Lithium Exploration Group Inc.: Exhibit 10.5 - Filed by newsfilecorp.com






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

LITHIUM EXPLORATION GROUP, INC. 

Convertible Promissory Note
 due • , 2015 

	Dated: • , 2014 	USD$•  


     For value received, Lithium
Exploration Group, Inc., a Nevada corporation (the “Company”), hereby
promises to pay to the order of • (together with its successors,
representatives, and permitted assigns, the “Holder”), in accordance with
the terms hereinafter provided, up to an aggregate of $•  (•  dollars) (the
“Principal Amount”), which includes the aggregate principal sum of $• (• 
dollars) and 15% prepaid interest per annum over 18 months. The Principal Amount
outstanding shall be due and payable on the following schedule:

              
1.             
$• , being $•  and 15% prepaid interest over 18 months, shall be due 18 months
from the date the date hereof and the Company is in receipt of the payment of $• from the Holder. 

     The due dates of any outstanding
principal balance are referred to herein as the “Maturity Date”, respectively.


     All payments under or pursuant to
this Note refer to and 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 Company or by wire transfer of funds to the Holder’s account,
instructions for which are attached hereto as Exhibit A.

ARTICLE I 

                             
Section
1.1              
Purchase Agreement. This Note has been executed and delivered pursuant to
the Security Purchase Agreement dated as of • , 2014 (the “Purchase
Agreement”) by and among the Company and the purchasers listed therein.
Capitalized terms used and not otherwise defined herein shall have the meanings
set forth for such terms in the Purchase Agreement.

                             
Section
1.2              
Interest.

                             
(a)              
Beginning on the issuance date of this Note (the “Issuance Date”), the
outstanding principal balance of this Note shall bear interest, in arrears, at a
rate per annum equal to 15 percent accruing on an 18 month basis commencing • ,
2014 in cash or restricted shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock”) at the option of the Holder.




                             
Section
1.2               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 Nevada, such
payment may be due on the next succeeding business day and such next succeeding
day shall be included in the calculation of the amount of accrued interest
payable on such date. 

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

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

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)               the
Company shall fail to make the payment of any amount of principal outstanding on
the date such payment is due hereunder;

               (b)               the
Company shall fail to make any payment of interest in shares of Common Stock for
a period of three (3) days after the date such interest is due;

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

               (d)               the
Company’s notice to the Holder, including by way of public announcement, at any
time, of its inability to comply or its intention not to comply with proper
requests for conversion of this Note into shares of Common Stock;

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

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

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               (g)              
any material representation or warranty made by the Company 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;

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

               (i)               the
Company 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;

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

               (k)               the
failure of the Company to instruct its transfer agent to remove any legends from
shares of Common Stock eligible to be sold under Rule 144 of the Securities Act
and issue such unlegended certificates to the Holder within five (5) business
days of the Holder’s request so long as the Holder has provided reasonable
assurances and opinions of counsel to the Company that such shares of Common
Stock can be resold pursuant to Rule 144; or 

               (l)                the
failure of the Company to pay any amounts due to the Holder herein within three
(3) business days of receipt of notice to the Company. 

                              Section
2.2               Remedies
Upon An Event of Default. If an Event of Default shall have occurred and
shall be continuing, the Holder of this Note may at any time at its option, (a)
declare the entire unpaid principal balance of this Note, together with all
interest accrued hereon, due and payable, and thereupon, the same shall be
accelerated and so due and payable, without presentment, demand, protest, or notice, all of which are hereby expressly
unconditionally and irrevocably waived by the Company; provided, however, that
upon the occurrence of an Event of Default described in (i) Sections 2.1 (k) or
(l), the outstanding principal balance and interest hereunder shall be
automatically due and payable and (ii) Sections 2.1 (a)-(j) and 2.1(m) -(n),
demand the prepayment of this Note pursuant to Section 3.6 hereof, (b) subject
to Section 3.4 hereof, demand that the principal amount of this Note then
outstanding shall be converted into shares of Common Stock at a Conversion Price
(as defined in Section 3.2(a) hereof) per share calculated pursuant to Section
3.1 hereof assuming that the date that the Event of Default occurs is the
Conversion Date and demand that all accrued and unpaid interest under this Note
shall be converted into shares of Common Stock in accordance with Section 1.2
hereof, or (c) exercise or otherwise enforce any one or more of the Holder’s
rights, powers, privileges, remedies and interests under this Note, the Purchase
Agreement, 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. 

