exv4w1



 








EXHIBIT 4.1



THE SECURITIES REPRESENTED HEREBY HAVE NOT 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 (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B)
AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS
NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTION 2(d)(viii) HEREOF. THE
PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 2(d)(viii) HEREOF.




SENIOR SECURED NOTE




			
	Note No:                     	 	 
	March 17, 2006
	 	$                    





     FOR VALUE RECEIVED, INFINITY ENERGY RESOURCES, INC., a Delaware corporation (the “Company”),
hereby promises to pay to the order of                                          or registered assigns (the “Holder”) the
principal amount of                      United States Dollars ($                    ) when due, whether upon
maturity, acceleration, redemption or otherwise, and to pay interest (“Interest”) on the unpaid
principal balance hereof on each Interest Payment Date (as defined in Section 2(a)(xix)) and upon
maturity, or earlier upon conversion, acceleration or redemption pursuant to the terms hereof, at
the Applicable Interest Rate. Interest on this Note payable on each Interest Payment Date and upon
maturity, or earlier upon conversion, acceleration or redemption pursuant to the terms hereof,
shall accrue from the Issuance Date and shall be computed on the basis of a 365-day year and actual
days elapsed.




          (1) Payments of Principal. All payments of principal of this Note (to the extent such
principal is not converted into Shares (as defined in Section 2(a)(xli) in accordance with the
terms hereof) shall be made in lawful money of the United States of America by wire transfer of
immediately available funds to such account as the Holder may from time to time designate by
written notice in accordance with the provisions of this Note. Except as provided in Section 7,
the Company has no right, but under certain circumstances may have an obligation, to make payments
of principal of this Note in cash prior to the Maturity Date (as defined in Section 2(a)(xxiii)).
Whenever any amount expressed to be due by the terms of this Note is due on any day that is not a
Business Day (as defined in Section 2(a)(vi)), the same shall instead be due on



 









 




the next succeeding day that is a Business Day. Each capitalized term used herein, and not otherwise defined,
shall have the meaning ascribed thereto in the Securities Purchase
Agreement, dated as of January 13, 2005, pursuant to which this Note and the Other Notes (as
defined below) were originally issued (as such agreement may be amended from time to time as
provided in such agreement, the “Securities Purchase Agreement”). This Note and all Other Notes
issued by the Company pursuant to the Securities Purchase Agreement on the Initial Closing Date and
any Additional Closing Dates and all notes issued in exchange therefor or replacement thereof are
collectively referred to in this Note as the “Notes.” This Note and each of the Other Notes
originally issued by the Company on the same Closing Date shall be deemed to be of the same
"Series.”




          (2) Conversion of this Note. This Note shall be converted into Shares on the terms
and conditions set forth in this Section 2.


               (a) Certain Defined Terms. For purposes of this Note, the following terms shall have
the following meanings:





          (i) “3-Month LIBOR Rate” means the London Interbank Offered Rate of LIBOR with
respect to a three-month period for deposits of United States Dollars as reported by
Bloomberg Financial Markets (or any successor thereto, “Bloomberg”) at approximately
10:00 a.m. (New York time) through its “LIBOR Rates” function (accessed by typing
“LR” [GO] on a Bloomberg terminal, and looking at the row entitled “3 MONTH” and
under the column entitled “DOLLAR LIBOR”) (or such other page as may replace that
page on that service, or such other service as may be selected jointly by the
Company and the Holders of the Notes). If such rate appears on the Bloomberg LIBOR
Rates page on any date of determination of the 3-Month LIBOR Rate (a “LIBOR
Determination Date”), the 3-Month LIBOR Rate for such date of determination will be
such rate. If on any LIBOR Determination Date such rate does not appear on the
Bloomberg LIBOR Rates page, the Company and the Holders of the Notes will jointly
request each of four major reference banks in the London interbank market, as
selected jointly by the Company and the Holders of the Notes, to provide the Company
with its offered quotation for United States dollar deposits for the upcoming
three-month period, to prime banks in the London interbank market at approximately
4:00 p.m., London time on any such LIBOR Determination Date and in a principal
amount that is representative for a single transaction in United States Dollars in
such market at such time. If at least two reference banks provide the Company with
offered quotations, 3-Month LIBOR Rate on such LIBOR Determination Date will be the
arithmetic mean of all such quotations. If on such LIBOR Determination Date fewer
than two of the reference banks provide the Company with offered quotations, 3-Month
LIBOR Rate on such LIBOR Determination Date will be the arithmetic mean of the
offered per annum rates that three major banks in New York City selected jointly by
the Company and the Holders of the Notes quote at approximately 11:00 A.M.



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in New York City on such LIBOR Determination Date for three-month United States dollar
loans to leading European banks, in a principal amount that is representative for a single transaction in United States dollars in such market
at such time. If these New York City quotes are not available, then the 3-Month
LIBOR Rate determined on such LIBOR Determination Date will continue to be 3-Month
LIBOR Rate as then currently in effect on such LIBOR Determination Date.




          (ii) “After-tax PV10” means, as of the date of any determination, the present
value of estimated future revenues to be generated by the Company and its
Subsidiaries, on a consolidated basis, from the production of their proved reserves
(calculated in accordance with SEC guidelines and based on the most recent
independent reserve report), net of estimated lease operating expenses, production
taxes, federal income taxes and future development costs, using price and costs as
of the date of determination without future escalation and without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and depreciation, depletion and amortization, and discounted using an annual
discount rate of 10% (as most recently disclosed by the Company on a Form 10-K, 10-Q
or 8-K based on an independent reserve report that was current as of the date that
the Company’s After-tax PV10 was disclosed in such Form 10-K, 10-Q or 8-K); provided
that After-tax PV10 shall mean zero unless the Company has (A) publicly disclosed
(either on a Form 10-K, 10-Q or 8-K) its After-tax PV10 as of a date within 100 days
of such date of determination and (B) certified as of such date of determination
that, to the Knowledge of the Company, After-tax PV10, if determined as of such date
of determination, would not be materially lower than After-tax PV10 as most recently
disclosed by the Company on a Form 10-K, 10-Q or 8-K.




          (iii) “Aggregate Notes Balance” means, as of the date of any determination, the
aggregate outstanding principal amount of all the Notes, together with all accrued
but unpaid interest thereon.




          (iv) “Allocation Percentage” means, with respect to each holder of Note as of
the date of any determination, a fraction of which the numerator is the aggregate
principal amount of the Notes originally purchased by such holder on the Initial
Closing Date and any Additional Closing Dates occurring on or prior to such date of
determination, and of which the denominator is the aggregate principal amount of the
Notes purchased by all holders on the Initial Closing Date and such Additional
Closing Dates.




          (v) “Applicable Interest Rate” initially shall mean the per annum interest rate
equal to the sum of (a) the 3-Month LIBOR Rate in effect on the Issuance Date, and
(b) six and three-quarter percent (6.75%); provided,



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however, that on the first
Business Day of each calendar quarter commencing after the Issuance Date (each, an
“Interest Reset Date”), such rate shall be adjusted to the per annum interest rate
equal to the sum of (a) the 3-Month LIBOR Rate in effect on such date, and (b) six and three-quarter percent
(6.75%). Each Applicable Interest Rate will be applicable as of and after the
Interest Reset Date to which it relates to, but not including, the next succeeding
Interest Reset Date.




          (vi) “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.




          (vii) “Common Stock” means (A) the Company’s common stock, $0.0001 par value
per share, and (B) any capital stock resulting from a reclassification of such
common stock.




          (viii) “Company Alternative Redemption Rate” means at any time during a
12-month period beginning on and including a date set forth below, the rate,
expressed as a percentage, set forth opposite such date below:



	 	 	 	 	 
	Issuance Date
	 	 	105	%
	First Anniversary of the Issuance Date
	 	 	104	%
	Second Anniversary of the Issuance Date
	 	 	103	%
	Third Anniversary of the Issuance Date
	 	 	102	%







and, if there has been a Maturity Date Extension (as defined below), the Company
Alternative Redemption Rate, at any time during the 12-month period beginning on and
including the fourth anniversary of the Issuance Date, shall be 101%.




          (ix) “Conversion Amount” means (A) the sum of (1) the principal amount of this
Note to be converted, redeemed or otherwise with respect to which this determination
is being made and (2) the Interest Amount with respect to the amount referred to in
the immediately preceding clause (1), or (B) in the case of an Interest Conversion
(as defined in Section 6), the Interest Amount to be converted.




          (x) “Conversion Price” means, as of any Conversion Date or other date of
determination, 95% of the Weighted Average Price of the Common Stock on the Trading
Day immediately preceding the Conversion Date applicable to the conversion for which
such determination is being made, subject to adjustment as provided herein.




          (xi) “Dollars” or “$” means United States Dollars.



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          (xii) “Expected Trading Days” means, with respect to any Company Alternative
Conversion Period (as defined in Section 8(a)), the number of regularly scheduled
Business Days in such period on which the Principal Market is scheduled to be open
for trading of the Common Stock.




          (xiii) “Fixed Maturity Date” means September 17, 2007; provided,
however, in the event that the principal amount of Notes of this or any
other Series is, in one or a series of transactions, reduced by at least $5,000,000
during the period beginning on March 18, 2006 and ending on September 17, 2006,
pursuant to (A) redemption by the Company pursuant to a Company Alternative
Redemption (as defined in Section 7(a)) (other than pursuant to a Mandatory
Compliance Redemption (as defined in Section 13)) with a Company Alternative
Redemption Date (as defined in Section 7(a)) on or prior to September 17, 2006, or
(B) conversion by the holders of the Notes pursuant to a Company Alternative
Conversion (as defined in Section 8(a)) (other than pursuant to a Mandatory
Compliance Conversion (as defined in Section 13)) for which the Company Alternative
Conversion Period (as defined in Section 8(a)) ends on or prior to September 17,
2006 (such reduction described in clauses (A) and (B) immediately above being
referred to as a “Six-Month Redemption/Conversion”), then the “Fixed Maturity Date”
shall mean September 17, 2009; provided, further, that if a
Six-Month Redemption/Conversion occurs and there has been a Maturity Date Extension,
then the “Fixed Maturity Date” shall mean September 17, 2010.




          (xiv) “Free Cash Flow Amount” means, as of the date of any determination, the
sum of (I) the lesser of (A) the product of (1) the Free Cash Multiple, multiplied
by (2) the Services Business Free Cash Flow and (B) the product of (x) 2, multiplied
by (y) the Services Business Revenue, plus (II) the lesser of (1) 50% of the result
of the immediately preceding clause (I), and (2) 30% of the Company’s After-tax
PV10, plus (III) 10% of the Company’s After-tax PV10.




          (xv) “Free Cash Flow Multiple” shall be the following number: 10 for any
determination of the Free Cash Flow Amount on December 31, 2004, 9.5 for any
determination of the Free Cash Flow Amount on March 31, 2005, 9.0 for any
determination of the Free Cash Flow Amount on June 30, 2005, 8.5 for any
determination of the Free Cash Flow Amount on September 30, 2005, and 8.0 for any
determination of the Free Cash Flow Amount after September 30, 2005.




          (xvi) “Free Cash Flow Test Failure” means that, as of the date of any
determination, the Free Cash Flow Amount is less than or equal to the Aggregate
Notes Balance.



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          (xvii) “Free Cash Flow Test Failure Amount” means that, in the event that there
is a Free Cash Flow Test Failure as of the date of any determination, an amount
equal to the product of (A) a fraction, of which the numerator is the outstanding
principal amount of this Note, together with all accrued but unpaid Interest thereon
as of such date, and of which the denominator is the outstanding principal amount of all Notes of the same Series as this
Note, together with all accrued but unpaid interest thereon as of such date,
multiplied by (B) an amount equal to the result of (x) the Aggregate Notes Balance
as of such date of determination, minus (y) the Priority Notes Balance as of such
date of determination, minus (z) the Free Cash Flow Amount; provided that, for
purposes of this calculation of “Free Cash Flow Test Failure Amount,” if the result
of (x)-(y)-(z) above is less than zero, then the amount used for (B) in the above
calculation shall be zero; and provided, further, that the Free Cash Flow Test
Failure Amount, as defined and determined under this Note, shall not exceed the
Principal of this Note together with all accrued but unpaid Interest thereon.




          (xviii) “Interest Amount” means, with respect to any Principal, all accrued and
unpaid Interest (including any Default Interest as defined in Section 6) on such
Principal through and including such date of determination.




          (xix) “Interest Payment Date” means the first Business Day of each calendar
quarter, beginning with the calendar quarter that commences on April 1, 2006 through
and including the last calendar quarter that commences prior to the Maturity Date.




          (xx) “Issuance Date” means the original date of issuance of this Note pursuant
to the Securities Purchase Agreement, regardless of any exchange or replacement
hereof.




          (xxi) “Lien” means, with respect to any asset, any mortgage, lien, pledge,
hypothecation, charge, security interest, encumbrance or adverse claim of any kind
and any restrictive covenant, condition, restriction or exception of any kind that
has the practical effect of creating a mortgage, lien, pledge, hypothecation,
charge, security interest, encumbrance or adverse claim of any kind (including any
of the foregoing created by, arising under or evidenced by any conditional sale or
other title retention agreement, the interest of a lessor with respect to a Capital
Lease Obligation, or any financing lease having substantially the same economic
effect as any of the foregoing).




          (xxii) “Mandatory Compliance Amount” means, as of the date of any
determination, (A) the Free Cash Flow Test Failure Amount, minus (B) any Principal
as to which a notice has been given to the Holder by the Company for conversion or
redemption in accordance herewith, but which has not been converted or paid prior to
the date of such determination, provided the Company



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is in compliance with Sections
7 and 8 in connection therewith (such amount in this clause (B) being referred to as
the “Excluded Amount”).




          (xxiii) “Maturity Date” means the earliest to occur of (A) the Fixed Maturity
Date, (B) the date of a Maturity Date Triggering Event, (C) such date as all
amounts due under this Note have been fully paid.




          (xxiv) “Maturity Date Extension” means the holders of Notes representing at
least two-thirds (2/3) of the aggregate principal amount of the then outstanding
Notes that are of the same Series as this Note, have (A) received a notice from the
Company no earlier than sixty (60) days, and no later than thirty (30) days prior to
September 17, 2008 (which notice the Company may deliver on only one occasion with
respect to such Series of Notes), requesting the holders of such Series of Notes to
extend the Fixed Maturity Date by twelve (12) months and (B) within ten (10)
Business Days of receipt of the notice described in clause (A) (such 10-Business-Day
Period, the “Response Period”), agreed in writing to extend the Maturity Date of all
the Notes of such Series by twelve (12) months, (provided that, for the avoidance of
doubt, if the Company does not receive such written agreement within the Response
Period from the requisite holders of the Notes of such Series, such requested
extension shall be deemed denied and the Fixed Maturity Date shall not be extended);
provided, however, that the Company shall not have the right to
request a Maturity Date Extension, and the holders of Notes shall not grant or be
deemed to have granted a Maturity Date Extension, and the Fixed Maturity Date shall
not be or be deemed to be extended unless and until a Six Month
Redemption/Conversion shall have occurred.




          (xxv) “Maturity Date Triggering Event” means any principal amount of the 7%
Notes is outstanding on the Business Day immediately preceding the scheduled
maturity date of the 7% Notes, unless the Free Cash Flow Amount as of the end of the
quarterly or annual period covered by the quarterly report on Form 10-Q or annual
report on Form 10-K most recently filed, or required to be filed, by the Company
with the SEC exceeds 150% of the Aggregate Notes Balance as of the Business Day
immediately preceding the scheduled maturity of the 7% Notes.




          (xxvi) “Other Notes” means all of the senior secured notes, other than this
Note, that have been issued by the Company pursuant to the Securities Purchase
Agreement and all notes issued in exchange therefor or replacement thereof.




          (xxvii) “Permitted Lien” means (a) Liens created by the Security Documents;
(b) Liens existing on the date of this Agreement not otherwise described in any
other clause of this definition and set forth on Schedule 3(aa); (c) Liens
for taxes or other governmental charges not at the time due and payable



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so long as
the Company and its Subsidiaries maintain adequate reserves in accordance with
United States generally accepted accounting principles (“GAAP”) in respect of such
taxes and charges; (d) Liens arising in the ordinary course of business in favor of
carriers, warehousemen, mechanics and materialmen, or other similar Liens imposed by
law, which remain payable without penalty or which are being contested in good faith
by appropriate proceedings diligently prosecuted, which proceedings have the effect
of preventing the forfeiture or sale of the property subject thereto, and in each case
for which adequate reserves in accordance with GAAP are being maintained; (e) Liens
arising in the ordinary course of business in connection with worker’s compensation,
unemployment compensation and other types of social security (excluding Liens
arising under ERISA) or Liens consisting of cash collateral securing the Company’s
or any of its Active Subsidiaries’ performance of surety bonds, bids, performance
bonds and similar obligations (exclusive of obligations for the payment of borrowed
money) permitted pursuant to clause (a)(IV) of Section 12 and, in each case, for
which the Company maintains adequate reserves; (f) attachments, appeal bonds (and
cash collateral securing such bonds), judgments and other similar Liens, for sums
not exceeding $500,000 in the aggregate for Company and its Subsidiaries, arising in
connection with court proceedings, provided that the execution or other enforcement
of such Liens is effectively stayed; (g) easements, rights of way, restrictions,
minor defects or irregularities in title and other similar Liens arising in the
ordinary course of business and not materially detracting from the value of the
property subject thereto and not interfering in any material respect with the
ordinary conduct of the business of the Company or any Subsidiary; (h) Liens in
favor of U.S. Bank and LaSalle in respect of the Duke LC Account and the Returned
Items Account (each as defined in the Security Agreement) to the extent such
accounts are maintained and permitted to exist in accordance with the terms of the
Security Agreement; (i) Liens consisting of cash collateral securing the Company’s
and its Active Subsidiaries’ reimbursement obligations under letters of credit
permitted by clauses (a)(VI) and (a)(VII) of Section 12, provided that the aggregate
amount of cash collateral securing such Indebtedness does not exceed the undrawn
face amount of all such letters of credit outstanding at any one time; (j) Liens
securing Indebtedness listed on Schedule 4(u) of the Securities Purchase Agreement
for up to thirty (30) days following the Initial Closing Date; (k) Liens on
equipment subject to Capital Lease Obligations permitted to be incurred pursuant to
clause (a)(V) of Section 12, to the extent such Liens secure such Capital Lease
Obligations; and (l) Liens in favor of Schlumberger Technology Corporation and Red
Oak Capital Management LP (collectively, the “Service Parties”), granted pursuant to
the Joint Value Enhancement Agreement, dated December 3, 2003, among Infinity Oil &
Gas of Wyoming, Inc. (“IOGW”) and the Service Parties (as in effect on the date
hereof, the “JVEA”), on the three (3) Project Wells (as such term is defined in the
JVEA) described on Exhibit C to Schedule VIII of the



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Security Agreement, to the
extent such Liens secure the obligations of IOGW to the Service Parties under the
JVEA.




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




          (xxix) “Principal” means the outstanding principal amount of this Note as of
any date of determination.




          (xxx) “Priority Notes Balance” means, as of the date of any determination, the
aggregate outstanding principal amount of all the Notes that have a Fixed Maturity
Date that is later than the Fixed Maturity Date of this Note, together with all
accrued but unpaid interest thereon.




          (xxxi) “Principal Market” means, with respect to the Common Stock or any other
security, the NASDAQ National Market or if the Common Stock or such other security,
as the case may be, is not traded on the NASDAQ National Market, then the principal
securities exchange or trading market for the Common Stock or such other security.




          (xxxii) “Registrable Securities” for purposes of this Note means Shares issued
or issuable upon conversion of this Note, and any shares of capital stock issued or
issuable with respect to such Shares as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, without regard to any
limitations on conversions of this Note.




          (xxxiii) “Registration Rights Agreement” means that certain registration rights
agreement, dated as of January 13, 2005, among the Company and the initial holders
of the Notes relating to the filing of registration statements covering, among other
things, the resale of Registrable Securities, as such agreement may be amended from
time to time as provided in such agreement.




          (xxxiv) “Registration Statement” means a registration statement or registration
statements filed under the 1933 Act pursuant to the Registration Rights Agreement
covering the resale of Registrable Securities.




          (xxxx) “SEC” means the United States Securities and Exchange Commission, or any
successor thereto.




          (xxxvi) “Security Agreement” means that certain security agreement among the
Company, its Active Subsidiaries and the initial holders of the Notes relating to
the granting by the Company and the Subsidiaries of a first-



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priority security
interest in all the assets of the Company and its Active Subsidiaries, as such
agreement may be amended from time to time as provided in such agreement.




          (xxxvii) “Security Documents” means any agreement, document or instrument
executed concurrently herewith or at any time hereafter pursuant to which the
Company, its Active Subsidiaries or any other Person either (i) guarantees payment
or performance of all or any portion of the obligations hereunder or under any other
instruments delivered in connection with the transactions contemplated hereby and by the Securities Purchase Agreement,
and/or (ii) provides, as security for all or any portion of such obligations, a Lien
on any of its assets in favor of the Holder, as any or all of the same may be
amended, supplemented, restated or otherwise modified from time to time.




          (xxxviii) “Series Allocation Percentage” means, with respect to each holder of
Notes of the same Series as this Note, a fraction of which the numerator is the
aggregate principal amount of Notes of such Series initially purchased by such
holder on the Issuance Date and of which the denominator is the aggregate principal
amount of Notes of such Series purchased by all holders on the Issuance Date.




          (xxxix) “Services Business Free Cash Flow” means, as of the date of any
determination, the result of (A) the consolidated net operating income before
interest, taxes, depreciation and amortization of the oil field services segment of
the operations of the Company and its Subsidiaries (as such segment is described in
the Company’s annual report on Form 10-K for the year ended December 31, 2003),
excluding net operating income derived from the Company and its affiliates, for the
12-month period ended on such date of determination, plus (B) the aggregate amount
of interest, service charges and fees paid by the Company in connection with the
LaSalle Facility and the mortgage Indebtedness of Consolidated Oil Well Services,
Inc. listed on Schedule 4(u) to the Securities Purchase Agreement prior to December
31, 2004 but during the 12-month period ended on such date of determination, minus
(C) all capital expenditures not funded solely out of the proceeds of Permitted
Subordinate Debt or issuances of non-redeemable capital stock of the Company,
interest and income taxes, in each case, of such segment for such 12-month period,
all as determined in accordance with GAAP applied on a consistent basis and
disclosed in the Company’s most recently filed quarterly report on Form 10-Q and/or
annual report on Form 10-K, as applicable.




          (xxxx) “Services Business Revenue” means, as of the date of any determination,
the consolidated revenue from the oil field services segment of the operations of
the Company and its Subsidiaries (as such segment is described in the Company’s
annual report on Form 10-K for the year ended December 31, 2003) excluding net
revenue derived from the Company and its affiliates, for the



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12-month period ended
on such date of determination, determined in accordance with GAAP applied on a
consistent basis and disclosed in the Company’s most recently filed quarterly report
on Form 10-Q and/or annual report on Form 10-K, as applicable.




          (xli) “Shares” means shares of Common Stock.




          (xlii) “Trading Day” means any day on which the Common Stock is traded on its
Principal Market; provided that “Trading Day” shall not include any day on which the
Principal Market is open for trading for less than 4.5 hours.




          (xliii) “Warrants” means the warrants issued to the holders of the Notes
pursuant to the Securities Purchase Agreement, and all warrants issued in exchange
or substitution therefor or replacement thereof pursuant to the terms of such
warrants or the Securities Purchase Agreement.




          (xliv) “Weighted Average Price” means, for any security as of any date, the
dollar volume-weighted average price for such security on its Principal Market
during the period beginning at 9:30 a.m. New York City time (or such other time as
its Principal Market publicly announces is the official open of trading) and ending
at 4:00 p.m. New York City time (or such other time as its 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 on the
electronic bulletin board for such security during the period beginning at 9:30 a.m.
New York City time (or such other time as such over-the-counter market publicly
announces is the official open of trading), and ending at 4:00 p.m. New York City
time (or such other time as such over-the-counter 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
the National Quotation Bureau, Inc. If the Weighted Average Price cannot be
calculated for such security on such 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 holders of Notes representing at least
two-thirds (2/3) of the aggregate principal amount of the Notes then outstanding as
to which such determination is being made. If the Company and the holders of the
Notes representing at least two-thirds (2/3) of the aggregate principal amount of
the Notes then outstanding as to which such determination is being made are unable
to agree upon the fair market value of the Common Stock, then such dispute shall be
resolved pursuant to Section 2(d)(iii) below with the term “Weighted Average Price”
being substituted for the term “Conversion Price.” All such determinations shall be



11









 






appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during any period during which the Weighted Average Price
is being determined.


               (b) Holder’s Conversion Right; Mandatory Redemption at Maturity. Subject to the
provisions of Section 5, at any time or times on or after the Issuance Date, the Holder shall be
entitled to convert all or any part of the Principal (and the Interest Amount relating thereto)
into fully paid and nonassessable Shares in accordance with Section 2(d), at the Conversion Rate
(as defined in Section 2(c)). The Company shall not issue any fraction of a Share upon any
conversion. If the issuance would result in the issuance of a fraction of a Share, then the
Company shall round such fraction of a Share up or down to the nearest whole share
(with 0.5 rounded up). If any Principal remains outstanding on the Maturity Date, then all
such Principal (and the Interest Amount relating thereto) shall be redeemed as of such date in
accordance with Section 2(d)(vii).



               (c) Conversion Rate. The number of Shares issuable upon conversion of any portion of
this Note pursuant to Section 2 shall be determined according to the following formula (the
“Conversion Rate”):




Conversion Amount

Conversion Price



               (d) Mechanics of Conversion. The conversion of this Note shall be conducted in the
following manner:





          (i) Holder’s Delivery Requirements. To convert a Conversion Amount
into Shares on any date (the “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m. New York
City time on such date, a copy of an executed conversion notice in the form attached
hereto as Exhibit I (the “Conversion Notice”) to the Company, and (B) if
required by Section 2(d)(viii), surrender to a common carrier for delivery to the
Company, no later than three (3) Business Days after the Conversion Date, the
original Note being converted (or an indemnification undertaking reasonably
acceptable to the Company with respect to this Note in the case of its loss, theft
or destruction).




          (ii) Company’s Response. Upon receipt or deemed receipt by the Company
of a copy of a Conversion Notice, the Company (I) shall immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to the Holder and the
Company’s designated transfer agent (the “Transfer Agent”), which confirmation shall
constitute an instruction to the Transfer Agent to process such Conversion Notice in
accordance with the terms herein and (II) on or before the second (2nd)
Business Day following the date of receipt or deemed receipt by the Company of such
Conversion Notice (the “Share Delivery Date”)



12









 






(A) provided that the Transfer Agent
is participating in The Depository Trust Company (“DTC”) Fast Automated Securities
Transfer Program and provided that the Holder is eligible to receive Shares through
DTC, credit such aggregate number of Shares to which the Holder shall be entitled to
the Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system, or (B) if the foregoing shall not apply, 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 to
which the Holder shall be entitled. If this Note is submitted for conversion, as
may be required by Section 2(d)(viii), and the Principal represented by this Note is
greater than the Principal being converted, then the Company shall, as soon as
practicable and in no event later than three (3) Business Days after receipt of this
Note (the “Note Delivery Date”) and at its own expense, issue and deliver to the Holder a new
Note representing the Principal not converted.




          (iii) Dispute Resolution. In the case of a dispute as to the
determination of the Conversion Price or the arithmetic calculation of the
Conversion Rate, the Company shall instruct the Transfer Agent to issue to the
Holder the Shares representing the number of Shares that is not disputed and shall
transmit an explanation of the disputed determinations or arithmetic calculations to
the Holder via facsimile within two (2) Business Day of receipt or deemed receipt of
the Holder’s Conversion Notice or other date of determination. If the Holder and
the Company are unable to agree upon the determination of the Conversion Price or
arithmetic calculation of the Conversion Rate within one (1) Business Day of such
disputed determination or arithmetic calculation being transmitted to the Holder,
then the Company shall promptly (and in any event within two (2) Business Days)
submit via facsimile (A) the disputed determination of the Conversion Price to an
independent, reputable investment banking firm agreed to by the Company and the
holders of the Notes representing at least two-thirds (2/3) of the aggregate
principal amounts of the Notes then outstanding as to which such determination is
being made, or (B) the disputed arithmetic calculation of the Conversion Rate to the
Company’s independent, outside accountant, as the case may be. The Company shall
direct 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 two (2) 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.




          (iv) Record Holder. The person or persons entitled to receive the
Shares issuable upon a conversion of this Note shall be treated for all purposes as
the legal and record holder or holders of such Shares on the Conversion Date.



13









 






          (v) Company’s Failure to Timely Convert.


                         (A) Cash Damages. If within three (3) Business Days after the Company’s receipt of
the facsimile copy of a Conversion Notice or deemed receipt of a Conversion Notice the Company
shall fail to issue and deliver a certificate to the Holder for, or credit the Holder’s or its
designee’s balance account with DTC with, the number of Shares to which the Holder is entitled upon
the Holder’s conversion of any Conversion Amount, or if the Company fails to issue and deliver a
new Note representing the Principal to which such Holder is entitled on or before the Note Delivery
Date pursuant to Section 2(d)(ii), then in addition to all other available remedies that the Holder
may pursue hereunder and under the Securities Purchase Agreement (including indemnification
pursuant to Section 8 thereof or at law or in equity), the Company shall pay additional damages to
the Holder for each day after the Share Delivery Date such conversion is not timely effected and/or
each day after the Note Delivery Date such Note is not delivered in an amount equal to 0.5% of the sum of (a) the product of (I) the number of
Shares not issued to the Holder or its designee on or prior to the Share Delivery Date and to which
the Holder is entitled and (II) the Weighted Average Price of the Common Stock on the Share
Delivery Date (such product is referred to herein as the “Share Product Amount”), and (b) in the
event the Company has failed to deliver a Note to the Holder on or prior to the Note Delivery Date,
the product of (y) the number of Shares issuable upon conversion of the Principal represented by
the Note as of the Note Delivery Date and (z) the Weighted Average Price of the Common Stock on the
Note Delivery Date; provided that in no event shall cash damages accrue pursuant to this Section
2(d)(v)(A) with respect to the Share Product Amount during the period, if any, in which the
Conversion Price or the arithmetic calculation of the Conversion Rate is subject to a bona fide
dispute that is subject to and being resolved pursuant to, and in compliance with the time periods
and other provisions of, the dispute resolution provisions of Section 2(d)(iii), provided that the
Shares are delivered to the Holder within two (2) Business Days of the resolution of such bona fide
dispute. Alternatively, subject to Section 2(d)(iii), at the election of the Holder made in the
Holder’s sole discretion, the Company shall pay to the Holder, in lieu of the additional damages
referred to in the preceding sentence (but in addition to all other available remedies that the
Holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification
pursuant to Section 8 thereof or at law or in equity)), 110% of the amount by which (A) the
Holder’s total purchase price (including brokerage commissions, if any) for the Shares purchased to
make delivery in satisfaction of a sale by the Holder of the Shares to which the Holder is entitled
but has not received upon a conversion exceeds (B) the net proceeds received by the Holder from the
sale of the Shares to which the Holder is entitled but has not received upon such conversion. If
the Company fails to pay the additional damages set forth in this Section 2(d)(v)(A) within five
(5) Business Days of the date incurred, then the Holder entitled to such payments shall have the
right at any time, so long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of such cash damages, the number of
Shares equal to the quotient of (X) the aggregate amount of the damages payments described herein
divided by (Y) the Conversion Price in effect on suc
h Conversion Date as specified by the Holder in
the Conversion Notice.





14









 







                         (B) Void Conversion Notice; Adjustment to Conversion Price. If for any reason the
Holder has not received all of the Shares prior to the tenth (10th) Business Day after the Share
Delivery Date with respect to a conversion of this Note, other than due to the limitation contained
in Section 5(b) or to the pendency of a dispute being resolved in accordance with Section 2(d)(iii)
(a “Conversion Failure”), then the Holder, upon written notice to the Company (a “Void Conversion
Notice”), 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 the Holder’s Conversion
Notice; provided that the voiding of the Holder’s Conversion Notice shall not affect the Company’s
obligations to make any payments that have accrued prior to the date of such notice pursuant to
Section 2(d)(v)(A) or otherwise.



                         (C) Redemption. In the event of a Conversion Failure, the Holder, upon written notice
to the Company, may require that the Company redeem, in accordance with Section 3, all of the
Principal, including the Principal previously submitted for conversion and with respect to which the Company has not delivered shares of Common Stock;
provided that the Holder shall not be entitled to require redemption of any Principal pursuant to
this clause (C) solely as a result of a Conversion Failure caused by any Principal being the
subject of a bona fide dispute that is subject to and being resolved pursuant to, and in compliance
with the time periods and other provisions of, the dispute resolution provisions of Section
2(d)(iii), provided the Shares are delivered to the Holder within two (2) Business Days of the
resolution of such bona fide dispute.





          (vi) Pro Rata Conversion. In the event the Company receives a
Conversion Notice from more than one holder of the Notes for the same Conversion
Date and the Company can convert some, but not all, of such Notes, then, subject to
Section 5(c), the Company shall convert from each holder of the Notes electing to
have Notes converted at such time a pro rata amount of such holder’s Note submitted
for conversion based on the principal amount of the Note submitted for conversion on
such date by such holder relative to the principal amount of the Notes submitted for
conversion on such date.




          (vii) Mechanics of Mandatory Redemption. If any Principal remains
outstanding on the Maturity Date, then the Holder shall surrender this Note, duly
endorsed for cancellation, to the Company, and such Principal shall be redeemed by
the Company as of the Maturity Date by payment on the Maturity Date to the Holder of
an amount equal to the sum of (A) 100% of such Principal plus (B) the Interest
Amount with respect to such Principal.




          (viii) Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon conversion of this Note in accordance with the terms hereof, the Holder
shall not be required to physically surrender this Note to the Company unless all of
the Principal is being converted. The Holder and the Company shall maintain records
showing the Principal converted or redeemed and the dates of such conversions or
redemptions or shall use such other method, reasonably



15









 






satisfactory to the Holder
and the Company, so as not to require physical surrender of this Note upon each such
conversion or redemption. In the event of any dispute or discrepancy, such records
of the Company establishing the Principal to which the Holder is entitled shall be
controlling and determinative in the absence of demonstrable error. Notwithstanding
the foregoing, if this Note is converted or redeemed as aforesaid, the Holder may
not transfer this Note unless the Holder first physically surrenders this Note to
the Company, whereupon the Company will forthwith issue and deliver upon the order
of the Holder a new Note of like tenor, registered as the Holder may request,
representing in the aggregate the remaining Principal represented by this Note. The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by
reason of the provisions of this paragraph, following conversion or redemption of
any portion of this Note, the Principal of this Note may be less than the principal
amount stated on the face hereof.


               (e) Taxes. The Company shall pay any and all taxes (excluding income taxes, franchise
taxes or other taxes levied on gross earnings, profits or the like of the Holder) that may be
payable with respect to the issuance and delivery of Shares upon the conversion of this Note.




          (3) Redemption at Option of the Holder.


               (a) Redemption Option Upon Triggering Event. In addition to all other rights of the
Holder contained herein, after a Triggering Event (as defined in Section 3(b)), the Holder shall
have the right, at the Holder’s option, to require the Company to redeem all or a portion of the
Principal at a price (“Redemption Price”) equal to the sum of (i) 120% of such Principal plus (ii)
the Interest Amount with respect to such Principal.



               (b) Triggering Event. A “Triggering Event” shall be deemed to have occurred at such
time as any of the following events:





          (i) the failure of any Note Registration Statement (as defined in the
Registration Rights Agreement) required to be filed pursuant to Section 2(a)(iii) or
Section 2(e)(iii) of the Registration Rights Agreement to be declared effective by
the SEC on or prior to the date that is 45 days after the applicable Effectiveness
Deadline (as defined in the Registration Rights Agreement);




          (ii) while a Note Registration Statement filed pursuant to Section 2(a)(iii),
Section 2(a)(iv) or Section 2(e)(iii) of the Registration Rights Agreement is
required to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of such Note Registration Statement lapses for any
reason (including the issuance of a stop order) or is unavailable to the Holder for
sale of Note Registrable Securities (as defined in the Registration Rights
Agreement) in accordance with the terms of the Registration



16









 






Rights Agreement, and
such lapse or unavailability continues for a period of five (5) consecutive Trading
Days or for more than an aggregate of ten (10) Trading Days in any 365-day period
(other than days during an Allowable Grace Period (as defined in the Registration
Rights Agreement));




          (iii) the suspension from trading or failure of the Common Stock to be listed
on the NASDAQ National Market or the New York Stock Exchange for a period of five
(5) consecutive Trading Days or for more than an aggregate of ten (10) Trading Days
in any 365-day period;




          (iv) the Company’s or the Transfer Agent’s notice to any holder of the Notes,
including by way of public announcement, at any time, of its intention not to comply
with a request for conversion of any Notes into Shares that is tendered in
accordance with the provisions of the Notes (excluding, however, a notice that
relates solely to a bona fide dispute that is subject to and being resolved pursuant
to, and in compliance with the time periods and other
provisions of, the dispute resolution provisions of Section 2(d)(iii), provided
neither such dispute nor such notice is publicly disclosed);




          (v) a Conversion Failure (as defined in Section 2(d)(v)(B));




          (vi) upon the Company’s receipt or deemed receipt of a Conversion Notice, the
Company not being obligated to issue Shares upon such conversion due to the
provisions of Section 5(c).




          (vii) the Company or any of its Subsidiaries breaches any representation,
warranty, covenant or other term or condition of the Securities Purchase Agreement,
the Registration Rights Agreement, the Warrants, this Note, the Security Documents
or any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby and hereby, except to the
extent that such breach would not have a Material Adverse Effect (as defined in
Section 3(a) of the Securities Purchase Agreement) and except, in the case of a
breach of a covenant or other term that is curable, only if such breach continues
for a period of at least ten (10) days after any “officer” (as such term is defined
in Rule 16a-1 under the 1934 Act) of the Company, or the principal financial officer
of any of the Company’s Active Subsidiaries, knew or reasonably should have known of
such breach; or




          (viii) the Company does not comply with the provisions of Section 6, 7, 12 or
13 hereof or Section 4(l), 4(n), 4(o), 4(p), 4(q), 4(r), 4(s), 4(t) or 4(v) or the
last sentence of Section 4(w) of the Securities Purchase Agreement.


               (c) Mechanics of Redemption at Option of Holder. Within one (1) Business Day after
the occurrence of a Triggering Event, the Company shall deliver written




17









 







notice thereof via
facsimile and overnight courier (“Notice of Triggering Event”) to the Holder and each holder of the
Other Notes. At any time after the earlier of the Holder’s receipt of a Notice of Triggering Event
and the Holder’s becoming aware of a Triggering Event, the Holder may require the Company to redeem
up to all of the Principal by delivering written notice thereof via facsimile and overnight courier
(“Notice of Redemption at Option of Holder”) to the Company, which Notice of Redemption at Option
of Holder shall indicate (i) the Principal that the Holder is electing to have the Company redeem
from it and (ii) the applicable Redemption Price, as calculated pursuant to Section 3(a) above;
provided that a Notice of Redemption at Option of Holder may only be sent during the period
beginning on and including the date of the Triggering Event and ending on and including the date
which is twenty (20) Business Days after the date on which the Holder receives a Notice of
Triggering Event from the Company with respect to such Triggering Event.



               (d) Payment of Redemption Price. Upon the Company’s receipt of a Notice(s) of
Redemption at Option of the Holder from any holder of the Other Notes, the Company shall promptly
notify the Holder by facsimile of the Company’s receipt of such notice(s). Each holder that has
sent such a notice shall, if required pursuant to Section 2(d)(viii),
promptly submit to the Company such holder’s Note that such holder has elected to have
redeemed. The Company shall deliver the applicable Redemption Price to the Holder within five (5)
Business Days after the Company’s receipt of a Notice of Redemption at Option of Holder, provided
that the Holder’s Note shall have been so delivered to the Company. If the Company is unable to
redeem all of the Notes submitted for redemption, the Company shall (i) redeem a pro rata amount
from each holder of the Notes based on the principal amount of the Notes submitted for redemption
by such holder relative to the aggregate principal amount of the Notes submitted for redemption by
all holders of the Notes, and (ii) in addition to any remedy the Holder may have under this Note,
the Securities Purchase Agreement and the Security Documents, pay to the Holder interest at the
rate of the lesser of 1.5% per month (prorated for partial months) or the highest lawful maximum
interest rate in respect of the unredeemed Principal until paid in full.



               (e) Void Redemption. In the event that the Company does not pay the Redemption Price
within the time period set forth in Section 3(d), at any time thereafter and until the Company pays
such unpaid Redemption Price in full, the Holder shall have the option (the “Void Optional
Redemption Option”) to, in lieu of redemption, require the Company to promptly return to the Holder
any or all of the Notes or any portion thereof representing the Principal that was submitted for
redemption by the Holder under this Section 3 and for which the Redemption Price (together with any
interest thereon) has not been paid, by sending written notice thereof to the Company via facsimile
(the “Void Optional Redemption Notice”). Upon the Company’s receipt of such Void Optional
Redemption Notice, (i) the Notice of Redemption at Option of Holder shall be null and void with
respect to the Principal subject to the Void Optional Redemption Notice, and (ii) the Company shall
immediately return to the Holder any Note subject to the Void Optional Redemption Notice.





18









 







               (f) Disputes; Miscellaneous. In the event of a bona fide dispute as to the
determination of the arithmetic calculation of the Redemption Price, such dispute shall be resolved
pursuant to Section 2(d)(iii) above, with the term “Redemption Price” being substituted for the
term “Conversion Rate.” A holder’s delivery of a Void Optional Redemption Notice and exercise of
its rights following such notice shall not affect the Company’s obligations to make any payments
that have accrued prior to the date of such notice. In the event of a redemption pursuant to this
Section 3 of less than all of the Principal, the Company shall promptly cause to be issued and
delivered to the Holder a Note representing the remaining Principal that has not been redeemed, if
necessary.




          (4) Other Rights of the Holders.


               (a) Reorganization, Reclassification, Consolidation, Merger or Sale. Any
recapitalization, reorganization, reclassification, consolidation, merger, sale of all or
substantially all of the Company’s assets to another Person or other transaction that is effected
in such a way that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock
is referred to herein as “Organic Change.” Prior to the consummation of any (i) sale of all or
substantially all of the Company’s assets to an acquiring Person (including, for the
avoidance of doubt, the sale of all or substantially all of the assets of the Company’s
Subsidiaries in the aggregate) or (ii) other Organic Change following which the Company is not a
surviving entity, the Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the “Acquiring Entity”) a written agreement, in
form and substance satisfactory to the holders representing at least two-thirds (2/3) of the
aggregate principal amount of the Notes then outstanding, to deliver to the Holder in exchange for
this Note, a security of the Acquiring Entity evidenced by a written instrument substantially
similar in form and substance to this Note and satisfactory to the holders representing at least
two-thirds (2/3) of the aggregate principal amount of the Notes then outstanding. Prior to the
consummation of any other Organic Change, the Company shall make appropriate provision (in form and
substance satisfactory to the holders representing at least two-thirds (2/3) of the aggregate
principal amount of the Notes then outstanding) to ensure that the Holder will thereafter have the
right to acquire and receive in lieu of or in addition to (as the case may be) the Shares
immediately theretofore acquirable and receivable upon the conversion of this Note (without regard
to any limitations or restrictions on conversion) such shares of stock, securities or assets that
would have been issued or payable in such Organic Change with respect to or in exchange for the
number of Shares that would have been acquirable and receivable upon the conversion of this Note as
of the date of such Organic Change (without taking into account any limitations or restrictions on
the conversion of this Note).



               (b) Optional Redemption Upon Change of Control. In addition to the rights of the
Holder under Section 4(a), upon a Change of Control (as defined below) of the Company the Holder
shall have the right, at the Holder’s option, to require the Company to redeem all or a portion of
the Principal at a price equal to 105% (or 115% in the case of an event satisfying the definition
of Change of Control pursuant to subsection (iii) below) of the Principal




19









 




plus the Interest Amount
with respect to such Principal (the “Change of Control Redemption Price”). No sooner than thirty
(30) nor later than twenty (20) Business 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 (a “Notice of Change of Control”) to the Holder.
At any time during the period beginning after receipt of a Notice of Change of Control (or, in the
event a Notice of Change of Control is not delivered at least twenty (20) Business Days prior to a
Change of Control, at any time on or after the date which is twenty (20) Business Days prior to a
Change of Control) and ending on the date of such Change of Control, the Holder may require the
Company to redeem all or a portion of the Principal by delivering written notice thereof via
facsimile and overnight courier (a “Notice of Redemption Upon Change of Control”) to the Company,
which Notice of Redemption Upon Change of Control shall be irrevocable (provided that the Company
complies with its obligations under this Section 4(b)) and shall indicate (i) the Principal that
the Holder is submitting for redemption, and (ii) the applicable Change of Control Redemption
Price, as calculated pursuant to this Section 4(b). Upon the Company’s receipt of a Notice(s) of
Redemption Upon Change of Control from any holder of the Other Notes, the Company shall promptly,
but in no event later than one (1) Business Day following such receipt, notify the Holder by
facsimile of the Company’s receipt of such Notice(s) of Redemption Upon Change of Control. The
Company shall deliver the Change of Control Redemption Price simultaneously with the consummation
of the Change of Control; provided that, if required by Section 2(d)(viii), this Note shall have
been so delivered to the Company. The Company shall not enter into any binding agreement or other
arrangement with respect to a Change of Control unless the Company provides that the payments
provided for in this Section 4(b) shall have priority to payments to stockholders in connection
with such Change of Control and the Company complies with such provision. For purposes of this
Section 4(b), “Change of Control” means (i) the consolidation, merger or other business combination
of the Company with or into another Person (other than (A) a consolidation, merger or other
business combination in which holders of the Company’s voting power immediately prior to the
transaction continue after the transaction to hold, directly or indirectly, a majority of the
combined voting power of the surviving entity or entities entitled to vote generally for the
election of 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 (including, for the avoidance of
doubt, the sale of all or substantially all of the assets of the Company’s Subsidiaries in the
aggregate) or (iii) the consummation of a purchase, tender or exchange offer made to and accepted
by the holders of more than the 50% of the outstanding Shares.




          (5) Limitations on Conversion.


               (a) Permitted Conversions. The Holder shall not have the right to convert this Note
except (i) at any time after the Holder delivers a Void Optional Redemption Notice pursuant to
Section 3(e), (ii) at any time after the Holder delivers a Void Acceleration Notice pursuant to
Section 11(c), (iii) at any time after an Event of Default (as defined in Section 11(a)) arising
from an event described in clause (v) or (vi) of Section 11(a), and (iv) in




20









 




connection with a
Company Alternative Conversion pursuant to Section 8, including in connection with an Interest
Conversion pursuant to Section 6 or a Mandatory Compliance Conversion pursuant to Section 13.



               (b) 4.99% Limitation. The Company shall not effect any conversion of this Note and
the Holder shall not have the right to convert Principal or any Interest Amount in excess of that
portion of the Principal Amount or any Interest Amount that, upon giving effect to such conversion,
would cause the aggregate number of Shares beneficially owned by the Holder and its affiliates to
exceed 4.99% of the total outstanding Shares following such conversion or issuance of Interest
Shares. For purposes of the foregoing proviso, the aggregate number of Shares beneficially owned
by the Holder and its affiliates shall include the Shares issuable upon conversion of this Note,
with respect to which the determination of such proviso is being made, but shall exclude the Shares
that would be issuable upon (i) conversion of the remaining, unconverted Principal and any Interest
Amount with respect thereto beneficially owned by the Holder and its affiliates and (ii) exercise,
conversion or exchange of the unexercised, unconverted or unexchanged portion of any other
securities of the Company (including any warrants or convertible preferred stock) subject to a
limitation on conversion, exercise or exchange analogous to the limitation contained herein
beneficially owned by the Holder and its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 5, beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”). For
purposes of this Section 5(b), in determining the number of outstanding Shares the Holder may rely on the number of
outstanding Shares as reflected in (1) the Company’s most recent quarterly report on Form 10-Q, or
annual report on Form 10-K, as the case may be, (2) a more recent public announcement by the
Company or (3) any other notice by the Company or the transfer agent for the common stock setting
forth the number of Shares outstanding. Upon the written request of the Holder, the Company shall
promptly, but in no event later than two (2) Business Days following the receipt of such request,
confirm in writing to the Holder the number of Shares then outstanding. In any case, the number of
outstanding Shares shall be determined after giving effect to the conversion, exercise or exchange
of securities of the Company, including the Notes and the Warrants, by the Holder and its
affiliates since the date as of which such number of outstanding Shares was reported. For purposes
of determining the maximum number of Shares that the Company may issue to the Holder pursuant to
Section 5(b) upon conversion of this Note on a particular Conversion Date, Holder’s delivery of a
Conversion Notice with respect to such conversion shall constitute a representation (on which the
Company may rely without investigation) by the Holder that, upon the issuance of the Shares to be
issued to it on such Conversion Date, the shares of Common Stock beneficially owned by the Holder
and its affiliates shall not exceed 4.99% of the total outstanding Shares immediately after giving
effect to such conversion, as determined in accordance with this Section 5(b).



               (c) Limitation on Number of Shares Issuable Hereunder. The Company shall not be
obligated to issue any Shares upon conversion of this Note if the issuance of such Shares would
exceed that number of Shares which the Company may issue upon conversion of the Notes and upon
exercise of the Warrants (the “Exchange Cap”) without




21









 




breaching the Company’s obligations under the
rules or regulations of the Principal Market, except that such limitation shall not apply in the
event that the Company (a) obtains Shareholder Approval or (b) obtains a written opinion from
outside counsel to the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Holders representing at least two-thirds (2/3) of the aggregate
principal amount of the Notes then outstanding. Until Shareholder Approval or such written opinion
is obtained, no purchaser of Notes pursuant to the Securities Purchase Agreement (the “Purchasers”)
shall be issued, upon conversion of, or as interest on, this Note, a number of Shares greater than
the product of (i) the difference of (x) the Exchange Cap, minus (y) the sum of (A) the aggregate
number of Shares that have been issued upon exercise of any Warrants or upon conversion of any
Notes prior to the date of such determination and (B) 100% of the Shares issuable as of the date of
such determination upon exercise of all Warrants then outstanding, multiplied by (ii) such
Purchaser’s Allocation Percentage (the “Cap Allocation Amount”). In the event that any Purchaser
shall sell or otherwise transfer any of such Purchaser’s Notes, the transferee shall be allocated a
pro rata portion of such Purchaser’s Cap Allocation Amount. In the event that any holder of Notes
shall convert all of such holder’s Notes and exercise all of such holder’s Warrants into a number
of Shares in an amount which, in the aggregate, is less than such holder’s Cap Allocation Amount,
then the difference between such holder’s Cap Allocation Amount and the number of Shares actually
issued to such holder upon conversion of such holder’s Notes and exercise of such holder’s Warrants
shall be allocated to the respective Cap Allocation Amounts of the remaining holders of Notes and
Warrants on a pro rata basis in proportion to the aggregate number of Shares issuable upon conversion of the Notes and exercise of the Warrants then held
by each such Holder.




          (6) Interest. Interest shall be payable on each Interest Payment Date, to the record
holder of this Note on such Interest Payment Date, in cash or, as permitted by the provisions of
Section 8, by electing to convert such Interest by giving a Company Alternative Conversion Notice
(as defined below) at least five (5) Business Days prior to such Interest Payment Date (each an
“Interest Conversion Election”) for a Company Alternative Conversion with respect to an Interest
Amount equal to the entire amount of such Interest (the “Interest Conversion Amount”) in accordance
with, and subject to the conditions and requirements of, Section 8 (an “Interest Conversion”). If
the Company does not make an Interest Conversion Election with respect to such Interest, such
Interest shall be paid in cash. The Company may only make an Interest Conversion Election if it
makes the same election with respect to all the Notes of the same Series. An Interest Conversion
Election shall be irrevocable by the Company. Upon delivery of an Alternative Conversion Notice
with respect to an Interest Conversion Amount, the Company shall comply with the provisions of
Sections 8. Any accrued and unpaid Interest which is not paid within five (5) Business Days of
such accrued and unpaid Interest’s Interest Payment Date shall bear interest at the rate of the
lesser of 1.5% per month (prorated for partial months) or the highest lawful maximum interest rate
per annum from such Interest Payment Date until the same is paid in full (the “Default Interest”).
The Company shall pay any and all taxes (excluding income taxes, franchise taxes or other taxes
levied on gross



22









 




earnings, profits or the like of the Holder) that may be payable with respect to
the issuance and delivery of Interest Shares.




          (7) Company Alternative Redemption.


               (a) General. At any time after Issuance Date, the Company shall have the right to
redeem some or all of the Principal (a “Company Alternative Redemption”) (excluding Principal that
is part of a Pro Rata Conversion Amount relating to a Company Alternative Conversion Notice Date
occurring prior to the Company Alternative Redemption Notice Date) for an amount in cash equal to
the product of (A) the applicable Company Alternative Redemption Rate and (B) the sum of (i) the
Principal being redeemed pursuant to this Section 7 and (ii) the Interest Amount with respect to
such Principal as of the Company Alternative Redemption Date (as defined below) (the “Company
Alternative Redemption Price”); provided that the Conditions to Company Alternative Redemption (as
set forth in Section 7(c)) and the conditions of this Section 7(a) and Section 7(b) are satisfied
(or waived in writing by the Holder). The Company may exercise its right to Company Alternative
Redemption by delivering to the Holder written notice (the “Company Alternative Redemption Notice”)
at least five (5) Business Days prior to the date of consummation of such redemption (“Company
Alternative Redemption Date”). The date on which the Holder receives the Company Alternative
Redemption Notice is referred to as the “Company Alternative Redemption Notice Date.” A Company
Alternative Redemption Notice shall be irrevocable by the Company. If the Company elects a Company
Alternative Redemption pursuant to this Section 7(a), then it must simultaneously take the same
action with respect to all of the Other Notes of the same Series as this Note. If the Company elects a Company Alternative Redemption (and
similar action under Other Notes of the same Series) with respect to less than all of the aggregate
principal amount of Notes of such Series then outstanding, then the Company shall elect to redeem a
principal amount (together with the related Interest Amount) from each of the holders of Notes of
such Series equal to the product of (I) the aggregate principal amount of the Notes of such Series
that the Company has elected to redeem pursuant to this Section 7 (or the similar provisions of
such Other Notes), multiplied by (II) the Holder’s Series Allocation Percentage (such amount with
respect to each holder of the Notes is referred to as its “Pro Rata Redemption Amount” and with
respect to the Holder is referred to as the Pro Rata Redemption Amount). In the event that the
initial holder of any Notes of such Series shall sell or otherwise transfer any of such holder’s
Notes, the transferee shall be allocated a pro rata portion of such holder’s Series Allocation
Percentage. The Company Alternative Redemption Notice shall state (i) the date selected by the
Company for the Company Alternative Redemption Date in accordance with this Section 7(a), (ii) the
aggregate principal amount of Notes of such Series that the Company has elected to redeem from all
of the holders of Notes of such Series pursuant to this Section 7 and (iii) each holder’s Pro Rata
Redemption Amount of the principal amount of Notes of such Series the Company has elected to redeem
pursuant to this Section 7(a).



               (b) Mechanics of Company Alternative Redemption. If the Company has exercised its
right to Company Alternative Redemption in accordance with Section 7(a) and the conditions of this
Section 7 are satisfied on the Company Alternative Redemption Date




23









 




(including the Conditions to
Company Alternative Redemption as set forth in Section 7(c)) (or waived in writing by the Holder),
then the Holder’s Pro Rata Redemption Amount, if any, that remains outstanding on the Company
Alternative Redemption Date shall be redeemed by the Company on such Company Alternative Redemption
Date by the payment by the Company to the Holder on such Company Alternative Redemption Date, by
wire transfer of immediately available funds, of an amount equal to the Company Alternative
Redemption Price for the Holder’s Pro Rata Redemption Amount. Notwithstanding anything contained
herein to the contrary, no notice delivered by the Company to any Holder regarding a Condition to
Company Alternative Redemption shall contain any material non-public information.



               (c) Conditions to Company Alternative Redemption. For purposes of this Section 7,
“Conditions to Company Alternative Redemption” means the following conditions: (i) during the
period beginning on and including the Issuance Date and ending on and including the applicable
Company Alternative Redemption Date, there shall not have occurred either (x) the public
announcement of a pending, proposed or intended Change of Control that has not been abandoned,
terminated or consummated and publicly disclosed as such at least ten (10) Trading Days prior to
the Company Alternative Redemption Notice Date or (y) a Triggering Event or an Event of Default, or
an event that with the passage of time or the giving of notice and without being cured would
constitute a Triggering Event or an Event of Default; and (ii) on each day during the period
beginning 90 days prior to the Company Alternative Redemption Notice Date and ending on and
including the applicable Company Alternative Redemption Date, the Company and its Subsidiaries
otherwise shall have been in compliance with in all material respects and shall not have breached
or been in breach in any material respect of any provision or covenant of the Securities Purchase Agreement or any of the other
Transaction Documents.



               (d) Remedies. In the event that the Company does not pay the Company Alternative
Redemption Price in full for the Holder’s Pro Rata Redemption Amount on the Company Alternative
Redemption Date and the Conditions to Company Alternative Redemption were satisfied, or to the
extent not satisfied, were waived by the Holder, then in addition to any remedy the Holder may have
under this Note and the Securities Purchase Agreement (including indemnification pursuant to
Section 8 thereof or at law or in equity), the Company Alternative Redemption Price payable in
respect of such unredeemed Pro Rata Redemption Amount shall bear interest at the rate of the lesser
of 1.5% per month (prorated for partial months) and the highest lawful maximum interest rate.




          (8) Company Alternative Conversion.


               (a) General. After the date that is ten (10) Trading Days after the Registration
Statement has been declared effective by the SEC, the Company shall have the right, in accordance
with the terms and subject to the conditions of this Section 8 (and, in the case of any Interest
Conversion Amount, Section 6, and, in the case of any Mandatory Compliance Amount, Section 13) and
provided that the Conditions to Company Alternative Conversion (as set forth below) are satisfied,
to require that all or any portion of the Principal




24









 




(together with the Interest Amount with respect
thereto) or any Interest payable on any Interest Payment Date be converted at the applicable
Conversion Price (a “Company Alternative Conversion”). The Company may exercise its right to elect
a Company Alternative Conversion by delivering to the Holder written notice thereof (a “Company
Alternative Conversion Notice”) at least five (5) Business Days prior to the first Trading Day of
the Company Alternative Conversion Period (as defined below). The date on which the Holder
receives the Company Alternative Conversion Notice, as applicable is referred to as the “Company
Alternative Conversion Notice Date”). If the Company elects a Company Alternative Conversion
(including an Interest Conversion pursuant to Section 6 or a Mandatory Compliance Conversion
pursuant to Section 13) pursuant to this Section 8, then it must simultaneously take the same
action with respect to all of the Other Notes of the same Series. The Company shall require
conversion of a Conversion Amount from each holder of Notes of such Series equal to (x) the product
of (I) the aggregate principal amount of Notes of such Series that the Company has elected to
convert pursuant to this Section 8 (or the similar provisions of such Other Notes), together with
the Interest Amount thereon, multiplied by (II) such holder’s Series Allocation Percentage or (y)
in the case of an Interest Conversion, the Interest Conversion Amount (such Conversion Amount with
respect to each such holder is referred to as its “Pro Rata Conversion Amount”). The Company
Alternative Conversion Notice shall indicate the number of consecutive Trading Days selected by the
Company during which the Holder must convert its Pro Rata Conversion Amount (the “Company
Alternative Conversion Period”) and the date of the first day of the Company Alternative Conversion
Period, which date must be at least five (5) Business Days after the Company Alternative Conversion
Notice Date, provided that (I) the Company Alternative Conversion Period shall be at least ten
(10) Trading Days and no more than thirty (30) Trading Days, (II) in the case of a Company
Alternative Conversion that is a Mandatory Compliance Conversion under Section 13 or an Interest Conversion under Section 6,
the Company Alternative Conversion Period shall be the twenty (20) consecutive Trading Days
commencing five (5) Business Days after such Company Alternative Conversion Notice Date, and (III)
any Company Alternative Conversion Period set forth in any Company Alternative Conversion Notice
given pursuant to any Other Notes on the same day shall be the same as the Company Alternative
Conversion Period set forth in the Company Alternative Conversion Notice given pursuant to this
Note. The Company Alternative Conversion Notice shall also indicate the date selected by the
Company for the last Trading Day of the Company Alternative Conversion Period, which is the last
date by which the Holder must convert its Pro Rata Conversion Amount (the “Final Company
Alternative Conversion Date”), (x) the aggregate principal amount (or Interest in the case of an
Interest Conversion Election) of the Series of Notes that the Company has elected to convert from
all the holders of Notes of such Series pursuant to this Section 8 (or other similar provisions in
such Other Notes), and (y) each holder’s Pro Rata Conversion Amount.



               (b) Mechanics of Company Alternative Conversion. If the Company has exercised its
right to Company Alternative Conversion in accordance with Section 8(a) and Section 6 or 13, as
applicable, and the conditions of this Section 8 are satisfied (or waived in writing by the Holder)
on the Company Alternative Conversion Notice Date and at each time the Holder delivers a Conversion
Notice or is deemed to have delivered a Conversion Notice with




25









 




respect to any portion of the
aggregate Pro Rata Conversion Amount of all Notes held by the Holder (a “Company Alternative
Conversion Date”) (including the Conditions to Company Alternative Conversion as set forth in
Section 8(c)), then, subject to Sections 5 and 8(d), the Holder shall convert the Pro Rata
Conversion Amount, together with any Interest Amount with respect to the allocable portion of
principal represented by such Pro Rata Conversion Amount accruing through and including the
applicable Conversion Date, in whole or in part and at such time or times as the Holder, in its
sole discretion determines, during the Company Alternative Conversion Period; provided, however,
that the Holder shall not be permitted to convert, during the Company Alternative Conversion
Period, any portion of the aggregate Conversion Amount of all Notes held by the Holder relating to
the Company Alternative Conversion Period that exceeds the product of (i) the Holder’s Allocation
Percentage and (ii) twenty percent (20%) of the sum of the daily dollar trading volume (as reported
by Bloomberg) of the Common Stock on its Principal Market on each of the Trading Days during the
Company Alternative Conversion Period (such limitation, the “Volume Conversion Restriction
Amount”). In the event any Pro Rata Conversion Amount has not been converted by the Holder prior
to the Final Company Alternative Conversion Date, then, subject to the limitations set forth in
Sections 5 and 8(e), the remaining Pro Rata Conversion Amount shall be converted as of the Final
Company Alternative Conversion Date, as if the Holder had delivered a Conversion Notice pursuant to
Section 2 with respect to such Pro Rata Conversion Amount on the Final Company Alternative
Conversion Date but without the Holder being required to actually deliver such Conversion Notice,
provided that the Conditions to Company Alternative Conversion are satisfied (or waived in writing
by the Holder) on the Final Company Alternative Conversion Date. In the event that the Conditions
to Company Alternative Conversion are not satisfied on the Final Company Alternative Conversion
Date (and, for the avoidance of doubt, on each day during the Company Alternative Conversion
Period), then the Company Alternative Conversion shall be null and void with respect to all or
any part designated by the Holder of the unconverted Pro Rata Conversion Amount and the Holder
shall be entitled to all the rights of a holder of this Note with respect to such amount of the Pro
Rata Conversion Amount and, accordingly, shall be subject to all the other provisions of this Note,
including that if such amount remains outstanding on the Maturity Date, then the Company shall
redeem the Principal represented by such amount in accordance with Section 2(d)(vii), unless such
Pro Rata Conversion Amount is an Interest Conversion Amount, a Mandatory Compliance Amount or an
Excluded Amount, in which the case Company shall be deemed to have given a Company Alternative
Redemption Notice with respect to such unconverted Pro Rata Conversion Amount (and, for purposes of
Section 7(a), shall be entitled to give such Company Alternative Redemption Notice), and such
amount shall be redeemed or paid by the Company within five (5) Business Days in accordance with
Section 7. Notwithstanding the foregoing, at any time during a Company Alternative Conversion
Period that does not relate to an Interest Conversion or a Mandatory Compliance Conversion, the
Company may give written notice to the Holder of termination of such Company Alternative Conversion
Period, provided that the Company gives the same notice to all holders of Notes of this Series, and
in such case, such Company Alternative Conversion Period shall terminate at the end of the first
Business Day following the Holder’s receipt of such not
ice of termination, the Company Alternative
Conversion shall be null and void with respect to any part of the Pro Rata Conversion Amount that
has not been converted as of such termination of the Company Alternative





26









 







Conversion Period (by
delivering a Conversion Notice on or prior to the first Business Day following the Holder’s receipt
of such notice of termination), and the Holder shall be entitled to all the rights of a holder of
the Note with respect to such amount of the Pro Rata Conversion Amount and, accordingly, shall be
subject to all the other provisions of this Note, including that if such amount remains outstanding
on the Maturity Date, then the Company shall redeem the Principal represented by such amount in
accordance with Section 2(d)(vii). Notwithstanding anything contained herein to the contrary, no
notice delivered by the Company to any Holder regarding a Condition to Company Alternative
Conversion shall contain any material non-public information.




          (c) Conditions to Company Alternative Conversion. “Conditions to Company Alternative
Conversion” means the following conditions: (i) except in the case of an Interest Conversion or
Mandatory Compliance Conversion, the aggregate principal amount of the Notes of any Series selected
for conversion by the Company as reflected in the Company Alternative Conversion Notice is at least
$500,000 (or, if less, the aggregate principal amount of the Notes of such Series then
outstanding); (ii) none of the Expected Trading Days during the Company Alternative Conversion
Period to which the Company Alternative Conversion Notice relates shall be Expected Trading Days in
any Company Alternative Conversion Period as to which another Company Alternative Conversion Notice
has been given pursuant to this Note or any Other Notes; (iii) the aggregate Conversion Amount of
the Notes selected for conversion by the Company as reflected in the Company Alternative Conversion
Notice shall not exceed fifteen percent (15%) of the product of (I) the arithmetic average of the
daily dollar trading volume (as reported by Bloomberg) of the Common Stock on its Principal Market
over the twenty (20) consecutive Trading Days ending on and including the date that is immediately
preceding the Company Alternative Conversion Notice Date multiplied by (II) the number of Expected
Trading Days during the Company Alternative Conversion Period to which the Company Alternative
Conversion Notice relates; (iv) the Company shall not have delivered the Company Alternative
Conversion Notice during any other Company Alternative Conversion Period nor, except in the case of
a Company Alternative Conversion being effected for purposes of a Mandatory Compliance Conversion
under Section 13, within twenty (20) Trading Days after the previous Final Company Alternative
Conversion Date; (v) during the period beginning on and including the Issuance Date and ending on
and including the Company Alternative Conversion Date, there shall not have occurred either (x) the
public announcement of a pending, proposed or intended Change of Control that has not been
abandoned, terminated or consummated and publicly disclosed as such at least ten (10) Trading Days
prior to the Company Alternative Conversion Date or (y) a Triggering Event or an Event of Default
(as defined in Section 11); (v) during the period beginning on the Issuance Date and ending on and
including the Company Alternative Conversion Date, the Company shall have delivered Shares upon
conversion of the Notes and upon exercise of the Warrants on a timely basis as set forth in Section
2(d)(ii) of the Notes and Section 2(a) of the Warrants, respectively; (vi) on each day during the
period beginning on and including the date that is forty-five (45) days prior to the Company
Alternative Conversion Notice Date and ending on and including the applicable Company Alternative
Conversion Date, the Common Stock is listed on the NASDAQ National Market or the New York Stock
Exchange and the Common Stock has not been suspended from trading on the NASDAQ National Market



27









 




or the New York Stock Exchange nor shall delisting or suspension by the NASDAQ National Market or the
New York Stock Exchange have been threatened either (A) in writing by the NASDAQ National Market or
the New York Stock Exchange or (B) by falling below the minimum listing maintenance requirements of
the NASDAQ National Market or the New York Stock Exchange; (vii) on each day during the period
beginning on and including the date that is ten (10) days prior to the Company Alternative
Conversion Notice Date and ending on and including the Company Alternative Conversion Date, a
Registration Statement shall be effective and available for the sale of not less 150% of the
Registrable Securities issuable upon conversion as of the Company Alternative Conversion Notice
Date of the aggregate Conversion Amount selected for conversion by the Company as reflected in the
Company Alternative Conversion Notice, in accordance with the Registration Rights Agreement, and
there shall not have been any Grace Period applicable to such Registration Statement (as defined in
the Registration Rights Agreement); (viii) on each day during the period beginning ninety (90) days
prior to the Company Alternative Conversion Notice Date, the Company and its Subsidiaries otherwise
shall have been in compliance with in all respects and shall not have breached or been in breach of
any provision or covenant of the Notes or any other Transaction Documents; and (ix) the Company
shall have obtained all requisite approvals of its stockholders for the issuance of the Shares to
the holders of the Notes.



               (d) Company Alternative Conversion Floor. If the Weighted Average Price of the Common
Stock during the applicable Company Alternative Conversion Period falls below $4.00 (subject to
adjustment for stock splits, stock dividends, stock combinations and other similar events after the
date of the Securities Purchase Agreement) or such higher price (which shall not exceed 85% of the
lesser of (i) the arithmetic average of the Weighted Average Price of the Common Stock on each of
the five (5) Trading Days immediately preceding the Company Alternative Conversion Notice Date and
(ii) the Weighted Average Price on the Trading Day immediately preceding the Company Alternative
Conversion Notice Date) as provided by the Company in the applicable Company Alternative Conversion Notice (the “Company
Alternative Conversion Trigger Price”), then any Company Alternative Conversion pursuant to Section
8(b) shall automatically terminate with respect to any Pro Rata Conversion Amount that is not
subject to a Conversion Notice delivered to the Company on or prior to the Company Alternative
Conversion Floor Trigger Date (as defined below), in accordance with this Section 8(d). The
Company Alternative Conversion Trigger Price shall be subject to adjustment for any stock dividend,
stock split, stock combination or other similar transaction. The first Trading Day, if any, during
the applicable Company Alternative Conversion Period on which the Weighted Average Price of the
Common Stock is less than the Company Alternative Conversion Trigger Price shall constitute a
“Company Alternative Conversion Floor Trigger Date” with respect to such Company Alternative
Conversion Period. On the first day immediately following the Company Alternative Conversion Floor
Trigger Date the Company Alternative Conversion shall be null and void with respect any portion of
the Pro Rata Conversion Amount that the Holder has not converted on or prior to the Company
Alternative Conversion Floor Trigger Date (by delivering a Conversion Notice on or prior to the
Company Alternative Conversion Floor Trigger Date), and the holder shall be entitled to all the
rights of a holder of this Note with respect to such amount of the Pro Rata Conversion Amount




28









 




and, accordingly, shall be subject to all the other provisions of this Note, including that if such
amount remains outstanding on the Maturity Date, then the Company shall redeem the Principal
represented by such amount in accordance with Section 2(d)(vii), unless such Pro Rata Conversion
Amount is an Interest Conversion Amount, a Mandatory Compliance Amount or an Excluded Amount, in
which case the Company shall be deemed to have given a Company Alternative Redemption Notice with
respect to such unconverted Pro Rata Conversion Amount (and, for purposes of Section 7(a) shall be
entitled to give such Company Alternative Conversion Notice), and such amount shall be redeemed or
paid by the Company within two (2) Business Days of the Company Alternative Conversion Floor
Trigger Date in accordance with Section 7.



               (e) Company Alternative Conversion Period Volume Limitations. Notwithstanding
anything contained in this Section 8 to the contrary, on the applicable Final Company Alternative
Conversion Date, (i) the Holder shall not be required (but shall be permitted subject to clause
(ii) of this Section 8(e)) to convert (and shall not be deemed, solely as a result of Section 8(b),
to have converted), on the applicable Final Company Alternative Conversion Date, any portion of the
aggregate Pro Rata Conversion Amount of all Notes held by the Holder in excess of the difference
between (A) the product of (I) the Holder’s Allocation Percentage and (II) ten percent (10%) of the
sum of the daily dollar trading volume (as reported by Bloomberg) of the Common Stock on its
Principal Market on each of the Trading Days during the Company Alternative Conversion Period,
minus (B) the aggregate Pro Rata Conversion Amount of all Notes held by the Holder converted by the
Holder during the Company Alternative Conversion Period and (ii) the Holder shall neither be
required nor permitted to convert (and shall not be deemed, solely as a result of Section 8(b) to
have converted), on the applicable Final Company Alternative Conversion Date, any portion of the
aggregate Pro Rata Conversion Amount of all Notes held by the Holder in excess of the difference
between (A) the applicable Volume Conversion Restriction Amount, minus (B) the aggregate Pro Rata
Conversion Amount of all Notes held by the Holder converted by the Holder during the Company
Alternative Conversion Period. Following the Final Company Alternative
Conversion Date, the Company Alternative Conversion shall be null and void with respect to the
unconverted Pro Rata Conversion Amount, and the Holder shall be entitled to all the rights of a
holder of this Note with respect to such amount of the Pro Rata Conversion Amount, and,
accordingly, shall be subject to all the other provisions of this Note, including that if such
amount remains outstanding on the Maturity Date, then the Company shall redeem the Principal
represented by such amount in accordance with Section 2(d)(vii), unless such Pro Rata Conversion
Amount is an Interest Conversion Amount, a Mandatory Compliance Amount or an Excluded Amount, in
which case the Company shall be deemed to have given a Company Alternative Redemption Notice with
respect to such unconverted Pro Rata Conversion Amount (and, for purposes of Section 7(a), shall be
entitled to give such Company Alternative Redemption Notice), and such amount shall be redeemed or
paid by the Company within five (5) Business Days in accordance with Section 7.




          (9) Reservation of Shares.



29









 




               (a) Reservation. The Company shall, so long as any of the Notes are outstanding, take
all action necessary to reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, such number of Shares as shall
from time to time be sufficient to effect the conversion of all of the principal amount then
outstanding under the Notes (together with accrued and unpaid Interest thereon); provided that the
number of Shares so reserved shall at no time be less than 100% of the number of Shares for which
the Notes are at any time convertible (without regard to any limitations on conversions) (the
“Required Reserve Amount”). The initial number of Shares reserved for conversions of the Notes and
each increase in the number of Shares so reserved 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 of
the Notes or increase in the number of reserved Shares, as the case may be. In the event the
Holder shall sell or otherwise transfer any portion of the Holder’s Notes, each transferee shall be
allocated a pro rata portion of the number of Shares reserved for such transferor. Any Shares
reserved and allocated to any Person that ceases to hold any Notes shall be allocated to the
remaining holders of the Notes, pro rata based on the principal amount of the Notes then held by
such holders.



               (b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved Shares to
satisfy its obligation to reserve for issuance upon conversion of the Notes at least a number of
Shares equal to the Required Reserve Amount, then the Company shall immediately take all action
necessary to increase the Company’s authorized Shares to an amount sufficient to allow the Company
to reserve the Required Reserve Amount for the Notes then outstanding.




          (10) Voting Rights. The Holders of the Notes shall have no voting rights, except as
required by law and as expressly provided in this Note.



          (11) Defaults and Remedies.


               (a) Events of Default. An “Event of Default” is (i) default in payment of any
Principal of this Note, any Company Alternative Redemption Price, or any Change of Control
Redemption Price, when and as due; (ii) default in payment of any Interest on this Note that is not
included in an amount described in the immediately preceding clause (i) that is not cured within
two (2) Business Days from the date such Interest was due; (iii) failure by the Company for ten
(10) days after notice to it to comply with any other provision of this Note in all material
respects; (iv) any default in payment of at least $300,000, individually or in the aggregate, under
or acceleration prior to maturity of, or any event or circumstances arising such that, any person
is entitled, or could, with the giving of notice and/or lapse of time and/or the fulfillment of any
condition and/or the making of any determination, become entitled, to require repayment before its
stated maturity of, or to take any step to enforce any security for, any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed of at least $300,000 by the Company or any of its Subsidiaries or
for money borrowed the repayment of at least $300,000 of




30









 




which is guaranteed by the Company or any
of its Subsidiaries, whether such indebtedness or guarantee now exists or shall be created
hereafter; (v) if the Company or any of its Subsidiaries pursuant to or within the meaning of any
Bankruptcy Law (as defined below); (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 Custodian
of it or any of its Subsidiaries for all or substantially all of its property; (D) makes a general
assignment for the benefit of its creditors; or (E) admits in writing that it is generally unable
to pay its debts as the same become due; (vi) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that (1) is for relief against the Company in an involuntary case;
(2) appoints a Custodian (as defined below) of the Company or any Subsidiary for all or
substantially all of its property; or (3) orders the liquidation of the Company or any Subsidiary;
(vii) the Company fails to file, or is determined to have failed to file, in a timely manner any
report required to be filed with the SEC pursuant to the 1934 Act, provided that any filing made
within the time period permitted by Rule 12b-25 under the 1934 Act and pursuant to a timely filed
Form 12b-25 shall, for purposes of this clause (vii), be deemed to be timely filed; (viii) the
Company or any of its Subsidiaries breaches any representation, warranty, covenant or other term or
condition of the Security Documents that adversely affects the security interest of the Holder (or
any agent or representative thereof on their behalf) in any material portion of the Collateral (as
defined in the Security Agreement) or the perfection or priority thereof; or (ix) one or more
judgments, non-interlocutory orders or decrees shall be entered by a U.S. state or federal or a
foreign court or administrative agency of competent jurisdiction against any the Company or any of
its Subsidiaries involving in the aggregate a liability (to the extent not covered by independent
third-party insurance) as to any single or related series of transactions, incidents or conditions,
of $300,000 or more, and the same shall remain unsatisfied, unvacated, unbonded or unstayed pending
appeal for a period of thirty (30) days after the entry thereof. The term “Bankruptcy Law” means
Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. The term
“Custodian” means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law. Within five (5) Business Days after the occurrence of any Event of Default set
forth in clause (iv), (v), (vi), (viii) or (ix) above, the Company shall deliver written notice
thereof to the Holder.



               (b) Remedies. If an Event of Default occurs and is continuing, the Holder of this
Note may declare all of this Note, including all amounts due hereunder (the “Acceleration Amount”),
to be due and payable immediately, except that in the case of an Event of Default arising from
events described in clauses (v) and (vi) of Section 11(a), this Note shall immediately become due
and payable without further action or notice. In addition to any remedy the Holder may have under
this Note and the Securities Purchase Agreement, such unpaid amount shall bear interest at the rate
of the lesser of 1.5% per month (prorated for partial months) or the highest lawful maximum
interest rate until paid in full. Nothing in this Section 11 shall limit any other rights the
Holder may have under this Note, the Security Documents or the Securities Purchase Agreement,
including Sections 2 and 3 of this Note.



               (c) Void Acceleration. In the event that the Company does not pay the Acceleration
Amount within five (5) Business Days of this Note becoming due under Section 11(b), at any time
thereafter and until the Company pays such unpaid Acceleration




31









 




Amount in full, the Holder shall
have the option to, in lieu of redemption, require the Company to promptly return this Note (to the
extent this Note has been previously delivered to the Company), in whole or any portion thereof, to
the Holder, by sending written notice thereof to the Company via facsimile (the “Void Acceleration
Notice”). Upon the Company’s receipt of such Void Acceleration Notice, (i) the acceleration
pursuant to Section 11(b) shall be null and void with respect to the portion of this Note subject
to such Void Acceleration Notice, and (ii) the Company shall promptly return the portion of this
Note (to the extent this Note has been previously delivered to the Company) subject to such Void
Acceleration Notice.




          (12) Other Indebtedness. Payments of principal and other payments due under this Note
shall not be subordinated to any obligations of the Company. The Holder of this Note is entitled
to the benefits of the Security Documents, and in the event of a transfer of this Note in
accordance with the terms hereof and the Securities Purchase Agreement, the Holder shall be deemed
to have assigned its rights under the Security Documents. For so long as this Note is outstanding,
the Company shall not, and shall not permit any of its Subsidiaries to, (a) issue, incur, assume or
extend the term of any Indebtedness (as defined below) except for (I) Indebtedness under the Notes,
(II) Indebtedness, (A) the holders of which agree in writing to be subordinate to the Notes on
terms and conditions acceptable to the Buyers, including with regard to interest payments and
repayment of principal, (B) which does not mature or otherwise require or permit redemption or
repayment prior to or on the Maturity Date of any Notes then outstanding; and (C) which is not
secured by any assets of the Company or any of its Subsidiaries, (III) Indebtedness solely between
the Company and/or one of its domestic Active Subsidiaries, on the one hand, and the Company and/or
one of its domestic Active Subsidiaries, on the other, provided that in each case a majority of the
equity of any such domestic Active Subsidiary is directly or indirectly owned by the Company, such
domestic Active Subsidiary is controlled by the Company and such domestic Active Subsidiary is a
party to the Guaranty Agreement and the Security Agreement, (IV) surety bonds, bids, performance
bond, and similar obligations (exclusive of obligations for the payment of borrowed money) obtained
by the Company and its Subsidiaries in the ordinary course of business for the purpose of
satisfying federal, state and/or local legal requirements for owning and operating their oil and
gas properties or operating the Services Business, (V) Capital Lease Obligations incurred in
connection with acquiring equipment for the Company’s oil and gas exploration and production
business in amounts not exceeding individually, the fair market value of the equipment subject to
such Capital Lease Obligations and in an aggregate outstanding amount not exceeding 7.5% of
After-tax PV10 at any one time, (VI) reimbursement obligations in respect of letters of credit
issued by one or more financial institutions for the account of the Company or any of its Active
Subsidiaries in connection with the Company’s establishment and maintenance of a Hedged position
with respect to, at any time, a maximum of 2/3 of the Company’s estimate of its oil and gas
production for the succeeding 12 calendar months on a rolling 12-calendar month basis, (VII)
reimbursement obligations in respect of letters of credit issued for the account of the Company or
any of its Active Subsidiaries for the purpose of securing performance obligations of the Company
or its Active Subsidiaries incurred in the ordinary course of business (and not issued in
connection with the Company’s establishment and maintenance of a Hedged position) so long as the
aggregate face amount of all such letters of credit do not exceed $1,000,000 at any



32









 







one time, (VIII) Indebtedness under that certain unsecured promissory note, dated January 27, 2003, in the
name of Dobber Aviation, L.L.C., in a principal amount not exceeding $2,500,000 (less any payments
of principal thereon or other reductions to principal made from time to time with respect thereto),
and (IX) that certain unsecured obligation of the Company to Premium Assignment Corporation
existing as of the date of this Agreement in an amount not to exceed $159,623.86 (less any payments
of such obligation or other reductions to such obligation made from time to time with respect
thereto); (b) issue, incur, assume, or extend the term of any Indebtedness in a principal amount in
excess of $2,000,000 where the proceeds of such Indebtedness are to be used to develop, or in
connection with the development of, assets located outside the United States in which the holders
of the Notes do not have a valid, perfected first priority security interest; (c) issue any capital
stock of the Company or any Subsidiary redeemable prior to the Maturity Date; (d) directly or
indirectly, create, assume or suffer to exist any Lien, other than a Permitted Lien, on any asset
now owned or hereafter acquired by the Company or any of its Subsidiaries; or (e) except as
required or expressly permitted by Section 4(d), 4(q), 4(r) or 4(u) of the Securities Purchase
Agreement, redeem, or otherwise repay in cash any principal of, any Indebtedness (other than
Indebtedness under the Notes). For purposes of this Note: (x) “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services (other than unsecured account
trade payables that are (i) entered into or incurred in the ordinary course of the Company’s and
its Subsidiaries’ business, (ii) on terms that require full payment within 90 days, (iii) not
unpaid in excess of 90 days beyond invoice due date or are being contested in good faith and as to
which such reserve as is required by GAAP has been made and (iv) not exceeding at any one time an
aggregate among the Company and its Subsidiaries of $5,000,000 in the oil and gas production
segment of the Company’s business (as such segment is described in the Company’s annual report on
Form 10-K for the year ended December 31, 2003) or $1,000,000 in all other segments of the
Company’s business, collectively, (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, redeemable capital stock 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 Capital Lease
Obligations, (G) all indebtedness referred to in clauses (A) through (F) 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, change, 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 that owns such assets or property has not assumed or become liable for the payment of such
indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (A) through (G) above; (y) “Capital Lease Obligation”
means, as to any Person, any obligation that is required to be classified and accounted for as a
capital lease on a balance sheet of such Person prepared in accordance with GAAP, and the amount of
such obligation shall be the capitalized amount thereof, determined in accordance with



33









 







GAAP; and (z) “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.



          (13) Free Cash Flow Amount and Mandatory Compliance Conversion or Redemption. On the
first Business Day following each date that the Company files or is required to file an annual
report on Form 10-K or a quarterly report on Form 10-Q (which in each case shall disclose the Free
Cash Flow Amount as of the end of the period covered by such report and details of the calculation
thereof, and the components thereof), the Company shall deliver to the Holder a certificate
executed by its principal financial officer (an “Officer’s Certificate”) certifying as to whether
or not as of the end of the period covered by such report, there is a Free Cash Flow Test Failure
and the related calculations with respect thereto. Notwithstanding anything contained herein to
the contrary, no Officer’s Certificate delivered by the Company to any Holder regarding a Free Cash
Flow Test Failure shall contain any material non-public information. Upon each occurrence of a
Free Cash Flow Test Failure, the Company shall provide the Holder, by the third (3rd) Business Day
following the delivery of the Officer’s Certificate either (i) if permitted by the provisions of
Section 8, a Company Alternative Conversion Notice for a Company Alternative Conversion of
Principal of this Note equal to the applicable Mandatory Compliance Amount, and any Interest Amount
related thereto, in accordance with, and subject to the conditions and requirements of, Section 8
(a “Mandatory Compliance Conversion”), (ii) a Company Alternative Redemption Notice for a Company
Alternative Redemption of the Principal of this Note equal to the applicable Mandatory Compliance
Amount, and any Interest Amount related thereto, in accordance with Section 7 (a “Mandatory
Compliance Redemption”) or (iii) a combination of the immediately preceding clauses (i) and (ii);
provided that all of the outstanding applicable Mandatory Compliance Amount, and any Interest
Amount related thereto, must be converted or redeemed by the Company, subject to the provisions of
Section 7 and/or 8, as applicable; provided further that the Company may elect more than one of the
Mandatory Compliance Conversion and the Mandatory Compliance Redemption, if each such election is
with respect to at least 20% of the Mandatory Compliance Amount and if such election is the same for all Notes of the same Series. If the
Company has not satisfied the conditions required to make a Mandatory Compliance Conversion
election with respect to one or more Series of Notes, subject to satisfaction of the conditions of
Section 8, the Company may still make a Mandatory Compliance Conversion election with respect to
those Series of Notes for which it can satisfy the conditions for delivery of a Mandatory
Compliance Conversion election. Upon delivery of a Company Alternative Redemption Notice or
Company Alternative Conversion Notice pursuant to the preceding sentence, the Company is required
to comply with the provisions of Sections 7 and 8, respectively. If a Company Alternative
Conversion Notice does not cover the entire applicable Mandatory Compliance Amount or no Company
Alternative Conversion Notice is given with respect to an applicable Mandatory Compliance Amount,
the Company will be deemed to have



34









 







elected a Mandatory Compliance Redemption hereunder with respect
to the remaining Mandatory Compliance Amount not covered by a Company Alternative Conversion Notice
(and, for purposes of Section 7(a), shall be entitled to elect such Mandatory Compliance
Redemption).



          (14) Participation; Restrictions. While this Note is outstanding, the Company shall
not, and shall not permit any of its Subsidiaries to: (i) declare, set aside or pay any dividends
on or make any other distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or in substitution for any
capital stock; provided however, that any Subsidiary may declare, set aside or pay any dividends on
or make any other distributions (whether in cash, stock, equity securities or property) in respect
of any of its capital stock that is held solely by the Company or by a domestic Active Subsidiary,
provided that a majority of the equity of such domestic Active Subsidiary is directly or indirectly
owned by the Company, such domestic Active Subsidiary is controlled by the Company and such
domestic Active Subsidiary is a party to the Guaranty Agreement and the Security Agreement, (ii)
purchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock or
the capital stock of any of its Subsidiaries, direct or indirect, except repurchases of unvested
shares at cost in connection with the termination of the employment relationship with any employee
pursuant to stock option or purchase agreements in effect on the date hereof and set forth on
Schedule 3(c) of the Securities Purchase Agreement, or (iii) grant, issue or sell any
Options, Convertible Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of its capital stock. While this Note is outstanding,
the Company and its Subsidiaries shall not enter into any agreement which would limit or restrict
the Company’s or any of its Subsidiaries’ ability to perform under, or take any other voluntary
action to avoid or seek to avoid the observance or performance of any of the terms to be observed
or performed by it under, this Note, the Securities Purchase Agreement, the Registration Rights
Agreement, the Warrants and the Security Documents.



          (15) Notices.


               (a) The Company will give written notice to the Holder at least ten (10) Business Days prior
to the date on which the Company closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription
offer to holders of Common Stock or (III) for determining rights to vote with respect to any
Organic Change (as defined in Section 4(a)), dissolution or liquidation, provided that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.



               (b) The Company will also give written notice to the Holder at least ten (10) Business Days
prior to the date on which any Organic Change (as defined in Section 4(a)), dissolution or
liquidation will take place, provided that such information shall be made known to the public prior
to or in conjunction with such notice being provided to the Holder.





35









 








          (16) Vote to Change the Terms of the Notes. The written consent of the Company and
the holders representing at least two-thirds (2/3) of the principal amount then outstanding under
the Notes of the same Series shall be required for any change that relates only to such Series of
Notes (including this Note) and upon receipt of such consent, each such Note of the such Series
shall be deemed amended thereby. The written consent of the Company and the holders representing
at least two-thirds (2/3) of the principal amount then outstanding under the all of the Notes shall
be required for any change that relates to all of the Notes (including this Note), and upon receipt
of such consent, each Note shall be deemed amended thereby.



          (17) Lost or Stolen Notes. 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 an indemnification undertaking by the Holder to the Company
in customary form and reasonably satisfactory to the Company and, in the case of mutilation, upon
surrender and cancellation of this Note, the Company shall execute and deliver a new Note of like
tenor and date; provided, however, the Company shall not be obligated to re-issue a Note if the
Holder contemporaneously requests the Company to convert this Note in its entirety into Shares as
permitted hereunder.



          (18) 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, at law or in equity (including a decree of specific performance and/or
other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with
the provisions giving rise to such remedy, and nothing herein shall limit the Holder’s right to
pursue actual damages for any failure by the Company to comply with the terms of this Note. The
Company covenants to the Holder that there shall be no characterization concerning this instrument
other than as expressly provided herein. 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 thereof 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.



          (19) Specific Shall Not Limit General; Construction. No specific provision contained
in this Note shall limit or modify any more general provision contained herein. This Note shall be
deemed to be jointly drafted by the Company and all Purchasers and shall not be construed against
any person as the drafter hereof.



          (20) 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



36









 







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.



          (21) Notice. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement.



          (22) Transfer of this Note. The Holder may assign or transfer some or all of its
rights hereunder, subject to compliance with the 1933 Act and the provisions of Section 2(f) of the
Securities Purchase Agreement without the consent of the Company, provided that any transfer of
this Note to a Person that is not an affiliate of the Holder of this Note of less than all of the
Principal represented hereby, shall be in Principal amount of not less than $2,000,000.



          (23) 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 (b) an attorney is retained to represent the Holder in 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, including reasonable attorneys’ fees and
disbursements.



          (24) Cancellation. After all principal and other amounts at any time owed under this
Note have been paid in full or converted into Shares in accordance with the terms hereof, this Note
shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.



          (25) Note Exchangeable for Different Denominations. Subject to Section 2(d)(viii), in
the event of a conversion or redemption pursuant to this Note of less than all of the Principal,
the Company shall promptly cause to be issued and delivered to the Holder, upon tender by the
Holder of this Note, a new Note of like tenor representing the remaining Principal that has not
been so converted or redeemed. This Note is exchangeable, upon the surrender hereof by the Holder
at the principal office of the Company, for a new Note or Notes containing the same terms and conditions and representing in the aggregate the Principal, and each such
new Note will represent such portion of such Principal as is designated by the Holder at the time
of such surrender. The date the Company issued this Note shall be the “Issuance Date” hereof
regardless of the number of times a new Note shall be issued.



          (26) 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, the Security Documents and the
Securities Purchase Agreement.



          (27) Governing Law. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of



37









 







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
country or jurisdiction) that would cause the application of the laws of any jurisdiction or
country other than the State of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, 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, that such suit, action or proceeding is brought in an inconvenient forum or that
the venue of such suit, action or proceeding is improper. 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 to such party at the address for such 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 HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.



          (28) Effect of Redemption or Conversion; No Prepayment. Upon payment of the
Redemption Price, the Change of Control Redemption Price, the Company Alternative Redemption Price
or the amount provided for in Section 2(d)(vii), each in accordance with the terms hereof with
respect to any portion of the Principal of this Note, or delivery of Shares upon conversion of any
portion of the Principal in accordance with the terms hereof, such portion of the Principal of this
Note shall be deemed paid in full and shall no longer be deemed outstanding for any purpose.
Except as specifically set forth in this Note, including Section 2, the Company does not have any
right, option, or obligation, to pay any portion of the Principal at any time prior to the Maturity
Date.



          (29) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Holder hereunder or the Holder enforces or exercises its rights hereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, by
a trustee, receiver or any other person under any law (including any bankruptcy law, U.S. state or
federal law, common law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such enforcement or setoff had not
occurred.



          (30) Interpretative Matters. Unless the context otherwise requires, (a) all
references to Sections, Schedules or Exhibits are to Sections, Schedules or Exhibits contained in
or attached to this Note, (b) each accounting term not otherwise defined in this Note has the
meaning assigned to it in accordance with GAAP, (c) words in the singular or plural include the



38









 







singular and plural and pronouns stated in either the masculine, the feminine or neuter gender
shall include the masculine, feminine and neuter and (d) the use of the word “including” in this
Note shall be by way of example rather than limitation. If a stock split, stock dividend, stock
combination or other similar event occurs during any period over which an average price is being
determined, then an appropriate adjustment will be made to such average to reflect such event.



* * * * * *




39









 




     IN WITNESS WHEREOF, the Company has caused this Note to be signed by James A. Tuell, its
President and Chief Executive Officer, as of the 17th day of March 2006.




	 	 	 	 	 
	 	INFINITY ENERGY RESOURCES, INC.

 	 
	 	By:  	/s/ James
A. Tuell	 
	 	 	Name:  	James A. Tuell 	 
	 	 	Title:  	President and Chief Executive Officer 	 
	 




 









 





EXHIBIT I

INFINITY ENERGY RESOURCES, INC.

CONVERSION NOTICE




          Reference is made to the Convertible Note (the “Note”) of Infinity Energy Resources, Inc., a
Delaware corporation (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 $0.0001 per share (the “Common Stock”), of the Company, as
of the date specified below.



          Date of Conversion:                                                                                                                                                                  



          Aggregate Conversion Amount to be converted, other than pursuant to Section 6:                                                    



          Principal, applicable thereto, to be converted:                                                                                                                     



          Interest Conversion Amount to be converted pursuant to Section 6:                                                                             


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:                                                                                                


DTC Participant Number and Name (if electronic book entry transfer):
                                                                                 

Account Number (if electronic book entry transfer):                                                                                                                 




 









 





ACKNOWLEDGMENT




          The Company hereby acknowledges this Conversion Notice and hereby directs [TRANSFER AGENT] to
issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated_________ ___, 200___from the Company and acknowledged and agreed to by
[TRANSFER AGENT].



	 	 	 	 	 
	 	INFINITY ENERGY RESOURCES, INC.

 	 
	 	By:  	 	 
	 	Name:  	 	 
	 	Title: