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EXHIBIT 4.2




CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES

OF THE

SERIES D CONVERTIBLE PREFERRED STOCK

OF

DIRT MOTOR SPORTS, INC.




     The undersigned, the Chief Executive Officer of Dirt Motor Sports, Inc., a Delaware
corporation (the “Company”), in accordance with the provisions of the Delaware General Corporation
Law, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Company, the following resolution creating a series of
Series D Convertible Preferred Stock, was duly adopted on May ___, 2006:



     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of
Directors of the Company by provisions of the Certificate of Incorporation of the Company (the
“Certificate of Incorporation”), there hereby is created out of the shares of Preferred Stock, par
value $.01 per share, of the Company authorized in Article IV of the Certificate of Incorporation
(the “Preferred Stock”), a series of Preferred Stock of the Company, to be named “Series D
Convertible Preferred Stock,” consisting of Twenty Thousand (20,000) shares, which series shall
have the following designations, powers, preferences and relative and other special rights and the
following qualifications, limitations and restrictions:



     1. Designation and Rank. The designation of such series of the Preferred Stock shall
be the Series D Convertible Preferred Stock, par value $.01 per share (the “Series D Preferred
Stock”). The maximum number of shares of Series D Preferred Stock shall be Twenty Thousand
(20,000) shares. The Series D Preferred Stock shall rank pari passu with shares of the Company’s
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock and shall rank senior
to the Company’s common stock, par value $.0001 per share (the “Common Stock”), and to all other
classes and series of equity securities of the Company which by their terms do not rank senior to
the Series D Preferred Stock (“Junior Stock”). The Series D Preferred Stock shall be subordinate
to and rank junior to all indebtedness of the Company now or hereafter outstanding.



     2.  Dividends.



          (a) Payment of Dividends. Commencing twelve (12) months following the date of the
initial issuance (the “Issuance Date”) of the Series D Preferred Stock and subject to Section
5(c)(ii) hereof, the holders of record of shares of Series D Preferred Stock shall be entitled to
receive, out of any assets at the time legally available therefor and as declared by the Board of
Directors, dividends at the rate of four percent (4%) of the stated Liquidation Preference Amount
(as defined in Section 4 hereof) per share per annum and increasing to six percent (6%) of the
stated Liquidation Preference Amount per share per annum commencing twenty-four (24) months
following the Issuance Date (the “Dividend Payment”), and no more, payable semi-annually on the
first business day of June and December of each year. The Company shall pay dividends in
registered shares of Common Stock unless the Company gives notice to the Holders no less than five
(5) trading days prior to the date the Dividend Payment is




 









 







due that it elects to make such Dividend Payment in cash. At any time the Company is required
to or has elected to pay any dividend in registered shares of Common Stock, the number of
registered shares of Common Stock to be issued to the holder shall be an amount equal to the
quotient of (i) the Dividend Payment divided by (ii) ninety percent (90%) of the average of the
Closing Bid Prices for the twenty (20) trading days immediately preceding the date the Dividend
Payment is due. In the case of shares of Series D Preferred Stock outstanding for less than a full
year, dividends shall be pro rated based on the portion of each year during which such shares are
outstanding. Dividends on the Series D Preferred Stock shall be cumulative, shall accrue and be
payable semi-annually. Dividends on the Series D Preferred Stock are prior and in preference to
any declaration or payment of any distribution (as defined below) on any outstanding shares of
Junior Stock. Such dividends shall accrue on each share of Series D Preferred Stock from day to
day whether or not earned or declared so that if such dividends with respect to any previous
dividend period at the rate provided for herein have not been paid on, or declared and set apart
for, all shares of Series D Preferred Stock at the time outstanding, the deficiency shall be fully
paid on, or declared and set apart for, such shares on a pro rata basis with all other equity
securities of the Company ranking on a parity with the Series D Preferred Stock as to the payment
of dividends before any distribution shall be paid on, or declared and set apart for Junior Stock.
Notwithstanding the foregoing, the Company shall be permitted to issue registered shares of Common
Stock pursuant to this Section 2(a) only if (1) the Registration Statement (as defined in Section
5(c)(ii) hereof) is effective and has been effective, without lapse or suspension of any kind, for
a period sixty (60) consecutive calendar days, or the shares of Common Stock into which the Series
D Preferred Stock can be converted may be offered for sale to the public pursuant to Rule 144(k)
(“Rule 144(k)”) under the Securities Act of 1933, as amended, (2) trading in the Common Stock shall
not have been suspended by the Securities and Exchange Commission, the OTC Bulletin Board or The
Nasdaq Capital Market (or other exchange or market on which the Common Stock is trading) at any
time during the sixty (60) day period immediately prior to the applicable data or determination,
and (3) the Company is in material compliance with the terms and conditions of this Certificate of
Designation and the other Transaction Documents (as defined in the Purchase Agreement).
Notwithstanding the foregoing to the contrary, if for any reason the Company cannot issue
registered shares of Common Stock to a holder as required under this Section 2(a), the Company
shall promptly notify the Holder of such determination but in no event later than five (5) trading
days prior to the date the Dividend Payment is due and shall pay such dividends in cash.




          (b) So long as any shares of Series D Preferred Stock are outstanding, the Company shall not
declare, pay or set apart for payment any dividend or make any distribution on any Junior Stock
(other than dividends or distributions payable in additional shares of Junior Stock), unless at the
time of such dividend or distribution the Company shall have paid all accrued and unpaid dividends
on the outstanding shares of Series D Preferred Stock.




          (c) In the event of a dissolution, liquidation or winding up of the Company pursuant to
Section 4, all accrued and unpaid dividends on the Series D Preferred Stock shall be payable on the
date of payment of the preferential amount to the holders of Series D Preferred Stock. In the event
of (i) a mandatory redemption pursuant to Section 9 or (ii) a redemption upon the occurrence of a
Triggering Event (as defined in Section 8(d)), all accrued and unpaid dividends on the Series D
Preferred Stock shall be payable on the date of such redemption. In




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the event of a voluntary conversion pursuant to Section 5(a), all accrued and unpaid dividends
on the Series D Preferred Stock being converted shall be payable on the Voluntary Conversion Date
(as defined in Section 5(b)(i)).




          (d) For purposes hereof, unless the context otherwise requires, “distribution” shall mean the
transfer of cash or property without consideration, whether by way of dividend or otherwise,
payable other than in shares of Common Stock or other equity securities of the Company, or the
purchase or redemption of shares of the Company (other than redemptions set forth in Section 8
below or repurchases of Common Stock held by employees or consultants of the Company upon
termination of their employment or services pursuant to agreements providing for such repurchase or
upon the cashless exercise of options held by employees or consultants) for cash or property.




