exv10w5



 







Exhibit 10.5




EXHIBIT A



NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.



Original Issue Date: March 31, 2006

Original Conversion Price (subject to adjustment herein): $1.345.




$ 5,000,000




SENIOR SECURED CONVERTIBLE NOTE

DUE JANUARY 1, 2008




     THIS NOTE is a duly authorized and issued Senior Secured Convertible Note of Las Vegas Gaming,
Inc., a Nevada corporation, having a principal place of business at 4000 W. Ali Baba Lane, Las
Vegas, NY 89118 (the “Company”), designated as its Senior Secured Convertible Note, due
January 1, 2008 (the “Note(s)”).



     FOR VALUE RECEIVED, the Company promises to pay to CAMOFI Master LDC or its registered assigns
(the “Holder”), the principal sum of Three Million Dollars ($5,000,000) on January 1, 2008
or such earlier date as the Notes are required or permitted to be repaid as provided hereunder (the
“Maturity Date”). This Note is subject to the following additional provisions:



     Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Note: (a) capitalized terms not otherwise defined herein have the
meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the
following meanings:




     “Alternate Consideration” shall have the meaning set forth in Section
6(e)(iii).




     “Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States or a day on which banking institutions in the
State of New York are authorized or required by law or other government action to close.




     “Change of Control Transaction” means the occurrence after March 31, 2006, of
any of (i) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 33% of the voting securities of the Company, or (ii) a
replacement at one time or within



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a eighteen month period of more than one-half of the members of the Company’s board of
directors which is not approved by a majority of those individuals who are members of the
board of directors on the date hereof (or by those individuals who are serving as members of
the board of directors on any date whose nomination to the board of directors was approved
by a majority of the members of the board of directors who are members on the date hereof),
or (iii) the execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth above in (i) or (ii).




     “Common Stock” means the common stock, $0.001 par value, of the Company and
stock of any other class into which such shares may hereafter have been reclassified or
changed.




     “Conversion Date” shall have the meaning set forth in Section 5(a) hereof.




     “Conversion Price” shall have the meaning set forth in Section 5(c).




     “Conversion Shares” means the shares of Common Stock issuable upon conversion
of Notes in accordance with the terms hereof.




     “Effectiveness Period” shall have the meaning given to such term in the
Registration Rights Agreement.




     “Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notice of Conversions, if any, (ii) all liquidated damages and other
amounts owing in respect of the Notes shall have been paid; (iii) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction Documents (and
the Company believes, in good faith, that such effectiveness will continue uninterrupted for
the foreseeable future), (iv) the Common Stock is trading on the Trading Market and all of
the shares issuable pursuant to the Transaction Documents are listed for trading on a
Trading Market (and the Company believes, in good faith, that trading of the Common Stock on
a Trading Market will continue uninterrupted for the foreseeable future), (v) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock
for the issuance of all of the shares issuable pursuant to the Transaction Documents, (vi)
there is then existing no Event of Default or event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (vii) all of the shares issued or
issuable pursuant to the transaction proposed would not violate the limitations set forth in
Section 4, (viii) no public announcement of a pending or proposed Fundamental Transaction,
Change of Control Transaction or acquisition transaction has occurred that has not been
consummated and (ix) the closing price for the Common Stock is at least 115% of the
Conversion Price (as adjusted).




     “Event of Default” shall have the meaning set forth in Section 8.




     “Exchange Act” means the Securities Exchange Act of 1934, as amended.




     “Fundamental Transaction” shall have the meaning set forth in Section 6(e)(iii)
hereof.




     “Late Fees” shall have the meaning set forth in the second paragraph to this
Note.



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     “Mandatory Prepayment Amount” shall equal the aggregate principal amount of the
Notes not converted to common stock at 110% of the principal amount thereof to the date of
repayment.




     “Monthly Redemption” shall mean the redemption of the Note pursuant to Section
7(a) hereof.




     “Monthly Redemption Amount” shall mean, as to a Monthly Redemption, $208,333.




     “Monthly Redemption Date” means the first Business Day of each month,
commencing on the first Business Day of April 2007 and ending upon the full redemption of
this Note.




     “Monthly Conversion Price” shall have the meaning set forth in Section 7(a)
hereof.




     “Optional Prepayment Amount” for any Notes shall equal 115% of the principal
amount thereof to the date of repayment.




     “Original Issue Date” shall mean the date of the first issuance of the Notes
regardless of the number of transfers of any Note and regardless of the number of
instruments which may be issued to evidence such Note.




     “Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a governmental
agency.




     “Purchase Agreement” means the Securities Purchase Agreement, dated as of March
31, 2006, to which the Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.




     “Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the date of the Purchase Agreement, to which the Company and the original Holder are
parties, as amended, modified or supplemented from time to time in accordance with its
terms.




     “Registration Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering among other things the
resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.




     “Securities Act” means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.




     “Subsidiary” shall have the meaning given to such term in the Purchase
Agreement.




     “Threshold Period” shall have the meaning given to such term in Section 5(e).




     “Trading Day” means a day on which the Common Stock is traded on a Trading
Market.




     “Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq SmallCap Market,
the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the
OTC Bulletin Board.




     “Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.



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     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the primary Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. EST to
4:02 p.m. Eastern Time) using the VAP function; (b) if the Common Stock is not then listed
or quoted on the Trading Market and if prices for the Common Stock are then reported in the
“Pink Sheets” published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (c) in all other cases, the fair market value of a share of
Common Stock as determined by a nationally recognized-independent appraiser selected in good
faith by Purchasers holding a majority of the principal amount of Notes then outstanding.



     Section 2. Prepayment and Commitment Fee.




     a) Optional Prepayment. The Company shall have the right to prepay, in cash,
all or a portion of the Notes for an amount equal to 115% of the principal amount to be
repaid plus amounts owing pursuant to the Advisory Services Letter.




     b) Mandatory Prepayment. On the closing of a Qualified Financing or, in the
event that no Qualified Financing occurs prior to the Maturity Date, the Company will be
required to prepay or repay, in cash, the aggregate principal amount of the Notes not
converted to Common Stock at 110% of the principal amount thereof to such date of prepayment
or repayment.




     c) Commitment Fee. For so long as any portion of this Note is outstanding, the
Company shall pay, quarterly on July 1, October 1, January 1 and April 1 (commencing July 1,
2006), a fee in cash to the Holder equal to $125,000. Such fee shall be pro-rated for any
partial quarter.



     Section 3. Registration of Transfers and Exchanges.




     a) Different Denominations. This Note is exchangeable for an equal aggregate
principal amount of Notes of different authorized denominations, as requested by the Holder
surrendering the same. No service charge will be made for such registration of transfer or
exchange.




     b) Investment Representations. This Note has been issued subject to certain
investment representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement and
applicable federal and state securities laws and regulations.




     c) Reliance on Note Register. Prior to due presentment to the Company for
transfer of this Note, the Company and any agent of the Company may treat the Person in
whose name this Note is duly registered on the Note Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes, whether or not
this Note is overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.




Section 4. Share Issuance Limitations; Holder’s Restriction on Shares. The
Company’s right to pay principal through the issuance of shares of Common Stock pursuant to
Sections 7(a) or (b), shall be limited to the extent that after the issuance of such shares, the Holder (together
with the



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Holder’s affiliates) would beneficially own in excess of 4.99% of the number of
shares of the Common Stock outstanding immediately after such issuance. Except as set forth
in the preceding sentence, for purposes of this Section 4, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act. For purposes of this
Section 4, 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-QSB or Form 10-KSB, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the Company’s Transfer
Agent setting forth the number of shares of Common Stock outstanding. Upon the written or
oral request of the Holder, the Company shall within two Trading 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, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was reported.



     Section 5. Conversion.




     a) Voluntary Conversion. At any time after the Original Issue Date until this
Note is no longer outstanding, this Note shall be convertible into shares of Common Stock at
the option of the Holder, in whole or in part at any time and from time to time (subject to
the limitations on conversion set forth in Section 5(d) hereof). The Holder shall effect
conversions by delivering to the Company the form of Notice of Conversion attached hereto as
Annex A (a “Notice of Conversion”), specifying therein the principal amount
of Notes to be converted and the date on which such conversion is to be effected (a
“Conversion Date”). If no Conversion Date is specified in a Notice of Conversion,
the Conversion Date shall be the date that such Notice of Conversion is provided hereunder.
To effect conversions hereunder, the Holder shall not be required to physically surrender
Notes to the Company unless the entire principal amount of this Note has been so converted.
Conversions hereunder shall have the effect of lowering the outstanding principal amount of
this Note in an amount equal to the applicable conversion. The Holder and the Company shall
maintain records showing the principal amount converted and the date of such conversions.
The Company shall deliver any objection to any Notice of Conversion within 3 Business Days
of receipt of such notice. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest error. The Holder
and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a portion of this Note, the unpaid and
unconverted principal amount of this Note may be less than the amount stated on the face
hereof. However, at the Company’s request, the Holder shall surrender the Note to the
Company within five (5) Trading Days following such request so that a new Note reflecting
the correct principal amount may be issued to Holder.




     b) Automatic Conversion. Upon the completion of a Qualified Financing, 30% of
the aggregate principal amount of this Note shall automatically convert into shares of
Common Stock at the Conversion Price.




     c) Conversion Price. The conversion price in effect on any Conversion Date
shall be $1.345, provided that in the event that the Company consummates a Qualified
Financing, the Conversion Price shall be adjusted (downward only) to the lesser of (i)
$1.345 per share and (ii) 75% of the effective price per share received by the Company on
such Qualified Financing. Anything to the contrary notwithstanding, in no event shall the
Conversion Price exceed $1.345 per share.



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     d) Conversion Limitations; Holder’s Restriction on Conversion. The
Company shall not effect any conversion of this Note, and the Holder shall not have the
right to convert any portion of this Note, pursuant to Section 5(a) or (b) or otherwise, to
the extent that after giving effect to such conversion, the Holder (together with the
Holder’s affiliates), as set forth on the applicable Notice of Conversion, would
beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the foregoing sentence,
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 the
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 5(d), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent
that the limitation contained in this section applies, the determination of whether this
Note is convertible (in relation to other securities owned by the Holder) and of which a
portion of this Note is convertible shall be in the sole discretion of such Holder. To
ensure compliance with this restriction, the Holder will be deemed to represent to the
Company each time it delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such determination. For purposes of this
Section 5(d), 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-QSB or Form 10-KSB, as the case may be, (y) a more recent
public announcement by the Company or (z) any other notice by the Company or the Company’s
Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the
written or oral request of the Holder, the Company shall within two Trading 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. The provisions of this Section 5(d) may be waived by
the Holder upon, at the election of the Holder, not less than 61 days’ prior notice to the
Company, and the provisions of this Section 5(d) shall continue to apply until such 61st day
(or such later date, as determined by the Holder, as may be specified in such notice of
waiver).




     e) Mechanics of Conversion




     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal amount
of this Note to be converted by (y) the Conversion Price.




     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after any Conversion Date, the Company will deliver to the Holder (A) a
certificate or certificates representing the Conversion Shares which shall be free
of restrictive legends and trading restrictions (other than those required by the
Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of Notes (including, if so timely elected by the Company, shares of
Common Stock



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representing the payment of the Monthly Redemption Amount) and (B) a
bank check in the amount of principal (if the Company is required to pay the
principal in cash). The Company shall, if available and if allowed under applicable
securities laws, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically through
the Depository Trust Corporation or another established clearing corporation
performing similar functions.




     iii. Failure to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed by
the applicable Holder, as a result of negligence by the Company, by the third
Trading Day after a Conversion Date, the Holder shall be entitled by written notice
to the Company at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the Company
shall immediately return the certificates representing the principal amount of Notes
tendered for conversion.




     iv. Obligation Absolute; Partial Liquidated Damages. If the Company
fails, through its own negligence, to deliver to the Holder such certificate or
certificates pursuant to Section 5(e)(ii) by the third Trading Day after the
Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $1000 of principal amount being converted,
$10 per Trading Day (increasing to $20 per Trading Day after 5 Trading Days after
such damages begin to accrue) for each Trading Day after such third Trading Day
until such certificates are delivered. The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Note in accordance with the
terms hereof are absolute and unconditional, irrespective of any action or inaction
by the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action to
enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person of
any obligation to the Company or any violation or alleged violation of law by the
Holder or any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Company to the Holder in connection with the
issuance of such Conversion Shares; provided, however, such delivery
shall not operate as a waiver by the Company of any such action the Company may have
against the Holder. In the event a Holder of this Note shall elect to convert any
or all of the outstanding principal amount hereof, the Company may not refuse
conversion based on any claim that the Holder or any one associated or affiliated
with the Holder of has been engaged in any violation of law, agreement or for any
other reason, unless, an injunction from a court, on notice, restraining and or
enjoining conversion of all or part of this Note shall have been sought and obtained
and the Company posts a surety bond for the benefit of the Holder in the amount of
150% of the principal amount of this Note outstanding, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable to
such Holder to the extent it obtains judgment. In the absence of an injunction
precluding the same, the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. Nothing herein shall limit a Holder’s
right to pursue actual damages or declare an Event of Default pursuant to Section 8
herein for the Company’s failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any such rights
shall not
prohibit the Holders from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.



