imxform8k081216_ex10-2.htm


    Exhibit
10.2

     

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”)
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR IMPLANT SCIENCES CORPORATION SHALL HAVE RECEIVED AN
OPINION OF COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT
AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED.

     

    SENIOR
SECURED CONVERTIBLE PROMISSORY NOTE

     

    Dated:  December
10, 2008                                                                          $5,600,000

     

    For value
received, IMPLANT SCIENCES CORPORATION, a corporation organized under the laws
of the Commonwealth of Massachusetts (the “Maker” or the “Company”), hereby
promises to pay to the order of DMRJ GROUP, LLC, a Delaware limited
liability company, with an address at 152 West 57th Street,
4th
Floor, New York, NY 10019 (together with its successors, representatives, and
assigns, the “Holder”), in
accordance with the terms hereinafter provided, the principal amount of Five
Million Six Hundred Thousand Dollars ($5,600,000) hereunder, together with
interest and all other obligations outstanding hereunder.

     

    All
payments under or pursuant to this Senior Secured Convertible Promissory Note
(this “Note”)
shall be made in United States Dollars in immediately available funds to the
Holder at the address of the Holder first set forth above or at such other place
as the Holder may designate from time to time in writing to the Maker or by wire
transfer of funds to the Holder’s account, instructions for which are attached
hereto as Exhibit
A.  The outstanding principal balance of this Note shall be due
and payable on December 10, 2009 (the “Maturity Date”) or at
such earlier time as provided herein.

     

    ARTICLE
I

     

    Section
1.1                                Purchase
Agreement.  This Note has been executed and delivered pursuant
to the Note and Warrant Purchase Agreement, bearing even date herewith (the
“Purchase Agreement”), by and between the Maker and the Holder (as an
Investor).  Capitalized terms used and not otherwise defined herein
shall have the meanings set forth for such terms in the Purchase
Agreement.

     

    Section
1.2                                Interest.  Interest
on the original principal amount of this Note in the amount of $616,000
calculated at the rate of eleven percent (11%) per annum for the period
commencing on the date hereof through the scheduled Maturity Date on an
unconditional, non-refundable, original issue discount basis shall be paid in
full on the date hereof.  Furthermore, upon the occurrence of an Event
of Default (as defined below) described in Sections 2.1(a), (h) or (i), the
Maker will pay interest to the Holder, payable on demand, additional default
rate interest at a rate equal to the lesser of two and one half percent (2.5%)
per month (prorated for partial months) and the maximum applicable legal rate
per annum, computed on the basis of a

     

    
      
        
        

      

      
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      360-day
year of twelve (12) thirty-day months on the outstanding principal balance of
the Note and on all unpaid interest from the date of the Event of
Default.

    

     

    Section
1.3                                Payment of Principal;
Prepayment.  The principal amount shall be paid as follows: (a)
the principal amount of One Million Dollars ($1,000,000) shall due and payable
on December 24, 2008 hereof, (b) upon the release to Maker of any funds (the
amount of such funds, the “Escrow Release
Funds”) held in escrow in connection with the sale of Accurel Systems
International Corp. to Evans Analytical Group, LLC, the lesser of (i) the principal amount
of One Million Dollars ($1,000,000) or (ii) the principal amount of the Escrow
Release Funds shall be immediately due and payable; and (c) the remaining
principal balance plus all outstanding interest and all other amounts due and
owing hereunder shall be paid in full on the Maturity
Date.  Notwithstanding the foregoing, the principal balance hereunder
and all other amounts may be payable in full at such earlier time upon
acceleration of this Note in accordance with the terms hereof.  Any
amount of principal repaid hereunder may not be reborrowed.  The Maker
may prepay all or any portion of the principal amount of this Note in an amount
equal to the sum of (i) 100% of the amount of the principal prepayment, and (ii)
all outstanding interest and all other amounts due and owing hereunder, upon not
less than three (3) Business Days prior written notice to the Holder, without
other penalty or premium.  This Note is further subject to mandatory
prepayment at the option of the Holder as set forth in Article 4
hereof.

     

    Section
1.4                                Security
Documents.  The obligations of the Maker hereunder are secured
by a continuing security interest in substantially all of the assets of the
Maker pursuant to the terms of a Security Agreement bearing even date herewith
by and between the Maker and the Holder and other collateral
documents.

     

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

     

    Section
1.6                                Transfer.  This
Note may be transferred or sold, and may also be pledged, hypothecated or
otherwise granted as security, by the Holder; provided, however, that any
transfer or sale of this Note must be in compliance with any applicable
securities laws.

