactions not
primarily for financing purposes (including licensing or development
agreements), but only to the extent the transactions described in this clause (iv) are
entered into with non-affiliates of the Company.


 


26

















 


(h)           “Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either
case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) off-balance sheet liabilities retained in connection
with asset securitization programs, synthetic leases, sale and leaseback
transactions or other similar obligations arising with respect to any other
transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheet of such Person and its subsidiaries, and (H) all indebtedness
referred to in clauses (A) through (G) above secured by (or for which
the holder of such Indebtedness has an existing right, contingent or otherwise,
to be secured by) any mortgage, lien, pledge, charge, security interest or
other encumbrance upon or in any property or assets (including accounts and
contract rights) owned by any Person, even though the Person which owns such
assets or property has not assumed or become liable for the payment of such
indebtedness, and (I) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (A) through (H) above.  Notwithstanding the foregoing, trade payables
incurred in the ordinary course of business shall not constitute “Indebtedness”
for purposes of this Note.


 


(i)            “Issuance Date” means May 1, 2009.


 


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


 


(k)           “Original Issuance Date” means the First Closing Date, as
defined in the Securities Purchase and Exchange Agreement.


 


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


 


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


 


(n)           “Registration Rights Agreement” means that
certain registration rights agreement between the Company and the initial
Holders of the Notes relating to the registration of the resale of the shares
of Common Stock issuable upon conversion of the Notes and the exercise of the
Warrants.


 


27

















 


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


 


(p)           “Securities Purchase and Exchange Agreement” means the Securities
Purchase and Exchange Agreement, dated May 1, 2009, among the Company and
the initial Holders of the Notes pursuant to which the Company issued the
Notes.


 


(q)           “Senior Indebtedness” means the principal of (and
premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable costs, enforcement expenses (including
reasonable legal fees and disbursements, collateral protection expenses and
other reimbursement or indemnity obligations relating thereto)), and all other
obligations of the Company under (i) any of the agreements or instruments
evidencing any Indebtedness of the Company and its Subsidiaries arising after
the Issuance Date to an unaffiliated, third-party commercial lender (together
with any renewals, refundings, refinancings or other extensions thereof) for
purposes of purchasing equipment (which debt shall be secured only by the
assets purchased with such financing), and (ii) Indebtedness not to exceed
$4,000,000 in the aggregate that is secured solely by the Company’s and/or its
Subsidiaries’ accounts receivable and/or inventory.


 


(r)            “Subsidiary” means any business entity as to which the
Company directly or indirectly owns or has the power to vote or control 50% or
more of any class or series of capital stock or other equity securities of such
entity.


 


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


 


(t)            “Warrants” means the warrants issued under the Securities
Purchase and Exchange Agreement to the initial Holders of the Notes.


 


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


 


28

















 


on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m.,
New York Time (or such other time as such market publicly announces is the
official close of trading) as reported by Bloomberg, or, if no dollar
volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the highest closing bid price and the lowest closing
ask price of any of the market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 24. 
All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.


 


[Signature Page Follows]


 


29

















 


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


 


	
   

  	
  LIQUIDMETAL TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name: Tony Chung

  
	
   

  	
  Title:   Chief Financial Officer

  



 

















 


EXHIBIT I


 


LIQUIDMETAL TECHNOLOGIES, INC.


CONVERSION NOTICE


 


Reference
is made to the 8% Senior Secured Convertible Note (the “Note”) issued to the undersigned by
Liquidmetal Technologies, Inc. (the “Company”).  In accordance with and pursuant to the Note,
the undersigned hereby elects to convert the Conversion Amount (as defined in
the Note) of the Note indicated below into shares of Common Stock, par value
$0.001 per share (the “Common Stock”),
of the Company as of the date specified below.


 


Date of Conversion:


 


Aggregate Conversion Amount to be converted:


 


The
undersigned  hereby certifies to the
Company that the undersigned’s conversion of the amount set forth above in
accordance with Section 3(a) of the Note will not directly result in
the undersigned (together with the undersigned’s affiliates) beneficially
owning in excess of 4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to such conversion, calculated in accordance
with Section 3(d)(i) of the Note; provided that if the undersigned
has previously waived the 4.99% beneficial ownership limitation upon no less
than sixty one (61) days prior written notice, the undersigned certifies to the
Company that the undersigned’s conversion of the amount set forth above will
not directly result in the undersigned (together with the undersigned’s
affiliates) beneficially owning in excess of 9.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion,
calculated in accordance with Section 3(d)(i) of the Note.  Notwithstanding the foregoing, the
certification set forth in this paragraph shall not apply to, and shall not be
deemed to be made by, any Affiliated Investor (as that term is defined in the
Purchase Agreement referred to in the Note).


 


Please
confirm the following information:


 


Conversion Price:


 


Number of shares of Common Stock to be issued:


 


Please
issue the Common Stock into which the Note is being converted in the following
name and to the following address:


 


Issue to:


 


 


Facsimile Number:


 


Authorization:


 


	
  By:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  	
   

  	
   

  	
   

  
							



 


Account Number:

(if electronic book entry transfer)


 


Transaction Code Number:

(if electronic book entry transfer)


 

















 


ACKNOWLEDGMENT


 


The
Company hereby acknowledges this Conversion Notice and hereby directs American
Stock Transfer & Trust Co. to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
May 1, 2009, from the Company.


 


	
   

  	
  LIQUIDMETAL TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title: