f8k073108ex4v_ea3pacificap.htm


    
      Exhibit
4.5



     

     

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”).  THE SECURITIES MAY
NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE
144 OR REGULATION S UNDER SAID ACT.

     

    


     

    CALLABLE
SECURED CONVERTIBLE NOTE

     

    
      
         

        
          
            	
                    Irvine,
      California

                  	 
      
	
                    July
      31, 2008

                  	
                    $22,000

                  


          

        

         

      

    

     

    FOR VALUE
RECEIVED, PACIFICAP ENTERTAINMENT HOLDINGS, INC., a Nevada corporation
(hereinafter called the “Borrower”), hereby promises to
pay to the order of AJW MASTER FUND, LTD. or registered assigns (the “Holder”) the sum of $22,000,
on  July 31, 2011 (the “Maturity Date”), and to pay
interest on the unpaid principal balance hereof at the rate of twelve percent
(12%) per annum from July 31, 2008 (the “Issue Date”) until the same
becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.  Any amount of principal or interest on this
Note which is not paid when due shall bear interest at the rate of fifteen
percent (15%) per annum from the due date thereof until the same is paid (“Default
Interest”).  Interest shall commence accruing on the issue
date, shall be computed on the basis of a 365-day year and the actual number of
days elapsed and shall be payable, quarterly on March 31, June 30,
September 30 and December 31 of each year beginning on the last day of the
first full quarter after the Issue Date.  All payments due hereunder
(to the extent not converted into common stock, $.001 par value per share, of
the Borrower (the “Common
Stock”) in accordance with the terms hereof) shall be made in lawful
money of the United States of America.  All payments shall be made at
such address as the Holder shall hereafter give to the Borrower by written
notice made in accordance with the provisions of this Note.  Whenever
any amount expressed to be due by the terms of this Note is due on any day which
is not a business day, the same shall instead be due on the next succeeding day
which is a business day and, in the case of any interest payment date which is
not the date on which this Note is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining the amount
of interest due on such date.  As used in this Note, the term
“business day” shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are authorized or
required by law or executive order to remain closed.  Each capitalized
term used herein, and not otherwise defined, shall have the meaning ascribed
thereto in that certain Securities Purchase Agreement, dated July 31, 2008,
pursuant to which this Note was originally issued (the “Purchase
Agreement”).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

    This Note
is free from all taxes, liens, claims and encumbrances with respect to the issue
thereof and shall not be subject to preemptive rights or other similar rights of
stockholders of the Borrower and will not impose personal liability upon the
holder thereof.  The obligations of the Borrower under this Note shall
be secured by that certain Security Agreement and that certain Intellectual
Property Security Agreement by and between the Borrower and the Holder, each
dated July 31, 2008.

     

    The
following terms shall apply to this Note:

     

     

    ARTICLE
I.   CONVERSION RIGHTS

     

    1.1 Conversion
Right.  The Holder shall
have the right from time to time, and at any time on or prior to the earlier of
(i) the Maturity Date and (ii) the date of payment of the Default Amount (as
defined in Article III) pursuant to Section 1.6(a) or Article III, the Optional
Prepayment Amount (as defined in Section 5.1 or any payments pursuant to Section
1.7, each in respect of the remaining outstanding principal amount of this Note
to convert all or any part of the outstanding and unpaid principal amount of
this Note into fully paid and non-assessable shares of Common Stock, as such
Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall hereafter be
changed or reclassified at the conversion price  (the “Conversion Price”) determined
as provided herein (a “Conversion”); provided, however, that in no
event shall the Holder be entitled to convert any portion of this Note in excess
of that portion of this Note upon conversion of which the sum of (1) the number
of shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Notes or the unexercised
or unconverted portion of any other security of the Borrower subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (2) the number of shares of Common Stock issuable upon the
conversion of the portion of this Note with respect to which the determination
of this proviso is being made, would result in beneficial ownership by the
Holder and its affiliates of more than 4.9% of the outstanding shares of Common
Stock.  For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso.  The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing the Conversion Amount
(as defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A
(the “Notice of
Conversion”), delivered to the Borrower by the Holder in accordance with
Section 1.4 below; provided that the Notice of Conversion is submitted by
facsimile (or by other means resulting in, or reasonably expected to result in,
notice) to the Borrower before 6:00 p.m., New York, New York time on such
conversion date (the “Conversion
Date”).  

     

     

    
      
        
        

      

      
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      The term
“Conversion Amount”
means, with respect to any conversion of this Note, the sum of (1) the principal
amount of this Note to be converted in such conversion plus (2) accrued and
unpaid interest, if any, on such principal amount at the interest rates provided
in this Note to the Conversion Date plus (3) Default
Interest, if any, on the amounts referred to in the immediately preceding
clauses (1) and/or (2) plus (4) at the
Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights
Agreement, dated as of July 31, 2008, executed in connection with the initial
issuance of this Note and the other Notes issued on the Issue Date (the “Registration Rights
Agreement”).

    

     

    1.2 Conversion
Price.

     

    (a) Calculation
of Conversion Price.  The Conversion
Price shall be the lesser of (i) the Variable Conversion Price (as defined
herein) and (ii) the Fixed Conversion Price (as defined herein) (subject, in
each case, to equitable adjustments for stock splits, stock dividends or rights
offerings by the Borrower relating to the Borrower’s securities or the
securities of any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar
events).  The “Variable Conversion Price”
shall mean the Applicable Percentage (as defined herein) multiplied by the
Market Price (as defined herein).  “Market Price” means the
average of the lowest three (3) Trading Prices (as defined below) for the Common
Stock during the twenty (20) Trading Day period ending one Trading Day prior to
the date the Conversion Notice is sent by the Holder to the Borrower via
facsimile (the “Conversion
Date”).  “Trading Price” means, for any
security as of any date, the intraday trading price on the Over-the-Counter
Bulletin Board (the “OTCBB”) as reported by a
reliable reporting service mutually acceptable to and hereafter designated by
Holders of a majority in interest of the Notes and the Borrower or, if the OTCBB
is not the principal trading market for such security, the intraday trading
price of such security on the principal securities exchange or trading market
where such security is listed or traded or, if no intraday trading price of such
security is available in any of the foregoing manners, the average of the
intraday trading prices of any market makers for such security that are listed
in the “pink sheets” by the National Quotation Bureau, Inc.  If the
Trading Price cannot be calculated for such security on such date in the manner
provided above, the Trading Price shall be the fair market value as mutually
determined by the Borrower and the holders of a majority in interest of the
Notes being converted for which the calculation of the Trading Price is required
in order to determine the Conversion Price of such Notes.  “Trading Day” shall mean any
day on which the Common Stock is traded for any period on the OTCBB, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded.  “Applicable Percentage” shall
mean 25.0%.  The “Fixed Conversion Price” shall
mean $.02.

     

    (b) Conversion
Price During Major Announcements.  Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the event the Borrower
(i) makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any person, group
or entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the  “Announcement Date”), then the
Conversion Price shall, effective upon the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have been applicable
for a Conversion occurring on the Announcement Date and (y) the Conversion Price
that would otherwise be in effect. 

     

     

    
      
        
        

      

      
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      From and
after the Adjusted Conversion Price Termination Date, the Conversion Price shall
be determined as set forth in this Section 1.2(a).  For purposes
hereof,  “Adjusted
Conversion Price Termination Date” shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this Section 1.2(b) has been made, the date upon
which the Borrower (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) consummates or publicly announces the
termination or abandonment of the proposed transaction or tender offer (or
takeover scheme) which caused this Section 1.2(b) to become
operative.

    

     

    1.3 Authorized
Shares.  Subject to the
Stockholder Approval, the Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Note and the other Notes issued pursuant to the Purchase
Agreement.  The Borrower is required at all times to have authorized
and reserved two (2) times the number of shares that is actually issuable upon
full conversion of the Notes (based on the Conversion Price of the Notes or the
Exercise Price of the Warrants in effect from time to time) (the “Reserved
Amount”).  The Reserved Amount shall be increased from time to
time in accordance with the Borrower’s obligations pursuant to Section 4(h) of
the Purchase Agreement.  The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and
non-assessable.  In addition, if the Borrower shall issue any
securities or make any change to its capital structure which would change the
number of shares of Common Stock into which the Notes shall be convertible at
the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Notes.  The Borrower (i) acknowledges
that it has irrevocably instructed its transfer agent to issue certificates for
the Common Stock issuable upon conversion of this Note, and (ii) agrees
that its issuance of this Note shall constitute full authority to its officers
and agents who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Note.

     

    If, at
any time a Holder of this Note submits a Notice of Conversion, and the Borrower
does not have sufficient authorized but unissued shares of Common Stock
available to effect such conversion in accordance with the provisions of this
Article I (a “Conversion
Default”), subject to Section 4.8, the Borrower shall issue to the Holder
all of the shares of Common Stock which are then available to effect such
conversion.  The portion of this Note which the Holder included in its
Conversion Notice and which exceeds the amount which is then convertible into
available shares of Common Stock (the “Excess Amount”) shall,
notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the Holder’s
option at any time after) the date additional shares of Common Stock are
authorized by the Borrower to permit such conversion, at which time the
Conversion Price in respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Default Date (as defined below) and (ii) the Conversion
Price on the Conversion Date thereafter elected by the Holder in respect
thereof.  

     

     

    
      
        
        

      

      
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      In
addition, the Borrower shall pay to the Holder payments (“Conversion Default Payments”)
for a Conversion Default in the amount of (x) the sum of (1) the then
outstanding principal amount of this Note plus (2) accrued and
unpaid interest on the unpaid principal amount of this Note through the
Authorization Date (as defined below) plus (3) Default
Interest, if any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y)
..24, multiplied
by (z) (N/365), where N = the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion Default (the “Conversion Default Date”) to
the date (the “Authorization
Date”) that the Borrower authorizes a sufficient number of shares of
Common Stock to effect conversion of the full outstanding principal balance of
this Note.  The Borrower shall use its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable following the
earlier of (i) such time that the Holder notifies the Borrower or that the
Borrower otherwise becomes aware that there are or likely will be insufficient
authorized and unissued shares to allow full conversion thereof and (ii) a
Conversion Default.  The Borrower shall send notice to the Holder of
the authorization of additional shares of Common Stock, the Authorization Date
and the amount of Holder’s accrued Conversion Default Payments.  The
accrued Conversion Default Payments for each calendar month shall be paid in
cash or shall be convertible into Common Stock (at such time as there are
sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Borrower’s option, as follows:

    

     

    (a) In the
event Holder elects to take such payment in cash, cash payment shall be made to
Holder by the fifth (5th) day of
the month following the month in which it has accrued; and

     

    (b) In the
event Holder elects to take such payment in Common Stock, the Holder may convert
such payment amount into Common Stock at the Conversion Price (as in effect at
the time of conversion) at any time after the fifth day of the month following
the month in which it has accrued in accordance with the terms of this Article I
(so long as there is then a sufficient number of authorized shares of Common
Stock).

     

    The
Holder’s election shall be made in writing to the Borrower at any time prior to
6:00 p.m., New York, New York time, on the third day of the month following the
month in which Conversion Default payments have accrued.  If no
election is made, the Holder shall be deemed to have elected to receive
cash.  Nothing herein shall limit the Holder’s right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Borrower’s failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including degree of specific performance and/or
injunctive relief).

     

    1.4 Method of
Conversion.

     

    (a) Mechanics
of Conversion.  Subject to
Section 1.1, this Note may be converted by the Holder in whole or in part at any
time from time to time after the Issue Date, by (A) submitting to the
Borrower a Notice of Conversion (by facsimile or other reasonable means of
communication dispatched on the Conversion Date prior to 6:00 p.m., New York,
New York time) and (B) subject to Section 1.4(b), surrendering this Note at
the principal office of the Borrower.

     

     

    
      
        
        

      

      
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    (b) Surrender
of Note Upon Conversion.  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 Borrower unless the entire unpaid principal amount of
this Note is so converted.  The Holder and the Borrower shall maintain
records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Borrower, so as not to require physical surrender of this Note
upon each such conversion.  In the event of any dispute or
discrepancy, such records of the Borrower shall be controlling and determinative
in the absence of manifest error.  Notwithstanding the foregoing, if
any portion of this Note is converted as aforesaid, the Holder may not transfer
this Note unless the Holder first physically surrenders this Note to the
Borrower, whereupon the Borrower will forthwith issue and deliver upon the order
of the Holder a new Note of like tenor, registered as the Holder (upon payment
by the Holder of any applicable transfer taxes) may request, representing in the
aggregate the remaining unpaid principal amount of 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 of a portion
of this Note, the unpaid and unconverted principal amount of this Note
represented by this Note may be less than the amount stated on the face
hereof.

     

    (c) Payment
of Taxes.  The Borrower
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock or other
securities or property on conversion of this Note in a name other than that of
the Holder (or in street name), and the Borrower shall not be required to issue
or deliver any such shares or other securities or property unless and until the
person or persons (other than the Holder or the custodian in whose street name
such shares are to be held for the Holder’s account) requesting the issuance
thereof shall have paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has been
paid.

     

    (d) Delivery
of Common Stock Upon Conversion.  Upon receipt by
the Borrower from the Holder of a facsimile transmission (or other reasonable
means of communication) of a Notice of Conversion meeting the requirements for
conversion as provided in this Section 1.4, the Borrower shall issue and deliver
or cause to be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion within two (2)
business days after such receipt (and, solely in the case of conversion of the
entire unpaid principal amount hereof, surrender of this Note) (such second
business day being hereinafter referred to as the “Deadline”) in accordance with
the terms hereof and the Purchase Agreement (including, without limitation, in
accordance with the requirements of Section 2(g) of the Purchase Agreement that
certificates for shares of Common Stock issued on or after the effective date of
the Registration Statement upon conversion of this Note shall not bear any
restrictive legend).

     

    (e) Obligation
of Borrower to Deliver Common Stock.  Upon receipt by
the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid interest on
this Note shall be reduced to reflect such conversion, and, unless the Borrower
defaults on its obligations under this Article I, all rights with respect to the
portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion.  

     

     

    
      
        
        

      

      
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      If the
Holder shall have given a Notice of Conversion as provided herein, the
Borrower’s obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of the absence of any action
by the Holder to enforce the same, any waiver or consent with respect to any
provision thereof, the recovery of any judgment against any person or any action
to enforce the same, any failure or delay in the enforcement of any other
obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion.  The Conversion Date
specified in the Notice of Conversion shall be the Conversion Date so long as
the Notice of Conversion is received by the Borrower before 6:00 p.m., New York,
New York time, on such date.

    

     

    (f) Delivery
of Common Stock by Electronic Transfer.  In lieu of
delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower’s transfer agent is participating in the
Depository Trust Company (“DTC”) Fast Automated
Securities Transfer (“FAST”) program, upon request
of the Holder and its compliance with the provisions contained in Section 1.1
and in this Section 1.4, the Borrower shall use its best efforts to cause its
transfer agent to electronically transmit the Common Stock issuable upon
conversion to the Holder by crediting the account of Holder’s Prime Broker with
DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.

     

    (g) Failure
to Deliver Common Stock Prior to Deadline.  Without in any
way limiting the Holder’s right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the
Common Stock issuable upon conversion of this Note is more than two (2) days
after the Deadline (other than a failure due to the circumstances described in
Section 1.3 above, which failure shall be governed by such Section) the Borrower
shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline
that the Borrower fails to deliver such Common Stock.  Such cash
amount shall be paid to Holder by the fifth day of the month following the month
in which it has accrued or, at the option of the Holder (by written notice to
the Borrower by the first day of the month following the month in which it has
accrued), shall be added to the principal amount of this Note, in which event
interest shall accrue thereon in accordance with the terms of this Note and such
additional principal amount shall be convertible into Common Stock in accordance
with the terms of this Note.

     

    1.5 Concerning
the Shares.  The shares of
Common Stock issuable upon conversion of this Note may not be sold or
transferred unless  (i) such shares are sold pursuant to an effective
registration statement under the Act or (ii) the Borrower or its transfer agent
shall have been furnished with an opinion of  counsel (which opinion
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that the shares to be sold or transferred
may be sold or transferred pursuant to an exemption from such registration or
(iii) such shares are sold or transferred pursuant to Rule 144 under the
Act (or a successor rule) (“Rule 144”) or (iv) such shares
are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who
agrees to sell or otherwise transfer the shares only in accordance with this
Section 1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement).  

     

     

    
      
        
        

      

      
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      Except as
otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock
issuable upon conversion of this Note have been registered under the Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold, each certificate for
shares of Common Stock issuable upon conversion of this Note that has not been
so included in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the following form,
as appropriate:

    

     

    “THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.  THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR
REGULATION S UNDER SAID ACT.”

     

    The
legend set forth above shall be removed and the Borrower shall issue to the
Holder a new certificate therefor free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Common Stock
may be made without registration under the Act and the shares are so sold or
transferred, (ii) such Holder provides the Borrower or its transfer agent with
reasonable assurances that the Common Stock issuable upon conversion of this
Note (to the extent such securities are deemed to have been acquired on the same
date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock
issuable upon conversion of this Note, such security is registered for sale by
the Holder under an effective registration statement filed under the Act or
otherwise may be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be immediately
sold.  Nothing in this Note shall (i) limit the Borrower’s obligation
under the Registration Rights Agreement or (ii) affect in any way the Holder’s
obligations to comply with applicable prospectus delivery requirements upon the
resale of the securities referred to herein.

     

    1.6 Effect of Certain
Events.

     

    (a) Effect of
Merger, Consolidation, Etc.  At the option of
the Holder, the sale, conveyance or disposition of all or substantially all of
the assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of the
Borrower is disposed of, or the consolidation, merger or other business
combination of the Borrower with or into any other Person (as defined below) or
Persons when the Borrower is not the survivor shall either:  (i) be
deemed to be an Event of Default (as defined in Article III) pursuant to which
the Borrower shall be required to pay to the Holder upon the consummation of and
as a condition to such transaction an amount equal to the Default Amount (as
defined in Article III) or (ii) be treated pursuant to Section 1.6(b)
hereof.  “Person” shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.

     

     

    
      
        
        

      

      
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    (b) Adjustment
Due to Merger, Consolidation, Etc.  If, at any time
when this Note is issued and outstanding and prior to conversion of all of the
Notes, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Note shall
thereafter have the right to receive upon conversion of this Note, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the Holder would have been entitled to receive
in such transaction had this Note been converted in full immediately prior to
such transaction (without regard to any limitations on conversion set forth
herein), and in any such case appropriate provisions shall be made with respect
to the rights and interests of the Holder of this Note to the end that the
provisions hereof (including, without limitation, provisions for adjustment of
the Conversion Price and of the number of shares issuable upon conversion of the
Note) shall thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon the conversion
hereof.  The Borrower shall not effect any transaction described in
this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty
(30) days prior written notice (but in any event at least fifteen (15) days
prior written notice) of the record date of the special meeting of shareholders
to approve, or if there is no such record date, the consummation of, such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the Holder shall be
entitled to convert this Note) and (b) the resulting successor or acquiring
entity (if not the Borrower) assumes by written instrument the obligations of
this Section 1.6(b).  The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers or share
exchanges.

     

    (c) Adjustment
Due to Distribution.  If the Borrower
shall declare or make any distribution of its assets (or rights to acquire its
assets) to holders of Common Stock as a dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution to the
Borrower’s shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the
Holder of this Note shall be entitled, upon any conversion of this Note after
the date of record for determining shareholders entitled to such Distribution,
to receive the amount of such assets which would have been payable to the Holder
with respect to the shares of Common Stock issuable upon such conversion had
such Holder been the holder of such shares of Common Stock on the record date
for the determination of shareholders entitled to such
Distribution.

     

    (d) Adjustment
Due to Dilutive Issuance.  If, at any time
when any Notes are issued and outstanding, the Borrower issues or sells, or in
accordance with this Section 1.6(d) hereof is deemed to have issued or sold, any
shares of Common Stock for no consideration or for a consideration per share
(before deduction of reasonable expenses or commissions or underwriting
discounts or allowances in connection therewith) less than the Fixed Conversion
Price in effect on the date of such issuance (or deemed issuance) of such shares
of Common Stock (a “Dilutive
Issuance”), then immediately upon the Dilutive Issuance, the Fixed
Conversion Price will be reduced to the amount of the consideration per share
received by the Borrower in such Dilutive Issuance; provided that only
one adjustment will be made for each Dilutive Issuance.

     

     

    
      
        
        

      

      
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    The
Borrower shall be deemed to have issued or sold shares of Common Stock if the
Borrower in any manner issues or grants any warrants, rights or options, whether
or not immediately exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such
warrants, rights and options to purchase Common Stock or Convertible Securities
are hereinafter referred to as “Options”) and the price per
share for which Common Stock is issuable upon the exercise of such Options is
less than the Fixed Conversion Price then in effect, then the Fixed Conversion
Price shall be equal to such price per share.  For purposes of the
preceding sentence, the “price per share for which Common Stock is issuable upon
the exercise of such Options” is determined by dividing (i) the total amount, if
any, received or receivable by the Borrower as consideration for the issuance or
granting of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if
applicable).  No further adjustment to the Conversion Price will be
made upon the actual issuance of such Common Stock upon the exercise of such
Options or upon the conversion or exchange of Convertible Securities issuable
upon exercise of such Options.

     

    Additionally,
the Borrower shall be deemed to have issued or sold shares of Common Stock if
the Borrower in any manner issues or sells any Convertible Securities, whether
or not immediately convertible (other than where the same are issuable upon the
exercise of Options), and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Fixed Conversion Price then in
effect, then the Fixed Conversion Price shall be equal to such price per
share.  For the purposes of the preceding sentence, the “price per
share for which Common Stock is issuable upon such conversion or exchange” is
determined by dividing (i) the total amount, if any, received or receivable by
the Borrower as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Borrower upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii)
the maximum total number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities.  No further adjustment
to the Fixed Conversion Price will be made upon the actual issuance of such
Common Stock upon conversion or exchange of such Convertible
Securities.

     

     

    
      
        
        

      

      
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    (e) Purchase
Rights.  If, at any time
when any Notes are issued and outstanding, the Borrower issues any convertible
securities or rights to purchase stock, warrants, securities or other property
(the “Purchase Rights”)
pro rata to the record holders of any class of Common Stock, then the Holder of
this Note will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

     

    (f) Notice of
Adjustments.  Upon the
occurrence of each adjustment or readjustment of the Conversion Price as a
result of the events described in this Section 1.6, the Borrower, at its
expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to the Holder of a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based.  The Borrower shall, upon the written request
at any time of the Holder, furnish to such Holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the amount, if any,
of other securities or property which at the time would be received upon
conversion of the Note.

     

    1.7 Trading
Market Limitations.
Unless permitted by the applicable rules and regulations of the principal
securities market on which the Common Stock is then listed or traded, in no
event shall the Borrower issue upon conversion of or otherwise pursuant to this
Note and the other Notes issued pursuant to the Purchase Agreement more than the
maximum number of shares of Common Stock that the Borrower can issue pursuant to
any rule of the principal United States securities market on which the Common
Stock is then traded (the “Maximum Share Amount”), which
shall be 19.99% of the total shares outstanding on the Closing Date (as defined
in the Purchase Agreement), subject to equitable adjustment from time to time
for stock splits, stock dividends, combinations, capital reorganizations and
similar events relating to the Common Stock occurring after the date
hereof.  Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the “Maximum Conversion Date”), if
the Borrower fails to eliminate any prohibitions under applicable law or the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Borrower or any of
its securities on the Borrower’s ability to issue shares of Common Stock in
excess of the Maximum Share Amount (a “Trading Market Prepayment
Event”), in lieu of any further right to convert this Note, and in full
satisfaction of the Borrower’s obligations under this Note, the Borrower shall
pay to the Holder, within fifteen (15) business days of the Maximum Conversion
Date (the “Trading Market
Prepayment Date”), an amount equal to 130% times the sum of (a) the then
outstanding principal amount of this Note immediately following the Maximum
Conversion Date, plus (b) accrued and
unpaid interest on the unpaid principal amount of this Note to the Trading
Market Prepayment Date, plus (c) Default
Interest, if any, on the amounts referred to in clause (a) and/or (b) above,
plus (d) any
optional amounts that may be added thereto at the Maximum Conversion Date by the
Holder in accordance with the terms hereof (the then outstanding principal
amount of this Note immediately following the Maximum Conversion Date, plus the amounts
referred to in clauses (b), (c) and (d) above shall collectively be referred to
as the “Remaining Convertible
Amount”).  With respect to each Holder of Notes, the Maximum
Share Amount shall refer to such Holder’s pro rata share thereof
determined in accordance with Section 4.8 below.  

     

     

    
      
        
        

      

      
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      In the
event that the sum of (x) the aggregate number of shares of Common Stock issued
upon conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement plus
(y) the aggregate number of shares of Common Stock that remain issuable upon
conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement, represents at least one hundred percent (100%) of the Maximum Share
Amount (the “Triggering
Event”), the Borrower will use its best efforts to seek and obtain
Shareholder Approval (or obtain such other relief as will allow conversions
hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion
Date.  As used herein, “Shareholder Approval” means
approval by the stockholders of the Borrower to authorize the issuance of the
full number of shares of Common Stock which would be issuable upon full
conversion of the then outstanding Notes but for the Maximum Share
Amount.

    

     

    1.8 Status as
Stockholder.  Upon submission
of a Notice of Conversion by a Holder, (i) the shares covered thereby (other
than the shares, if any, which cannot be issued because their issuance would
exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share
Amount) shall be deemed converted into shares of Common Stock and (ii) the
Holder’s rights as a Holder of such converted portion of this Note shall cease
and terminate, excepting only the right to receive certificates for such shares
of Common Stock and to any remedies provided herein or otherwise available at
law or in equity to such Holder because of a failure by the Borrower to comply
with the terms  of this Note.  Notwithstanding the
foregoing, if a Holder has not received certificates for all shares of Common
Stock prior to the tenth (10th) business day after the expiration of the
Deadline with respect to a conversion of any portion of this Note for any
reason, then (unless the Holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Borrower) the Holder shall regain the
rights of a Holder of this Note with respect to such unconverted portions of
this Note and the Borrower shall, as soon as practicable, return such
unconverted Note to the Holder or, if the Note has not been surrendered, adjust
its records to reflect that such portion of this Note has not been
converted.  In all cases, the Holder shall retain all of its rights
and remedies (including, without limitation, (i) the right to receive Conversion
Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to
have the Conversion Price with respect to subsequent conversions determined in
accordance with Section 1.3) for the Borrower’s failure to convert this
Note.

     

     

    ARTICLE
II.  CERTAIN COVENANTS

     

    2.1 Distributions
on Capital Stock.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not
without the Holder’s written consent (a) pay, declare or set apart for such
payment, any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or (b) directly or
indirectly or through any subsidiary make any other payment or distribution in
respect of its capital stock except for distributions pursuant to any
shareholders’ rights plan which is approved by a majority of the Borrower’s
disinterested directors.

     

    2.2 Restriction
on Stock Repurchases.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not
without the Holder’s written consent redeem, repurchase or otherwise acquire
(whether for cash or in exchange for property or other securities or otherwise)
in any one transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to purchase or acquire
any such shares.

     

     

    
      
        
        

      

      
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    2.3 Borrowings.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, create, incur, assume or suffer to exist
any liability for borrowed money, except (a) borrowings in existence or
committed on the date hereof and of which the Borrower has informed Holder in
writing prior to the date hereof, (b) indebtedness to trade creditors or
financial institutions incurred in the ordinary course of business or (c)
borrowings, the proceeds of which shall be used to repay this Note.

     

    2.4 Sale of
Assets.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, sell, lease or otherwise dispose of any
significant portion of its assets outside the ordinary course of
business.  Any consent to the disposition of any assets may be
conditioned on a specified use of the proceeds of disposition.

     

    2.5 Advances
and Loans.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, lend money, give credit or make advances
to any person, firm, joint venture or corporation, including, without
limitation, officers, directors, employees, subsidiaries and affiliates of the
Borrower, except loans, credits or advances (a) in existence or committed on the
date hereof and which the Borrower has informed Holder in writing prior to the
date hereof, (b) made in the ordinary course of business or (c) not in excess of
$50,000.

     

    2.6 Contingent
Liabilities.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, assume, guarantee, endorse, contingently
agree to purchase or otherwise become liable upon the obligation of any person,
firm, partnership, joint venture or corporation, except by the endorsement of
negotiable instruments for deposit or collection and except assumptions,
guarantees, endorsements and contingencies (a) in existence or committed on the
date hereof and which the Borrower has informed Holder in writing prior to the
date hereof, and (b) similar transactions in the ordinary course of
business.

     

     

    ARTICLE
III.   EVENTS OF DEFAULT

     

    If any of
the following events of default (each, an “Event of Default”) shall
occur:

     

    3.1 Failure
to Pay Principal or Interest.  The Borrower
fails to pay the principal hereof or interest thereon when due on this Note,
whether at maturity, upon a Trading Market Prepayment Event pursuant to Section
1.7, upon acceleration or otherwise;

     

     

    
      
        
        

      

      
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    3.2 Conversion
and the Shares.  The Borrower
fails to issue shares of Common Stock to the Holder (or announces or threatens
that it will not honor its obligation to do so) upon exercise by the Holder of
the conversion rights of the Holder in accordance with the terms of this Note
(for a period of at least sixty (60) days, if such failure is solely as a result
of the circumstances governed by Section 1.3 and the Borrower is using its best
efforts to authorize a sufficient number of shares of Common Stock as soon as
practicable), fails to transfer or cause its transfer agent to transfer
(electronically or in certificated form) any certificate for shares of Common
Stock issued to the Holder upon conversion of or otherwise pursuant to this Note
as and when required by this Note or the Registration Rights Agreement, or fails
to remove any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate for any shares of Common Stock issued to
the Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Borrower shall
have been notified thereof in writing by the Holder;

     

    3.3 Failure
to Timely File Registration or Effect Registration.  The Borrower
fails to file the Registration Statement within ten (10) days following an
Investor Demand or obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement within ninety (90) days of the Filing
Date or such Registration Statement lapses in effect (or sales cannot otherwise
be made thereunder effective, whether by reason of the Borrower’s failure to
amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than twenty (20)
consecutive days or forty (40) days in any twelve (12) month period after the
Registration Statement becomes effective;

     

    3.4 Breach of
Covenants.  The Borrower
breaches any material covenant or other material term or condition contained in
Sections 1.3, 1.6 or 1.7 of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j)
or 5 of the Purchase Agreement and such breach continues for a period of ten
(10) days after written notice thereof to the Borrower from the
Holder;

     

    3.5 Breach of
Representations and Warranties.  Any
representation or warranty of the Borrower made herein or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith (including, without limitation, the Purchase Agreement and the
Registration Rights Agreement), shall be false or misleading in any material
respect when made and the breach of which has (or with the passage of time will
have) a material adverse effect on the rights of the Holder with respect to this
Note, the Purchase Agreement or the Registration Rights Agreement;

     

    3.6 Receiver
or Trustee.  The Borrower or
any subsidiary of the Borrower shall make an assignment for the benefit of
creditors, or apply for or consent to the appointment of a receiver or trustee
for it or for a substantial part of its property or business, or such a receiver
or trustee shall otherwise be appointed;

     

    3.7 Judgments.  Any money
judgment, writ or similar process shall be entered or filed against the Borrower
or any subsidiary of the Borrower or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period
of twenty (20) days unless otherwise consented to by the Holder, which consent
will not be unreasonably withheld;

     

     

    
      
        
        

      

      
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    3.8 Bankruptcy.  Bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
relief under any bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Borrower or any subsidiary of the
Borrower;

     

    3.9 Delisting
of Common Stock.  The Borrower
shall fail to maintain the listing of the Common Stock on at least one of the
OTCBB or an equivalent replacement exchange, the Nasdaq National Market, the
Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock
Exchange; or

     

    3.10 Default
Under Other Notes.  An Event of
Default has occurred and is continuing under any of the other Notes issued
pursuant to the Purchase Agreement,

     

    then,
upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Notes issued pursuant to the Purchase Agreement exercisable through
the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and upon the
occurrence of an Event of Default specified in Section 3.6 or 3.8, the Notes
shall become immediately due and payable and the Borrower shall pay to the
Holder, in full satisfaction of its obligations hereunder, an amount equal to
the greater of (i) 130% times the sum of (w) the then
outstanding principal amount of this Note plus (x) accrued and
unpaid interest on the unpaid principal amount of this Note to the date of
payment (the “Mandatory
Prepayment Date”) plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
“Default Sum”) or (ii)
the “parity value” of the Default Sum to be prepaid, where parity value means
(a) the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
“Conversion Date” for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the
highest Closing Price for the Common Stock during the period beginning on the
date of first occurrence of the Event of Default and ending one day prior to the
Mandatory Prepayment Date (the “Default Amount”) and all other
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, legal fees and expenses,
of collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or in equity.  If the Borrower fails to pay
the Default Amount within five (5) business days of written notice that such
amount is due and payable, then the Holder shall have the right at any time, so
long as the Borrower remains in default (and so long and to the extent that
there are sufficient authorized shares), to require the Borrower, upon written
notice, to immediately issue, in lieu of the Default Amount, the number of
shares of Common Stock of the Borrower equal to the Default Amount divided by
the Conversion Price then in effect.

     

     

     

    
      
        
        

      

      
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    ARTICLE
IV.  MISCELLANEOUS

     

    4.1 Failure
or Indulgence Not Waiver.  No failure or
delay on the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges.  All
rights and remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies otherwise available.

     

    4.2 Notices.  Any notice herein
required or permitted to be given shall be in writing and may be personally
served or delivered by courier or sent by United States mail and shall be deemed
to have been given upon receipt if personally served (which shall include
telephone line facsimile transmission) or sent by courier or three (3) days
after being deposited in the United States mail, certified, with postage
pre-paid and properly addressed, if sent by mail.  For the purposes
hereof, the address of the Holder shall be as shown on the records of the
Borrower; and the address of the Borrower shall be 2361 Campus Drive, Suite 101,
Irvine, California 92612, facsimile number: 949-833-8211.  Both the
Holder and the Borrower may change the address for service by service of written
notice to the other as herein provided.

     

    4.3 Amendments.  This Note and any
provision hereof may only be amended by an instrument in writing signed by the
Borrower and the Holder.  The term “Note” and all reference thereto,
as used throughout this instrument, shall mean this instrument (and the other
Notes issued pursuant to the Purchase Agreement) as originally executed, or if
later amended or supplemented, then as so amended or supplemented.

     

    4.4 Assignability.  This Note shall
be binding upon the Borrower and its successors and assigns, and shall inure to
be the benefit of the Holder and its successors and assigns.  Each
transferee of this Note must be an “accredited investor” (as defined in Rule
501(a) of the 1933 Act).  Notwithstanding anything in this Note to the
contrary, this Note may be pledged as collateral in connection with a bona fide margin account
or other lending arrangement.

     

    4.5 Cost of
Collection.  If default is
made in the payment of this Note, the Borrower shall pay the Holder hereof costs
of collection, including reasonable attorneys’ fees.

     

    4.6 Governing
Law.  THIS NOTE SHALL
BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE
BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES
FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING
UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING.  

     

     

    
      
        
        

      

      
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      BOTH
PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS
MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE
PARTY IN ANY SUCH SUIT OR PROCEEDING.  NOTHING HEREIN SHALL AFFECT
EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW.  BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY
SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL
MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’
FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.

    

     

    4.7 Certain
Amounts.  Whenever pursuant
to this Note the Borrower is required to pay an amount in excess of the
outstanding principal amount (or the portion thereof required to be paid at that
time) plus accrued and unpaid interest plus Default Interest on such interest,
the Borrower and the Holder agree that the actual damages to the Holder from the
receipt of cash payment on this Note may be difficult to determine and the
amount to be so paid by the Borrower represents stipulated damages and not a
penalty and is intended to compensate the Holder in part for loss of the
opportunity to convert this Note and to earn a return from the sale of shares of
Common Stock acquired upon conversion of this Note at a price in excess of the
price paid for such shares pursuant to this Note.  The Borrower and
the Holder hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a cash
payment without the opportunity to convert this Note into shares of Common
Stock.

     

    4.8 Allocations
of Maximum Share Amount and Reserved Amount.  The Maximum Share
Amount and Reserved Amount shall be allocated pro rata among the Holders of
Notes based on the principal amount of such Notes issued to each
Holder.  Each increase to the Maximum Share Amount and Reserved Amount
shall be allocated pro rata among the Holders of Notes based on the principal
amount of such Notes held by each Holder at the time of the increase in the
Maximum Share Amount or Reserved Amount.  In the event a Holder shall
sell or otherwise transfer any of such Holder’s Notes, each transferee shall be
allocated a pro rata portion of such transferor’s Maximum Share Amount and
Reserved Amount.  Any portion of the Maximum Share Amount or Reserved
Amount which remains allocated to any person or entity which does not hold any
Notes shall be allocated to the remaining Holders of Notes, pro rata based on
the principal amount of such Notes then held by such Holders.

     

    4.9 Damages
Shares.  The shares of
Common Stock that may be issuable to the Holder pursuant to Sections 1.3 and
1.4(g) hereof and pursuant to Section 2(c) of the Registration Rights Agreement
(“Damages Shares”) shall
be treated as Common Stock issuable upon conversion of this Note for all
purposes hereof and shall be subject to all of the limitations and afforded all
of the rights of the other shares of Common Stock issuable hereunder, including
without limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement.  For purposes of
calculating interest payable on the outstanding principal amount hereof, except
as otherwise provided herein, amounts convertible into Damages Shares (“Damages Amounts”) shall not
bear interest but must be converted prior to the conversion of any outstanding
principal amount hereof, until the outstanding Damages Amounts is
zero.

     

     

    
      
        
        

      

      
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    4.10 Denominations.  At the request of
the Holder, upon surrender of this Note, the Borrower shall promptly issue new
Notes in the aggregate outstanding principal amount hereof, in the form hereof,
in such denominations of at least $50,000 as the Holder shall
request.

     

    4.11 Purchase
Agreement.  By its acceptance
of this Note, each Holder agrees to be bound by the applicable terms of the
Purchase Agreement.

     

    4.12 Notice of
Corporate Events.  Except as
otherwise provided below, the Holder of this Note shall have no rights as a
Holder of Common Stock unless and only to the extent that it converts this Note
into Common Stock.  The Borrower shall provide the Holder with prior
notification of any meeting of the Borrower’s shareholders (and copies of proxy
materials and other information sent to shareholders).  In the event
of any taking by the Borrower of a record of its shareholders for the purpose of
determining shareholders who are entitled to receive payment of any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Borrower or any proposed
liquidation, dissolution or winding up of the Borrower, the Borrower shall mail
a notice to the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such
time.  The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
4.12.

     

    4.13 Remedies.  The Borrower
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder, by vitiating the intent and purpose of the
transaction contemplated hereby.  Accordingly, the Borrower
acknowledges that the remedy at law for a breach of its obligations under this
Note will be inadequate and agrees, in the event of a breach or threatened
breach by the Borrower of the provisions of this Note, that the Holder shall be
entitled, in addition to all other available remedies at law or in equity, and
in addition to the penalties assessable herein, to an injunction or injunctions
restraining, preventing or curing any breach of this Note and to enforce
specifically the terms and provisions thereof, without the necessity of showing
economic loss and without any bond or other security being
required.

     

     

    ARTICLE
V.   CALL OPTION

     

    
      
        
        

      

      
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    5.1 Call
Option.  Notwithstanding
anything to the contrary contained in this Article V, so long as  no Event
of Default or Trading Market Prepayment Event shall have occurred and be
continuing,  the Borrower has a sufficient number of authorized shares of
Common Stock reserved for issuance upon full conversion of the Notes, then at
any time after the Issue Date, and  the Common Stock is trading at or below
$.00081 per share, the Borrower shall have the right, exercisable on not less
than ten (10) Trading Days prior written notice to the Holders of the Notes
(which notice may not be sent to the Holders of the Notes until the Borrower is
permitted to prepay the Notes pursuant to this Section 5.1), to prepay all of
the outstanding Notes in accordance with this Section 5.1.  Any notice
of prepayment hereunder (an “Optional Prepayment”) shall be
delivered to the Holders of the Notes at their registered addresses appearing on
the books and records of the Borrower and shall state (1) that the Borrower is
exercising its right to prepay all of the Notes issued on the Issue Date and (2)
the date of prepayment (the “Optional Prepayment
Notice”).  On the date fixed for prepayment (the “Optional Prepayment Date”),
the Borrower shall make payment of the Optional Prepayment Amount (as defined
below) to or upon the order of the Holders as specified by the Holders in
writing to the Borrower at least one (1) business day prior to the Optional
Prepayment Date.  If the Borrower exercises its right to prepay the
Notes, the Borrower shall make payment to the holders of an amount in cash (the
“Optional Prepayment
Amount”) equal to either (i) 130% (for prepayments occurring within
thirty (30) days of the Issue Date), (ii) 140% for prepayments occurring
between thirty-one (31) and sixty (60) days of the Issue Date, or (iii) 150%
(for prepayments occurring after the sixtieth (60th) day
following the Issue Date), multiplied by the sum of (w) the then outstanding
principal amount of this Note plus (x) accrued
and unpaid interest on the unpaid principal amount of this Note to the Optional
Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
“Optional Prepayment
Sum”). Notwithstanding notice of an Optional Prepayment, the Holders
shall at all times prior to the Optional Prepayment Date maintain the right to
convert all or any portion of the Notes in accordance with Article I and any
portion of Notes so converted after receipt of an Optional Prepayment Notice and
prior to the Optional Prepayment Date set forth in such notice and payment of
the aggregate Optional Prepayment Amount shall be deducted from the principal
amount of Notes which are otherwise subject to prepayment pursuant to such
notice.  If the Borrower delivers an Optional Prepayment Notice and
fails to pay the Optional Prepayment Amount due to the Holders of the Notes
within two (2) business days following the Optional Prepayment Date, the
Borrower shall forever forfeit its right to redeem the Notes pursuant to this
Section 5.1.

     

    


     

    


     

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    IN WITNESS WHEREOF, Borrower
has caused this Note to be signed in its name by its duly authorized officer
this 31st day of
July, 2008.

     

    


    PACIFICAP
ENTERTAINMENT HOLDINGS, INC.

    


    


    


    By:           ______________________________

    Mark Schaftlein

    President

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

     

    EXHIBIT
A

     

    NOTICE
OF CONVERSION

     

    (To be
Executed by the Registered Holder

    in order
to Convert the Notes)

     

    The
undersigned hereby irrevocably elects to convert $__________ principal amount of
the Note (defined below) into shares of common stock, par value $.001 per share
(“Common Stock”), of
Pacificap Entertainment Holdings, Inc., a Nevada corporation (the “Borrower”) according to the
conditions of the convertible Notes of the Borrower dated as of July 31, 2008
(the “Notes”), as of the
date written below.  If securities are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such
certificates.  No fee will be charged to the Holder for any
conversion, except for transfer taxes, if any.  A copy of each Note is
attached hereto (or evidence of loss, theft or destruction
thereof).

     

    The
Borrower shall electronically transmit the Common Stock issuable pursuant to
this Notice of Conversion to the account of the undersigned or its nominee with
DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).

     

    Name of
DTC Prime Broker: 
____________________________________                                                                                                                    

    Account
Number:        ________________________________________                                                                                                             

     

    In lieu
of receiving shares of Common Stock issuable pursuant to this Notice of
Conversion by way of a DWAC Transfer, the undersigned hereby requests that the
Borrower issue a certificate or certificates for the number of shares of Common
Stock set forth below (which numbers are based on the Holder’s calculation
attached hereto) in the name(s) specified immediately below or, if additional
space is necessary, on an attachment hereto:

     

    Name:         ________________________________________________                                                                                                            

    Address:    ________________________________________________                                                                                                               

     

    The
undersigned represents and warrants that all offers and sales by the undersigned
of the securities issuable to the undersigned upon conversion of the Notes shall
be made pursuant to registration of the securities under the Securities Act of
1933, as amended (the “Act”), or pursuant to an
exemption from registration under the Act.

     

    Date of
Conversion:___________________________

    Applicable
Conversion Price:____________________

    Number of
Shares of Common Stock to be Issued Pursuant to

    Conversion
of the Notes:______________

    Signature:___________________________________

    Name:______________________________________

    Address:____________________________________

     

    The
Borrower shall issue and deliver shares of Common Stock to an overnight courier
not later than three business days following receipt of the original Note(s) to
be converted, and shall make payments pursuant to the Notes for the number of
business days such issuance and delivery is late.