     

    Section
1.7                                Replacement.  Upon
receipt of a duly executed, notarized and unsecured written statement from the
Holder with respect to the loss, theft or destruction of this Note (or any
replacement hereof) and a standard indemnity, or, in the case of a mutilation of
this Note, upon surrender and cancellation of such Note, the Maker shall issue a
new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Note.

     

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

     

    
      
        
        

      

      
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    ARTICLE
II


     

    EVENTS OF DEFAULT;
REMEDIES

     

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

     

    (a)           any
failure to make any payment of the principal amount, interest or any other
monetary obligation under this Note, as and when the same shall be due and
payable (whether on the Maturity Date or by acceleration or otherwise);
or

     

    (b)           the
Maker shall fail to observe or perform any other condition, covenant or
agreement contained in this Note and such failure continues for a period of ten
(10) days after the earlier of (i) the date on which such failure first becomes
known to any officer of the Maker or (ii) notice thereof is given to the Maker
by Holder; or

     

    (c)           the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the Nasdaq Capital Markets, the Nasdaq Global Market, the Nasdaq Global
Select Market, The New York Stock Exchange, Inc. or the NYSE Alternext Exchange
for a period of five (5) consecutive Trading Days, such a suspension to only
constitute an Event of Default if the Holder provides the Maker written
notification that it deems such suspension to be an Event of Default;
or

     

    (d)           the
Maker shall default in the performance or observance of any undertaking,
covenant, condition or agreement contained in Sections 3.5, 3.6, 3.12, 3.13,
3.15, 3.16, 3.19, 3.20, 3.22, 3.24, 3.30, and 3.31 of the Purchase
Agreement;  or

     

    (e)           the
Maker shall default in the performance or observance of any undertaking,
covenant, condition or agreement contained in the Purchase Agreement (other than
Sections 3.5, 3.6, 3.12, 3.13, 3.15, 3.16, 3.19, 3.20, 3.22, 3.24, 3.30, and
3.31 of the Purchase Agreement) or any other Transaction Document and such
failure continues for a period of ten (10) days after the earlier of (i) the
date on which such failure first becomes known to any officer of the Maker or
(ii) notice thereof is given to the Maker by Holder;  or

     

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

     

    (g)           (A)
a default in any payment of any amount or amounts of principal of or interest on
any Indebtedness of the Maker (other than the Indebtedness hereunder), the
aggregate principal amount of which Indebtedness is in excess of $50,000 or (B) a default in the
observance or performance of any other agreement or condition relating to any
Indebtedness or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit, after
any applicable grace period, the holder or holders or beneficiary
or

     

    
      
        
        

      

      
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      beneficiaries
of such Indebtedness to cause with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity; or

    

     

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

     

    (i)           a
proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or composition
or readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of Maker or of all or any substantial part of
Maker’s assets or (iii) similar relief in respect of it under any law providing
for the relief of debtors, and such proceeding or case described in clause (i),
(ii) or (iii) shall continue undismissed, or unstayed and in effect, for a
period of thirty (30) days or any order for relief shall be entered in an
involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic)
against the Maker or action under the laws of any jurisdiction (foreign or
domestic) analogous to any of the foregoing shall be taken with respect to the
Maker and shall continue undismissed, or unstayed and in effect for a period of
sixty (60) days; or

     

    (j)           a
judgment or judgments in the aggregate amount exceeding $50,000 is/are entered
against the Maker and not dismissed or discharged within twenty (20) days
following the entry thereof; or

     

    (k)           the
Maker shall cease to actively conduct its business operations for a period of
five (5) consecutive Business Days other than in connection with temporary
shutdown during the last two weeks of December 2008; or

     

    (l)           any
material portion of the properties or assets of the Maker is seized by any
governmental authority; or

     

    (m)           the
Maker is indicted for the commission of any criminal activity.

     

    Section
2.2                                Remedies Upon An Event of
Default.  If an Event of Default shall have occurred and shall
be continuing, the Holder may at any time at its option (a) declare the entire
unpaid principal balance of this Note, together with all interest accrued
hereon, plus fees and expenses, due and payable, and thereupon, the same shall
be accelerated and so due and

     

    
      
        
        

      

      
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      payable,
without presentment, demand, protest, or notice, all of which are hereby
expressly unconditionally and irrevocably waived by the Maker; provided,
however, that upon the occurrence of an Event of Default described in Sections
2.1 (h) or (i) above, the outstanding principal balance and accrued interest
hereunder, plus fees and expenses, shall be immediately and automatically due
and payable, and/or (b) exercise or otherwise enforce any one or more of the
Holder’s rights, powers, privileges, remedies and interests under this Note, the
Purchase Agreement, the Security Agreement or other Transaction Document or
applicable law.  No course of delay on the part of the Holder shall
operate as a waiver thereof or otherwise prejudice the right of the
Holder.  No remedy conferred hereby shall be exclusive of any other
remedy referred to herein or now or hereafter available at law, in equity, by
statute or otherwise.  Upon and after an Event of Default of the type
described in Sections 2.1(a), (h) or (i), this Note shall bear interest at the
default rate set forth in Section 1.2 hereof.

    

     

    ARTICLE
III

     

    CONVERSION;
ANTIDILUTION

     

    Section
3.1                                Conversion
Option.  At any time and from time to time on or after the
Issuance Date (as defined below), this Note shall be convertible (in whole or in
part), at the option of the Holder (the “Conversion Option”),
into such number of fully paid and non-assessable shares of Common Stock (the
“Conversion
Rate”) as is determined by dividing (x) that portion of the outstanding
principal balance plus any accrued but unpaid interest under this Note as of
such date that the Holder elects to convert by (y) the Conversion Price (as
defined in Section 3.2 hereof) then in effect on the date on which the Holder
delivers a notice of conversion (the “Conversion Notice”),
duly executed, to the Company (the “Voluntary Conversion Date”), provided,
however, that the Conversion Price shall be subject to adjustment as described
in Section 3.6 below.  The Holder shall deliver this Note to the
Company at the address designated in the Purchase Agreement at such time that
this Note is fully converted.  With respect to partial conversions of
this Note, the Company shall keep written records of the amount of this Note
converted as of each Conversion Date.

     

    Section
3.2                                Conversion
Price.  The term “Conversion Price” shall mean twenty six cents
($0.26), calculated as the 10 day weighted average closing price of the Maker’s
Common Stock prior to the closing, subject to adjustment under Section 3.6
hereof (the “Set Price”).

     

    
      	
              Section
      3.3

            	
              Mechanics of
      Conversion.

            


    

     

    (a)           Not
later than three (3) Trading Days after any Conversion Date, the Company or its
designated transfer agent, as applicable, shall issue and deliver to the
Depository Trust Company (“DTC”) account on the
Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified
in the Conversion Notice, registered in the name of the Holder or its
affiliates, for the number of shares of Common Stock to which the Holder shall
be entitled.  In the alternative, not later than three (3) Trading
Days after any Conversion Date, the Company or its designated transfer agent, as
applicable, shall deliver to the applicable Holder by express courier a
certificate or certificates which shall be free of restrictive legends and
trading restrictions (other than those required by Section 5.1 of the Purchase
Agreement)

     

    
      
        
        

      

      
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      representing
the number of shares of Common Stock being acquired upon the conversion of this
Note (the “Delivery
Date”).  Notwithstanding the foregoing to the contrary, the
Company or its transfer agent shall only be obligated to issue and deliver the
shares to the DTC on the Holder’s behalf via DWAC (or certificates free of
restrictive legends) if such conversion is in connection with a sale and the
Holder has complied with the applicable prospectus delivery requirements (as
evidenced by documentation furnished to and reasonably satisfactory to the
Company) or such shares may be sold pursuant to Rule 144 or other exemption
under the Securities Act.  If in the case of any Conversion Notice
such certificate or certificates are not delivered to or as directed by the
applicable Holder by the Delivery Date, the Holder shall be entitled by written
notice to the Company at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion, in which event the
Company shall immediately return this Note tendered for conversion, whereupon
the Company and the Holder shall each be restored to their respective positions
immediately prior to the delivery of such notice of revocation, except that any
amounts described in Sections 3.3(b) and (c) shall be payable through the date
notice of rescission is given to the Company.

    

     

    (b)           The
Company understands that a delay in the delivery of the shares of Common Stock
upon conversion of this Note beyond the Delivery Date could result in economic
loss to the Holder.  If the Company fails to deliver to the Holder
such shares via DWAC (or, if applicable, certificates) by the Delivery Date, the
Company shall pay to such Holder, in cash, an amount per Trading Day for each
Trading Day until such shares are delivered via DWAC or certificates are
delivered (if applicable), together with interest on such amount at a rate of
10% per annum, accruing until such amount and any accrued interest thereon is
paid in full, equal to the greater of (A) 2% of the aggregate principal amount
of the Notes requested to be converted for each Trading Day and (B) $2,000 per
day (which amount shall be paid as liquidated damages and not as a
penalty).  Nothing herein shall limit a Holder’s right to pursue
actual damages for the Company’s failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein and
such Holder shall have the right to pursue all remedies available to it at law
or in equity (including, without limitation, a decree of specific performance
and/or injunctive relief).  Notwithstanding anything to the contrary
contained herein, the Holder shall be entitled to withdraw a Conversion Notice,
and upon such withdrawal the Company shall only be obligated to pay the
liquidated damages accrued in accordance with this Section 3.3(b) through the
date the Conversion Notice is withdrawn.

     

    (c)           In
addition to any other rights available to the Holder, if the Company fails to
cause its transfer agent to transmit via DWAC or transmit to the Holder a
certificate or certificates representing the shares of Common Stock issuable
upon conversion of this Note (the “Conversion Shares”)
on or before the Delivery Date, and if after such date the Holder is required by
its broker to purchase (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the shares of
Common Stock issuable upon conversion of this Note which the Holder anticipated
receiving upon such conversion (a “Buy-In”), then the
Company shall (1) pay in cash to the Holder the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of shares of Common Stock issuable upon conversion of this Note that the
Company was

     

    
      
        
        

      

      
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      required
to deliver to the Holder in connection with the conversion at issue times (B)
the price at which the sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either reinstate the portion of
the Note and equivalent number of shares of Common Stock for which such
conversion was not honored or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with
its conversion and delivery obligations hereunder.  For example, if
the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of shares of Common Stock
with an aggregate sale price giving rise to such purchase obligation of $10,000,
under clause (1) of the immediately preceding sentence the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence reasonably requested
by the Company.  Nothing herein shall limit a Holder’s right to pursue
any other remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief
with respect to the Company’s failure to timely deliver certificates
representing shares of Common Stock upon conversion of this Note as required
pursuant to the terms hereof.

    

     

    Section
3.4                                Ownership Cap and Certain
Conversion Restrictions. Notwithstanding anything to the contrary set
forth in Section 3 of this Note, at no time may the Holder convert all or a
portion of this Note if the number of shares of Common Stock to be issued
pursuant to such conversion, when aggregated with all other shares of Common
Stock owned by the Holder at such time, would result in the Holder beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act and
the rules thereunder) in excess of 4.99% of the then issued and outstanding
shares of Common Stock outstanding at such time; provided, however, that upon
the Holder providing the Company with 61 days’ prior written notice that the
Holder would like to waive Section 3.4 of this Note with regard to any or all
shares of Common Stock issuable upon conversion of this Note, this Section 3.4
shall be of no force or effect with regard to all or a portion of the Note
referenced in the waiver notice.

     

    Section
3.5                                Trading Market
Regulation.  The Company shall not be obligated to issue any
shares of Common Stock upon conversion of this Note if the issuance of such
shares of Common Stock would exceed the aggregate number of shares of Common
Stock which the Company may issue upon conversion or exercise, as applicable, of
the Notes and Warrants in the aggregate without breaching the Company’s
obligations under the rules or regulations of any applicable Trading Market,
except that such limitation shall not apply in the event that the Company (A)
obtains the approval of its stockholders as required by the applicable rules of
such Trading Market for issuances of Common Stock in excess of such amount or
(B) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
Holder.

     


    
      
        
           

          


          


           

        

         


      

      
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    Section
3.6                                Adjustment of Conversion
Price.

     

    (a)           Until
the Note has been paid in full or converted in full, the Set Price shall be
subject to adjustment from time to time as follows (but shall not be increased,
other than pursuant to Section 3.6(a)(i) hereof):

     

    (i)           Adjustment for Stock
Dividends, Subdivisions and Combinations.  If at any time the
Company shall:

     

    


    (1)           set
a record date or take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, shares of Common Stock,

     

    (2)           subdivide
its outstanding shares of Common Stock into a larger number of shares of Common
Stock, or

     

    (3)           combine
its outstanding shares of Common Stock into a smaller number of shares of Common
Stock,

     

    then (1)
the number of Conversion Shares immediately after the occurrence of any such
event shall be adjusted to equal the number of shares of Common Stock which a
record holder of the same number of shares of Common Stock for which this Note
may be converted immediately prior to the occurrence of such event would own or
be entitled to receive after the happening of such event (without giving effect
to the limitations on exercise set forth in Section 3.4 hereof), and (2) the Set
Price then in effect shall be adjusted to equal (A) the Set Price then in effect
multiplied by the number of shares of Common Stock for which this Note may be
converted immediately prior to the adjustment (without giving effect to the
limitations on exercise set forth in Section 3.4 hereof) divided by (B) the
number of shares of Common Stock for which this Note may be converted
immediately after such adjustment (without giving effect to the limitations on
exercise set forth in Section 3.4 hereof).

     

    (ii)           Adjustment upon Issuance of
shares of Common Stock.  If at any time the Company issues or
sells, or in accordance with this Section 3.6(a)(ii) is deemed to have issued or
sold, any shares of Common Stock (including the issuance or sale of shares of
Common Stock owned or held by or for the account of the Company for a
consideration per share (the "New Issuance Price")
less than a price (the "Applicable Price")
equal to the Set Price in effect immediately prior to such issue or sale or
deemed issuance or sale (the foregoing a "Dilutive Issuance"),
then immediately after such Dilutive Issuance, the Set Price then in effect
shall be reduced to an amount equal to the New Issuance Price.  Upon
each such adjustment of the Set Price hereunder, the number of Conversion Shares
shall be adjusted to the number of shares of Common Stock determined by
multiplying the Set Price in effect immediately prior to such adjustment by the
number of Conversion Shares acquirable upon conversion of this Note immediately
prior to such adjustment and dividing the product thereof by the Set Price
resulting from such adjustment.  For purposes of determining the
adjusted Set Price under this Section 3.6, the following shall be
applicable:

     

    
      
        
        

      

      
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    (1)           Issuance of
Options.  If the Company in any manner grants any options to
purchase Common Stock (“Options”), other than
Options granted to employees and consultants pursuant to any employee stock
benefit, option, purchase or similar plan approved by the Company’s Board of
Directors, and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any stock or securities (other than Options) directly or indirectly
convertible into or exercisable or exchangeable for shares of Common Stock
(“Convertible
Securities”) issuable upon exercise of any such Option is less than the
Applicable Price, then such share of Common Stock 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 3.6(a)(ii)(1), the "lowest price per share for which
one share of Common Stock is issuable upon exercise of such Options or upon
conversion, exercise or exchange of such Convertible Securities issuable upon
exercise of any 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 of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option.  No further adjustment
of the Set Price or number of Conversion Shares shall be made upon the actual
issuance of such shares of Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such shares of
Common Stock upon conversion, exercise or exchange of such Convertible
Securities.

     

    (2)           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 of
Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock 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 3.6(a)(ii)(2), the "lowest
price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof" shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company
with respect to one share of Common Stock upon the issuance or sale of the
Convertible Security and upon conversion, exercise or exchange of such
Convertible Security.  No further adjustment of the Set Price or
number of Conversion Shares shall be made upon the actual issuance of such
shares of Common Stock upon conversion, exercise or exchange 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 this Note has been or is to
be made pursuant to other provisions of this Section 3.6, no further adjustment
of the Set Price or number of Conversion Shares shall be made by reason of such
issue or sale.

     

    (3)           Change in Option Price or
Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exercise or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exercisable or
exchangeable for shares of Common Stock increases or decreases at any time, the
Set Price and the number

     

    
      
        
        

      

      
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      of
Conversion Shares in effect at the time of such increase or decrease shall be
adjusted to the Set Price and the number of shares of Common Stock issuable upon
conversion of this Note which would have been in effect at such time had such
Options or Convertible Securities provided for such increased or decreased
purchase price, additional consideration or increased or decreased conversion
rate, as the case may be, at the time initially granted, issued or
sold.  For purposes of this Section 3.6(a)(ii)(3), if the terms of any
Option or Convertible Security that was outstanding as of the date of issuance
of this Note are increased or decreased in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and the
shares of Common Stock deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such increase or
decrease.  No adjustment pursuant to this Section 3.6(a)(ii)(3) shall
be made if such adjustment would result in an increase of the Set Price then in
effect or a decrease in the number of Conversion Shares.

    

     

    (4)           Calculation of Consideration
Received.  In case any Option is issued in connection with the
issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such
Options by the parties thereto, the Options will be deemed to have been issued
for a consideration of $0.01.  If any shares of Common Stock, 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 of Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration received by
the Company will be the closing sale price of such security on the date of
receipt.  If any shares of Common Stock, 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 of Common Stock, 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 Holder.  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 Holder.  The determination of such
appraiser shall be final and binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the
Company.

     

    (iii)           Certain Other
Distributions.  If at any time the Company shall set a record
date or take a record of the holders of its Common Stock for the purpose of
entitling them to receive any divi­dend or other distribution
of:

     

    (1)           cash
(other than a cash dividend payable out of earnings or earned surplus legally
available for the payment of dividends under the laws of the jurisdiction of
incorporation of the Company),

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    (2)           any
evidences of its indebtedness, any shares of stock of any class or any other
securities or property of any nature whatsoever (other than cash or Common
Stock), or

     

    (3)           any
warrants or other rights to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property of any nature whatsoever (other than cash or Common
Stock),

     

    then (1)
the number of Conversion Shares may shall be adjusted to equal the product of
the number of shares of Common Stock for which this Note may be converted
immediately prior to such adjustment (without giving effect to the limitations
on exercise set forth in Section 3.4 hereof) multiplied by a fraction (A) the
numerator of which shall be the Closing Bid Price of Common Stock at the date of
taking such record and (B) the denominator of which shall be such Closing Bid
Price minus the amount allocable to one share of Common Stock of any such cash
so distributable and of the fair value (as determined in good faith by the Board
of Directors of the Company and supported by an opinion from an investment
banking firm reasonably acceptable to the Holder) of any and all such evidences
of indebtedness, shares of stock, other securities or property or warrants or
other subscription or purchase rights so distributable, and (2) the Set Price
then in effect shall be adjusted to equal (A) the Set Price then in effect
multiplied by the number of shares of Common Stock for which this Note may be
converted immediately prior to the adjustment (without giving effect to the
limitations on exercise set forth in Section 3.4 hereof) divided by (B) the
number of shares of Common Stock for which this Note may be converted
immediately after such adjustment (without giving effect to the limitations on
exercise set forth in Section 3.4 hereof).  A reclassification of the
Common Stock (other than a change in par value, or from par value to no par
value or from no par value to par value) into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by the Company to the
holders of its Common Stock of such shares of such other class of stock within
the meaning of this Section 3.6(a) and, if the outstanding shares of Common
Stock shall be changed into a larger or smaller number of shares of Common Stock
as a part of such reclassification, such change shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Common Stock
within the meaning of Section 3.6(a).

    


    (b)           Other Provisions applicable
to Adjustments under this Section.  The following provisions
shall be applicable to the making of adjustments of the number of shares of
Common Stock for which this Note may be converted and the Set Price then in
effect provided for in this Section 3.6:

     

    (i)           Fractional
Interests.  In computing adjustments under this
Section 3.6, fractional interests in Common Stock shall be taken into
account to the nearest one one-hundredth (1/100th) of a
share.

     

    (ii)           When Adjustment Not
Required.  If the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a dividend or
distribution or subscription or purchase rights and shall, thereafter and before
the distribution to stockholders thereof, legally abandon its plan to pay or
deliver such dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the

     

    
      
        
        

      

      
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      taking of
such record and any such adjustment previously made in respect thereof shall be
rescinded and annulled.

    

     

    (c)           Form of Note after
Adjustments.  The form of this Note need not be changed because
of any adjustments in the Set Price or the number and kind of securities
purchasable upon conversion of this Note.

     

    (d)           Escrow of
Property.  If after any property becomes distributable pursuant
to this Section 3.6 by reason of the taking of any record of the holders of
Common Stock, but prior to the occurrence of the event for which such record is
taken, and the Holder converts this Note, such property shall be held in escrow
for the Holder by the Company to be distributed to the Holder upon and to the
extent that the event actually takes place, upon payment of the then current Set
Price.  Notwithstanding any other provision to the contrary herein, if
the event for which such record was taken fails to occur or is rescinded, then
such escrowed property shall be returned to the Company.

     

    (e)           No
Impairment.  The Company shall not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.6 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the Holder against
impairment.  In the event the Holder shall elect to convert the Note
as provided herein, the Company cannot refuse conversion based on any claim that
the Holder or any one associated or affiliated with the Holder has been engaged
in any violation of law, violation of an agreement to which the Holder is a
party or for any reason whatsoever, unless, an injunction from a court, or
notice, restraining and or adjoining conversion of the Note shall have issued
and the Company posts a surety bond for the benefit of the Holder in an amount
equal to one hundred fifty percent (150%) of the amount of the Notes, which bond
shall remain in effect until the completion of arbitration/litigation of the
dispute and the proceeds of which shall be payable to the Holder (as liquidated
damages) in the event it obtains judgment.

     

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

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

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

     

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

     

    (h)           Reservation of Common
Stock.  The Company shall at all times when this Note shall be
outstanding, reserve and keep available out of its authorized but unissued
Common Stock, such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of this Note and all interest accrued
thereon; provided that the
number of shares of Common Stock so reserved shall at no time be less than one
hundred fifty percent (150%) of the number of shares of Common Stock for which
this Note and all interest accrued thereon are at any time
convertible.  The Company shall, from time to time in accordance with
Delaware law, increase the authorized number of shares of Common Stock if at any
time the unissued number of authorized shares shall not be sufficient to satisfy
the Company’s obligations under this Section 3.6(h).

     

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

    


    ARTICLE
IV


     

    PREPAYMENT

     

    Section
4.1                                Prepayment.

     

    (a)           Prepayment Option Upon Major
Transaction.  In addition to all other rights of the Holder
contained herein, simultaneous with the occurrence of a Major Transaction (as
defined below), the Holder shall have the right, at the Holder’s option, to
require the Maker to prepay the Note in cash at a price equal to the sum of (i)
one hundred percent (100%) of the aggregate principal amount of this Note plus
all accrued and unpaid interest (if any), and (ii) all other fees, costs,
expenses, liquidated damages or other amounts (if any) owing in respect of this
Note and the other Transaction Documents (the “Major Transaction Prepayment
Price”); provided, however, in the case of a Major Transaction described in
Section 4.1(b)(iv) below, the Major Transaction Prepayment Price shall be equal
to the lesser of (x) the amount described in

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

       

      clauses
(i) and (ii) of this Section 4.1(a) or (y) 100% of the aggregate amount of cash
received (directly or indirectly) from time to time (whether as initial
consideration or through the payment or disposition of deferred consideration)
by or on behalf of Maker in connection with such Major Transaction after
deducting therefrom only reasonable fees, commissions, and expenses related
thereto and required to be paid by the Maker in connection with such Major
Transaction to the extent, but only to the extent, that the amounts so deducted
are, at the time of receipt of such cash, actually paid or payable to a Person
that is not an affiliate of Maker and are properly attributable to such Major
Transaction (the “Net Cash Proceeds”).

    

     

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

     

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

     

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

     

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

     

    (iv)           the
issuance by the Maker in one or more related or unrelated transactions of any
shares, Options (other than Options granted to employees and consultants
pursuant to any employee stock benefit, option, purchase or similar plan
approved by the Company’s Board of Directors), warrants (other than the
Warrants), interests, participations, or other equivalents (regardless of how
designated) of the Maker, whether voting or nonvoting, including Common Stock,
preferred stock or any other “equity security” (as such term is defined in Rule
3a11-1 of the General Rules and Regulations promulgated by the Commission under
the Exchange Act) or any equity contribution in received by the Company, which
in the aggregate results in Net Cash Proceeds in excess of
$500,000.

     

    (c)           Mechanics of Prepayment at
Option of Holder Upon Major Transaction.  No sooner than
fifteen (15) days nor later than ten (10) days prior to the consummation of a
Major Transaction, but not prior to the public announcement of such Major
Transaction, the Maker shall deliver written notice thereof via facsimile and
overnight courier (“Notice of Major Transaction”) to the Holder of this
Note.  At any time after receipt of a Notice of Major Transaction (or,
in the event a Notice of Major Transaction is not delivered at least ten (10)
days prior to a Major Transaction, at any time within ten (10) days prior to a
Major Transaction), the

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

       

      Holder of
this Note may require the Maker to prepay, effective immediately prior to the
consummation of such Major Transaction, the Note by delivering written notice
thereof via facsimile and overnight courier (“Notice of Prepayment at Option of
the Holder Upon Major Transaction”) to the Maker, which Notice of Prepayment at
Option of Holder Upon Major Transaction shall indicate the applicable Major
Transaction Prepayment Price, as calculated pursuant to Section 4.1(a)
above.

    

     

    (d)           Payment of Prepayment
Price.  Upon the Maker’s receipt of a Notice(s) of Prepayment
at Option of Holder Upon Major Transaction from the Holder of this Note, the
Maker shall immediately notify the Holder of this Note by facsimile of the
Maker’s receipt of such Notice(s) of Prepayment at Option of Holder Upon Major
Transaction and the Maker shall deliver the Major Transaction Prepayment Price
immediately prior to or contemporaneous with the consummation of the Major
Transaction.  If the Maker shall fail to prepay the Note submitted for
prepayment (other than pursuant to a dispute as to the arithmetic calculation of
the Prepayment Price) immediately prior to or contemporaneous with the
consummation of the Major Transaction, in addition to any remedy the Holder of
this Note may have under this Note and the Purchase Agreement, the Major
Transaction Prepayment Price payable in respect of the Note not prepaid shall
bear interest at the rate of two and one half percent (2.5%) per month (prorated
for partial months) until paid in full.

     

    ARTICLE
V

     

    


     

    MISCELLANEOUS

     

    Section
5.1                                Notices.  Any
notice, demand, request, waiver or other communication required or permitted to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery, telecopy or facsimile at the address or number designated in the
Purchase Agreement (if delivered on a Business Day during normal business hours
where such notice is to be received), or the first Business Day following such
delivery (if delivered other than on a Business Day during normal business hours
where such notice is to be received) or (b) on the second Business Day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first
occur.

     

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

     

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

     

    Section
5.4                                Remedies, Characterizations,
Other Obligations, Breaches and Injunctive Relief.  The
remedies provided in this Note shall be cumulative and in addition to
all

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

       

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

    

     

    Section
5.5                                Enforcement
Expenses.  The Maker agrees to pay all costs and expenses
incurred from time to time by the Holder with respect to any modification,
consent or waiver of the provisions of this Note or the Transaction Documents
and any enforcement of this Note and the Transaction Documents, including,
without limitation, reasonable attorneys’ fees and expenses.

     

    Section
5.6                                Amendments.

     

    (a)           This
Note may not be modified or amended in any manner except in writing executed by
the Maker and the Holder.

     

    (b)           To
the extent that amendments to this Note are required in connection with the
filing of a listing application with the American Stock Exchange in connection
with the transactions contemplated hereby, the Maker and the Holder shall
cooperate in good faith to reach mutually acceptable resolutions with regard to
such amendments, without penalty; provided that the Holder has, in its sole
discretion, determined such amendments to be advisable.

     

    Section
5.7                                Compliance with Securities
Laws.

     

    (a)           The
Holder of this Note acknowledges that this Note is being acquired solely for the
Holder’s own account and not as a nominee for any other party, and for
investment, and that the Holder shall not offer, sell or otherwise dispose of
this Note except in accordance with applicable law.

     

    (b)           The
Holder is an “accredited investor” (as defined in Rule 501 of Regulation D under
the Securities Act), and such Holder has such experience in business and
financial matters that it is capable of evaluating the merits and risks of an
investment in the Securities.  The Holder is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act and it is not
a broker-dealer.  The Holder acknowledges that an investment in the
Securities is speculative and involves a high degree of risk.

     

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

     

    Section
5.8                                Consent to
Jurisdiction.  Each of the Maker and the Holder (i) hereby
irrevocably submits to the exclusive jurisdiction of the United States District
Court sitting in the Southern District of New York and the courts of the State
of New York located in New York county for the purposes of any suit, action or
proceeding arising out of or relating to this Note and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper.  Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for notices to
it under the Purchase Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof.  Nothing in
this Section 3.8 shall affect or limit any right to serve process in any other
manner permitted by law.

     

    Section
5.9                                Binding
Effect.  This Note shall be binding upon, inure to the benefit
of and be enforceable by the Maker, the Holder and their respective successors
and permitted assigns.  The Maker shall not delegate or transfer this
Note or any obligations or undertakings contained in this Note.

     

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

     

    Section
5.11                                Maker Waivers; Dispute
Resolution.

     

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

     

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

     

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

     

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

    


    “Common Stock” means
shares of common stock, par value $0.10 per share, of the Company.

     

    “Company” means
Implant Sciences Corporation, a Massachusetts corporation.

     

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

     

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

    


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

    


    “Transaction
Documents” means this Note, the Purchase Agreement, the Security
Agreement, and all other security documents or related agreements now or
hereafter entered into in connection with and/or as security for this Note and
all amendments and supplements thereto and replacements thereof and any other
Transaction Document (as that term is defined in the Purchase
Agreement).

     

    
      
        
        

      

      
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    [Signature appears on following
page]

     

     

     

     

     

     

     


    
      
        
           

           

          


        

         


      

      
        -19-

        
          

        

      

      
         


      

    


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

     

    


    


    IMPLANT
SCIENCES CORPORATION

    


    


    By:           /s/ Phillip C.
Thomas_________________

    Name: Phillip C. Thomas

    Title: President

    


    


    



    
      
        
          [SIGNATURE
PAGE TO SENIOR SECURED

          CONVERTIBLE
PROMISSORY NOTE]

          S-1

          


           

        

         


      

      
         


        
          

        

      

      
         


      

    


    EXHIBIT
A

    


    WIRE
INSTRUCTIONS

     

    


     

    Wire instructions for DMRJ
Group, LLC

     

    Bank:

     

    ABA#:

     

    Account
Name:

     

    Account
Number:

     


    
      
        
           

          


           

        

         


      

      
         


        
          

        

      

      
         


      

    


    EXHIBIT
B

    


    FORM
OF

     

    NOTICE OF
CONVERSION

     

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

     

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

     

    Date of
Conversion
_________________________________________________________

     

    Applicable
Conversion Price __________________________________________________

     

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

     

    Signature___________________________________________________________________

     

    [Name]

     

    Address:__________________________________________________________________

     

    _______________________________________________________________________