Exhibit 10.1


 


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


 


CONVERTIBLE
SUBORDINATED NOTE


 


	
  Issuance
  Date: April 1, 2008

  	
   

  	
  Principal:
  U.S. $[

  	
  ]

  



 


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


 

















 


(1)           MATURITY
AND AMORTIZATION PAYMENTS.


 


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


 


(b)           Amortization
Payments.  Beginning on July 31,
2008 and at the end of each month thereafter (each, an “Amortization
Date”) until there is no outstanding Principal of this Note, the
Company shall redeem $[            ] [1/36th of the original Principal amount of this Note] of
this Note (each, an “Amortization Redemption
Amount”).  If the Company is
unable to redeem all Principal and Interest with respect to all Amortization
Redemption Amounts on this Note and the Other Notes, then the Company shall
redeem a pro rata amount from each holder of the Notes (including the Holder)
based on the principal amount of the Notes subject to payment of an
Amortization Redemption Amount on such Amortization Date pursuant to this Note
and the Other Notes.


 


2

















 


(c)           Payment of
Amortization Redemption Amount.  The
Company shall pay the Amortization Redemption Amount in cash in accordance with
the provisions of Section 12; provided, however, that if the Conditions to
Amortization Conversion (as defined below) are satisfied or waived in writing
by the Holder and the Company provides the Amortization Conversion Notice (as
defined below), then the Company shall have the right to require the Holder to
convert all or any such portion of the Amortization Redemption Amount
designated in the Amortization Conversion Notice into fully paid, validly
issued and nonassessable shares of Common Stock in accordance with the
applicable provisions of Section 3(c)(i). 
The Company may exercise its right to require conversion under this Section 1(c) by
delivering at least 20 Trading Days prior to such Amortization Date a written
notice thereof by facsimile and overnight courier to all, but not less than
all, of the holders of Notes and the Transfer Agent that specifically describes
the portion of the Amortization Redemption Amount for this Note and the Other
Notes that will be paid in Common Stock (the “Amortization
Conversion Notice” and the date all of the holders received such
notice is referred to as the “Amortization
Conversion Notice Date”).  The
Amortization Conversion Notice shall be irrevocable; provided; that if
any of the Conditions to Amortization Conversion is not satisfied on the
applicable Amortization Date or waived by the Holder, the Company will
notwithstanding delivery of the Amortization Conversion Notice be required to
pay the Amortization Redemption Amount in cash. 
The conversion price applicable to an Amortization Conversion (the “Amortization
Price”) that is being paid in Common Stock pursuant to this Section 1(c) shall
be 90% of the Weighted Average Price of the Common Stock for the 20 consecutive
Trading Days immediately preceding the Amortization Date.  For purposes of this Section 1(c), “Conditions to Amortization Conversion”
means  the following conditions: (i) the
Common Stock shall be traded on the Principal Market, the NASDAQ Gobal Market
or NASDAQ Capital Market, or the American Stock Exchange on the applicable
Amortization Date, (ii) on the Amortization Date, either (x) the
Registration Statement or Registration Statements contemplated by the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities (as defined in the Registration Rights
Agreement) then outstanding, together with the Common Stock to be issued on
such Amortization Date, in accordance with the terms of the Registration Rights
Agreement or (y) all shares of Common Stock issuable upon conversion of
the Notes shall be eligible for sale without restriction and without the need
for registration under any applicable federal or state securities laws, (iii) an
Authorized Share Failure shall not be in effect on the Amortization Date; and (iv) any
such payment of the Amortization Redemption Amount in Common Stock shall not
consist of more than 20% of the total dollar volume traded in the Common Stock
for the 20 Trading Days prior to the Amortization Date.


