Lithium Exploration Group Inc.: Exhibit 10.31 - 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. 

10% OID Convertible Promissory Note 
due September 3, 2014


USD$220,000 

Original Issue Date: March 3, 2014 

              
For value received, Lithium Exploration Group, Inc., a Nevada corporation
(the “Company”), hereby promises to pay to the order of JDF Capital
Inc. (together with its successors, representatives, and permitted assigns,
the “Holder”), in accordance with the terms hereinafter provided, up to
an aggregate of $220,000 (Two Hundred and Twenty Thousand Dollars) (the
“Principal Amount”). The Principal Amount outstanding shall be due and
payable on September 3, 2014 (the “Maturity Date”).

              
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 March 3, 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 12 percent accruing on a semi-annual basis commencing
March 3, 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;

              
(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;

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(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. 

              
(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). 

-4- 




                                   
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.
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. 

                                   
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.

-6- 




                                   
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. 

                                   (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. 

-9- 




                                   (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.

                                   (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) . 

-10- 




                                   (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”).

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

-11- 




                                                 
(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. 

                                   
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.

-16- 




                                   
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:      
_____________________________________________________

                       
_____________________________________________________

-20-