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     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 5(e)(ii) by the third Trading Day after the
Conversion Date, and if after such third Trading Day the Holder is required by its
brokerage firm to purchase (in an open market transaction or otherwise) Common Stock
to deliver in satisfaction of a sale by such Holder of the Conversion Shares which
the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any remedies available
to or elected by the Holder) the amount by which (x) the Holder’s total purchase
price (including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock that
such Holder anticipated receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation and (B) at the option
of the Holder, either reissue Notes in principal amount equal to the principal
amount of the attempted conversion or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with its
delivery requirements under Section 5(e)(ii). For example, if the Holder purchases
Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of Notes with respect to which the actual sale price of
the Conversion Shares at the time of the sale (including brokerage commissions, if
any) giving rise to such purchase obligation was a total of $10,000 under clause (A)
of the immediately preceding sentence, the Company shall be required to pay the
Holder $1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the Company to make payment
in respect of a Buy-In for the failure to timely deliver certificates hereunder and
the Company timely pays in full such payment, the Company shall not be required to
pay such Holder liquidated damages under Section 5(e)(iv) in respect of the
certificates resulting in such Buy-In.




     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its authorized
and unissued shares of Common Stock solely for the purpose of issuance upon
conversion of the Notes or payment of principal on the Notes, each as herein
provided, free from preemptive rights or any other actual contingent purchase rights
of persons other than the Holders, not less than such number of shares of the Common
Stock as shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Purchase Agreement) be issuable (taking
into account the adjustments and restrictions of Section 5) upon the conversion of
the outstanding principal amount of the Notes or payment of principal hereunder.
The Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Registration Statement is then effective under the
Securities Act, registered for public sale in accordance with such Registration
Statement.




     vii. Fractional Shares. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of any
final
fraction of a share based on the VWAP at such time. If the Company elects not,
or is



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unable, to make such a cash payment, the Holder shall be entitled to receive,
in lieu of the final fraction of a share, one whole share of Common Stock.




     viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of the Notes shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in respect of
the issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved in
the issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such Notes so converted and the Company shall not be
required to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax has
been paid.



     Section 6. Certain Adjustments.




     a) Stock Dividends and Stock Splits. If the Company, at any time while the
Notes are outstanding: (A) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company pursuant to this Note), (B)
subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine
(including by way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issue by reclassification of shares of the Common Stock any shares
of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall be the
number of shares of Common Stock outstanding after such event. Any adjustment made pursuant
to this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a subdivision,
combination or re-classification.




     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Note is outstanding, shall offer, sell, grant any option
to purchase or offer, sell or grant any right to reprice its securities, or otherwise
dispose of or issue (or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire
            shares of Common Stock, at an effective price per share less than the then Conversion Price
(such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive
Issuance”), as adjusted hereunder (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which is issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price per share which is less
than the Conversion Price, such issuance shall be deemed to have occurred for less than the
Conversion Price), then, the Conversion Price shall be reduced to equal the Base Share Price
and the number of Conversion Shares issuable hereunder shall be increased. Such adjustment
shall be made whenever such Common Stock or Common Stock Equivalents are issued. The
Company shall notify the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this section, indicating
therein the applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms (such notice the “Dilutive Issuance Notice”).
For



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purposes of clarification, whether or not the Company provides a Dilutive Issuance
Notice pursuant to this Section 6(b), upon the occurrence of any Dilutive Issuance, after
the date of such Dilutive Issuance the Holder is entitled to receive a number of Conversion
Shares based upon the Base Share Price regardless of whether the Holder accurately refers to
the Base Share Price in the Notice of Conversion.




     c) Pro Rata Distributions. If the Company, at any time while Notes are
outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences
of its indebtedness or assets or rights or warrants to subscribe for or purchase any
security, other than in connection with the Merger, then in each such case the Conversion
Price shall be determined by multiplying such Conversion Price in effect immediately prior
to the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined as of the
record date mentioned above, and of which the numerator shall be such VWAP on such record
date less the then fair market value at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the adjustments
shall be described in a statement provided to the Holders of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.




     d) Calculations. All calculations under this Section 6 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of
Common Stock outstanding at any given time shall not includes shares of Common Stock owned
or held by or for the account of the Company, and the description of any such shares of
Common Stock shall be considered on issue or sale of Common Stock. For purposes of this
Section 6, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding treasury
shares, if any) issued and outstanding.




     e) Notice to Holders.




     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 6, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. If the Company
issues a variable rate security, despite the prohibition thereon in the Purchase
Agreement, the Company shall be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion or exercise price at which such
securities may be converted or exercised in the case of a Variable Rate Transaction
(as defined in the Purchase Agreement), or the lowest possible adjustment price in
the case of an MFN Transaction (as defined in the Purchase Agreement).




     ii. Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution) on the Common Stock; (B) the Company
shall declare a special nonrecurring cash dividend on or a redemption of the Common
Stock; (C) the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or transfer of all or substantially
all of the



10









 







assets of the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or property; (E) the Company
shall authorize the voluntary or involuntary dissolution, liquidation or winding up
of the affairs of the Company; then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of conversion of the
Notes, and shall cause to be mailed to the Holders at their last addresses as they
shall appear upon the stock books of the Company, at least 20 calendar days prior
to the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or (y)
the date on which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as of which it
is expected that holders of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange;
provided, that the failure to mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice. Holders are entitled to convert Notes during the
20-day period commencing the date of such notice to the effective date of the event
triggering such notice.




     iii. Fundamental Transaction. If, at any time while this Note is
outstanding, (A) the Company effects any merger or consolidation of the Company with
or into another Person, other than the Merger, (B) the Company effects any sale of
all or substantially all of its assets in one or a series of related transactions,
(C) any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property (in any such case, a “Fundamental
Transaction”), then upon any subsequent conversion of this Note, the Holder
shall have the right to receive, for each Conversion Share that would have been
issuable upon such conversion absent such Fundamental Transaction, the same kind and
amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of one share of Common Stock (the
“Alternate Consideration”). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate Consideration issuable
in respect of one share of Common Stock in such Fundamental Transaction, and the
Company shall apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then the
Holder shall be given the same choice as to the Alternate Consideration it receives
upon any conversion of this Note following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue to the
Holder a new note consistent with the foregoing provisions and evidencing the
Holder’s right to convert such note into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with
the



11









 







provisions of this paragraph (c) and insuring that this Note (or any such
replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.




     iv. Exempt Issuance. Notwithstanding the foregoing, no adjustment will
be made under this Section 6 in respect of an Exempt Issuance.



     Section 7. Monthly Redemption




     a) Monthly Redemption. On each Monthly Redemption Date, the Company shall
redeem the Holder’s Monthly Redemption Amount, the sum of all liquidated damages and any
other amounts then owing to such Holder in respect of the Note. The Monthly Redemption
Amount due on each Monthly Redemption Date must be paid in cash. The Holder may convert,
pursuant to Section 5a, any principal amount of the Note subject to a Monthly Redemption at
any time prior to the date that the Monthly Redemption Amount and all amounts owing thereon
are due and paid in full. Unless otherwise indicated by the Holder in the applicable Notice
of Conversion, any principal amount of Note converted during any 20 day period until the
date the Monthly Redemption Amount is paid shall be first applied to the principal amount
subject to the Monthly Redemption and such Holder’s cash payment of the Monthly Redemption
Amount on such Monthly Redemption Date shall be reduced accordingly, and any remaining
principal amount so converted shall be applied against the next principal scheduled to be
repaid. The Company covenants and agrees that it will honor all Notice of Conversions
tendered up until such amounts are paid in full.




     b) Redemption Procedure. The payment of cash pursuant to a Monthly Redemption
shall be made on the Monthly Redemption Date. If Purchaser converts any Notes into Common
Stock prior to any Monthly Redemption payment, those conversions will be credited toward the
next Monthly Redemption payment due. Any conversions above the Monthly Redemption Amount
shall be credited towards future required payments. If any portion of the cash payment for
a Monthly Redemption shall not be paid by the Company by the respective due date, a penalty
shall accrue thereon at the rate of 18% per annum (or the maximum rate permitted by
applicable law, whichever is less) until the payment of the Monthly Redemption Amount, plus
all amounts owing thereon is paid in full. Alternatively, if any portion of the Monthly
Redemption Amount remains unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Company given at any time thereafter, to invalidate
ab initio such redemption, notwithstanding anything herein contained to the
contrary.



     Section 8. Negative Covenants. So long as any portion of this Note is
outstanding, the Company will not and will not permit any of its Subsidiaries to directly or
indirectly:




     a) enter into, create, incur, assume or suffer to exist any indebtedness or liens of
any kind, on or with respect to any of its property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom;




     b) amend its certificate of incorporation, bylaws or to its charter documents so as to
adversely affect any rights of the Holder;




     c) repay, repurchase or offer to repay, repurchase or otherwise acquire any of its
Common Stock, Preferred Stock, or other equity securities other than as to the Conversion
Shares
to the extent permitted or required under the Transaction Documents or as otherwise
permitted by the Transaction Documents;



12









 






     d) engage in any transactions with any officer, director, employee or any affiliate of
the Company, including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or
from, or otherwise requiring payments to or from any officer, director or such employee or,
to the knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or partner, in each
case in excess of $10,000 other than (i) for payment of salary or consulting fees for
services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) for other employee benefits, including stock option agreements under any stock option
plan of the Company; or




     e) create or acquire any Subsidiary after the date hereof unless (i) such Subsidiary is
a wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes party to the
Security Agreement and the Subsidiary Guaranty (either by executing a counterpart thereof or
an assumption or joinder agreement in respect thereof) and satisfied each condition of this
Agreement and the Transaction Documents as if such Subsidiary were a Subsidiary on the
Closing Date;




     f) sell, transfer or otherwise dispose of any of its assets on terms where it is or may
be leased to or re-acquired or acquired by the Company or any of its Subsidiaries;




     g) dispose, in a single transaction, or in a series of transactions all or any part of
its assets unless such disposal is (i) in the ordinary course of business, (ii) for fair
market value, (iii) for cash and (iv) approved by the board of directors of the Company; or




     h) enter into any agreement with respect to any of the foregoing.



     Section 9. Events of Default.




     a) “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court, or any order,
rule or regulation of any administrative or governmental body):




     i. any default in the payment of (A) the principal of amount of any Note, or
(B) Late Fees on, or liquidated damages in respect of, any Note, in each case free
of any claim of subordination, as and when the same shall become due and payable
(whether on a Conversion Date or the Maturity Date or by acceleration or otherwise)
which default, solely in the case of a default under clause (B) above, is not cured,
within 3 Trading Days;




     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in this Note or any of the other Transaction Documents (other
than a breach by the Company of its obligations to deliver shares of Common Stock to
the Holder upon conversion which breach is addressed in clause (xii) below) which
failure is not cured, if possible to cure, within the earlier to occur of (A) five
Trading Days after notice of such default sent by the Holder or by any other Holder
and (B) ten Trading Days after the Company shall become or should have become aware
of such failure;




     iii. a default or event of default (subject to any grace or cure period
provided for in the applicable agreement, document or instrument) shall occur under
(A) any of the



13









 






Transaction Documents other than the Notes, or (B) any other material
agreement, lease, document or instrument to which the Company or any Subsidiary is
bound;




     iv. any representation or warranty made herein, in any other Transaction
Document, in any written statement pursuant hereto or thereto, or in any other
report, financial statement or certificate made or delivered to the Holder or any
other holder of Notes shall be untrue or incorrect in any material respect as of the
date when made or deemed made;




     v. (i) the Company or any of its Subsidiaries shall commence, or there shall be
commenced against the Company or any such Subsidiary, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Subsidiary commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Company or any Subsidiary thereof or (ii) there
is commenced against the Company or any Subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of 60 days; or
(iii) the Company or any Subsidiary thereof is adjudicated by a court of competent
jurisdiction insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for it or any
substantial part of its property which continues undischarged or unstayed for a
period of 60 days; or (v) the Company or any Subsidiary thereof makes a general
assignment for the benefit of creditors; or (vi) the Company shall fail to pay, or
shall state that it is unable to pay, or shall be unable to pay, its debts generally
as they become due; or (vii) the Company or any Subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary thereof shall by
any act or failure to act expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or (ix) any corporate or other action is taken
by the Company or any Subsidiary thereof for the purpose of effecting any of the
foregoing;




     vi. the Company or any Subsidiary shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there may
be secured or evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Company in an amount exceeding
$150,000, whether such indebtedness now exists or shall hereafter be created and
such default shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable;




     vii. the Common Stock shall not be eligible for quotation on or quoted for
trading on a Trading Market and shall not again be eligible for and quoted or listed
for trading thereon within five Trading Days;




     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of 33%
of its assets in one or more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or other equity securities of the Company
(other than redemptions of Conversion Shares and repurchases of shares of Common
Stock or



14









 







other equity securities of departing officers and directors of the Company;
provided such repurchases shall not exceed $100,000, in the aggregate, for all
officers and directors during the term of this Note);




     ix. a Registration Statement shall not have been declared effective by the
Commission on or prior to the 240th calendar day after the Closing Date;




     x. if, during the Effectiveness Period (as defined in the Registration Rights
Agreement), the effectiveness of the Registration Statement lapses for any reason or
the Holder shall not be permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Registration Statement, in either case,
for more than 10 consecutive Trading Days or 15 non-consecutive Trading Days during
any 12 month period; provided, however, that in the event that the
Company is negotiating a merger, consolidation, acquisition or sale of all or
substantially all of its assets or a similar transaction and in the written opinion
of counsel to the Company, the Registration Statement, would be required to be
amended to include information concerning such transactions or the parties thereto
that is not available or may not be publicly disclosed at the time, the Company
shall be permitted an additional 10 consecutive Trading during any 12 month period
relating to such an event;




     xi. an Event (as defined in the Registration Rights Agreement) shall not have
been cured to the satisfaction of the Holder prior to the expiration of thirty days
from the Event Date (as defined in the Registration Rights Agreement) relating
thereto (other than an Event resulting from a failure of an Registration Statement
to be declared effective by the Commission on or prior to the Effectiveness Date (as
defined in the Registration Rights Agreement), which shall be covered by Section
9(a)(ix);




     xii. the Company shall fail for any reason to deliver certificates to a Holder
prior to the fifth Trading Day after a Conversion Date pursuant to and in accordance
with Section 5(e) or the Company shall provide notice to the Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversions of any Notes in accordance with the terms hereof; or




     xiii. the Company shall fail for any reason to pay in full the amount of cash
due pursuant to a Buy-In within five Trading Days after notice therefor is delivered
hereunder or shall fail to pay all amounts owed on account of an Event of Default
within five days of the date due.




     b) Remedies Upon Event of Default. If any Event of Default occurs, the full
principal amount of this Note, together with any other amounts owing in respect thereof, to
the date of acceleration shall become, at the Holder’s election, immediately due and payable
in cash. The aggregate amount payable upon an Event of Default shall be equal to 120% of
the principal amount of the Note. Commencing five days after the occurrence of any Event of
Default that results in the eventual acceleration of this Note, a penalty shall accrue on
this Note rate of 18% per annum, or such lower maximum amount of penalty rate permitted to
be charged under applicable law. All Notes for which the full Mandatory Prepayment Amount
hereunder shall have been paid in accordance herewith shall promptly be surrendered to or as
directed by the Company. The Holder need not provide and the Company hereby waives any
presentment, demand, protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be rescinded
and



15









 







annulled by Holder at any time prior to payment hereunder and the Holder shall have all
rights as a Note holder until such time, if any, as the full payment under this Section
shall have been received by it. No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereon.



     Section 10. Seniority.




               This Note is senior in rights of payment to any and all indebtedness of the Company



     Section 11. Miscellaneous.




     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holders hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth above,
facsimile number (702) 733-4907), Attn: Zak Khal, President, or such other address
or facsimile number as the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier service
addressed to each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this Section later
than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by the party to
whom such notice is required to be given.




     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Note shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal and liquidated damages (if any) on, this Note at the
time, place, and rate, and in the coin or currency, herein prescribed. This Note is a
direct debt obligation of the Company. This Note ranks pari passu with all
other Notes now or hereafter issued under the terms set forth herein.




     c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or
destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen
or destroyed but only upon receipt of evidence of such loss, theft or destruction of such
Note, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory
to the Company.




     d) Security Interest. This Note is a direct debt obligation of the Company
and, pursuant to the Security Agreement is secured by a first priority perfected security
interest in all of the assets of the Company and its subsidiaries for the benefit of the
Holders.



16









 






     e) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the transactions contemplated by
any of the Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be commenced in
the state and federal courts sitting in the City of New York, Borough of Manhattan (the
“New York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such New York
Courts are improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Note and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to this Note
or the transactions contemplated hereby. If either party shall commence an action or
proceeding to enforce any provisions of this Note, then the prevailing party in such action
or proceeding shall be reimbursed by the other party for its attorneys fees and other costs
and expenses incurred with the investigation, preparation and prosecution of such action or
proceeding.




     f) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this Note. The failure
of the Company or the Holder to insist upon strict adherence to any term of this Note on one
or more occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of this Note. Any
waiver must be in writing.




     g) Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain applicable to all
other persons and circumstances. If it shall be found that any penalty amount due hereunder
violates applicable regulations or laws governing usury, the applicable penalty due
hereunder shall automatically be reduced to equal the maximum permitted penalty. The Company
covenants (to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any
stay, extension or usury law or other law which would prohibit or forgive the Company from
paying all or any portion of the principal on this Note as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants that it will not,
by resort to any such law, hinder, delay or impeded the execution of any power herein
granted to the Holder, but will suffer and permit the execution of every such as though
no such law has been enacted.



17









 






     h) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the next succeeding
Business Day.




     i) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Note and shall not be deemed to limit or affect any of the
provisions hereof.



*********************




18









 





     IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized
officer as of the date first above indicated.



	 	 	 
	 

	 	LAS VEGAS GAMING, INC.
	 
	 	 
	 

	 	_/s/ Russell R. Roth
	 

	 	Russell R. Roth, CEO






19









 






ANNEX A




NOTICE OF CONVERSION




     The undersigned hereby elects to convert principal under the Senior Secured Convertible Note
of Las Vegas Gaming, Inc., a Nevada corporation (the “Company”), due on January 1, 2008,
into shares of common stock, par value $0.001 (the “Common Stock”), of the Company
according to the conditions hereof, as of the date written below. If shares are to be issued in
the name of a person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be charged to the holder
for any conversion, except for such transfer taxes, if any.



     By the delivery of this Notice of Conversion the undersigned represents and warrants to the
Company that its ownership of the Common Stock does not exceed the amounts determined in accordance
with Section 13(d) of the Exchange Act, specified under Section 4 of this Note.



     The undersigned agrees to comply with the prospectus delivery requirements under the
applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.



	 	 	 
	Conversion calculations:
	 	 
	 
	 	 
	 

	 	Date to Effect Conversion:
	 
	 	 
	 

	 	Principal Amount of Notes to be Converted:
	 
	 	 
	 

	 	Number of shares of Common Stock to be issued:
	 
	 	 
	 

	 	Signature:
	 
	 	 
	 

	 	Name:
	 
	 	 
	 

	 	Address:






20









 








Schedule 1


CONVERSION SCHEDULE


The Senior Secured Convertible Notes due on January 1, 2008, in the aggregate principal amount of
$5,000,000 issued by Las Vegas Gaming, Inc., a Nevada corporation. This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Note.




Dated:




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Aggregate	 	 	 	 
	 	 	 	 	 	 	Principal Amount	 	 	 	 
	 	 	 	 	 	 	Remaining	 	 	 	 
	 	 	 	 	 	 	Subsequent to	 	 	 	 
	 	 	 	 	 	 	Conversion	 	 	 	 
	Date of Conversion	 	 	 	 	 	(or original	 	 	 	 
	(or for first entry,	 	Amount of	 	 	Principal	 	 	 	 
	Original Issue Date)	 	Conversion	 	 	Amount)	 	 	Company Attest	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 






21