 


(d)           Special
Redemption Right.  Within two (2) trading
days after the closing of one or more Qualified Transactions resulting in
$25,000,000 (Twenty Five Million Dollars) in aggregate proceeds after
transaction expenses and placement agent or broker commissions or fees, the
Company will notify the Holder of said closing (a “Transaction Notice”).  Upon the closing of the Qualified
Transaction, the Holder may elect to have all or part of the outstanding
principal amount of this Note and all accrued but unpaid interest thereunder
redeemed within five (5) Trading Days of the Company’s receipt of written
notice of the Holder’s election to effect such redemption.  In order to
elect such redemption, the Holder must deliver written notice of redemption to
the Company within twenty (20) Trading Days after its receipt of the
Transaction Notice, and such written notice must be accompanied by the
surrender of the originally executed Note, which must be marked “cancelled”
(provided that in lieu of 


 


3

















 


surrendering
the Notes (if not fully redeemed), the Holder may deliver a certification to
the Company affirming that the requisite principal amount of Notes is being
forfeited as a result of such redemption, in which case the change in the Notes
will be noted by book entry by the Company).  For purposes hereof, the
term “Qualified Transactions”
means (A) the sale of Liquidmetal Korea’s manufacturing facility in
Pyong-Taek, Republic of Korea and that the appropriate authorities or banks in
the Republic of Korea approve the transfer of such proceeds from Liquidmetal
Korea to the Company and/or (B) the raising of capital in a debt or equity
offering after the date hereof (subject to any restrictions or limitations
thereon set forth in the Purchase Agreement or the Notes).


 


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


 


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


 


(a)           Conversion Right. 
Subject to the provisions of Section 3(d), at any time or times on
or after the Issuance Date, the Holder shall be entitled to convert any portion
of the outstanding and unpaid Conversion Amount (as defined below) in increments
of at least $50,000 of Principal (or such lesser amount if such amount
represents the remaining Principal amount) into fully paid and nonassessable
shares of Common Stock in accordance with Section 3(c), at the Conversion
Rate (as defined below).  The Company
shall not issue any fraction of a share of Common Stock upon any
conversion.  If the issuance would result
in the issuance of a fraction of a share of Common Stock, the Company shall
round such fraction of a share of Common Stock up to the nearest whole
share.  The Company shall pay any and all
taxes that may be payable with respect to the issuance and delivery of Common
Stock upon conversion of any Conversion Amount.


 


4

















 


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


 


(i)            “Conversion Amount” means the sum of (A) the
portion of the Principal to be converted, redeemed or otherwise with respect to
which this determination is being made, plus (B) accrued and unpaid
Interest with respect to such Principal.


 


(ii)           “Conversion Price” means, as of any
Conversion Date (as defined below) or other date of determination, and subject
to adjustment as provided herein, $1.10.


 


(c)           Mechanics of
Conversion.


 


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


 


5

















 


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


 


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


 


6

















 


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


 


(d)           Limitations on
Conversions.


 


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


 


7

















 


(ii)           Principal Market
Regulation.  The Company shall not be
obligated to issue any shares of Common Stock upon conversion of this Note if
the issuance of such shares of Common Stock would exceed that number of shares
of Common Stock that the Company may issue upon conversion of the Notes without
breaching the Company’s obligations under the rules or regulations of the
Principal Market (the “Exchange Cap”),
except that such limitation shall not apply in the event that the Company (A) obtains
the approval of its stockholders as required by the applicable rules of
the Principal Market for issuances of Common Stock in excess of such amount 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 of the
Notes representing at least a majority of the principal amounts of the Notes
then outstanding.  Until such approval or
written opinion is obtained, no holders of Notes (the “Purchasers”) shall be issued, upon
conversion of Notes, shares of Common Stock in an amount greater than the
product of the Exchange Cap multiplied by a fraction, the numerator of which is
the principal amount of Original Notes issued to such Purchaser pursuant to the
Securities Purchase Agreement on the Issuance Date and the denominator of which
is the aggregate principal amount of all Original Notes issued to the
Purchasers pursuant to the Securities Purchase Agreement on the Issuance Date
(with respect to each Purchaser, the “Exchange
Cap Allocation”).  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
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply
to such transferee with respect to the portion of the Exchange Cap Allocation
allocated to such transferee.  In the
event that any holder of Notes shall convert all of such holder’s Notes into a
number of shares of Common Stock which, in the aggregate, is less than such
holder’s Exchange Cap Allocation, then the difference between such holder’s
Exchange Cap Allocation and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Exchange Cap
Allocations of the remaining holders of Notes on a pro rata basis in proportion
to the aggregate principal amount of the Notes then held by each such holder.


