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                                                                    EXHIBIT 10.2

                                                                       EXHIBIT A

                              FORM OF INITIAL NOTE

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A)
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTION 2(D)(VIII) HEREOF.
THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 2(D)(VIII) HEREOF.

                         SENIOR SECURED CONVERTIBLE NOTE

_________ __, 2004                                                 $____________

      FOR VALUE RECEIVED, GALAXY ENERGY CORPORATION, a Colorado corporation (the
"COMPANY"), hereby promises to pay to the order of __________________ or
registered assigns (the "HOLDER") the principal amount of ___________________
United States Dollars ($________________) when due and to pay interest
("INTEREST") on the unpaid principal balance hereof at the Applicable Interest
Rate, whether upon maturity, acceleration, redemption or otherwise. Interest on
this Note shall commence accruing on the Issuance Date and shall be computed on
the basis of a 365-day year and actual days elapsed. Interest on this Note shall
be payable, in cash or stock in accordance with Section 6, on each Installment
Date, or earlier upon conversion or redemption pursuant to the terms hereof.

            (1) Payments of Principal. All payments of principal of this Note
(to the extent such principal is not converted into Shares (as defined below) in
accordance with the terms hereof) shall be made in lawful money of the United
States of America by wire transfer of immediately available funds to such
account as the Holder may from time to time designate by written notice in
accordance with the provisions of this Note. Whenever any amount expressed to be
due by the terms of this Note is due on any day that is not a Business Day (as
defined below), the same shall instead be due on the next succeeding day that is
a Business Day. Each capitalized term used herein, and not otherwise defined,
shall have the meaning ascribed thereto in the Securities Purchase Agreement,
dated August 19, 2004, pursuant to which this Note and
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the Other Notes (as defined below) were originally issued (as such agreement may
be amended from time to time as provided in such agreement, the "SECURITIES
PURCHASE AGREEMENT"). This Note and all Other Notes issued by the Company
pursuant to the Securities Purchase Agreement on the Initial Closing Date and
the Conditional Closing Date (each as defined in the Securities Purchase
Agreement) and all convertible notes issued in exchange therefor or replacement
thereof are collectively referred to in this Note as the "NOTES."

            (2) Conversion of this Note. This Note shall be converted into
Shares on the terms and conditions set forth in this Section 2.

                  (a) Certain Defined Terms. For purposes of this Note, the
following terms shall have the following meanings:

                        (i) "ADDITIONAL AMOUNT" means, with respect to any
            principal amount of this Note or Installment Conversion Amount as of
            the date of any determination, all accrued and unpaid Interest on
            such principal amount or Installment Conversion Amount, as
            applicable, through and including such date of determination;
            provided, however, that with respect to conversion of any portion of
            a Pro Rata Conversion Amount pursuant to Section 8 or any portion of
            a Mandatory Compliance Conversion Amount pursuant to Section 13
            during any Installment Period as to which the Company has elected
            conversion of any of the applicable Installment Amount, it shall
            mean the accrued and unpaid Interest on such portion from the
            Installment Date commencing such Installment Period through and
            including the Conversion Date of such Pro Rata Conversion Amount or
            Mandatory Compliance Conversion Amount, as applicable.

                        (ii) "AGGREGATE NOTES BALANCE" means, as of the date of
            any determination, the aggregate outstanding principal amount of,
            together with all accrued but unpaid Interest on, all the Notes.

                        (iii) "ALLOCATION PERCENTAGE" means, with respect to
            each holder of Notes, a fraction of which the numerator is the
            aggregate principal amount of the Notes initially purchased by such
            holder on the Initial Closing Date and the Conditional Closing Date
            and of which the denominator is the aggregate principal amount of
            the Notes purchased by all holders on the Initial Closing Date and
            the Conditional Closing Date.

                        (iv) "APPLICABLE INTEREST RATE" initially shall mean
            [INSERT: THE PER ANNUM INTEREST RATE EQUAL TO THE PRIME RATE IN
            EFFECT ON THE ISSUANCE DATE, PLUS SEVEN AND ONE-QUARTER PERCENT
            (7.25%)]; provided, however, that on the second Business Day of each
            calendar quarter commencing after the Issuance Date, such rate shall
            be adjusted to the per annum rate equal to the Prime Rate in effect
            on such date, plus seven and one-quarter percent (7.25%).

                                       2
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                        (v) "BUSINESS DAY" means any day other than Saturday,
            Sunday or other day on which commercial banks in the city of New
            York are authorized or required by law to remain closed.

                        (vi) "COMMON STOCK" means (A) the Company's common
            stock, $0.001 par value per share, and (B) any capital stock
            resulting from a reclassification of such common stock.

                        (vii) "COMPANY ALTERNATIVE REDEMPTION RATE" means (A) on
            any date during the period from and including the Issuance Date
            through and including the date that is one year after the Issuance
            Date, 107%, and (B) on any date during the period including the
            first day after the date that is one year after the Issuance Date
            through, and including the Business Day immediately preceding the
            Maturity Date, 105%.

                        (viii) "COMPANY CONVERSION PRICE" means, as of any
            Conversion Date or other date of determination, 93% of the Weighted
            Average Price of the Common Stock on the Trading Day immediately
            preceding the Conversion Date applicable to the conversion for which
            such determination is being made.

                        (ix) "CONVERSION AMOUNT" means the sum of (1) the
            principal amount of this Note to be converted, redeemed or otherwise
            with respect to which this determination is being made and (2) the
            Additional Amount with respect to the amount referred to in the
            immediately preceding clause (1); provided, however, that solely
            with respect to any conversion of any portion of an Installment
            Conversion Amount pursuant to Section 6(c) (including the delivery
            of a Conversion Notice with respect thereto), the Conversion Amount
            shall mean such portion of the Installment Conversion Amount, plus
            the Additional Amount with respect thereto from the applicable
            Installment Date through and including the Conversion Date of such
            portion of the Installment Conversion Date Amount.

                        (x) "CONVERSION PRICE" means (A) as of any Conversion
            Date or other date of determination (other than with respect to an
            Installment Conversion Amount pursuant to an Installment Conversion
            (as defined in Section 6(a)), a Pro Rata Conversion Amount pursuant
            to a Company Alternative Conversion (as defined in Section 8) or a
            Mandatory Compliance Conversion Amount pursuant to a Mandatory
            Compliance Conversion (as defined in Section 13)) during the period
            beginning on the Issuance Date and ending on and including the
            Maturity Date, the Fixed Conversion Price, and (B) with respect to
            any Installment Conversion Amount pursuant to an Installment
            Conversion, Pro Rata Conversion Amount pursuant to a Company
            Alternative Conversion or Mandatory Compliance Conversion Amount
            pursuant to a Mandatory Compliance Conversion, the lesser of the
            Fixed Conversion Price and the Company

                                       3
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Conversion Price, each as in effect as of such date and subject to adjustment as
provided herein.

                        (xi) "DOLLARS" or "$" means United States Dollars.

                        (xii) "DOMESTIC SUBSIDIARIES" means any of the
            Subsidiaries (as defined in the Securities Purchase Agreement) of
            the Company that are organized or formed under the laws of one of
            the states, territories or other jurisdictions of the United States
            of America.

                        (xiii) "EQUITY LIQUIDITY AMOUNT" means, as of the date
            of any determination, the product of (x) twenty (20%) percent of the
            average monthly dollar trading volume of the Common Stock on its
            Principal Market (as reported by Bloomberg or any successor thereto)
            over the three calendar months immediately preceding the date of any
            such determination, multiplied by (y) the number of calendar months
            (pro rated for partial months) remaining on the term of the Note
            from the date of such determination though and including the
            Maturity Date, multiplied by (z) the Holder's Allocation Percentage.

                        (xiv) "EQUITY LIQUIDITY TEST FAILURE" means that, as of
            the date of any determination, the Equity Liquidity Amount is less
            than or equal to the Principal plus accrued and unpaid Interest.

                        (xv) "EQUITY LIQUIDITY TEST FAILURE AMOUNT" means that,
            in the event that there is an Equity Liquidity Test Failure as of
            the date of any determination, the amount by which the Principal
            plus accrued and unpaid Interest as of such date of determination
            exceeds the Equity Liquidity Amount.

                        (xvi) "EXPECTED TRADING DAYS" means, with respect to any
            Installment Period, the number of regularly scheduled Business Days
            in such period on which the Principal Market is scheduled to be open
            for trading of the Common Stock.

                        (xvii) "FIXED CONVERSION PRICE" means as of any
            Conversion Date or other date of determination, [INSERT: 140% OF THE
            ARITHMETIC AVERAGE OF THE WEIGHTED AVERAGE PRICE OF THE COMMON STOCK
            ON EACH OF THE 20 CONSECUTIVE TRADING DAYS IMMEDIATELY PRECEDING THE
            ISSUANCE DATE], subject to adjustment as provided herein.

                        (xviii) "INSTALLMENT AMOUNT" means, (I) with respect to
            that Installment Date that is the Interest Only Payment Date, the
            Additional Amount with respect to the Principal as of such
            Installment Date, calculated as of such Installment Date, and (II)
            with respect to any Installment Date that is not the Interest Only
            Payment Date, the sum of (A) the lesser of (x) the Principal

                                       4
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            Amortization Amount multiplied by the Holders' Allocation Percentage
            and (y) the Principal, plus (B) the Additional Amount with respect
            to the Principal as of such Installment Date calculated as of such
            Installment Date, in each case subject to the reduction of any
            Installment Amount in accordance with Section 2(d)(ix). In the event
            the Holder shall sell or otherwise transfer any portion of this
            Note, the transferee shall be allocated a pro rata portion of the
            applicable Installment Amount.

                        (xix) "INSTALLMENT DATE" means each of the Interest Only
            Payment Date and the first Business Day of each calendar month
            beginning on and including March 1, 2005 through and including the
            calendar month immediately preceding the Maturity Date.

                        (xx) "INSTALLMENT PERIOD" means a period beginning on
            and including an Installment Date and ending on and including the
            date immediately preceding the next subsequent Installment Date, or
            in the case of the last Installment Date prior to the Maturity Date,
            the period beginning on and including such Installment Date and
            ending on and including the date immediately preceding the Maturity
            Date.

                        (xxi) "INTEREST ONLY PAYMENT DATE" shall mean January
            14, 2005, on which a payment of Interest only shall be due to the
            Holder, payable in cash or stock in accordance with Section 6.

                        (xxii) "ISSUANCE DATE" means the original date of
            issuance of this Note pursuant to the Securities Purchase Agreement,
            regardless of any exchange or replacement hereof.

                        (xxiii) "MANDATORY COMPLIANCE AMOUNT" means, as of the
            date of any determination, (A) the greater of (1) the Equity
            Liquidity Test Failure Amount and (2) the Share Availability Test
            Failure Amount, minus (B) the sum of any Installment Conversion
            Amount, any Installment Redemption Amount and any Pro Rata
            Redemption Amount, in each case as to which notice has been given to
            the Holder in accordance herewith, but which has not been converted
            or redeemed prior to the date of such determination, and as to which
            the Company is in compliance with Sections 6 and 7 and all
            conditions to such conversion or redemption continue to be satisfied
            as of such date of determination.

                        (xxiv) "MATURITY DATE" means September 1, 2006, or such
            earlier date as all amounts due under this Note have been fully
            paid; provided, however, that if the Conditional Closing (as defined
            in the Securities Purchase Agreement) occurs on or prior to January
            13, 2005, then it shall mean March 1, 2007, or such earlier date as
            all amounts due under this Note have been fully paid.

                                       5
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                        (xxv) "OTHER NOTES" means the convertible notes, other
            than this Note, issued by the Company pursuant to the Securities
            Purchase Agreement and all convertible notes issued in exchange
            therefor or replacement thereof.

                        (xxvi) "PERSON" means an individual, a limited liability
            company, a partnership, a joint venture, a corporation, a trust, an
            unincorporated organization or a government or any department or
            agency thereof or any other legal entity.

                        (xxvii) "PRIME RATE" shall mean the Prime Rate as
            published from time to time in The Wall Street Journal, as such rate
            may vary from time to time. If such rate is expressed in a range in
            said publication, the higher rate of the reported range will apply.

                        (xxviii)"PRINCIPAL" means the outstanding principal
            amount of this Note as of any date of determination.

                        (xxix) "PRINCIPAL AMORTIZATION AMOUNT" means (A)
            $625,000.00 if the Conditional Closing occurs on or prior to January
            13, 2005, or (B) $833,333.33 if the Conditional Closing does not
            occur on or prior to January 13, 2005.

                        (xxx) "PRINCIPAL MARKET" means the principal securities
            exchange or trading market for a security.

                        (xxxi) "REGISTRATION RIGHTS AGREEMENT" means that
            certain registration rights agreement among the Company and the
            initial holders of the Notes relating to the filing of registration
            statements covering, among other things, the resale of the Shares
            issuable upon conversion of the Notes, as such agreement may be
            amended from time to time as provided in such agreement.

                        (xxxii) "SEC" means the United States Securities and
            Exchange Commission, or any successor thereto.

                        (xxxiii) "SECURITY AGREEMENT" means that certain
            security agreement among the Company, the Domestic Subsidiaries and
            the initial holders of the Notes relating to the granting by the
            Company and the Domestic Subsidiaries of a first-priority security
            interest in all the assets of the Company and the Domestic
            Subsidiaries, as such agreement may be amended from time to time as
            provided in such agreement.

                        (xxxiv) "SECURITY DOCUMENTS" means any agreement,
            document or instrument executed concurrently herewith or at any time
            hereafter pursuant to which the Company, its Domestic Subsidiaries
            or any other Person either

                                       6
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            (i) guarantees payment or performance of all or any portion of the
            obligations hereunder or under any other instruments delivered in
            connection with the transactions contemplated hereby and by the
            Securities Purchase Agreement, and/or (ii) provides, as security for
            all or any portion of such obligations, a lien on any of its assets
            in favor of the Holder, as any or all of the same may be amended,
            supplemented, restated or otherwise modified from time to time.

                        (xxxv) "SHARE AVAILABILITY AMOUNT" means, as of the date
            of any determination, the product of (A) the arithmetic average of
            the Weighted Average Price of the Common Stock on each of the ten
            (10) consecutive Trading Days immediately preceding such date of
            determination and (B) the difference between (x) the number of
            shares of Common Stock registered and available for immediate resale
            pursuant to effective Registration Statements, without regard to any
            Allowable Grace Periods (as defined in the Registration Rights
            Agreement), and reserved for issuance for the Holder, minus (y) the
            number of shares of Common Stock for which Warrants then outstanding
            and held by the Holder are then exercisable.

                        (xxxvi) "SHARE AVAILABILITY TEST FAILURE" means that, as
            of the date of any determination, the Share Availability Amount is
            less than the Principal plus accrued and unpaid Interest.

                        (xxxvii) "SHARE AVAILABILITY TEST FAILURE AMOUNT" that,
            in the event that there is a Share Availability Test Failure as of
            the date of any determination, the amount by which the Principal
            plus accrued and unpaid Interest as of such date of determination
            exceeds the Share Availability Amount.

                        (xxxviii) "SHARES" means shares of Common Stock.

                        (xxxix) "TRADING DAY" means any day on which the Common
            Stock is traded on the principal securities exchange or securities
            market on which the Common Stock is then traded; provided that
            "Trading Day" shall not include any day on which the Common Stock is
            scheduled to trade, or actually trades, on such exchange or market
            for less than 4.5 hours.

                        (xl) "WARRANTS" means the warrants issued to the holders
            of the Notes pursuant to the Securities Purchase Agreement, and all
            warrants issued in exchange or substitution therefor or replacement
            thereof (including any warrants issued pursuant Section 3(b) of the
            Initial Warrants (as defined in the Securities Purchase Agreement)
            or any similar provisions of any warrants issued in exchange or
            substitution therefor or in replacement thereof).

                        (xli) "WEIGHTED AVERAGE PRICE" means, for any security
            as of any date, the dollar volume-weighted average price for such
            security on its Principal

                                       7
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            Market during the period beginning at 9:30 a.m. New York Time (or
            such other time as its Principal Market publicly announces is the
            official open of trading) and ending at 4:00 p.m. New York Time (or
            such other time as its Principal Market publicly announces is the
            official close of trading) as reported by Bloomberg Financial
            Markets ("BLOOMBERG") through its "Volume at Price" functions, or if
            the foregoing does not apply, the dollar volume-weighted average
            price of such security in the over-the-counter market on the
            electronic bulletin board for such security during the period
            beginning at 9:30 a.m. New York Time (or such other time as such
            over-the-counter market publicly announces is the official open of
            trading), and ending at 4:00 p.m. New York Time (or such other time
            as such over-the-counter market publicly announces is the official
            close of trading) as reported by Bloomberg, or, if no dollar
            volume-weighted average price is reported for such security by
            Bloomberg for such hours, the average of the highest closing bid
            price and the lowest closing ask price of any of the market makers
            for such security as reported in the "pink sheets" by the National
            Quotation Bureau, Inc. If the Weighted Average Price cannot be
            calculated for such security on such date on any of the foregoing
            bases, the Weighted Average Price of such security on such date
            shall be the fair market value as mutually determined by the Company
            and the holders of Notes representing at least two-thirds (2/3) of
            the aggregate principal amount of the Notes then outstanding as to
            which such determination is being made. If the Company and the
            holders of the Notes representing at least two-thirds (2/3) of the
            aggregate principal amount of the Notes then outstanding as to which
            such determination is being made are unable to agree upon the fair
            market value of the Common Stock, then such dispute shall be
            resolved pursuant to Section 2(d)(iii) below with the term "Weighted
            Average Price" being substituted for the term "Company Conversion
            Price." All such determinations shall be appropriately adjusted for
            any stock dividend, stock split, stock combination or other similar
            transaction during any period during which the Weighted Average
            Price is being determined.

                  (b) Holder's Conversion Right; Mandatory Redemption at
Maturity. Subject to the provisions of Section 5, at any time or times on or
after the Issuance Date, the Holder shall be entitled to convert all or any part
of the Principal (and the Additional Amount relating thereto) into fully paid
and nonassessable Shares in accordance with Section 2(d), at the Conversion Rate
(as defined below). The Company shall not issue any fraction of a Share upon any
conversion. If the issuance would result in the issuance of a fraction of a
Share, then the Company shall round such fraction of a Share up or down to the
nearest whole share. If any Principal remains outstanding on the Maturity Date,
then all such Principal shall be redeemed as of such date in accordance with
Section 2(d)(vii).

                  (c) Conversion Rate. The number of Shares issuable upon
conversion of any portion of this Note pursuant to Section 2 shall be determined
according to the following formula (the "CONVERSION RATE"):

                                       8
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                                Conversion Amount
                                -----------------
                                Conversion Price

                  (d) Mechanics of Conversion. The conversion of this Note shall
be conducted in the following manner:

                        (i) Holder's Delivery Requirements. To convert a
            Conversion Amount into Shares on any date (the "CONVERSION DATE"),
            the Holder shall (A) transmit by facsimile (or otherwise deliver),
            for receipt on or prior to 11:59 p.m. New York Time on such date, a
            copy of an executed conversion notice in the form attached hereto as
            Exhibit I (the "CONVERSION NOTICE") to the Company and (B) if
            required by Section 2(d)(viii), surrender to a common carrier for
            delivery to the Company as soon as practicable following such date
            the original Note being converted (or an indemnification undertaking
            reasonably acceptable to the Company with respect to this Note in
            the case of its loss, theft or destruction). Such Conversion Notice
            shall specify whether and in what amounts the Conversion Amount
            relates to (i) an Installment Conversion pursuant to Section 6, (ii)
            a Company Alternative Conversion pursuant to Section 8; and/or (iii)
            a Mandatory Compliance Conversion pursuant to Section 13, and any
            such conversion shall reduce the applicable Installment Conversion
            Amount, Pro Rata Conversion Amount and/or Mandatory Compliance
            Conversion Amount, as so specified.

                        (ii) Company's Response. Upon receipt or deemed receipt
            (which for purposes hereof shall mean pursuant to Section 6(c)) by
            the Company of a copy of a Conversion Notice, the Company (I) shall
            immediately send, via facsimile, a confirmation of receipt of such
            Conversion Notice to the Holder and the Company's designated
            transfer agent (the "TRANSFER AGENT"), which confirmation shall
            constitute an instruction to the Transfer Agent to process such
            Conversion Notice in accordance with the terms herein and (II) on or
            before the second (2nd) Business Day following the date of receipt
            or deemed receipt by the Company of such Conversion Notice (the
            "SHARE DELIVERY DATE") (A) provided that the Transfer Agent is
            participating in The Depository Trust Company ("DTC") Fast Automated
            Securities Transfer Program and provided that the Holder is eligible
            to receive Shares through DTC, credit such aggregate number of
            Shares to which the Holder shall be entitled to the Holder's or its
            designee's balance account with DTC through its Deposit Withdrawal
            Agent Commission system or (B) if the foregoing shall not apply,
            issue and deliver to the address as specified in the Conversion
            Notice, a certificate, registered in the name of the Holder or its
            designee, for the number of Shares to which the Holder shall be
            entitled. If this Note is submitted for conversion, as may be
            required by Section 2(d)(viii), and the Principal represented by
            this Note is greater than the Principal being converted, then the
            Company shall, as soon as practicable and in no event later than
            three (3) Business Days after receipt of this Note (the "NOTE
            DELIVERY

                                       9
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            DATE") and at its own expense, issue and deliver to the Holder a new
            Note representing the Principal not converted.

                        (iii) Dispute Resolution. In the case of a dispute as to
            the determination of the Conversion Price or the arithmetic
            calculation of the Conversion Rate, the Company shall instruct the
            Transfer Agent to issue to the Holder the Shares representing the
            number of Shares that is not disputed and shall transmit an
            explanation of the disputed determinations or arithmetic
            calculations to the Holder via facsimile within one (1) Business Day
            of receipt or deemed receipt of the Holder's Conversion Notice or
            other date of determination. If the Holder and the Company are
            unable to agree upon the determination of the Conversion Price or
            arithmetic calculation of the Conversion Rate within one (1)
            Business Day of such disputed determination or arithmetic
            calculation being transmitted to the Holder, then the Company shall
            immediately submit via facsimile (A) the disputed determination of
            the Conversion Price to an independent, reputable investment banking
            firm agreed to by the Company and the holders of the Notes
            representing at least two-thirds (2/3) of the aggregate principal
            amounts of the Notes then outstanding as to which such determination
            is being made, or (B) the disputed arithmetic calculation of the
            Conversion Rate to the Company's independent, outside accountant, as
            the case may be. The Company shall cause the investment bank or the
            accountant, as the case may be, to perform the determinations or
            calculations and notify the Company and the Holder of the results no
            later than two (2) Business Days from the time it receives the
            disputed determinations or calculations. Such investment bank's or
            accountant's determination or calculation, as the case may be, shall
            be binding upon all parties absent error.

                        (iv) Record Holder. The person or persons entitled to
            receive the Shares issuable upon a conversion of this Note shall be
            treated for all purposes as the legal and record holder or holders
            of such Shares on the Conversion Date.

                        (v) Company's Failure to Timely Convert.

                              (A) Cash Damages. If within three (3) Business
Days after the Company's receipt of the facsimile copy of a Conversion Notice or
deemed receipt of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder for, or credit the Holder's or its
designee's balance account with DTC with, the number of Shares to which the
Holder is entitled upon the Holder's conversion of any Conversion Amount, or if
the Company fails to issue and deliver a new Note representing the Principal to
which such Holder is entitled on or before the Note Delivery Date pursuant to
Section 2(d)(ii), then in addition to all other available remedies that the
Holder may pursue hereunder and under the Securities Purchase Agreement
(including indemnification pursuant to Section 8 thereof or at law or in
equity), the Company shall pay additional damages to the Holder for each day
after the Share Delivery Date such conversion is not timely effected and/or each
day after the Note Delivery Date such Note is

                                       10
<PAGE>

not delivered in an amount equal to 0.5% of the sum of (a) the product of (I)
the number of Shares not issued to the Holder or its designee on or prior to the
Share Delivery Date and to which the Holder is entitled and (II) the Weighted
Average Price of the Common Stock on the Share Delivery Date (such product is
referred to herein as the "SHARE PRODUCT AMOUNT"), and (b) in the event the
Company has failed to deliver a Note to the Holder on or prior to the Note
Delivery Date, the product of (y) the number of Shares issuable upon conversion
of the Principal represented by the Note as of the Note Delivery Date and (z)
the Weighted Average Price of the Common Stock on the Note Delivery Date;
provided that in no event shall cash damages accrue pursuant to this Section
2(d)(v)(A) with respect to the Share Product Amount during the period, if any,
in which the Conversion Price or the arithmetic calculation of the Conversion
Rate is subject to a bona fide dispute that is subject to and being resolved
pursuant to, and in compliance with the time periods and other provisions of,
the dispute resolution provisions of Section 2(d)(iii), provided that the Shares
are delivered to the Holder within one (1) Business Day of the resolution of
such bona fide dispute. Alternatively, subject to Section 2(d)(iii), at the
election of the Holder made in the Holder's sole discretion, the Company shall
pay to the Holder, in lieu of the additional damages referred to in the
preceding sentence (but in addition to all other available remedies that the
Holder may pursue hereunder and under the Securities Purchase Agreement
(including indemnification pursuant to Section 8 thereof or at law or in
equity)), 110% of the amount by which (A) the Holder's total purchase price
(including brokerage commissions, if any) for the Shares purchased to make
delivery in satisfaction of a sale by such holder of the Shares to which such
holder is entitled but has not received upon a conversion exceeds (B) the net
proceeds received by such holder from the sale of the Shares to which the Holder
is entitled but has not received upon such conversion. If the Company fails to
pay the additional damages set forth in this Section 2(d)(v) within five (5)
Business Days of the date incurred, then the Holder entitled to such payments
shall have the right at any time, so long as the Company continues to fail to
make such payments, to require the Company, upon written notice, to immediately
issue, in lieu of such cash damages, the number of Shares equal to the quotient
of (X) the aggregate amount of the damages payments described herein divided by
(Y) the Conversion Price in effect on such Conversion Date as specified by the
Holder in the Conversion Notice.

                              (B) Void Conversion Notice; Adjustment to
Conversion Price. If for any reason the Holder has not received all of the
Shares prior to the tenth (10th) Business Day after the Share Delivery Date with
respect to a conversion of this Note, then the Holder, upon written notice to
the Company (a "VOID CONVERSION NOTICE"), may void its Conversion Notice with
respect to, and retain or have returned, as the case may be, any portion of this
Note that has not been converted pursuant to the Holder's Conversion Notice;
provided that the voiding of the Holder's Conversion Notice shall not affect the
Company's obligations to make any payments that have accrued prior to the date
of such notice pursuant to Section 2(d)(v)(A) or otherwise. Thereafter, the
Fixed Conversion Price with respect to all of the Principal shall be adjusted to
the lesser of (I) the Fixed Conversion Price as in effect on the date on which
the Holder voided the Conversion Notice and (II) the lowest Weighted Average
Price during the period beginning on the Conversion Date and ending on the date
such holder voided the Conversion Notice, subject to further adjustment as
provided in this Note; provided that in no

                                       11
<PAGE>

event shall an adjustment to the Fixed Conversion Price with respect to any
Principal be made pursuant to this Section 2(d)(v)(B) with respect to any
conversion of this Note that is the subject of a bona fide dispute that is
subject to and being resolved pursuant to, and in compliance with the time
periods and other provisions of, the dispute resolution provisions of Section
2(d)(iii), provided the Shares are delivered to the Holder within one (1)
Business Day of the resolution of such bona fide dispute.

                              (C) Redemption. If for any reason the Holder has
not received all of the Shares prior to the tenth (10th) Business Day after the
Share Delivery Date with respect to a conversion of this Note (a "CONVERSION
FAILURE"), then the Holder, upon written notice to the Company, may require that
the Company redeem, in accordance with Section 3, all of the Principal,
including the Principal previously submitted for conversion and with respect to
which the Company has not delivered shares of Common Stock; provided that the
Holder shall not be entitled to require redemption of any Principal pursuant to
this clause (C) solely as a result of a Conversion Failure caused by any
Principal being the subject of a bona fide dispute that is subject to and being
resolved pursuant to, and in compliance with the time periods and other
provisions of, the dispute resolution provisions of Section 2(d)(iii), provided
the Shares are delivered to the Holder within one (1) Business Day of the
resolution of such bona fide dispute.

                        (vi) Pro Rata Conversion. In the event the Company
            receives a Conversion Notice from more than one holder of the Notes
            for the same Conversion Date and the Company can convert some, but
            not all, of such Notes, then, subject to Section 5(c), the Company
            shall convert from each holder of the Notes electing to have Notes
            converted at such time a pro rata amount of such holder's Note
            submitted for conversion based on the principal amount of the Note
            submitted for conversion on such date by such holder relative to the
            principal amount of the Notes submitted for conversion on such date.

                        (vii) Mechanics of Mandatory Redemption. If any
            Principal remains outstanding on the Maturity Date, then the Holder
            shall surrender this Note, duly endorsed for cancellation, to the
            Company, and such Principal shall be redeemed by the Company as of
            the Maturity Date by payment on the Maturity Date to the Holder of
            an amount equal to the sum of (A) 100% of such Principal plus (B)
            the Additional Amount with respect to such Principal.

                        (viii) Book-Entry. Notwithstanding anything to the
            contrary set forth herein, upon conversion of this Note in
            accordance with the terms hereof, the Holder shall not be required
            to physically surrender this Note to the Company unless all of the
            Principal is being converted. The Holder and the Company shall
            maintain records showing the principal amount converted or redeemed
            and the dates of such conversions or redemptions or shall use such
            other method, reasonably satisfactory to the Holder and the Company,
            so as not to require physical surrender of this Note upon each such
            conversion or redemption. In the

                                       12
<PAGE>

            event of any dispute or discrepancy, such records of the Company
            establishing the Principal to which the Holder is entitled shall be
            controlling and determinative in the absence of error.
            Notwithstanding the foregoing, if this Note is converted or redeemed
            as aforesaid, the Holder may not transfer this Note unless the
            Holder first physically surrenders this Note to the Company,
            whereupon the Company will forthwith issue and deliver upon the
            order of the Holder a new Note of like tenor, registered as the
            Holder may request, representing in the aggregate the remaining
            Principal represented by this Note. The Holder and any assignee, by
            acceptance of this Note, acknowledge and agree that, by reason of
            the provisions of this paragraph, following conversion or redemption
            of any portion of this Note, the Principal of this Note may be less
            than the principal amount stated on the face hereof. Each Note shall
            bear the following legend:

                  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
                  OF THIS NOTE, INCLUDING SECTION 2(d)(viii) HEREOF. THE
                  PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE PRINCIPAL
                  AMOUNT STATED ON THE FACE HEREOF PURSUANT TO SECTION
                  2(d)(viii) HEREOF.

                        (ix) Application of Conversion Amounts. Subject to
            Sections 6(b), 7(b) and 13(b), any principal amount which the Holder
            converts in accordance with this Section 2 (other than pursuant to
            Installment Conversions) shall be deducted first from the
            Installment Amount relating to the latest Installment Date (i.e.,
            nearest to the Maturity Date) with respect to which Installment
            Amounts remain outstanding and then sequentially from the
            immediately preceding Installment Amounts.

                  (e) Taxes. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Shares upon the conversion
of this Note.

                  (f) Adjustments to Conversion Price. The Conversion Price will
be subject to adjustment from time to time as provided in this Section 2(f).

                        (i) Adjustment of Fixed Conversion Price upon Issuance
            of Common Stock. If and whenever on or after the Issuance Date, the
            Company issues or sells, or in accordance with this Section 2(f) is
            deemed to have issued or sold, any Shares (including the issuance or
            sale of Shares owned or held by or for the account of the Company,
            but excluding Exempted Issuances) for a consideration per share less
            than a price (the "APPLICABLE PRICE") equal to the Fixed Conversion
            Price in effect immediately prior to such time, then immediately
            after such issue or sale, the Fixed Conversion Price then in effect
            shall be reduced to an amount equal to such consideration per share.
            For purposes

                                       13
<PAGE>

            of determining the adjusted Fixed Conversion Price under this
            Section 2(f)(i), the following shall be applicable:

                              (A) Issuance of Options. If the Company in any
manner grants or sells any Options (as defined below) and the lowest price per
share for which one Share is issuable upon the exercise of any such Option or
upon conversion, exchange or exercise of any Convertible Securities (as defined
below) issuable upon exercise of such Option is less than the Applicable Price,
then such Share shall be deemed to be outstanding and to have been issued and
sold by the Company at the time of the granting or sale of such Option for such
price per share. For purposes of this Section 2(f)(i)(A), the "lowest price per
share for which one Share is issuable upon the exercise of any such Option or
upon conversion, exchange or exercise of any Convertible Securities issuable
upon exercise of such Option" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one Share upon granting or sale of the Option, upon exercise of the Option and
upon conversion, exchange or exercise of any Convertible Security issuable upon
exercise of such Option. No further adjustment of the Fixed Conversion Price
shall be made upon the actual issuance of such Share or of such Convertible
Securities upon the exercise of such Options or upon the actual issuance of such
Share upon conversion, exchange or exercise of such Convertible Securities.

                              (B) Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities and the lowest
price per share for which one Share is issuable upon such conversion, exchange
or exercise thereof is less than the Applicable Price, then such Share shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the issuance or sale of such Convertible Securities for such price per
share. For the purposes of this Section 2(f)(i)(B), the "lowest price per share
for which one Share is issuable upon such conversion, exchange or exercise"
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one Share upon the
issuance or sale of the Convertible Security and upon the conversion, exchange
or exercise of such Convertible Security. No further adjustment of the Fixed
Conversion Price shall be made upon the actual issuance of such Share upon
conversion, exchange or exercise of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Fixed Conversion Price had been or are to be
made pursuant to other provisions of this Section 2(f)(i), then no further
adjustment of the Fixed Conversion Price shall be made by reason of such issue
or sale.

                              (C) Change in Option Price or Rate of Conversion.
If the purchase, exchange or exercise price provided for in any Options, the
additional consideration, if any, payable upon the issue, conversion, exchange
or exercise of any Convertible Securities, or the rate at which any Options or
Convertible Securities are convertible into or exchangeable or exercisable for
Shares changes at any time, then the Fixed Conversion Price in effect at the
time of such change shall be adjusted to the Fixed Conversion Price that would
have been in effect at such time had such Options or Convertible Securities
provided for

                                       14
<PAGE>

such changed purchase, exchange or exercise price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold. For purposes of this Section 2(f)(i)(C), if the terms of any
Option or Convertible Security that was outstanding as of the Issuance Date are
changed in the manner described in the immediately preceding sentence, then such
Option or Convertible Security and the Shares deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment shall be made if such adjustment would result
in an increase of the Fixed Conversion Price then in effect.

                              (D) Calculation of Consideration Received. In case
any Options are issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction or series of
related transactions, (A) the Options will be deemed to have been issued for a
consideration equal to the greater of $0.01 and the specific aggregate
consideration, if any, allocated to such Options (in either case, the "OPTION
CONSIDERATION") and, for purposes of applying the provisions of this Section
2(f), the Option Consideration shall be allocated pro rata among all the shares
of Common Stock issuable upon exercise of such Options to determine the
consideration per share of Common Stock, and (B) the other securities will be
deemed to have been issued for an aggregate consideration equal to the aggregate
consideration received by the Company for the Options and other securities
(determined as provided below), less the sum of (1) the Black-Scholes Value (as
defined below) of such Options and (2) the Option Consideration. If any Shares,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any Shares, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the Company will be
the fair value of such consideration, except where such consideration received
by the Company consists of marketable securities, in which case the amount of
consideration received by the Company will be the Weighted Average Price of such
securities on the date of receipt of such securities. If any Shares, Options or
Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such Shares, Options or Convertible Securities, as the case may
be. The fair value of any consideration other than cash or securities will be
determined jointly by the Company and the holders of Notes representing at least
two-thirds (2/3) of the aggregate principal amount of the Notes then
outstanding. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the "VALUATION EVENT"),
the fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holders representing
at least two-thirds (2/3) of the aggregate principal amount of the Notes then
outstanding. The determination of such appraiser shall be final and binding upon
all parties absent error, and the fees and expenses of such appraiser shall be
borne by the Company.

                                       15
<PAGE>

                              (E) Record Date. If the Company takes a record of
the holders of Shares for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Shares, Options or in Convertible
Securities or (2) to subscribe for or purchase Shares, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Shares deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.

                              (F) Certain Definitions. For purposes of this
Section 2(f)(i), the following terms have the respective meanings set forth
below:

                                    (I) "APPROVED STOCK PLAN" means any employee
benefit plan that has been approved by the Board of Directors and stockholders
of the Company prior to the date of the Securities Purchase Agreement and listed
on Schedule 3(c) thereto, pursuant to which the Company's securities may be
issued to any employee, officer or director for services provided to the
Company.

                                    (II) "BLACK-SCHOLES VALUE" of any Options
shall mean the sum of the amounts resulting from applying the Black-Scholes
pricing model to each such Option, which calculation is made with the following
inputs: (i) the "option striking price" being equal to the lowest exercise price
possible under the terms of such Option on the date of the issuance of such
Option (the "VALUATION DATE"), (ii) the "interest rate" being equal to the
interest rate on one-year United States Treasury Bills issued most recently
prior to the Valuation Date, (iii) the "time until option expiration" being the
time from the Valuation Date until the expiration date of such Option, (iv) the
"current stock price" being equal to the Weighted Average Price of the Common
Stock on the Valuation Date, (v) the "volatility" being the 100-day historical
volatility of the Common Stock as of the Valuation Date (as reported by the
Bloomberg "HVT" screen), and (vi) the "dividend rate" being equal to zero.
Within three (3) Business Days after the Valuation Date, each of the Company and
the holder of this Note shall deliver to the other a written calculation of its
determination of the Black-Scholes Value of the Options. If the holder and the
Company are unable to agree upon the calculation of the Black-Scholes Value of
the Options within five (5) Business Days of the Valuation Date, then the
Company shall submit via facsimile the disputed calculation to an investment
banking firm (jointly selected by the Company and the holders of Notes
representing at least two-thirds (2/3) of the principal amount then outstanding)
within seven (7) Business Days of the Valuation Date. The Company shall cause
such investment banking firm to perform the calculations and notify the company
and the Holder of the results no later than ten (10) Business Days after the
Valuation Date. Such investment banking firm's calculation of the Black-Scholes
Value of the Options shall be deemed conclusive absent error. The Company shall
bear the fees and expenses of such investment banking firm for providing such
calculation.

                                    (III) "CONVERTIBLE SECURITIES" means any
stock or securities (other than Options) directly or indirectly convertible into
or exchangeable or exercisable for Shares.

                                       16
<PAGE>

                                    (IV) "EXEMPTED ISSUANCES" shall mean: (A)
Shares issued or deemed to have been issued by the Company pursuant to an
Approved Stock Plan; (B) Shares issued or deemed to have been issued upon the
conversion, exchange or exercise of any Option or Convertible Security
outstanding on the date prior to the Issuance Date and set forth in Schedule
3(c) to the Securities Purchase Agreement, provided that the terms of such
Option or Convertible Security are not amended or otherwise modified on or after
the date of the Securities Purchase Agreement; and (C) Shares issued or deemed
to have been issued by the Company upon conversion of the Notes or exercise of
the Warrants.

                                    (V) "OPTIONS" means any rights, warrants or
options to subscribe for or purchase Shares or Convertible Securities.

                        (ii) Adjustment of Fixed Conversion Price upon
            Subdivision or Combination of Common Stock. If the Company at any
            time on or after the Issuance Date subdivides (by any stock split,
            stock dividend, recapitalization or otherwise) outstanding Shares
            into a greater number of shares, the Fixed Conversion Price in
            effect immediately prior to such subdivision will be proportionately
            reduced. If the Company at any time on or after the Issuance Date
            combines (by combination, reverse stock split or otherwise) its
            outstanding Shares into a smaller number of shares, the Fixed
            Conversion Price in effect immediately prior to such combination
            will be proportionately increased.

                        (iii) Holder's Right of Alternative Conversion Price
            Following Issuance of Convertible Securities. If the Company in any
            manner issues or sells any Options or Convertible Securities at any
            time on or after the Issuance Date that are convertible into or
            exchangeable or exercisable for Shares at a price that varies or may
            vary with the market price of the Shares, including by way of one or
            more resets to a fixed price or increases in the number of Shares
            issued or issuable, or at a price that upon the passage of time or
            the occurrence of certain events automatically is reduced or is
            adjusted or at the option of any Person may be reduced or adjusted,
            whether or not based on a formulation of the then current market
            price of the Shares (each of the formulations, reductions or
            adjustment provisions for such variable price being herein referred
            to as a "VARIABLE PRICE"), then the Company shall provide written
            notice thereof via facsimile and overnight courier to the Holder
            ("VARIABLE NOTICE") on the date of issuance of such Convertible
            Securities or Options. From and after the date the Company issues
            any such Convertible Securities or Options with a Variable Price,
            the Holder shall have the right, but not the obligation, in its sole
            discretion to substitute the Variable Price for the Conversion Price
            upon conversion of any Principal by designating in the Conversion
            Notice delivered upon conversion of such Principal that, solely for
            purposes of such conversion, the Holder is relying on the Variable
            Price rather than the Conversion Price then in effect. The Holder's
            election to

                                       17
<PAGE>

            rely on a Variable Price for a particular conversion of Principal
            shall not obligate the Holder to rely on a Variable Price for any
            future conversions of Principal.

                        (iv) Other Events. If any event occurs of the type
            contemplated by the provisions of this Section 2(f) but not
            expressly provided for by such provisions (including the granting of
            stock appreciation rights, phantom stock rights or other rights with
            equity features), then the Company's Board of Directors will make an
            appropriate adjustment in the Conversion Price so as to protect the
            rights of the Holder; provided that no such adjustment will increase
            the Conversion Price as otherwise determined pursuant to this
            Section 2(f).

                        (v) Notices.

                              (A) Promptly upon any adjustment of the Conversion
Price, the Company will give written notice thereof to the Holder, setting forth
in reasonable detail, and certifying, the calculation of such adjustment.

                              (B) The Company will give written notice to the
Holder at least ten (10) Business Days prior to the date on which the Company
closes its books or takes a record (I) with respect to any dividend or
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining rights to
vote with respect to any Organic Change (as defined in Section 4(a)),
dissolution or liquidation, provided that such information shall be made known
to the public prior to or in conjunction with such notice being provided to the
Holder.

                              (C) The Company will also give written notice to
the Holder at least ten (10) Business Days prior to the date on which any
Organic Change (as defined in Section 4(a)), dissolution or liquidation will
take place, provided that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

            (3) Redemption at Option of the Holder.

                  (a) Redemption 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 Company to redeem all or a portion of the Principal at a price
("REDEMPTION PRICE") equal to the greater of (i) the sum of (x) 125% of such
Principal plus (y) the Additional Amount with respect to such Principal and (ii)
the product of (A) the Conversion Rate in effect at such time as the Holder
delivers a Notice of Redemption at Option of Holder (as defined below),
multiplied by (B) the Weighted Average Price of the Common Stock on the Trading
Day immediately preceding such Triggering Event.

                  (b) Triggering Event. A "TRIGGERING EVENT" shall be deemed to
have occurred at such time as any of the following events:

                                       18
<PAGE>

                        (i) the failure of any Registration Statement (as
            defined in the Registration Rights Agreement) to be declared
            effective by the SEC on or prior to the date that is 30 days after
            the applicable Effectiveness Deadline (as defined in the
            Registration Rights Agreement);

                        (ii) while the Registration Statement is required to be
            maintained effective pursuant to the terms of the Registration
            Rights Agreement, the effectiveness of the Registration Statement
            lapses for any reason (including the issuance of a stop order) or is
            unavailable to the Holder for sale of all of the Registrable
            Securities (as defined in the Registration Rights Agreement) in
            accordance with the terms of the Registration Rights Agreement, and
            such lapse or unavailability continues for a period of five (5)
            consecutive Trading Days or for more than an aggregate of ten (10)
            Trading Days in any 365-day period (other than days during an
            Allowable Grace Period (as defined in the Registration Rights
            Agreement));

                        (iii) the Common Stock is not quoted on The NASDAQ Stock
            Market's OTC Bulletin Board or listed on a national securities
            exchange or on the NASDAQ National Market or the NASDAQ SmallCap
            Market, or if the Common Stock has been listed on a national
            securities exchange or on the NASDAQ National Market or the NASDAQ
            SmallCap Market, the trading of the Common Stock on such market is
            suspended for a period of five (5) consecutive Trading Days or for
            more than an aggregate of ten (10) Trading Days in any 365-day
            period;

                        (iv) the Company's or the Transfer Agent's notice to any
            holder of the Notes, including by way of public announcement, at any
            time, of its intention not to comply with a request for conversion
            of any Notes into Shares that is tendered in accordance with the
            provisions of the Notes (excluding, however, a notice that relates
            solely to a bona fide dispute that is subject to and being resolved
            pursuant to, and in compliance with the time periods and other
            provisions of, the dispute resolution provisions of Section
            2(d)(iii), provided neither such dispute nor such notice is publicly
            disclosed);

                        (v) a Conversion Failure (as defined in Section
            2(d)(v)(C));

                        (vi) upon the Company's receipt or deemed receipt of a
            Conversion Notice, the Company not being obligated to issue Shares
            upon such conversion due to the provisions of Section 5(c).

                        (vii) the Company or any of its Domestic Subsidiaries
            breaches any representation, warranty, covenant or other term or
            condition of the Securities Purchase Agreement, the Registration
            Rights Agreement, the Warrants, this Note,

                                       19
<PAGE>

            the Security Documents or any other agreement, document, certificate
            or other instrument delivered in connection with the transactions
            contemplated thereby and hereby, except to the extent that such
            breach would not have a Material Adverse Effect (as defined in
            Section 3(a) of the Securities Purchase Agreement) and except, in
            the case of a breach of a covenant or other term that is curable,
            only if such breach continues for a period of at least ten (10)
            days; or

                        (viii) the Company does not comply with the provisions
            of Section 6, 7, 12 or 13 hereof or Section 4(l), 4(n), 4(o), 4(p)
            or 4(q) of the Securities Purchase Agreement.

                  (c) Mechanics of Redemption at Option of Holder. Within one
(1) Business Day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile and overnight courier ("NOTICE OF
TRIGGERING EVENT") to the Holder and each holder of the Other Notes. At any time
after the earlier of the Holder's receipt of a Notice of Triggering Event and
the Holder's becoming aware of a Triggering Event, the Holder may require the
Company to redeem up to all of the Principal by delivering written notice
thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF
HOLDER") to the Company, which Notice of Redemption at Option of Holder shall
indicate (i) the Principal that the Holder is electing to have the Company
redeem from it and (ii) the applicable Redemption Price, as calculated pursuant
to Section 3(a) above; provided that a Notice of Redemption at Option of Holder
may only be sent during the period beginning on and including the date of the
Triggering Event and ending on and including the date which is the later of (I)
twenty (20) Business Days after the date on which the Holder receives a Notice
of Triggering Event from the Company with respect to such Triggering Event and
(II) ten (10) Business Days after the date on which such Triggering Event is
cured and the Holder receives written notice from the Company confirming such
Triggering Event has been cured.

                  (d) Payment of Redemption Price. Upon the Company's receipt of
a Notice(s) of Redemption at Option of the Holder from any holder of the Other
Notes, the Company shall promptly notify the Holder by facsimile of the
Company's receipt of such notice(s). Each holder that has sent such a notice
shall, if required pursuant to Section 2(d)(viii), promptly submit to the
Company such holder's Note that such holder has elected to have redeemed. The
Company shall deliver the applicable Redemption Price to the Holder within five
(5) Business Days after the Company's receipt of a Notice of Redemption at
Option of Holder; provided that a Holder's Note shall have been so delivered to
the Company. If the Company is unable to redeem all of the Notes submitted for
redemption, the Company shall (i) redeem a pro rata amount from each holder of
the Notes based on the principal amount of the Notes submitted for redemption by
such holder relative to the aggregate principal amount of the Notes submitted
for redemption by all holders of the Notes, and (ii) in addition to any remedy
the Holder may have under this Note, the Securities Purchase Agreement and the
Security Documents, pay to the Holder interest at the rate of 2.0% per month
(prorated for partial months) in respect of the unredeemed Principal until paid
in full.

                                       20
<PAGE>

                  (e) Void Redemption. In the event that the Company does not
pay the Redemption Price within the time period set forth in Section 3(d), at
any time thereafter and until the Company pays such unpaid Redemption Price in
full, the Holder shall have the option (the "VOID OPTIONAL REDEMPTION OPTION")
to, in lieu of redemption, require the Company to promptly return to the Holder
any or all of the Notes or any portion thereof representing the Principal that
was submitted for redemption by the Holder under this Section 3 and for which
the Redemption Price (together with any interest thereon) has not been paid, by
sending written notice thereof to the Company via facsimile (the "VOID OPTIONAL
REDEMPTION NOTICE"). Upon the Company's receipt of such Void Optional Redemption
Notice, (i) the Notice of Redemption at Option of Holder shall be null and void
with respect to the Principal subject to the Void Optional Redemption Notice,
(ii) the Company shall immediately return to the Holder any Note subject to the
Void Optional Redemption Notice, (iii) the Fixed Conversion Price with respect
to all the Principal shall be adjusted to the lesser of (A) the Fixed Conversion
Price as in effect on the date on which the Void Optional Redemption Notice is
delivered to the Company and (B) the lowest Weighted Average Price during the
period beginning on and including the date on which the Notice of Redemption at
Option of Holder is delivered to the Company and ending on and including the
date on which the Void Optional Redemption Notice is delivered to the Company.

                  (f) Disputes; Miscellaneous. In the event of a bona fide
dispute as to the determination of the arithmetic calculation of the Redemption
Price, such dispute shall be resolved pursuant to Section 2(d)(iii) above, with
the term "Redemption Price" being substituted for the term "Conversion Rate." A
holder's delivery of a Void Optional Redemption Notice and exercise of its
rights following such notice shall not affect the Company's obligations to make
any payments that have accrued prior to the date of such notice. In the event of
a redemption pursuant to this Section 3 of less than all of the Principal, the
Company shall promptly cause to be issued and delivered to the Holder a Note
representing the remaining Principal that has not been redeemed, if necessary.

            (4) Other Rights of the Holders.

                  (a) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person or other transaction that is effected in such a way that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as "ORGANIC CHANGE." Prior to the
consummation of any (i) sale of all or substantially all of the Company's assets
to an acquiring Person (including, for the avoidance of any doubt, the sale of
assets of its Subsidiaries) or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "ACQUIRING ENTITY") a written agreement, in form and substance
satisfactory to the holders representing at least two-thirds (2/3) of the
aggregate principal amount of the Notes then outstanding, to deliver to the
Holder in exchange for this Note, a security of the Acquiring Entity evidenced
by a written instrument substantially similar in form and substance to this Note
and

                                       21
<PAGE>

satisfactory to the holders representing at least two-thirds (2/3) of the
aggregate principal amount of the Notes then outstanding. Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance satisfactory to the holders representing at
least two-thirds (2/3) of the aggregate principal amount of the Notes then
outstanding) to ensure that the Holder will thereafter have the right to acquire
and receive in lieu of or in addition to (as the case may be) the Shares
immediately theretofore acquirable and receivable upon the conversion of this
Note (without regard to any limitations or restrictions on conversion) such
shares of stock, securities or assets that would have been issued or payable in
such Organic Change with respect to or in exchange for the number of Shares that
would have been acquirable and receivable upon the conversion of this Note as of
the date of such Organic Change (without taking into account any limitations or
restrictions on the conversion of this Note).

                  (b) Optional Redemption Upon Change of Control. In addition to
the rights of the Holder under Section 4(a), upon a Change of Control (as
defined below) of the Company the Holder shall have the right, at the Holder's
option, to require the Company to redeem all or a portion of the Principal at a
price equal to the greater of (A) the sum of (x) 115% of the Principal plus (y)
the Additional Amount with respect to such Principal, and (B) the product of (I)
the Conversion Rate on the date the Holder gives a Notice of Redemption Upon
Change of Control (as defined below), multiplied by (II) the arithmetic average
of the Weighted Average Prices of the Common Stock during the five (5) Trading
Days immediately preceding such date (the "CHANGE OF CONTROL REDEMPTION PRICE").
No sooner than 30 nor later than 20 Business Days prior to the consummation of a
Change of Control, but not prior to the public announcement of such Change of
Control, the Company shall deliver written notice thereof via facsimile and
overnight courier (a "NOTICE OF CHANGE OF CONTROL") to the Holder. At any time
during the period beginning after receipt of a Notice of Change of Control (or,
in the event a Notice of Change of Control is not delivered at least ten (10)
Business Days prior to a Change of Control, at any time on or after the date
which is ten (10) Business Days prior to a Change of Control) and ending on the
date of such Change of Control, the Holder may require the Company to redeem all
or a portion of the Principal by delivering written notice thereof via facsimile
and overnight courier (a "NOTICE OF REDEMPTION UPON CHANGE OF CONTROL") to the
Company, which Notice of Redemption Upon Change of Control shall indicate (i)
the Principal that the Holder is submitting for redemption, and (ii) the
applicable Change of Control Redemption Price, as calculated pursuant to this
Section 4(b). Upon the Company's receipt of a Notice(s) of Redemption Upon
Change of Control from any holder of the Other Notes, the Company shall
promptly, but in no event later than one (1) Business Day following such
receipt, notify the Holder by facsimile of the Company's receipt of such
Notice(s) of Redemption Upon Change of Control. The Company shall deliver the
Change of Control Redemption Price simultaneously with the consummation of the
Change of Control; provided that, if required by Section 2(d)(viii), this Note
shall have been so delivered to the Company. The Company shall not enter into
any binding agreement or other arrangement with respect to a Change of Control
unless the Company provides that the payments provided for in this Section 4(b)
shall have priority to payments to stockholders in connection with such Change
of Control and the Company complies with such provision. For purposes of this
Section 4(b), "CHANGE OF CONTROL" means (i) the consolidation,

                                       22
<PAGE>

merger or other business combination of the Company with or into another Person
(other than (A) a consolidation, merger or other business combination in which
holders of the Company'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, or (B) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Company),
(ii) the sale or transfer of all or substantially all of the Company's assets
(including, for the avoidance of any doubt, the sale of assets of its
Subsidiaries) or (iii) the consummation of a purchase, tender or exchange offer
made to and accepted by the holders of more than the 50% of the outstanding
Shares.

                  (c) Purchase Rights. If at any time the Company grants, issues
or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of its capital stock (the "PURCHASE RIGHTS"), then the Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights that such holder could have acquired if the Holder had
held the number of Shares acquirable upon complete conversion of this Note
(without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

            (5) Limitations on Conversion.

                  (a) Permitted Conversions. The Holder shall not have the right
to convert this Note except at any time (i) pursuant to a Conversion Notice at
the Fixed Conversion Price, (ii) after the date that is 183 days after the
Issuance Date, (iii) upon the occurrence of a Triggering Event, (iv) following
the public announcement of a pending, proposed or intended Change of Control,
(v) in connection with an Installment Conversion pursuant to Section 6, (vi) in
connection with a Company Alternative Conversion pursuant to Section 8 or (vii)
in connection with a Mandatory Compliance Conversion pursuant to Section 13.

                  (b) 4.99% Limitation. The Company shall not effect any
conversion of this Note and the Holder shall not have the right to convert
Principal or any Additional Amount in excess of that portion of the Principal or
any Additional Amount that, upon giving effect to such conversion, would cause
the aggregate number of Shares beneficially owned by the Holder and its
affiliates to exceed 4.99% of the total outstanding Shares following such
conversion. For purposes of the foregoing proviso, the aggregate number of
Shares beneficially owned by the Holder and its affiliates shall include the
Shares issuable upon conversion of this Note with respect to which the
determination of such proviso is being made, but shall exclude the Shares that
would be issuable upon (i) conversion of the remaining, unconverted Principal
and any Additional Amount with respect thereto beneficially owned by the Holder
and its affiliates and (ii) exercise, conversion or exchange of the unexercised,
unconverted or unexchanged portion of any other securities of the Company
(including any warrants or

                                       23
<PAGE>

convertible preferred stock) subject to a limitation on conversion, exercise or
exchange analogous to the limitation contained herein beneficially owned by the
Holder and its affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 5, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 ACT"). For purposes of this Section 5(b), in determining the number
of outstanding Shares the Holder may rely on the number of outstanding Shares as
reflected in (1) the Company's most recent Form 10-QSB, Form 10-Q, Form 10-KSB
or Form 10-K, as the case may be, (2) a more recent public announcement by the
Company or (3) any other notice by the Company or its transfer agent setting
forth the number of Shares outstanding. Upon the written request of the Holder,
the Company shall promptly, but in no event later than two (2) Business Days
following the receipt of such request, confirm in writing to the Holder the
number of Shares then outstanding. In any case, the number of outstanding Shares
shall be determined after giving effect to the conversion, exercise or exchange
of securities of the Company, including the Notes and the Warrants, by the
Holder and its affiliates since the date as of which such number of outstanding
Shares was reported.

                  (c) Limitation on Number of Conversion Shares. Prior to the
date on which Shareholder Approval (as defined in Section 4(k) of the Securities
Purchase Agreement) has been obtained, the Company shall not be obligated to
issue any Shares upon conversion of this Note if the issuance of such Shares
would exceed that number of Shares which the Company may issue upon Conversion
of this Note (the "EXCHANGE CAP") without breaching the Company's obligations
under the rules or regulations of the Principal Market, if at the time of any
determination, the Common Stock is listed on a national securities exchange or
on the NASDAQ National Market or NASDAQ SmallCap Market, except that such
limitation shall not apply in the event that the Company obtains a written
opinion from outside counsel to the Company that approval of the Company's
shareholders is not required under the applicable rules of the Principal Market,
which opinion shall be reasonably satisfactory to the Holders representing at
least two-thirds (2/3) of the aggregate principal amount of the Notes then
outstanding. Until Shareholder Approval or such written opinion is obtained, no
purchaser of Notes pursuant to the Securities Purchase Agreement (the
"PURCHASERS") shall be issued, upon conversion of this Note, a number of Shares
greater than the product of (i) the Exchange Cap amount multiplied by (ii) such
Purchaser's Allocation Percentage (the "CAP ALLOCATION AMOUNT"). In the event
that any Purchaser shall sell or otherwise transfer any of such Purchaser's
Notes, the transferee shall be allocated a pro rata portion of such Purchaser's
Cap Allocation Amount. In the event that any holder of Notes, shall convert all
of such holder's Notes and exercise such holders Warrants into a number of
Shares which, in the aggregate, is less than such holder's Cap Allocation
Amount, then the difference between such holder's Cap Allocation Amount and the
number of Shares actually issued to such holder upon conversion of such holder's
Notes and exercise of such holder's Warrants shall be allocated to the
respective Cap Allocation Amounts of the remaining holders of Notes and Warrants
on a pro rata basis in proportion to the aggregate number of Shares issuable
upon conversion of the Notes and exercise of the Warrants then held by each such
Holder.

                                       24
<PAGE>

            (6) Installment Conversion or Redemption.

                  (a) General. With respect to each Installment Date, the
Company shall either (i) require conversion of the applicable Installment
Amount, in whole or in part, in accordance with this Section 6 at the applicable
Conversion Price, but subject to the satisfaction of the Conditions to
Installment Conversion (as defined below) (an "INSTALLMENT CONVERSION") or (ii)
redeem the applicable Installment Amount, in whole or in part, in accordance
with this Section 6 (an "INSTALLMENT REDEMPTION"); provided that all of the
outstanding applicable Installment Amount must be converted or redeemed by the
Company, subject to the provisions of this Section 6; provided further that the
Company may elect more than one of the Installment Conversion and the
Installment Redemption, if each such election is with respect to at least 20% of
the Installment Amount. Not more than fifteen (15) Business Days nor less than
ten (10) Business Days immediately preceding each Installment Date, the Company
shall deliver written notice (each an "INSTALLMENT NOTICE"), which Installment
Notice shall state (i) the portion, if any, of the applicable Installment Amount
which the Company elects to convert pursuant to an Installment Conversion (the
"INSTALLMENT CONVERSION AMOUNT"), (ii) the portion, if any, of the applicable
Installment Amount which the Company elects to redeem pursuant to an Installment
Redemption (the "INSTALLMENT REDEMPTION AMOUNT"), which amount when added to the
Installment Conversion Amount must equal the applicable Installment Amount, and
(iii) if the Company has elected, in whole or in part, an Installment
Conversion, then the Installment Notice shall certify that the Conditions to
Installment Conversion are satisfied as of the date of the Installment Notice.
If at any time during an Installment Period after the Company delivers an
Installment Notice certifying that the Conditions to Installment Conversion are
satisfied, one or more of the Conditions to Installment Conversion is no longer
satisfied (a "SUBSEQUENT CONDITION FAILURE"), the Company shall immediately
notify the Holder that the Conditions to Installment Conversion are no longer
satisfied. If the Company does not deliver an Installment Notice in accordance
with this Section 6(a), then the "INSTALLMENT REDEMPTION AMOUNT" shall mean the
applicable Installment Amount. The Installment Notice shall be irrevocable. The
Company shall elect to redeem and convert the applicable Installment Amount
pursuant to this Section 6 and the corresponding Installment Amounts of the
Other Notes pursuant to the corresponding provisions of the Other Notes in the
same ratio of principal amount being redeemed and principal amount being
converted. The Installment Redemption Amount (whether set forth in the
Installment Notice or by operation of this Section 6(a)) shall be redeemed in
accordance with Section 6(b) and the Installment Conversion Amount shall be
converted in accordance with Section 6(c).

                  (b) Mechanics of Installment Redemption. If the Company
elects, or is deemed to have elected, an Installment Redemption in accordance
with Section 6(a), then the Installment Redemption Amount, if any, which remains
outstanding on the applicable Installment Date shall be redeemed by the Company
on such Installment Date, and the Company shall pay to the Holder on such
Installment Date, by wire transfer of immediately available funds, an amount in
cash (the "INSTALLMENT REDEMPTION PRICE") equal to 100% of the Installment
Redemption Amount. If the Company fails to redeem any Installment Redemption
Amount which is outstanding on the applicable Installment Date by payment to the
Holder of the

                                       25
<PAGE>

applicable Installment Redemption Price, then in addition to any remedy the
Holder may have under this Note (including Section 3) and the Securities
Purchase Agreement (including indemnification pursuant to Section 8 thereof or
at law or in equity), the Installment Redemption Price payable in respect of
such unredeemed Installment Redemption Amount shall bear interest at the rate of
2.0% per month (prorated for partial months) until paid in full. Notwithstanding
anything to the contrary in this Section 6, but subject to Section 5, until the
Installment Redemption Price (together with any interest thereon) is paid in
full, the Installment Redemption Amount (together with any interest thereon) may
be converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 2. In the event the Holder delivers a Conversion Notice to the Company
after the earlier of the date which is 10 Business Days immediately preceding
the applicable Installment Date and the Holder's receipt of the Installment
Notice in which the Company elects or is deemed to have elected an Installment
Redemption but prior to the applicable Installment Date, the Conversion Amount
specified in such Conversion Notice shall be deducted (1) first, unless
otherwise specified in writing by the Holder, from any unconverted Installment
Conversion Amount relating to the immediately preceding Installment Date,
unconverted Pro Rata Conversion Amount relating to the immediately preceding
Installment Date and/or unconverted Mandatory Compliance Conversion Amount
relating to the immediately preceding Mandatory Compliance Conversion Notice
Date (in each case as specified in the applicable Conversion Notice) then (2)
second, from the Installment Redemption Amount, then (3) third, from any
Mandatory Compliance Redemption Amount which is the subject of a Mandatory
Compliance Notice but which has not yet been redeemed, then (4) fourth, from any
Pro Rata Redemption Amount which is the subject of a Company Alternative
Redemption Notice but which has not yet been redeemed, and then (5) fifth, in
accordance with Section 2(d)(ix).

                  (c) Mechanics of Installment Conversion. If the Company
delivers an Installment Notice with respect to any Installment Date in which the
Company elects, in whole or in part, an Installment Conversion in accordance
with Section 6(a), then, subject to Section 5, the Holder shall convert the
applicable Installment Conversion Amount, if any, which remains outstanding,
together with any Additional Amount with respect to such Installment Conversion
Amount accruing from such Installment Date through and including the applicable
Conversion Date, at such time or times as the Holder, in its sole discretion
determines, during the Installment Period commencing on such Installment Date;
provided, however, that the Holder shall not be permitted to convert at a
Conversion Price lower than the Fixed Conversion Price, during the Installment
Period, any portion of the Installment Conversion Amount that exceeds the
product of (i) the Holder's Allocation Percentage and (ii) fifteen percent (15%)
of the sum of the daily dollar trading volume (as reported by Bloomberg or any
successor thereto) of the Common Stock on its Principal Market on each of the
Trading Days during the Installment Period (such limitation, the "INSTALLMENT
VOLUME CONVERSION RESTRICTION"). The Holder shall convert all or any portion of
the applicable Installment Amount by delivering a Conversion Notice pursuant to
Section 2 with respect to the portion of such Installment Conversion Amount
being so converted and the Additional Amount with respect thereto from the
Installment Date through and including the Conversion Date thereof; provided
that the Conditions to Installment Conversion are satisfied (or waived in
writing by the Holder) on such Installment Date and at the time the Holder
delivers

                                       26
<PAGE>

the Conversion Notice. In the event of a Subsequent Condition Failure (where
such unsatisfied conditions are not waived in writing by the Holder), the
Company shall redeem such unconverted Installment Conversion Amount, or portion
thereof, together with the Additional Amount with respect thereto from the
Installment Date through and including the date of such redemption (such
designated amount being referred to as the "ADDITIONAL REDEMPTION AMOUNT"). Such
redemption shall occur on the later of the Installment Date and the first
Business Day after such Subsequent Condition Failure (either instance referred
to as the "ADDITIONAL PAYMENT DATE") and the Company shall pay to the Holder on
the Additional Payment Date, by wire transfer of immediately available funds, an
amount in cash (the "ADDITIONAL REDEMPTION PRICE") equal to 100% of the
Additional Redemption Amount. If the Company fails to redeem any Additional
Redemption Amount on the Additional Payment Date by payment of the Additional
Redemption Price, then the Holder shall have the rights set forth in Section
6(b) as if the Company failed to pay the applicable Installment Redemption Price
(including such failure constituting a Triggering Event described in Section
3(b)(viii)). In the event any Installment Conversion Amount has not been
converted by the Holder prior to the date immediately preceding the next
subsequent Installment Date (or the Maturity Date in the case of the final
installment) (the "FINAL INSTALLMENT DETERMINATION DATE"), then, subject to the
limitations set forth in this Section 6(c) and Sections 5 and 6(f), the
remaining Installment Conversion Amount shall be converted as of the Final
Installment Determination Date, as if the Holder had delivered a Conversion
Notice pursuant to Section 2 with respect to such Installment Conversion Amount
on the Final Installment Determination Date but without the Holder being
required to actually deliver such Conversion Notice, provided that the
Conditions to Installment Conversion are satisfied (or waived in writing by the
Holder) on the Final Installment Determination Date; in the event that the
Conditions to Installment Conversion are not satisfied on the Final Installment
Determination Date, the Company shall redeem the Installment Conversion Amount
in accordance with the provisions in this Section 6(c) with respect to a
redemption following a Subsequent Condition Failure. The date the Holder
receives the Installment Notice shall mean the "INSTALLMENT NOTICE DATE."
Notwithstanding anything contained herein to the contrary, no notice delivered
by the Company to any Holder regarding a Condition to Installment Conversion
shall contain any material non-public information.

                  (d) Conditions to Installment Conversion. For purposes of this
Section 6, "CONDITIONS TO INSTALLMENT CONVERSION" means the following
conditions: (i) during the period beginning on and including the Issuance Date
and ending on and including the applicable date that 100% of the applicable
Installment Amount (and any Additional Amount with respect thereto) has been
converted into Shares in accordance with this Section 6 and such Shares have
been delivered to the Holder in accordance with Section 2 (the "INSTALLMENT
CONVERSION DATE"), the Company shall have delivered Shares upon conversion of
Conversion Amounts of this Note on a timely basis as set forth in Section
2(d)(ii) and delivered Shares upon exercise of the Warrants on a timely basis as
set forth in Section 2(a) of the Warrants; (ii) on each day during the period
beginning ninety (90) days (or one (1) Business Day in the case of an election
that relates to an Interest Only Payment Date) prior to the Installment Notice
Date and ending on and including the applicable Installment Conversion Date, the
Common Stock is quoted on The NASDAQ Stock Market's OTC Bulletin Board or listed
on a national securities

                                       27
<PAGE>

exchange or on the NASDAQ National Market or the NASDAQ SmallCap Market, and if
the Common Stock is listed on a national securities exchange or on the NASDAQ
National Market or the NASDAQ SmallCap Market, the Common Stock has not been
suspended from trading on such exchange or market nor shall delisting or
suspension by such exchange or market have been threatened either (A) in writing
by such exchange or market or (B) by falling below the minimum listing
maintenance requirements of such exchange or market; (iii) during the period
beginning ninety (90) days prior to the Installment Notice Date and ending on
and including the applicable Installment Conversion Date, there shall not have
occurred the consummation of a Change of Control; (iv) during the period
beginning on and including the Issuance Date and ending on and including the
applicable Installment Conversion Date, there shall not have occurred either (x)
the public announcement of a pending, proposed or intended Change of Control
which has not been abandoned, terminated or consummated and publicly announced
as such at least ten (10) Trading Days prior to the Installment Notice Date or
(y) a Triggering Event or an Event of Default (as defined in Section 11); (v) on
each day during the period beginning forty-five (45) days (or one (1) day in the
case of an election that relates to an Interest Only Payment Date) prior to the
Installment Notice Date and ending on and including the applicable Installment
Conversion Date, the Registration Statement (as defined in the Registration
Rights Agreement) shall be effective and available for the sale of at least all
of the Registrable Securities (as defined in the Registration Rights Agreement)
and there shall not have been any Grace Period (as defined in the Registration
Rights Agreement) during such period; (vi) on each of the five consecutive
Trading Days immediately preceding the delivery of an Installment Notice
specifying any Installment Conversion Amount, the Weighted Average Price of the
Common Stock shall exceed $1.00 (subject to adjustment for stock splits, stock
dividends, stock combinations and other similar events after the date of the
Securities Purchase Agreement), (VII) the aggregate Conversion Amount of the
Notes selected for conversion by the Company as reflected in the Installment
Notice shall not require the conversion by all holders of Notes of an aggregate
Installment Conversion Amount that exceeds ten percent (10%) of the product of
(A) the arithmetic average of the daily dollar trading volume (as reported by
Bloomberg or any successor thereto) of the Common Stock on its Principal Market
on each of the twenty (20) consecutive Trading Days ending on and including the
date immediately preceding the Installment Notice Date, and (B) the number of
Expected Trading Days during the Installment Period to which the Installment
Notice relates, (viii) the Shareholder Approval has been obtained or the Common
Stock is not listed on a national securities exchange or on the NASDAQ National
Market or the NASDAQ SmallCap Market such that approval of the Company's
shareholders to issue Conversion Shares upon the conversion of the Notes and
Warrant Shares upon exercise of the Warrants in excess of the Exchange Cap is
not required and (ix) on each day during the period beginning on and including
the later of the Issuance Date and ninety (90) days prior to the Installment
Notice Date and ending on and including the applicable Installment Conversion
Date, the Company and its Subsidiaries otherwise shall have been in compliance
with in all respects and shall not have breached, or been in breach, of any
provision or covenant of the Securities Purchase Agreement, the Registration
Rights Agreement, the Security Documents, any of the Warrants or any of the
Notes.

                  (e) Installment Floor. If the Weighted Average Price of the
Common

                                       28
<PAGE>

Stock during the applicable Installment Period falls below $1.00 (subject to
adjustment for stock splits, stock dividends, stock combinations and other
similar events after the date of the Securities Purchase Agreement), or such
higher price (not to exceed 85% of the lesser of (i) the arithmetic average of
the Weighted Average Price of the Common Stock on each of the five (5) Trading
Days immediately preceding the Installment Notice Date and (ii) the Weighted
Average Price on the Trading Day immediately preceding the Installment Notice
Date) as provided by the Company in any applicable Installment Notice (the
"INSTALLMENT TRIGGER PRICE"), then any Installment Conversion pursuant to
Section 6(c) shall automatically terminate with respect to any Installment
Conversion Amount that is not subject to a Conversion Notice delivered to the
Company on or prior to the Floor Trigger Date (as defined below), in accordance
with this Section 6(e). In the event that the Company provides for a higher
price in any Installment Notice, such new Installment Trigger Price shall be the
Installment Trigger Price for all remaining Installment Periods under this Note,
until and unless the Company provides for a new Installment Trigger Price in any
subsequent Installment Notice. The Installment Trigger Price shall be subject to
adjustment for any stock dividend, stock split, stock combination or other
similar transaction. The first Trading Day, if any, during the applicable
Installment Period on which the Weighted Average Price of the Common Stock is
less than the Installment Trigger Price shall constitute a "FLOOR TRIGGER DATE"
with respect to such Installment Period. On or prior to the date that is two (2)
Business Days after such Floor Trigger Date (the "SECOND PAYMENT DATE"), the
Company shall redeem all of the remaining unconverted Installment Conversion
Amount that is not subject to a Conversion Notice delivered to the Company on or
prior to the Floor Trigger Date, together with the Additional Amount with
respect to such unconverted Installment Conversion Amount accruing from such
Installment Date through and including the date of such redemption (the "SECOND
REDEMPTION AMOUNT"), by payment to the Holder on or before the Second Payment
Date, by wire transfer of immediately available funds, an amount in cash (the
"SECOND REDEMPTION PRICE") equal to 100% of the Second Redemption Amount. If the
Company fails to redeem any Second Redemption Amount on or before the Second
Payment Date by payment of the Second Redemption Price, then the Holder shall
have the rights set forth in Section 6(b) as if the Company failed to pay the
applicable Installment Redemption Price (including such failure constituting a
Triggering Event described in Section 3(b)(viii)).

                  (f) Installment Period Volume Limitations. Notwithstanding
anything contained in this Section 6 to the contrary, the Holder shall not be
required (but shall be permitted) to convert (and shall not be deemed, solely as
a result of Section 6(c), to have converted) any portion of an Installment
Conversion Amount on the applicable Final Installment Determination Date in
excess of the difference between (A) the product of (I) the Holder's Allocation
Percentage and (II) ten percent (10%) of the sum of the daily dollar trading
volume (as reported by Bloomberg or any successor thereto) of the Common Stock
on its Principal Market on each of the Trading Days during the Installment
Period, minus (B) any Installment Conversion Amount previously converted by the
Holder during the Installment Conversion Period. In the event that any portion
of the Installment Conversion Amount remains unconverted on the Final
Installment Determination Date because the Holder has not delivered a Conversion
Notice with respect thereto on or prior to the Final Installment Determination
Date and such

                                       29
<PAGE>

portion does not otherwise convert as a result of the limitation set forth in
this Section 6(f), the Company shall redeem such unconverted portion of the
Installment Conversion Amount, together with the Additional Amount with respect
thereto from the Installment Date through and including the date of such
redemption, on or before the date that is three (3) Business Days following the
Final Installment Determination Date, by wire transfer of immediately available
funds. If the Company fails to redeem any such amount on or before such date,
then the Holder shall have the rights set forth in Section 6(b) as if the
Company failed to pay the applicable Installment Redemption Price (including
such failure constituting a Triggering Event described in Section 3(b)(viii)).

            (7) Company Alternative Redemption.

                  (a) General. At any time after 183 days after the Issuance
Date, the Company shall have the right to redeem some or all of the Principal (a
"COMPANY ALTERNATIVE REDEMPTION") (excluding Principal that is part of (x) an
Installment Amount relating to an Installment Notice Date (y) a Mandatory
Compliance Amount relating to a Mandatory Compliance Notice Date or (z) a Pro
Rata Conversion Amount relating to a Company Alternative Conversion Notice Date,
in any such case occurring prior to the Company Alternative Redemption Date) for
an amount in cash equal to the product of (A) the applicable Alternative
Redemption Rate and (B) of the sum of (i) the Principal being redeemed pursuant
to this Section 7, plus (ii) the Additional Amount with respect to such
Principal as of the Company Alternative Redemption Date (as defined below) (the
"COMPANY ALTERNATIVE REDEMPTION PRICE"); provided that the Conditions to Company
Alternative Redemption (as set forth in Section 7(c)) and the conditions of this
Section 7(a) and Section 7(b) are satisfied (or waived in writing by the
Holder). The Company may exercise its right to Company Alternative Redemption by
delivering to the Holder written notice ("COMPANY ALTERNATIVE REDEMPTION
NOTICE") at least fifteen (15) Business Days but not more than twenty (20)
Business Days prior to the date of consummation of such redemption ("COMPANY
ALTERNATIVE REDEMPTION DATE"). The date on which the Holder receives the Company
Alternative Redemption Notice is referred to as the "COMPANY ALTERNATIVE
REDEMPTION NOTICE DATE." The Company Alternative Redemption Notice shall be
irrevocable. If the Company elects a Company Alternative Redemption pursuant to
this Section 7(a), then it must simultaneously take the same action with respect
to the Other Notes. If the Company elects a Company Alternative Redemption (or
similar action under the Other Notes) with respect to less than all of the
aggregate principal amount of the Notes then outstanding (ignoring for such
purposes all principal amounts that are part of Installment Amounts for any
Installment Date occurring prior to the Company Alternative Redemption Date or
the corresponding provisions under the Other Notes), then the Company shall
elect to redeem a principal amount (together with the related Additional Amount)
from each of the holders of the Notes equal to the product of (I) the aggregate
principal amount of Notes that the Company has elected to redeem pursuant to
this Section 7 (or the similar provisions of the Other Notes), multiplied by
(II) the Holder's Allocation Percentage (such amount with respect to each Holder
is referred to as its "PRO RATA REDEMPTION AMOUNT" and with respect to the
Holder is referred to as the Pro Rata Redemption Amount). In the event that the
initial holder of any Notes shall sell or otherwise transfer any of such
holder's Notes, the transferee shall be

                                       30
<PAGE>

allocated a pro rata portion of such holder's Allocation Percentage. The Company
Alternative Redemption Notice shall state (i) the date selected by the Company
for the Company Alternative Redemption Date in accordance with this Section
7(a), (ii) the aggregate principal amount of the Notes that the Company has
elected to redeem from all of the holders of the Notes pursuant to this Section
7 and (iii) each holder's Pro Rata Redemption Amount of the principal amount of
the Notes the Company has elected to redeem pursuant to this Section 7(a).

                  (b) Mechanics of Company Alternative Redemption. If the
Company has exercised its right to Company Alternative Redemption in accordance
with Section 7(a) and the conditions of this Section 7 are satisfied on the
Company Alternative Redemption Date (including the Conditions to Company
Alternative Redemption as set forth in Section 7(c)) (or waived in writing by
the Holder), then the Pro Rata Redemption Amount, if any, that remains
outstanding on the Company Alternative Redemption Date shall be redeemed by the
Company on such Company Alternative Redemption Date by the payment by the
Company to the Holder on the Company Alternative Redemption Date, by wire
transfer of immediately available funds, of an amount equal to the Company
Alternative Redemption Price for the Pro Rata Redemption Amount. Notwithstanding
anything contained herein to the contrary, if the Holder delivers a Conversion
Notice after a Company Alternative Redemption Notice Date, but prior to the
Company Alternative Redemption Date, then the Conversion Amount specified in
such Conversion Notice shall be deducted (1) first, unless otherwise specified
in writing by the Holder, from any unconverted Installment Conversion Amount
relating to the immediately preceding Installment Date, unconverted Pro Rata
Conversion Amount relating to the immediately preceding Installment Date and/or
unconverted Mandatory Compliance Conversion Amount which is the subject of a
Mandatory Compliance Conversion Notice relating to the immediately preceding
Early Repayment Notice Date (in each case as specified in the applicable
Conversion Notice), then (2) second, from any Installment Redemption Amount
which is the subject of an Installment Notice but which has not yet been
redeemed, then (3) third, from any Mandatory Compliance Redemption Amount which
is the subject of a Mandatory Compliance Notice but which has not yet been
redeemed, then (4) fourth, from the Pro Rata Redemption Amount, and then (5)
fifth, in accordance with Section 2(d)(ix). All principal amounts of this Note
redeemed pursuant to this Section 7 shall be deducted first from the Installment
Amount relating to the latest Installment Date (i.e., nearest to the Maturity
Date) with respect to which Installment Amounts remain outstanding and then
sequentially from the immediately preceding Installment Amounts. Notwithstanding
anything contained herein to the contrary, no notice delivered by the Company to
any Holder regarding a Condition to Company Alternative Redemption shall contain
any material non-public information.

                  (c) Conditions to Company Alternative Redemption. For purposes
of this Section 7, "CONDITIONS TO COMPANY ALTERNATIVE REDEMPTION" means the
following conditions: (i) during the period beginning on and including Issuance
Date and ending on and including the Company Alternative Redemption Date, the
Company shall have delivered Shares upon conversion of Conversion Amounts on a
timely basis as set forth in Section 2(d)(ii) and delivered Shares upon exercise
of the Warrants on a timely basis as set forth in Section 2(a) of the Warrants;
(ii) on each day during the period beginning ninety (90) days prior to the
Company

                                       31
<PAGE>

Alternative Redemption Notice Date and ending on and including the applicable
Company Alternative Redemption Date, the Common Stock is quoted on The NASDAQ
Stock Market's OTC Bulletin Board or listed on a national securities exchange or
on the NASDAQ National Market or the NASDAQ SmallCap Market, and if the Common
Stock is listed on a national securities exchange or on the NASDAQ National
Market or the NASDAQ SmallCap Market, the Common Stock has not been suspended
from trading on such exchange or market nor shall delisting or suspension by
such exchange or market have been threatened either (A) in writing by such
exchange or market or (B) by falling below the minimum listing maintenance
requirements of such exchange or market; (iii) during the period beginning on
and including the Issuance Date and ending on and including the applicable
Company Alternative Redemption Date, there shall not have occurred either (x)
the public announcement of a pending, proposed or intended Change of Control
that has not been abandoned, terminated or consummated and publicly disclosed as
such at least ten (10) Trading Days prior to the Company Alternative Redemption
Notice Date or (y) a Triggering Event or an Event of Default; (iv) on each day
during the period beginning ninety (90) days prior to the Company Alternative
Redemption Notice Date and ending on and including the applicable Company
Alternative Redemption Date, the Initial Registration Statement (as defined in
the Registration Rights Agreement) shall be effective and available for the sale
of at least all of the Registrable Securities (as defined in the Registration
Rights Agreement) and there shall not have been any Grace Period (as defined in
the Registration Rights Agreement) during such period; (v) if a Change of
Control is consummated on or after the Issuance Date, the Company Alternative
Redemption Date is at least twenty (20) Business Days after the consummation and
public announcement of such Change of Control; and (vi) on each day during the
period beginning ninety (90) days prior to the Company Alternative Redemption
Notice Date and ending on and including the applicable Company Alternative
Redemption Date, the Company and its Subsidiaries otherwise shall have been in
compliance with in all respects and shall not have breached or been in breach of
any provision or covenant of the Securities Purchase Agreement, the Security
Documents, the Registration Rights Agreement, any of the Warrants or any of the
Notes.

                  (d) Remedies. In the event that the Company does not pay the
Company Alternative Redemption Price in full for the Holder's Pro Rata
Redemption Amount on the Company Alternative Redemption Date and the Conditions
to the Company Alternative Redemption were satisfied, or to the extent not
satisfied, were waived by the Holder, then in addition to any remedy the Holder
may have under this Note and the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof or at law or in equity) (i) the
Company Alternative Redemption Price payable in respect of such unredeemed Pro
Rata Redemption Amount shall bear interest at the rate of 2.0% per month
(prorated for partial months) and (ii) the Company shall not be permitted to
submit another Company Alternative Redemption Notice without the prior written
consent of the Holder.

            (8) Company Alternative Conversion.

                  (a) General. The Company shall have the right, in its sole
discretion, to require that all or any portion of the Principal (together with
the Additional Amount with

                                       32
<PAGE>

respect thereto) be converted ("COMPANY ALTERNATIVE CONVERSION") (excluding
Principal that is part of (x) an Installment Amount relating to an Installment
Notice Date (y) a Mandatory Compliance Amount relating to a Mandatory Compliance
Notice Date or (z) a Pro Rata Redemption Amount relating to a Company
Alternative Redemption Notice Date, in any such case occurring prior to the
Company Alternative Conversion Notice Date) at the applicable Conversion Price
during any Installment Period commencing on or after March 1, 2005, in
accordance with the terms and conditions of this Section 8 and provided that the
Conditions to Company Alternative Conversion (as set forth below) are satisfied.
The Company may exercise its right to Company Alternative Conversion only by
delivering to the Holder written notice thereof ("COMPANY ALTERNATIVE CONVERSION
NOTICE") at the same time it delivers the Installment Notice with respect to
such Installment Period. The date on which the Holder receives the Company
Alternative Conversion Notice is referred to as the "COMPANY ALTERNATIVE
CONVERSION NOTICE DATE"). The Company Alternative Conversion Notice shall be
irrevocable by the Company. If the Company elects a Company Alternative
Conversion pursuant to this Section 8, then it must simultaneously take the same
action with respect to the Other Notes. The Company shall require conversion of
a principal amount (together with the related Additional Amount) from each
holder of the Notes equal to the product of (I) the aggregate principal amount
of Notes that the Company has elected to convert pursuant to this Section 8 (or
the similar provisions of the Other Notes), multiplied by (II) such holder's
Allocation Percentage (such amount with respect to each holder is referred to as
its "PRO RATA CONVERSION AMOUNT"). The Company Alternative Conversion Notice
shall indicate (x) the aggregate principal amount of the Notes that the Company
has elected to convert from all the holders of the Notes pursuant to this
Section 8 (or other similar provisions in the Other Notes) and (z) each holder's
Pro Rata Conversion Amount of the principal amount of the Notes the Company has
elected to convert pursuant to this Section 8 (or other similar provisions in
the Other Notes).

                  (b) Mechanics of Company Alternative Conversion. If the
Company has exercised its right to Company Alternative Conversion in accordance
with Section 8(a) and the conditions of this Section 8 are satisfied on the
Company Alternative Conversion Date (including the Conditions to Company
Alternative Conversion as set forth in Section 8(c)) (or waived in writing by
the Holder), then, subject to the limitations set forth in Sections 5 and 8(d),
the Holder shall convert the Pro Rata Conversion Amount, together with any
Additional Amount with respect to the allocable portion of the principal
represented by such Pro Rata Conversion Amount accruing through and including
the applicable Conversion Date, at such time or times as the Holder, in its sole
discretion determines, during the Company Alternative Conversion Period (as
defined below). If the Conditions to Company Alternative Conversion are not
satisfied (or waived in writing by the Holder) on such Company Alternative
Conversion Date, then the Company Alternative Conversion shall be null and void
with respect to all or any part designated by the Holder of the unconverted Pro
Rata Conversion Amount and the Holder shall be entitled to all the rights of a
holder of this Note with respect to such amount of the Pro Rata Conversion
Amount, and, accordingly, shall be subject to all the other provisions of this
Note, including that if such amount remains outstanding on the Maturity Date,
then the Company shall redeem the Principal represented by such amount in
accordance with Section 2(d)(vii). In the event any Pro

                                       33
<PAGE>

Rata Conversion Amount has not been converted by the Holder prior to the date
immediately preceding the next subsequent Installment Date (or the Maturity Date
in the case of the final installment) (the "FINAL COMPANY ALTERNATIVE CONVERSION
DETERMINATION DATE"), then, subject to the limitations set forth in Sections 5
and 8(e), the remaining Pro Rata Conversion Amount shall be converted as of the
Final Company Alternative Conversion Determination Date, as if the Holder had
delivered a Conversion Notice pursuant to Section 2 with respect to such Pro
Rata Conversion Amount on the Final Company Alternative Conversion Determination
Date but without the Holder being required to actually deliver such Conversion
Notice, provided that the Conditions to Company Alternative Conversion are
satisfied (or waived in writing by the Holder) on the Final Company Alternative
Conversion Determination Date; in the event that the Conditions to Company
Alternative Conversion are not satisfied on the Final Company Alternative
Conversion Determination Date, then the Company Alternative Conversion shall be
null and void with respect to all or any part designated by the Holder of the
unconverted Pro Rata Conversion Amount and the Holder shall be entitled to all
the rights of a holder of this Note with respect to such amount of the Pro Rata
Conversion Amount, and, accordingly, shall be subject to all the other
provisions of this Note, including that if such amount remains outstanding on
the Maturity Date, then the Company shall redeem the Principal represented by
such amount in accordance with Section 2(d)(vii). Notwithstanding anything
contained herein to the contrary, no notice delivered by the Company to any
Holder regarding a Condition to Company Alternative Conversion shall contain any
material non-public information. "COMPANY ALTERNATIVE CONVERSION PERIOD" means
the next Installment Period following a Company Alternative Conversion Notice.

                  (c) Conditions to Company Alternative Conversion. "CONDITIONS
TO COMPANY ALTERNATIVE CONVERSION" means the following conditions: (i) the
aggregate principal amount of the Notes selected for conversion by the Company
as reflected in the Company Alternative Conversion Notice is at least $500,000
(or, if less, the aggregate principal amount of the Notes then outstanding);
(ii) the aggregate Conversion Amount of the Notes selected for conversion by the
Company as reflected in the Company Alternative Conversion Notice shall not
exceed the difference between (A) ten percent (10%) of the product of (I) the
arithmetic average of the daily dollar trading volume (as reported by Bloomberg
or any successor thereto) of the Common Stock on its Principal Market over the
twenty (20) consecutive Trading Days ending on and including the date that is
immediately preceding the Company Alternative Conversion Notice Date and (II)
the number of Expected Trading Days during such Company Alternative Conversion
Period to which the Company Alternative Conversion Notice relates, minus (B) the
aggregate of any Installment Conversion Amounts of all of the Notes with respect
to such Installment Period; (iii) during the period beginning on and including
the Issuance Date and ending on and including the Company Alternative Conversion
Date, there shall not have occurred either (x) the public announcement of a
pending, proposed or intended Change of Control that has not been abandoned,
terminated or consummated and publicly disclosed as such at least ten (10)
Trading Days prior to the Company Alternative Conversion Date or (y) a
Triggering Event or an Event of Default; (iv) during the period beginning on and
including the Issuance Date and ending on and including the date on which 100%
of the applicable Pro Rata Conversion Amount (and any Additional Amount with
respect thereto) has been converted into

                                       34
<PAGE>

Common Stock in accordance with this Section 8 (the "COMPANY ALTERNATIVE
CONVERSION DATE"), the Company shall have delivered Shares upon conversion of
the Notes and upon exercise of the Warrants on a timely basis as set forth in
Section 2(d)(ii) of the Notes and Section 2(a) of the Warrants, respectively;
(v) on each day during the period beginning on and including the date that is
ninety (90) days prior to the Company Alternative Conversion Notice Date and
ending on and including the applicable Company Alternative Conversion Date, the
Common Stock is quoted on The NASDAQ Stock Market's OTC Bulletin Board or listed
on a national securities exchange or on the NASDAQ National Market or the NASDAQ
SmallCap Market, and if the Common Stock is listed on a national securities
exchange or on the NASDAQ National Market or the NASDAQ SmallCap Market, the
Common Stock has not been suspended from trading on such exchange or market nor
shall delisting or suspension by such exchange or market have been threatened
either (A) in writing by such exchange or market or (B) by falling below the
minimum listing maintenance requirements of such exchange or market; (vi) on
each day during the period beginning on and including the date that is ninety
(90) days prior to the Company Alternative Conversion Notice Date and ending on
and including the Company Alternative Conversion Date, the Initial Registration
Statement (as defined in the Registration Rights Agreement) shall be effective
and available for the sale of at least all of the Registrable Securities (as
defined in the Registration Rights Agreement) and there shall not have been any
Grace Period (as defined in the Registration Rights Agreement); (vii) on each
day during the period beginning ninety (90) days, prior to the Company
Alternative Conversion Notice Date, the Company and its Subsidiaries otherwise
shall have been in compliance with in all respects and shall not have breached
or been in breach of any provision or covenant of the Securities Purchase
Agreement, the Registration Rights Agreement, the Security Documents, any of the
Warrants or any of the Notes; (viii) the Shareholder Approval has been obtained
or the Common Stock is not listed on a national securities exchange or on the
NASDAQ National Market or the NASDAQ SmallCap Market such that approval of the
Company's shareholders to issue Conversion Shares upon the conversion of the
Notes and Warrant Shares upon exercise of the Warrants in excess of the Exchange
Cap is not required and (ix) on each of the five consecutive Trading Days
immediately preceding the delivery of the Company Alternative Conversion Notice
specifying any Pro Rata Conversion Amount, the Weighted Average Price of the
Common Stock shall exceed $1.00 (subject to adjustment for stock splits, stock
dividends, stock combinations and other similar events after the date of the
Securities Purchase Agreement).

                  (d) Company Alternative Conversion Floor. If the Weighted
Average Price of the Common Stock during the applicable Company Alterative
Conversion Period falls below $1.00 (subject to adjustment for stock splits,
stock dividends, stock combinations and other similar events after the date of
the Securities Purchase Agreement) or such higher price (which shall be the same
as the Installment Trigger Price then in effect, if the Company has established
an Installment Trigger Price in excess of $1.00 (subject to adjustment for stock
splits, stock dividends, stock combinations and other similar events after the
date of the Securities Purchase Agreement), or otherwise shall not exceed 85% of
the lesser of (i) the arithmetic average of the Weighted Average Price of the
Common Stock on each of the five (5) Trading Days immediately preceding the
Company Alternative Conversion Notice Date and (ii) the Weighted Average Price
on the Trading Day immediately preceding the Company Alternative

                                       35
<PAGE>

Conversion Notice Date) as provided by the Company in the applicable Company
Alternative Conversion Notice (the "COMPANY ALTERATIVE CONVERSION TRIGGER
PRICE"), then any Company Alterative Conversion pursuant to Section 8(b) shall
automatically terminate with respect to any Pro Rata Conversion Amount that is
not subject to a Conversion Notice delivered to the Company on or prior to the
Company Alternative Conversion Floor Trigger Date (as defined below), in
accordance with this Section 8(d). The Company Alterative Conversion Trigger
Price shall be subject to adjustment for any stock dividend, stock split, stock
combination or other similar transaction. The first Trading Day, if any, during
the applicable Company Alterative Conversion Period on which the Weighted
Average Price of the Common Stock is less than the Company Alterative Conversion
Trigger Price shall constitute a "COMPANY ALTERATIVE CONVERSION FLOOR TRIGGER
DATE" with respect to such Company Alterative Conversion Period. On the first
day immediately following the Company Alterative Conversion Floor Trigger Date,
the Company Alternative Conversion shall be null and void with respect to all or
any part designated by the Holder of the unconverted Pro Rata Conversion Amount
that is not subject to a Conversion Notice delivered to the Company on or prior
to the Company Alternative Conversion Floor Trigger Date and the Holder shall be
entitled to all the rights of a holder of this Note with respect to such amount
of the Pro Rata Conversion Amount, and, accordingly, shall be subject to all the
other provisions of this Note, including that if such amount remains outstanding
on the Maturity Date, then the Company shall redeem the Principal and interest
represented by such amount in accordance with Section 2(d)(vii).

                  (e) Company Alternative Conversion Period Volume Limitations.
Notwithstanding anything contained in this Section 8 to the contrary, the Holder
shall not be required (but shall be permitted) to convert (and shall not be
deemed, solely as a result of Section 8(b), to have converted) any portion of
the Pro Rata Conversion Amount on the applicable Final Company Alternative
Determination Date in excess of the difference between (A) the product of (I)
the Holder's Allocation Percentage and (II) ten percent (10%) of the sum of the
daily dollar trading volume (as reported by Bloomberg or any successor thereto)
of the Common Stock on its Principal Market on each of the Trading Days during
the Company Alternative Conversion Period, minus (B) the aggregate of any
Conversion Amounts converted by the Holder during the Company Alternative
Conversion Period (such determination to be made after the applicable
determinations are made on the same date pursuant to Sections 6(f) and 13(f)).
Following the Final Company Alternative Conversion Determination Date, the
Company Alternative Conversion shall be null and void with respect to the Pro
Rata Conversion Amount which was not converted on the Final Company Alternative
Conversion Determination Date as a result of the limitation set forth in the
immediately preceding sentence, and the Holder shall be entitled to all the
rights of a holder of this Note with respect to such amount of the Pro Rata
Conversion Amount, and, accordingly, shall be subject to all the other
provisions of this Note, including that if such amount remains outstanding on
the Maturity Date, then the Company shall redeem the Principal and interest
represented by such amount in accordance with Section 2(d)(vii).

            (9) Reservation of Shares.

                                       36
<PAGE>

                  (a) Reservation. The Company shall, so long as any of the
Notes are outstanding, take all action necessary to reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Notes, such number of Shares as shall from time
to time be sufficient to effect the conversion of all of the principal amount
then outstanding under the Notes (together with accrued Additional Amounts
thereon); provided that the number of Shares so reserved shall at no time be
less than 200% of the number of Shares for which the Notes are at any time
convertible (without regard to any limitations on conversions) (the "REQUIRED
RESERVE AMOUNT"). The initial number of Shares reserved for conversions of the
Notes and each increase in the number of shares so reserved shall be allocated
pro rata among the holders of the Notes based on the principal amount of the
Notes held by each holder at the time of issuance of the Notes or increase in
the number of reserved Shares, as the case may be. In the event the Holder shall
sell or otherwise transfer any portion of the Holder's Notes, each transferee
shall be allocated a pro rata portion of the number of Shares reserved for such
transferor. Any Shares reserved and allocated to any Person that ceases to hold
any Notes shall be allocated to the remaining holders of the Notes, pro rata
based on the principal amount of the Notes then held by such holders.

                  (b) Insufficient Authorized Shares. If at any time while any
of the Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved Shares to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of Shares equal to the
Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then the Company shall
immediately take all action necessary to increase the Company's authorized
Shares to an amount sufficient to allow the Company to reserve the Required
Reserve Amount for the Notes then outstanding. Without limiting the generality
of the foregoing sentence, as soon as practicable after the date of the
occurrence of an Authorized Share Failure, but in no event later than ninety
(90) days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its stockholders for the authorization of an increase in
the number of authorized Shares. In connection with such meeting, the Company
shall file with the SEC, and provide each stockholder with, a proxy statement
and shall use its best efforts to solicit its stockholders' approval of such
increase in authorized Shares and to cause its Board of Directors to recommend
to the stockholders that they approve such proposal. The proxy statement shall
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein in light of the circumstances under which they were made not
misleading.

            (10) Voting Rights. The Holders of the Notes shall have no voting
rights, except as required by law and as expressly provided in this Note.

            (11) Defaults and Remedies.

                  (a) Events of Default. An "EVENT OF DEFAULT" is (i) default in
payment of any principal amount of this Note, the Redemption Price, the
Installment Redemption Price, the Additional Redemption Price, the Second
Redemption Price, the Company Alternative Redemption Price, the Change of
Control Redemption Price, the

                                       37
<PAGE>

Mandatory Compliance Additional Redemption Price, the Mandatory Second
Redemption Price or the Mandatory Compliance Redemption Price when and as due;
(ii) failure by the Company for ten (10) days after notice to it to comply with
any other provision of this Note in all material respects; (iii) any default in
payment of at least $100,000, individually or in the aggregate, under or
acceleration prior to maturity of, or any event or circumstances arising such
that, any person is entitled, or could, with the giving of notice and/or lapse
of time and/or the fulfillment of any condition and/or the making of any
determination, become entitled, to require repayment before its stated maturity
of, or to take any step to enforce any security for, any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed of at least $100,000 by the
Company or any of its Subsidiaries or for money borrowed the repayment of at
least $100,000 of which is guaranteed by the Company or any of its Subsidiaries,
whether such indebtedness or guarantee now exists or shall be created hereafter;
(iv) if the Company or any of its Subsidiaries pursuant to or within the meaning
of any Bankruptcy Law (as defined below); (A) commences a voluntary case; (B)
consents to the entry of an order for relief against it in an involuntary case;
(C) consents to the appointment of a Custodian of it or any of its Subsidiaries
for all or substantially all of its property; (D) makes a general assignment for
the benefit of its creditors; or (E) admits in writing that it is generally
unable to pay its debts as the same become due; (v) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (1) is for
relief against the Company in an involuntary case; (2) appoints a Custodian (as
defined below) of the Company or any Subsidiary for all or substantially all of
its property; or (3) orders the liquidation of the Company or any Subsidiary;
(vi) the Company fails to file, or is determined to have failed to file, in a
timely manner any report required to be filed with the SEC pursuant to the 1934
Act; provided, however, that a failure to file in a timely manner a report that
is required solely pursuant to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06 or
4.02(a) of SEC Form 8-K shall not be deemed an Event of Default pursuant to this
clause (vi); (vii) the Company or any of its Domestic Subsidiaries breaches any
representation, warranty, covenant or other term or condition of the Security
Documents; or (viii) one or more judgments, non-interlocutory orders or decrees
shall be entered against any the Company or any of its Subsidiaries involving in
the aggregate a liability (to the extent not covered by independent third-party
insurance) as to any single or related series of transactions, incidents or
conditions, of $100,000 or more, and the same shall remain unsatisfied,
unvacated, unbonded or unstayed pending appeal for a period of thirty (30) days
after the entry thereof. The term "BANKRUPTCY LAW" means Title 11, U.S. Code, or
any similar federal or state law for the relief of debtors. The term "CUSTODIAN"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law. Within five (5) Business Days after the occurrence of any Event
of Default set forth in clause (iii) or clause (vi) above, the Company shall
deliver written notice thereof to the Holder.

                  (b) Remedies. If an Event of Default occurs and is continuing,
the Holder of this Note may declare all of this Note, including all amounts due
hereunder (the "ACCELERATION AMOUNT"), to be due and payable immediately, except
that in the case of an Event of Default arising from events described in clauses
(iv) and (v) of Section 11(a), this Note shall immediately become due and
payable without further action or notice. In addition to any remedy the Holder
may have under this Note and the Securities Purchase Agreement, such

                                       38
<PAGE>

unpaid amount shall bear interest at the rate of 2.0% per month (prorated for
partial months) until paid in full. Nothing in this Section 11 shall limit any
other rights the Holder may have under this Note, the Security Documents or the
Securities Purchase Agreement, including Section 3 of this Note.

                  (c) Void Acceleration. In the event that the Company does not
pay the Acceleration Amount within five (5) Business Days of this Note becoming
due under Section 11(b), at any time thereafter and until the Company pays such
unpaid Acceleration Amount in full, the Holder shall have the option (the "VOID
ACCELERATION OPTION") to, in lieu of redemption, require the Company to promptly
return this Note (to the extent this Note has been previously delivered to the
Company), in whole or any portion thereof, to the Holder, by sending written
notice thereof to the Company via facsimile (the "VOID ACCELERATION NOTICE").
Upon the Company's receipt of such Void Acceleration Notice, (i) the
acceleration pursuant to Section 11(b) shall be null and void with respect to
the portion of this Note subject to such Void Acceleration Notice, (ii) the
Company shall promptly return this Note (to the extent this Note has been
previously delivered to the Company) to the Holder, (iii) the Fixed Conversion
Price with respect to all the Principal shall be adjusted to the lesser of (A)
the Fixed Conversion Price as in effect on the date on which the Void
Acceleration Notice is delivered to the Company and (B) the lowest Weighted
Average Price of the Common Stock during the period beginning on and including
the date on which this Note became due under Section 11(b) and ending on and
including the date on which the Void Acceleration Notice is delivered to the
Company.

            (12) Other Indebtedness. Payments of principal and other payments
due under this Note shall not be subordinated to any obligations of the Company.
The Holder of this Note is entitled to the benefits of the Security Documents,
and in the event of a transfer of this Note in accordance with the terms hereof
and the Securities Purchase Agreement, the Holder shall be deemed to have
assigned its rights under the Security Documents. For so long as this Note is
outstanding, the Company shall not, and shall not permit any of its Subsidiaries
(as defined in the Securities Purchase Agreement) to, (a) issue or incur any
Indebtedness (as defined below), except for Indebtedness the holders of which
agree in writing to be subordinate to this Note on terms and conditions
acceptable to the Holder, including with regard to interest payments or
repayment of principal, (b) issue or incur any Indebtedness that would mature or
require or permit repayment or redemption prior to the Maturity Date; (c) issue
or incur any Indebtedness which is secured by any of the collateral or other
property subject to the Security Documents; (d) issue any capital stock of the
Company or any Subsidiary redeemable prior to the Maturity Date; or (e) directly
or indirectly, create, assume or suffer to exist any Lien on any asset now owned
or hereafter acquired by the Company or any of its Subsidiaries. For purposes of
this Note: (x) "INDEBTEDNESS" of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
unsecured account trade payables that are (i) entered into or incurred in the
ordinary course of the Company's and its Subsidiaries' business, (ii) on terms
that require full payment within 90 days, (iii) not unpaid in excess of 90 days
beyond invoice due date or are being contested in good faith and as to which
such reserve as is required by United States generally accepted accounting
principles ("GAAP") has been made and (iv) not exceeding

                                       39
<PAGE>

at any one time an aggregate among the Company and its Subsidiaries of
$2,500,000), (C) all reimbursement or payment obligations with respect to
letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures, redeemable capital stock or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property
or assets acquired with the proceeds of such indebtedness (even though the
rights and remedies of the seller or bank under such agreement in the event of
default are limited to repossession or sale of such property), (F) all
indebtedness referred to in clauses (A) through (E) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, change, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person that
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (G) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (A) through (F)
above, and (y) "CONTINGENT OBLIGATION" means, as to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

            (13) Mandatory Compliance Conversion or Redemption.

                  (a) General. On or after January 1, 2005, upon the occurrence
of an Equity Liquidity Test Failure or a Share Availability Test Failure, the
Holder may elect to have up to that principal amount of this Note equal to the
Mandatory Compliance Amount, and any Additional Amount with respect thereto,
repaid early by the Company. Beginning on January 1, 2005 and on each first
Business Day of each calendar month thereafter, the Company shall deliver to the
Holder a certificate executed by its Chief Financial Officer (an "OFFICER'S
CERTIFICATE") certifying as to whether or not as of such date there is an Equity
Liquidity Test Failure or a Share Availability Test Failure, and the related
calculations thereto. Notwithstanding any failure by the Company to timely
deliver such Officer's Certificate, the Holder shall still have the right to
elect to have a portion of this Note redeemed in accordance with this Section 13
by delivering to the Company an Early Repayment Election Notice (as defined
below). If, in the event of an Equity Liquidity Test Failure or a Share
Availability Test Failure, the Holder elects to have all or any portion of the
Mandatory Compliance Amount repaid early in accordance with this Section 13, the
Holder shall provide the Company with written notice (an "EARLY REPAYMENT
ELECTION NOTICE") of such election (an "EARLY REPAYMENT ELECTION") not later
than two (2) Business Days after receipt by the Holder of an Officer's
Certificate that certifies the existence of the Equity Liquidity Test Failure or
the Share Availability Test Failure. The date of the Holder's delivery of an
Early Repayment Election Notice is referred to herein as the "EARLY REPAYMENT
NOTICE DATE." Upon receipt of the Early

                                       40
<PAGE>

Repayment Election Notice, the Company shall either (i) require conversion of
the applicable Mandatory Compliance Amount, in whole or in part, in accordance
with this Section 13 at the applicable Conversion Price, but subject to the
limitations set forth in Sections 5 and 13(f) and satisfaction of the Conditions
to Mandatory Compliance Conversion (as defined below) (a "MANDATORY COMPLIANCE
CONVERSION") or (ii) redeem the applicable Mandatory Compliance Amount, in whole
or in part, in accordance with this Section 13 (a "MANDATORY COMPLIANCE
REDEMPTION"); and provided that all of the outstanding applicable Mandatory
Compliance Amount must be converted or redeemed by the Company, subject to the
provisions of this Section 13; provided further that the Company may elect more
than one of the Mandatory Compliance Conversion and the Mandatory Compliance
Redemption, if each such election is with respect to at least 20% of the
Mandatory Compliance Amount. Within two (2) Business Days of the Early Repayment
Notice Date, the Company shall deliver a written notice to the Holder (each a
"MANDATORY COMPLIANCE NOTICE"), which Mandatory Compliance Notice shall state
(i) the portion, if any, of the applicable Mandatory Compliance Amount which the
Company elects to convert pursuant to an Mandatory Compliance Conversion (the
"MANDATORY COMPLIANCE CONVERSION AMOUNT"), (ii) the portion, if any, of the
applicable Mandatory Compliance Amount which the Company elects to redeem
pursuant to an Mandatory Compliance Redemption (the "MANDATORY COMPLIANCE
REDEMPTION AMOUNT"), which amount when added to the Mandatory Compliance
Conversion Amount must equal the applicable Mandatory Compliance Amount, and
(iii) if the Company has elected, in whole or in part, a Mandatory Compliance
Conversion, then the Mandatory Compliance Notice shall certify as of the date of
the Mandatory Compliance Notice that the Conditions to Mandatory Compliance
Conversion are satisfied as of the date of the Mandatory Compliance Notice (a
Mandatory Compliance Notice electing a Mandatory Compliance Conversion being
referred to herein as a "MANDATORY COMPLIANCE CONVERSION NOTICE"). If at any
time during a Mandatory Compliance Period (as defined below) after the Company
delivers an Mandatory Compliance Notice certifying that the Conditions to
Mandatory Compliance Conversion are satisfied, one or more of the Conditions to
Mandatory Compliance Conversion is no longer satisfied (a "MANDATORY COMPLIANCE
SUBSEQUENT CONDITION FAILURE"), the Company shall immediately notify the Holder
the Conditions to Mandatory Compliance Conversion are no longer satisfied. If
the Company does not deliver an Mandatory Compliance Notice in accordance with
this Section 13(a), then the "MANDATORY COMPLIANCE REDEMPTION AMOUNT" shall mean
the applicable Mandatory Compliance Amount, and the Company shall be deemed to
have elected a Mandatory Compliance Redemption. The Mandatory Compliance Notice
shall be irrevocable. The Company shall elect to redeem and convert the
applicable Mandatory Compliance Amount pursuant to this Section 13 and the
corresponding Mandatory Compliance Amounts of the Other Notes, to the extent the
Holders of such Other Notes have also made an Early Repayment Election pursuant
to the corresponding provisions of the Other Notes, in the same ratio of
principal amount being redeemed and principal amount being converted. The
Mandatory Compliance Redemption Amount (whether set forth in the Mandatory
Compliance Notice or by operation of this Section 13(a)) shall be redeemed in
accordance with Section 13(b) and the Mandatory Compliance Conversion Amount
shall be converted in accordance with Section 13(c). For purposes hereof,
"MANDATORY COMPLIANCE PERIOD" means the period beginning on the date the Company
delivers the Holder a Mandatory Compliance Conversion Notice and

                                       41
<PAGE>

ending on and including the date immediately preceding the first Business Day of
the calendar month following the calendar month in which such Mandatory
Compliance Conversion Notice is delivered.

                  (b) Mechanics of Mandatory Compliance Redemption. If the
Company elects, or is deemed to have elected, a Mandatory Compliance Redemption
in accordance with Section 13(a), then on the fifth (5th) Business Day following
the Early Repayment Notice Date (the "MANDATORY COMPLIANCE REDEMPTION DATE"),
the Company shall pay to the Holder, by wire transfer of immediately available
funds, an amount in cash (the "MANDATORY COMPLIANCE REDEMPTION PRICE") equal to
100% of the Mandatory Compliance Redemption Amount, together with the Additional
Amount with respect thereto through and including the Mandatory Compliance
Redemption Date. If the Company fails to redeem any Mandatory Compliance
Redemption Amount on the Mandatory Compliance Redemption Date by payment to the
Holder of the applicable Mandatory Compliance Redemption Price, then in addition
to any remedy the Holder may have under this Note (including Section 3) and the
Securities Purchase Agreement (including indemnification pursuant to Section 8
thereof or at law or in equity), the Mandatory Compliance Redemption Price
payable in respect of such unredeemed Mandatory Compliance Redemption Amount
shall bear interest at the rate of 2.0% per month (prorated for partial months)
until paid in full. Notwithstanding anything to the contrary in this Section 13,
but subject to Section 5, until the Mandatory Compliance Redemption Price
(together with any interest thereon) is paid in full, the Mandatory Compliance
Redemption Amount (together with any interest thereon) may be converted, in
whole or in part, by the Holder into Common Stock pursuant to Section 2. In the
event the Holder delivers a Conversion Notice to the Company after the Holder's
receipt of the Mandatory Compliance Notice in which the Company elects or is
deemed to have elected a Mandatory Compliance Redemption, but prior to the
Mandatory Compliance Redemption Date, the Conversion Amount specified in such
Conversion Notice shall be deducted (1) first, unless otherwise specified in
writing by the Holder, from any Installment Conversion Amount relating to the
immediately preceding Installment Date, Pro Rata Conversion Amount relating to
the immediately preceding Installment Date and/or Mandatory Compliance
Conversion Amount relating to the immediately preceding Mandatory Compliance
Conversion Notice Date (in each case as specified in the applicable Conversion
Notice), then (2) second, from any Installment Redemption Amount which is the
subject of an Installment Notice but which has not yet been redeemed, then (3)
third, from the Mandatory Compliance Amount, then (4) fourth, from any Pro Rata
Redemption Amount which is the subject of a Company Alternative Redemption
Notice but which has not yet been redeemed, and then (5) fifth, in accordance
with Section 2(d)(ix).

                  (c) Mechanics of Mandatory Compliance Conversion. If the
Company delivers a Mandatory Compliance Conversion Notice in accordance with
Section 13(a), then, subject to the limitations set forth in Sections 5 and
13(f), the Holder shall convert the applicable Mandatory Compliance Conversion
Amount, together with any Additional Amount with respect to the allocable
portion of the principal represented by such Mandatory Compliance Conversion
Amount accruing through and including the applicable Conversion Date, at such
time or times as the Holder, in its sole discretion determines, during the
Mandatory

                                       42
<PAGE>

Compliance Period. The Holder shall convert all or any portion of the applicable
Mandatory Compliance Conversion Amount and such Additional Amount by delivering
a Conversion Notice pursuant to Section 2 with respect to the portion of such
Mandatory Compliance Conversion Amount being so converted and the applicable
Additional Amount through and including the Conversion Date thereof; provided
that the Conditions to Mandatory Compliance Conversion are satisfied (or waived
in writing by the Holder) on the date the Company delivers the Mandatory
Compliance Conversion Notice to the Holder and at the time the Holder delivers
the Conversion Notice. In the event of a Mandatory Compliance Subsequent
Condition Failure (where such unsatisfied conditions are not waived in writing
by the Holder), the Company shall redeem such unconverted Mandatory Compliance
Conversion Amount, or portion thereof, together with the applicable Additional
Amount through and including the date of such redemption, (such designated
amount being referred to as the "MANDATORY COMPLIANCE ADDITIONAL REDEMPTION
AMOUNT"). Such redemption shall occur on the first Business Day after the
Mandatory Compliance Subsequent Condition Failure (the "MANDATORY COMPLIANCE
ADDITIONAL PAYMENT DATE") and the Company shall pay to the Holder on the
Mandatory Compliance Additional Payment Date, by wire transfer of immediately
available funds, an amount in cash (the "MANDATORY COMPLIANCE ADDITIONAL
REDEMPTION PRICE") equal to 100% of the Mandatory Compliance Additional
Redemption Amount. If the Company fails to redeem any Mandatory Compliance
Additional Redemption Amount on the Mandatory Compliance Additional Payment Date
by payment of the Mandatory Compliance Additional Redemption Price, then the
Holder shall have the rights set forth in Section 13(b) as if the Company failed
to pay the applicable Mandatory Compliance Redemption Price (including such
failure constituting a Triggering Event described in Section 3(b)(viii)). In the
event any Mandatory Compliance Conversion Amount has not been converted by the
Holder prior to the date immediately preceding the first Business Day of the
next calendar month (or the Maturity Date in the case of the final installment)
(a "FINAL MANDATORY COMPLIANCE DETERMINATION DATE"), then, subject to the
limitations set forth in Sections 5 and 13(f), the remaining Mandatory
Compliance Conversion Amount, together with the applicable Additional Amount
through and including the Final Mandatory Compliance Determination Date, shall
be converted as of the Final Mandatory Compliance Determination Date, as if the
Holder had delivered a Conversion Notice pursuant to Section 2 with respect to
such Mandatory Compliance Conversion Amount on the Final Mandatory Compliance
Determination Date but without the Holder being required to actually deliver
such Conversion Notice, provided that the Conditions to Mandatory Compliance
Conversion are satisfied (or waived in writing by the Holder) on the Final
Mandatory Compliance Determination Date; in the event that the Conditions to
Mandatory Compliance Conversion are not satisfied on the Final Mandatory
Compliance Determination Date, the Company shall redeem such Mandatory
Compliance Conversion Amount, together with the applicable Additional Amount
through and including the Final Mandatory Compliance Determination Date, in
accordance with the provisions of this Section 13(c) with respect to a
redemption following a Mandatory Compliance Subsequent Condition Failure.
Notwithstanding anything contained herein to the contrary, no notice delivered
by the Company to any Holder regarding a Condition to Mandatory Compliance
Conversion shall contain any material non-public information. "MANDATORY
COMPLIANCE CONVERSION NOTICE DATE" means the date the Holder receives the
Mandatory Compliance Conversion Notice.

                                       43
<PAGE>

                  (d) Conditions to Mandatory Compliance Conversion. For
purposes of this Section 13, "CONDITIONS TO MANDATORY COMPLIANCE CONVERSION"
means the following conditions: (i) during the period beginning on and including
the Issuance Date and ending on and including the date on which 100% of the
applicable Mandatory Compliance Conversion Amount (and any Additional Amount
with respect thereto) has been converted into Common Stock in accordance with
this Section 13 (the "MANDATORY COMPLIANCE CONVERSION DATE"), the Company shall
have delivered Shares upon conversion of Conversion Amounts of this Note on a
timely basis as set forth in Section 2(d)(ii) and delivered Shares upon exercise
of the Warrants on a timely basis as set forth in Section 2(a) of the Warrants;
(ii) on each day during the period beginning ninety (90) days prior to the Early
Repayment Notice Date and ending on and including the applicable Mandatory
Compliance Conversion Date, the Common Stock is quoted on The NASDAQ Stock
Market's OTC Bulletin Board or listed on a national securities exchange or on
the NASDAQ National Market or the NASDAQ SmallCap Market, and if the Common
Stock is listed on a national securities exchange or on the NASDAQ National
Market or the NASDAQ SmallCap Market, the Common Stock has not been suspended
from trading on such exchange or market nor shall delisting or suspension by
such exchange or market have been threatened either (A) in writing by such
exchange or market or (B) by falling below the minimum listing maintenance
requirements of such exchange or market; (iii) during the period beginning 90
days prior to the Early Repayment Notice Date and ending on and including the
applicable Mandatory Compliance Conversion Date, there shall not have occurred
the consummation of a Change of Control; (iv) during the period beginning on and
including the Issuance Date and ending on and including the applicable Mandatory
Compliance Conversion Date, there shall not have occurred either (x) the public
announcement of a pending, proposed or intended Change of Control which has not
been abandoned, terminated or consummated and publicly announced as such at
least ten (10) Trading Days prior to the date of the Early Repayment Notice Date
or (y) a Triggering Event or an Event of Default; (v) on each day during the
period beginning ninety (90) days prior to the Early Repayment Notice Date and
ending on and including the applicable Mandatory Compliance Conversion Date, the
Registration Statement (as defined in the Registration Rights Agreement) shall
be effective and available for the sale of at least all of the Registrable
Securities (as defined in the Registration Rights Agreement) and there shall not
have been any Grace Period (as defined in the Registration Rights Agreement)
during such period; (vi) on each of the five consecutive Trading Days
immediately preceding the Mandatory Compliance Conversion Notice Date, the
Weighted Average Price of the Common Stock shall exceed $1.00 (subject to
adjustment for stock splits, stock dividends, stock combinations and other
similar events after the date of the Securities Purchase Agreement); (vii) the
aggregate Conversion Amount of the Notes selected for conversion by the Company
as reflected in the Mandatory Compliance Conversion Notice shall not exceed the
difference of (A) ten percent (10%) of the product of (I) the arithmetic average
of the daily dollar trading volume (as reported by Bloomberg or any successor
thereto) of the Common Stock on its Principal Market over the twenty (20)
consecutive Trading Days ending on and including the date that is immediately
preceding the Mandatory Compliance Conversion Notice Date, and (II) the number
of Expected Trading Days during the Mandatory Compliance Period to which the
Mandatory Compliance Conversion Notice relates, minus (B) the aggregate

                                       44
<PAGE>

of any Installment Conversion Amounts of all of the Notes with respect to any
Installment Period of which the Mandatory Compliance Period is a part; (viii)
the Shareholder Approval has been obtained or the Common Stock is not listed on
a national securities exchange or on the NASDAQ National Market or the NASDAQ
SmallCap Market such that approval of the Company's shareholders to issue
Conversion Shares upon the conversion of the Notes and Warrant Shares upon
exercise of the Warrants in excess of the Exchange Cap is not required and (ix)
on each day during the period beginning ninety (90) days prior to the Early
Repayment Notice Date and ending on and including the applicable Mandatory
Compliance Conversion Date, the Company and its Subsidiaries otherwise shall
have been in compliance with in all respects and shall not have breached, or
been in breach, of any provision or covenant of the Securities Purchase
Agreement, the Registration Rights Agreement, the Security Documents, any of the
Warrants or any of the Notes.

                  (e) Mandatory Compliance Floor. If the Weighted Average Price
of the Common Stock during the applicable Mandatory Compliance Period falls
below $1.00 (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar events after the date of the Securities Purchase
Agreement) or such higher price (which shall be the same as the Installment
Trigger Price then in effect, if the Company has established an Installment
Trigger Price in excess of $1.00 (subject to adjustment for stock splits, stock
dividends, stock combinations and other similar events after the date of the
Securities Purchase Agreement), or otherwise shall not exceed 85% of the lesser
of (i) the arithmetic average of the Weighted Average Price of the Common Stock
on each of the five (5) Trading Days immediately preceding the Company Mandatory
Compliance Conversion Notice Date and (ii) the Weighted Average Price on the
Trading Day immediately preceding the Mandatory Compliance Conversion Notice
Date) as provided by the Company in any applicable Mandatory Compliance
Conversion Notice (the "MANDATORY COMPLIANCE CONVERSION TRIGGER PRICE"), then
any Mandatory Compliance Conversion pursuant to Section 13(c) shall
automatically terminate with respect to any Mandatory Compliance Conversion
Amount that is not subject to a Conversion Notice delivered to the Company on or
prior to the Mandatory Compliance Conversion Floor Trigger Date (as defined
below), in accordance with this Section 13(e). In the event that the Company
provides for a higher price in any Mandatory Compliance Notice, such new
Mandatory Compliance Conversion Trigger Price shall be the Mandatory Compliance
Conversion Trigger Price for all remaining Mandatory Compliance Periods under
this Note, until and unless the Company provides for a new Mandatory Compliance
Conversion Trigger Price in any subsequent Mandatory Compliance Conversion
Notice. The Mandatory Compliance Conversion Trigger Price shall be subject to
adjustment for any stock dividend, stock split, stock combination or other
similar transaction. The first Trading Day, if any, during the applicable
Mandatory Compliance Period on which the Weighted Average Price of Common Stock
is less than the Mandatory Compliance Conversion Trigger Price shall constitute
a "MANDATORY COMPLIANCE CONVERSION FLOOR TRIGGER DATE" with respect to such
Mandatory Compliance Period. On or prior to the date which is two (2) Business
Days after such Mandatory Compliance Conversion Floor Trigger Date (the
"MANDATORY COMPLIANCE CONVERSION SECOND PAYMENT DATE"), the Company shall redeem
all of the remaining unconverted Mandatory Compliance Conversion Amount that is
not subject to a Conversion Notice delivered to the

                                       45
<PAGE>

Company on or prior to the Mandatory Compliance Conversion Floor Trigger Date,
together with the applicable Additional Amount (the "MANDATORY COMPLIANCE
CONVERSION SECOND REDEMPTION AMOUNT"), by payment to the Holder on or before the
Mandatory Compliance Conversion Second Payment Date, by wire transfer of
immediately available funds, an amount in cash (the "MANDATORY SECOND REDEMPTION
PRICE") equal to 100% of the Mandatory Compliance Conversion Second Redemption
Amount. If the Company fails to redeem any Mandatory Compliance Conversion
Second Redemption Amount on or before the Second Payment Date by payment of the
Mandatory Second Redemption Price, then the Holder shall have the rights set
forth in Section 13(b) as if the Company failed to pay the applicable Mandatory
Compliance Conversion Redemption Price (including such failure constituting a
Triggering Event described in Section 3(b)(viii)).

                  (f) Mandatory Compliance Period Volume Limitations.
Notwithstanding anything contained in this Section 13 to the contrary, the
Holder shall not be required (but shall be permitted) to convert (and shall not
be deemed, solely as a result of Section 13(c), to have converted) any portion
of the Mandatory Compliance Conversion Amount on the applicable Final Mandatory
Compliance Determination Date in excess of the difference between (A) the
product of (I) the Holder's Allocation Percentage and (II) ten percent (10%) of
the sum of the daily dollar trading volume (as reported by Bloomberg or any
successor thereto) of the Common Stock on its Principal Market on each of the
Trading Days during the Mandatory Compliance Period, minus (B) the aggregate of
any Installment Conversion Amounts and Mandatory Compliance Conversion Amounts
converted by the Holder during the Mandatory Compliance Period (such
determination to be made after any applicable determination is made on the same
date pursuant to Section 6(f)). In the event that any portion of the Mandatory
Compliance Conversion Amount remains unconverted on the Final Mandatory
Compliance Determination Date because the Holder has not delivered a Conversion
Notice with respect thereto on or prior to the Final Mandatory Compliance
Determination Date and such portion does not otherwise convert as a result of
the limitation set forth in this Section 13(f), the Company shall redeem such
unconverted portion of the Mandatory Compliance Conversion Amount, together with
the Additional Amount with respect to the allocable portion of the principal
represented by such Mandatory Compliance Conversion Amount through and including
the date of such redemption, on or before the date that is three (3) Business
Days following Final Mandatory Compliance Determination Date, by wire transfer
of immediately available funds. If the Company fails to redeem any such amount
on or before such date, then the Holder shall have the rights set forth in
Section 13(b) as if the Company failed to pay the applicable Mandatory
Compliance Redemption Price (including such failure constituting a Triggering
Event described in Section 3(b)(viii)).

            (14) Participation; Restrictions. The Holder shall be entitled to
such dividends paid and distributions made to the holders of Common Stock to the
same extent as if the Holder had converted this Note in full into Shares at the
Conversion Price then in effect (without taking into account any limitations or
restrictions on the convertibility of this Note) immediately prior to the record
date for such dividend or distribution, or, if no such record date is taken,
immediately prior to the date as of which the record holders of Common Stock are
to be

                                       46
<PAGE>

determined for such dividend or distribution. Payments made pursuant to the
previous sentence shall be made concurrently with the dividend or distribution
to the holders of Common Stock. While this Note is outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to: (i) declare, set
aside or pay any dividends on or make any other distributions (whether in cash,
stock, equity securities or property) in respect of any capital stock or split,
combine or reclassify any capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for any
capital stock or (ii) purchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock or the capital stock of any of its
Subsidiaries, direct or indirect, except repurchases of unvested shares at cost
in connection with the termination of the employment relationship with any
employee pursuant to stock option or purchase agreements in effect on the date
hereof and set forth on Schedule 3(c) of the Securities Purchase Agreement.
While this Note is outstanding, the Company and its Subsidiaries shall not enter
into any agreement which would limit or restrict the Company's ability to
perform under, or take any other voluntary action to avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed by it
under, this Note, the Securities Purchase Agreement, the Security Agreement, the
Registration Rights Agreement and the Warrants.

            (15) Vote to Change the Terms of the Notes. The written consent of
the Company and the holders representing at least two-thirds (2/3) of the
principal amount then outstanding under the Notes shall be required for any
change to the Notes (including this Note) and upon receipt of such consent, each
Note shall be deemed amended thereby.

            (16) Lost or Stolen Notes. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of an
indemnification undertaking by the Holder to the Company in customary form and
reasonably satisfactory to the Company and, in the case of mutilation, upon
surrender and cancellation of this Note, the Company shall execute and deliver a
new Note of like tenor and date; provided, however, the Company shall not be
obligated to re-issue a Note if the Holder contemporaneously requests the
Company to convert this Note in its entirety into Shares as permitted hereunder.

            (17) 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 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 the
Holder's right to pursue actual damages for any failure by the Company to comply
with the terms of this Note. The Company covenants to the Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations

                                       47
<PAGE>

hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.

            (18) Specific Shall Not Limit General; Construction. No specific
provision contained in this Note shall limit or modify any more general
provision contained herein. This Note shall be deemed to be jointly drafted by
the Company and all Purchasers and shall not be construed against any person as
the drafter hereof.

            (19) Failure or Indulgence Not Waiver. No failure or delay on the
part of a 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.

            (20) Notice. Whenever notice is required to be given under this
Note, unless otherwise provided herein, such notice shall be given in accordance
with Section 9(f) of the Securities Purchase Agreement.

            (21) Transfer of this Note. The Holder may assign or transfer some
or all of its rights hereunder, subject to compliance with the 1933 Act and the
provisions of Section 2(f) of the Securities Purchase Agreement without the
consent of the Company.

            (22) Payment of Collection, Enforcement and Other Costs. If (a) this
Note is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding; or (b) an attorney is
retained to represent the Holder in any bankruptcy, reorganization, receivership
of the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action, including reasonable
attorneys' fees and disbursements.

            (23) Cancellation. After all principal and other amounts at any time
owed under this Note have been paid in full or converted into Shares in
accordance with the terms hereof, this Note shall automatically be deemed
canceled, shall be surrendered to the Company for cancellation and shall not be
reissued.

            (24) Note Exchangeable for Different Denominations. Subject to
Section 2(d)(viii), in the event of a conversion or redemption pursuant to this
Note of less than all of the Principal, the Company shall promptly cause to be
issued and delivered to the Holder, upon tender by the Holder of this Note, a
new Note of like tenor representing the remaining Principal that has not been so
converted or redeemed. This Note is exchangeable, upon the surrender hereof by
the Holder at the principal office of the Company, for a new Note or Notes
containing the same terms and conditions and representing in the aggregate the
Principal, and

                                       48
<PAGE>

each such new Note will represent such portion of such Principal as is
designated by the Holder at the time of such surrender. The date the Company
issued this Note shall be the "Issuance Date" hereof regardless of the number of
times a new Note shall be issued.

            (25) Waiver of Notice. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note, the Security Documents and the Securities Purchase Agreement.

            (26) Governing Law. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
country or jurisdiction) that would cause the application of the laws of any
jurisdiction or country other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Note and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT
OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

            (27) Effect of Redemption or Conversion; No Prepayment. Upon payment
of the Redemption Price, the Installment Redemption Price, the Additional
Redemption Price, the Second Redemption Price, the Company Alternative
Redemption Price, Change of Control Redemption Price, Mandatory Compliance
Additional Redemption Price, the Mandatory Second Redemption Price or the
Mandatory Compliance Redemption Price or the amount provided for in Section
2(d)(vii), each in accordance with the terms hereof with respect to any portion
of the Principal, or delivery of Shares upon conversion of any portion of the
Principal in accordance with the terms hereof, such portion of the Principal
shall be deemed paid in full and shall no longer be deemed outstanding for any
purpose. Except as specifically set forth in this Note, the Company does not
have any right, option, or obligation, to pay any portion of the Principal at
any time prior to the Maturity Date.

                                       49
<PAGE>

            (28) Payment Set Aside. To the extent that the Company makes a
payment or payments to the Holder hereunder or the Holder enforces or exercises
its rights hereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
by a trustee, receiver or any other person under any law (including any
bankruptcy law, U.S. state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.

            (29) Interpretative Matters. Unless the context otherwise requires,
(a) all references to Sections, Schedules or Exhibits are to Sections, Schedules
or Exhibits contained in or attached to this Agreement, (b) each accounting term
not otherwise defined in this Agreement has the meaning assigned to it in
accordance with GAAP, (c) words in the singular or plural include the singular
and plural and pronouns stated in either the masculine, the feminine or neuter
gender shall include the masculine, feminine and neuter and (d) the use of the
word "including" in this Agreement shall be by way of example rather than
limitation.

                                   * * * * * *

                                       50
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Note to be signed by
_____________, its ____________________, as of the ___ day of _________ 2004.

                                                     GALAXY ENERGY CORPORATION

                                                     By:
                                                        ------------------------
                                                        Name:
                                                        Title:

<PAGE>

                                    EXHIBIT I
                            GALAXY ENERGY CORPORATION
                                CONVERSION NOTICE

      Reference is made to the Convertible Note (the "NOTE") of Galaxy Energy
Corporation, a Colorado corporation (the "COMPANY"). In accordance with and
pursuant to the Note, the undersigned hereby elects to convert the Conversion
Amount (as defined in the Note) of the Note indicated below into Shares of
Common Stock, par value $0.001 per share (the "COMMON STOCK"), of the Company,
as of the date specified below.

      Date of Conversion:_______________________________________________________

      Aggregate Conversion Amount to be converted:______________________________

      Additional Amount, applicable thereto, to be converted:___________________

Please confirm the following information:

      This conversion represents a: (check each one, if any, that applies and
      enter the applicable conversion amount applicable thereto)

      [ ]         Company Installment Conversion:_______________________________

      [ ]         Mandatory Compliance Conversion:______________________________

      [ ]         Company Alternative Conversion:_______________________________

      Conversion Price:_________________________________________________________

      Number of shares of Common Stock to be issued:____________________________

      Is the Variable Priced being relied on pursuant to Section 2(f)(iii) of
      the Note? (check one) Yes____ No____

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

      Issue to:_________________________________________________________________

      Facsimile Number:_________________________________________________________

      Authorization:______________________________
            By:___________________________________
            Title:________________________________

      Dated:______________________________________

      DTC Participant Number and Name (if electronic book entry transfer):______

      Account Number (if electronic book entry transfer):_______________________

<PAGE>

                                 ACKNOWLEDGMENT

      The Company hereby acknowledges this Conversion Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated ___________ ___, 200_
from the Company and acknowledged and agreed to by [TRANSFER AGENT].

                                                GALAXY ENERGY CORPORATION

                                                By:_____________________________
                                                Name:___________________________
                                                Title:__________________________