     3. Voting Rights.



          (a) Class Voting Rights. The Series D Preferred Stock shall have the following class
voting rights (in addition to the voting rights set forth in Section 3(b) hereof). So long as any
shares of the Series D Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote or consent of the holders of at least seventy-five percent (75%) of the shares of
the Series D Preferred Stock outstanding at the time, given in person or by proxy, either in
writing or at a meeting, in which the holders of the Series D Preferred Stock vote separately as a
class: (i) amend, alter or repeal the provisions of the Series D Preferred Stock, whether by
merger, consolidation or otherwise, so as to adversely affect any right, preference, privilege or
voting power of the Series D Preferred Stock; provided, however, that any creation
and issuance of another series of Junior Stock shall not be deemed to adversely affect such rights,
preferences, privileges or voting powers; (ii) repurchase, redeem or pay dividends on, shares of
Common Stock or any other shares of the Company’s Junior Stock; (iii) amend the Certificate of
Incorporation or By-Laws of the Company so as to affect materially and adversely any right,
preference, privilege or voting power of the Series D Preferred Stock; provided,
however, that any creation and issuance of another series of Junior Stock shall not be
deemed to adversely affect such rights, preferences, privileges or voting powers; (iv) effect any
distribution with respect to Junior Stock; (v) reclassify the Company’s outstanding securities;
(vi) voluntarily file for bankruptcy, liquidate the Company’s assets or make an assignment for the
benefit of the Company’s creditors; or (vii) change the nature of the Company’s business.
Notwithstanding the foregoing to the contrary, the Company shall not issue any securities ranking
pari passu or senior to the Series D Preferred Stock with respect to the distribution of assets on
liquidation, dissolution or winding up without the affirmative vote or consent of the holders of at
least eighty percent (80%) of the shares of the Series D Preferred Stock outstanding at the time.




          (b) General Voting Rights. Except with respect to transactions upon which the Series
D Preferred Stock shall be entitled to vote separately as a class pursuant to Section 3(a) above
and except as otherwise required by Delaware law, the Series D Preferred Stock shall have no voting
rights. The Common Stock into which the Series D Preferred Stock is convertible shall, upon
issuance, have all of the same voting rights as other issued and outstanding Common Stock of the
Company.




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     4. Liquidation Preference.



          (a) In the event of the liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, the holders of shares of the Series D Preferred Stock then
outstanding shall be entitled to receive, out of the assets of the Company available for
distribution to its stockholders, an amount equal to $3,000 per share, subject to adjustment for
stock splits or stock dividends (the “Liquidation Preference Amount”), of the Series D Preferred
Stock plus any accrued and unpaid dividends before any payment shall be made or any assets
distributed to the holders of the Common Stock or any other Junior Stock. If the assets of the
Company are not sufficient to pay in full the Liquidation Preference Amount plus any accrued and
unpaid dividends payable to the holders of outstanding shares of the Series D Preferred Stock and
any series of preferred stock or any other class of stock on a parity, as to rights on liquidation,
dissolution or winding up, with the Series D Preferred Stock, then all of said assets will be
distributed among the holders of the Series D Preferred Stock and the other classes of stock on a
parity with the Series D Preferred Stock, if any, ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in full. The
liquidation payment with respect to each outstanding fractional share of Series D Preferred Stock
shall be equal to a ratably proportionate amount of the liquidation payment with respect to each
outstanding share of Series D Preferred Stock. All payments for which this Section 4(a) provides
shall be in cash, property (valued at its fair market value as determined by an independent
appraiser reasonably acceptable to the holders of a majority of the Series D Preferred Stock) or a
combination thereof; provided, however, that no cash shall be paid to holders of
Junior Stock unless each holder of the outstanding shares of Series D Preferred Stock has been paid
in cash the full Liquidation Preference Amount plus any accrued and unpaid dividends to which such
holder is entitled as provided herein. After payment of the full Liquidation Preference Amount
plus any accrued and unpaid dividends to which each holder is entitled, such holders of shares of
Series D Preferred Stock will not be entitled to any further participation as such in any
distribution of the assets of the Company.




          (b) A consolidation or merger of the Company with or into any other corporation or
corporations, or a sale of all or substantially all of the assets of the Company, or the
effectuation by the Company of a transaction or series of related transactions in which more than
50% of the voting shares of the Company is disposed of or conveyed, shall not be deemed to be a
liquidation, dissolution, or winding up within the meaning of this Section 4. In the event of the
merger or consolidation of the Company with or into another corporation, the Series D Preferred
Stock shall maintain its relative powers, designations and preferences provided for herein and no
merger shall result inconsistent therewith.




          (c) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, stating a payment date and the place where the distributable amounts
shall be payable, shall be given by mail, postage prepaid, no less than forty-five (45) days prior
to the payment date stated therein, to the holders of record of the Series D Preferred Stock at
their respective addresses as the same shall appear on the books of the Company.




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     5. Conversion. The holder of Series D Preferred Stock shall have the following
conversion rights (the “Conversion Rights”):



          (a) Right to Convert. At any time on or after the Issuance Date, the holder of any
such shares of Series D Preferred Stock may, at such holder’s option, subject to the limitations
set forth in Section 7 herein, elect to convert (a “Voluntary Conversion”) all or any portion of
the shares of Series D Preferred Stock held by such person into a number of fully paid and
nonassessable shares of Common Stock equal to the quotient of (i) the Liquidation Preference Amount
of the shares of Series D Preferred Stock being converted plus any accrued and unpaid dividends
divided by (ii) the Conversion Price (as defined in Section 5(d) below) then in effect as of the
date of the delivery by such holder of its notice of election to convert. In the event of a notice
of redemption of any shares of Series D Preferred Stock pursuant to Section 8 hereof, the
Conversion Rights of the shares designated for redemption shall terminate at the close of business
on the date fixed for redemption, unless the redemption price is not paid on such redemption date,
in which case the Conversion Rights for such shares shall continue until such price is paid in
full. In the event of a liquidation, dissolution or winding up of the Company, the Conversion
Rights shall terminate at the close of business on the date fixed for the payment of any such
amounts distributable on such event to the holders of Series D Preferred Stock. In the event of
such a redemption or liquidation, dissolution or winding up, the Company shall provide to each
holder of shares of Series D Preferred Stock notice of such redemption or liquidation, dissolution
or winding up, which notice shall (i) be sent at least fifteen (15) days prior to the termination
of the Conversion Rights and (ii) state the amount per share of Series D Preferred Stock that will
be paid or distributed on such redemption or liquidation, dissolution or winding up, as the case
may be.




          (b) Mechanics of Voluntary Conversion. The Voluntary Conversion of Series D Preferred
Stock shall be conducted in the following manner:




               (i) Holder’s Delivery Requirements. To convert Series D Preferred Stock into full
shares of Common Stock on any date (the “Conversion Date”), the holder thereof shall
transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time
on such date, a copy of a fully executed notice of conversion in the form attached hereto as
Exhibit I (the “Conversion Notice”), to the Company at (405) 360-5354, Attention:
Chief Financial Officer. The holders of Series D Preferred Stock shall deliver the original
certificates representing the shares of Series D Preferred Stock being converted, or an
indemnification undertaking with respect to such shares in the case of their loss, theft or
destruction (the “Preferred Stock Certificates”), at such time that a holder’s shares of
Series D Preferred Stock are fully converted or redeemed. With respect to partial conversions of
the Series D Preferred Stock, the Company shall keep written records for each holder of the number
of shares of Series D Preferred Stock converted as of each Conversion Date.



               (ii) Company’s Response. Upon receipt by the Company of a facsimile copy of a fully
executed Conversion Notice, the Company shall immediately send, via facsimile, a confirmation of
receipt of such Conversion Notice to such holder. The Company or its designated transfer agent
(the “Transfer Agent”), as applicable, shall, within three (3) trading days following the
date of receipt by the Company of the facsimile copy of the fully executed



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Conversion Notice, 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.




               (iii) Dispute Resolution. In the case of a dispute as to the arithmetic calculation
of the number of shares of Common Stock to be issued upon conversion, the Company shall cause its
Transfer Agent to promptly issue to the holder the number of shares of Common Stock that is not
disputed and shall submit the arithmetic calculations to the holder via facsimile as soon as
possible, but in no event later than two (2) business days after receipt of such holder’s
Conversion Notice. If such holder and the Company are unable to agree upon the arithmetic
calculation of the number of shares of Common Stock to be issued upon such conversion within one
(1) business day of such disputed arithmetic calculation being submitted to the holder, then the
Company shall within one (1) business day submit via facsimile the disputed arithmetic calculation
of the number of shares of Common Stock to be issued upon such conversion to the Company’s
independent, outside accountant. The Company shall cause the accountant to perform the
calculations and notify the Company and the holder of the results no later than seventy-two (72)
hours from the time it receives the disputed calculations. Such accountant’s calculation shall be
binding upon all parties absent manifest error. The reasonable expenses of such accountant in
making such determination shall be paid by the Company, in the event the holder’s calculation was
correct, or by the holder, in the event the Company’s calculation was correct, or equally by the
Company and the holder in the event that neither the Company’s or the holder’s calculation was
correct. The period of time in which the Company is required to effect conversions or redemptions
under this Certificate of Designation shall be tolled with respect to the subject conversion or
redemption pending resolution of any dispute by the Company made in good faith and in accordance
with this Section 5(b)(iii).



               (iv) Record Holder. The person or persons entitled to receive the shares of Common
Stock issuable upon a conversion of the Series D Preferred Stock shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on the Conversion Date.



               (v) Company’s Failure to Timely Convert. If within three (3) business days of the
Company’s receipt of an executed copy of the Conversion Notice (the “Share Delivery Period”) the
Transfer Agent shall fail to issue and deliver to a holder the number of shares of Common Stock to
which such holder is entitled upon such holder’s conversion of the Series D Preferred Stock (a
“Conversion Failure”), in addition to all other available remedies which such holder may pursue
hereunder and under the Series D Convertible Preferred Stock Purchase Agreement (the “Purchase
Agreement”) among the Company and the initial holders of the Series D Preferred Stock (including
indemnification pursuant to Section 6 thereof), the Company shall pay additional damages to such
holder on each business day after such third (3rd) business day that such conversion is
not timely effected in an amount equal 0.5% of the product of (A) the number of shares of Common
Stock not issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which such
holder is entitled and (B) the Closing Bid Price (as defined in Section 5(c)(iv) below) of the
Common Stock on the last possible date which the Company could have issued such Common Stock to
such holder without violating Section 5(b)(ii). If the



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Company fails to pay the additional damages set forth in this Section 5(b)(v) within five (5)
business days of the date incurred, then such payment shall bear interest at the rate of 2.0% per
month (pro rated for partial months) until such payments are made.




               (vi) Buy-In Rights. In addition to any other rights available to the holders of
Series D Preferred Stock, if the Company fails to cause its Transfer Agent to transmit to the
holder a certificate or certificates representing the shares of Common Stock issuable upon
conversion of the Series D Preferred Stock on or before the Delivery Date, and if after such date
the holder is required by its broker to purchase (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the holder of the shares of Common
Stock issuable upon conversion of Series D Preferred Stock which the holder anticipated receiving
upon such conversion (a “Buy-In”), then the Company shall (1) pay in cash to the holder the
amount by which (x) the holder’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of shares of Common Stock issuable upon conversion of Series D Preferred Stock that the
Company was required to deliver to the holder in connection with the conversion at issue times (B)
the price at which the sell order giving rise to such purchase obligation was executed, and (2) at
the option of the holder, either reinstate the shares of Series D Preferred Stock and equivalent
number of shares of Common Stock for which such conversion was not honored or deliver to the holder
the number of shares of Common Stock that would have been issued had the Company timely complied
with its conversion and delivery obligations hereunder. For example, if the holder purchases
Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted conversion of shares of Common Stock with an aggregate sale price giving rise to such
purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company
shall be required to pay to the holder $1,000. The holder shall provide the Company written notice
indicating the amounts payable to the holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a
holder’s right to pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing shares of Common Stock
upon conversion of the Series D Preferred Stock as required pursuant to the terms hereof.



          (c) Mandatory Conversion.




               (i) The number of outstanding shares of Series D Preferred Stock referred to below in Section
5(c)(ii) on the Mandatory Conversion Date shall, automatically and without any action on the part
of the holder thereof, convert into a number of fully paid and nonassessable shares of Common Stock
equal to the quotient of (i) the Liquidation Preference Amount of the number of shares of Series D
Preferred Stock being converted on the Mandatory Conversion Date plus all accrued but unpaid
dividends divided by (ii) the Conversion Price in effect on the Mandatory Conversion Date.



               (ii) As used herein, “Mandatory Conversion Date” shall mean, subject to the provisions of
Section 7 hereof, the date that the Closing Bid Price (as defined below) of the Common Stock is
equal to or exceeds $7.50 (as may be adjusted for any stock splits or
combinations of the Common Stock) for a period of ten (10) consecutive trading days;
provided,



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that, (A) the first trading day of such ten (10) trading day period shall
commence at least one hundred eighty (180) days following the effective date (the “Effective Date”)
of the registration statement (the “Registration Statement”) providing for the resale of the shares
of Common Stock issuable upon conversion of the Series D Preferred Stock, and (B) the dollar
trading volume of the Common Stock for each of such ten (10) trading days exceeds $1,000,000; and
provided further, that, on the Mandatory Conversion Date, (1) the
Registration Statement is effective and has been effective, without lapse or suspension of any
kind, for a period sixty (60) consecutive calendar days, or the shares of Common Stock into which
the Series D Preferred Stock can be converted may be offered for sale to the public pursuant to
Rule 144(k) under the Securities Act of 1933, as amended, (2) trading in the Common Stock shall not
have been suspended by the Securities and Exchange Commission, the OTC Bulletin Board or The Nasdaq
Capital Market (or other exchange or market on which the Common Stock is trading), and (3) the
Company is in material compliance with the terms and conditions of this Certificate of Designation
and the other Transaction Documents (as defined in the Purchase Agreement). Notwithstanding the
foregoing, the Mandatory Conversion Date shall not occur for as long as (i) a Triggering Event (as
defined in Section 8(d) hereof) shall have occurred and be continuing, or (ii) any event shall have
occurred and be continuing which with the passage of time and the failure to cure would result in a
Triggering Event. In the event that a holder of Series D Preferred Stock may not convert all of
its shares of Series D Preferred Stock upon a Mandatory Conversion because of the restrictions
contained in Section 7 hereof, such number of shares of Series D Preferred Stock that may not be
converted because of the restrictions contained in Section 7 hereof shall remain outstanding, shall
not accrue any dividends pursuant to Section 2 hereof and shall automatically convert into Common
Stock when such holder’s beneficial ownership falls below 4.99% or 9.99%, as applicable. The
Mandatory Conversion Date and the Voluntary Conversion Date collectively are referred to in this
Certificate of Designation as the “Conversion Date.”




               (iii) In the event that the Company completes a bona fide underwritten public offering of the
Common Stock resulting in gross proceeds of at least $20,000,000 at a price per share of at least
$4.50, subject to the approval of the lead underwriter, (A) all of the outstanding shares of Series
D Preferred Stock shall automatically and without any action on the part of a holder, subject to
Section 7 hereof, convert into a number of fully paid and nonassessable shares of Common Stock
equal to the quotient of (i) the Liquidation Preference Amount per share of Series D Preferred
Stock outstanding at such time divided by (ii) the Conversion Price and (B) all accrued and unpaid
dividends on the Series D Preferred Stock shall automatically and without any action on the part of
the holders, subject to Section 7(b) hereof, convert into a number of fully paid and nonassessable
shares of Common Stock as determined in accordance with Section 2(a) hereof.



               (iv) In the event that a holder is restricted from converting its shares of Series D Preferred
Stock and any accrued but unpaid dividends upon the consummation of a bona fide underwritten public
offering referred to above because of the restrictions contained in Section 7 hereof, such holder
shall exchange its shares of Series D Preferred Stock that cannot be converted because of such
restriction for a number of shares of a new series of convertible preferred stock of the Company
(the “Mandatory Conversion Preferred Stock”). The Mandatory Conversion Preferred Stock
issued in exchange for such shares of Series D Preferred Stock shall
pay no dividends, shall have a de-minimus liquidation preference amount and shall convert into



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Common Stock at the Conversion Price when such holder’s beneficial ownership percentage of Common
Stock falls below 4.99% or 9.99%, as applicable. In the event that an exchange pursuant to Section
3(a)(9) of the Securities Exchange Act of 1934, as amended, thereunder is unavailable, upon the
first occurrence of a Mandatory Conversion Date in which the Company is required to issue shares of
Mandatory Conversion Preferred Stock pursuant to this Section 5(c), the Company shall file a
registration statement on Form SB-2 with the Securities and Exchange Commission within thirty (30)
days of such Mandatory Conversion Date providing for the resale of the shares of Common Stock
issuable upon conversion of the Mandatory Conversion Preferred Stock. The Company shall use its
reasonable best efforts to cause such registration statement to become effective within ninety (90)
days of such Mandatory Conversion Date and to remain effective until such date as is the earlier of
(i) the date when all shares of Common Stock covered by such registration statement have been sold
(ii) the date when all shares of Common Stock may be sold without any volume restrictions pursuant
to Rule 144(e) under the Securities Act or (iii) the date on which the shares of Common Stock may
be sold without any restriction pursuant to Rule 144(k) under the Securities Act.




               (v) The term “Closing Bid Price” shall mean, for any security as of any date, the last closing
bid price of such security on the OTC Bulletin Board, Nasdaq Capital Market or other principal
exchange on which such security is traded as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price of such security as reported
by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as reported in the “pink sheets”
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as mutually determined by the Company and the holders of a
majority of the outstanding shares of Series D Preferred Stock.



               (vi) On the Mandatory Conversion Date, the outstanding shares of Series D Preferred Stock
shall be converted automatically without any further action by the holders of such shares and
whether or not the Preferred Stock Certificates representing such shares are surrendered to the
Company or its Transfer Agent. Upon a Mandatory Conversion, each holder of Series D Preferred
Stock shall use its best efforts to cause the Preferred Stock Certificates to be delivered to the
Company or in the event that such Preferred Stock Certificates have been lost, stolen, or
destroyed, such holder shall execute an agreement satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection therewith. Upon the occurrence of a Mandatory
Conversion of the Series D Preferred Stock pursuant to this Section 5, the Company shall cause its
Transfer Agent to deliver the shares of Common Stock issuable upon such conversion (in the same
manner set forth in Section 5(b)(ii)) to the holder within three (3) trading days of the Mandatory
Conversion Date.



          (d) Conversion Price.




               (i) The term “Conversion Price” shall mean $3.00 per share, subject to adjustment under
Section 5(e) hereof. Notwithstanding any adjustment hereunder, at no time
shall the Conversion Price be greater than $3.00 per share except if it is adjusted pursuant
to Section 5(e)(i).



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               (ii) Notwithstanding the foregoing to the contrary, if during any period (a “Black-out
Period”), a holder of Series D Preferred Stock is unable to trade any Common Stock issued or
issuable upon conversion of the Series D Preferred Stock immediately due to the postponement of
filing or delay or suspension of effectiveness of the Registration Statement or because the Company
has otherwise informed such holder of Series D Preferred Stock 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 Series D Preferred Stock or due to the Company exercising its rights
under Section 3(n) of the Registration Rights Agreement (as defined in the Purchase Agreement)),
such holder of Series D Preferred Stock 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 of Series D Preferred Stock 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.



          (e) Adjustments of Conversion Price.




               (i) Adjustments for Stock Splits and Combinations. If the Company shall at any time
or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock,
the Conversion Price shall be proportionately decreased. If the Company shall at any time or from
time to time after the Issuance Date, combine the outstanding shares of Common Stock, the
Conversion Price shall be proportionately increased. Any adjustments under this Section 5(e)(i)
shall be effective at the close of business on the date the stock split or combination becomes
effective.



               (ii) Adjustments for Certain Dividends and Distributions. If the Company 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 Conversion Price 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 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 Company shall at any
time or from time to time after the Issuance Date, make or issue or set a



10









 




record date for the
determination of holders of Common Stock entitled to receive a dividend or other distribution
payable in securities of the Company 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 Series D Preferred
Stock shall receive upon conversions thereof, in addition to the number of shares of Common Stock
receivable thereon, the number of securities of the Company which they would have received had
their Series D Preferred Stock 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 5(e)(iii)
with respect to the rights of the holders of the Series D Preferred Stock; 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; and provided, further, that no such adjustment shall be made if the
holders of Series D Preferred Stock simultaneously receive (i) a dividend or other distribution of
shares of Common Stock in a number equal to the number of shares of Common Stock as they would have
received if all outstanding shares of Series D Preferred Stock had been converted into Common Stock
on the date of such event or (ii) a dividend or other distribution of shares of Series D Preferred
Stock which are convertible, as of the date of such event, into such number of shares of Common
Stock as is equal to the number of additional shares of Common Stock being issued with respect to
each share of Common Stock in such dividend or distribution.




               (iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock
issuable upon conversion of the Series D Preferred Stock 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 5(e)(i), (ii) and
(iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section
5(e)(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 of each share of Series D Preferred Stock shall have the right thereafter to convert such
share of Series D Preferred Stock 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 share of Series D Preferred Stock 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 Company (other than by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 5(e)(i), (ii) and (iii), or a reclassification, exchange or
substitution of shares provided for in Section 5(e)(iv)), or a merger or consolidation of the
Company with or into another corporation where the holders of outstanding voting
securities prior to such merger or consolidation do not own over 50% of the outstanding voting
securities of the merged or consolidated entity, immediately after such merger or consolidation,



11









 




or
the sale of all or substantially all of the Company’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 if necessary and provision shall be made if necessary (by adjustments of the
Conversion Price or otherwise) so that the holder of each share of Series D Preferred Stock shall
have the right thereafter to convert such share of Series D Preferred Stock into the kind and
amount of shares of stock and other securities or property of the Company 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 5(e)(v) with respect to the rights of the
holders of the Series D Preferred Stock after the Organic Change to the end that the provisions of
this Section 5(e)(v) (including any adjustment in the Conversion Price then in effect and the
number of shares of stock or other securities deliverable upon conversion of the Series D Preferred
Stock) 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) In the event the Company, shall, at any time, from time to time, issue or sell any
additional shares of Common Stock (otherwise than as provided in the foregoing subsections (i)
through (v) of this Section 5(e) or pursuant to Common Stock Equivalents (hereafter defined)
granted or issued prior to the Issuance Date) (the “Additional Shares of 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 paragraph (A) of Section
5(e)(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 5(e)(vii).




               (vii) Issuance of Common Stock Equivalents. If the Company, at any time after the
Issuance Date, shall issue any securities convertible into or exchangeable for, directly or
indirectly, Common Stock (“Convertible Securities”), other than the Series D



12









 




Preferred Stock, 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 Company 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 Conversion
Price, 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 or adjusted shall cause the Aggregate Per Common Share Price to be less than
Conversion Price in effect at the time of such amendment or adjustment, then the Conversion Price
then in effect shall be adjusted pursuant to Section (5)(e)(vi) above assuming that all Additional
Shares of Common Stock have been issued pursuant to the Convertible Securities or Common Stock
Equivalents for a purchase price equal to the Aggregate Per Common Share Price. No adjustment of
the Conversion Price 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 therefore, 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 Convertible
Securities other than the Series D Preferred Stock, or any rights or warrants or options to
purchase any such Common Stock or Convertible Securities, shall be issued or sold:



                    (1) in connection with any merger or consolidation in which the Company is the surviving
corporation (other than any consolidation or merger in which the previously outstanding shares of
Common Stock of the Company shall be changed to or exchanged for the stock or other securities of
another corporation), the amount of consideration therefore shall be deemed to be the fair value,
as jointly determined reasonably and in good faith by the Board of Directors of the Company and the
holders of the Series D Preferred Stock, of such portion of the assets and business of the
nonsurviving corporation as such Board and holders of the Series D Preferred Stock may jointly
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 Company in which the Company is not the
surviving corporation, in each case not resulting in a change of control (as defined in Section
5A), or in which the previously outstanding shares of Common Stock of the Company 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
Company for stock or other securities of any corporation, the Company 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



13









 




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 Series D Preferred Stock, the determination of the
applicable Conversion Price or the number of shares of Common Stock issuable upon conversion of the
Series D Preferred Stock 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 Series D Preferred Stock. In the event any consideration received by the Company
for any securities consists of property other than cash, the fair market value thereof at the time
of issuance or as otherwise applicable shall be as determined in good faith by the Board of
Directors of the Company. In the event Common Stock is issued with other shares or securities or
other assets of the Company for consideration which covers both, the consideration computed as
provided in this Section (5)(e)(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Company.




               (ix) Record Date. In case the Company shall take record of the holders of its Common
Stock or any other Preferred 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.



               (x) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the
Company shall not be required to make any adjustment to the Conversion Price upon (i) the Company’s
issuance of any Additional Shares of Common Stock in connection with an acquisition of the Company,
(ii) the Company’s issuance of Additional Shares of Common Stock pursuant to a bona fide firm
underwritten public offering of the Company’s securities, (iii) any issuances of warrants issued
pursuant to the Purchase Agreement, (iv) securities issued pursuant to the conversion or exercise
of convertible or exercisable securities issued or outstanding on or prior to the date hereof or
issued pursuant to the Purchase Agreement (so long as the conversion or exercise price in such
securities are not amended to lower such price and/or adversely affect the holders), (v) any
warrants issued to the placement agent for the transactions contemplated by the Purchase Agreement
or in connection with other financial services rendered to the Company, (vi) the payment of any
dividends on the Series D Preferred Stock, (vii) the Company’s issuance of Additional Shares of
Common Stock in connection with strategic license agreements and other partnering arrangements so
long as such issuances are not for the purpose of raising capital and the Company has received the
prior written consent of the holders of the shares of the Series D Preferred Stock outstanding at
such time, and (viii) the Company’s issuance of Common Stock or the issuance or grants of options
to purchase Common Stock pursuant to the Company’s stock option plans and employee stock purchase
plans outstanding on the date hereof and which have been approved by the Board of Directors of the
Company.



          (f) No Impairment. The Company 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
Company, but will at all times in good faith, assist in the carrying out of all the provisions of
this




14









 







Section 5 and in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series D Preferred Stock against impairment.




          (g) 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 the Series D Preferred Stock pursuant to this Section 5, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of such Series D Preferred Stock a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The
Company shall, upon written request of the holder of such affected Series D Preferred Stock, at any
time, furnish or cause to be furnished to such holder a like certificate setting forth such
adjustments and readjustments, the 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 a share of such Series D Preferred Stock. Notwithstanding the
foregoing, the Company shall not be obligated to deliver a certificate unless such certificate
would reflect an increase or decrease of at least one percent of such adjusted amount.




          (h) Issue Taxes. The Company 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 shares of Series D Preferred Stock pursuant thereto;
provided, however, that the Company shall not be obligated to pay any transfer
taxes resulting from any transfer requested by any holder in connection with any such conversion.




          (i) Notices. All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by facsimile or three (3) business days following
being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed
to the holder of record at its address appearing on the books of the Company. The Company will
give written notice to each holder of Series D Preferred Stock at least twenty (20) days prior to
the date on which the Company closes its books or takes a record (I) with respect to any dividend
or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to
holders of Common Stock or (III) 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 Company will also give written
notice to each holder of Series D Preferred Stock at least twenty (20) 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 such holder prior to such information being made known to the
public.




          (j) Fractional Shares. No fractional shares of Common Stock shall be issued upon
conversion of the Series D Preferred Stock. In lieu of any fractional shares to which the holder
would otherwise be entitled, the Company shall pay cash equal to the product of such
fraction multiplied by the average of the Closing Bid Prices of the Common Stock for the five
(5) consecutive trading immediately preceding the Voluntary Conversion Date or the Mandatory
Conversion Date, as applicable.




15









 








          (k) Reservation of Common Stock. The Company shall, so long as any shares of Series D
Preferred Stock are outstanding, reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the Series D Preferred Stock, a
number of shares of Common Stock equal to at least one hundred twenty percent (120%) of the number
of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all
of the Series D Preferred Stock then outstanding without regard to any limitations on conversion.
The initial number of shares of Common Stock reserved for conversions of the Series D Preferred
Stock and any increase in the number of shares so reserved shall be allocated pro rata among the
holders of the Series D Preferred Stock based on the number of shares of Series D Preferred Stock
held by each holder of record at the time of issuance of the Series D Preferred Stock or increase
in the number of reserved shares, as the case may be. In the event a holder shall sell or
otherwise transfer any of such holder’s shares of Series D Preferred Stock, each transferee shall
be allocated a pro rata portion of the number of reserved shares of Common Stock reserved for such
transferor. Any shares of Common Stock reserved and which remain allocated to any person or entity
which does not hold any shares of Series D Preferred Stock shall be allocated to the remaining
holders of Series D Preferred Stock, pro rata based on the number of shares of Series D Preferred
Stock then held by such holder.




          (l) Retirement of Series D Preferred Stock. Conversion of Series D Preferred Stock
shall be deemed to have been effected on the Conversion Date. Upon conversion of only a portion of
the number of shares of Series D Preferred Stock represented by a certificate surrendered for
conversion, the Company shall issue and deliver to such holder at the expense of the Company, a new
certificate covering the number of shares of Series D Preferred Stock representing the unconverted
portion of the certificate so surrendered as required by Section 5(b)(ii).




          (m) Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of Series D Preferred Stock 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 Company 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.




     5A. Change of Control. Notwithstanding anything to the contrary set forth in this
Certificate of Designation, in the event of any consolidation or merger of the Company in which
the Company is not the surviving corporation or in which the previously outstanding shares of
Common Stock of the Company shall be changed into or exchanged for the stock or other securities of
such surviving corporation, in each case resulting in a change of control, the holder shall acquire
securities issued by the surviving corporation in exchange of holder’s Series D Preferred Stock,
which securities shall have terms and conditions at least as favorable as the Series D Preferred
Stock. For purposes of this Section 5A, “change of control” shall mean a
transaction in which a third party acquires greater than fifty percent (50%) of the voting rights
in one or a series of related transactions.



16









 





     6. No Preemptive Rights. Except as provided in Section 5 hereof and in the Purchase
Agreement, no holder of the Series D Preferred Stock shall be entitled to rights to subscribe for,
purchase or receive any part of any new or additional shares of any class, whether now or
hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible
into or exchangeable for shares of any class, but all such new or additional shares of any class,
or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for
shares, may be issued and disposed of by the Board of Directors on such terms and for such
consideration (to the extent permitted by law), and to such person or persons as the Board of
Directors in their absolute discretion may deem advisable.



     7. Conversion Restrictions.



          (a) Notwithstanding anything to the contrary set forth in this Certificate of Designation, at
no time may a holder of shares of Series D Preferred Stock convert shares of the Series D Preferred
Stock if the number of shares of Common Stock to be issued pursuant to such conversion would cause
the number of shares of Common Stock owned by such holder at such time to exceed, when aggregated
with all other shares of Common Stock owned by such holder at such time, the number of shares of
Common Stock which would result in such holder beneficially owning (as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in
excess of 4.99% of the then issued and outstanding shares of Common Stock outstanding at such time;
provided, however, that upon a holder of Series D Preferred Stock providing the
Company with sixty-one (61) days notice (pursuant to Section 5(i) hereof) (the “Waiver Notice”)
that such holder would like to waive Section 7(a) of this Certificate of Designation with regard to
any or all shares of Common Stock issuable upon conversion of Series D Preferred Stock, this
Section 7(a) shall be of no force or effect with regard to those shares of Series D Preferred Stock
referenced in the Waiver Notice.




          (b) Notwithstanding anything to the contrary set forth in this Certificate of Designation, at
no time may a holder of shares of Series D Preferred Stock convert shares of the Series D Preferred
Stock if the number of shares of Common Stock to be issued pursuant to such conversion would cause
the number of shares of Common Stock owned by such holder at such time to exceed, when aggregated
with all other shares of Common Stock owned by such holder at such time, the number of shares of
Common Stock which would result in such holder beneficially owning (as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in
excess of 9.99% of the then issued and outstanding shares of Common Stock outstanding at such time;
provided, however, that upon a holder of Series D Preferred Stock providing the
Company with a Waiver Notice that such holder would like to waive Section 7(b) of this Certificate
of Designation with regard to any or all shares of Common Stock issuable upon conversion of Series
D Preferred Stock, this Section 7(b) shall be of no force or effect with regard to those shares of
Series D Preferred Stock referenced in the Waiver Notice.




     8. Redemption.



          (a) Intentionally Omitted.





17









 








          (b)  Redemption Option Upon Triggering Event. In addition to all other rights of the
holders of Series D Preferred Stock contained herein, after a Triggering Event (as defined below),
each holder of Series D Preferred Stock shall have the right, at such holder’s option, to require
the Company to redeem for cash all or a portion of such holder’s shares of Series D Preferred Stock
at a price per share of Series D Preferred Stock equal to one hundred twenty percent (120%) of the
Liquidation Preference Amount, plus any accrued but unpaid dividends and liquidated damages the
“Triggering Event Redemption Price”).




          (c) Intentionally Omitted.




          (d) “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 shares of Series D Preferred Stock 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) and such lapse continues for a period of twenty
(20) consecutive trading days, or (ii) is unavailable to the holder of the Series D Preferred Stock
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 such holder’s
Series D Preferred Stock can be converted cannot be sold in the public securities market pursuant
to Rule 144(k) (“Rule 144(k)”) under the Securities Act of 1933, as amended, provided that
the cause of such lapse or unavailability is not due to factors solely within the control of such
holder of Series D Preferred Stock;



               (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, The Nasdaq National
Market, The Nasdaq Capital Market, the New York Stock Exchange, Inc. or the American Stock
Exchange, Inc., for a period of five (5) consecutive trading days;



               (iii) the Company’s notice to any holder of Series D Preferred Stock, including by way of
public announcement, at any time, of its inability to comply (including for any of the reasons
described in Section 9) or its intention not to comply with proper requests for conversion of any
Series D Preferred Stock into shares of Common Stock; or



               (iv) the Company’s failure to comply with a Conversion Notice tendered in accordance with the
provisions of this Certificate of Designation within ten (10) business days after the receipt by
the Company of a fully executed copy of the Conversion Notice; or



               (v) the Company deregisters its shares of Common Stock and as a result such shares of Common
Stock are no longer publicly traded; or



               (vi) the Company consummates a “going private” transaction and as a result the Common Stock is
no longer registered under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as
amended; or



18









 





               (vii) the Company breaches any representation, warranty, covenant or other term or condition
of the Purchase Agreement, this Certificate of Designation or any other agreement, document,
certificate or other instrument delivered in connection with the transactions contemplated thereby
or hereby, except to the extent that such breach would not have a Material Adverse Effect (as
defined in the Purchase Agreement) and except, in the case of a breach of a covenant which is
curable, only if such breach continues for a period of a least ten (10) days.



          (e) Intentionally Omitted.




          (f) Mechanics of Redemption at Option of Buyer Upon Triggering Event. Within one (1)
day after the occurrence of a Triggering Event, the Company shall deliver written notice thereof
via facsimile and overnight courier (“Notice of Triggering Event”) to each holder of Series D
Preferred Stock. 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 Series D Preferred Stock
then outstanding may require the Company to redeem all of the Series D Preferred Stock by
delivering written notice thereof via facsimile and overnight courier (“Notice of Redemption at
Option of Buyer Upon Triggering Event”) to the Company, which Notice of Redemption at Option of
Buyer Upon Triggering Event shall indicate (i) the number of shares of Series D Preferred Stock
that such holder is electing to redeem and (ii) the applicable Triggering Event Redemption Price,
as calculated pursuant to Section 8(b) above.




          (g) Payment of Triggering Event Redemption Price. Upon the Company’s receipt of a
Notice(s) of Redemption at Option of Buyer Upon Triggering Event from any holder of Series D
Preferred Stock, the Company shall immediately notify each holder of Series D Preferred Stock by
facsimile of the Company’s receipt of such Notice(s) of Redemption at Option of Buyer Upon
Triggering Event and each holder which has sent such a notice shall promptly submit to the Company
such holder’s Preferred Stock Certificates which such holder has elected to have redeemed. The
Company shall pay the Triggering Event Redemption Price in cash. If the Company shall fail to
redeem all of the Series D Preferred Stock submitted for redemption (other than pursuant to a
dispute as to the arithmetic calculation of the Triggering Event Redemption Price), in addition to
any remedy such holder of Series D Preferred Stock may have under this Certificate of Designation
and the Purchase Agreement, the Triggering Event Redemption Price payable in respect of such
unredeemed Series D Preferred Stock shall bear interest at the rate of 2.0% per month (prorated for
partial months) until paid in full. Until the Company pays such unpaid applicable Triggering Event
Redemption Price in full to a holder of shares of Series D Preferred Stock submitted for
redemption, such holder shall have the option (the “Void Optional Redemption Option”) to, in lieu
of redemption, require the Company to promptly return to such holder(s) all of the shares of Series
D Preferred Stock that were submitted for redemption by such holder(s) under this Section 8 and for
which the applicable Triggering Event Redemption Price has not been paid, by sending written notice
thereof to the Company via facsimile (the “Void Optional Redemption Notice”). Upon the Company’s
receipt
of such Void Optional Redemption Notice(s) and prior to payment of the full applicable
Triggering Event Redemption Price to such holder, (i) the Notice(s) of Redemption at Option of
Buyer Upon Triggering Event shall be null and void with respect to those shares of Series D
Preferred Stock submitted for redemption and for which the applicable Triggering Event




19









 







Redemption
Price has not been paid and (ii) the Company shall immediately return any Series D Preferred Stock
submitted to the Company by each holder for redemption under this Section 8(d) and for which the
applicable Triggering Event Redemption Price has not been paid and (iii) the Conversion Price of
such returned shares of Series D Preferred Stock shall be adjusted to the lesser of (A) the
Conversion Price and (B) the lowest Closing Bid Price during the period beginning on the date on
which the Notice(s) of Redemption of Option of Buyer Upon Triggering Event is delivered to the
Company and ending on the date on which the Void Optional Redemption Notice(s) is delivered to the
Company; 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 Redemption
Notice and exercise of its rights following such notice shall not effect the Company’s obligations
to make any payments which have accrued prior to the date of such notice other than interest
payments. Payments provided for in this Section 8 shall have priority to payments to other
stockholders in connection with a Triggering Event.




     9. Inability to Fully Convert.



          (a) Holder’s Option if Company Cannot Fully Convert. If, upon the Company’s receipt
of a Conversion Notice or on the Mandatory Conversion Date, the Company cannot issue shares of
Common Stock registered for resale under the Registration Statement for any reason, including,
without limitation, because the Company (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 Company or its securities from issuing all of the Common
Stock which is to be issued to a holder of Series D Preferred Stock pursuant to a Conversion Notice
or (y) subsequent to the Effective Date, fails to have a sufficient number of shares of Common
Stock registered for resale under the Registration Statement, then the Company shall issue as many
shares of Common Stock as it is able to issue in accordance with such holder’s Conversion Notice
and pursuant to Section 5(b)(ii) above and, with respect to the unconverted Series D Preferred
Stock, the holder, solely at such holder’s option, can elect, within five (5) business days after
receipt of notice from the Company thereof to:




               (i) intentionally omitted;



               (ii) if the Company’s inability to fully convert Series D Preferred Stock is pursuant to
Section 9(a)(y) above, require the Company to issue restricted shares of Common Stock in accordance
with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above;



               (iii) void its Conversion Notice and retain or have returned, as the case may be, the shares
of Series D Preferred Stock that were to be converted pursuant to such holder’s Conversion Notice
(provided that a holder’s voiding its Conversion Notice shall not
effect the Company’s obligations to make any payments which have accrued prior to the date of
such notice);



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               (iv) exercise its Buy-In rights pursuant to and in accordance with the terms and provisions of
Section 5(b)(vi) hereof.



          (b) Mechanics of Fulfilling Holder’s Election. The Company shall immediately send via
facsimile to a holder of Series D Preferred Stock, upon receipt of a facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as described in Section 9(a) above, a
notice of the Company’s inability to fully satisfy such holder’s Conversion Notice (the “Inability
to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason
why the Company is unable to fully satisfy such holder’s Conversion Notice and (ii) the number of
Series D Preferred Stock which cannot be converted. Such holder shall notify the Company of its
election pursuant to Section 9(a) above by delivering written notice via facsimile to the Company
(“Notice in Response to Inability to Convert”).




          (c) Intentionally Omitted.




          (d) Pro-rata Conversion and Redemption. In the event the Company receives a
Conversion Notice from more than one holder of Series D Preferred Stock on the same day and the
Company can convert and redeem some, but not all, of the Series D Preferred Stock pursuant to this
Section 9, the Company shall convert and redeem from each holder of Series D Preferred Stock
electing to have Series D Preferred Stock converted and redeemed at such time an amount equal to
such holder’s pro-rata amount (based on the number shares of Series D Preferred Stock held by such
holder relative to the number of shares of Series D Preferred Stock outstanding) of all shares of
Series D Preferred Stock being converted and redeemed at such time.




     10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting, of the holders of
not less than seventy-five percent (75%) of the then outstanding shares of Series D Preferred
Stock, shall be required (a) for any change to this Certificate of Designation or the Company’s
Certificate of Incorporation which would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series D Preferred Stock or (b) for the issuance of
shares of Series D Preferred Stock other than pursuant to the Purchase Agreement.



     11. Lost or Stolen Certificates. Upon receipt by the Company of evidence satisfactory
to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates
representing the shares of Series D Preferred Stock, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the holder to the Company and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company
shall execute and deliver new preferred stock certificate(s) of like tenor and date;
provided, however, the Company shall not be obligated to re-issue Preferred Stock
Certificates if the holder contemporaneously requests the Company to convert such shares of Series
D Preferred Stock into Common Stock.



     12. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief.
The remedies provided in this Certificate of Designation shall be cumulative and in addition to all
other remedies available under this Certificate of Designation, at law or in equity (including a
decree of specific performance and/or other injunctive relief), no remedy contained herein shall



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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 Company to comply with
the terms of this Certificate of Designation. 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 Company (or the performance thereof). The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to the holders of the Series
D Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the holders of the
Series D Preferred Stock shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic loss and without any
bond or other security being required.




     13. Specific Shall Not Limit General; Construction. No specific provision contained
in this Certificate of Designation shall limit or modify any more general provision contained
herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and
all initial purchasers of the Series D Preferred Stock and shall not be construed against any
person as the drafter hereof.



     14. Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of
Series D Preferred Stock 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.



     15. Disclosure. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Certificate of Designation, unless the Company has in good faith determined
that the matters relating to such notice do not constitute material, nonpublic information relating
to the Company or its Subsidiaries, the Company shall within one (1) Business Day after any such
receipt or delivery publicly disclose such material, nonpublic information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice contains material,
nonpublic information relating to the Company or its Subsidiaries, the Company so shall indicate to
the Holders contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holders shall be allowed to presume that all matters relating to such notice do not
constitute material, nonpublic information relating to the Company or its Subsidiaries.



22









 





     IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does
affirm the foregoing as true this ___day of May, 2006.



	 	 	 	 	 
	 	DIRT MOTOR SPORTS, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 




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EXHIBIT I




DIRT MOTOR SPORTS, INC.

CONVERSION NOTICE



Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the
Series D Preferred Stock of Dirt Motor Sports, Inc. (the “Certificate of Designation”). In
accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to
convert the number of shares of Series D Preferred Stock, par value $.01 per share (the “Preferred
Shares”), of Dirt Motor Sports, Inc., a Delaware corporation (the “Company”), indicated below into
shares of Common Stock, par value $.0001 per share (the “Common Stock”), of the Company, by
tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.




	 	 	 
	     Date of Conversion:

	                                                            	 
	 
	 	 
	     Number of Preferred Shares to be converted:

	                    	 
	 
	 	 
	     Stock certificate no(s). of Preferred Shares to be converted:                     
	 
	 	 
	     The Common Stock have been sold pursuant to the Registration Statement (as defined in the
Purchase Agreement): YES                                 NO                     
	 
	 	 
	Please confirm the following information:
	 	 
	 
	 	 
	     Conversion Price:

	 	                                                            
	 
	 	 
	     Number of shares of Common Stock to be issued:

	 	                                                            
	 
	 	 
	Please issue the Common Stock into which the Preferred Shares are being converted and, if
applicable, any check drawn on an account of the Company in the following name and to the following
address:
	 
	 	 
	     Issue to:

	 	                                                            
	 

	 	                                                            
	 
	 	 
	     Facsimile Number:

	 	                                                            
	 
	 	 
	     Authorization:

	 	                                                            
	 

	 	By:                                                       
	 

	 	Title:                                                    
	 
	 	 
	     Dated:
	 	 







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