 


(4)           RIGHTS UPON EVENT OF DEFAULT.


 


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


 


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


 


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


 


8

















 


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


 


(iii)          any default under, redemption of or acceleration prior to maturity of
any Indebtedness (as defined below) of the Company or any of its Subsidiaries
(as defined in the Securities Purchase Agreement) other than with respect to
any Other Notes and the Senior Indebtedness; provided that in the case of a
payment default of such Indebtedness, such default is not cured within
applicable cure periods; further provided that in the case of a non-payment
default of such Indebtedness that has not resulted in an acceleration or
redemption of such Indebtedness prior to its maturity, only upon acceleration
or redemption of such Indebtedness;


 


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


 


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


 


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


 


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


 


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


 


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


 


9

















 


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


 


(5)           RIGHTS UPON
CHANGE OF CONTROL.


 


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


 


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


 


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


 


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


 


No
sooner than 15 days nor later than 10 days prior to the consummation of a
Change of Control, but not prior to the public announcement of such Change of
Control, the Company shall deliver written notice thereof via facsimile and
overnight courier to the Holder (a “Change of
Control Notice”).


 


(b)           Assumption.  Prior to the consummation of any Change of
Control, the Company will secure from any Person purchasing the Company’s
assets or Common Stock or any successor resulting from such Change of Control
(in each case, an “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then outstanding) to deliver to 


 


10

















 


each holder of Notes in exchange for such Notes, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to the Notes, including, without limitation, having a
principal amount and interest rate equal to the principal amounts and the
interest rates of the Notes held by such holder, and satisfactory to the
holders of Notes representing at least a majority of the principal amount of
the Notes then outstanding.  In the event
that an Acquiring Entity is directly or indirectly controlled by a company or
entity whose common stock or similar equity interest is listed, designated or
quoted on a securities exchange or trading market, the holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then outstanding may elect to treat such Person as the Acquiring Entity for
purposes of this Section 5(b).


 


(c)           Redemption Right.  At any time during the period beginning after
the Holder’s receipt of a Change of Control Notice and ending on the date of
the consummation of such Change of Control (or, in the event a Change of
Control Notice is not delivered at least 10 days prior to a Change of Control,
at any time on or after the date which is 10 days prior to a Change of Control
and ending ten days after the consummation of such Change of Control), the
Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (“Change of
Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing
to redeem; provided, however, that the Company shall not be under any
obligation to redeem all or any portion of this Note or to deliver the
applicable Change of Control Redemption Price unless and until the applicable
Change of Control is consummated.  The
portion of this Note subject to redemption pursuant to this Section 5
shall be redeemed by the Company in cash at a price equal to the greater of (i) the
sum of (x) the product of (A) the Applicable Percentage (as defined
below) and (B) the Conversion Amount being redeemed and (y) the
amount of any accrued but unpaid Interest on such Conversion Amount being redeemed
through the date of such redemption payment and (ii) the product of (x) the
Applicable Percentage and (y) the sum of (1) the product of (A) the
Conversion Amount being redeemed multiplied by (B) the quotient determined
by dividing (I) the aggregate cash consideration and the aggregate cash
value of any non-cash consideration per Common Share to be paid to the holders
of the Common Shares upon consummation of the Change of Control (any such
non-cash consideration in the form of securities to be valued at the higher of
the Closing Sale Price of such securities as of the Trading Day immediately
prior to the consummation of such Change of Control, the Closing Sale Price on
the Trading Day immediately following the public announcement of such proposed
Change of Control and the Closing Sale Price on the Trading Day immediately
prior to the public announcement of such proposed Change of Control) by (II) the
Conversion Price plus (2) the amount of any accrued but unpaid Interest on
such Conversion Amount being redeemed through the date of such redemption
payment, (the “Change of Control Redemption
Price”).  Redemptions required by this Section 5(c) shall
be made in accordance with the provisions of Section 12 and shall have
priority to payments to stockholders in connection with a Change of
Control.  For purposes of this Note, the
term “Applicable Percentage” means 120% if
the Change of Control is consummated on or before the first (1st)
anniversary of the Original Date, 115% if the Change of Control is consummated
after the first (1st) anniversary of the Original Date but on or
before the second (2nd) anniversary of the Original Date, and 110%
if the Change of Control is consummated at any time after the second (2nd)
anniversary of the Original Date.


