exhibit_4-1.htm


    
      

    

    Exhibit
4.1

    
 

    THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE 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 AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF MAY BE SOLD, TRANSFERRED,  OR OTHERWISE DISPOSED OF, UNDER AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES
LAWS.

    


    UNLESS
PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS SECURITY MUST NOT
TRADE THE SECURITY BEFORE NOVEMBER 17, 2008.

    


    


    VALCENT
PRODUCTS INC.

    


    Zero
Coupon Senior Secured Convertible Promissory Note

    due July
16, 2009

    


    
       

      
        	No. 2	
                 ______________

              


      

      Dated:  July
16, 2008

    

    


    


    For value
received, VALCENT PRODUCTS INC., a corporation organized under the laws of
Alberta, Canada (the “Maker”), hereby
promises to pay to the order of ___________, with an address 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 and redemption fees
thereon.  Concurrently with the issuance of this Note, the Maker is
issuing separate zero coupon senior secured convertible promissory 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, plus an amount equal to
30% of the then outstanding principal balance, of this Note shall be due and
payable on July 16, 2009 (the “Maturity Date”) or at
such earlier time as provided herein.

     


    
      
         


      

      
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    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 July 16, 2008 (the
“Purchase
Agreement”), by and among the Maker, the Holder and the other parties
named 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.  This
Note is issued as an original issue discount obligation reflecting an interest
rate of 12%, and all references to the principal amount hereof shall mean and
refer to the stated value of this Note ($_______), as the same may be reduced
pursuant to conversions and redemptions in accordance with the terms
hereof.  Upon the occurrence of an Event of Default (as defined in
Section 2.1 hereof), 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 eighteen percent (18%) and the maximum applicable legal rate per annum,
calculated based on a 360-day year. The payment of any
prepayment, repayment or redemption fee hereunder (whether on maturity or
otherwise) represents compensation for the termination of the conversion option
contained herein, the value of which the Maker acknowledges.

     

    Section
1.3          Payment of Principal;
Prepayment.   The principal amount hereof shall be paid in
full on the Maturity Date or, if earlier, upon acceleration of this Note in
accordance with the terms hereof.  Upon repayment on the Maturity
Date, the Maker shall pay a redemption fee equal to 30% of the principal amount
hereof repaid (in addition to the principal amount then
outstanding).  Any amount of principal repaid hereunder may not be
reborrowed.  The Maker may not prepay any portion of the principal
amount of this Note without the prior written consent of the Holder, which may
be withheld in the Holder’s sole and absolute discretion, except as set forth
below in this Section 1.3 and as set forth in Section 3.6(k)
hereof.

     

    (a)           From
the Issuance Date though six months from the Issuance Date (the “Initial
Period”):

     

    (i)           The
Issuer may prepay this Note in full by making payment of the principal amount
due under the Note, plus a redemption fee of 30% of the principal amount hereof,
at any time without notice;

    


    (ii)           If
Holder provides the Issuer notice of its intent to convert any portion of this
Note during the Initial Period, in lieu thereof, the Issuer may elect to prepay
the full principal amount of the Note, together with payment of a redemption fee
of 30% of the principal amount hereof, by providing Holder three days notice of
its intent to prepay the Note in full.  The Issuer shall then have ten
business days to pay the Note together with the redemption fee in
full.

    


    (b)           From
the end of the Initial Period through the Maturity Date, Issuer may prepay the
principal amount due the Note, plus a redemption fee of 30% of the principal
amount hereof, at any time by giving the Holder ten business days
notice.  Upon receipt of Issuer’s intent to prepay the Note, in lieu
thereof, the Holder may elect to convert the Note as provided in Section 3.6(k)
of this Note.


    
      
         


      

      
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    (c)           
This Note is further subject to mandatory prepayment at the option of the Holder
as set forth in Section 3.6 hereof.


    


    Section
1.4          Security
Agreement.  The obligations of the Maker hereunder are secured
by a continuing security interest in substantially all of the assets of the
Maker and the Maker’s subsidiaries pursuant to the terms of a Security Agreement
dated as of July 16, 2008 by and among the Maker and the Maker’s subsidiaries,
on the one hand, and the Holder and the Other Holders, on the other
hand.

     

    Section
1.5          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 may 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
1.6          Transfer.  Subject
to the prior written consent of Maker, which consent will not be unreasonably
withheld, this Note may be transferred or sold, subject to the provisions of
Section 5.8 of this Note, or pledged, hypothecated or otherwise granted as
security by the Holder; provided, however, that any transfer or sale of this
Note must be in compliance with all applicable securities laws.

     

    Section
1.7         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 a standard indemnity, 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
1.8           Use of
Proceeds.  The Maker shall use the proceeds of this Note as set
forth in the Purchase Agreement.

     

     

    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:

     

    (a)           any
default in the payment of (1) the principal amount hereunder when due, or (2)
within 5 Business Days after receiving written demand from the Holder, interest
on, or redemption or other fees in respect of, this Note, as and when the same
shall become due and payable (whether on the Maturity Date or by acceleration or
otherwise); or

     

    (b)           the
Maker shall fail to observe or perform any other covenant or agreement contained
in this Note, which failure is not cured, if possible to cure, within five (5)
Business Days after the earlier of (i) Maker’s receipt of notice thereof or (ii)
the date that the Maker knew or became aware, or should reasonably have known or
been aware, of such failure; or

     


    
      
         


      

      
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    (c)           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 American Stock Exchange, the Nasdaq Capital Markets, the Nasdaq
Global Market, the Nasdaq Global Select Market or The New York Stock Exchange,
Inc. for a period of five (5) consecutive Trading Days, such a suspension shall
only constitute an Event of Default if the Holder provides the Maker written
notification that it deems such suspension to be an Event of Default;
or

     

    (d)           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 3.7(a) hereof) or its intention not to comply with proper requests for
conversion of this Note into shares of Common Stock; or

     

    (e)           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) make the payment
of any fees under this Note, the Purchase Agreement or the other Transaction
Documents, which failure is not remedied within five (5) Business Days after the
earlier of (i) the Maker’s receipt of notice thereof or (ii) the date that the
Maker knew or became aware, or should reasonably have known or been aware, of
such failure; or

     

    (f)           the
Maker or the Guarantors shall fail to perform or observe any covenant, condition
or agreement contained in the Transaction Documents (other than this Note and
the Other Notes) and such default is not fully cured within five (5) Business
Days after the earlier of (i) the Maker’s receipt of notice thereof or (ii) the
date that the Maker knew or became aware, or should reasonably have known or
been aware, of such failure; or

     

    (g)           default
shall be made in the performance or observance of (i) any covenant, condition or
agreement contained in this Note and such default is not fully cured within five
(5) Business Days after the earlier of (i) the Maker’s receipt of notice thereof
or (ii) the date that the Maker knew or became aware, or should reasonably have
known or been aware, of such default;  or

     

    (h)           any
material representation or warranty made by the Maker herein or in the Purchase
Agreement or any other Transaction Document shall prove to have been false or
incorrect or breached in a material respect on the date as of which made;
or

     

    (i)           any
failure by Maker to cure within five (5) Business Days after the earlier of (i)
the Maker’s receipt of notice of or (ii) the date that the Maker knew or became
aware, or should reasonably have known or been aware, of  (A) 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 $50,000 or (B) 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

     


    
      
         


      

      
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    (j)           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

     

    (k)           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 thirty
(30) 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 thirty (30) days;
or

     

    (l)           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 sold pursuant to
Rule 144; or

     

    (m)           (i)
any default or event of default, or event that, with the passage of time or
giving of notice or both would constitute a default or event of default, shall
have occurred under (A) the Technology License Agreement (the “Vertigro License
Agreement”) among Pagic LP (“Pagic”), West Peak Ventures of Canada, Ltd. and
Vertigro Algae Technologies, LLC (“Vertigro”), (B) the Master License Agreement
between Pagic (as successor to MK Enterprises LLC) and the Maker, and (C) the
Product Development Agreement between Pagic (as successor to MK Enterprises LLC)
and the Maker ((A), (B), and (C) collectively referred to as the “License
Agreements”); or (ii) any License Agreement shall have been terminated by any of
the parties thereto; or (iii) Vertigro shall not be permitted or authorized to
use the Intellectual Property (as defined in the Vertigro License Agreement) as
contemplated by the Vertigro License Agreement for any reason; or

     


    
      
         


      

      
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    (n)           the
occurrence of any Event of Default under the Other Notes (after giving effect to
any cure period set forth therein).

     

    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, plus fees and expenses, due and payable pursuant to Section
3.6(a) hereof, 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 Sections 2.1 (j) or (k)
above, the outstanding principal balance and accrued interest hereunder, plus
fees and expenses, shall be immediately and automatically due and payable
pursuant to Section 3.6(a) 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 the Conversion Price per share on the
Trading Day immediately preceding the date the Holder demands conversion
pursuant to this clause, 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 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.  Upon and after an Event of Default,
this Note shall bear interest at the default rate set forth in Section 1.2
hereof.

     

     

    ARTICLE
III

     

    ­CONVERSION;
ANTIDILUTION; PREPAYMENT

     

    Section
3.1           Conversion
Option.  At any time and from time to 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
defined in Section 3.2 hereof) 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: (604) 606-7980,
Attn.: Grant
Atkins) (the “Voluntary Conversion
Date”), provided, however, that the Conversion Price shall be subject to
adjustment as described in Section 3.5 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.  

     

     


    
      
         


      

      
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    Section
3.2           Conversion Price.  The term
“Conversion Price” shall mean $.51, subject to adjustment under Section 3.5
hereof (the “Set Price”); provided, that, at any time and from time to time
after January 16, 2009, the Conversion Price shall equal the lesser of the then
effective Set Price and seventy percent (70%) of the average of the five lowest
Closing Bid Prices for the ten (10) preceding Trading Days.

     

    
      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 (as
evidenced by documentation furnished to and reasonably satisfactory to the
Maker) or such shares may be sold pursuant to Rule 144 or other exemption under
the Securities Act.  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, if applicable, certificates) 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 (if applicable), together with interest on such amount at a rate of
10% 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)
$2,000 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.

     


    
      
         


      

      
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    (c)           In
addition to any other rights available to the Holder, if the Maker fails to
cause its transfer agent to transmit via DWAC or transmit to the Holder a
certificate or certificates representing the shares of Common Stock issuable
upon conversion of this Note 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
this Note which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Maker 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 this Note that the
Maker 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 portion of the Note 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 Maker 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 Maker shall be
required to pay the Holder $1,000. The Holder shall provide the Maker 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 Maker.  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 Maker’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant to the
terms hereof.

     

    
      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, 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 9.99% of the then issued
and outstanding shares of Common Stock outstanding at such time; provided, however, that upon
the Holder providing the Maker with 61 days’ prior written notice that the
Holder would like to waive Section 3.4(a) of this Note with regard to any or all
shares of Common Stock issuable upon conversion of this Note, this Section
3.4(a) shall be of no force or effect with regard to all or a portion of the
Note referenced in the Waiver Notice.

     

     

     

     

     

     

    
      
        
        

      

      
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    Section
3.5           Adjustment of Conversion
Price.


    (a)           Until
the Note has been paid in full or converted in full, the Set Price shall be
subject to adjustment from time to time as follows (but shall not be increased,
other than pursuant to Section 3.5(a)(i) hereof):

     

    (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 Set 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 Set Price in effect immediately prior to the
combination shall be proportionately increased.  Any adjustments under
this Section 3.5(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 become irrevocably obligated
to issue the holders of Common Stock a dividend or other distribution payable in
shares of Common Stock, then, and in each event, the applicable Set Price in
effect immediately prior to such event shall be decreased as of the time of such
issuance or, in the event a record date shall have been fixed, as of the close
of business on such record date, by multiplying, the applicable Set 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 become irrevocably obligated
to issue the holders of its Common Stock a dividend or other distribution
payable in other than shares of Common Stock, then, and in each event, an
appropriate revision to the applicable Set Price shall be made and provision
shall be made (by adjustments of the Set 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 or other issuer (as applicable) 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 3.5(a)(iii) with respect to the
rights of the holders of this Note; provided, however, that if a
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 Set Price shall
be adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions.

     


    
      
         


      

      
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    (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 3.5(a)(i), (ii) and (iii), or
a reorganization, merger, consolidation, or sale of assets provided for in
Section 3.5(a)(v)), then, and in each event, an appropriate revision to the Set
Price shall be made and provisions shall be made (by adjustments of the Set
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 3.5(a)(i), (ii) and (iii), or a reclassification, exchange or
substitution of shares provided for in Section 3.5(a)(iv)), or a merger or
consolidation of the Maker with or into another Person 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, (A) if the surviving
entity in any such Organic Change is a public company the traded equity
securities of which are registered pursuant to the Securities Exchange Act of
1934, as amended, and such securities are listed or quoted on a national
securities exchange (as defined in the Securities Exchange Act of 1934) or the
OTC Bulletin Board, an appropriate revision to the Set Price shall be made and
provision shall be made (by adjustments of the Set 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, and (B) if the
surviving entity in any such Organic Change is not such a public company, or its
equity securities are not listed or quoted on a national securities exchange or
the OTC Bulletin Board, the Holder shall have the right to demand prepayment
pursuant to Section 3.6(b) hereof.  In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section
3.5(a)(v) with respect to the rights of the Holder after the Organic Change to
the end that the provisions of this Section 3.5(a)(v) (including any adjustment
in the applicable Set Price then in effect and the number of shares of stock or
other securities deliverable upon conversion of this Note) 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; Below Market Price Issuances. In the
event the Maker, 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 3.5(a)) (“Additional Shares of Common
Stock”), at a price per share less than the Conversion Price then in
effect or without consideration, then the Set Price upon each such issuance
shall be reduced to a price equal to the consideration per share paid for such
Additional Shares of Common Stock.  If the Maker shall issue Common
Stock or rights, options or warrants entitling the recipient or holder thereof
to subscribe for or purchase shares of Common Stock at a price per share less
than the VWAP on the date of issuance, but higher than the Set Price then in
effect, the Set Price shall be multiplied by a fraction, of which the
denominator shall be the number of shares of the Common Stock outstanding on the
date of issuance of such Common Stock or rights or warrants plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered (assuming receipt by the Maker in full of all consideration payable upon
exercise of such rights, options or warrants) would purchase at such
VWAP.  Such adjustment shall be made whenever such securities are
issued, and shall become effective immediately after the record date (if
applicable) for the determination of stockholders entitled to receive such
rights, options or warrants.

     


    
      
         


      

      
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    (vii)        Issuance of Common Stock
Equivalents.  The provisions of this Section 3.5(a)(vii) shall
apply if (a) the Maker, at any time after the Issuance Date, shall issue any
securities convertible into or exchangeable for, directly or indirectly, Common
Stock (“Convertible
Securities”), or (b) any rights or warrants or options to purchase any
such Common Stock or Convertible Securities (collectively, the “Common Stock
Equivalents”) shall be issued or sold.  If the price per share
for which Additional Shares of Common Stock may be issuable pursuant to any such
Common Stock Equivalent shall be less than the applicable Set 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 be less than the
applicable Set Price in effect at the time of such amendment or adjustment, then
the applicable Set Price upon each such issuance or amendment shall be adjusted
as provided in the first sentence of subsection (vi) of this Section
3.5(a).

     

    (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 3.5(a)(viii) shall be allocated among such securities
and assets as determined in good faith by the Board of Directors of the Maker;
or

     


    
      
         


      

      
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    (3)          
except in the circumstances described in subsections (1) and (2) above, for any
non-cash consideration, the value of the consideration other than cash received
by the Maker shall be deemed to be the fair market value of such consideration,
as determined reasonably and in good faith by the Maker’s Board of Directors and
deemed to be acceptable by the Holder.

    


    (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 Set Price in
connection with the following: (a) issuances of options to employees, officers
or directors of the Maker pursuant to any compensatory stock option plan
existing on the date hereof (and not amended to increase the shares available
thereunder) if such grants were duly approved by a majority of the non-employee
members of the Board of Directors of the Maker or a majority of the members of a
committee of non-employee directors established for such purpose and such
options have an exercise price in excess of the Closing Bid Price on the date of
grant; (b) the issuance of stock grants or stock bonuses to employees, officers
or directors of the Maker pursuant to any compensatory stock option plan
existing on the date hereof (and not amended to increase the shares available
thereunder) if such issuances were duly approved by a majority of the
non-employee members of the Board of Directors of the Maker or a majority of the
members of a committee of non-employee directors established for such purpose;
(c) issuances of securities upon the exercise or exchange of or conversion of
any securities issued hereunder and/or securities exercisable or exchangeable
for or convertible into shares of Common Stock issued and outstanding on the
Issuance Date, provided that such securities have not been amended since the
Issuance Date to increase the number of such securities or to decrease the
exercise, exchange or conversion price of any such securities; (d) securities
issued pursuant to acquisitions or strategic transactions, provided any such
issuance shall only be to a person which is, itself or through its subsidiaries,
an operating company in a business synergistic with the business of the Maker
and in which the Maker receives benefits in addition to the investment of funds,
but shall not include a transaction in which the Maker is issuing securities
primarily for the purpose of raising capital or to an entity whose primary
business is investing in securities; (e) shares of Common Stock issued upon
conversion of the Note and the Other Notes, the Warrants and the warrants issued
to the Finder on the date hereof as described in the Purchase Agreement; and (f)
shares of Common Stock to be issued pursuant to obligations existing on the date
hereof under the License Agreements (existing and as in effect as of the date
hereof) in an amount not to exceed 300,000 shares.


    
      
         


      

      
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    (d)           No
Impairment.  The Maker shall not, by amendment of its Articles
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 3.5 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 fifty percent (150%) 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 (as liquidated damages) 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 3.5, 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 Closing Bid Prices
of the Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.

     


    
      
         


      

      
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    (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 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 fifty percent (150%) 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
Alberta 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 3.5(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
3.6           Prepayment.

     

    (a)           Prepayment Upon an Event of
Default.  Notwithstanding anything to the contrary contained
herein, upon the occurrence of an Event of Default, 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 one hundred and thirty percent (130%)
of the aggregate principal amount of this Note plus all accrued and unpaid
interest (if any) applicable at the time of such request.  Nothing in
this Section 3.6(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 in cash at a
price equal to the sum of (i) the greater of (A) one hundred and thirty percent
(130%) of the aggregate principal amount of this Note plus all accrued and
unpaid interest (if any) and (B) in the event at such time the Holder is unable
to obtain the benefit of its conversion rights through the conversion of this
Note and resale of the shares of Common Stock issuable upon conversion hereof in
accordance with the terms of this Note and the other Transaction Documents or
the Equity Conditions are not satisfied with respect to all such shares of
Common Stock, the aggregate principal amount of this Note plus all accrued but
unpaid interest hereon, divided by the Conversion Price on (x) the date the
Prepayment Price (as defined below) is demanded or otherwise due or (y) the date
the Major Transaction Prepayment Price is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Major Transaction Prepayment Price is
demanded or otherwise due, and (y) the date the Major Transaction Prepayment
Price is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Note and the other
Transaction Documents (the “Major Transaction Prepayment
Price”).

     

    (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 this Note in cash at a price equal to the sum of (i) the greater
of (A) one hundred and thirty percent (130%) of the aggregate principal amount
of this Note plus all accrued and unpaid interest (if any) and (B) the aggregate
principal amount of this Note plus all accrued but unpaid interest hereon (if
any), divided by the Conversion Price on (x) the date the Prepayment Price (as
defined below) is demanded or otherwise due or (y) the date the Prepayment Price
is paid in full, whichever is less, multiplied by the VWAP on (x) the date the
Prepayment Price is demanded or otherwise due, and (y) the date the Prepayment
Price is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Note and the other
Transaction Documents (the “Triggering Event Prepayment
Price,” and, collectively with the Major Transaction Prepayment Price,
the “Prepayment
Price”).

     


    
      
         


      

      
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    (d)           “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 (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)           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 American Stock Exchange, the Nasdaq Capital Markets, the Nasdaq
Global Market, the Nasdaq Global Select Market or The New York Stock Exchange,
Inc., for a period of five (5) consecutive Trading Days;

     

    (ii)          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 3.7) or its intention not to comply with proper
requests for conversion of any Notes into shares of Common Stock;
or

     


    
      
         


      

      
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    (iii)         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; or

     

    (iv)        the
Maker deregisters its shares of Common Stock under the Securities Exchange Act
of 1934; or

     

    (v)         the
Maker 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 Exchange
Act.

     

    (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
immediately prior to the consummation 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
principal amount of the Notes that such holder is electing to have prepaid and
(ii) the applicable Major Transaction Prepayment Price, as calculated pursuant
to Section 3.6(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 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
3.6(c) above.  A holder shall only be permitted to require the Maker
to prepay the Note pursuant to Section 3.6 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.

     

     

     

    
      
        
        

      

      
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    (j)          
 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 3.6(i), to such holder within five (5) 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 3.6(h), the Maker shall deliver
the applicable Major Transaction Prepayment Price immediately prior to the
consummation 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 and Other Notes held by such
holder relative to the number of Notes and Other 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 3.6 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 3.6(j)
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 Closing Bid
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 3.6
shall have priority to payments to other stockholders in connection with a Major
Transaction.

     

     

     

     

     

    
      
        
        

      

      
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    (k)           
Maker Prepayment
Option.  On and after the Initial Period, the Maker may prepay
in cash all (but not less than all) of the outstanding principal amount of this
Note and the Other Notes upon ten (10) days prior written notice to the Holder
and the Other Holders (the “Maker’s Prepayment
Notice”) at a price equal to one hundred and thirty percent (130%) of the
aggregate principal amount of this Note (the “Maker's Prepayment
Price”); provided, however, that if
after the Initial Period, the Holder has delivered a Conversion Notice to the
Maker or delivers a Conversion Notice within such ten (10) day period following
delivery of the Maker’s Prepayment Notice, the principal amount of the Notes
designated to be converted may not be prepaid by the Maker and shall be
converted in accordance with Section 3.3 hereof; provided further that if during
the period between delivery of the Maker's Prepayment Notice and the Maker's
Prepayment Date (as defined below), a holder shall become entitled to deliver a
Notice of Prepayment at Option of Holder Upon Major Transaction or Notice of
Prepayment at Option of Holder upon Triggering Event, then the such rights of
the holders shall take precedence over the previously delivered Maker Prepayment
Notice.  The Maker's Prepayment Notice shall state the date of
prepayment which date shall be the eleventh (11th) day after the Maker has
delivered the Maker's Prepayment Notice (the “Maker's Prepayment
Date”), the Maker’s Prepayment Price and the principal amount of Notes to
be prepaid by the Maker.  The Maker shall deliver the Maker's
Prepayment Price on the Maker’s Prepayment Date, provided, that if the holder(s)
delivers a Conversion Notice before the Maker's Prepayment Date, then the
portion of the Maker's Prepayment Price which would be paid to prepay the Notes
covered by such Conversion Notice shall be returned to the Maker upon delivery
of the Common Stock issuable in connection with such Conversion Notice to the
holder(s).  On the Maker's Prepayment Date, the Maker shall pay the
Maker's Prepayment Price, subject to any adjustment pursuant to the immediately
preceding sentence, to the Holder and the Other Holders.  If the Maker
fails to pay the Maker's Prepayment Price by the eleventh (11th) day after the
Maker has delivered the Maker's Prepayment Notice, the prepayment will be
declared null and void and the Maker shall lose its right to serve a Maker’s
Prepayment Notice pursuant to this Section 3.6(k) in the
future.  Notwithstanding the foregoing to the contrary, the Maker may
effect a prepayment pursuant to this Section 3.6(k) only if (A) trading in the
Common Stock shall not have been suspended by the Securities and Exchange
Commission or the OTC Bulletin Board (or other national securities exchange on
which the Common Stock is trading), (B) the Maker is in material compliance with
the terms and conditions of this Note and the other Transaction Documents, and
(C) the Maker is not in possession of any material non-public
information.  Notwithstanding the above, on or prior to January 16,
2009, (A) the Maker’s Prepayment Notice may be delivered with at least one (1)
day’s prior written notice (provided that the Maker’s Prepayment Price is paid
on the date of prepayment set forth in such notice), (B) Sweetwater Capital
Corporation (“Sweetwater”) shall be permitted to exercise the Maker’s prepayment
option under this Section 3.6(f) if the same shall have been assigned to
Sweetwater by the Maker and the conditions set forth in this Section 3.6(f) are
otherwise fulfilled and (C) the Maker shall be permitted to deliver a Maker’s
Prepayment Notice after delivery of a Conversion Notice, and such conversion
shall be of no force and effect if the Maker delivers the Maker’s Prepayment
Price by the third (3) Trading Day following such Conversion
Notice.

     

    Section
3.7           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 for any reason,
including, without limitation, because the Maker (x) does not have a sufficient
number of shares of Common Stock authorized and available, or (y) 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, 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:

     


    
      
         


      

      
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    (i)           If
the Maker’s inability to fully convert is pursuant to Section 3.7(a)(x) above,
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 3.7(a)(y) above,
require the Maker to issue restricted shares of Common Stock in accordance with
such holder’s Conversion Notice;

     

    (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);

     

    (iv)        exercise
its Buy-In rights pursuant to and in accordance with the terms and provisions of
Section 3.3(c) of this Note.

     

    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 3.7(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 3.7(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 3.7(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 the date that is one (1) Business Day
following the Maker’s receipt of the Holder’s Notice in Response to Inability to
Convert (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 Closing Bid Price during the
period beginning on the Conversion Date and ending on the date the Holder voided
the Mandatory Prepayment.

     


    
      
         


      

      
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    (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 3.7,
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 and
any  Other Notes outstanding) of all the Notes being converted and
prepaid at such time.

     

    Section
3.8           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

     

    COVENANTS

    


    For so long as this Note is
outstanding, without the prior written consent of the
Holder:

    


    Section
4.1          No
Liens.  Other than Permitted Encumbrances, the Maker shall not,
and shall not permit its Subsidiaries to, enter into, create, incur, assume or
suffer to exist any liens, security interests, charges, claims or other
encumbrances of any kind (collectively, “Liens”) on or with respect to any of
its assets now owned or hereafter acquired or any interest therein or any income
or profits therefrom.

     

    Section
4.2          No
Indebtedness.  Other than Indebtedness existing on the date
hereof and disclosed in the Commission Documents, the Maker shall not, and shall
not permit any Subsidiary to, enter into, create, incur, assume or suffer to
exist any Indebtedness, other than Permitted Indebtedness.

     


    
      
         


      

      
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    Section
4.3           Compliance with Transaction
Documents.  The Maker shall, and shall cause its Subsidiaries
to, comply with its obligations under this Note and the other Transaction
Documents.

     

    Section
4.4          Compliance with
Law.  The Maker shall, and shall cause each of its Subsidiaries
to, comply with law and duly observe and conform in all material respects to all
valid requirements of governmental authorities relating to the conduct of its
business or to its properties or assets.

     

    Section
4.5          Transactions with
Affiliates.  The Maker shall not, and shall not permit its
Subsidiaries to, engage in any transactions with any officer, director, employee
or any Affiliate of the Maker or any Subsidiary, including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Maker, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $50,000, other than (i) for payment of
reasonable salary for services actually rendered, as approved by the Board of
Directors of the Maker as fair in all respects to the Maker or the applicable
Subsidiary, and (ii) reimbursement for expenses incurred on behalf of the Maker
or any Subsidiary.  Notwithstanding the forgoing the prohibitions in
this covenant shall not prohibit the Maker from (i) permitting to exist any
transaction with any officer, director, employee, or any Affiliate of the Maker
or any Subsidiary pursuant to the License Agreements (as in effect on the date
hereof), (ii) the issuance of Permitted Indebtedness described in clause (a) of
the definition thereof to any officer, director, employee, or any Affiliate of
the Maker or any Subsidiary, (iii) the issuance of any stock option, stock
grants or stock bonuses (to the extent the same are described in 3.5(c)(a) or
(b)) or (iv) issuance of Common Stock or Common Stock Equivalents by the Maker
for cash consideration and for capital raising purposes to any officer,
director, employee, or any Affiliate of the Maker or any Subsidiary if such
securities are issued at a price equal to at least $0.55 per share (as adjusted
for splits, combinations and the like after the date hereof), the aggregate
consideration received pursuant to such issuances does not exceed $10 million
and the issuance of such securities does not otherwise cause an Event of Default
hereunder.

     

    Section
4.6           No
Dividends.  the Maker shall not, and shall not permit any
Subsidiary to, (i) declare or pay any dividends or make any distributions to any
holder(s) of Common Stock or other equity security of the Maker or such
Subsidiaries (other than dividend and distributions from a Subsidiary to the
Maker), (ii) purchase, redeem or otherwise acquire for value, directly or
indirectly, any shares or other equity security of the Maker or any Subsidiary,
(iii) form or create any subsidiary become a partner in any partnership or joint
venture, or make any acquisition of any interest in any Person or acquire
substantially all of the assets of any Person, or (iv) transfer, assign, pledge,
issue or otherwise permit any equity or other ownership interests in the
Subsidiaries to be beneficially owned or held by any person other than the
Maker, other than, with respect to Vertigro, the 50% ownership interest therein
held by Global Green Solutions, Inc. Notwithstanding any provision to the
contrary in this Note, the Purchase Agreement, or any of the ancillary
documents, the term Subsidiary in this Section 4.6 shall not include Vertigro
once Vertigro is released from  the Guaranty and Security Agreement,
both of which were executed concurrently with this Note.

     


    
      
         


      

      
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    Section
4.7           No Merger or Sale of
Assets.  The Maker shall not, and shall not permit any
Subsidiary to, (i) merge or consolidate or sell or dispose of all its assets or
any substantial portion thereof or (ii) in any way or manner alter its
organizational structure or effect a change of entity. Notwithstanding any
provision to the contrary in this Note, the Purchase Agreement, or any of the
ancillary documents, the term Subsidiary in this Section 4.7 shall not include
Vertigro once Vertigro is released from the Guaranty and Security Agreement,
both of which were executed concurrently with this Note.

     

    Section
4.8           Payment of Taxes,
Etc.  The Maker shall, and shall cause each of its Subsidiaries
to, promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, property or business of the Maker and the
Subsidiaries, except for such failures to pay that, individually or in the
aggregate, have not had and would not reasonably be expected to have a Material
Adverse Effect; provided, however, that any such tax, assessment, charge or levy
need not be paid if the validity thereof shall currently be contested in good
faith by appropriate proceedings and if the Maker or such Subsidiaries shall
have set aside on its books adequate reserves with respect thereto, and
provided, further, that the Maker and such Subsidiaries will pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.

     

    Section
4.9           Corporate
Existence.  The Maker shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use property owned or
possessed by it and reasonably deemed to be necessary to the conduct of its
business.

     

    Section
4.10         Investment Company
Act.  The Maker shall conduct its businesses in a manner so
that it will not become subject to the Investment Company Act of 1940, as
amended.

     

    Section
4.11        Maintenance of
Assets.  The Maker shall, and shall cause its Subsidiaries to,
keep its properties in good repair, working order and condition, reasonable wear
and tear excepted, and from time to time make all necessary and proper repairs,
renewals, replacements, additions and improvements thereto.

     

    Section
4.12         Indebtedness to
Affiliates.   The Maker shall not, and shall not permit
any Subsidiary to, make any payment on any indebtedness owed to officers,
directors or Affiliates.

     

    Section
4.13         Restriction on
Dividends.  The Maker shall not, and shall not permit any
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to pay dividends or distributions to the Maker, pay any indebtedness
owed to the Maker or transfer any properties or assets to the Maker.
Notwithstanding any provision to the contrary in this Note, the Purchase
Agreement, or any of the ancillary documents, the term Subsidiary in this
Section 4.13 shall not include Vertigro once Vertigro is released from the
Guaranty and Security Agreement, both of which were executed concurrently with
this Note.

     


    
      
         


      

      
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    Section
4.14         No Investments.  The Maker
shall not, and shall not permit any Subsidiary to, make or suffer to exist any
Investments or commitments therefor, other than Investments made in the ordinary
course of business.

     

    Section
4.15         No Transfers to
Vertigro.  On and after the release of Vertigro pursuant to
Section 4 of the Guaranty, the Maker shall not, and shall not permit any
Subsidiary then subject to the Guaranty to, make any Vertigro Advances (as
defined in the Guaranty).

    


     

    ARTICLE
V

     

    ­MISCELLANEOUS

     

    Section
5.1           ­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, 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 any notices sent or received, or any actions taken with
respect to, the Other Notes.

     

    Section
5.2           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.  In no event shall the rate of
interest payable hereunder exceed the maximum rate (if any) permitted by
applicable law.

     

    Section
5.3          ­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
5.4          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
5.5          Enforcement
Expenses.  The Maker agrees to pay all costs and expenses of
enforcement of this Note, including, without limitation, reasonable attorneys’
fees and expenses.

     

    Section
5.6           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
5.7           Amendments.  This
Note may not be modified or amended in any manner except in writing executed by
the Maker and the Holder.

     

    Section
5.8          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 except in accordance with applicable
law.  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 AND THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION HEREOF HAVE 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 AND THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION
UNDER THE ACT AND SUCH STATE SECURITIES LAWS.”

     

    UNLESS
PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS SECURITY MUST NOT
TRADE THE SECURITY BEFORE NOVEMBER17, 2008

     

     

     

    
      
        
        

      

      
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    Section
5.9           ­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 5.9 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
5.10        ­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
5.11        ­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
5.12         ­Maker Waivers; Dispute
Resolution.  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.

     


    
      
         


      

      
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    (c)           In
the case of a dispute as to the determination of the Closing Bid Price or the
VWAP or the arithmetic calculation of the Conversion Price, any adjustment to
the Conversion Price, liquidated damages amount, interest or dividend
calculation, or any redemption price, redemption amount, adjusted Conversion
Price, or similar calculation, or as to whether a subsequent issuance of
securities is prohibited hereunder or would lead to an adjustment to the
Conversion Price, the Maker shall submit the disputed determinations or
arithmetic calculations via facsimile within two (2) Business Days of receipt,
or deemed receipt, of the Conversion Notice, any redemption notice, default
notice or other event giving rise to such dispute, as the case may be, to the
Holder. If the Holder and the Maker are unable to agree upon such determination
or calculation within two (2) Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Maker shall,
within two (2) Business Days submit via facsimile (a) the disputed determination
of the Closing Price or the VWAP to an independent, reputable investment bank
selected by the Maker and approved by the Holder, which approval shall not be
unreasonably withheld, (b) the disputed arithmetic calculation of the Conversion
Price, adjusted Conversion Price or any redemption price, redemption amount or
default amount to the Maker’s independent, outside accountant or (c) the
disputed facts regarding whether a subsequent issuance of securities is
prohibited hereunder or would lead to an adjustment to the Conversion Price (or
any of the other above described facts not expressly designated to the
investment bank or accountant), to an expert attorney from a nationally
recognized outside law firm (having at least 100 attorneys and having with no
prior relationship with the Maker) selected by the Maker and approved by the
Lead Purchaser as defined in the Purchase Agreement).  The Maker, at
the Maker’s expense, shall cause the investment bank, the accountant, the law
firm, or other expert, as the case may be, to perform the determinations or
calculations and notify the Maker and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank’s, accountant’s or attorney’s determination
or calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

     

    Section
5.13         Definitions.  Terms
used herein and not defined shall have the meanings set forth in the Purchase
Agreement.  For the purposes hereof, the following terms shall have
the following meanings:

     

    “Business Day” (whether or not
capitalized) shall mean any day banking transactions can be conducted in both
New York City, NY, USA and Vancouver, British Columbia, Canada,
and  does not include any day which is a federal, state or provincial
holiday in either location.

    


    “Closing Bid Price”
shall mean, on any particular date (i) the last trading price per share of the
Common Stock on such date on the OTC Bulletin Board or another registered
national securities exchange on which the Common Stock is then listed, or if
there is no such price on such date, then the last trading price on such
exchange or quotation system on the date nearest preceding such date, or (ii) if
the Common Stock is not then listed or traded on a registered national
securities exchange or quoted on the OTC Bulletin Board, then the average of the
“Pink Sheet” quotes for the relevant conversion period, as determined in good
faith by the Holder, or (iii) if the Common Stock is not then publicly traded
the fair market value of a share of Common Stock as determined by the Holder and
reasonably acceptable to the Maker.


    
      
         


      

      
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    “Equity Conditions”
shall mean, during the period in question, (i) the Maker shall have duly honored
all conversions and redemptions scheduled to occur or occurring by virtue of one
or more Conversion Notices of the Holder, if any, (ii) all liquidated damages
and other amounts owing to the Holder in respect of this Note and the other
Transaction Documents shall have been paid; (iii) (A) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the shares issued or issuable pursuant to
the Transaction Documents or (B) there exists, under Rule 144 of the Securities
Act, “current public information” with respect to the Maker and the Holder is
permitted to resell the shares of Common Stock issued or issuable pursuant to
the Transaction Documents pursuant to Rule 144 of the Securities Act, without
any restriction as to volume, (iv) the Common Stock is trading on the Trading
Market and all of the shares issuable pursuant to the Transaction Documents are
listed for trading on a Trading Market (and the Maker believes, in good faith,
that trading of the Common Stock on a Trading Market will continue uninterrupted
for the foreseeable future), (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all
of the shares issuable pursuant to the Transaction Documents, (vi) there is then
existing no Event of Default or event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (vii) the issuance of
the shares in question to the Holder would not violate the 4.99% or 9.99%
limitations set forth in Section 3.4 hereof, and (viii) no public announcement
of a pending or proposed Major Transaction or Triggering Event has
occurred.

    


    “Indebtedness” means
(a) all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement or other
obligations in respect of letters of credit, bankers acceptances, current swap
agreements, interest rate hedging agreements, interest rate swaps, or other
financial products, (c) all capital lease obligations that exceed $100,000 in
the aggregate in any fiscal year, (d) all obligations or liabilities secured by
a lien or encumbrance on any asset of the Maker, irrespective of whether such
obligation or liability is assumed, (e) all obligations for the deferred
purchase price of assets, together with trade debt and other accounts payable
that exceed $100,000 in the aggregate in any fiscal year, (f) all synthetic
leases, and (g) any obligation guaranteeing or intended to guarantee (whether
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse) any of the foregoing obligations of any other person; provided,
however, Indebtedness shall not include (I) usual and customary trade debt
incurred in the ordinary course of business and (II) endorsements for collection
or deposit in the ordinary course of business.

    


    “Investment” means,
with respect to any Person, all investments in any other Person, whether by way
of extension of credit, loan, advance, purchase of stock or other ownership
interest (other than ownership interests in such Person), bonds, notes,
debentures or other securities, or otherwise, and whether existing on the date
of this Agreement or thereafter made, but such term shall not include the cash
surrender value of life insurance policies on the lives of officers or
employees, excluding amounts due from customers for services or products
delivered or sold in the ordinary course of business.


    
      
         


      

      
        27

        
          

        

      

      
         


      

    


    


    “Permitted
Encumbrance” means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges or
levies not yet due or Liens for taxes, assessments and other governmental
charges or levies being contested in good faith and by appropriate proceedings
for which adequate reserves (in the good faith judgment of the management of the
Maker) have been established in accordance with GAAP; (b) Liens imposed by law
which were incurred in the ordinary course of the Maker’s business, such as
carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and
other similar Liens arising in the ordinary course of the Maker’s business, and
which (x) do not individually or in the aggregate materially detract from the
value of such property or assets or materially impair the use thereof in the
operation of the business of the Maker and its consolidated subsidiaries or (y)
are being contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing for the foreseeable future the forfeiture or sale
of the property or asset subject to such Lien and (c) Liens securing PMSI
Indebtedness to the extent such Liens relate only to the assets acquired by such
PMSI Indebtedness.

    


    “Permitted Indebtedness” shall mean (a)
Indebtedness in an amount not to exceed $1,000,000 in the aggregate incurred
after the date hereof, which Indebtedness (i) is expressly subordinate in right
of payment to the Notes, (ii) does not mature prior to the date of Maturity of
the Notes, (iii) does not permit any payment of principal thereof or interest
thereon prior to the payment in full of the Notes, (iv) shall not be secured by
any asset of the Maker or the Subsidiaries, (v) is issued by the Maker, (vi) the
use of proceeds of which are to provide working capital to the Maker and (vii)
the interest rate of which shall not exceed 10% per annum and (b) PMSI
Indebtedness.

    


    “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.

    


    “PMSI Indebtedness”
means purchase money security Indebtedness for assets acquired by the Maker or
the Subsidiaries in the ordinary course of their businesses to the extent such
Indebtedness does not exceed the fair market value of the assets acquired with
the proceeds of such Indebtedness and such Indebtedness is secured solely by
such assets.

    


    “Trading Day” means
(a) a day on which the Common Stock is traded on the OTC Bulletin Board or a
registered national securities exchange, or (b) if the Common Stock is not
traded on the OTC Bulletin Board or a registered national securities exchange, 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) or (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.


    
      
         


      

      
        28

        
          

        

      

      
         


      

    


    “Trading Market” means
the Over the Counter Bulletin Board, the New York Stock Exchange, the Nasdaq
Capital Markets, the Nasdaq Global Markets, the Nasdaq Global Select Market or
the American Stock Exchange.

    


    “VWAP” means, for any
date, (i) the daily volume weighted average price of the Common Stock for such
date on the OTC Bulletin Board or other Trading Market as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m.
Eastern Time); (ii) if the Common Stock is not then listed or quoted on the
OTC Bulletin Board or other Trading Market and if prices for the Common Stock
are then reported in the “Pink Sheets” published by the Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(iii) in all other cases, the fair market value of a share of Common Stock
as determined by an independent appraiser selected in good faith by the Holder
and reasonably acceptable to the Maker.

     

     

     

     

     

     

     

     

     

     

     

     

     

    
 

    



    
      
         


      

      
        29

        
          

        

      

      
         


      

    


    


    IN WITNESS WHEREOF, the Maker
has caused this Note to be duly executed by its duly authorized officer as of
the date first above indicated.

     

     

     

    
      	 	VALCENT PRODUCTS
      INC.	 
	 	 	 	 
	
               

            	
              By:
      

            	/s/ 	 
	 	 	Name: 	 
	 	 	Title: 	 
	 	 	 	 


    

    
 

     

     

    
 

     

     

    
      
        
           


        

        
          30

          
            

          

        

        
           


        

      

    

    


    EXHIBIT
A

    


    WIRE
INSTRUCTIONS

     

    


     

    Payee:
________________________________________________________

     

    Bank:  ________________________________________________________

     

    Address:
______________________________________________________

     

       _____________________________________________________

     

    Bank No.:
_____________________________________________________

     

    Account
No.:  __________________________________________________

     

    Account
Name: _________________________________________________

     

    


     

    


     


    
      
         


      

      
        A-1

        
          

        

      

      
         


      

    


    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 [and accrued interest thereon] of the above Note No. ___ into
shares of Common Stock of Valcent Products Inc. (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:__________________________________________________________________

     

    _______________________________________________________________________

     

    


     

    


     

    
 

     

     

     

    B-1