textech_sb2-ex1005.htm


    EXHIBIT
      10.5

     

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

     

    


     

    CALLABLE
      SECURED CONVERTIBLE NOTE

     

    Rockville,
      Maryland

    
    

    
      	September
              28,
              2006  	
               $300,000

            


    

     

     

    FOR
      VALUE RECEIVED, TEXTECHNOLOGIES INC., a
      Delaware corporation (hereinafter called the “Borrower”), hereby promises
      to
      pay to the order of AJW OFFSHORE, LTD. or registered assigns (the “Holder”) the sum of $300,000,
      on September 28, 2009 (the “Maturity Date”), and to pay
      interest on the unpaid principal balance hereof at the rate of six percent
      (6%)
      (the “Interest Rate”)
      per annum from September 28, 2006 (the “Issue Date”) until the same
      becomes due and payable, whether at maturity or upon acceleration or by
      prepayment or otherwise.  Any amount of principal or interest on this
      Note which is not paid when due shall bear interest at the rate of fifteen
      percent (15%) per annum from the due date thereof until the same is paid (“Default
      Interest”).  Interest shall commence accruing on the Issue
      Date, shall be computed on the basis of a 365-day year and the actual number
      of
      days elapsed and shall be payable quarterly provided that no interest shall
      be
      due and payable for any month in which the Trading Price (as such term is
      defined below) is greater than $1.5625 for each Trading Day (as such term is
      defined below) of the month. All payments due hereunder (to the extent not
      converted into common stock, $.001 par value per share (the “Common Stock”) in accordance
      with the terms hereof) shall be made in lawful money of the United States of
      America.  All payments shall be made at such address as the Holder
      shall hereafter give to the Borrower by written notice made in accordance with
      the provisions of this Note.  Whenever any amount expressed to be due
      by the terms of this Note is due on any day which is not a business day, the
      same shall instead be due on the next succeeding day which is a business day
      and, in the case of any interest payment date which is not the date on which
      this Note is paid in full, the extension of the due date thereof shall not
      be
      taken into account for purposes of determining the amount of interest due on
      such date.  As used in this Note, the term “business day” shall mean
      any day other than a Saturday, Sunday or a day on which commercial banks in
      the
      city of New York, New York are authorized or required by law or executive order
      to remain closed.  Each capitalized term used herein, and not
      otherwise defined, shall have the meaning ascribed thereto in that certain
      Securities Purchase Agreement, dated September 28, 2006, pursuant to which
      this
      Note was originally issued (the “Purchase
      Agreement”).


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    This
      Note
      is free from all taxes, liens, claims and encumbrances with respect to the
      issue
      thereof and shall not be subject to preemptive rights or other similar rights
      of
      shareholders of the Borrower and will not impose personal liability upon the
      holder thereof.  The obligations of the Borrower under this Note shall
      be secured by that certain Security Agreement and Intellectual Property Security
      Agreement, each dated September 28, 2006 by and between the Borrower and the
      Holder.

     

    The
      following terms shall apply to this Note:

     

     

    ARTICLE
      I.
CONVERSION RIGHTS

     

    1.1           
      Conversion
      Right.  The Holder
      shall
      have the right from time to time, and at any time on or prior to the earlier
      of
      (i) the Maturity Date and (ii) the date of payment of the Default Amount (as
      defined in Article III) pursuant to Section 1.6(a) or Article III, the Optional
      Prepayment Amount (as defined in Section 5.1 or any payments pursuant to Section
      1.7, each in respect of the remaining outstanding principal amount of this
      Note
      to convert all or any part of the outstanding and unpaid principal amount of
      this Note into fully paid and non-assessable shares of Common Stock, as such
      Common Stock exists on the Issue Date, or any shares of capital stock or other
      securities of the Borrower into which such Common Stock shall hereafter be
      changed or reclassified at the conversion price  (the “Conversion Price”) determined
      as provided herein (a “Conversion”); provided,
however,
      that in no
      event shall the Holder be entitled to convert any portion of this Note in excess
      of that portion of this Note upon conversion of which the sum of (1) the number
      of shares of Common Stock beneficially owned by the Holder and its affiliates
      (other than shares of Common Stock which may be deemed beneficially owned
      through the ownership of the unconverted portion of the Notes or the unexercised
      or unconverted portion of any other security of the Borrower (including, without
      limitation, the warrants issued by the Borrower pursuant to the Purchase
      Agreement) subject to a limitation on conversion or exercise analogous to the
      limitations contained herein) and (2) the number of shares of Common Stock
      issuable upon the conversion of the portion of this Note with respect to which
      the determination of this proviso is being made, would result in beneficial
      ownership by the Holder and its affiliates of more than 4.99% of the outstanding
      shares of Common Stock and providedfurther
      that the
      Holder shall not be entitled to convert any portion of this Note during any
      month immediately succeeding a Determination Date on which the Borrower
      exercises its prepayment option pursuant to Section 5.2 of this
      Note.  For purposes of the proviso to the immediately preceding
      sentence, beneficial ownership shall be determined in accordance with Section
      13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G
      thereunder, except as otherwise provided in clause (1) of such
      proviso.  The number of shares of Common Stock to be issued upon each
      conversion of this Note shall be determined by dividing the Conversion Amount
      (as defined below) by the applicable Conversion Price then in effect on the
      date
      specified in the notice of conversion, in the form attached hereto as Exhibit
      A
      (the “Notice of
      Conversion”), delivered to the Borrower by the Holder in accordance with
      Section 1.4 below; provided that the Notice of Conversion is submitted by
      facsimile (or by other means resulting in, or reasonably expected to result
      in,
      notice) to the Borrower before 6:00 p.m., New York, New York time on such
      conversion date (the “Conversion
      Date”).  The term “Conversion Amount” means, with
      respect to any conversion of this Note, the sum of (1) the principal amount
      of
      this Note to be converted in such conversion plus (2) accrued
      and
      unpaid interest, if any, on such principal amount at the interest rates provided
      in this Note to the Conversion Date, provided, however, that the Company shall
      have the right to pay any or all interest in cash plus (3) Default
      Interest, if any, on the amounts referred to in the immediately preceding
      clauses (1) and/or (2) plus (4) at the
      Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and
      1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights
      Agreement, dated as of September 28, 2006, executed in connection with the
      initial issuance of this Note and the other Notes issued on the Issue Date
      (the
“Registration Rights
      Agreement”).  The term “Determination Date” means the
      last business day of each month after the Issue Date.


    
      
        
        

      

      
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    1.2           
      Conversion
      Price.

     

    (a)           
      Calculation
      of Conversion Price.  The Conversion
      Price shall be the lesser of (i) the Variable Conversion Price (as defined
      herein) and (ii) the Fixed Conversion Price (as defined herein) (subject, in
      each case, to equitable adjustments for stock splits, stock dividends or rights
      offerings by the Borrower relating to the Borrower’s securities or the
      securities of any subsidiary of the Borrower, combinations, recapitalization,
      reclassifications, extraordinary distributions and similar
      events).  The “Variable Conversion Price”
shall mean the Applicable
      Percentage (as defined herein) multiplied by the
      Market Price (as defined herein).  “Market Price” means the
      average of the lowest three (3) Trading Prices (as defined below) for the Common
      Stock during the twenty (20) Trading Day period ending one Trading Day prior
      to
      the date the Conversion Notice is sent by the Holder to the Borrower via
      facsimile (the “Conversion
      Date”).  “Trading Price” means, for
      any
      security as of any date, the intraday trading price on the Over-the-Counter
      Bulletin Board, or applicable trading market (the “OTCBB”) as reported by a
      reliable reporting service (“Reporting Service”) mutually
      acceptable to Borrower and Holder and hereafter designated by Holders of a
      majority in interest of the Notes and the Borrower or, if the OTCBB is not
      the
      principal trading market for such security, the intraday trading price of such
      security on the principal securities exchange or trading market where such
      security is listed or traded or, if no intraday trading price of such security
      is available in any of the foregoing manners, the average of the intraday
      trading prices of any market makers for such security that are listed in the
      “pink sheets” by the National Quotation Bureau, Inc.  If the Trading
      Price cannot be calculated for such security on such date in the manner provided
      above, the Trading Price shall be the fair market value as mutually determined
      by the Borrower and the holders of a majority in interest of the Notes being
      converted for which the calculation of the Trading Price is required in order
      to
      determine the Conversion Price of such Notes.  “Trading Day” shall mean any
      day on which the Common Stock is traded for any period on the OTCBB, or on
      the
      principal securities exchange or other securities market on which the Common
      Stock is then being traded.  “Applicable Percentage” shall
      mean 50%; provided, however, that the Applicable Percentage shall be increased
      to (i) 55% in the event that the Registration Statement (as defined in the
      Registration Rights Agreement) is filed on or before the Filing Date (as defined
      in the in the Registration Rights Agreement) and (ii) 60% in the event that
      the
      Registration Statement (as defined in the Registration Rights Agreement) becomes
      effective on or before the Effectiveness Deadline (as defined in the
      Registration Rights Agreement).  In addition, the Holder agrees that
      it will limit all of its conversions to no more than the greater of (1) $80,000
      per calendar month; or (2) the average daily dollar volume calculated during
      the
      ten (10) business days prior to a conversion, per conversion.