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ARTICLE III 

CONVERSION; ANTIDILUTION; PREPAYMENT 

                              Section
3.1               Conversion
Option.

               (a)               At
any time on or after the Issuance Date, this Note shall be convertible (in whole
or in part), at the option of the Holder (the “Conversion Option”), into
such number of fully paid and non-assessable shares of Common Stock (the
“Conversion Rate”) as is determined by dividing that portion of the
outstanding principal balance under this Note as of such date that the Holder
elects to convert by the Conversion Price (as defined in Section 3.2(a) hereof)
then in effect on the date on which the Holder faxes 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 3.5
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.

               (b)               On
any Voluntary Conversion Date, the Holder may cause the any outstanding
Principal Amount of this Note plus all accrued and unpaid interest to convert
into a number of fully paid and nonassessable shares of Common Stock equal to
the quotient of the elected outstanding principal amount of this Note plus all
accrued interest on the elected outstanding on the Voluntary Conversion Date (as
described in this Section below) divided by the Conversion Price as described in
Section 3.2(a) below. 

Furthermore, upon the occurrence of an Event of Default (as
defined in Section 2.1 hereof), then to the extent permitted by law, the Company
will pay interest to the Holder, payable on demand, on the outstanding principal
balance of the Note from the date of the Event of Default until such Event of
Default is cured at the rate of the lesser of fifteen percent (15%) and the
maximum applicable legal rate per annum. 

-4- 




               (c)               Conversion
Limitations; Holder’s Restriction on Conversion. The Company shall
not effect any conversion of this Note, and the Holder shall not have the right
to convert any portion of this Note, to the extent that after giving effect to
such conversion, the Holder (together with the Holder’s affiliates), as set
forth on the applicable Conversion Notice, would beneficially own in excess of
4.99% of the number of shares of the Common Stock outstanding immediately after
giving effect to such conversion. For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number
of shares of Common Stock issuable upon conversion of this Note with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted portion of this Note beneficially owned by the
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Notes or the Warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act. To the extent that the limitation contained in this section applies, the
determination of whether this Note is convertible (in relation to other
securities owned by the Holder) and of which a portion of this Note is
convertible shall be in the sole discretion of such Holder. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company
each time it delivers a Conversion Notice that such Conversion Notice has not
violated the restrictions set forth in this paragraph and the Company shall have
no obligation to verify or confirm the accuracy of such determination. For
purposes of this Section, in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares of Common
Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K (or
such related form), as the case may be, (y) a more recent public announcement by
the Company or (z) any other notice by the Company or the Company’s Transfer
Agent setting forth the number of shares of Common Stock outstanding. Upon the
written or oral request of the Holder, the Company shall within two Trading Days
confirm orally and in writing to the Holder the number of shares of Common Stock
then outstanding. In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported. The provisions of this Section may be waived by the Holder upon, at
the election of the Holder, not less than 61 days’ prior notice to the Company,
and the provisions of this Section shall continue to apply until such 61st day
(or such later date, as determined by the Holder, as may be specified in such
notice of waiver). 

                              Section
3.2               Conversion
Price. 

               (a)              The
term “Conversion Price” shall mean a 50% discount of the lowest closing
price of the common stock for the 20 trading days immediately prior to (i) the
date of the Purchase Agreement, or (ii) the Voluntary Conversion Date.

                              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 designee, for the
number of shares of Common Stock to which the Holder shall be entitled. In the
alternative, not later than three (3) Trading Days after any Conversion Date,
the Company shall deliver to the applicable Holder by express courier a
certificate or certificates which shall be free of restrictive legends and
trading restrictions (other than those required by Section 5.1 of the Purchase
Agreement) representing the number of shares of Common Stock being acquired upon
the conversion of this Note (the “Delivery Date”). Notwithstanding the
foregoing to the contrary, the 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. 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 if 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.

-5- 




               (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 a certificate or certificates pursuant to this Section hereunder 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, together with interest on such amount at a rate of
10% per annum, accruing until such amount and any accrued interest thereon is
paid in full, equal to the greater of (A) (i) 1% of the aggregate principal
amount of the Note requested to be converted for the first five (5) Trading Days
after the Delivery Date and (ii) 2% of the aggregate principal amount of the
Note requested to be converted for each Trading Day thereafter and (B) $2,000
per day (which amount shall be paid as liquidated damages and not as a penalty).
Nothing herein shall limit a Holder’s right to pursue actual damages for the
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 to the Holder a certificate or certificates
representing the shares of Common Stock issuable upon conversion of this Note on
or before the Delivery Date, and if after such date the Holder is required by
its broker to purchase (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the shares of
Common Stock issuable upon conversion of this Note which the Holder anticipated
receiving upon such exercise (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 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. 

-6- 




                              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 would exceed, when aggregated
with all other shares of Common Stock owned by the Holder at such time, the
number of shares of Common Stock which would result in the Holder beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act and
the rules thereunder) more than 9.9% of all of the Common Stock outstanding at
such time; provided, however, that upon the Holder providing the Company with
sixty-one (61) days notice (pursuant to Section 4.1 hereof) (the “Waiver
Notice”) that the Holder would like to waive this Section 3.4 with regard to any
or all shares of Common Stock issuable upon conversion of this Note, this
Section 3.4 will be of no force or effect with regard to all or a portion of the
Note referenced in the Waiver Notice; provided, further, that this provision
shall be of no further force or effect during the sixty-one (61) days
immediately preceding the Maturity Date.

                              Section
3.5               Adjustment
of Conversion Price. 

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


                                             (i)              
Adjustments for Stock Splits and Combinations. If the Company shall at
any time or from time to time after the Issuance Date, effect a stock split of
the outstanding Common Stock, the applicable Conversion Price in effect
immediately prior to the stock split shall be proportionately decreased. If the
Company shall at any time or from time to time after the Issuance Date, combine
the outstanding shares of Common Stock, the applicable Conversion Price in
effect immediately prior to the combination shall be proportionately increased.
Any adjustments under this Section 3.5(a)(i) shall be effective at the close of
business on the date the stock split or combination occurs. 

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

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

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

                                             (iii)                Adjustment
for Other Dividends and Distributions. If the Company shall at any time or
from time to time after the Issuance Date, make or issue or set a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in other than shares of Common Stock, then, and in
each event, an appropriate revision to the applicable Conversion Price shall be
made and provision shall be made (by adjustments of the Conversion Price or
otherwise) so that the holders of this Note shall receive upon conversions
thereof, in addition to the number of shares of Common Stock receivable thereon, the number
of securities of the Company which they would have received had this Note been
converted into Common Stock on the date of such event and had thereafter, during
the period from the date of such event to and including the Conversion Date,
retained such securities (together with any distributions payable thereon during
such period), giving application to all adjustments called for during such
period under this Section 3.5(a)(iii) with respect to the rights of the holders
of this Note; provided, however, that if such record date shall
have been fixed and such dividend is not fully paid or if such distribution is
not fully made on the date fixed therefor, the Conversion Price shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions. 

-7- 




                                             (iv)               Adjustments
for Reclassification, Exchange or Substitution. If the Common Stock issuable
upon conversion of this Note at any time or from time to time after the Issuance
Date shall be changed to the same or different number of shares of any class or
classes of stock, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of shares or stock
dividends provided for in Sections 3.5(a)(i), (ii) and (iii), or a
reorganization, merger, consolidation, or sale of assets provided for in Section
3.5(a)(v)), then, and in each event, an appropriate revision to the Conversion
Price shall be made and provisions shall be made (by adjustments of the
Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock and
other securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of shares of Common Stock into which such
Note might have been converted immediately prior to such reclassification,
exchange, substitution or other change, all subject to further adjustment as
provided herein. 

                                             (v)               Adjustments
for Reorganization, Merger, Consolidation or Sales of Assets. If at
any time or from time to time after the Issuance Date there shall be a capital
reorganization of the Company (other than by way of a stock split or combination
of shares or stock dividends or distributions provided for in Section 3.5(a)(i),
(ii) and (iii), or a reclassification, exchange or substitution of shares
provided for in Section 3.5(a)(iv)), or a merger or consolidation of the Company
with or into another corporation where the holders of outstanding voting
securities prior to such merger or consolidation do not own over fifty percent
(50%) of the outstanding voting securities of the merged or consolidated entity,
immediately after such merger or consolidation, or the sale of all or
substantially all of the Company’s properties or assets to any other person (an
“Organic Change”), then as a part of such Organic Change an appropriate
revision to the Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price or otherwise) so that the Holder shall have
the right thereafter to convert such Note into the kind and amount of shares of
stock and other securities or property of the Company or any successor
corporation resulting from Organic Change. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section
3.5(a)(v) with respect to the rights of the Holder after the Organic Change to
the end that the provisions of this Section 3.5(a)(v) (including any adjustment
in the applicable Conversion Price then in effect and the number of shares of
stock or other securities deliverable upon conversion of this Note) shall be
applied after that event in as nearly an equivalent manner as may be
practicable. 

                                             (vi)               Issuance
of Common Stock Equivalents. If the Company, at any time after the Issuance
Date, shall issue any securities convertible into or exchangeable for, directly
or indirectly, Common Stock (“Convertible Securities”), other than the
Note, or any rights or warrants or options to purchase any such Common Stock or
Convertible Securities, shall be issued or sold (collectively, the “Common
Stock Equivalents”) and the aggregate of the price per share for which
Additional Shares of Common Stock may be issuable thereafter pursuant to such
Common Stock Equivalent, plus the consideration received by the Company for
issuance of such Common Stock Equivalent divided by the number of shares of
Common Stock issuable pursuant to such Common Stock Equivalent (the
“Aggregate Per Common Share Price”) shall be less than the applicable
Conversion Price then in effect, or if, after any such issuance of Common
Stock Equivalents, the price per share for which Additional Shares of Common
Stock may be issuable thereafter is amended or adjusted, and such price as so
amended shall make the Aggregate Per Share Common Price be less than the
applicable Conversion Price in effect at the time of such amendment or
adjustment, then the applicable Conversion Price upon each such issuance or
amendment shall be adjusted as provided in the first sentence of subsection (vi)
of this Section 3.5(a) on the basis that (1) the maximum number of Additional
Shares of Common Stock issuable pursuant to all such Common Stock Equivalents
shall be deemed to have been issued (whether or not such Common Stock
Equivalents are actually then exercisable, convertible or exchangeable in whole
or in part) as of the earlier of (A) the date on which the Company shall enter
into a firm contract for the issuance of such Common Stock Equivalent, or (B)
the date of actual issuance of such Common Stock Equivalent. No adjustment of
the applicable Conversion Price shall be made under this subsection (vii) upon
the issuance of any Convertible Security which is issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor, if
any adjustment shall previously have been made to the exercise price of such
warrants then in effect upon the issuance of such warrants or other rights
pursuant to this subsection (vii). No adjustment shall be made to the Conversion
Price upon the issuance of Common Stock pursuant to the exercise, conversion or
exchange of any Convertible Security or Common Stock Equivalent where an
adjustment to the Conversion Price was made as a result of the issuance or
purchase of any Convertible Security or Common Stock Equivalent. 

-8- 




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

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

                                                            (2)               in
the event of any consolidation or merger of the Company in which the Company is
not the surviving corporation or in which the previously outstanding shares of
Common Stock of the Company shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Company for stock or other securities of
any corporation, the Company shall be deemed to have issued a number of shares
of its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation. If any such calculation results in adjustment
of the applicable Conversion Price, or the number of shares of Common Stock
issuable upon conversion of the Note, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Note immediately prior to such merger, consolidation or sale,
shall be made after giving effect to such adjustment of the number of shares of
Common Stock issuable upon conversion of the Note. In the event Common Stock is
issued with other shares or securities or other assets of the Company for
consideration which covers both, the consideration computed as provided in this
Section 3.5(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Company. 

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

-9- 




                              (c)               Certain
Issues Excepted. Anything herein to the contrary notwithstanding, the
Company shall not be required to make any adjustment to the Conversion Price in
connection with (i) securities issued (other than for cash) in connection with a
merger, acquisition, or consolidation, (ii) securities issued pursuant to a bona
fide firm underwritten public offering of the Company’s securities, (iii)
securities issued pursuant to the conversion or exercise of convertible or
excercisable securities issued or outstanding on or prior to the date hereof or
issued pursuant to the Purchase Agreement, (iv) the shares of Common Stock
issuable upon the exercise of Warrants, (v) securities issued in connection with
strategic license agreements or other partnering arrangements so long as such
issuances are not for the purpose of raising capital, (vi) Common Stock issued
or options to purchase Common Stock granted or issued pursuant to the Company’s
stock option plans and employee stock purchase plans as they now exist and (vii)
the payment of any accrued interest in shares of Common Stock pursuant to this
Note. 