 


11

















 


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


 


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


 


(b)           Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for Common Stock (a “Corporate
Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon a conversion of this
Note, (i) in addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder would have been
entitled with respect to such shares of Common Stock had such shares of Common
Stock been held by the Holder upon the consummation of such Corporate Event or (ii) in
lieu of the shares of Common Stock otherwise receivable upon such conversion,
such securities or other assets received by the holders of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate.  Provision made
pursuant to the preceding sentence shall be in a form and substance
satisfactory to the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.


 


(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.


 


(a)           Adjustment of
Conversion Price upon Issuance of Common Stock.  If and whenever on or after the Issuance
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
or sold by the Company in connection with any Excluded Security) for a
consideration per share (the “New Securities
Issuance Price”) less than a price (the “Applicable Price”) equal to the Conversion Price in effect
immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”),


 


12
















 


then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount (rounded to the nearest cent) equal to the New
Securities Issuance Price.  For purposes
of determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:


 


(i)            Issuance of
Options.  If the Company in any
manner grants or sells any Options and the lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such share of
Common Stock shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the granting or sale of such Option for such
price per share.  For purposes of this Section 7(a)(i),
the “lowest price per share for which one share of Common Stock is issuable
upon the exercise of any such Option or upon conversion or exchange or exercise
of any Convertible Securities issuable upon exercise of such Option” shall be
equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common Stock upon
granting or sale of the Option, upon exercise of the Option and upon conversion
or exchange or exercise of any Convertible Security issuable upon exercise of
such Option.  No further adjustment of
the Conversion Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options or
upon the actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.


 


(ii)           Issuance of
Convertible Securities.  If the Company
in any manner issues or sells any Convertible Securities and the lowest price
per share for which one share of Common Stock is issuable upon such conversion
or exchange or exercise thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the issuance of sale of such Convertible
Securities for such price per share.  For
the purposes of this Section 7(a)(ii), the “price per share for which one
share of Common Stock is issuable upon such conversion or exchange or exercise”
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one share of Common
Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security.  No further adjustment of the Conversion Price
shall be made upon the actual issuance of such Common Stock upon conversion or
exchange or exercise of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.  Notwithstanding anything in this Note to the
contrary, in the event that the Company agrees to decrease the conversion price
of any of its 7% Convertible Secured Promissory Notes due August 2007 in
connection with an agreement by the holder of any such notes to convert the
same, such decrease in the conversion price will not result in any adjustment
to the Conversion Price pursuant to this Section 7(a) of this Note.


 


13

















 


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


 


(iv)          Calculation of
Consideration Received.  In case any
Option is issued in connection with the issue or sale of other securities of
the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $.01.  If any Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the net amount
received by the Company therefor.  If any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt.  If
any Common Stock, Options or Convertible Securities are issued to the owners of
the non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor will be deemed to be
the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. 
The fair value of any consideration other than cash or securities will
be determined jointly by the Company and the holders of Notes representing at
least a majority of the principal amounts of the Notes then outstanding.  If such parties are unable to reach agreement
within ten days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five Business Days after the tenth day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the holders of Notes representing at least a
majority of the principal amounts of the Notes then outstanding.  The determination of such appraiser shall be
deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne equally by the Company, on the hand, and the
holders of the Notes, on the other hand.


 


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


 


14

















 


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


 


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


 


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


 


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


 


15

















 