     


    
      
        
        

      

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

     

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

     


    
      
        
        

      

      
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    If,
      at
      any time a Holder of this Note submits a Notice of Conversion, and the Borrower
      does not have sufficient authorized but unissued shares of Common Stock
      available to effect such conversion in accordance with the provisions of this
      Article I (a “Conversion
      Default”), subject to Section 4.8, the Borrower shall issue to the Holder
      all of the shares of Common Stock which are then available to effect such
      conversion.  The portion of this Note which the Holder included in its
      Conversion Notice and which exceeds the amount which is then convertible into
      available shares of Common Stock (the “Excess Amount”) shall,
      notwithstanding anything to the contrary contained herein, not be convertible
      into Common Stock in accordance with the terms hereof until (and at the Holder’s
      option at any time after) the date additional shares of Common Stock are
      authorized by the Borrower to permit such conversion, at which time the
      Conversion Price in respect thereof shall be the lesser of (i) the Conversion
      Price on the Conversion Default Date (as defined below) and (ii) the Conversion
      Price on the Conversion Date thereafter elected by the Holder in respect
      thereof.  In addition, the Borrower shall pay to the Holder payments
      (“Conversion Default
      Payments”) for a Conversion Default in the amount of (x) the sum of (1)
      the then
      outstanding principal amount of this Note plus (2) accrued
      and
      unpaid interest on the unpaid principal amount of this Note through the
      Authorization Date (as defined below) plus (3) Default
      Interest, if any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y)
      .24, multiplied
      by (z) (N/365), where N = the number of days from the day the holder
      submits a Notice of Conversion giving rise to a Conversion Default (the “Conversion Default Date”) to
      the date (the “Authorization
      Date”) that the Borrower authorizes a sufficient number of shares of
      Common Stock to effect conversion of the full outstanding principal balance
      of
      this Note.  The Borrower shall use its best efforts to authorize a
      sufficient number of shares of Common Stock as soon as practicable following
      the
      earlier of (i) such time that the Holder notifies the Borrower or that the
      Borrower otherwise becomes aware that there are or likely will be insufficient
      authorized and unissued shares to allow full conversion thereof and (ii) a
      Conversion Default.  The Borrower shall send notice to the Holder of
      the authorization of additional shares of Common Stock, the Authorization Date
      and the amount of Holder’s accrued Conversion Default Payments.  The
      accrued Conversion Default Payments for each calendar month shall be paid in
      cash or shall be convertible into Common Stock (at such time as there are
      sufficient authorized shares of Common Stock) at the applicable Conversion
      Price, at the Borrower’s option, as follows:

     

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

     

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

     

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


    
      
        
        

      

      
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    1.4           
      Method of
      Conversion.

     

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

     

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

     

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

     

    (d)           
      Delivery
      of Common Stock Upon Conversion.  Upon receipt
      by
      the Borrower from the Holder of a facsimile transmission (or other reasonable
      means of communication) of a Notice of Conversion meeting the requirements
      for
      conversion as provided in this Section 1.4, the Borrower shall issue and deliver
      or cause to be issued and delivered to or upon the order of the Holder
      certificates for the Common Stock issuable upon such conversion within three
      (3)
      business days after such receipt (and, solely in the case of conversion of
      the
      entire unpaid principal amount hereof, surrender of this Note) (such second
      business day being hereinafter referred to as the “Deadline”) in accordance with
      the terms hereof and the Purchase Agreement (including, without limitation,
      in
      accordance with the requirements of Section 2(g) of the Purchase Agreement
      that
      certificates for shares of Common Stock issued on or after the effective date
      of
      the Registration Statement upon conversion of this Note shall not bear any
      restrictive legend).


    
      
        
        

      

      
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    (e)           
      Obligation
      of Borrower to Deliver Common Stock.  Upon receipt
      by
      the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
      holder of record of the Common Stock issuable upon such conversion, the
      outstanding principal amount and the amount of accrued and unpaid interest
      on
      this Note shall be reduced to reflect such conversion, and, unless the Borrower
      defaults on its obligations under this Article I, all rights with respect to
      the
      portion of this Note being so converted shall forthwith terminate except the
      right to receive the Common Stock or other securities, cash or other assets,
      as
      herein provided, on such conversion.  If the Holder shall have given a
      Notice of Conversion as provided herein, the Borrower’s obligation to issue and
      deliver the certificates for Common Stock shall be absolute and unconditional,
      irrespective of the absence of any action by the Holder to enforce the same,
      any
      waiver or consent with respect to any provision thereof, the recovery of any
      judgment against any person or any action to enforce the same, any failure
      or
      delay in the enforcement of any other obligation of the Borrower to the holder
      of record, or any setoff, counterclaim, recoupment, limitation or termination,
      or any breach or alleged breach by the Holder of any obligation to the Borrower,
      and irrespective of any other circumstance which might otherwise limit such
      obligation of the Borrower to the Holder in connection with such
      conversion.  The Conversion Date specified in the Notice of Conversion
      shall be the Conversion Date so long as the Notice of Conversion is received
      by
      the Borrower before 6:00 p.m., New York, New York time, on such
      date.

     

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

     

    (g)           
      Failure
      to Deliver Common Stock Prior to Deadline.  Without in
      any
      way limiting the Holder’s right to pursue other remedies, including actual
      damages and/or equitable relief, the parties agree that if delivery of the
      Common Stock issuable upon conversion of this Note is more than three (3)
      business days after the Deadline (other than a failure due to the circumstances
      described in Section 1.3 above, which failure shall be governed by such Section)
      the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond
      the Deadline that the Borrower fails to deliver such Common
      Stock.  Such cash amount shall be paid to Holder by the fifth day of
      the month following the month in which it has accrued or, at the option of
      the
      Holder (by written notice to the Borrower by the first day of the month
      following the month in which it has accrued), shall be added to the principal
      amount of this Note, in which event interest shall accrue thereon in accordance
      with the terms of this Note and such additional principal amount shall be
      convertible into Common Stock in accordance with the terms of this
      Note.

     


    
      
        
        

      

      
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    1.5           
      Concerning
      the Shares.  The shares
      of
      Common Stock issuable upon conversion of this Note may not be sold or
      transferred unless  (i) such shares are sold pursuant to an effective
      registration statement under the Act or (ii) the Borrower or its transfer agent
      shall have been furnished with an opinion of  counsel (which opinion
      shall be in form, substance and scope customary for opinions of counsel in
      comparable transactions) to the effect that the shares to be sold or transferred
      may be sold or transferred pursuant to an exemption from such registration
      or
      (iii) such shares are sold or transferred pursuant to Rule 144 under the
      Act (or a successor rule) (“Rule 144”) or (iv) such shares
      are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who
      agrees to sell or otherwise transfer the shares only in accordance with this
      Section 1.5 and who is an Accredited Investor (as defined in the Purchase
      Agreement).  Except as otherwise provided in the Purchase Agreement
      (and subject to the removal provisions set forth below), until such time as
      the
      shares of Common Stock issuable upon conversion of this Note have been
      registered under the Act as contemplated by the Registration Rights Agreement
      or
      otherwise may be sold pursuant to Rule 144 without any restriction as to the
      number of securities as of a particular date that can then be immediately sold,
      each certificate for shares of Common Stock issuable upon conversion of this
      Note that has not been so included in an effective registration statement or
      that has not been sold pursuant to an effective registration statement or an
      exemption that permits removal of the legend, shall bear a legend substantially
      in the following form, as appropriate:

     

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

     

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


    
      
        
        

      

      
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    1.6           
      Effect of Certain
      Events.

     

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

     

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


    
      
        
        

      

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

     

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

     

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


    
      
        
        

      

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

     

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

     

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


    
      
        
        

      

      
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    1.7           
      Trading
      Market Limitations.
Unless permitted
      by the applicable rules and regulations of the principal
      securities market on which the Common Stock is then listed or traded, in no
      event shall the Borrower issue upon conversion of or otherwise pursuant to
      this
      Note and the other Notes issued pursuant to the Purchase Agreement more than
      the
      maximum number of shares of Common Stock that the Borrower can issue pursuant
      to
      any rule of the principal United States securities market on which the Common
      Stock is then traded (the “Maximum Share Amount”), which
      shall be 19.99% of the total shares outstanding on the Closing Date (as defined
      in the Purchase Agreement), subject to equitable adjustment from time to time
      for stock splits, stock dividends, combinations, capital reorganizations and
      similar events relating to the Common Stock occurring after the date
      hereof.  Once the Maximum Share Amount has been issued (the date of
      which is hereinafter referred to as the “Maximum Conversion Date”), if
      the Borrower fails to eliminate any prohibitions under applicable law or the
      rules or regulations of any stock exchange, interdealer quotation system or
      other self-regulatory organization with jurisdiction over the Borrower or any
      of
      its securities on the Borrower’s ability to issue shares of Common Stock in
      excess of the Maximum Share Amount (a “Trading Market Prepayment
      Event”), in lieu of any further right to convert this Note, and in full
      satisfaction of the Borrower’s obligations under this Note, the Borrower shall
      pay to the Holder, within fifteen (15) business days of the Maximum Conversion
      Date (the “Trading Market
      Prepayment Date”), an amount equal to 130% times the
sum
      of (a) the then
      outstanding principal amount of this Note immediately following the Maximum
      Conversion Date, plus (b) accrued
      and
      unpaid interest on the unpaid principal amount of this Note to the Trading
      Market Prepayment Date, plus (c) Default
      Interest, if any, on the amounts referred to in clause (a) and/or (b) above,
      plus (d) any
      optional amounts that may be added thereto at the Maximum Conversion Date by
      the
      Holder in accordance with the terms hereof (the then outstanding principal
      amount of this Note immediately following the Maximum Conversion Date, plus the amounts
      referred to in clauses (b), (c) and (d) above shall collectively be referred
      to
      as the “Remaining Convertible
      Amount”).  With respect to each Holder of Notes, the Maximum
      Share Amount shall refer to such Holder’s prorata
      share thereof
      determined in accordance with Section 4.8 below.  In the event that
      the sum of (x) the aggregate number of shares of Common Stock issued upon
      conversion of this Note and the other Notes issued pursuant to the Purchase
      Agreement plus
      (y) the aggregate number of shares of Common Stock that remain issuable upon
      conversion of this Note and the other Notes issued pursuant to the Purchase
      Agreement, represents at least one hundred percent (100%) of the Maximum Share
      Amount (the “Triggering
      Event”), the Borrower will use its best efforts to seek and obtain
      Shareholder Approval (or obtain such other relief as will allow conversions
      hereunder in excess of the Maximum Share Amount) as soon as practicable
      following the Triggering Event and before the Maximum Conversion
      Date.  As used herein, “Shareholder Approval” means
      approval by the shareholders of the Borrower to authorize the issuance of the
      full number of shares of Common Stock which would be issuable upon full
      conversion of the then outstanding Notes but for the Maximum Share
      Amount.


    
      
        
        

      

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

     

     

    ARTICLE
      II. CERTAIN
      COVENANTS

     

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

     

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

     

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


    
      
        
        

      

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

     

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

     

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

     

     

    ARTICLE
      III. EVENTS
      OF DEFAULT

     

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

     

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

     

    3.2           
      Conversion
      and the Shares.  The Borrower
      fails to issue shares of Common Stock to the Holder (or announces or threatens
      that it will not honor its obligation to do so) upon exercise by the Holder
      of
      the conversion rights of the Holder in accordance with the terms of this Note
      (for a period of at least sixty (60) days, if such failure is solely as a result
      of the circumstances governed by Section 1.3 and the Borrower is using its
      best
      efforts to authorize a sufficient number of shares of Common Stock as soon
      as
      practicable), fails to transfer or cause its transfer agent to transfer
      (electronically or in certificated form) any certificate for shares of Common
      Stock issued to the Holder upon conversion of or otherwise pursuant to this
      Note
      as and when required by this Note or the Registration Rights Agreement, or
      fails
      to remove any restrictive legend (or to withdraw any stop transfer instructions
      in respect thereof) on any certificate for any shares of Common Stock issued
      to
      the Holder upon conversion of or otherwise pursuant to this Note as and when
      required by this Note or the Registration Rights Agreement (or makes any
      announcement, statement or threat that it does not intend to honor the
      obligations described in this paragraph) and any such failure shall continue
      uncured (or any announcement, statement or threat not to honor its obligations
      shall not be rescinded in writing) for three (3) days after the Borrower shall
      have been notified thereof in writing by the Holder;


    
      
        
        

      

      
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    3.3           
      Failure
      to Timely File Registration or Effect Registration.  The
      Borrower fails to file
      the Registration Statement within forty-five(45)
      days following the Closing Date (as
      defined in the Purchase Agreement) or obtain effectiveness with the Securities
      and Exchange Commission of the Registration Statement within one hundred
twenty(120)
      days following the Closing Date (as
      defined in the Purchase Agreement) or such Registration Statement lapses in
      effect (or sales cannot otherwise be made thereunder effective, whether by
      reason of the Borrower’s failure to amend or supplement the prospectus included
      therein in accordance with the Registration Rights Agreement or
      otherwise) for more than ten (10) consecutive days or twenty (20) days in any
      twelve month period after the Registration Statement becomes
      effective;

     

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

     

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

     

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

     

    3.7           
      Judgments.  Any
      money
      judgment, writ or similar process shall be entered or filed against the Borrower
      or any subsidiary of the Borrower or any of its property or other assets for
      more than $250,000, and shall remain unvacated, unbonded or unstayed for a
      period of twenty (20) days unless otherwise consented to by the Holder, which
      consent will not be unreasonably withheld;

     

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

     

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


    
      
        
        

      

      
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    3.10           
      Default
      Under Other Notes.  An Event of
      Default has occurred and is continuing under any of the other Notes issued
      pursuant to the Purchase Agreement, then, upon the occurrence and during the
      continuation of any Event of Default specified in Section 3.1, 3.2, 3.3, 3.4,
      3.5, 3.7, 3.9, or 3.10, at the option of the Holders of a majority of the
      aggregate principal amount of the outstanding Notes issued pursuant to the
      Purchase Agreement exercisable through the delivery of written notice to the
      Borrower by such Holders (the “Default Notice”), and upon the
      occurrence of an Event of Default specified in Section 3.6 or 3.8, the Notes
      shall become immediately due and payable and the Borrower shall pay to the
      Holder, in full satisfaction of its obligations hereunder, an amount equal
      to
      the greater of (i) 140% times the sum
      of (w) the then
      outstanding principal amount of this Note plus (x) accrued
      and
      unpaid interest on the unpaid principal amount of this Note to the date of
      payment (the “Mandatory
      Prepayment Date”) plus (y)
      Default
      Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any
      amounts
      owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
      Section 2(c) of the Registration Rights Agreement (the then outstanding
      principal amount of this Note to the date of payment plus the amounts
      referred to in clauses (x), (y) and (z) shall collectively be known as the
      “Default Sum”) or (ii)
      the “parity value” of the Default Sum to be prepaid, where parity value means
      (a) the highest number of shares of Common Stock issuable upon conversion of
      or
      otherwise pursuant to such Default Sum in accordance with Article I, treating
      the Trading Day immediately preceding the Mandatory Prepayment Date as the
      “Conversion Date” for purposes of determining the lowest applicable Conversion
      Price, unless the Default Event arises as a result of a breach in respect of
      a
      specific Conversion Date in which case such Conversion Date shall be the
      Conversion Date), multiplied by (b) the
      highest Closing Price for the Common Stock during the period beginning on the
      date of first occurrence of the Event of Default and ending one day prior to
      the
      Mandatory Prepayment Date (the “Default Amount”) and all other
      amounts payable hereunder shall immediately become due and payable, all without
      demand, presentment or notice, all of which hereby are expressly waived,
      together with all costs, including, without limitation, legal fees and expenses,
      of collection, and the Holder shall be entitled to exercise all other rights
      and
      remedies available at law or in equity.  If the Borrower fails to pay
      the Default Amount within five (5) business days of written notice that such
      amount is due and payable, then the Holder shall have the right at any time,
      so
      long as the Borrower remains in default (and so long and to the extent that
      there are sufficient authorized shares), to require the Borrower, upon written
      notice, to immediately issue, in lieu of the Default Amount, the number of
      shares of Common Stock of the Borrower equal to the Default Amount divided
      by
      the Conversion Price then in effect.

     

     

    ARTICLE
      IV.
MISCELLANEOUS

     

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


    
      
        
        

      

      
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    4.2           
      Notices.  Any
      notice herein
      required or permitted to be given shall be in writing and may be personally
      served or delivered by courier or sent by United States mail and shall be deemed
      to have been given upon receipt if personally served (which shall include
      telephone line facsimile transmission) or sent by courier or three (3) days
      after being deposited in the United States mail, certified, with postage
      pre-paid and properly addressed, if sent by mail.  For the purposes
      hereof, the address of the Holder shall be as shown on the records of the
      Borrower; and the address of the Borrower shall be 13520 Oriental Street,
      Rockville, MD 20853, facsimile number: (301)
      560-6665.  Both the Holder and the Borrower may change the address for
      service by service of written notice to the other as herein
      provided.

     

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

     

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

     

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

     

    4.6           
      Governing
      Law.  THIS NOTE SHALL
      BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
      OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
      SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE
      BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND UNITED
      STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE
      ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH
      OR
      THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE
      THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
      PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A
      PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
      SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
      PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE
      PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES AGREE THAT
      A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE
      CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT
      OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN
      ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND
      EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN
      CONNECTION WITH SUCH DISPUTE.


    
      
        
        

      

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

     

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

     

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

     

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

     

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


    
      
        
        

      

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

     

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


    
      
        
        

      

      
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    ARTICLE
      V. CALL
      OPTION

     

    5.1           
      Call
      Option.  Notwithstanding
      anything to the contrary contained in this Article V, so long as (i) no
      Event of Default or Trading Market Prepayment Event shall have occurred and
      be
      continuing, (ii) the Borrower has a sufficient number of authorized shares
      of Common Stock reserved for issuance upon full conversion of the Notes, then
      at
      any time after the Issue Date, and (iii) the Common Stock is trading at or
      below $[  ] per share, the Borrower shall have the right, exercisable
      on not less than three (3) Trading Days prior written notice to the Holders
      of
      the Notes (which notice may not be sent to the Holders of the Notes until the
      Borrower is permitted to prepay the Notes pursuant to this Section 5.1), to
      prepay all of the outstanding Notes in accordance with this Section
      5.1.  Any notice of prepayment hereunder (an “Optional Prepayment”) shall be
      delivered to the Holders of the Notes at their registered addresses appearing
      on
      the books and records of the Borrower and shall state (1) that the Borrower
      is
      exercising its right to prepay all of the Notes issued on the Issue Date and
      (2)
      the date of prepayment (the “Optional Prepayment
      Notice”).  On the date fixed for prepayment (the “Optional Prepayment
      Date”),
      the Borrower shall make payment of the Optional Prepayment Amount (as defined
      below) to or upon the order of the Holders as specified by the Holders in
      writing to the Borrower at least one (1) business day prior to the Optional
      Prepayment Date.  If the Borrower exercises its right to prepay the
      Notes, the Borrower shall make payment to the holders of an amount in cash
      (the
“Optional Prepayment
      Amount”) equal to either (i) 120% (for prepayments occurring within
      thirty (30) days of the Issue Date), (ii) 130% for prepayments occurring
      between thirty-one (31) and sixty  (60) days of the Issue Date, or
      (iii) 140% (for prepayments occurring after the sixtieth (60th)
      day
      following the Issue Date), multiplied by the sum of (w) the then outstanding
      principal amount of this Note plus (x) accrued
      and unpaid interest on the unpaid principal amount of this Note to the Optional
      Prepayment Date plus (y) Default
      Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any
      amounts
      owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
      Section 2(c) of the Registration Rights Agreement (the then outstanding
      principal amount of this Note to the date of payment plus the amounts
      referred to in clauses (x), (y) and (z) shall collectively be known as the
      “Optional Prepayment
      Sum”). Notwithstanding notice of an Optional Prepayment, the Holders
      shall at all times prior to the Optional Prepayment Date maintain the right
      to
      convert all or any portion of the Notes in accordance with Article I and any
      portion of Notes so converted after receipt of an Optional Prepayment Notice
      and
      prior to the Optional Prepayment Date set forth in such notice and payment
      of
      the aggregate Optional Prepayment Amount shall be deducted from the principal
      amount of Notes which are otherwise subject to prepayment pursuant to such
      notice.  If the Borrower delivers an Optional Prepayment Notice and
      fails to pay the Optional Prepayment Amount due to the Holders of the Notes
      within two (2) business days following the Optional Prepayment Date, the
      Borrower shall forever forfeit its right to redeem the Notes pursuant to this
      Section 5.1.


    
      
        
        

      

      
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    5.2           
      Partial
      Call Option.  Notwithstanding anything to the contrary
      contained in this Article V, in the event that the Average Daily Price of the
      Common Stock, as reported by the Reporting Service, for each day of the month
      ending on any Determination Date is below the Initial Market Price, the Borrower
      may, at its option, prepay a portion of the outstanding principal amount of
      the
      Notes equal to 104% of the principal amount hereof divided by thirty-six (36)
      plus one month’s interest which will stay all conversions for that
      month.  The term “Initial Market Price” means
      shall mean the volume weighted average price of the Common Stock for the five
      (5) Trading Days immediately preceding the Closing which is $1.25.

     

    


     

    


     

    


     

    


     

    


     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

     


    
      
        
        

      

      
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    IN
      WITNESS WHEREOF, Borrower
      has caused this Note to be signed in its name by its duly authorized officer
      this 28th
      day of
      September, 2006.

     

    


    TEXTECHNOLOGIES
      INC.

    


    


    


    By:  /s/
      Peter
      Maddocks                                             
    

            Peter
      Maddocks

           Chief
      Executive Officer


    
      
        
        

      

      
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    EXHIBIT
      A

     

    NOTICE
      OF CONVERSION

    (To
      be
      Executed by the Registered Holder

    in
      order
      to Convert the Notes)

     

    The
      undersigned hereby irrevocably elects to convert $__________ principal amount
      of
      the Note (defined below) into shares of common stock, par value
      [    ] per share (“Common Stock”), of
      Textechnologies Inc., a Delaware corporation (the “Borrower”) according to the
      conditions of the convertible Notes of the Borrower dated as of September 28,
      2006 (the “Notes”), as
      of the date written below.  If securities are to be issued in the name
      of a person other than the undersigned, the undersigned will pay all transfer
      taxes payable with respect thereto and is delivering herewith such
      certificates.  No fee will be charged to the Holder for any
      conversion, except for transfer taxes, if any.  A copy of each Note is
      attached hereto (or evidence of loss, theft or destruction
      thereof).

     

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

     

    Name
      of
      DTC Prime Broker:
      ________________________________________________________________________________

    Account
      Number:
      _______________________________________________________________________________________

     

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

     

    Name:
      ________________________________________________________________________________________________

    Address:
      ______________________________________________________________________________________________

     

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

     

    Date
      of
      Conversion:___________________________

    Applicable
      Conversion Price:____________________

    Number
      of
      Shares of Common Stock to be Issued Pursuant to

    Conversion
      of the Notes:______________

    Signature:___________________________________

    Name:______________________________________

    Address:____________________________________

     


    
      
        
        

      

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

     

    24