                              (d)               No
Impairment. The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith, assist in the carrying out of all the provisions of this Section 3.5 and
in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the Holder against impairment. In the event a
Holder shall elect to convert any Note as provided herein, the Company cannot
refuse conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law, violation
of an agreement to which such Holder is a party or for any reason whatsoever,
unless, an injunction from a court, or notice, restraining and or adjoining
conversion of all or of said Note shall have issued and the Company posts a
surety bond for the benefit of such Holder in an amount equal to one hundred
thirty percent (130%) of the amount of the Note the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment. 

                              (e)               Certificates
as to Adjustments. Upon occurrence of each adjustment or readjustment of the
Conversion Price or number of shares of Common Stock issuable upon conversion of
this Note pursuant to this Section 3.5, 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. 

                              (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.

-10- 




                              (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 twenty percent (120%) 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
Nevada corporate 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 3.5(h) . 

                              (i)              
Regulatory Compliance. If any shares of Common Stock to be reserved for
the purpose of conversion of this Note or any interest accrued thereon require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the 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. 

                              Section
3.6               Prepayment.


                              (a)               Prepayment
Upon an Event of Default. Notwithstanding anything to the contrary contained
herein, upon the occurrence of an Event of Default described in Sections 2.1(a)
-(j) and 2.1(m) -(o) hereof, the Holder shall have the right, at such Holder’s
option, to require the Company to prepay in cash all or a portion of this Note
at a price equal to one hundred twenty percent (120%) of the aggregate principal
amount of this Note plus all accrued and unpaid interest applicable at the time
of such request (the “Event of Default Prepayment Price”). Nothing in
this Section 3.6(a) shall limit the Holder’s rights under Section 2.2 hereof.

                              (b)               Prepayment
Option Upon Major Transaction. In addition to all other rights of the Holder
contained herein, simultaneous with the occurrence of a Major Transaction (as
defined in Section 3.6(e) hereof), the Holder shall have the right, at the
Holder’s option, to require the Company to prepay all or a portion of the
Holder’s Note at a price equal to one hundred ten percent (110%) of the
aggregate principal amount of this Note plus all accrued and unpaid interest
(the “Major Transaction Prepayment Price”). 

                              (c)              
Prepayment Option Upon Triggering Event. In addition to all other rights
of the Holder contained herein, after a Triggering Event (as defined below), the
Holder shall have the right, at the Holder’s option, to require the Company to
prepay all or a portion of this Note in cash at a price equal to the sum of (i)
the greater of (A) one hundred twenty percent (120%) of the aggregate principal
amount of this Note plus all accrued and unpaid interest and (B) in the event at
such time the Holder is unable to obtain the benefit of its conversion rights
through the conversion of this Note and resale of the shares of Common Stock
issuable upon conversion hereof in accordance with the terms of this Note and
the other Transaction Documents, the aggregate principal amount of this Note
plus all accrued but unpaid interest hereon, divided by the Conversion Price on
(x) the date the Prepayment Price (as defined below) is demanded or otherwise
due or (y) the date the Prepayment Price is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Prepayment Price is demanded or
otherwise due, and (y) the date the Prepayment Price is paid in full, whichever
is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of this Note and the
other Transaction Documents (the “Triggering Event Prepayment Price,” and,
collectively with the “Major Transaction Prepayment Price,” the “Prepayment
Price”).

-11- 




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

                                             (i)              the
consolidation, merger or other business combination of the Company 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 Company or
(B) 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 

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

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

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

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

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

                                             (iii)             
the Company’s failure to comply with a Conversion Notice tendered in accordance
with the provisions of this Note within ten (10) business days after the receipt
by the Company of the Conversion Notice; or 

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

                                             (v)               the
Company consummates a “going private” transaction and as a result the Common
Stock is no longer registered under Sections 12(b) or 12(g) of the Exchange Act.

                              (f)               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 Company shall deliver written notice thereof via facsimile and
overnight courier (“Notice of Major Transaction”) to the Holder of this Note. At
any time after receipt of a Notice of Major Transaction (or, in the event a
Notice of Major Transaction is not delivered at least ten (10) days
prior to a Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of the Notes then outstanding may require the Company
to prepay, effective immediately prior to the consummation of such Major
Transaction, all of the holder’s Notes then outstanding by delivering written
notice thereof via facsimile and overnight courier (“Notice of Prepayment at
Option of Holder Upon Major Transaction”) to the Company, which Notice of
Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the
number of Notes that such holder is electing to prepay and (ii) the applicable
Major Transaction Prepayment Price, as calculated pursuant to Section 3.6(b)
above. 

-12- 




                              (g)               Mechanics
of Prepayment at Option of Holder Upon Triggering Event. 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 each holder of the Notes. At any time after the earlier of
a holder’s receipt of a Notice of Triggering Event and such holder becoming
aware of a Triggering Event, any holder of this Note may require the Company to
prepay all of the Notes on a pro rata basis by delivering written notice thereof
via facsimile and overnight courier (“Notice of Prepayment at Option
of Holder Upon Triggering Event”) to the Company, which Notice of Prepayment
at Option of Holder Upon Triggering Event shall indicate (i) the amount of the
Note that such holder is electing to have prepaid and (ii) the applicable
Triggering Event Prepayment Price, as calculated pursuant to Section 3.6(c)
above. A holder shall only be permitted to require the Company to prepay the
Note pursuant to Section 3.6 hereof for the greater of a period of ten (10) days
after receipt by such holder of a Notice of Triggering Event or for so long as
such Triggering Event is continuing. 

                              (h)               Payment
of Prepayment Price. Upon the Company’s receipt of a Notice(s) of Prepayment
at Option of Holder Upon Triggering Event or a Notice(s) of Prepayment at Option
of Holder Upon Major Transaction from any holder of the Notes, the Company shall
immediately notify each holder of the Notes by facsimile of the Company’s
receipt of such Notice(s) of Prepayment at Option of Holder Upon Triggering
Event or Notice(s) of Prepayment at Option of Holder Upon Major Transaction and
each holder which has sent such a notice shall promptly submit to the Company
such holder’s certificates representing the Notes which such holder has elected
to have prepaid. The Company shall deliver the applicable Triggering Event
Prepayment Price, in the case of a prepayment pursuant to Section 3.6(i), to
such holder within five (5) business days after the Company’s receipt of a
Notice of Prepayment at Option of Holder Upon Triggering Event and, in the case
of a prepayment pursuant to Section 3.(f), the Company shall deliver the
applicable Major Transaction Prepayment Price immediately prior to the
consummation of the Major Transaction; provided that a holder’s original Note
shall have been so delivered to the Company; provided further that if the
Company is unable to prepay all of the Notes to be prepaid, the Company shall
prepay an amount from each holder of the Notes being prepaid equal to such
holder’s pro-rata amount (based on the number of Notes held by such holder
relative to the number of Notes outstanding) of all Notes being prepaid. If the
Company shall fail to prepay all of the Notes submitted for prepayment (other
than pursuant to a dispute as to the arithmetic calculation of the Prepayment
Price), in addition to any remedy such holder of the Notes may have under this
Note and the Purchase Agreement, the applicable Prepayment Price payable in
respect of such Notes not prepaid shall bear interest at the rate of two percent
(2%) per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Prepayment Price in full to a holder of the
Notes submitted for prepayment, such holder shall have the option (the “Void
Optional Prepayment Option”) to, in lieu of prepayment, require the Company to
promptly return to such holder(s) all of the Notes that were submitted for
prepayment by such holder(s) under this Section 3.6 and for which the applicable
Prepayment Price has not been paid, by sending written notice thereof to the
Company via facsimile (the “Void Optional Prepayment Notice”). Upon the
Company’s receipt of such Void Optional Prepayment Notice(s) and prior to
payment of the full applicable Prepayment Price to such holder, (i) the
Notice(s) of Prepayment at Option of Holder Upon Triggering Event or the
Notice(s) of Prepayment at Option of Holder Upon Major Transaction, as the case
may be, shall be null and void with respect to those Notes submitted for prepayment and for which the applicable
Prepayment Price has not been paid, (ii) the Company shall immediately return
any Notes submitted to the Company by each holder for prepayment under this
Section 3.6(h) and for which the applicable Prepayment Price has not been paid
and (iii) the Conversion Price of such returned Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Void
Optional Prepayment Notice(s) is delivered to the Company and (B) the lowest
Closing Bid Price during the period beginning on the date on which the Notice(s)
of Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
Prepayment at Option of Holder Upon Triggering Event, as the case may be, is
delivered to the Company and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Company; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder’s delivery of a Void Optional Prepayment Notice
and exercise of its rights following such notice shall not effect the Company’s
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3.6 shall have priority to
payments to other stockholders in connection with a Major Transaction.

-13- 




                              (i)               Company
Prepayment Option upon Major Transaction. Upon the consummation of a Major
Transaction, the Company may prepay in cash all or any portion of the
outstanding principal amount of this Note together with all accrued and unpaid
interest thereon upon at least thirty (30) days prior written notice to the
Holder (the “Company’s Prepayment Notice”) at a price equal to one
hundred twenty percent (120%) of the aggregate principal amount of this Note
plus any accrued but unpaid interest (the “Company’s Prepayment Price”);
provided, however, that if a holder has delivered a Conversion Notice to the
Company or delivers a Conversion Notice within such thirty (30) day period
following delivery of the Company’s Prepayment Notice, the principal amount of
the Notes plus any accrued but unpaid interest designated to be converted may
not be prepaid by the Company and shall be converted in accordance with Section
3.3 hereof; provided further that if during the period between delivery of the
Company’s Prepayment Notice and the Company’s Prepayment Date (as defined
below), a holder shall become entitled and elects to deliver a Notice of
Prepayment at Option of Holder Upon Major Transaction or Notice of Prepayment at
Option of Holder upon Triggering Event, then such rights of the holders shall
take precedence over the previously delivered Company Prepayment Notice if the
holder so elects. The Company’s Prepayment Notice shall state the date of
prepayment which date shall be the date of the consummation of the Major
Transaction (the “Company’s Prepayment Date”), the Company’s Prepayment Price
and the principal amount of Notes plus any accrued but unpaid interest to be
prepaid by the Company. The Company shall deliver the Company’s Prepayment Price
on the Company’s Prepayment Date, provided, that if the holder(s) delivers a
Conversion Notice before the Company’s Prepayment Date, then the portion of the
Company’s Prepayment Price which would be paid to prepay the Notes covered by
such Conversion Notice shall be returned to the Company upon delivery of the
Common Stock issuable in connection with such Conversion Notice to the
holder(s). On the Company’s Prepayment Date, the Company shall pay the Company’s
Prepayment Price, subject to any adjustment pursuant to the immediately
preceding sentence, to the holder(s) on a pro rata basis. If the Company fails
to pay the Company’s Prepayment Price by the third (3rd) business day after the
Company’s Prepayment Date, the prepayment will be declared null and void and the
Company shall lose its right to serve a Company’s Prepayment Notice pursuant to
this Section 3.6(i) in the future. Notwithstanding the foregoing to the
contrary, the Company may effect a prepayment pursuant to this Section 3.6(i)
only if trading in the Common Stock shall not have been suspended by the
Securities and Exchange Commission or the Nasdaq SmallCap Market (or other
exchange or market on which the Common Stock is trading), and and the Company is
in material compliance with the terms and conditions of this Note and the other
Transaction Documents.

                              Section
3.7              
Inability to Fully Convert. 

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

-14- 




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

                                             (ii)               void
its Conversion Notice and retain or have returned, as the case may be, this Note
that was to be converted pursuant to the Conversion Notice (provided that the
Holder’s voiding its Conversion Notice shall not effect the Company’s
obligations to make any payments which have accrued prior to the date of such
notice). In the event a Holder shall elect to convert any portion of its Notes
as provided herein, the Company cannot refuse conversion based on any claim that
such Holder or any one associated or affiliated with such Holder has been
engaged in any violation of law, violation of an agreement to which such Holder
is a party or for any reason whatsoever, unless, an injunction from a court, on
notice, restraining and or adjoining conversion of all or of said Notes shall
have been issued and the Company posts a surety bond for the benefit of such
Holder in an amount equal to 130% of the principal amount of the Notes the
Holder has elected to convert, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Holder in the event it obtains judgment.

                              (b)               Mechanics
of Fulfilling Holder’s Election. The Company shall immediately send via
facsimile to the Holder, upon receipt of a facsimile copy of a Conversion Notice
from the Holder which cannot be fully satisfied as described in Section 3.7(a)
above, a notice of the Company’s inability to fully satisfy the Conversion
Notice (the “Inability to Fully Convert Notice”). Such Inability to Fully
Convert Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder’s Conversion Notice, (ii) the amount of this Note which
cannot be converted and (iii) the applicable Mandatory Prepayment Price. The
Holder shall notify the Company of its election pursuant to Section 3.7(a) above
by delivering written notice via facsimile to the Company (“Notice in
Response to Inability to Convert”). 

                              (c)              
Payment of Prepayment Price. If the Holder shall elect to have its Notes
prepaid pursuant to Section 3.7(a)(i) above, the Company shall pay the Mandatory
Prepayment Price to the Holder within thirty (30) days of the Company’s receipt
of the Holder’s Notice in Response to Inability to Convert, provided that
prior to the Company’s receipt of the Holder’s Notice in Response to Inability
to Convert the Company has not delivered a notice to the Holder stating, to the
satisfaction of the Holder, that the event or condition resulting in the
Mandatory Prepayment has been cured and all Conversion Shares issuable to the
Holder can and will be delivered to the Holder in accordance with the terms of
this Note. If the Company shall fail to pay the applicable Mandatory Prepayment
Price to the Holder on a timely basis as described in this Section 3.7(c) (other
than pursuant to a dispute as to the determination of the arithmetic calculation
of the Prepayment Price), in addition to any remedy the Holder may have under
this Note and the Purchase Agreement, such unpaid amount shall bear interest at
the rate of two percent (2%) per month (prorated for partial months) until paid
in full. Until the full Mandatory Prepayment Price is paid in full to the Holder, the Holder may (i) void
the Mandatory Prepayment with respect to that portion of the Note for which the
full Mandatory Prepayment Price has not been paid, (ii) receive back such Note,
and (iii) require that the Conversion Price of such returned Note be adjusted to
the lesser of (A) the Conversion Price as in effect on the date on which the
Holder voided the Mandatory Prepayment and (B) the lowest Closing Bid Price
during the period beginning on the Conversion Date and ending on the date the
Holder voided the Mandatory Prepayment.

-15- 




                              (d)              
Pro-rata Conversion and Prepayment. In the event the Company receives a
Conversion Notice from more than one holder of the Notes on the same day and the
Company can convert and prepay some, but not all, of the Notes pursuant to this
Section 3.7, the Company shall convert and prepay from each holder of the Notes
electing to have its Notes converted and prepaid at such time an amount equal to
such holder’s pro-rata amount (based on the principal amount of the Notes held
by such holder relative to the principal amount of the Notes outstanding) of all
the Notes being converted and prepaid at such time. 

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

ARTICLE IV 

MISCELLANEOUS 

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

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

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

-16- 




                             Section
4.4              
Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The
remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note, at law or in equity (including, without
limitation, a decree of specific performance and/or other injunctive relief), no
remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a holder’s
right to pursue actual damages for any failure by the Company 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 Company (or the
performance thereof). The Company 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
Company agrees that, in the event of any such breach or threatened breach, the
Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.

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

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

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

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



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




                              Section
4.9              
Consent to
Jurisdiction. Each
of the Company and the Holder (i) hereby irrevocably submits to the exclusive
jurisdiction of the State of Nevada 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 Company and the Holder
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under the Purchase Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing in this Section
4.9 shall affect or limit any right to serve process in any other manner
permitted by law. Each of the Company and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to
this Note shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party. 

-17- 




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

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

                             Section
4.12               Company
Waivers. Except as otherwise specifically provided herein, the Company 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 Company liable for the payment of this Note, AND DO HEREBY
WAIVE TRIAL BY JURY. 

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

                             (b)               THE
COMPANY 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. 

	 	LITHIUM EXPLORATION GROUP, INC. 
	 	  
	 	  
	 	By:
      ________________________________________________
	 	           Name:
    
	 	           Title:
    


-18- 





	EXHIBIT A 
	 
	WIRE INSTRUCTIONS 


Payee:
_______________________________________________________________

Bank:
________________________________________________________________

Address:
_____________________________________________________________

                
_____________________________________________________________

Bank No.:
____________________________________________________________

Account No.:
_________________________________________________________

Account Name:
________________________________________________________

-19- 




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 Lithium Exploration Group, Inc. 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:
      _______________________________________________________	 
	 	 
	Print Name:
      ______________________________________________________	 
	 	 
	Address: 
      _______________________________________________________	 
	 	 
	
                      
      ________________________________________________________