(b)           Pro Rata Conversion Requirement.  If
the Company elects to cause a conversion of all or any portion of the
Conversion Amount of this Note pursuant to Section 9(a), then it must
simultaneously take the same action with respect to the Other Notes (except
that the Company is not required to take the same action with respect to the
Other Notes to the extent limited by Section 3(d) in this Note or
similar provisions under the Other Notes). 
If the Company elects to cause the conversion of this Note pursuant to Section 9(a) (or
similar provisions under the Other Notes) with respect to less than all of the
Conversion Amounts of the Notes then outstanding, then the Company shall
require conversion of a Conversion Amount from each of the holders of the Notes
equal to the product of (I) the aggregate Conversion Amount of Notes which
the Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Original Notes purchased by such holder
pursuant to the Securities Purchase Agreement and the denominator of which is
the sum of the aggregate principal amount of the Original Notes purchased by
all holders pursuant to the Securities Purchase Agreement (except to the extent
limited by Section 3(d) in this Note or similar provisions under the
Other Notes) (such fraction with respect to each holder is referred to as its “Allocation Percentage,” and such amount
with respect to each holder is referred to as its “Pro Rata Conversion Amount”). 
In the event that the initial holder of any Notes shall sell or
otherwise transfer any of such holder’s Notes, the transferee shall be
allocated a pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section 9(a),
which Trading Day shall be at least 10 Business Days but not more than 60
Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the
aggregate Conversion Amount of the Notes which the Company has elected to be
subject to mandatory conversion from all of the holders of the Notes pursuant
to this Section 9 (and analogous provisions under the Other Notes), (iii) each
holder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes the
Company has elected to cause to be converted pursuant to this Section 9
(and analogous provisions under the Other Notes) and (iv) the number of
shares of Common Stock to be issued to such Holder as of the Mandatory
Conversion Date.  All Conversion Amounts
converted by the Holder after the Mandatory Conversion Notice Date shall reduce
the Conversion Amount of this Note required to be converted on the Mandatory
Conversion Date.  If the Company has
elected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shall
apply, to the extent applicable, as if the Company and the Transfer Agent had
received from the Holder on the Mandatory Conversion Date a Conversion Notice
with respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.


 


(c)           Conditions to
Mandatory Conversion.  For purposes
of this Section 9, “Conditions to
Mandatory Conversion” means  the
following conditions: (i) during the period beginning on the date that is
six months prior to the Mandatory Conversion Date and ending on and including
the Mandatory Conversion Date, the Company shall have delivered shares of
Common Stock upon any conversion of Conversion Amounts as set forth in Section 3(c)(i);
(ii) on each day during the period beginning on the first Trading Day of
the Mandatory Conversion Measuring Period and ending on and including the
Mandatory Conversion Date, the Common Stock shall be traded on the Principal
Market, the NASDAQ Global Market or Global Select Market, the NASDAQ Capital
Market, the New York Stock Exchange, or the American Stock Exchange; (iii) on
the Mandatory Conversion Date either (x) the Registration Statement or 


 


16

















 


Registration Statements
contemplated by the Registration Rights Agreement shall be effective and
available for the sale for all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Common
Stock issuable upon conversion of the Notes shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; (iv) on the Mandatory Conversion Date, an Authorized
Share Failure shall not be in effect; and (v) any such payment of the
Conversion Amount in Common Stock shall not consist of more than 20% of the
total dollar volume traded in the Common Stock for the 20 Trading Days prior to
the Mandatory Conversion Date.


 


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


 


(11)         RESERVATION OF
AUTHORIZED SHARES.


 


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


 


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


 


17

















 


(12)         HOLDER’S REDEMPTIONS.


 


(a)           Mechanics.  In the event that the Holder
has sent an Event of Default Redemption Notice or a Change of Control
Redemption Notice to the Company pursuant to Section 4(b) or Section 5(c),
respectively (each, a “Redemption Notice”),
the Holder shall promptly submit this Note to the Company.  If the Holder has submitted an Event of
Default Redemption Notice in accordance with Section 4(b), the Company
shall deliver the applicable Event of Default Redemption Price to the Holder
within five Business Days after the Company’s receipt of the Holder’s Event of
Default Redemption Notice.  If the Holder
has submitted a Change of Control Redemption Notice in accordance with Section 5(c),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five Business Days after the Company’s receipt of such notice if such
notice is received after the consummation of such Change of Control.  With respect to an Amortization Redemption,
the Company shall deliver the applicable Amortization Redemption Amount to the
Holder within five Business Days after the end of the applicable month for such
Amortization Redemption.  In the event of
a redemption of less than all of the Conversion Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder, at the
Holder’s request, a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed.  In the event that the Company does not pay
the Event of Default Redemption Price, the Change of Control Redemption Price,
or the Amortization Redemption Amount (each, the “Redemption Price”), as applicable, to the Holder (or deliver
any Common Stock to be issued pursuant to a Redemption Notice) within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price (and issues any Common Stock required pursuant to a Redemption
Notice) in full, the Holder shall have the option, in lieu of redemption, to
require the Company to promptly return to the Holder all or any portion of this
Note representing the Conversion Amount that was submitted for redemption and
for which the applicable Redemption Price (or any Common Stock required to be
issued pursuant to a Redemption Notice) has not been paid.  Upon the Company’s receipt of such notice, (x) the
Redemption Notice shall be null and void with respect to such Conversion
Amount, (y) the Company shall immediately return this Note, or issue a new
Note (in accordance with Section 19(d)) to the Holder representing such
Conversion Amount and (z) the Conversion Price of this Note or such new
Notes shall be adjusted to the lesser of (A) the Conversion Price as in
effect on the date on which the Redemption Notice is voided and (B) the
Closing Bid Price on the date on which the Redemption Notice is voided.


 


(b)           Redemption by
Other Holders.  Upon the Company’s receipt
of notice from any of the holders of the Other Notes for redemption or
repayment as a result of an event or occurrence substantially similar to the
events or occurrences described in Section 4(b) or Section 5(c) (each,
an “Other Redemption Notice”), the
Company shall immediately forward to the Holder by facsimile a copy of such
notice.  If the Company receives a
Redemption Notice and one or more Other Redemption Notices during the seven
Business Day period beginning on and including the date which is three Business
Days prior to the Company’s receipt of the 


 


18

















 


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


 


(13)         SUBORDINATION TO SENIOR INDEBTEDNESS.


 


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


 


(b)           No Payment if Default Under Senior
Indebtedness.


 


(i)            [Intentionally left blank]


 


(ii)           No cash payment on account of Principal or Redemption Price of, or
Interest on, this Note or any other payment payable with respect to this Note
shall be made, and no portion of this Note shall be redeemed or purchased
directly or indirectly by the Company, if at the time of such payment or
purchase or immediately after giving effect thereto, (A) a default in the
payment of principal, premium, if any, interest or other obligations in respect
of any Senior Indebtedness having either an outstanding principal balance or a
commitment to lend greater than $500,000 (“Designated Senior Debt”)
occurs and is continuing (or, in the case of Senior Indebtedness for which
there is a period of grace, in the event of such a default that continues
beyond the period of grace, if any, specified in the instrument evidencing such
Senior Indebtedness) (a “Payment Default”),
unless and until such Payment Default shall have been cured or waived or shall
have ceased to exist or (B) the Company shall have received notice (a “Payment Blockage Notice”) from the holder or holders of
Designated Senior Debt that there exists under such Designated Senior Debt a
default, which shall not have been cured or waived, permitting the holder or
holders thereof to declare such Designated Senior Debt due and payable, but only
for the period (the “Payment Blockage Period”)
commencing on the date of receipt of the Payment Blockage Notice and ending on
the earlier of (a) the date such default shall have been cured or waived,
or (b) the 180th day immediately following the Company’s receipt of such
Payment Blockage Notice.  The Company
shall resume payments on and distributions in respect of this Note, including
any past scheduled payments of the principal of (and premium, if any) and
interest on this Note to which the 


 


19

















 


Holder would have been entitled but for the provisions of this Section 13(b)(ii) in
the case of a Payment Default, within five (5) Business Days of the date upon
which such Payment Default is cured or waived or ceases to exist (and if
payment is made within such time period, any Event of Default with respect to
such nonpayment shall be cured).  In
addition, notwithstanding clauses (A) and (B) of this subsection
(ii), unless the holders of Designated Senior Debt shall have accelerated the
maturity of such Designated Senior Debt or there is a Payment Default, the
Company shall resume payments on this Note within (5) Business Days after the
end of each Payment Blockage Period.  In
any consecutive 365-day period, there shall be (i) no more than three
Payment Blockage Notices given in the aggregate on this Note and the Other
Notes, irrespective of the number of defaults with respect to Designated Senior
Debt during such period, and (ii) at least 90 days during which no Payment
Blockage Period shall be in effect.


