Exhibit
10.3


 


THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF
COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER
THAT THIS NOTE MAY BE SOLD, TRANSFERRED, 
OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE
ACT AND SUCH STATE SECURITIES LAWS.


 


 


COMMUNICATION INTELLIGENCE CORPORATION


 


Convertible
Promissory Note

due October 28, 2007


 


	
  No. CN-04-

  	
  $

  
	
  Dated: October 28,
  2004

  	
   

  



 


For value
received, COMMUNICATION
INTELLIGENCE CORPORATION, a Delaware corporation (the “Maker”),
hereby promises to pay to the order of                                               
(together with its successors, representatives, and permitted assigns, the “Holder”),
in accordance with the terms hereinafter provided, the principal amount of                                                 
($                            ),
together with interest thereon. 
Concurrently with the issuance of this Note, the Maker is issuing
separate notes (the “Other Notes”) to separate purchasers (the “Other
Holders”) pursuant to the Purchase Agreement (as defined in Section 1.1
hereof).


 


All
payments under or pursuant to this Note shall be made in United States Dollars
in immediately available funds to the Holder at the address of the Holder first
set forth above or at such other place as the Holder may designate from time to
time in writing to the Maker or by wire transfer of funds to the Holder’s
account, instructions for which are attached hereto as Exhibit A.  The outstanding principal balance of this
Note, plus all accrued but unpaid interest, shall be due and payable on October 28,
2007 (the “Maturity Date”) or at such earlier time as provided herein.


 


ARTICLE I


 


Section 1.1                                      Purchase
Agreement.  This Note has been
executed and delivered pursuant to the Note and Warrant Purchase Agreement
dated as of October 28, 2004 (the “Purchase Agreement”) by and
among the Maker and the purchasers listed therein.  Capitalized terms used and not otherwise
defined herein shall have the meanings set forth for such terms in the Purchase
Agreement.


 





















 


Section 1.2                                      Interest;
Payment of Interest.  Beginning on
the issuance date of this Note (the “Issuance Date”), the outstanding
principal balance of this Note shall bear interest, in arrears, at a rate per
annum equal to seven percent (7%), payable semi-annually at the option of the
Maker in cash or in registered shares of the Maker’s common stock, par value
$0.01 per share (the “Common Stock”). 
The number of shares of registered Common Stock to be issued as payment
of accrued and unpaid interest shall be determined by dividing (a) the total
amount of accrued and unpaid interest to be converted into Common Stock by (b)
the average of the Volume Weighted Average Prices (as defined in Section 3.2(c)
hereof) of the Common Stock for the ten (10) Trading Days prior to the date
such interest payment is due.  Interest
shall be computed on the basis of a 360-day year of twelve (12) 30-day months
and shall accrue commencing on the Issuance Date.  Furthermore, upon the occurrence of an Event
of Default (as defined in Section 2.1 hereof), then to the extent
permitted by law, the Maker will pay interest to the Holder, payable on demand,
on the outstanding principal balance of the Note from the date of the Event of
Default until such Event of Default is cured at the rate of the lesser of ten
percent (10%) and the maximum applicable legal rate per annum.


 


Section 1.3                                      Payment
on Non-Business Days.  Whenever any
payment to be made shall be due on a Saturday, Sunday or a public holiday under
the laws of the State of New York, such payment shall be due on the next
succeeding business day and such next succeeding day shall be included in the
calculation of the amount of accrued interest payable on such date.


 


Section 1.4                                      Transfer.  This Note may be transferred or sold, subject
to the provisions of Section 4.8 of this Note, or pledged, hypothecated or
otherwise granted as security by the Holder.


 


Section 1.5                                      Replacement.  Upon receipt of a duly executed, notarized
and unsecured written statement from the Holder with respect to the loss, theft
or destruction of this Note (or any replacement hereof), and without requiring
an indemnity bond or other security, or, in the case of a mutilation of this
Note, upon surrender and cancellation of such Note, the Maker shall issue a new
Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Note.


 


Section 1.6                                      Senior
Securities.  So long as this Note or the
Other Notes are outstanding, the Maker shall not issue any securities that rank
pari passu or senior to this Note or the Other Notes without the consent of the
holders of one hundred percent (100%) of the principal amount of this Note and
the Other Notes outstanding at the time; provided, however, the
Maker may borrow up to two million dollars ($2,000,000) in connection with a
bank financing so long as no equity securities or convertible debt securities
are issued by the Maker in connection with such bank financing.


 


ARTICLE II


 


EVENTS OF DEFAULT;  REMEDIES


 


Section 2.1                                      Events
of Default.  The occurrence of any of
the following events shall be an “Event of Default” under this Note:


 


2





















 


(a)                                  the
Maker shall fail to make the payment of any amount of principal outstanding on
the date such payment is due hereunder; or


 


(b)                                 the
Maker shall fail to make any payment of interest in cash or shares of Common
Stock on the date such payment is due hereunder; or


 


(c)                                  the
failure of the Registration Statement to be declared effective by the
Securities and Exchange Commission on or prior to the date which is ninety (90)
days after the Closing Date; or


 


(d)                                 the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, Nasdaq National Market, Nasdaq SmallCap Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc. for a period of five (5)
consecutive Trading Days; or


 


(e)                                  the
Maker’s notice to the Holder, including by way of public announcement, at any
time, of its inability to comply (including for any of the reasons described in
Section 3.8(a) hereof) or its intention not to comply with proper requests
for conversion of this Note into shares of Common Stock; or


 


(f)                                    the
Maker shall fail to (i) timely deliver the shares of Common Stock upon
conversion of the Note or any interest accrued and unpaid, (ii) timely file the
Registration Statement or (iii) make the payment of any fees and/or liquidated
damages under this Note, the Purchase Agreement or the Registration Rights
Agreement, which failure in the case of items (i) and (iii) of this Section 2.1(f)
is not remedied within three (3) business days after the incurrence thereof; or


 


(g)                                 while
the Registration Statement is required to be maintained effective pursuant to
the terms of the Registration Rights Agreement, the effectiveness of the
Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the Holder for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive Trading Days, provided
that the Maker has not exercised its rights pursuant to Section 3(n) of
the Registration Rights Agreement and the cause of such lapse or unavailability
is not due to factors primarily within the control of Holder; or


 


(h)                                 default
shall be made in the performance or observance of (i) any material covenant,
condition or agreement contained in this Note (other than as set forth in
clause (f) of this Section 2.1) and such default is not fully cured within
five (5) business days after the occurrence thereof or (ii) any material
covenant, condition or agreement contained in the Purchase Agreement, the Other
Notes or the Registration Rights Agreement which is not covered by any other
provisions of this Section 2.1 and such default is not fully cured within five
(5) business days after the occurrence thereof; 
or


 


3





















 


(i)                                     any
material representation or warranty made by the Maker herein or in the Purchase
Agreement, the Registration Rights Agreement or the Other Notes shall prove to
have been false or incorrect or breached in a material respect on the date as
of which made; or


 


(j)                                     the
Maker shall (i) default in any payment of any amount or amounts of principal of
or interest on any Indebtedness (other than the Indebtedness hereunder) the
aggregate principal amount of which Indebtedness is in excess of $100,000  or (ii) default in the observance or performance of any
other agreement or condition relating to any Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur or condition exist, the effect of which default or other
event or condition is to cause, or to permit the holder or holders or
beneficiary or beneficiaries of such Indebtedness to cause with the giving of
notice if required, such Indebtedness to become due prior to its stated
maturity; or


 


(k)                                  the
Maker shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property or assets, (ii) make a general assignment
for the benefit of its creditors, (iii) commence a voluntary case under the
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition
seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors’
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
(vi) issue a notice of bankruptcy or winding down of its operations or issue a
press release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing; or


 


(l)                                     a
proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or
composition or readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of it or of all or any substantial
part of its assets in connection with the liquidation or dissolution of the
Maker or (iii) similar relief in respect of it under any law providing for the
relief of debtors, and such proceeding or case described in clause (i), (ii) or
(iii) shall continue undismissed, or unstayed and in effect, for a period of
sixty (60) days or any order for relief shall be entered in an involuntary case
under United States Bankruptcy Code (as now or hereafter in effect) or under
the comparable laws of any jurisdiction (foreign or domestic) against the Maker
or action under the laws of any jurisdiction (foreign or domestic) analogous to
any of the foregoing shall be taken with respect to the Maker and shall
continue undismissed, or unstayed and in effect for a period of sixty (60)
days; or


 


(m)                               the
failure of the Maker to instruct its transfer agent to remove any legends from
shares of Common Stock eligible to be sold under Rule 144 of the Securities Act
and issue such unlegended certificates to the Holder within three (3) business
days of the Holder’s request so long as the Holder has provided reasonable
assurances to the Maker that such shares of Common Stock can be resold pursuant
to Rule 144; or


 


4





















 


(n)                                 the
failure of the Maker to pay any amounts due to the Holder herein or in the
Purchase Agreement or the Registration Rights Agreement within three (3)
business days of receipt of notice to the Maker; or


 


(o)                                 the
occurrence of an Event of Default under the Other Notes.


 


Section 2.2                                      Remedies
Upon An Event of Default.  If an
Event of Default shall have occurred and shall be continuing, the Holder of
this Note may at any time at its option, (a) declare the entire unpaid
principal balance of this Note, together with all interest accrued hereon, due and
payable, and thereupon, the same shall be accelerated and so due and payable,
without presentment, demand, protest, or notice, all of which are hereby
expressly unconditionally and irrevocably waived by the Maker; provided,
however, that upon the occurrence of an Event of Default described in
(i) Sections 2.1 (k) or (l), the outstanding principal balance and accrued
interest hereunder shall be automatically due and payable and (ii) Sections 2.1
(c)-(j), demand the prepayment of this Note pursuant to Section 3.7
hereof, (b) demand that the principal amount of this Note then outstanding and
all accrued and unpaid interest thereon shall be converted into shares of
Common Stock at a Conversion Price per share calculated pursuant to Section 3.1
hereof assuming that the date that the Event of Default occurs is the
Conversion Date (as defined in Section 3.1 hereof), or (c) exercise or
otherwise enforce any one or more of the Holder’s rights, powers, privileges,
remedies and interests under this Note, the Purchase Agreement, the
Registration Rights Agreement or applicable law.  No course of delay on the part of the Holder
shall operate as a waiver thereof or otherwise prejudice the right of the
Holder.  No remedy conferred hereby shall
be exclusive of any other remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise.


 


ARTICLE III



CONVERSION; ANTIDILUTION; PREPAYMENT


 


Section 3.1                                      Conversion
Option.  At any time on or after the
Issuance Date, this Note shall be convertible (in whole or in part), at the
option of the Holder (the “Conversion Option”), into such number of
fully paid and non-assessable shares of Common Stock (the “Conversion Rate”)
as is determined by dividing (x) that portion of the outstanding principal
balance plus any accrued but unpaid interest under this Note as of such date
that the Holder elects to convert by (y) the Conversion Price (as hereinafter
defined) then in effect on the date on which the Holder faxes a notice of
conversion (the “Conversion Notice”), duly executed, to the Maker (facsimile
number (419) 735-7922, Attn.: Chief Financial Officer) (the “Holder’s Conversion
Date”), provided, however, that the Conversion Price shall be subject to
adjustment as described in Section 3.6 below.  The Holder shall deliver this Note to the
Maker at the address designated in the Purchase Agreement at such time that
this Note is fully converted.  With
respect to partial conversions of this Note, the Maker shall keep written
records of the amount of this Note converted as of each Conversion Date.


 


5





















 


Section 3.2                                      Conversion
Price.


 


(a)                                  The
term “Conversion Price” shall mean $.462, subject to adjustment under Section 3.6
hereof; provided, however, the Conversion Price shall be no
greater than $.462 except if it is adjusted pursuant to Section 3.6(a)(i)
hereof.


 


(b)                                 Notwithstanding
any of the foregoing to the contrary, if during any period (a “Black-out
Period”), a Holder is unable to trade any Common Stock issued or issuable
upon conversion of this Note immediately due to the postponement of filing or
delay or suspension of effectiveness of a registration statement or because the
Maker has otherwise informed such Holder that an existing prospectus cannot be
used at that time in the sale or transfer of such Common Stock (provided that
such postponement, delay, suspension or fact that the prospectus cannot be used
is not due to factors solely within the control of the Holder of the Notes or
due to the Maker exercising its rights under Section 3(n) of the
Registration Rights Agreement), such Holder shall have the option but not the
obligation on any Conversion Date within ten (10) Trading Days following the
expiration of the Black-out Period of using the Conversion Price applicable on
such Conversion Date or any Conversion Price selected by such Holder that would
have been applicable had such Conversion Date been at any earlier time during
the Black-out Period or within the ten (10) Trading Days thereafter.  In no event shall the Black-out Period have
any effect on the Maturity Date of this Note.


 


(c)                                  The
term “Volume
Weighted Average Price” shall mean the daily volume weighted average price
(based on a Trading Day from 9:30 a.m. to 4:00 p.m., eastern time) of the
Common Stock of the Maker on the OTC Bulletin Board as reported by Bloomberg
Financial LP using the AQR function.


 


6





















 


Section 3.3                                      Mechanics
of Conversion.


 


(a)                                  Not
later than three (3) Trading Days after any Conversion Date, the Maker or its
designated transfer agent, as applicable, shall issue and deliver to the
Depository Trust Company (“DTC”) account on the Holder’s behalf via the
Deposit Withdrawal Agent Commission System (“DWAC”) as specified in the
Conversion Notice, registered in the name of the Holder or its designee, for
the number of shares of Common Stock to which the Holder shall be
entitled.  In the alternative, not later
than three (3) Trading Days after any Conversion Date, the Maker shall deliver
to the applicable Holder by express courier a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 5.1 of the Purchase Agreement) representing the number
of shares of Common Stock being acquired upon the conversion of this Note (the “Delivery
Date”).  Notwithstanding the
foregoing to the contrary, the Maker or its transfer agent shall only be
obligated to issue and deliver the shares to the DTC on the Holder’s behalf via
DWAC (or certificates free of restrictive legends) if such conversion is in
connection with a sale and the Holder has complied with the applicable
prospectus delivery requirements.  If in
the case of any Conversion Notice such certificate or certificates are not
delivered to or as directed by the applicable Holder by the Delivery Date, the
Holder shall be entitled by written notice to the Maker at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Maker shall immediately return this Note
tendered for conversion, whereupon the Maker and the Holder shall each be
restored to their respective positions immediately prior to the delivery of
such notice of revocation, except that any amounts described in Sections 3.3(b)
and (c) shall be payable through the date notice of rescission is given to the
Maker.


 


(b)                                 The
Maker understands that a delay in the delivery of the shares of Common Stock
upon conversion of this Note beyond the Delivery Date could result in economic
loss to the Holder.  If the Maker fails
to deliver to the Holder such shares via DWAC or a certificate or certificates
pursuant to this Section hereunder by the Delivery Date, the Maker shall
pay to such Holder, in cash, an amount per Trading Day for each Trading Day
until such shares are delivered via DWAC or certificates are delivered,
together with interest on such amount at a rate of 6% per annum, accruing until
such amount and any accrued interest thereon is paid in full, equal to the
greater of (A) (i) 1% of the aggregate principal amount of the Notes requested
to be converted for the first five (5) Trading Days after the Delivery Date and
(ii) 2% of the aggregate principal amount of the Notes requested to be
converted for each Trading Day thereafter and (B) $1,000 per day (which amount
shall be paid as liquidated damages and not as a penalty).  Nothing herein shall limit a Holder’s right
to pursue actual damages for the Maker’s failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it at law or in equity (including, without limitation, a decree of specific
performance and/or injunctive relief). 
Notwithstanding anything to the contrary contained herein, the Holder
shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the
Maker shall only be obligated to pay the liquidated damages accrued in
accordance with this Section 3.3(b) through the date the Conversion Notice
is withdrawn.


 


(c)                                  In
addition to any other rights available to the Holder, if the Maker fails to
deliver to the Holder such certificate or certificates pursuant to Section 3.3(a)
by the Delivery Date and if after the Delivery Date the Holder purchases (in an
open market transaction or


 


7





















 


otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Conversion Shares which the Holder anticipated receiving upon such conversion
(a “Buy-In”), then the Maker shall pay in cash to the Holder (in
addition to any remedies available to or elected by the Holder) an amount equal
to (A) the aggregate amount paid by such Holder for the shares of Common Stock
so purchased minus (B) the aggregate amount of net proceeds, if any, received
by such Holder from the sale of the shares of Common Stock issued by the Maker
pursuant to such conversion, together with interest thereon at a rate of the
lesser of 15% and the maximum applicable legal rate per annum, accruing until
such amount and any accrued interest thereon is paid in full (which amount
shall be paid as liquidated damages and not as a penalty).  For example, if the Holder purchases shares
of Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 aggregate principal amount of
this Note, the Maker shall be required to pay the Holder $1,000, plus
interest.  The Holder shall provide the
Maker written notice indicating the amounts payable to the Holder in respect of
the Buy-In.


 


Section 3.4                                      Ownership
Cap and Certain Conversion Restrictions. 


 


(a)                                  Notwithstanding
anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of
Common Stock to be issued pursuant to such conversion, when aggregated with all
other shares of Common Stock owned by the Holder at such time, the number of
shares of Common Stock which would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder) more than 4.9% of all of the Common Stock outstanding at such
time; provided, however, that upon the Holder providing the Maker
with sixty-one (61) days notice (pursuant to Section 4.1 hereof) (the “Waiver
Notice”) that the Holder would like to waive this Section 3.4(a) with
regard to any or all shares of Common Stock issuable upon conversion of this
Note, this Section 3.4(a) will be of no force or effect with regard to all
or a portion of the Note referenced in the Waiver Notice; provided, further,
that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Maturity Date.


 


(b)                                 Notwithstanding
anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of
Common Stock to be issued pursuant to such conversion, when aggregated with all
other shares of Common Stock owned by the Holder at such time, would result in
the Holder beneficially owning (as determined in accordance with Section 13(d)
of the Exchange Act and the rules thereunder) in excess of 9.9% of the then
issued and outstanding shares of Common Stock outstanding at such time; provided,
however, that upon the Holder providing the Maker with a Waiver Notice
that the Holder would like to waive Section 3.4(b) of this Note with
regard to any or all shares of Common Stock issuable upon conversion of this
Note, this Section 3.4(b) shall be of no force or effect with regard to
all or a portion of the Note referenced in the Waiver Notice; provided, further,
that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Maturity Date.


 


Section 3.5                                      Intentionally
Omitted.


 


Section 3.6                                      Adjustment
of Conversion Price.


 


8





















 


(a)                                  The
Conversion Price shall be subject to adjustment from time to time as follows:


 


(i)                                     Adjustments
for Stock Splits and Combinations. 
If the Maker shall at any time or from time to time after the Issuance
Date, effect a stock split of the outstanding Common Stock, the applicable
Conversion Price in effect immediately prior to the stock split shall be
proportionately decreased.  If the Maker
shall at any time or from time to time after the Issuance Date, combine the
outstanding shares of Common Stock, the applicable Conversion Price in effect
immediately prior to the combination shall be proportionately increased.  Any adjustments under this Section 3.6(a)(i)
shall be effective at the close of business on the date the stock split or
combination occurs.


 


(ii)                                  Adjustments
for Certain Dividends and Distributions. 
If the Maker shall at any time or from time to time after the Issuance
Date, make or issue or set a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
shares of Common Stock, then, and in each event, the applicable Conversion
Price in effect immediately prior to such event shall be decreased as of the
time of such issuance or, in the event such record date shall have been fixed,
as of the close of business on such record date, by multiplying, the applicable
Conversion Price then in effect by a fraction:


 


(1)                                  the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date; and


 


(2)                                  the
denominator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution.


 


(iii)                               Adjustment
for Other Dividends and Distributions. 
If the Maker shall at any time or from time to time after the Issuance
Date, make or issue or set a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
other than shares of Common Stock, then, and in each event, an appropriate
revision to the applicable Conversion Price shall be made and provision shall
be made (by adjustments of the Conversion Price or otherwise) so that the
holders of this Note shall receive upon conversions thereof, in addition to the
number of shares of Common Stock receivable thereon, the number of securities
of the Maker which they would have received had this Note been converted into
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the Conversion Date, retained such
securities (together with any distributions payable thereon during such
period), giving application to all adjustments called for during such period
under this Section 3.6(a)(iii) with respect to the rights of the holders
of this Note and the Other Notes; provided, however, that if such
record date shall have been fixed and such dividend is not fully paid or if
such distribution is not fully made on the date fixed therefor, the Conversion
Price shall be adjusted pursuant to this paragraph as of the time of actual
payment of such dividends or distributions.


 


9





















 


(iv)                              Adjustments
for Reclassification, Exchange or Substitution.  If the Common Stock issuable upon conversion
of this Note at any time or from time to time after the Issuance Date shall be
changed to the same or different number of shares of any class or classes of
stock, whether by reclassification, exchange, substitution or otherwise (other
than by way of a stock split or combination of shares or stock dividends
provided for in Sections 3.6(a)(i), (ii) and (iii), or a reorganization, merger,
consolidation, or sale of assets provided for in Section 3.6(a)(v)), then,
and in each event, an appropriate revision to the Conversion Price shall be
made and provisions shall be made (by adjustments of the Conversion Price or
otherwise) so that the Holder shall have the right thereafter to convert this
Note into the kind and amount of shares of stock and other securities
receivable upon reclassification, exchange, substitution or other change, by
holders of the number of shares of Common Stock into which such Note might have
been converted immediately prior to such reclassification, exchange,
substitution or other change, all subject to further adjustment as provided
herein.


 


(v)                                 Adjustments
for Reorganization, Merger, Consolidation or Sales of  Assets.  If at any time or from time to time after the
Issuance Date there shall be a capital reorganization of the Maker (other than
by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 3.6(a)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in Section 3.6(a)(iv)),
or a merger or consolidation of the Maker with or into another corporation
where the holders of outstanding voting securities prior to such merger or
consolidation do not own over fifty percent (50%) of the outstanding voting
securities of the merged or consolidated entity, immediately after such merger
or consolidation, or the sale of all or substantially all of the Maker’s
properties or assets to any other person (an “Organic Change”), then as
a part of such Organic Change an appropriate revision to the Conversion Price
shall be made and provision shall be made (by adjustments of the Conversion
Price or otherwise) so that the Holder shall have the right thereafter to
convert such Note into the kind and amount of shares of stock and other
securities or property of the Maker or any successor corporation resulting from
Organic Change.  In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 3.6(a)(v) with respect to the rights of the Holder after the
Organic Change to the end that the provisions of this Section 3.6(a)(v)
(including any adjustment in the applicable Conversion Price then in effect and
the number of shares of stock or other securities deliverable upon conversion
of this Note and the Other Notes) shall be applied after that event in as
nearly an equivalent manner as may be practicable.


 


(vi)                              Adjustments
for Issuance of Additional Shares of Common Stock.


 


(A)                              Commencing
on the Issuance Date and for a period of one (1) year thereafter, in the event
the Maker shall issue or sell any additional shares of Common Stock or
preferred stock or any securities convertible or exercisable into, or
exchangeable for, directly or indirectly, Common Stock or preferred stock (the “Additional
Shares of Common Stock”), at a price per share less than the Conversion
Price then in effect or without consideration, the Conversion Price then in
effect shall be reduced to a price equal to the consideration per share paid
for such Additional Shares of Common Stock.


 


(B)                                Commencing
on the date that is one (1) year and one (1) day following the Issuance Date,
in the event the Maker shall issue or sell any Additional Shares of


 


10





















 


Common Stock at a price per share less than the
Conversion Price or without consideration, the Conversion Price then in effect
upon each such issuance shall be adjusted to that price (rounded to the nearest
cent) determined by multiplying the Conversion Price by a fraction:


 


(1)                                  the
numerator of which shall be equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to the issuance of such Additional
Shares of Common Stock plus (B) the number of shares of Common Stock
(rounded to the nearest whole share) which the aggregate consideration for the
total number of such Additional Shares of Common Stock so issued would purchase
at a price per share equal to the then Conversion Price, and


 


(2)                                  the
denominator of which shall be equal to the number of shares of Common Stock
outstanding immediately after the issuance of such Additional Shares of Common
Stock.


 


No adjustment of the
number of shares of Common Stock shall be made under paragraphs (A) and (B) of Section 3.6(a)(vi)
upon the issuance of any Additional Shares of Common Stock which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights in any
Common Stock Equivalents (as defined below), if any such adjustment shall
previously have been made upon the issuance of such warrants or other rights or
upon the issuance of such Common Stock Equivalents (or upon the issuance of any
warrant or other rights therefore) pursuant to Section 3.6(a)(vii).


 


(vii)                           Issuance
of Common Stock Equivalents.  If the
Maker, at any time after the Issuance Date, shall issue (other than as provided
in Sections 3.6(a)(i) through (vi) above) any securities convertible into or
exchangeable for, directly or indirectly, Common Stock (“Convertible
Securities”), other than the Notes, or any rights or warrants or options to
purchase any such Common Stock or Convertible Securities, shall be issued or
sold (collectively, the “Common Stock Equivalents”) and the aggregate of
the price per share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent, plus the consideration
received by the Maker for issuance of such Common Stock  Equivalent divided by the number of shares of
Common Stock issuable pursuant to such Common Stock Equivalent (the “Aggregate
Per Common Share Price”) shall be less than the applicable Conversion Price
then in effect, or if, after any such issuance of Common Stock Equivalents, the
price per share for which Additional Shares of Common Stock may be issuable
thereafter is amended or adjusted, and such price as so amended shall make the
Aggregate Per Share Common Price be less than the applicable Conversion Price
in effect at the time of such amendment or adjustment, then the applicable
Conversion Price upon each such issuance or amendment shall be adjusted as
provided in the first sentence of subsection (vi) of this Section 3.6(a)
on the basis that (1) the maximum number of Additional Shares of Common Stock
issuable pursuant to all such Common Stock Equivalents shall be deemed to have
been issued (whether or not such Common Stock Equivalents are actually then
exercisable, convertible or exchangeable in whole or in part) as of the earlier
of (A) the date on which the Maker shall enter into a firm contract for the
issuance of such Common Stock Equivalent, or (B) the date of actual issuance of
such Common Stock Equivalent.  No
adjustment of the applicable Conversion Price


 


11





















 


shall be made under this subsection (vii) upon
the issuance of any Convertible Security which is issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor, if
any adjustment shall previously have been made to the exercise price of such
warrants then in effect upon the issuance of such warrants or other rights
pursuant to this subsection (vii). 
No adjustment shall be made to the Conversion Price upon the issuance of
Common Stock pursuant to the exercise, conversion or exchange of any
Convertible Security or Common Stock Equivalent where an adjustment to the
Conversion Price was made as a result of the issuance or purchase of any
Convertible Security or Common Stock Equivalent.


 


(viii)                        Consideration
for Stock.  In case any shares of
Common Stock or any Common Stock Equivalents shall be issued or sold:


 


(1)                                  in
connection with any merger or consolidation in which the Maker is the surviving
corporation (other than any consolidation or merger in which the previously
outstanding shares of Common Stock of the Maker shall be changed to or
exchanged for the stock or other securities of another corporation), the amount
of consideration therefor shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Maker, of such
portion of the assets and business of the nonsurviving corporation as such
Board may determine to be attributable to such shares of Common Stock,
Convertible Securities, rights or warrants or options, as the case may be; or


 


(2)                                  in
the event of any consolidation or merger of the Maker in which the Maker is not
the surviving corporation or in which the previously outstanding shares of
Common Stock of the Maker shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of
any corporation, the Maker shall be deemed to have issued a number of shares of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation.  If
any such calculation results in adjustment of the applicable Conversion Price,
or the number of shares of Common Stock issuable upon conversion of the Notes,
the determination of the applicable Conversion Price or the number of shares of
Common Stock issuable upon conversion of the Notes immediately prior to such
merger, consolidation or sale, shall be made after giving effect to such
adjustment of the number of shares of Common Stock issuable upon conversion of
the Notes.  In the event Common Stock is
issued with other shares or securities or other assets of the Maker for
consideration which covers both, the consideration computed as provided in this
Section 3.6(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Maker.


 


(b)                                 Record
Date.  In case the Maker shall take
record of the holders of its Common Stock for the purpose of entitling them to
subscribe for or purchase Common Stock or Convertible Securities, then the date
of the issue or sale of the shares of Common Stock shall be deemed to be such
record date.


 


(c)                                  Certain
Issues Excepted.  Anything herein to
the contrary notwithstanding, the Maker shall not be required to make any
adjustment to the Conversion Price upon (i) a


 


12





















 


Permitted Financing, (ii) any issuances of warrants
issued to a Purchaser pursuant to the Purchase Agreement, and (iii) the payment
of any interest on the Notes.


 


(d)                                 No
Impairment.  The Maker shall not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Maker, but will at all times in good faith, assist in the carrying out of all the
provisions of this Section 3.6 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
Holder against impairment.  In the event
a Holder shall elect to convert any Notes as provided herein, the Maker cannot
refuse conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law, violation
of an agreement to which such Holder is a party or for any reason whatsoever, unless,
an injunction from a court, or notice, restraining and or adjoining conversion
of all or of said Notes shall have issued and the Maker posts a surety bond for
the benefit of such Holder in an amount equal to one hundred thirty percent (130%)
of the amount of the Notes the Holder has elected to convert, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Holder in the event it
obtains judgment.


 


(e)                                  Certificates
as to Adjustments.  Upon occurrence
of each adjustment or readjustment of the Conversion Price or number of shares
of Common Stock issuable upon conversion of this Note pursuant to this Section 3.6,
the Maker at its expense shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to the Holder a certificate
setting forth such adjustment and readjustment, showing in detail the facts
upon which such adjustment or readjustment is based.  The Maker shall, upon written request of the
Holder, at any time, furnish or cause to be furnished to the Holder a like
certificate setting forth such adjustments and readjustments, the applicable
Conversion Price in effect at the time, and the number of shares of Common Stock
and the amount, if any, of other securities or property which at the time would
be received upon the conversion of this Note. 
Notwithstanding the foregoing, the Maker shall not be obligated to
deliver a certificate unless such certificate would reflect an increase or
decrease of at least one percent (1%) of such adjusted amount.


 


(f)                                    Issue
Taxes.  The Maker shall pay any and
all issue and other taxes, excluding federal, state or local income taxes, that
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of this Note pursuant thereto; provided, however, that
the Maker shall not be obligated to pay any transfer taxes resulting from any
transfer requested by the Holder in connection with any such conversion.


 


(g)                                 Fractional
Shares.  No fractional shares of
Common Stock shall be issued upon conversion of this Note.  In lieu of any fractional shares to which the
Holder would otherwise be entitled, the Maker shall pay cash equal to the
product of such fraction multiplied by the average of the Volume Weighted
Average Prices of the Common Stock for the five (5) consecutive Trading Days
immediately preceding the Conversion Date.


 


(h)                                 Reservation
of Common Stock.  The Maker shall at
all times when this Note shall be outstanding, reserve and keep available out
of its authorized but unissued Common


 


13





















 


Stock, such number of shares of Common Stock as shall
from time to time be sufficient to effect the conversion of this Note and all interest
accrued thereon; provided that the number of shares of Common Stock so
reserved shall at no time be less than one hundred percent (100%) of the number
of shares of Common Stock for which this Note and all interest accrued thereon
are at any time convertible.  The Maker
shall, from time to time in accordance with the Delaware General Corporation
Law, increase the authorized number of shares of Common Stock if at any time
the unissued number of authorized shares shall not be sufficient to satisfy the
Maker’s obligations under this Section 3.6(h).


 


(i)                                     Regulatory
Compliance.  If any shares of Common
Stock to be reserved for the purpose of conversion of this Note or any interest
accrued thereon require registration or listing with or approval of any governmental
authority, stock exchange or other regulatory body under any federal or state
law or regulation or otherwise before such shares may be validly issued or
delivered upon conversion, the Maker shall, at its sole cost and expense, in
good faith and as expeditiously as possible, endeavor to secure such
registration, listing or approval, as the case may be.


 


Section 3.7                                      Prepayment.


 


(a)                                  Prepayment
Upon an Event of Default. 
Notwithstanding anything to the contrary contained herein, upon the
occurrence of an Event of Default described in Sections 2.1(c)-(l) hereof, the
Holder shall have the right, at such Holder’s option, to require the Maker to
prepay in cash all or a portion of this Note at a price equal to the Triggering
Event Prepayment Price (as defined in Section 3.7(c) below) applicable at
the time of such request (the “Event of Default Prepayment Price”).  Nothing in this Section 3.7(a) shall
limit the Holder’s rights under Section 2.2 hereof.


 


(b)                                 Prepayment
Option Upon Major Transaction.  In
addition to all other rights of the Holder contained herein, simultaneous with
the occurrence of a Major Transaction (as defined below), the Holder shall have
the right, at the Holder’s option, to require the Maker to prepay all or a
portion of the Holder’s Notes at a price equal to one hundred percent (100%) of
the aggregate principal amount of this Note plus all accrued and unpaid
interest (the “Major Transaction Prepayment Price”); provided that the
Maker shall have the sole option to pay the Major Transaction Prepayment Price
in cash or shares of Common Stock.  If
the Maker elects to pay the Major Transaction Prepayment Price in shares of
Common Stock, the price per share shall be based upon the Conversion Price then
in effect on the day preceding the date of delivery of the Notice of Prepayment
at Option of Holder Upon Major Transaction (as hereafter defined) and the
Holder shall have demand registration rights with respect to such shares.


 


(c)                                  Prepayment
Option Upon Triggering Event.  In
addition to all other rights of the Holder contained herein, after a Triggering
Event (as defined below), the Holder shall have the right, at the Holder’s
option, to require the Maker to prepay all or a portion of the Holder’s Notes in
cash at a price equal to one hundred percent (100%) of the aggregate principal
amount of this Note plus all accrued and unpaid interest (the “Triggering
Event Prepayment Price,” and, collectively with the “Major Transaction
Prepayment Price,” the “Prepayment Price”).  


 


14





















 


(d)                                 Intentionally
Omitted.


 


(e)                                  “Major
Transaction.”  A “Major
Transaction” shall be deemed to have occurred at such time as any of the
following events:


 


(i)                                     the
consolidation, merger or other business combination of the Maker with or into
another Person (as defined in Section 4.13 hereof) (other than (A)
pursuant to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Maker or (B) a consolidation, merger or
other business combination in which holders of the Maker’s voting power
immediately prior to the transaction continue after the transaction to hold,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or
their equivalent if other than a corporation) of such entity or entities).


 


(ii)                                  the
sale or transfer of more than fifty percent (50%) of the Maker’s assets (based
on the fair market value as determined in good faith by the Maker’s Board of
Directors) other than inventory in the ordinary course of business in one or a
related series of transactions; or


 


(iii)                               closing
of a purchase, tender or exchange offer made to the holders of more than fifty
percent (50%) of the outstanding shares of Common Stock in which more than
fifty percent (50%) of the outstanding shares of Common Stock were tendered and
accepted.


 


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


 


(i)                                     so
long as any Notes are outstanding, the effectiveness of the Registration
Statement, after it becomes effective, (i) lapses for any reason (including,
without limitation, the issuance of a stop order) or (ii) is unavailable to the
Holder for sale of the shares of Common Stock, and such lapse or unavailability
continues for a period of twenty (20) consecutive Trading Days, and the shares
of Common Stock into which the Holder’s Notes can be converted cannot be sold
in the public securities market pursuant to Rule 144(k), provided that the
cause of such lapse or unavailability is not due to factors primarily within
the control of the Holder of the Notes; and provided further that a Triggering
Event shall not have occurred if and to the extent the Maker exercised its
rights set forth in Section 3(n) of the Registration Rights Agreement;


 


(ii)                                  the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, Nasdaq National Market, Nasdaq SmallCap Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc., for a period of five (5)
consecutive Trading Days;


 


(iii)                               the
Maker’s notice to any holder of the Notes, including by way of public
announcement, at any time, of its inability to comply (including for any of the
reasons described in Section 3.8) or its intention not to comply with
proper requests for conversion of any Notes into shares of Common Stock; or


 


15





















 


(iv)                              the
Maker’s failure to comply with a Conversion Notice tendered in accordance with
the provisions of this Note within ten (10) business days after the receipt by
the Maker of the Conversion Notice.


 


(g)                                 Intentionally
Omitted.


 


(h)                                 Mechanics
of Prepayment at Option of Holder Upon Major Transaction.  No sooner than fifteen (15) days nor later
than ten (10) days prior to the consummation of a Major Transaction, but not
prior to the public announcement of such Major Transaction, the Maker shall deliver
written notice thereof via facsimile and overnight courier (“Notice of Major
Transaction”) to the Holder of this Note. 
At any time after receipt of a Notice of Major Transaction (or, in the
event a Notice of Major Transaction is not delivered at least ten (10) days
prior to a Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of the Notes then outstanding may require the Maker to
prepay, effective simultaneously with the closing of such Major Transaction, all
of the holder’s Notes then outstanding by delivering written notice thereof via
facsimile and overnight courier (“Notice of Prepayment at Option of Holder
Upon Major Transaction”) to the Maker, which Notice of Prepayment at Option
of Holder Upon Major Transaction shall indicate (i) the number of Notes that
such holder is electing to prepay and (ii) the applicable Major Transaction
Prepayment Price, as calculated pursuant to Section 3.7(b) above.


 


(i)                                     Mechanics
of Prepayment at Option of Holder Upon Triggering Event.  Within one (1) business day after the
occurrence of a Triggering Event, the Maker shall deliver written notice
thereof via facsimile and overnight courier (“Notice of Triggering Event”)
to each holder of the Notes.  At any time
after the earlier of a holder’s receipt of a Notice of Triggering Event and
such holder becoming aware of a Triggering Event, any holder of this Note and
the Other Notes then outstanding may require the Maker to prepay all of the
Notes on a pro rata basis by delivering written notice thereof via facsimile
and overnight courier (“Notice of Prepayment at Option of Holder Upon
Triggering Event”) to the Maker, which Notice of Prepayment at Option of
Holder Upon Triggering Event shall indicate (i) the amount of the Note that such
holder is electing to have prepaid and (ii) the applicable Triggering Event
Prepayment Price, as calculated pursuant to Section 3.7(c) above.  A holder shall only be permitted to require
the Maker to prepay the Note pursuant to Section 3.7 hereof for the
greater of a period of ten (10) days after receipt by such holder of a Notice
of Triggering Event or for so long as such Triggering Event is continuing.


 


(j)                                     Intentionally
Omitted.


 


(k)                                  Payment
of Prepayment Price.  Upon the Maker’s
receipt of a Notice(s) of Prepayment at Option of Holder Upon Triggering Event
or a Notice(s) of Prepayment at Option of Holder Upon Major Transaction from
any holder of the Notes, the Maker shall immediately notify each holder of the
Notes by facsimile of the Maker’s receipt of such Notice(s) of Prepayment at
Option of Holder Upon Triggering Event or Notice(s) of Prepayment at Option of
Holder Upon Major Transaction and each holder which has sent such a notice
shall promptly submit to the Maker such holder’s certificates representing the
Notes which such holder has elected to have prepaid.  The Maker shall deliver the applicable
Triggering Event Prepayment Price, in the case of a prepayment pursuant to Section 3.7(i),
to such holder within five (5)


 


16





















 


business days after the
Maker’s receipt of a Notice of Prepayment at Option of Holder Upon Triggering
Event and, in the case of a prepayment pursuant to Section 3.7(h), the
Maker shall deliver the applicable Major Transaction Prepayment Price
simultaneously with the closing of the Major Transaction; provided that a
holder’s original Note shall have been so delivered to the Maker; provided
further that if the Maker is unable to prepay all of the Notes to be prepaid,
the Maker shall prepay an amount from each holder of the Notes being prepaid
equal to such holder’s pro-rata amount (based on the number of Notes held by
such holder relative to the number of Notes outstanding) of all Notes being
prepaid.  If the Maker shall fail to
prepay all of the Notes submitted for prepayment (other than pursuant to a
dispute as to the arithmetic calculation of the Prepayment Price), in addition
to any remedy such holder of the Notes may have under this Note and the
Purchase Agreement, the applicable Prepayment Price payable in respect of such
Notes not prepaid shall bear interest at the rate of two percent (2%) per month
(prorated for partial months) until paid in full.  Until the Maker pays such unpaid applicable
Prepayment Price in full to a holder of the Notes submitted for prepayment,
such holder shall have the option (the “Void Optional Prepayment Option”)
to, in lieu of prepayment, require the Maker to promptly return to such
holder(s) all of the Notes that were submitted for prepayment by such holder(s)
under this Section 3.7 and for which the applicable Prepayment Price has
not been paid, by sending written notice thereof to the Maker via facsimile
(the “Void Optional Prepayment Notice”). 
Upon the Maker’s receipt of such Void Optional Prepayment Notice(s) and
prior to payment of the full applicable Prepayment Price to such holder, (i)
the Notice(s) of Prepayment at Option of Holder Upon Triggering Event or the
Notice(s) of Prepayment at Option of Holder Upon Major Transaction, as the case
may be, shall be null and void with respect to those Notes submitted for
prepayment and for which the applicable Prepayment Price has not been paid,
(ii) the Maker shall immediately return any Notes submitted to the Maker by
each holder for prepayment under this Section 3.7(k) and for which the
applicable Prepayment Price has not been paid and (iii) the Conversion Price of
such returned Notes shall be adjusted to the lesser of (A) the Conversion Price
as in effect on the date on which the Void Optional Prepayment Notice(s) is
delivered to the Maker and (B) the lowest Volume Weighted Average Price during
the period beginning on the date on which the Notice(s) of Prepayment of Option
of Holder Upon Major Transaction or the Notice(s) of Prepayment at Option of
Holder Upon Triggering Event, as the case may be, is delivered to the Maker and
ending on the date on which the Void Optional Prepayment Notice(s) is delivered
to the Maker; provided that no adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in effect.  A holder’s delivery of a Void Optional
Prepayment Notice and exercise of its rights following such notice shall not
effect the Maker’s obligations to make any payments which have accrued prior to
the date of such notice.  Payments
provided for in this Section 3.7 shall have priority to payments to other
stockholders in connection with a Major Transaction.


 


(l)                                     Maker
Prepayment Option.  Commencing three
(3) months following the Effectiveness Date (as defined in the Registration
Rights Agreement) so long as (A) the Volume Weighted Average Price of the
Common Stock exceeds two hundred fifty percent (250%) of the Conversion Price
for twenty (20) consecutive Trading Days so long as the first Trading Day of
such twenty (20) Trading Day period shall commence three (3) months following
the Effectiveness Date, (B) the Registration Statement (as defined in the
Registration Rights Agreement) is effective and has been effective, without
lapse or suspension of any kind, for a period sixty (60) consecutive calendar
days, (C) trading in the Common Stock shall not have


 


17





















 


been suspended by the
Securities and Exchange Commission or the OTC Bulletin Board and (D) the Maker
is in material compliance with the terms and conditions of this Note and the
other Transaction Documents (as defined in the Purchase Agreement), the Maker
may prepay all or any portion of this Note, plus any accrued but unpaid
interest, upon ten (10) business days prior written notice to the holder (the “Maker
Prepayment Notice”) at a prepayment price equal to a number of shares of
Common Stock equal to the quotient of (a) the principal amount of this Note
plus any accrued and unpaid interest outstanding on the Maker Prepayment Date
(as defined below) divided by (b) the Conversion Price then in effect (the “Maker
Prepayment Price”).  Notwithstanding
anything contained in this Section 3.7(l) to the contrary, if the Holder
has delivered a Conversion Notice to the Maker or delivers a Conversion Notice
after receipt of the Maker’s Prepayment Notice, the portion of this Note
designated to be converted may not be prepaid by the Maker.  The Maker Prepayment Notice shall state the
date of prepayment (the “Maker Prepayment Date”), the principal amount
of the Notes of such Holder to be prepaid and the Maker Prepayment Price and
shall call upon the Holder to surrender to the Maker on the Maker Prepayment
Date at the place designated in the Maker Prepayment Notice such Holder’s
Note.  The Maker Prepayment Date shall be
no more than ten (10) Trading Days after the date on which the Holder is
notified of the Maker’s intent to prepay this Note (the “Maker Prepayment
Notice Date”).  If the Maker fails to
pay the Maker Prepayment Price by the eleventh (11th) Trading Day
following the Maker Prepayment Notice Date, the prepayment will be declared
null and void and the Maker shall lose its right to deliver a Maker Prepayment
Notice to the Holder in the future.  On
or after the Maker Prepayment Date, the Holder shall surrender this Note to the
Maker at the place designated in the Maker Prepayment Notice and shall
thereupon be entitled to receive payment of the Maker Prepayment Price.


 


Section 3.8                                      Inability
to Fully Convert.


 


(a)                                  Holder’s
Option if Maker Cannot Fully Convert. 
If, upon the Maker’s receipt of a Conversion Notice, the Maker cannot
issue shares of Common Stock registered for resale under the Registration
Statement for any reason, including, without limitation, because the Maker (w)
does not have a sufficient number of shares of Common Stock authorized and
available, (x) is otherwise prohibited by applicable law or by the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Maker or any of its
securities from issuing all of the Common Stock which is to be issued to the
Holder pursuant to a Conversion Notice or (y) fails to have a sufficient number
of shares of Common Stock registered for resale under the Registration
Statement, then the Maker shall issue as many shares of Common Stock as it is
able to issue in accordance with the Holder’s Conversion Notice and, with
respect to the unconverted portion of this Note, the Holder, solely at Holder’s
option, can elect to:


 


(i)                                     require
the Maker to prepay that portion of this Note for which the Maker is unable to
issue Common Stock in accordance with the Holder’s Conversion Notice (the “Mandatory
Prepayment”) at a price per share equal to the Triggering Event Prepayment
Price as of such Conversion Date (the “Mandatory Prepayment Price”);


 


(ii)                                  if
the Maker’s inability to fully convert is pursuant to Section 3.8(a)(x)
above, require the Maker to issue restricted shares of Common Stock in
accordance with such holder’s Conversion Notice;


 


18





















 


(iii)                               void
its Conversion Notice and retain or have returned, as the case may be, this
Note that was to be converted pursuant to the Conversion Notice (provided that
the Holder’s voiding its Conversion Notice shall not effect the Maker’s
obligations to make any payments which have accrued prior to the date of such
notice).


 


In the event a Holder
shall elect to convert any portion of its Notes as provided herein, the Maker
cannot refuse conversion based on any claim that such Holder or any one
associated or affiliated with such Holder has been engaged in any violation of
law, violation of an agreement to which such Holder is a party or for any
reason whatsoever, unless, an injunction from a court, on notice, restraining
and or adjoining conversion of all or of said Notes shall have been issued and
the Maker posts a surety bond for the benefit of such Holder in an amount equal
to 130% of the principal amount of the Notes the Holder has elected to convert,
which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Holder in the event it obtains judgment.


 


(b)                                 Mechanics
of Fulfilling Holder’s Election.  The
Maker shall immediately send via facsimile to the Holder, upon receipt of a
facsimile copy of a Conversion Notice from the Holder which cannot be fully
satisfied as described in Section 3.8(a) above, a notice of the Maker’s
inability to fully satisfy the Conversion Notice (the “Inability to Fully
Convert Notice”).  Such Inability to
Fully Convert Notice shall indicate (i) the reason why the Maker is unable to
fully satisfy such holder’s Conversion Notice, (ii) the amount of this Note
which cannot be converted and (iii) the applicable Mandatory Prepayment
Price.  The Holder shall notify the Maker
of its election pursuant to Section 3.8(a) above by delivering written
notice via facsimile to the Maker (“Notice in Response to Inability to
Convert”).


 


(c)                                  Payment
of Prepayment Price.  If the Holder
shall elect to have its Notes prepaid pursuant to Section 3.8(a)(i) above,
the Maker shall pay the Mandatory Prepayment Price to the Holder within thirty
(30) days of the Maker’s receipt of the Holder’s Notice in Response to
Inability to Convert, provided that prior to the Maker’s receipt of the
Holder’s Notice in Response to Inability to Convert the Maker has not delivered
a notice to the Holder stating, to the satisfaction of the Holder, that the
event or condition resulting in the Mandatory Prepayment has been cured and all
Conversion Shares issuable to the Holder can and will be delivered to the
Holder in accordance with the terms of this Note.  If the Maker shall fail to pay the applicable
Mandatory Prepayment Price to the Holder on a timely basis as described in this
Section 3.8(c) (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Prepayment Price), in addition to any
remedy the Holder may have under this Note and the Purchase Agreement, such
unpaid amount shall bear interest at the rate of two percent (2%) per month
(prorated for partial months) until paid in full.  Until the full Mandatory Prepayment Price is
paid in full to the Holder, the Holder may (i) void the Mandatory Prepayment
with respect to that portion of the Note for which the full Mandatory
Prepayment Price has not been paid, (ii) receive back such Note, and (iii)
require that the Conversion Price of such returned Note be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Holder
voided the Mandatory Prepayment and (B) the lowest Volume Weighted Average
Price during the period beginning on the Conversion Date and ending on the date
the Holder voided the Mandatory Prepayment.


 


19





















 


(d)                                 Pro-rata
Conversion and Prepayment.  In the
event the Maker receives a Conversion Notice from more than one holder of the
Notes on the same day and the Maker can convert and prepay some, but not all,
of the Notes pursuant to this Section 3.8, the Maker shall convert and
prepay from each holder of the Notes electing to have its Notes converted and
prepaid at such time an amount equal to such holder’s pro-rata amount (based on
the principal amount of the Notes held by such holder relative to the principal
amount of the Notes outstanding) of all the Notes being converted and prepaid
at such time.


 


Section 3.9                                      No
Rights as Shareholder.  Nothing
contained in this Note shall be construed as conferring upon the Holder, prior
to the conversion of this Note, the right to vote or to receive dividends or to
consent or to receive notice as a shareholder in respect of any meeting of
shareholders for the election of directors of the Maker or of any other matter,
or any other rights as a shareholder of the Maker.


 


ARTICLE IV



MISCELLANEOUS


 


Section 4.1                                      Notices.  Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer
back received), telecopy or facsimile at the address or number designated in
the Purchase Agreement (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid, addressed
to such address, or upon actual receipt of such mailing, whichever shall first
occur.  The Maker will give written
notice to the Holder at least ten (10) days prior to the date on which the
Maker takes a record (x) with respect to any dividend or distribution upon the
Common Stock, (y) with respect to any pro rata subscription offer to holders of
Common Stock or (z) for determining rights to vote with respect to any Organic
Change, dissolution, liquidation or winding-up and in no event shall such notice
be provided to such holder prior to such information being made known to the
public.  The Maker will also give written
notice to the Holder at least ten (10) days prior to the date on which any
Organic Change, dissolution, liquidation or winding-up will take place and in
no event shall such notice be provided to the Holder prior to such information
being made known to the public. The Maker shall promptly notify the Holder of
this Note of any notices sent or received, or any actions taken with respect to
the Other Notes.


 


Section 4.2                                      Governing
Law.  This Note shall be governed by
and construed in accordance with the internal laws of the State of New York,
without giving effect to any of the conflicts of law principles which would
result in the application of the substantive law of another jurisdiction.  This Note shall not be interpreted or
construed with any presumption against the party causing this Note to be
drafted.


 


Section 4.3                                      Headings.  Article and section headings in
this Note are included herein for purposes of convenience of reference only and
shall not constitute a part of this Note for any other purpose.


 


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Section 4.4                                      Remedies,
Characterizations, Other Obligations, Breaches and Injunctive Relief.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note, at
law or in equity (including, without limitation, a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall
be deemed a waiver of compliance with the provisions giving rise to such remedy
and nothing herein shall limit a holder’s right to pursue actual damages for
any failure by the Maker to comply with the terms of this Note.  Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the holder thereof and shall not, except
as expressly provided herein, be subject to any other obligation of the Maker
(or the performance thereof).  The Maker
acknowledges that a breach by it of its obligations hereunder will cause
irreparable and material harm to the Holder and that the remedy at law for any
such breach may be inadequate. Therefore the Maker agrees that, in the event of
any such breach or threatened breach, the Holder shall be entitled, in addition
to all other available rights and remedies, at law or in equity, to seek and
obtain such equitable relief, including but not limited to an injunction restraining
any such breach or threatened breach, without the necessity of showing economic
loss and without any bond or other security being required.


 


Section 4.5                                      Enforcement
Expenses.  The Maker and the Holder hereby agree that the prevailing party in any
suit, action or proceeding arising out of or relating to the enforcement of
this Note shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party.


 


Section 4.6                                      Binding
Effect.   The obligations of the
Maker and the Holder set forth herein shall be binding upon the successors and
assigns of each such party, whether or not such successors or assigns are
permitted by the terms hereof.


 


Section 4.7                                      Amendments.  This Note may not be modified or amended in
any manner except in writing executed by the Maker and the Holder.


 


Section 4.8                                      Compliance
with Securities Laws.  The Holder of
this Note acknowledges that this Note is being acquired solely for the Holder’s
own account and not as a nominee for any other party, and for investment, and
that the Holder shall not offer, sell or otherwise dispose of this Note.  This Note and any Note issued in substitution
or replacement therefor shall be stamped or imprinted with a legend in
substantially the following form:


 


“THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM,
SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.”


 


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Section 4.9                                      Consent
to Jurisdiction.  Each of the Maker
and the Holder (i) hereby irrevocably submits to the exclusive jurisdiction of
the United States District Court sitting in the Southern District of New York
and the courts of the State of New York located in New York county for the
purposes of any suit, action or proceeding arising out of or relating to this
Note and (ii) hereby waives, and agrees not to assert in any such suit, action
or proceeding, any claim that it is not personally subject to the jurisdiction
of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper.  Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for notices to
it under the Purchase Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof.  Nothing in this Section 4.9 shall affect
or limit any right to serve process in any other manner permitted by law.  Each of the Maker and the Holder hereby agree
that the prevailing party in any suit, action or proceeding arising out of or relating
to this Note shall be entitled to reimbursement for reasonable legal fees from
the non-prevailing party.


 


Section 4.10                                Parties
in Interest.  This Note shall be
binding upon, inure to the benefit of and be enforceable by the Maker, the
Holder and their respective successors and permitted assigns.


 


Section 4.11                                Failure
or Indulgence Not Waiver.  No failure
or delay on the part of the Holder in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.


 


Section 4.12                                Maker
Waivers.  Except as otherwise
specifically provided herein, the Maker and all others that may become liable
for all or any part of the obligations evidenced by this Note, hereby waive
presentment, demand, notice of nonpayment, protest and all other demands’ and
notices in connection with the delivery, acceptance, performance and
enforcement of this Note, and do hereby consent to any number of renewals of
extensions of the time or payment hereof and agree that any such renewals or
extensions may be made without notice to any such persons and without affecting
their liability herein and do further consent to the release of any person
liable hereon, all without affecting the liability of the other persons, firms
or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY
JURY.


 


(a)                                  No
delay or omission on the part of the Holder in exercising its rights under this
Note, or course of conduct relating hereto, shall operate as a waiver of such
rights or any other right of the Holder, nor shall any waiver by the Holder of
any such right or rights on any one occasion be deemed a waiver of the same
right or rights on any future occasion.


 


(b)                                 THE
MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.


 


Section 4.13                                Definitions.  For the purposes hereof, the following terms
shall


 


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have the following
meanings:


 


“Person” means an
individual or a corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind.


 


“Trading Day”
means (a) a day or which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (b) if the Common Stock is
not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the
Common Stock is not listed or quoted as set forth in (a) and (b) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day which shall
be a legal holiday or a day on which banking institutions in the State of New
York are authorized or required by law or other government action to close.


 


 


	
   

  	
  COMMUNICATION
  INTELLIGENCE CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 


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EXHIBIT A


 


WIRE INSTRUCTIONS.


 


Payee:                                                                                                                 


 


Bank:                                                                                                                  


 


Address:                                                                                                           


                                                                                                            


 


Bank No.:                                                                                                           


 


Account No.:                                                                                                      


 


Account Name:                                                                                                   


 


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FORM OF


 


NOTICE OF
CONVERSION


 


(To be Executed by
the Registered Holder in order to Convert the Note)


 


The undersigned hereby
irrevocably elects to convert $                                 
of the principal amount of the above Note No.       
into shares of Common Stock of Communication Intelligence Corporation (the “Maker”)
according to the conditions hereof, as of the date written below.


 


Date of Conversion                                                                                                                   


 


Applicable Conversion
Price                                                                                                     


 


Number of shares of
Common Stock beneficially owned or deemed beneficially owned by the Holder on
the Date of Conversion:                                                   


 


	
  Signature

  	
   

  	
   

  
	
   

  
	
   

  	
  [Name]

  
	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  
						



 


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