**Exhibit 10.2**

 

**NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTEDBY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARECONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,OR APPLICABLE STATE SECURITIES LAWS.  THESECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED INTHE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIESUNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OFCOUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIREDUNDER SAID ACT.  ANY TRANSFEREE OF THISNOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND19(a) HEREOF.  THE PRINCIPAL AMOUNTREPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPONCONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACEHEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.**

 

**CONVERTIBLE SUBORDINATED NOTE**

 
| Issuance  Date: July 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]****orregistered assigns (**“Holder”**) theamount set out above as the Principal (as reduced pursuant to the terms hereofpursuant to redemption, conversion or otherwise, the **“Principal”**) when due, whether upon the Maturity Date (asdefined below), acceleration, redemption or otherwise (in each case inaccordance with the terms hereof) and to pay interest (**“Interest”**) on any outstanding Principal atthe rate of interest as determined pursuant to Section 2, from the dateset out above as the Issuance Date (the **“IssuanceDate”**) until the same becomes due and payable, whether upon anInterest Date (as defined below), the Maturity Date, acceleration, conversion,redemption or otherwise (in each case in accordance with the termshereof).  This Convertible SubordinatedNote (including all Convertible Subordinated Notes issued in exchange, transferor replacement hereof, this **“Note”**)is one of an issue of Convertible Subordinated Notes issued on January 3,2007 (the “**Original Date**”) pursuant to theSecurities Purchase Agreement (the “**Original Notes**”)or issued after January 3, 2007 in satisfaction of interest and/or otheramounts owing by the Company to the holders of the Original Notes (the “**Interest Notes**”) (the Original Notes and Interest Notes arecollectively referred to as the “**Notes**” herein,and any Notes other than this Note are collectively referred to as the “**Other Notes**”).  ThisNote is deemed to be issued pursuant to Section 2 of the Holder’s OriginalNote and is subject to the terms and provisions of the Securities PurchaseAgreement.  Certain capitalized terms aredefined in Section 29.

 

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(1)           MATURITY ANDAMORTIZATION PAYMENTS.

 

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

 

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

 

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(c)           Payment of Amortization RedemptionAmount.  The Company shall pay theAmortization Redemption Amount in cash in accordance with the provisions of Section 12;provided, however, that if the Conditions to Amortization Conversion (asdefined below) are satisfied or waived in writing by the Holder and the Companyprovides the Amortization Conversion Notice (as defined below), then theCompany shall have the right to require the Holder to convert all or any suchportion of the Amortization Redemption Amount designated in the AmortizationConversion Notice into fully paid, validly issued and nonassessable shares ofCommon Stock in accordance with the applicable provisions of Section 3(c)(i).  The Company may exercise its right to requireconversion under this Section 1(c) by delivering at least 20 TradingDays prior to such Amortization Date a written notice thereof by facsimile andovernight courier to all, but not less than all, of the holders of Notes andthe Transfer Agent that specifically describes the portion of the AmortizationRedemption Amount for this Note and the Other Notes that will be paid in CommonStock (the **“Amortization Conversion Notice”**andthe date all of the holders received such notice is referred to as the “**Amortization Conversion Notice Date**”).  The Amortization Conversion Notice shall beirrevocable; provided; that if any of the Conditions to AmortizationConversion is not satisfied on the applicable Amortization Date or waived bythe Holder, the Company will notwithstanding delivery of the AmortizationConversion Notice be required to pay the Amortization Redemption Amount incash.  The conversion price applicable toan Amortization Conversion (the “Amortization Price”) that is being paid inCommon Stock pursuant to this Section 1(c) shall be 90% of theWeighted Average Price of the Common Stock for the 20 consecutive Trading Daysimmediately preceding the Amortization Date. For purposes of this Section 1(c), “**Conditions to Amortization Conversion**” means****the following conditions: (i) theCommon Stock shall be traded on the Principal Market, the NASDAQ Gobal Marketor NASDAQ Capital Market, or the American Stock Exchange on the applicableAmortization Date, (ii) on the Amortization Date, either (x) theRegistration Statement or Registration Statements contemplated by theRegistration Rights Agreement shall be effective and available for the sale forall of the Registrable Securities (as defined in the Registration RightsAgreement) then outstanding, together with the Common Stock to be issued onsuch Amortization Date, in accordance with the terms of the Registration RightsAgreement or (y) all shares of Common Stock issuable upon conversion ofthe Notes shall be eligible for sale without restriction and without the needfor registration under any applicable federal or state securities laws, (iii) anAuthorized Share Failure shall not be in effect on the Amortization Date; and (iv) anysuch payment of the Amortization Redemption Amount in Common Stock shall notconsist of more than 20% of the total dollar volume traded in the Common Stockfor the 20 Trading Days prior to the Amortization Date.

 

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

 

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

 

(2)           INTEREST;INTEREST RATE.  Interest onthis Note shall commence accruing on the Issuance Date and shall be computed onthe basis of a 365-day year and actual days elapsed and shall be payable inarrears on the first day of each Calendar Quarter and on the Maturity Dateduring 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 InterestDate in cash at the rate of 8.00% per annum (the **“Interest Rate”**).  Priorto the payment of Interest on an Interest Date, Interest on this Note shallaccrue at the Interest Rate and be payable by way of inclusion of the Interestin the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event ofDefault, the Interest Rate shall be increased so that the Interest Rate shallbe twelve percent (12.00%) per annum.  Inthe event that such Event of Default is subsequently cured, the adjustmentreferred to in the preceding sentence shall cease to be effective as of thedate of such cure; provided that the Interest as calculated at such increasedrate during the continuance of such Event of Default shall continue to apply tothe extent relating to the days after the occurrence of such Event of Defaultthrough and including the date of cure of such Event of Default.

 

(3)           CONVERSION OFNOTES.  This Note shall be convertibleinto shares of the Company’s common stock, par value $0.001 per share (the **“Common Stock”**), on the terms andconditions 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 beentitled to convert any portion of the outstanding and unpaid Conversion Amount(as defined below) in increments of at least $50,000 of Principal (or suchlesser amount if such amount represents the remaining Principal amount) intofully 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 uponany conversion.  If the issuance wouldresult in the issuance of a fraction of a share of Common Stock, the Companyshall round such fraction of a share of Common Stock up to the nearest wholeshare.  The Company shall pay any and alltaxes that may be payable with respect to the issuance and delivery of CommonStock upon conversion of any Conversion Amount.

 

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(b)           Conversion Rate.  The number of shares of Common Stock issuableupon conversion of any Conversion Amount pursuant to Section 3(a) shallbe determined by dividing (x) such Conversion Amount by (y) theConversion Price (as defined below) (the **“ConversionRate”**).

 

(i)            **“ConversionAmount”** means the sum of (A) the portion of the Principal to beconverted, redeemed or otherwise with respect to which this determination isbeing made, plus (B) accrued and unpaid Interest with respect to suchPrincipal.

 

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

 

(c)           Mechanicsof Conversion.

 

(i)            Optional Conversion.  To convert any Conversion Amount into sharesof Common Stock on any date (a **“ConversionDate”**), the Holder shall (A) transmit by facsimile (orotherwise 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 attachedhereto as Exhibit I (the **“ConversionNotice”**) 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 aspracticable on or following such date (or an indemnification undertaking withrespect to this Note in the case of its loss, theft or destruction).  On or before the first Business Day followingthe date of receipt of a Conversion Notice, the Company shall transmit byfacsimile a confirmation of receipt of such Conversion Notice to the Holder andthe Company’s transfer agent (the “**TransferAgent**”).  On or before thesecond Business Day following the date of receipt of a Conversion Notice (the **“Share Delivery Date”**), the Company shall (X) creditsuch aggregate number of shares of Common Stock to which the Holder shall beentitled to the Holder’s or its designee’s balance account with DepositoryTrust Company (“**DTC**”) through itsDeposit Withdrawal At Custodian system or (Y) if the Transfer Agent is notparticipating in DTC Fast Automated Securities Transfer Program, issue anddeliver 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 sharesof Common Stock to which the Holder shall be entitled.  If this Note is physically surrendered forconversion as required by Section 3(c)(iii) and the outstandingPrincipal of this Note is greater than the Principal portion of the ConversionAmount being converted, then the Company shall as soon as practicable and in noevent later than five Business Days after receipt of this Note and at its ownexpense, 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 theshares of Common Stock issuable upon a conversion of this Note shall be treatedfor all purposes as the record holder or holders of such shares of Common Stockon the Conversion Date.

 

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(ii)           Company’s Failure to TimelyConvert.  If the Company shall failto issue a certificate to the Holder or credit the Holder’s balance accountwith DTC for the number of shares of Common Stock to which the Holder isentitled upon conversion of any Conversion Amount on or prior to the date whichis five Business Days after the Conversion Date (a **“Conversion Failure”**), then (A) the Company shall payliquidated damages to the Holder for each day of such Conversion Failure in anamount equal to 1.0%****of theproduct of (I) the sum of the number of shares of Common Stock not issuedto the Holder on or prior to the Share Delivery Date and to which the Holder isentitled, and (II) the Closing Sale Price of the Common Stock on the ShareDelivery Date and (B) the Holder, upon written notice to the Company, mayvoid its Conversion Notice with respect to, and retain or have returned, as thecase may be, any portion of this Note that has not been converted pursuant tosuch Conversion Notice; provided that the voiding of a Conversion Notice shallnot affect the Company’s obligations to make any payments which have accruedprior to the date of such notice pursuant to this Section 3(c)(ii) orotherwise.  In addition to the foregoing,if within three (3) Trading Days after the Company’s receipt of thefacsimile copy of a Conversion Notice the Company shall fail to issue anddeliver a certificate to the Holder or credit the Holder’s balance account withDTC for the number of shares of Common Stock to which the Holder is entitledupon such holder’s conversion of any Conversion Amount, and if on or after suchTrading 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 Stockissuable upon such conversion that the Holder anticipated receiving from theCompany (a “**Buy-In**”), then theCompany shall, within five (5) Business Days after the Holder’s requestand in the Holder’s discretion, either (i) pay cash to the Holder in anamount equal to the Holder’s total purchase price (including brokeragecommissions and other out-of-pocket expenses, if any) for the shares of CommonStock so purchased (the **“Buy-In Price”**),at which point the Company’s obligation to deliver such certificate (and toissue such Common Stock) shall terminate, or (ii) promptly honor itsobligation to deliver to the Holder a certificate or certificates representingsuch 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 sharesof Common Stock, times (B) the Closing Bid Price on the Conversion Date.

 

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

 

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

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership.  Unless waived by the Holder upon no less thansixty one (61) days prior written notice to the Company, the Company shall noteffect any conversion of this Note pursuant to Section 3(a) to theextent that after giving effect to such conversion the Holder (together withthe Holder’s affiliates) would beneficially own in excess of 4.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion.  Even if the Holderwaives the limitation set forth in the preceding sentence, the Company shall inno event effect any conversion of this Note, and the Holder of this Note shallnot 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 (togetherwith the Holder’s affiliates) would beneficially own in excess of 9.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion.  For purposes of theforegoing sentences, the number of shares of Common Stock beneficially owned bythe Holder and its affiliates shall include the number of shares of CommonStock issuable upon conversion of this Note with respect to which thedetermination of such sentence is being made, but shall exclude the number ofshares of Common Stock which would be issuable upon (A) conversion of theremaining, nonconverted portion of this Note beneficially owned by the Holderor any of its affiliates and (B) exercise or conversion of the unexercisedor nonconverted portion of any other securities of the Company (including,without limitation, any Other Notes or warrants) subject to a limitation onconversion or exercise analogous to the limitation contained hereinbeneficially owned by the Holder or any of its affiliates.  Except as set forth in the precedingsentence, for purposes of this Section 3(d)(i), beneficial ownership shallbe calculated in accordance with Section 13(d) of the SecuritiesExchange Act of 1934, as amended.  Forpurposes of this Section 3(d)(i), in determining the number of outstandingshares of Common Stock, the Holder may rely on the number of outstanding sharesof Common Stock as reflected in (x) the Company’s most recent Form 10-Qor 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 forththe number of shares of Common Stock outstanding.  For any reason at any time, upon the writtenor oral request of the Holder, the Company shall within two Business Daysconfirm orally and in writing to the Holder the number of shares of CommonStock then outstanding.  In any case, thenumber of outstanding shares of Common Stock shall be determined after givingeffect to the conversion or exercise of securities of the Company, includingthis Note, by the Holder or its affiliates since the date as of which suchnumber of outstanding shares of Common Stock was reported.

 

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(ii)           Principal Market Regulation.  The Company shall not be obligated to issueany shares of Common Stock upon conversion of this Note if the issuance of suchshares of Common Stock would exceed that number of shares of Common Stock thatthe Company may issue upon conversion of the Notes without breaching theCompany’s obligations under the rules or regulations of the PrincipalMarket (the **“Exchange Cap”**),except that such limitation shall not apply in the event that the Company (A) obtainsthe approval of its stockholders as required by the applicable rules ofthe Principal Market for issuances of Common Stock in excess of such amount or (B) obtainsa written opinion from outside counsel to the Company that such approval is notrequired, which opinion shall be reasonably satisfactory to the holders of theNotes representing at least a majority of the principal amounts of the Notesthen outstanding.  Until such approval orwritten opinion is obtained, no holders of Notes (the **“Purchasers”**) shall be issued, uponconversion of Notes, shares of Common Stock in an amount greater than theproduct of the Exchange Cap multiplied by a fraction, the numerator of which isthe principal amount of Original Notes issued to such Purchaser pursuant to theSecurities Purchase Agreement on the Issuance Date and the denominator of whichis the aggregate principal amount of all Original Notes issued to thePurchasers pursuant to the Securities Purchase Agreement on the Issuance Date(with respect to each Purchaser, the **“ExchangeCap Allocation”**).  In theevent that any Purchaser shall sell or otherwise transfer any of such Purchaser’sNotes, the transferee shall be allocated a pro rata portion of such Purchaser’sExchange Cap Allocation, and the restrictions of the prior sentence shall applyto such transferee with respect to the portion of the Exchange Cap Allocationallocated to such transferee.  In theevent that any holder of Notes shall convert all of such holder’s Notes into anumber of shares of Common Stock which, in the aggregate, is less than suchholder’s Exchange Cap Allocation, then the difference between such holder’sExchange Cap Allocation and the number of shares of Common Stock actuallyissued to such holder shall be allocated to the respective Exchange CapAllocations of the remaining holders of Notes on a pro rata basis in proportionto the aggregate principal amount of the Notes then held by each such holder.

 

(4)           RIGHTS UPONEVENT OF DEFAULT.

 

(a)           Event of Default.  Each of the following events shall constitutean **“Event of Default”**:

 

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

 

(ii)           the Company’s failure to pay to theHolder any amounts other than Principal or Interest when and as due under thisNote, the Securities Purchase Agreement, or the Registration Rights Agreement,which failure is not cured within five Business Days after notice of suchdefault sent by the Holder to the Company;

 

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(iii)          any default under, redemption of oracceleration prior to maturity of any Indebtedness (as defined below) of theCompany or any of its Subsidiaries (as defined in the Securities PurchaseAgreement) other than with respect to any Other Notes and the SeniorIndebtedness; provided that in the case of a payment default of suchIndebtedness, such default is not cured within applicable cure periods; furtherprovided that in the case of a non-payment default of such Indebtedness thathas not resulted in an acceleration or redemption of such Indebtedness prior toits maturity, only upon acceleration or redemption of such Indebtedness;

 

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

 

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

 

(vi)          a court of competent jurisdictionenters an order or decree under any Bankruptcy Law that (A) is for reliefagainst the Company or any of its Subsidiaries in an involuntary case thatremains undismissed for a period of 90 days, (B) appoints a Custodian ofthe Company or any of its Subsidiaries that remains undischarged or unstayedfor a period of 90 days, or (C) orders the liquidation of the Company orany of its Subsidiaries;

 

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

 

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

 

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

 

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(b)           Redemption Right.  Promptly after the occurrence of an Event ofDefault with respect to this Note or any Other Note, the Company shall deliverwritten notice thereof via facsimile and overnight courier (an **“Event of Default Notice”**) to theHolder.  At any time after the earlier ofthe Holder’s receipt of an Event of Default Notice and the Holder becomingaware of an Event of Default, the Holder may require the Company to redeem allor any portion of this Note by delivering written notice thereof (the **“Event of Default Redemption Notice”**) tothe Company, which Event of Default Redemption Notice shall indicate theportion of this Note the Holder is electing to redeem.  Each portion of this Note subject toredemption by the Company pursuant to this Section 4(b) shall beredeemed by the Company at a price equal to the greater of (i) theConversion Amount to be redeemed and (ii) the product of (A) theConversion Rate with respect to such Conversion Amount in effect at such timeas the Holder delivers an Event of Default Redemption Notice and (B) theClosing Sale Price of the Common Stock on the date immediately preceding suchEvent of Default (the **“Event of DefaultRedemption Price”**). Redemptions required by this Section 4(b) shall be made inaccordance with the provisions of Section 12.

 

(5)           RIGHTS UPON CHANGE OFCONTROL.

 

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

 

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

 

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

 

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

 

Nosooner than 15 days nor later than 10 days prior to the consummation of aChange of Control, but not prior to the public announcement of such Change ofControl, the Company shall deliver written notice thereof via facsimile andovernight courier to the Holder (a **“Change ofControl Notice”**).

 

(b)           Assumption.  Prior to the consummation of any Change ofControl, the Company will secure from any Person purchasing the Company’sassets 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 Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding) to deliver to 

 

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eachholder of Notes in exchange for such Notes, a security of the Acquiring Entityevidenced by a written instrument substantially similar in form and substanceto the Notes, including, without limitation, having a principal amount andinterest rate equal to the principal amounts and the interest rates of theNotes held by such holder, and satisfactory to the holders of Notesrepresenting at least a majority of the principal amount of the Notes thenoutstanding.  In the event that anAcquiring Entity is directly or indirectly controlled by a company or entitywhose common stock or similar equity interest is listed, designated or quotedon a securities exchange or trading market, the holders of Notes representingat least a majority of the aggregate principal amount of the Notes thenoutstanding may elect to treat such Person as the Acquiring Entity for purposesof this Section 5(b).

 

(c)           Redemption Right.  At any time during the period beginning afterthe Holder’s receipt of a Change of Control Notice and ending on the date ofthe consummation of such Change of Control (or, in the event a Change ofControl 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 Controland ending ten days after the consummation of such Change of Control), theHolder may require the Company to redeem all or any portion of this Note bydelivering written notice thereof (**“Change ofControl Redemption Notice”**) to the Company, which Change of ControlRedemption Notice shall indicate the Conversion Amount the Holder is electingto redeem; provided, however, that the Company shall not be under anyobligation to redeem all or any portion of this Note or to deliver theapplicable Change of Control Redemption Price unless and until the applicableChange of Control is consummated.  Theportion of this Note subject to redemption pursuant to this Section 5shall be redeemed by the Company in cash at a price equal to the greater of (i) thesum of (x) the product of (A) the Applicable Percentage (as definedbelow) and (B) the Conversion Amount being redeemed and (y) theamount of any accrued but unpaid Interest on such Conversion Amount beingredeemed through the date of such redemption payment and (ii) the productof (x) the Applicable Percentage and (y) the sum of (1) theproduct of (A) the Conversion Amount being redeemed multiplied by (B) thequotient determined by dividing (I) the aggregate cash consideration andthe aggregate cash value of any non-cash consideration per Common Share to bepaid to the holders of the Common Shares upon consummation of the Change ofControl (any such non-cash consideration in the form of securities to be valuedat the higher of the Closing Sale Price of such securities as of the TradingDay immediately prior to the consummation of such Change of Control, theClosing Sale Price on the Trading Day immediately following the publicannouncement of such proposed Change of Control and the Closing Sale Price onthe Trading Day immediately prior to the public announcement of such proposedChange of Control) by (II) the Conversion Price plus (2) the amountof any accrued but unpaid Interest on such Conversion Amount being redeemedthrough the date of such redemption payment, (the “**Change of Control Redemption Price**”).  Redemptionsrequired by this Section 5(c) shall be made in accordance with theprovisions of Section 12 and shall have priority to payments to stockholdersin connection with a Change of Control. For purposes of this Note, the term “**ApplicablePercentage**” means 120% if the Change of Control is consummated on orbefore the first (1st) anniversaryof the Original Date, 115% if the Change of Control is consummated after thefirst (1st) anniversary of the Original Date but on or before thesecond (2nd) anniversaryof the Original Date, and 110% if the Change of Control is consummated at anytime after the second (2nd) anniversary of the Original Date.

 

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(6)           RIGHTS UPON ISSUANCE OFPURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

 

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

 

(b)           Other Corporate Events. Prior to theconsummation 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 orother assets with respect to or in exchange for Common Stock (a **“Corporate Event”**), the Company shall makeappropriate provision to insure that the Holder will thereafter have the rightto receive upon a conversion of this Note, (i) in addition to the sharesof Common Stock receivable upon such conversion, such securities or otherassets to which the Holder would have been entitled with respect to such sharesof Common Stock had such shares of Common Stock been held by the Holder uponthe consummation of such Corporate Event or (ii) in lieu of the shares ofCommon Stock otherwise receivable upon such conversion, such securities orother assets received by the holders of Common Stock in connection with theconsummation of such Corporate Event in such amounts as the Holder would havebeen entitled to receive had this Note initially been issued with conversionrights for the form of such consideration (as opposed to shares of CommonStock) at a conversion rate for such consideration commensurate with theConversion Rate.  Provision made pursuantto the preceding sentence shall be in a form and substance satisfactory to theholders of Notes representing at least a majority of the aggregate principalamount of the Notes then outstanding.

 

(7)           RIGHTS UPON ISSUANCE OFOTHER SECURITIES.

 

(a)           Adjustment of ConversionPrice upon Issuance of Common Stock.  If and whenever on or after the IssuanceDate, the Company issues or sells, or in accordance with this Section 7(a) isdeemed to have issued or sold, any shares of Common Stock (including the issuanceor sale of shares of Common Stock owned or held by or for the account of theCompany, but excluding shares of Common Stock deemed to have been issued orsold by the Company in connection with any Excluded Security) for aconsideration per share (the **“New SecuritiesIssuance Price”**) less than a price (the **“Applicable Price”**) equal to the Conversion Price in effectimmediately prior to such issue or sale (the foregoing a **“Dilutive Issuance”**), 

 

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then immediately after such DilutiveIssuance, 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 adjustedConversion Price under this Section 7(a), the following shall beapplicable:

 

(i)            Issuance of Options.  If the Company in any manner grants or sellsany Options and the lowest price per share for which one share of Common Stockis issuable upon the exercise of any such Option or upon conversion or exchangeor exercise of any Convertible Securities issuable upon exercise of such Optionis less than the Applicable Price, then such share of Common Stock shall bedeemed to be outstanding and to have been issued and sold by the Company at thetime 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 issuableupon the exercise of any such Option or upon conversion or exchange or exerciseof any Convertible Securities issuable upon exercise of such Option” shall beequal to the sum of the lowest amounts of consideration (if any) received orreceivable by the Company with respect to any one share of Common Stock upongranting or sale of the Option, upon exercise of the Option and upon conversionor exchange or exercise of any Convertible Security issuable upon exercise ofsuch Option.  No further adjustment ofthe Conversion Price shall be made upon the actual issuance of such CommonStock or of such Convertible Securities upon the exercise of such Options orupon the actual issuance of such Common Stock upon conversion or exchange orexercise of such Convertible Securities.

 

(ii)           Issuance of ConvertibleSecurities.  If theCompany in any manner issues or sells any Convertible Securities and the lowestprice per share for which one share of Common Stock is issuable upon suchconversion 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 havebeen issued and sold by the Company at the time of the issuance of sale of suchConvertible 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 suchconversion or exchange or exercise” shall be equal to the sum of the lowestamounts of consideration (if any) received or receivable by the Company withrespect to any one share of Common Stock upon the issuance or sale of theConvertible Security and upon the conversion or exchange or exercise of suchConvertible Security.  No furtheradjustment of the Conversion Price shall be made upon the actual issuance ofsuch Common Stock upon conversion or exchange or exercise of such ConvertibleSecurities, and if any such issue or sale of such Convertible Securities ismade upon exercise of any Options for which adjustment of the Conversion Pricehad 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 suchissue or sale.  Notwithstanding anythingin this Note to the contrary, in the event that the Company agrees to decreasethe conversion price of any of its 7% Convertible Secured Promissory Notes due August 2007in connection with an agreement by the holder of any such notes to convert thesame, such decrease in the conversion price will not result in any adjustmentto the Conversion Price pursuant to this Section 7(a) of this Note.

 

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

 

(iv)          Calculation of ConsiderationReceived.  In case anyOption is issued in connection with the issue or sale of other securities ofthe Company, together comprising one integrated transaction in which nospecific consideration is allocated to such Options by the parties thereto, theOptions will be deemed to have been issued for a consideration of $.01.  If any Common Stock, Options or ConvertibleSecurities 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 amountreceived by the Company therefor.  If anyCommon Stock, Options or Convertible Securities are issued or sold for aconsideration other than cash, the amount of the consideration other than cashreceived by the Company will be the fair value of such consideration, exceptwhere such consideration consists of securities, in which case the amount ofconsideration received by the Company will be the Closing Sale Price of suchsecurities on the date of receipt.  If anyCommon Stock, Options or Convertible Securities are issued to the owners of thenon-surviving entity in connection with any merger in which the Company is thesurviving entity, the amount of consideration therefor will be deemed to be thefair value of such portion of the net assets and business of the non-survivingentity as is attributable to such Common Stock, Options or ConvertibleSecurities, as the case may be.  The fairvalue of any consideration other than cash or securities will be determined jointlyby the Company and the holders of Notes representing at least a majority of theprincipal amounts of the Notes then outstanding.  If such parties are unable to reach agreementwithin ten days after the occurrence of an event requiring valuation (the **“Valuation Event”**), the fair value of suchconsideration will be determined within five Business Days after the tenth dayfollowing the Valuation Event by an independent, reputable appraiser jointlyselected by the Company and the holders of Notes representing at least amajority of the principal amounts of the Notes then outstanding.  The determination of such appraiser shall bedeemed binding upon all parties absent manifest error and the fees and expensesof such appraiser shall be borne equally by the Company, on the hand, and theholders of the Notes, on the other hand.

 

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(v)           Record Date.  IftheCompanytakesarecordoftheholdersofCommonStockforthepurposeofentitlingthem(A)toreceiveadividendorotherdistributionpayableinCommonStock,OptionsorinConvertibleSecuritiesor(B)tosubscribefororpurchaseCommon Stock,Options or Convertible Securities, then such record date will be deemed to bethe date of the issue or sale of the shares of Common Stock deemed to have beenissued or sold upon the declaration of such dividend or the making of suchother distribution or the date of the granting of such right of subscription orpurchase, as the case may be.

 

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

 

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

 

(9)           COMPANY’S RIGHT OF MANDATORYCONVERSION.  (a) MandatoryConversion.  If at any time from andafter the Issuance Date, the Weighted Average Price of the Common Stock exceeds250% of the conversion price of the Original Notes as of the Original Date(subject to appropriate adjustments for stock splits, stock dividends, stockcombinations and other similar transactions after the Original Date) for eachof any 20 consecutive Trading Days (the **“MandatoryConversion Measuring Period”**) and the Conditions to MandatoryConversion (as set forth in Section 9(c)) are satisfied or waived inwriting by the Holder, the Company shall have the right to require the Holderto convert all or any such portion of the Conversion Amount of this Notedesignated in the Mandatory Conversion Notice into fully paid, validly issuedand nonassessable shares of Common Stock in accordance with Section 3(c) hereofat the Conversion Rate as of the Mandatory Conversion Date (as defined below)(a “**Mandatory Conversion**”).  The Company may exercise its right to requireconversion under this Section 9(a) by delivering within not more thanfive Trading Days following the end of such Mandatory Conversion MeasuringPeriod a written notice thereof by facsimile and overnight courier to all, butnot less than all, of the holders of Notes and the Transfer Agent (the **“Mandatory Conversion Notice”** and the dateall of the holders received such notice is referred to as the “**Mandatory Conversion Notice Date**”).  The Mandatory Conversion Notice shall beirrevocable.

 

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(b)           Pro Rata ConversionRequirement.  If theCompany elects to cause a conversion of all or any portion of the ConversionAmount of this Note pursuant to Section 9(a), then it must simultaneouslytake the same action with respect to the Other Notes (except that the Companyis not required to take the same action with respect to the Other Notes to theextent limited by Section 3(d) in this Note or similar provisionsunder the Other Notes).  If the Companyelects to cause the conversion of this Note pursuant to Section 9(a) (orsimilar provisions under the Other Notes) with respect to less than all of theConversion Amounts of the Notes then outstanding, then the Company shallrequire conversion of a Conversion Amount from each of the holders of the Notesequal to the product of (I) the aggregate Conversion Amount of Notes whichthe 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 theaggregate principal amount of the Original Notes purchased by such holderpursuant to the Securities Purchase Agreement and the denominator of which isthe sum of the aggregate principal amount of the Original Notes purchased byall holders pursuant to the Securities Purchase Agreement (except to the extentlimited by Section 3(d) in this Note or similar provisions under theOther Notes) (such fraction with respect to each holder is referred to as its “**Allocation Percentage**,” and such amountwith 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 orotherwise transfer any of such holder’s Notes, the transferee shall beallocated a pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state (i) theTrading 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 60Business Days following the Mandatory Conversion Notice Date (the “**Mandatory Conversion Date**”), (ii) theaggregate Conversion Amount of the Notes which the Company has elected to besubject to mandatory conversion from all of the holders of the Notes pursuantto this Section 9 (and analogous provisions under the Other Notes), (iii) eachholder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes theCompany has elected to cause to be converted pursuant to this Section 9(and analogous provisions under the Other Notes) and (iv) the number ofshares of Common Stock to be issued to such Holder as of the MandatoryConversion Date.  All Conversion Amountsconverted by the Holder after the Mandatory Conversion Notice Date shall reducethe Conversion Amount of this Note required to be converted on the MandatoryConversion Date.  If the Company haselected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shallapply, to the extent applicable, as if the Company and the Transfer Agent hadreceived from the Holder on the Mandatory Conversion Date a Conversion Noticewith respect to the Conversion Amount being converted pursuant to the MandatoryConversion.

 

(c)           Conditions to MandatoryConversion.  Forpurposes of this Section 9, “**Conditionsto Mandatory Conversion**” means****thefollowing conditions: (i) during the period beginning on the date that issix months prior to the Mandatory Conversion Date and ending on and includingthe Mandatory Conversion Date, the Company shall have delivered shares ofCommon 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 ofthe Mandatory Conversion Measuring Period and ending on and including theMandatory Conversion Date, the Common Stock shall be traded on the PrincipalMarket, the NASDAQ Global Market or Global Select Market, the NASDAQ CapitalMarket, the New York Stock Exchange, or the American Stock Exchange; (iii) onthe Mandatory Conversion Date either (x) the Registration Statement or 

 

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Registration Statements contemplated by theRegistration Rights Agreement shall be effective and available for the sale forall of the Registrable Securities in accordance with the terms of theRegistration Rights Agreement or (y) all shares of Common Stock issuableupon conversion of the Notes shall be eligible for sale without restriction andwithout the need for registration under any applicable federal or statesecurities laws; (iv) on the Mandatory Conversion Date, an Authorized ShareFailure shall not be in effect; and (v) any such payment of the ConversionAmount in Common Stock shall not consist of more than 20% of the total dollarvolume traded in the Common Stock for the 20 Trading Days prior to theMandatory Conversion Date.

 

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

 

(11)         RESERVATION OF AUTHORIZEDSHARES.

 

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

 

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

 

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(12)         HOLDER’S REDEMPTIONS.

 

(a)           Mechanics.  In the event that the Holder has sent anEvent of Default Redemption Notice or a Change of Control Redemption Notice tothe 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 ofDefault Redemption Notice in accordance with Section 4(b), the Companyshall deliver the applicable Event of Default Redemption Price to the Holderwithin five Business Days after the Company’s receipt of the Holder’s Event ofDefault Redemption Notice.  If the Holderhas submitted a Change of Control Redemption Notice in accordance with Section 5(c),the Company shall deliver the applicable Change of Control Redemption Price tothe Holder concurrently with the consummation of such Change of Control if suchnotice is received prior to the consummation of such Change of Control andwithin five Business Days after the Company’s receipt of such notice if suchnotice 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 theHolder within five Business Days after the end of the applicable month for suchAmortization Redemption.  In the event ofa redemption of less than all of the Conversion Amount of this Note, theCompany shall promptly cause to be issued and delivered to the Holder, at theHolder’s request, a new Note (in accordance with Section 19(d)) representingthe outstanding Principal which has not been redeemed.  In the event that the Company does not paythe 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 deliverany Common Stock to be issued pursuant to a Redemption Notice) within the timeperiod required, at any time thereafter and until the Company pays such unpaidRedemption Price (and issues any Common Stock required pursuant to a RedemptionNotice) in full, the Holder shall have the option, in lieu of redemption, torequire the Company to promptly return to the Holder all or any portion of thisNote representing the Conversion Amount that was submitted for redemption andfor which the applicable Redemption Price (or any Common Stock required to beissued pursuant to a Redemption Notice) has not been paid.  Upon the Company’s receipt of such notice, (x) theRedemption Notice shall be null and void with respect to such ConversionAmount, (y) the Company shall immediately return this Note, or issue a newNote (in accordance with Section 19(d)) to the Holder representing suchConversion Amount and (z) the Conversion Price of this Note or such newNotes shall be adjusted to the lesser of (A) the Conversion Price as ineffect on the date on which the Redemption Notice is voided and (B) theClosing 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 anyof the holders of the Other Notes for redemption or repayment as a result of anevent or occurrence substantially similar to the events or occurrencesdescribed in Section 4(b) or Section 5(c) (each, an **“Other Redemption Notice”**), the Companyshall immediately forward to the Holder by facsimile a copy of suchnotice.  If the Company receives aRedemption Notice and one or more Other Redemption Notices during the sevenBusiness Day period beginning on and including the date which is three BusinessDays prior to the Company’s receipt of the 

 

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Holder’s Redemption Notice and ending on andincluding the date which is three Business Days after the Company’s receipt ofthe Holder’s Redemption Notice and the Company is unable to redeem allprincipal, interest and other amounts designated in such Redemption Notice andsuch 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 forredemption pursuant to such Redemption Notice and such Other Redemption Noticesreceived by the Company during such seven Business Day period.

 

(13)         SUBORDINATION TO SENIORINDEBTEDNESS.

 

(a)           General.  The Company and the Holder covenant and agreethat this Note shall be subject to the provisions of this Section 13 andto the extent and in the manner set forth in this Section 13, theindebtedness 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 expresslymade subordinate and junior and subject in right of payment to the priorpayment in full in cash of all Senior Indebtedness of the Company nowoutstanding or hereinafter incurred.

 

(b)           No Payment if Default UnderSenior Indebtedness.

 

(i)            [Intentionally left blank]

 

(ii)           No cash payment on accountof Principal or Redemption Price of, or Interest on, this Note or any otherpayment payable with respect to this Note shall be made, and no portion of thisNote shall be redeemed or purchased directly or indirectly by the Company, ifat the time of such payment or purchase or immediately after giving effectthereto, (A) a default in the payment of principal, premium, if any,interest or other obligations in respect of any Senior Indebtedness havingeither an outstanding principal balance or a commitment to lend greater than$500,000 (“**Designated Senior Debt**”) occursand is continuing (or, in the case of Senior Indebtedness for which there is aperiod of grace, in the event of such a default that continues beyond theperiod of grace, if any, specified in the instrument evidencing such SeniorIndebtedness) (a “**Payment Default**”),unless and until such Payment Default shall have been cured or waived or shallhave ceased to exist or (B) the Company shall have received notice (a “**Payment Blockage Notice**”) from the holder or holders ofDesignated Senior Debt that there exists under such Designated Senior Debt adefault, which shall not have been cured or waived, permitting the holder orholders thereof to declare such Designated Senior Debt due and payable, butonly for the period (the “**Payment Blockage Period**”)commencing on the date of receipt of the Payment Blockage Notice and ending onthe 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 suchPayment Blockage Notice.  The Companyshall resume payments on and distributions in respect of this Note, includingany past scheduled payments of the principal of (and premium, if any) andinterest on this Note to which the 

 

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

 

(c)           Payment upon Dissolution,Etc.  In the event of any bankruptcy,insolvency, reorganization, receivership, composition, assignment for benefitof creditors or other similar proceeding initiated by or against the Company orany dissolution or winding up or total or partial liquidation or reorganizationof the Company (being hereinafter referred to as a “**Proceeding**”), the Holder agrees that such Holder shall, uponrequest of a holder of Senior Indebtedness, and at such holder of SeniorIndebtedness’ own expense, take all reasonable actions (including but notlimited to the execution and filing of documents and the giving of testimony inany Proceeding, whether or not such testimony could have been compelled byprocess) necessary to prove the full amount of all its claims in anyProceeding, and the Holder shall not waive any claim in any Proceeding withoutthe written consent of such holder.  Ifthe Holder does not file a proper proof of claim or proof of debt in the formrequired in any Proceeding at least thirty (30) days before the expiration ofthe time to file such claim, the holders of any Senior Indebtedness are herebyauthorized to file an appropriate claim for and on behalf of the Holder.

 

The Holder shall retain the right to vote andotherwise act with respect to the claims under this Note (including, withoutlimitation, the right to vote to accept or reject any plan of partial orcomplete liquidation, reorganization, arrangement, composition or extension); provided that the Holder shall not vote withrespect to any such plan or take any other action in any way so as to (i) contestthe validity of any Senior Indebtedness or any collateral therefor orguaranties thereof, (ii) contest the relative rights and duties of any ofthe lenders under the Senior Indebtedness established in any instruments oragreement creating or evidencing the Senior Indebtedness with respect to any ofsuch collateral or guaranties, or (iii) contest the Holders’ obligationsand agreements set forth in this Section 13.

 

Upon payment or distribution to creditors ina Proceeding of assets of the Company of any kind or character, whether incash, property or securities, all principal and interest due upon any SeniorIndebtedness shall first be paid in full before the Holder shall be entitled toreceive or, if received, to retain any payment or distribution on account ofthis Note, and upon any such Proceeding, any payment or distribution of assetsof the Company of any kind or character, whether in cash, property orsecurities, to which the Holder would be entitled except for the 

 

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provisions of this Section 13 shall bepaid by the Company or by any receiver, trustee in bankruptcy, liquidatingtrustee, agent or other Person making such payment or distribution, or by theHolder who shall have received such payment or distribution, directly to theholders of the Senior Indebtedness (pro rata to each such holder on the basisof the respective amounts of such Senior Indebtedness held by such holder) ortheir representatives to the extent necessary to pay all such SeniorIndebtedness in full after giving effect to any concurrent payment ordistribution to or for the holders of such Senior Indebtedness, before anypayment 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), theCompany may make regularly scheduled payments of the Principal of, or Intereston, this Note or any other payment payable with respect to this Note, if at thetime of payment, and immediately after giving effect thereto, there exists noPayment Default or a Payment Blockage Period.

 

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

 

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

 

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

 

(h)           Holders of SeniorIndebtedness.  Theseprovisions regarding subordination will constitute a continuing offer to allPersons who, in reliance upon such provisions, become holders of, or continueto hold, Senior Indebtedness; such provisions are made for the benefit of theholders of Senior Indebtedness, and such holders are hereby made obligees undersuch provisions to the same extent as if they were named therein, and they orany of them may proceed to enforce such subordination and no amendment ormodification of the provisions contained herein shall diminish the rights ofsuch holders unless such holders have

 

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agreed in writing thereto.  The holders of Senior Indebtedness may, atany time and from time to time, without the consent of or notice to the Holder,without incurring responsibility to the Holder and without impairing orreleasing the subordination provisions of this Section 13, (i) subjectto 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, orotherwise amend, modify, restate or supplement the same (provided that any suchmodified indebtedness continues to be constitute Senior Indebedness within themeaning of this Agreement), (ii) sell, exchange or release any collateralmortgaged, pledged or otherwise securing the Senior Indebtedness, (iii) releaseany Person liable in any manner for the Senior Indebtedness and (iv) exerciseor refrain from exercising any rights against the Company or any other Person.

 

(i)            Proceeds Held in Trust.  In the event that notwithstanding theforegoing, any payment or distribution of assets of the Company of any kind orcharacter, whether in cash, property or securities (including, withoutlimitation, by way of setoff or otherwise) prohibited by the provisions hereofshall be received by the Holder before all Senior Indebtedness if paid in fullin cash, such payment or distribution shall be held in trust for the benefit ofand shall be paid over or delivered to the holders of Senior Indebtedness, astheir respective interests may appear, as calculated by the Company, forapplication to, or to be held as collateral for, the payment of any SeniorIndebtedness remaining unpaid to the extent necessary to pay all SeniorIndebtedness in full in cash after giving effect to any concurrent payment ordistribution to or for the holders of such Senior Indebtedness.

 

(j)            Blockage of Remedies.  During any Payment Default or any PaymentBlockage Period, if an Event of Default has occurred and is continuing underthis Note, the Holder will not commence or join with any creditor of theCompany in asserting or commencing any proceedings to collect or enforce itsrights hereunder or take any action to foreclose or realize upon theindebtedness hereunder for a period beginning on the date of such Event ofDefault and ending on the first to occur of (i) the date that is 180 daysfollowing the date that the holders of the Senior Indebtedness are notified ofsuch 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 thecase may be; provided, however, that until all of the SeniorIndebtedness shall have been paid in full in cash, any payments, distributionsor proceeds received by the Holder resulting from the exercise of any action tocollect or enforce any right or remedy available to the Holder shall be subjectto the terms of this Note.

 

(k)           Subsequent SeniorIndebtedness Requested Modifications.  In connection with the incurrence of anyfuture Senior Indebtedness, the Holder agrees that it shall act reasonably andnegotiate in good faith any modifications to the provisions of this Section 13reasonably requested by the holder of such Senior Indebtedness; provided thatnothing in this section shall restrict the holders of Notes representing atleast a majority of the aggregate principal amount of the Notes thenoutstanding from changing or amending this Section 13 pursuant to Section 17hereof.

 

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

 

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

 

(15)         RANK; ADDITIONALINDEBTEDNESS; LIENS.

 

## (a)           Rank.      All payments due under thisNote (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 allexisting and future Senior Indebtedness and (c) shall be senior to allother Indebtedness of the Company and its Subsidiaries, other than SeniorIndebtedness and Pari Passu Indebtedness.

##  

## (b)           Incurrence of SeniorIndebtedness.  So long asthis Note is outstanding, the Company shall not, and the Company shall notpermit any of its Subsidiaries to, directly or indirectly, incur or guarantee,assume or suffer to exist any Indebtedness which shall rank senior to the Notesother than Senior Indebtedness.

##  

## (c)           Existence of Liens.  So long as this Note is outstanding, theCompany 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 orassets (including accounts and contract rights) owned by the Company or any ofits Subsidiaries (collectively, “**Liens**”)other than Permitted Liens.  As usedherein, “**Permitted Liens**” means (i) Liensincurred to secure Senior Indebtedness, (ii) Liens on fixed or capitalassets acquired, constructed or improved by the Company or any Subsidiary, tothe extent of Indebtedness incurred within thirty days for such acquisition,construction or improvement and incurred within thirty days of suchacquisition, construction or improvement, (iii) purchase money Liens, or (iv) carriers’,warehousemen’s, mechanics’, materialmen’s, repairmen’s and other similar Liensimposed by law.

##  

## (d)           Restricted Payments.  The Company shall not, and the Company shallnot 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 orcash equivalents (in whole or in part, whether by way of open market purchases,tender offers, private transactions or otherwise), all or any portion of anyIndebtedness, other than Senior Indebtedness or Pari Passu Indebtedness,whether by way of payment in respect of principal of (or premium, if any) orinterest on, such Indebtedness if at the time such payment is due or isotherwise made or, after giving effect to such payment, an event constitutingan Event of Default has occurred and is continuing.

 

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

 

(17)         VOTE TO ISSUE, OR CHANGE THETERMS OF, NOTES.  Theaffirmative vote at a meeting duly called for such purpose or the writtenconsent without a meeting, of the holders of Notes representing not less than amajority of the aggregate principal amount of the then outstanding Notes, shallbe required for any change or amendment to this Note or the Other Notesprovided such change or amendment is consented to by the Company, which suchconsent may be granted or withheld in the sole discretion of the Company.

 

(18)         TRANSFER.  This Note may be offered, sold, assigned ortransferred by the Holder without the consent of the Company, subject only tothe 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 Holdershall surrender this Note to the Company, whereupon the Company will forthwithissue 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 Principalbeing transferred by the Holder and, if less then the entire outstandingPrincipal is being transferred, a new Note (in accordance with Section 19(d))to the Holder representing the outstanding Principal not beingtransferred.  The Holder and anyassignee, by acceptance of this Note, acknowledge and agree that, by reason ofthe provisions of Section 3(c)(iii) and this Section 19(a),following conversion or redemption of any portion of this Note, the outstandingPrincipal represented by this Note may be less than the Principal stated on theface of this Note.

 

(b)           Lost, Stolen or MutilatedNote.  Upon receipt by the Company ofevidence reasonably satisfactory to the Company of the loss, theft, destructionor mutilation of this Note, and, in the case of loss, theft or destruction, ofany indemnification undertaking by the Holder to the Company in customary formand, 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 accordancewith Section 19(d)) representing the outstanding Principal.

 

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

 

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

 

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

 

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

 

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

 

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(23)         FAILURE OR INDULGENCE NOTWAIVER.  No failure or delay on thepart of the Holder in the exercise of any power, right or privilege hereundershall operate as a waiver thereof, nor shall any single or partial exercise ofany such power, right or privilege preclude other or further exercise thereofor of any other right, power or privilege.

 

(24)         DISPUTE RESOLUTION.  In the case of a dispute as to thedetermination of the Redemption Price or the arithmetic calculation of theConversion Rate or the Redemption Price, the Company shall submit the disputeddeterminations or arithmetic calculations via facsimile within one Business Dayof receipt of the Conversion Notice or Redemption Notice or other event givingrise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable toagree upon such determination or calculation within one Business Day of suchdisputed determination or arithmetic calculation being submitted to the Holder,then the Company shall, within one Business Day submit via facsimile (a) thedisputed determination of the Closing Bid Price or the Closing Sale Price to anindependent, reputable investment bank selected by the Company and approved bythe Holder or (b) the disputed arithmetic calculation of the Conversion Rate orthe Redemption Price to the Company’s independent, outside accountant.  The Company, at the Company’s expense, shallcause the investment bank or the accountant, as the case may be, to perform thedeterminations or calculations and notify the Company and the Holder of theresults no later than five Business Days from the time it receives the disputeddeterminations or calculations.  Suchinvestment bank’s or accountant’s determination or calculation, as the case maybe, shall be binding upon all parties absent demonstrable error.

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices.  Whenever notice is required to be given underthis Note, unless otherwise provided herein, such notice shall be given inaccordance with Section 9(f) of the Securities PurchaseAgreement.  The Company shall provide theHolder with prompt written notice of all actions taken pursuant to this Note,including in reasonable detail a description of such action and the reasontherefore.  Without limiting the generalityof the foregoing, the Company will give written notice to the Holder (i) immediatelyupon any adjustment of the Conversion Price, setting forth in reasonabledetail, and certifying, the calculation of such adjustment and (ii) atleast twenty days prior to the date on which the Company closes its books ortakes a record (A) with respect to any dividend or distribution upon theCommon Stock, (B) with respect to any pro rata subscription offer toholders of Common Stock or (C) for determining rights to vote with respectto any Change of Control, dissolution or liquidation, provided in each casethat such information shall be made known to the public prior to or inconjunction with such notice being provided to the Holder.  Notwithstanding the foregoing, Section 4(i) ofthe Securities Purchase Agreement shall apply to all notices given pursuant tothis Note.

 

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

 

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inwriting (which address, in the case of each of the Purchasers, shall initiallybe as set forth on the Schedule of Buyers attached to the Securities PurchaseAgreement); provided that the Holder may elect to receive a payment of cash viawire transfer of immediately available funds by providing the Company withprior written notice setting out such request and the Holder’s wire transferinstructions.  Whenever any amountexpressed to be due by the terms of this Note is due on any day which is not aBusiness Day, the same shall instead be due on the next succeeding day which isa Business Day and, in the case of any Interest Date which is not the date onwhich this Note is paid in full, the extension of the due date thereof shallnot be taken into account for purposes of determining the amount of Interestdue on such date.

 

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

 

(27)         WAIVER OF NOTICE.  To the extent permitted by law, the Companyhereby waives demand, notice, protest and all other demands and notices inconnection with the delivery, acceptance, performance, default or enforcementof this Note and the Securities Purchase Agreement.

 

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

 

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

 

(a)           **“ApprovedStock Plan”** means any employee benefit, option or incentiveplan which has been approved by the Board of Directors of the Company, pursuantto 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)           **“BusinessDay”** means any day other than Saturday, Sunday or other day on whichcommercial banks in The City of New York are authorized or required by law toremain closed.

 

(d)           **“CalendarQuarter”** means each of: the period beginning on andincluding January 1 and ending on and including March 31; the periodbeginning 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 andincluding December 31.

 

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(e)           **“ClosingBid Price”** and **“Closing SalePrice”** means, for any security as of any date, the last closing bidprice and last closing trade price, respectively, for such security on thePrincipal Market, as reported by Bloomberg, or, if the Principal Market beginsto operate on an extended hours basis and does not designate the closing bidprice or the closing trade price, as the case may be, then the last bid priceor 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 theprincipal securities exchange or trading market for such security, the lastclosing bid price or last trade price, respectively, of such security on theprincipal securities exchange or trading market where such security is listedor traded as reported by Bloomberg, or if the foregoing do not apply, the lastclosing bid price or last trade price, respectively, of such security in theover-the-counter market on the electronic bulletin board for such security asreported by Bloomberg, or, if no closing bid price or last trade price,respectively, is reported for such security by Bloomberg, the average of thebid prices, or the ask prices, respectively, of any market makers for suchsecurity as reported in the “pink sheets” by Pink Sheets LLC (formerly theNational Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculatedfor a security on a particular date on any of the foregoing bases, the ClosingBid Price or the Closing Sale Price, as the case may be, of such security onsuch date shall be the fair market value as mutually determined by the Companyand the Holder.  If the Company and theHolder are unable to agree upon the fair market value of such security, thensuch dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriatelyadjusted for any stock dividend, stock split, stock combination or othersimilar transaction during the applicable calculation period.

 

(f)            [Intentionally left blank]

 

(g)           **“ContingentObligation”** means, as to any Person, any direct or indirectliability, contingent or otherwise, of that Person with respect to anyindebtedness, lease, dividend or other obligation of another Person if theprimary purpose or intent of the Person incurring such liability, or theprimary effect thereof, is to provide assurance to the obligee of suchliability that such liability will be paid or discharged, or that anyagreements relating thereto will be complied with, or that the holders of suchliability will be protected (in whole or in part) against loss with respectthereto.

 

(h)           “**Convertible Securities**” means any stock or securities (otherthan Options) directly or indirectly convertible into or exercisable orexchangeable for Common Stock.

 

(i)            **“ExcludedSecurities”** means any shares of Common Stock issued orissuable: (i) in connection with any Approved Stock Plan; (ii) uponconversion of the Notes and the Other Notes; (iii) upon conversion of anyOptions or Convertible Securities which are outstanding on the Issuance Date, (iv) pursuantto or in connection with commercial credit arrangements, equipment leasefinancings, acquisitions of other assets or businesses, strategic transactionsnot primarily for financing purposes, or similar transactions into which theCompany may enter with a non-affiliate.

 

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(j)            **“Indebtedness”** of any Personmeans, without duplication (A) all indebtedness for borrowed money, (B) allobligations issued, undertaken or assumed as the deferred purchase price ofproperty or services (other than trade payables entered into in the ordinarycourse of business), (C) all reimbursement or payment obligations withrespect to letters of credit, surety bonds and other similar instruments, (D) allobligations evidenced by notes, bonds, debentures or similar instruments,including obligations so evidenced incurred in connection with the acquisitionof property, assets or businesses, (E) all indebtedness created or arisingunder any conditional sale or other title retention agreement, or incurred asfinancing, in either case with respect to any property or assets acquired withthe proceeds of such indebtedness (even though the rights and remedies of theseller or bank under such agreement in the event of default are limited torepossession or sale of such property), (F) all monetary obligations underany leasing or similar arrangement which, in connection with generally acceptedaccounting principles, consistently applied for the periods covered thereby, isclassified as a capital lease, (G) off-balance sheet liabilities retainedin connection with asset securitization programs, synthetic leases, sale andleaseback transactions or other similar obligations arising with respect to anyother transaction which is the functional equivalent of or takes the place ofborrowing but which does not constitute a liability on the consolidated balancesheet of such Person and its subsidiaries, and (H) all indebtednessreferred to in clauses (A) through (G) above secured by (or for whichthe holder of such Indebtedness has an existing right, contingent or otherwise,to be secured by) any mortgage, lien, pledge, charge, security interest orother encumbrance upon or in any property or assets (including accounts andcontract rights) owned by any Person, even though the Person which owns suchassets or property has not assumed or become liable for the payment of suchindebtedness, and (I) all Contingent Obligations in respect ofindebtedness or obligations of others of the kinds referred to in clauses (A) through(H) above.

 

(k)           **“IssuanceDate”** means October 1, 2007.

 

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

 

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

 

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

 

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

 

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(p)           **“SEC”** means theUnited States Securities and Exchange Commission.

 

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

 

(r)            **“SeniorIndebtedness”** means the principal of (and premium, if any),interest on, and all fees and other amounts (including, without limitation, anyreasonable costs, enforcement expenses (including reasonable legal fees anddisbursements, collateral protection expenses and other reimbursement orindemnity obligations relating thereto)), and all other obligations of theCompany under (i) any of the agreements or instruments evidencing anyIndebtedness of the Company and its Subsidiaries arising after the OriginalDate to an unaffiliated, third-party commercial lender (together with anyrenewals, refundings, refinancings or other extensions thereof) for purposes ofpurchasing equipment (which debt shall be secured only by the assets purchasedwith such financing), and (ii) Indebtedness secured by up to a maximum ofeighty five percent (85%) of the Company’s accounts receivable and/or up tosixty percent (60%) of the value of the Company’s inventory.  For the avoidance of doubt, SeniorIndebtedness shall not include the debt which is required to be paid by theCompany pursuant to Section 4(i) of the Securities PurchaseAgreement.

 

(s)           [Intentionally left blank]

 

(t)            **“TradingDay”** means any day on which the Common Stock is traded on the PrincipalMarket, or, if the Principal Market is not the principal trading market for theCommon Stock, then on the principal securities exchange or securities market onwhich the Common Stock is then traded; provided that “Trading Day” shall notinclude any day on which the Common Stock is scheduled to trade on suchexchange or market for less than 4.5 hours or any day that the Common Stock issuspended from trading during the final hour of trading on such exchange ormarket (or if such exchange or market does not designate in advance the closingtime of trading on such exchange or market, then during the hour ending at4:00:00 p.m., New York Time).

 

(u)           [intentionally left blank]

 

(v)           **“WeightedAverage Price”** means, for any security as of any date, the dollarvolume-weighted average price for such security on the Principal Market duringthe period beginning at 9:30:01 a.m., New York Time (or such other time asthe Principal Market publicly announces is the official open of trading), andending at 4:00:00 p.m., New York Time (or such other time as the PrincipalMarket publicly announces is the official close of trading) as reported byBloomberg through its “Volume at Price” functions, or, if the foregoing doesnot apply, the dollar volume-weighted average price of such security in theover-the-counter market on the electronic bulletin board for such securityduring the period beginning at 9:30:01 a.m., New York Time (or such othertime as such market publicly announces is the official open of trading), andending at 4:00:00 p.m., New York Time (or such other time as such marketpublicly

 

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announcesis the official close of trading) as reported by Bloomberg, or, if no dollarvolume-weighted average price is reported for such security by Bloomberg forsuch hours, the average of the highest closing bid price and the lowest closingask price of any of the market makers for such security as reported in the “pinksheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot becalculated 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 fairmarket value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable toagree upon the fair market value of such security, then such dispute shall beresolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stockdividend, stock split, stock combination or other similar transaction duringthe applicable calculation period.

 

**[Signature Page Follows]**

 

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

 
| ** ** | **LIQUIDMETAL TECHNOLOGIES, INC.** |
|------------|------------------------------------|
|       |                               |   |   |
|       |                               |   |   |
|       | By:                                |   |
|       |                               | Name: | Gerald  E. Morrow |
|       |                               | Title: | Chief  Financial Officer |
|            |                                    |  |  |  |  |

 

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**EXHIBIT I**

 

**LIQUIDMETAL TECHNOLOGIES, INC.**

**CONVERSION NOTICE**

 

Referenceis 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 inthe 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:                                                                                                              

 

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

 

Pleaseconfirm the following information:

 

Conversion Price:                                                                                                                                                     

 

Number of shares of Common Stock to be issued:                                                                                                              

 

Pleaseissue the Common Stock into which the Note is being converted in the followingname and to the following address:

 

Issue to:                                                                                                                                                     

 

 

 

Facsimile Number:                                                                                                                                                

 

Authorization:                                                                                                                                                             

 
| By:    |   |
|--------|--------|
|   |   | Title: |   |
|   |   |   |
| Dated: |   |
|        |        |  |  |  |  |

 

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|   | Account  Number:                           |   |
|--------|--------------------------------------------|--------|
|   |  (if  electronic book entry transfer) |
|   |                                       |
|   | Transaction  Code Number:                  |   |
|   |  (if  electronic book entry transfer) |
|        |                                            |        |  |

 

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**ACKNOWLEDGMENT**

 

TheCompany hereby acknowledges this Conversion Notice and hereby directs AmericanStock Transfer & Trust Co. to issue the above indicated number ofshares of Common Stock in accordance with the Transfer Agent Instructions datedJanuary 3, 2007 from the Company.

 
| ** ** | **LIQUIDMETAL TECHNOLOGIES, INC.** |
|------------|------------------------------------|
|       |                               |   |
|       |                               |   |
|       | By:                                |   |
|       |                               | Name: |
|       |                               | Title: |

 

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