 


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


 


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


 


Upon
payment or distribution to creditors in a Proceeding of assets of the Company
of any kind or character, whether in cash, property or securities, all
principal and interest due upon any Senior Indebtedness shall first be paid in
full before the Holder shall be entitled to receive or, if received, to retain
any payment or distribution on account of this Note, and upon any such
Proceeding, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the Holder would
be entitled except for the 


 


20

















 


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


 


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


 


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


 


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


 


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


 


(h)           Holders of Senior
Indebtedness.  These provisions
regarding subordination will constitute a continuing offer to all Persons who,
in reliance upon such provisions, become holders of, or continue to hold,
Senior Indebtedness; such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are hereby made obligees under such
provisions to the same extent as if they were named therein, and they or any of
them may proceed to enforce such subordination and no amendment or modification
of the provisions contained herein shall diminish the rights of such holders
unless such holders have 


 


21

















 


agreed in writing thereto.  The
holders of Senior Indebtedness may, at any time and from time to time, without
the consent of or notice to the Holder, without incurring responsibility to the
Holder and without impairing or releasing the subordination provisions of this Section 13,
(i) subject to the limitations set forth herein, increase the amount of,
change the manner, terms or place of payment of, or renew or alter, any Senior
Indebtedness, or otherwise amend, modify, restate or supplement the same
(provided that any such modified indebtedness continues to be constitute Senior
Indebedness within the meaning of this Agreement), (ii) sell, exchange or
release any collateral mortgaged, pledged or otherwise securing the Senior
Indebtedness, (iii) release any Person liable in any manner for the Senior
Indebtedness and (iv) exercise or refrain from exercising any rights
against the Company or any other Person.


 


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


 


(j)            Blockage of
Remedies.  During any Payment Default
or any Payment Blockage Period, if an Event of Default has occurred and is
continuing under this Note, the Holder will not commence or join with any
creditor of the Company in asserting or commencing any proceedings to collect
or enforce its rights hereunder or take any action to foreclose or realize upon
the indebtedness hereunder for a period beginning on the date of such Event of
Default and ending on the first to occur of (i) the date that is 180 days
following the date that the holders of the Senior Indebtedness are notified of
such Event of Default or (ii) the date such Payment Default is cured,
waived or ceases to exist or the date such Payment Blockage Period ends, as the
case may be; provided, however, that until all of the Senior
Indebtedness shall have been paid in full in cash, any payments, distributions
or proceeds received by the Holder resulting from the exercise of any action to
collect or enforce any right or remedy available to the Holder shall be subject
to the terms of this Note.


 


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


 


22

















 


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


 


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


 


(15)         RANK; ADDITIONAL
INDEBTEDNESS; LIENS.


 


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


 


(b)           Incurrence
of Senior Indebtedness.  So long as
this Note is outstanding, the Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, incur or guarantee,
assume or suffer to exist any Indebtedness which shall rank senior to the Notes
other than Senior Indebtedness.


 


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


 


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


 


23

















 


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


 


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


 


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


 


(19)         REISSUANCE OF THIS
NOTE.


 


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


 


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


 


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


 


24
















 


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


 


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


 


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


 


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


 


25

















 


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


 


(24)                            DISPUTE RESOLUTION.  In
the case of a dispute as to the determination of the Redemption Price or the
arithmetic calculation of the Conversion Rate or the Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder.  If the Holder and the
Company are unable to agree upon such determination or calculation within one
Business Day of such disputed determination or arithmetic calculation being submitted
to the Holder, then the Company shall, within one Business Day submit via
facsimile (a) the disputed determination of the Closing Bid Price or the
Closing Sale Price to an independent, reputable investment bank selected by the
Company and approved by the Holder or (b) the disputed arithmetic
calculation of the Conversion Rate or the Redemption Price to the Company’s
independent, outside accountant.  The
Company, at the Company’s expense, shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holder of the results no later than five
Business Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.


 


(25)                            NOTICES; PAYMENTS.


 


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


 


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


 


26

















 


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


 


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


 


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


 


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


 


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


 


(a)           “Approved Stock Plan” means any employee benefit, option or
incentive plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company’s securities may be issued to any
employee, consultant, officer or director for services provided to the Company.


 


(b)           “Bloomberg”
means Bloomberg Financial Markets.


 


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


 


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


 


27

















 


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


 


(f)            [Intentionally left blank]


 


(g)           “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.


 


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


 


(i)            “Excluded
Securities” means any shares of Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion of the Notes
and the Other Notes; (iii) upon conversion of any Options or Convertible
Securities which are outstanding on the Issuance Date, (iv) pursuant to or
in connection with commercial credit arrangements, equipment lease financings,
acquisitions of other assets or businesses, strategic transactions not
primarily for financing purposes, or similar transactions into which the
Company may enter with a non-affiliate.


 


28

















 


(j)            “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 trade payables entered into
in the ordinary course of business), (C) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in
the event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (G) off-balance
sheet liabilities retained in connection with asset securitization programs,
synthetic leases, sale and leaseback transactions or other similar obligations
arising with respect to any other transaction which is the functional
equivalent of or takes the place of borrowing but which does not constitute a
liability on the consolidated balance sheet of such Person and its
subsidiaries, and (H) all indebtedness referred to in clauses (A) through
(G) above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property
or assets (including accounts and contract rights) owned by any Person, even
though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (I) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (H) above.


 


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


 


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


 


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


 


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


 


(o)           “Registration
Rights Agreement” means that certain Registration Rights Agreement,
dated January 3, 2007, between the Company and the initial holders of the
Interest Notes.


 


29

















 


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


 


(q)           “Securities
Purchase Agreement” means that certain Securities Purchase
Agreement, dated January 3, 2007, between the Company and the initial
holders of the Original Notes pursuant to which the Company issued the Original
Notes.


 


(r)            “Senior
Indebtedness” means the principal of (and premium, if any), interest
on, and all fees and other amounts (including, without limitation, any
reasonable costs, enforcement expenses (including reasonable legal fees and
disbursements, collateral protection expenses and other reimbursement or
indemnity obligations relating thereto)), and all other obligations of the
Company under (i) any of the agreements or instruments evidencing any
Indebtedness of the Company and its Subsidiaries arising after the Original
Date to an unaffiliated, third-party commercial lender (together with any
renewals, refundings, refinancings or other extensions thereof) for purposes of
purchasing equipment (which debt shall be secured only by the assets purchased
with such financing), and (ii) Indebtedness secured by up to a maximum of
eighty five percent (85%) of the Company’s accounts receivable and/or up to
sixty percent (60%) of the value of the Company’s inventory.  For the avoidance of doubt, Senior
Indebtedness shall not include the debt which is required to be paid by the
Company pursuant to Section 4(i) of the Securities Purchase
Agreement.


 


(s)           [Intentionally left blank]


 


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


 


(u)           [intentionally left blank]


 


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


 


30

















 


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


 


[Signature Page Follows]


 


31

















 


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


 


	
   

  	
   

  	
  LIQUIDMETAL TECHNOLOGIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Gerald
  E. Morrow

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Chief
  Financial Officer

  
						



 

















 


EXHIBIT I


 


LIQUIDMETAL TECHNOLOGIES, INC.


CONVERSION NOTICE


 


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


 


Date of Conversion:


 


Aggregate Conversion Amount to be converted:


 


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


 


Please
confirm the following information:


 


Conversion Price:


 


Number of shares of Common Stock to be issued:


 


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


 


	
  Issue
  to:

  	
   

  
	
   

  
	
   

  
	
  Facsimile
  Number:

  
	
   

  
	
  Authorization:

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


	
  Dated:

  	
   

  



 

















 


	
   

  	
  Account
  Number:

  	
   

  
	
   

  	
  (if electronic book entry transfer)

  
	
   

  	
   

  
	
   

  	
  Transaction
  Code Number:

  	
   

  
	
   

  	
  (if electronic book entry transfer)

  
				



 

















 


ACKNOWLEDGMENT


 


The
Company hereby acknowledges this Conversion Notice and hereby directs American
Stock Transfer & Trust Co. to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
January 3, 2007 from the Company.


 


	
   

  	
  LIQUIDMETAL TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title: