Exhibit 10.4 - Form of Series B Notes


    
      

      

    

    Exhibit
      10.4

     

    
      EXHIBIT
        B 

       

      FORM
        OF SERIES B CONVERTIBLE NOTE

       

      NEITHER
        THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
        THE
        SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
        LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
        (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL,
        IN A
        FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
        UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
        SAID
        ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
        WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
        BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
        TERMS
        OF THIS NOTE, INCLUDING SECTIONS 3(d)(iii) AND 17(a) HEREOF. THE PRINCIPAL
        AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE
        UPON
        CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
        PURSUANT TO SECTION 3(d)(iii) OF THIS NOTE.

       

      nCOAT,
        Inc.

       

      Series
        B Convertible Note

       

      
        	
                Issuance
                  Date: May __, 2007

              	
                Original
                  Principal Amount: U.S.
                  $_____________

              


      

      


      FOR
        VALUE RECEIVED, nCOAT,
        Inc., a Delaware corporation (the "Company"),
        hereby promises to pay to [___________] or its registered assigns ("Holder")
        the
        amount set out above as the Original Principal Amount (as reduced pursuant
        to
        the terms hereof pursuant to conversion or otherwise, the "Principal")
        when
        due, whether upon the Maturity Date (as defined below), acceleration, redemption
        or otherwise (in each case in accordance with the terms hereof) and to pay
        interest ("Interest")
        on any
        outstanding Principal at the Interest Rate as required by Section 2 hereof.
        This
        Series B Convertible Note (including all Convertible Notes issued in exchange,
        transfer or replacement hereof, this "Note")
        is one
        of an issue of Convertible Notes issued pursuant to the Securities Purchase
        Agreement (as defined below) on the Closing Date (collectively, the
        "Notes”
and
        such other Convertible Notes, the “Other
        Notes”).
        Certain capitalized terms used herein are defined in Section 27. Capitalized
        terms used but not defined herein shall have the meanings set forth in the
        Securities Purchase Agreement (as defined below). 

       

       


      
        
           

        

        
           

          
            

          

        

        
           

        

      


      (1) PAYMENTS
        OF PRINCIPAL.
        On the
        Maturity Date, the Company shall pay to the Holder an amount in cash
        representing all outstanding Principal, accrued and unpaid Interest, if any,
        and
        accrued and unpaid Late Charges, if any, on such Principal and Interest.
        The
        "Maturity Date"
        shall
        be three years from the date of the Initial Closing, as may be extended at
        the
        option of the Holder (i) in the event that, and for so long as, a Trigger
        Event
        (as defined in Section 4(a)) shall have occurred and be continuing on the
        Maturity Date (as may be extended pursuant to this Section 1) or any event
        that
        shall have occurred and be continuing that with the passage of time and the
        failure to cure would result in a Trigger Event, and (ii) through the date
        that
        is ten (10) Business Days after the consummation of a Change of Control in
        the
        event that a Change of Control is publicly announced or a Change of Control
        Notice (as defined in Section 5(b)) is delivered prior to the Maturity Date.
        Other than as specifically permitted by the Note, the Company may not prepay
        any
        portion of the outstanding Principal, accrued and unpaid Interest or accrued
        and
        unpaid Late Charges, if any, on Principal and Interest.

       

      (2) INTEREST;
        INTEREST RATE.
        During
        the term of this Note, Interest shall accrue on outstanding Principal at
        an
        interest rate equal to six percent (6%) per annum (the “Interest
        Rate”)
        commencing on the Issuance Date. Interest
        shall be calculated on the basis of a 365-day year and the actual number
        of days
        elapsed, to the extent permitted by applicable law. Any Interest that shall
        accrue hereunder shall be payable quarterly in arrears on each January 1,
        April
        1, July 1 and October 1 (each an “Interest
        Payment Due Date”),
        beginning on the first such date after the Issuance Date hereof, in cash
        or
        registered shares of Common Stock (“Interest
        Shares”)
        at the
        option of the Company. If the Company elects to pay any Interest due in
        registered shares of the Company’s common stock, par value $0.001 per share (the
“Common
        Stock”):
        (i)
        the issuance price of the Interest Shares will be 90% of the 5-day Weighted
        Average Price (as defined in Section 27(hh)) of the Common Stock ending on
        the
        day prior to the Interest payment due date, (ii) the Common
        Stock
        shall
        have traded an average of at least 125,000 shares per day for each of the
        five
        trading days prior to the applicable Interest Payment Due Date, (iii)
a
        registration
        statement covering the resale by the Holder of the Interest Shares shall
        be
        current and effective as of the date of delivery of such Interest Shares
        to the
        Holder, and (iv) a
        Trigger
        Event, as defined below, in accordance with Section 4(a)(iv),
        shall
        not have occurred.
        Interest
        hereunder will be paid to the Holder or its assignee in whose name this Note
        is
        registered on the records of the Company regarding registration and transfers
        of
        Notes.

       

      (3) CONVERSION
        OF NOTES.
        This
        Note shall be convertible by the Holder into shares of the Company's Common
        Stock on the terms and conditions set forth in this Section 3.

       

      (a) Conversion
        Right.
        At any
        time or times on or after the Issuance Date, the Holder shall be entitled
        to
        convert, at the Holder’s sole option, any portion of the outstanding and unpaid
        Conversion Amount (as defined below) into fully paid and nonassessable shares
        of
        Common Stock in accordance with Section 3(d), at the Conversion Rate (as
        defined
        below). The Company shall not issue any fraction of a share of Common Stock
        upon
        any conversion. If the issuance would result in the issuance of a fraction
        of a
        share of Common Stock, the Company shall round such fraction of a share of
        Common Stock up to the nearest whole share. The Company shall pay any and
        all
        taxes that may be payable with respect to the issuance and delivery of Common
        Stock upon conversion of any Conversion Amount; provided
        that the
        Company shall not be required to pay any tax that may be payable in respect
        of
        any issuance of Common Stock to any Person other than the converting Holder
        or
        with respect to any income tax due by the Holder with respect to such Common
        Stock.

       

       


      
        
           

        

        
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      (b) Forced
        Conversion.
        Upon
        thirty (30) days prior written notice to all of the Holders, the Company
        shall
        have the right to call all, but not less than all, of the Notes for Conversion
        at the Conversion Price (as defined below)(the call date specified in such
        notice is referred to herein as the “Forced
        Conversion Date”)
        provided that: (i) the Company’s Common Stock has closed at a price equal to or
        greater than 300% of the then applicable Series A Conversion Price for each
        of
        the twenty (20) trading days immediately preceding the Forced Conversion
        Date
        (“Measurement
        Period”);
        (ii)
        there is either an effective registration statement providing for the resale
        of
        the shares of Common Stock underlying the Notes during each trading day of
        the
        Measurement Period or all of the shares of Common Stock underlying the Notes
        may
        be resold pursuant to Rule 144(k) of the Securities Act without restriction
        during each trading day of the Measurement Period; and (iii) the Common Stock
        has traded an average of 500,000 shares per day during the Measurement Period.
        Notwithstanding the foregoing, in no event shall the Company force the
        conversion of a Holder of Notes if such forced conversion would result in
        such
        Holder beneficially owning more than Maximum Percentage I or Maximum Percentage
        II (each as defined below in Section 3(e)(1)(A) and Section 3(e)(1)(A),
        respectively).

       

      (c) Conversion
        Rate.
        The
        number of shares of Common Stock issuable upon conversion of any Conversion
        Amount shall be determined by dividing (x) such Conversion Amount by (y)
        the
        then applicable Conversion Price (the "Conversion
        Rate").

       

      (i) "Conversion
        Amount"
        means
        the sum of (A) the portion of the Principal to be converted, redeemed or
        otherwise with respect to which this determination is being made, (B) accrued
        and unpaid Interest with respect to such Principal, if any, and (C) accrued
        and
        unpaid Late Charges with respect to such Principal and Interest, if
        any.

       

      (ii) "Conversion
        Price"
        means,
        as of any Conversion Date (as defined below) or other date of determination,
        an
        amount equal to $0.40, subject to adjustment as provided herein.

       

      (d) Mechanics
        of Conversion.

       

      (i) Optional
        Conversion.
        To
        convert any Conversion Amount into shares of Common Stock on any date (a
        "Conversion
        Date"),
        the
        Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
        on or
        prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice
        of conversion in the form attached hereto as Exhibit
        I
        (the
        "Conversion
        Notice")
        to the
        Company and (B) if required by Section 3(d)(iii), surrender this Note to
        a
        common carrier for delivery to the Company as soon as practicable on or
        following such date (or an indemnification undertaking with respect to this
        Note
        in the case of its loss, theft or destruction). On or before the second
        (2nd)
        Trading
        Day following the date of receipt of a Conversion Notice, the Company shall
        transmit by facsimile a confirmation of receipt of such Conversion Notice
        to the
        Holder and the Company's transfer agent (the "Transfer
        Agent").
        If
        this Note is physically surrendered for conversion as required by Section
        3(d)(iii) and the outstanding Principal of this Note is greater than the
        Principal portion of the Conversion Amount being converted, then the Company
        shall as soon as practicable and in no event later than three (3) Business
        Days
        after receipt of this Note and at its own expense, issue and deliver to the
        holder a new Note (in accordance with Section 17(d)) representing the
        outstanding Principal not converted. The Person or Persons entitled to receive
        the shares of Common Stock issuable upon a conversion of this Note shall
        be
        treated for all purposes as the record holder or holders of such shares of
        Common Stock on the Conversion Date. 

       

       


      
        
           

        

        
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      (ii) Delivery
        of Certificates. On or before the third (3rd) Trading Day following the date
        of receipt of a Conversion Notice (the "Share Delivery Date")
        or request for removal of restrictive legends on the shares of Common Stock
        issuable in connection therewith, the Company shall (X) provided that the
        Transfer Agent is participating in the Depository Trust Company
        ("DTC") Fast Automated Securities Transfer Program, credit such
        aggregate number of shares of Common Stock to which the Holder shall be entitled
        to the Holder's or its designee's balance account with DTC through its Deposit
        Withdrawal Agent Commission system or (Y) if the Transfer Agent is not
        participating in the DTC Fast Automated Securities Transfer Program, issue
        and
        deliver to the address as specified in the Conversion Notice, a certificate,
        registered in the name of the Holder or its designee, for the number of shares
        of Common Stock to which the Holder shall be entitled.  

       

      (A)  If
        such
        delivery is made more than two (2) additional Trading Days after conversion
        or
        request for removal of legend (a “Conversion
        Failure”),
        as
        the case may be, then the Company will compensate the Holder at a rate of
        $100
        per day for each of the first ten (10) Trading Days and $200 per day thereafter
        for each $10,000 of securities. In such event, after the first such ten (10)
        Trading Days noted above, the Holder will also have the right to rescind
        its
        Conversion Notice for the Notes. 

       

      (B)  If
        the
        certificates have not been delivered by the fifth (5th)
        Trading
        Day after conversion or request for removal of legend, as the case may be,
        and
        the Holder has purchased (in an open market transaction or otherwise) Common
        Stock to deliver in satisfaction of a sale by the Holder of Common Stock
        issuable upon such conversion that the Holder anticipated receiving from
        the
        Company (a "Buy-In"),
        then
        the Company shall, within three (3) Trading Days after the Holder's request
        and
        in the Holder's discretion, either (i) pay cash to the Holder in an amount
        equal
        to the Holder's total purchase price (including brokerage commissions and
        other
        out-of-pocket expenses, if any) for the shares of Common Stock so purchased
        (the
"Buy-In
        Price"),
        at
        which point the Company's obligation to deliver such certificate (and to
        issue
        such Common Stock) shall terminate, or (ii) promptly honor its obligation
        to
        deliver to the Holder a certificate or certificates representing such Common
        Stock and pay cash to the Holder in an amount equal to the excess (if any)
        of
        the Buy-In Price over the product of (A) such number of shares of Common
        Stock,
        times (B) the Closing Bid Price on the Conversion Date.

       

      (iii) Registration;
        Book-Entry.
        The
        Company shall maintain a register (the "Register")
        for
        the recordation of the names and addresses of the holders of each Note and
        the
        principal amount of the Notes held by such holders (the "Registered
        Notes").
        The
        entries in the Register shall be conclusive and binding for all purposes
        absent
        manifest error. The Company and the holders of the Notes shall treat each
        Person
        whose name is recorded in the Register as the owner of a Note for all purposes,
        including, without limitation, the right to receive payments of principal
        and
        interest hereunder, notwithstanding notice to the contrary. A Registered
        Note
        may be assigned or sold in whole or in part only by registration of such
        assignment or sale on the Register. Upon its receipt of a request to assign
        or
        sell all or part of any Registered Note by a Holder, the Company shall record
        the information contained therein in the Register and issue one or more new
        Registered Notes in the same aggregate principal amount as the principal
        amount
        of the surrendered Registered Note to the designated assignee or transferee
        pursuant to Section 17. Notwithstanding anything to the contrary set forth
        herein, upon conversion of any portion of this Note in accordance with the
        terms
        hereof, the Holder shall not be required to physically surrender this Note
        to
        the Company unless (A) the full Conversion Amount represented by this Note
        is
        being converted or (B) the Holder has provided the Company with prior written
        notice (which notice may be included in a Conversion Notice) requesting
        reissuance of this Note upon physical surrender of this Note. The Holder
        and the
        Company shall maintain records showing the Principal, Interest and Late Charges,
        if any, converted and the dates of such conversions or shall use such other
        method, reasonably satisfactory to the Holder and the Company, so as not
        to
        require physical surrender of this Note upon conversion.

       

       


      
        
           

        

        
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      (iv) Pro
        Rata Conversion; Disputes.
        In the
        event that the Company receives a Conversion Notice from more than one holder
        of
        Notes for the same Conversion Date and the Company can convert some, but
        not
        all, of such portions of the Notes submitted for conversion, the Company
        shall
        convert from each holder of Notes electing to have Notes converted on such
        date
        a pro rata amount of such holder's portion of its Notes submitted for conversion
        based on the principal amount of Notes submitted for conversion on such date
        by
        such holder relative to the aggregate principal amount of all Notes submitted
        for conversion on such date. In the event of a dispute as to the number of
        shares of Common Stock issuable to the Holder in connection with a conversion
        of
        this Note, the Company shall issue to the Holder the number of shares of
        Common
        Stock not in dispute and resolve such dispute in accordance with Section
        22.

       

      (e)   Limitations
        on Conversions. 

       

      (1)
        Beneficial Ownership.
        (A) The
        Company shall not effect the conversion of this Note or issue Interest Shares,
        and the Holder shall not have the right to convert this Note or receive Interest
        Shares, to the extent that after giving effect to such conversion or issuance,
        such Person (together with such Person's affiliates) would beneficially own
        in
        excess of 4.99% (the "Maximum
        Percentage I")
        of the
        shares of Common Stock outstanding immediately after giving effect to such
        conversion or issuance, as the case may be. For purposes of the foregoing
        sentence, the aggregate number of shares of Common Stock beneficially owned
        by
        such Person 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 shares of Common Stock which would be issuable upon (i) conversion
        of the remaining, unconverted portion of this Note beneficially owned by
        such
        Person and its affiliates and (ii) exercise or conversion of the unexercised
        or
        unconverted portion of any other securities of the Company beneficially owned
        by
        such Person and its affiliates (including, without limitation, any convertible
        notes or convertible preferred stock or warrants) subject to a limitation
        on
        conversion or exercise analogous to the limitation contained herein. Except
        as
        set forth in the preceding sentence, for purposes of this paragraph, beneficial
        ownership shall be calculated in accordance with Section 13(d) of the Securities
        Exchange Act of 1934, as amended. For purposes of this Note, 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 (1) the Company's most
        recent Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB, Current Report on
        Form
        8-K or other public filing with the Securities and Exchange Commission, as
        the
        case may be, (2) a more recent public announcement by the Company or (3)
        any
        other notice by the Company or the Transfer Agent setting forth the number
        of
        shares of Common Stock outstanding. For any reason at any time, upon the
        written
        or oral request of the Holder, the Company shall within one Business Day
        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 the Notes and the Warrants, by the Holder and its
        affiliates since the date as of which such number of outstanding shares of
        Common Stock was reported. By written notice to the Company, the Holder may
        from
        time to time increase or decrease the Maximum Percentage I to any other
        percentage in excess of 4.99% specified in such notice; provided that (i)
        any
        such increase will not be effective until the sixty-first (61st)
        day
        after such notice is delivered to the Company, and (ii) any such increase
        or
        decrease will apply only to the Holder and not to any other holder of
        Warrants.

       

       


      
        
           

        

        
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      (B)
        The
        Company shall not effect the conversion of this Note or issue Interest Shares,
        and the Holder shall not have the right to convert this Note or receive Interest
        Shares, to the extent that after giving effect to such conversion or issuance,
        such Person (together with such Person's affiliates) would beneficially own
        in
        excess of 9.99% (the "Maximum
        Percentage II")
        of the
        shares of Common Stock outstanding immediately after giving effect to such
        conversion or issuance, as the case may be. For purposes of the foregoing
        sentence, the aggregate number of shares of Common Stock beneficially owned
        by
        such Person 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 shares of Common Stock which would be issuable
        upon (i) conversion of the remaining, unconverted portion of this Note
        beneficially owned by such Person and its affiliates and (ii) exercise or
        conversion of the unexercised or unconverted portion of any other securities
        of
        the Company beneficially owned by such Person and its affiliates (including,
        without limitation, any convertible notes or convertible preferred stock
        or
        warrants) subject to a limitation on conversion or exercise analogous to
        the
        limitation contained herein. Except as set forth in the preceding sentence,
        for
        purposes of this paragraph, beneficial ownership shall be calculated in
        accordance with Section 13(d) of the Securities Exchange Act of 1934, as
        amended. For purposes of this Note, 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 (1) the Company's most recent Form 10-K,
        Form
        10-KSB, Form 10-Q, Form 10-QSB, Current Report on Form 8-K or other public
        filing with the Securities and Exchange Commission, as the case may be, (2)
        a
        more recent public announcement by the Company or (3) any other notice by
        the
        Company or the Transfer Agent setting forth the number of shares of Common
        Stock
        outstanding. For any reason at any time, upon the written or oral request
        of the
        Holder, the Company shall within one Business Day 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 the Notes and the Warrants, by the Holder and its affiliates since
        the
        date as of which such number of outstanding shares of Common Stock was reported.
        By written notice to the Company, the Holder may from time to time increase
        or
        decrease the Maximum Percentage II to any other percentage in excess of 9.99%
        specified in such notice; provided that (i) any such increase will not be
        effective until the sixty-first (61st)
        day
        after such notice is delivered to the Company, and (ii) any such increase
        or
        decrease will apply only to the Holder and not to any other holder of
        Warrants.

       

       


      
        
           

        

        
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      (2)
        Principal Market Regulation.
        

       

      (a)
        Exchange Cap.
        The
        Company shall not be obligated to issue any shares of Common Stock upon
        conversion of this Note or exercise of the Warrants and no Buyer shall be
        entitled to receive any shares of Common Stock if the issuance of such shares
        of
        Common Stock would exceed that number of shares of Common Stock which the
        Company may issue upon exercise or conversion, as applicable, of the Warrants
        and Notes or otherwise without breaching the Company's obligations under
        the
        rules or regulations of any applicable Eligible Market (the "Exchange
        Cap"),
        except that such limitation shall not apply in the event that the Company
        (A)
        obtains the approval of its stockholders as required by the applicable rules
        of
        the Eligible Market for issuances of shares of Common Stock in excess of
        such
        amount or (B) obtains a written opinion from outside counsel to the Company
        that
        such approval is not required, which opinion shall be reasonably satisfactory
        to
        the Required Holders. Until such approval or written opinion is obtained,
        no
        Buyer shall be issued in the aggregate, upon exercise or conversion, as
        applicable, of any Warrants or Notes, shares of Common Stock in an amount
        greater than the product of the Exchange Cap multiplied by a fraction, the
        numerator of which is the total number of shares of Common Stock underlying
        the
        Notes issued to such Buyer pursuant to the Securities Purchase Agreement
        on the
        Issuance Date and the denominator of which is the aggregate number of shares
        of
        Common Stock underlying the Series A Notes and the Series B Notes issued
        to the
        Buyers pursuant to the Securities Purchase Agreement on the Issuance Date
        (with
        respect to each Buyer, the "Exchange
        Cap Allocation").
        In
        the event that any Buyer shall sell or otherwise transfer any of such Buyer's
        Notes, the transferee shall be allocated a pro rata portion of such Buyer's
        Exchange Cap Allocation, and the restrictions of the prior sentence shall
        apply
        to such transferee with respect to the portion of the Exchange Cap Allocation
        allocated to such transferee. In the event that any holder of Notes shall
        convert all of such holder's Notes into a number of shares of Common Stock
        which, in the aggregate, is less than such holder's Exchange Cap Allocation,
        then the difference between such holder's Exchange Cap Allocation and the
        number
        of shares of Common Stock actually issued to such holder shall be allocated
        to
        the respective Exchange Cap Allocations of the remaining holders of the Series
        A
        Notes and Series B Notes on a pro rata basis in proportion to the total number
        of shares of Common Stock underlying the Series A Notes and Series B Notes
        then
        held by each such holder. In the event that the Company is prohibited from
        issuing any Conversion Shares for which a Conversion Notice has been received
        as
        a result of the operation of this Section 3(e)(2), the Company shall pay
        cash in
        exchange for cancellation of such Conversion Shares, at a price per Conversion
        Share equal to the Weighted Average Price as of the date of the attempted
        conversion.

       


      
        
           

        

        
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      (b)
        Redemption Upon Exchange Cap Violation. In
        the
        event that, anytime after the Shareholder Issuance Voting Deadline (as defined
        in the Securities Purchase Agreement), (A) the Shareholder Issuance Approval
        (as
        defined in the Securities Purchase Agreement), if applicable, has not been
        obtained and (B) the then Holder’s current Fully Diluted Amount (as defined
        below) would exceed the Holder’s Pro-Rata Portion (as defined below) of the
        Exchange Cap (an “Exchange
        Cap Violation”),
        then
        the Company shall be required to redeem, from time to time, a sufficient
        amount
        of the Notes such that the Holder’s Fully Diluted Amount after such redemption
        equals the Holder’s Pro-Rata Portion of the Exchange Cap (an “Exchange
        Cap Redemption”).
        Each
        Exchange Cap Redemption shall be at a redemption price, in cash, equal to
        the
        outstanding principal amount of this Note to be redeemed, plus all accrued
        and
        unpaid Interest, Late Charges and any other amounts when and as due under
        this
        Note (the “Exchange
        Cap Redemption Amount”).
        The
        Exchange Cap Redemption Amount shall be applied first to accrued and unpaid
        Interest, Late Charges and any other amounts when and as due under this Note,
        and then to the principal amount of the Note.

      


      The
        Exchange Cap Redemption Amount shall be due and payable to the Holder within
        five (5) Business Days of the date of each applicable Exchange Cap Violation
        (each, an “Exchange
        Redemption Payment Date”).
        

      


      For
        purposes hereof, “Fully
        Diluted Amount”
shall
        mean (i) the aggregate number of shares of Common Stock that have been issued
        to
        the Holder upon the conversion of Holder’s Note, plus (ii) the aggregate number
        of shares of Common Stock that would be issuable to the Holder upon the full
        Conversion of all of Holder’s outstanding Note, together with any accrued and
        unpaid Interest, Late Charges and any other amounts when and as due under
        this
        Note and the full exercise of Holders Warrants (in each case, without regard
        to
        any limitations on conversion herein or elsewhere, including but not limited
        to
        the Exchange Cap, Maximum Percentage I or Maximum Percentage II, and without
        regard to whether or not a sufficient number of shares are authorized and
        reserved to effect any such exercise and issuance).

      


      “Holder’s
        Pro-Rata Portion”
shall
        mean the purchase price of the Note purchased by the Holder in this offering,
        divided by the aggregate purchase price of all Notes sold by the Company
        in this
        offering. 

      


       

      (4) RIGHTS
        UPON TRIGGER EVENT.

       

      (a) Trigger
        Event.
        Each of
        the following events shall constitute a "Trigger
        Event":

       

      (i) the
        suspension from trading or failure of the Common Stock to be listed on the
        Principal Market or an Eligible Market for a period of five (5) consecutive
        Trading Days or for more than an aggregate of ten (10) Trading Days in any
        365-day period;

       

       


      
        
           

        

        
          8

          
            

          

        

        
           

        

      


      (ii) the
        Company's (A) failure to cure a Conversion Failure by delivery of the required
        number of shares of Common Stock within ten (10) Trading Days after the
        applicable Conversion Date or (B) notice, written or oral, to any holder
        of the
        Notes, including by way of public announcement or through any of its agents,
        at
        any time, of its intention not to comply with a request for conversion of
        any
        Notes into shares of Common Stock that is tendered in accordance with the
        provisions of the Notes;

       

      (iii) at
        any
        time following the tenth (10th)
        consecutive Business Day that the Holder's Authorized Share Allocation is
        less
        than the number of shares of Common Stock that the Holder would be entitled
        to
        receive upon a conversion of the full Conversion Amount of this Note (without
        regard to any limitations on conversion);

       

      (iv) the
        Company's failure to pay to the Holder any amount of Principal (including,
        without limitation, any redemption payments), Interest, Late Charges or other
        amounts when and as due under this Note or any other Transaction Document
        (as
        defined in the Securities Purchase Agreement) or any other agreement, document,
        certificate or other instrument delivered in connection with the transactions
        contemplated hereby and thereby to which the Holder is a party, except, in
        the
        case of a failure to pay any Interest and Late Charges when and as due, in
        which
        case only if such failure continues for a period of at least five (5) Business
        Days;

       

      (v) (A)
        any
        payment default or other default occurs under any Indebtedness of the Company
        or
        any of its Subsidiaries (as defined in Section 3(a) of the Securities Purchase
        Agreement) that results in a redemption of or acceleration prior to maturity
        of
        $100,000 or more of such Indebtedness in the aggregate, or (B) any material
        default occurs under any Indebtedness of the Company or any of its Subsidiaries
        having an aggregate outstanding balance in excess of $100,000 and such default
        continues uncured for more than ten (10) Business Days, other than, in each
        case
        (A) or (B) above, or a default with respect to any Other Notes;

       

      (vi) the
        Company or any of its Subsidiaries, pursuant to or within the meaning of
        Title
        11, U.S. Code, or any similar Federal, foreign or state law for the relief
        of
        debtors (collectively, "Bankruptcy
        Law"),
        (A)
        commences a voluntary case, (B) consents to the entry of an order for relief
        against it in an involuntary case, (C) consents to the appointment of a
        receiver, trustee, assignee, liquidator or similar official (a "Custodian"),
        (D)
        makes a general assignment for the benefit of its creditors or (E) admits
        in
        writing that it is generally unable to pay its debts as they become
        due;

       

      (vii) a
        court
        of competent jurisdiction enters an order or decree under any Bankruptcy
        Law
        that (A) is for relief against the Company or any of its Subsidiaries in
        an
        involuntary case, (B) appoints a Custodian of the Company or any of its
        Subsidiaries or (C) orders the liquidation of the Company or any of its
        Subsidiaries;

       

       


      
        
           

        

        
          9

          
            

          

        

        
           

        

      


      (viii) a
        final
        judgment or judgments for the payment of money aggregating in excess of $250,000
        are rendered against the Company or any of its Subsidiaries and which judgments
        are not, within sixty (60) days after the entry thereof, bonded, discharged
        or
        stayed pending appeal, or are not discharged within sixty (60) days after
        the
        expiration of such stay; provided, however, that any judgment which is covered
        by insurance or an indemnity from a credit worthy party shall not be included
        in
        calculating the $250,000 amount set forth above so long as the Company provides
        the Holder a written statement from such insurer or indemnity provider (which
        written statement shall be reasonably satisfactory to the Holder) to the
        effect
        that such judgment is covered by insurance or an indemnity and the Company
        will
        receive the proceeds of such insurance or indemnity within thirty (30) days
        of
        the issuance of such judgment;

       

      (ix) the
        Company breaches any representation, warranty, covenant or other term or
        condition of any Transaction Document, except, in the case of a breach of
        a
        covenant which is curable, only if such breach continues for a period of
        at
        least ten (10) consecutive Business Days;

       

      (x) any
        breach or failure in any respect to comply with Section 12 of this
        Note;

       

      (xi) the
        Company’s failure to engage
        the services of a transfer agent for its Common Stock that is a participant
        in
        the Depository Trust Company’s Full Fast Program prior to the date on which the
        Registration Statement is declared effective by the SEC; 

       

      (xii) any
        Trigger Event (as defined in the Other Notes) occurs with respect to any
        Other
        Notes; or

       

      (xiii) the
        Company has failed to comply in good faith with the Dispute Resolution
        Procedures (as defined herein) or has failed to adjust the Conversion Price
        as
        required hereunder following a Dilutive Issuance, or otherwise (after any
        applicable Dispute Resolution Procedure required herein).

       

      (b) Redemption
        Right.
        Upon
        the occurrence of a Trigger Event with respect to this Note or any Other
        Note,
        the Company shall within (1) Business Day deliver written notice thereof
        via
        facsimile or e-mail and overnight courier (a "Trigger
        Event Notice")
        to the
        Holder. At any time after the earlier of the Holder's receipt of a Trigger
        Event
        Notice and the Holder becoming aware of a Trigger Event, the Holder may require
        the Company to redeem all or any portion of this Note by delivering written
        notice thereof (the "Trigger
        Event Redemption Notice")
        to the
        Company, which Trigger Event Redemption Notice shall indicate the portion
        of
        this Note the Holder is electing to have redeemed. Each portion of this Note
        subject to redemption by the Company pursuant to this Section 4(b) shall
        be
        redeemed by the Company at an
        amount
        equal to
any
        accrued and unpaid liquidated damages, plus the greater of (A) the
        Conversion Amount to be redeemed multiplied by the Redemption
        Premium,
        or (B)
        the Conversion Amount to be redeemed multiplied by the quotient of (i) the
        Closing Sale Price at the time of the Triggering Event (or at the time of
        payment of the redemption price, if greater) divided by (ii) the Conversion
        Price
        (the
        "Trigger
        Event Redemption
        Price"),
        provided, however, (B) shall be applicable only in the event that a Trigger
        Event of the type specified in Section 4(a)(i), (ii) or (iii) hereof has
        occurred and remains uncured or the Conversion Shares otherwise could not
        be
        received or sold by the Holder without any resale restrictions.
        After
        a
        Trigger Event occurs, the Conversion Price shall be permanently decreased
        (but
        not increased) on the first Business Day of each calendar month thereafter
        (each
        a “Trigger
        Adjustment Date”)
        until
        either the Trigger Event is cured or the Trigger Event Redemption Price is
        paid
        in full, to a price (the “Trigger
        Event Reset Price”)
        equal
        to the lesser of (i) the Conversion Price then in effect, or (ii) the lowest
        Weighted Average Price that has occurred on any Trigger Adjustment Date since
        the date of occurrence of the Trigger Event. Redemptions required by this
        Section 4(b) shall be made in accordance with the provisions of Section 11.
        To
        the extent redemptions required by this Section 4(b) are deemed or determined
        by
        a court of competent jurisdiction to be prepayments of the Note by the Company,
        such redemptions shall be deemed to be voluntary prepayments. The parties
        hereto
        agree that in the event of the Company's redemption of any portion of the
        Note
        under this Section 4(b), the Holder's damages would be uncertain and difficult
        to estimate because of the parties' inability to predict future interest
        rates
        and the uncertainty of the availability of a suitable substitute investment
        opportunity for the Holder. Accordingly, any Triggering Event Redemption
        Price
        due under this Section 4(b) is intended by the parties to be, and shall be
        deemed, a reasonable estimate of the Holder's actual loss of its investment
        opportunity and not as a penalty.

       

       


      
        
           

        

        
          10

          
            

          

        

        
           

        

      


      (5) RIGHTS
        UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

       

      (a) Assumption.
        The
        Company shall not enter into or be party to a Fundamental Transaction unless
        (i)
        the Successor Entity assumes in writing all of the obligations of the Company
        under this Note and the other Transaction Documents in accordance with the
        provisions of this Section 5(a) pursuant to written agreements in form and
        substance satisfactory to the Required Holders and approved by the Required
        Holders prior to such Fundamental Transaction, including agreements to deliver
        to each holder of Notes in exchange for such Notes a security of the Successor
        Entity evidenced by a written instrument substantially similar in form and
        substance to the Notes, including, without limitation, having a principal
        amount
        and interest rate equal to the principal amounts then outstanding and the
        interest rates of the Notes held by such holder, having similar conversion
        rights as the Notes and having similar ranking to the Notes, and satisfactory
        to
        the Required Holders and (ii) the Successor Entity (including its Parent
        Entity)
        is a publicly traded corporation whose common stock is quoted on or listed
        for
        trading on an Eligible Market and has "Substantially Similar Trading
        Characteristics" (as defined below) as the Company. For purposes hereof,
        an
        entity shall have Substantially Similar Trading Characteristics as the Company
        if the average daily dollar trading volume of the common stock of such entity
        is
        equal to or in excess of $500,000
        for the
        60th through the 16th day prior to the public announcement of such transaction.
        Upon the occurrence of any Fundamental Transaction, the Successor Entity
        shall
        succeed to, and be substituted for (so that from and after the date of such
        Fundamental Transaction, the provisions of this Note referring to the "Company"
        shall refer instead to the Successor Entity), and may exercise every right
        and
        power of the Company and shall assume all of the obligations of the Company
        under this Note with the same effect as if such Successor Entity had been
        named
        as the Company herein. Upon consummation of the Fundamental Transaction,
        the
        Successor Entity shall deliver to the Holder confirmation that there shall
        be
        issued upon conversion or redemption of this Note at any time after the
        consummation of the Fundamental Transaction, in lieu of the shares of the
        Company's Common Stock (or other securities, cash, assets or other property)
        issuable upon the conversion or redemption of the Notes prior to such
        Fundamental Transaction, such shares of the publicly traded common stock
        (or
        their equivalent) of the Successor Entity (including its Parent Entity),
        as
        adjusted in accordance with the provisions of this Note. The provisions of
        this
        Section shall apply similarly and equally to successive Fundamental Transactions
        and shall be applied without regard to any limitations on the conversion
        or
        redemption of this Note.

       

       


      
        
           

        

        
          11

          
            

          

        

        
           

        

      


      (b) Redemption
        Right.
        No
        sooner than fifteen (15) days nor later than ten (10) days prior to the
        consummation of a Change of Control, but not prior to the public announcement
        of
        such Change of Control, the Company shall deliver written notice thereof
        via
        facsimile and overnight courier to the Holder (a "Change
        of Control Notice").
        At
        any time during the period beginning on the date of the Holder's receipt
        of a
        Change of Control Notice and ending twenty (20) Trading Days after the
        consummation of such Change of Control, the Holder may require the Company
        to
        redeem all or any portion of this Note by delivering written notice thereof
        ("Change
        of Control Redemption Notice")
        to the
        Company, which Change of Control Redemption Notice shall indicate the Conversion
        Amount the Holder is electing to have redeemed. The portion of this Note
        subject
        to redemption pursuant to this Section 5 shall be redeemed by the Company
        in
        cash for an amount equal to any accrued and unpaid liquidated damages, plus
        the
        greater of (i) the product of (x) the Conversion Amount being redeemed and
        (y)
        the quotient determined by dividing (A) the greater of the Closing Sale Price
        of
        the Common Stock immediately prior to the consummation of the Change of Control,
        the Closing Sale Price immediately following the public announcement of such
        proposed Change of Control and the Closing Sale Price of the Common Stock
        immediately prior to the public announcement of such proposed Change of Control
        by (B) the Conversion Price and (ii) 110% of the Conversion Amount being
        redeemed (the "Change
        of Control Redemption Price").
        Redemptions required by this Section 5 shall be made in accordance with the
        provisions of Section 11 and shall have priority to payments to stockholders
        in
        connection with a Change of Control. To the extent redemptions required by
        this
        Section 5(b) are deemed or determined by a court of competent jurisdiction
        to be
        prepayments of the Note by the Company, such redemptions shall be deemed
        to be
        voluntary prepayments. Notwithstanding anything to the contrary in this Section
        5, until the Change of Control Redemption Price is paid in full, the Conversion
        Amount submitted for redemption under this Section 5(b) may be converted,
        in
        whole or in part, by the Holder into Common Stock pursuant to Section 3.
        The
        parties hereto agree that in the event of the Company's redemption of any
        portion of the Note under this Section 5(b), the Holder's damages would be
        uncertain and difficult to estimate because of the parties' inability to
        predict
        future interest rates and the uncertainty of the availability of a suitable
        substitute investment opportunity for the Holder. Accordingly, any redemption
        premium due under this Section 5(b) is intended by the parties to be, and
        shall
        be deemed, a reasonable estimate of the Holder's actual loss of its investment
        opportunity and not as a penalty.

       

      (6) RIGHTS
        UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

       

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

       

       


      
        
           

        

        
          12

          
            

          

        

        
           

        

      


      (b) Other
        Corporate Events.
        In
        addition to and not in substitution for any other rights hereunder, prior
        to the
        consummation of any Fundamental Transaction pursuant to which holders of
        shares
        of Common Stock are entitled to receive securities or other assets with respect
        to or in exchange for shares of Common Stock (a "Corporate
        Event"),
        the
        Company shall make appropriate provision to insure that the Holder will
        thereafter have the right to receive upon a conversion of this Note, (i)
        in
        addition to the shares of Common Stock receivable upon such conversion, such
        securities or other assets to which the Holder would have been entitled with
        respect to such shares of Common Stock had such shares of Common Stock been
        held
        by the Holder upon the consummation of such Corporate Event (without taking
        into
        account any limitations or restrictions on the convertibility of this Note)
        or
        (ii) in lieu of the shares of Common Stock otherwise receivable upon such
        conversion, such securities or other assets received by the holders of shares
        of
        Common Stock in connection with the consummation of such Corporate Event
        in such
        amounts as the Holder would have been entitled to receive had this Note
        initially been issued with conversion rights for the form of such consideration
        (as opposed to shares of Common Stock) at a conversion rate for such
        consideration commensurate with the Conversion Rate. Provision made pursuant
        to
        the preceding sentence shall be in a form and substance satisfactory to the
        Required Holders. The provisions of this Section shall apply similarly and
        equally to successive Corporate Events and shall be applied without regard
        to
        any limitations on the conversion or redemption of this Note.

       

      (7) ADJUSTMENT
        OF CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF COMMON
        STOCK.
        If the
        Company at any time on or after the Subscription Date subdivides (by any
        stock
        split, stock dividend, recapitalization or otherwise) one or more classes
        of its
        outstanding shares of Common Stock into a greater number of shares, the
        Conversion Price in effect immediately prior to such subdivision will be
        proportionately reduced. If the Company at any time on or after the Subscription
        Date combines (by combination, reverse stock split or otherwise) one or more
        classes of its outstanding shares of Common Stock into a smaller number of
        shares, the Conversion Price in effect immediately prior to such combination
        will be proportionately increased.

       

      (8) ADJUSTMENT
        UPON ISSUANCE OF SHARES OF COMMON STOCK.
        If the
        Company issues or sells, or in accordance with this Section 8 is deemed to
        have
        issued or sold, any shares of Common Stock (including the issuance or sale
        of
        shares of Common Stock owned or held by or for the account of the Company,
        but
        excluding shares of Common Stock deemed to have been issued by the Company
        in
        connection with any Excluded Securities for a consideration per share (the
        "New
        Issuance Price")
        less
        than a price (the "Applicable
        Price")
        equal
        to the Conversion Price in effect immediately prior to such issue or sale
        or
        deemed issuance or sale (the foregoing a "Dilutive
        Issuance"),
        then
        immediately after such Dilutive Issuance, the Conversion Price then in effect
        shall be reduced to an amount equal to the New Issuance Price. Upon each
        such
        adjustment of the Conversion Price hereunder, the number of Conversion Shares
        shall be adjusted to the number of shares of Common Stock determined by
        multiplying the Conversion Price in effect immediately prior to such adjustment
        by the number of Conversion Shares acquirable upon conversion of this Note
        immediately prior to such adjustment and dividing the product thereof by
        the
        Conversion Price resulting from such adjustment. For purposes of determining
        the
        adjusted Conversion Price under this Section 8, the following shall be
        applicable:

       

       

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

       

      (a) Issuance
        of Options.
        If the
        Company in any manner grants any Options and the lowest price per share for
        which one share of Common Stock is issuable upon the exercise of any such
        Option
        or upon conversion, exercise or exchange of any Convertible Securities issuable
        upon exercise of any such Option is less than the Applicable Price, then
        such
        share of Common Stock shall be deemed to be outstanding and to have been
        issued
        and sold by the Company at the time of the granting or sale of such Option
        for
        such price per share. For purposes of this Section 8(a), the "lowest price
        per
        share for which one share of Common Stock is issuable upon exercise of such
        Options or upon conversion, exercise or exchange of such Convertible Securities"
        shall be equal to the sum of the lowest amounts of consideration (if any)
        received or receivable by the Company with respect to any one share of Common
        Stock upon the granting or sale of the Option, upon exercise of the Option
        and
        upon conversion, exercise or exchange of any Convertible Security issuable
        upon
        exercise of such Option. No further adjustment of the Conversion Price or
        number
        of Conversion Shares shall be made upon the actual issuance of such shares
        of
        Common Stock or of such Convertible Securities upon the exercise of such
        Options
        or upon the actual issuance of such shares of Common Stock upon conversion,
        exercise or exchange of such Convertible Securities. 

       

      (b) Issuance
        of Convertible Securities.
        If the
        Company in any manner issues or sells any Convertible Securities and the
        lowest
        price per share for which one share of Common Stock is issuable upon the
        conversion, exercise or exchange thereof is less than the Applicable Price,
        then
        such share of Common Stock shall be deemed to be outstanding and to have
        been
        issued and sold by the Company at the time of the issuance or sale of such
        Convertible Securities for such price per share. For the purposes of this
        Section 8(b), the "lowest price per share for which one share of Common Stock
        is
        issuable upon the conversion, exercise or exchange" shall be equal to the
        sum of
        the lowest amounts of consideration (if any) received or receivable by the
        Company with respect to one share of Common Stock upon the issuance or sale
        of
        the Convertible Security and upon conversion, exercise or exchange of such
        Convertible Security. No further adjustment of the Conversion Price or number
        of
        Conversion Shares shall be made upon the actual issuance of such shares of
        Common Stock upon conversion, exercise or exchange of such Convertible
        Securities, and if any such issue or sale of such Convertible Securities
        is made
        upon exercise of any Options for which adjustment of this Note has been or
        is to
        be made pursuant to other provisions of this Section 8, no further adjustment
        of
        the Conversion Price or number of Conversion Shares shall be made by reason
        of
        such issue or sale. 

       

       

       

       

       

       


      
        
           

        

        
          14

          
            

          

        

        
           

        

      


      (c) Change
        in Option Price or Rate of Conversion.
        If the
        purchase price provided for in any Options, the additional consideration,
        if
        any, payable upon the issue, conversion, exercise or exchange of any Convertible
        Securities, or the rate at which any Convertible Securities are convertible
        into
        or exercisable or exchangeable for shares of Common Stock increases or decreases
        at any time, the Conversion Price and the number of Conversion Shares in
        effect
        at the time of such increase or decrease shall be adjusted to the Conversion
        Price and the number of Conversion Shares which would have been in effect
        at
        such time had such Options or Convertible Securities provided for such increased
        or decreased purchase price, additional consideration or increased or decreased
        conversion rate, as the case may be, at the time initially granted, issued
        or
        sold. For purposes of this Section 8(c), if the terms of any Option or
        Convertible Security that was outstanding as of the date of issuance of this
        Note are increased or decreased in the manner described in the immediately
        preceding sentence, then such Option or Convertible Security and the shares
        of
        Common Stock deemed issuable upon exercise, conversion or exchange thereof
        shall
        be deemed to have been issued as of the date of such increase or decrease.
        No
        adjustment pursuant to this Section 8 shall be made if such adjustment would
        result in an increase of the Conversion Price then in effect or a decrease
        in
        the number of Conversion Shares.

       

      (d) Calculation
        of Consideration Received.
        In case
        any Option is issued in connection with the issue or sale of other securities
        of
        the Company, together comprising one integrated transaction, the Options
        will be
        deemed to have been issued for the difference of (i) the aggregate fair market
        value of such Options and other securities issued or sold in such integrated
        transaction, less (ii) the fair market value of the securities other than
        such
        Option, issued or sold in such transaction and the other securities issued
        or
        sold in such integrated transaction will be deemed to have been issued or
        sold
        for the balance of the consideration received by the Company. If any shares
        of
        Common Stock, Options or Convertible Securities are issued or sold or deemed
        to
        have been issued or sold for cash, the consideration received therefor will
        be
        deemed to be the net amount received by the Company therefor. If any shares
        of
        Common Stock, Options or Convertible Securities are issued or sold for a
        consideration other than cash, the amount of such consideration received
        by the
        Company will be the fair value of such consideration, except where such
        consideration consists of securities, in which case the amount of consideration
        received by the Company will be the Weighted Average Price of such security
        on
        the date of receipt. If any shares of Common Stock, Options or Convertible
        Securities are issued to the owners of the non-surviving entity in connection
        with any merger in which the Company is the surviving entity, the amount
        of
        consideration therefor will be deemed to be the fair value of such portion
        of
        the net assets and business of the non-surviving entity as is attributable
        to
        such shares of Common Stock, Options or Convertible Securities, as the case
        may
        be. The fair value of any consideration other than cash or securities will
        be
        determined jointly by the Company and the Required Holders. If such parties
        are
        unable to reach agreement within ten (10) days after the occurrence of an
        event
        requiring valuation (the "Valuation
        Event"),
        the
        fair value of such consideration will be determined within five (5) Business
        Days after the tenth day following the Valuation Event by an independent,
        reputable appraiser jointly selected by the Company and the Required Holders.
        The determination of such appraiser shall be final and binding upon all parties
        absent manifest error and the fees and expenses of such appraiser shall be
        borne
        by the Company.

       

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

       

       


      
        
           

        

        
          15

          
            

          

        

        
           

        

      


      (9) NONCIRCUMVENTION.
        The
        Company hereby covenants and agrees that the Company will not, by amendment
        of
        its Certificate of Incorporation, Bylaws or through any reorganization, transfer
        of assets, consolidation, merger, scheme of arrangement, 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 of this Note, and will at all
        times in good faith carry out all of the provisions of this Note and take
        all
        action as may be required to protect the rights of the Holder of this Note.
        

       

      (10) RESERVATION
        OF AUTHORIZED SHARES.

       

      (a) Reservation.
        So long
        as any of the Notes are outstanding, the Company shall take all action necessary
        to reserve and keep available out of its authorized and unissued Common Stock,
        solely for the purpose of effecting the conversion of the Notes, 120% of
        the
        number of shares of Common Stock as shall from time to time be necessary
        to
        effect the conversion of all of the Notes then outstanding; provided that
        at no
        time shall the number of shares of Common Stock so reserved be less than
        the
        number of shares required to be reserved by the previous sentence (without
        regard to any limitations on conversions) (the "Required
        Reserve Amount").
        The
        number of shares of Common Stock reserved for conversions of the Notes and
        each
        increase in the number of shares so reserved shall be allocated pro rata
        among
        the holders of the Notes based on the principal amount of the Notes held
        by each
        holder at the Closing (as defined in the Securities Purchase Agreement) or
        increase in the number of reserved shares, as the case may be (the "Authorized
        Share Allocation").
        In
        the event that a holder shall sell or otherwise transfer any of such holder's
        Notes, each transferee shall be allocated a pro rata portion of such holder's
        Authorized Share Allocation. Any shares of Common Stock reserved and allocated
        to any Person which ceases to hold any Notes shall be allocated to the remaining
        holders of Notes, pro rata based on the principal amount of the Notes then
        held
        by such holders.

       

      (b) Insufficient
        Authorized Shares.
        If at
        any time while any of the Notes remain outstanding the Company does not have
        a
        sufficient number of authorized and unreserved shares of Common Stock to
        satisfy
        its obligation to reserve for issuance upon conversion of the Notes at least
        a
        number of shares of Common Stock equal to the Required Reserve Amount (an
        "Authorized
        Share Failure"),
        then
        the Company shall immediately take all action necessary to increase the
        Company's authorized shares of Common Stock to an amount sufficient to allow
        the
        Company to reserve the Required Reserve Amount for the Notes then outstanding.
        Without limiting the generality of the foregoing sentence, as soon as
        practicable after the date of the occurrence of an Authorized Share Failure,
        but
        in no event later than sixty (60) days after the occurrence of such Authorized
        Share Failure, the Company shall hold a meeting of its stockholders for the
        approval of an increase in the number of authorized shares of Common Stock.
        In
        connection with such meeting, the Company shall provide each stockholder
        with a
        proxy statement and shall use its best efforts to solicit its stockholders'
        approval of such increase in authorized shares of Common Stock and to cause
        its
        board of directors to recommend to the stockholders that they approve such
        proposal.

       

      (11) HOLDER'S
        REDEMPTIONS.  

       


      
        
           

        

        
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      (a) The
        Company shall deliver the applicable Trigger Event Redemption Price to the
        Holder within five (5) Business Days after the Company's receipt of the Holder's
        Trigger Event Redemption Notice. If the Holder has submitted a Change of
        Control
        Redemption Notice in accordance with Section 5(b), the Company shall deliver
        the
        applicable Change of Control Redemption Price to the Holder concurrently
        with
        the consummation of such Change of Control if such notice is received prior
        to
        the consummation of such Change of Control and within five (5) Business Days
        after the Company's receipt of such notice otherwise. In the event of a
        redemption of less than all of the Conversion Amount of this Note, the Company
        shall promptly cause to be issued and delivered to the Holder a new Note
        (in
        accordance with Section 17(d)) representing the outstanding Principal which
        has
        not been redeemed. In the event that the Company does not pay the applicable
        Redemption Price to the Holder within the time period required, at any time
        thereafter and until the Company pays such unpaid Redemption Price in full,
        the
        Holder shall have the option, in lieu of redemption, to require the Company
        to
        promptly return to the Holder all or any portion of this Note representing
        the
        Conversion Amount that was submitted for redemption and for which the applicable
        Redemption Price (together with any Late Charges thereon) has not been paid.
        Upon the Company's receipt of such notice, (x) the Redemption Notice shall
        be
        null and void with respect to such Conversion Amount, (y) the Company shall
        immediately return this Note, or issue a new Note (in accordance with Section
        17(d)) to the Holder representing such Conversion Amount and (z) the Conversion
        Price of this Note or such new Notes shall be adjusted to the lesser of (A)
        the
        Conversion Price as in effect on the date on which the Redemption Notice
        is
        voided and (B) the lowest Closing Bid Price of the Common Stock during the
        period beginning on and including the date on which the Redemption Notice
        is
        delivered to the Company and ending on and including the date on which the
        Redemption Notice is voided. The Holder's delivery of a notice voiding a
        Redemption Notice and exercise of its rights following such notice shall
        not
        affect the Company's obligations to make any payments of Late Charges which
        have
        accrued prior to the date of such notice with respect to the Conversion Amount
        subject to such notice.

       

      (b) Redemption
        by Other Holders. Upon
        the
        Company's receipt of notice from any of the holders of the Other Notes for
        redemption or repayment as a result of an event or occurrence substantially
        similar to the events or occurrences described in Section 4(b) or Section
        5(b)
        (each, an "Other
        Redemption Notice"),
        the
        Company shall immediately, but no later than one (1) Business Day of its
        receipt
        thereof, forward to the Holder by facsimile a copy of such notice. If the
        Company receives a Redemption Notice and one or more Other Redemption Notices,
        during the seven (7) Business Day period beginning on and including the date
        which is three (3) Business Days prior to the Company's receipt of the Holder's
        Redemption Notice and ending on and including the date which is three (3)
        Business Days after the Company's receipt of the Holder's Redemption Notice
        and
        the Company is unable to redeem all principal, interest and other amounts
        designated in such Redemption Notice and such Other Redemption Notices received
        during such seven (7) Business Day period, then the Company shall redeem
        a pro
        rata amount from each holder of the Notes (including the Holder) based on
        the
        principal amount of the Notes submitted for redemption pursuant to such
        Redemption Notice and such Other Redemption Notices received by the Company
        during such seven (7) Business Day period.

       

      (12) VOTING
        RIGHTS.
        The
        Holder shall have no voting rights as the holder of this Note, except as
        required by law, including, but not limited to, Delaware General Corporation
        Law, Title 8, Chapter 1, and as expressly provided in this Note.

       

       


      
        
           

        

        
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      (13) COVENANTS.

       

      (a) Rank. All
        payments due under this Note (A) shall rank pari
        passu
        with all
        of the Series A Notes and the Series B Notes, and (B) shall rank senior to
        all
        other unsecured Indebtedness of the Company and its Subsidiaries incurred
        on or
        after the date of this Note.

       

      (b) Incurrence
        of Indebtedness.
        So long
        as there remains fifteen percent (15%) or more of the original Notes
        outstanding, the Company shall not, and the Company shall not permit any
        of its
        Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer
        to
        exist any Indebtedness, other than (i) the Indebtedness evidenced by this
        Note
        and the Other Notes, and (ii) other Permitted Indebtedness, without the prior
        written consent of the Holders of 75% of the then outstanding
        Notes.

       

      (c) Existence
        of Liens.
        So long
        as there remains fifteen percent (15%) or more of the original Notes
        outstanding,, the Company shall not, and the Company shall not permit any
        of its
        Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage,
        lien, pledge, charge, security interest or other encumbrance upon or in any
        property or assets (including accounts and contract rights) owned by the
        Company
        or any of its Subsidiaries (collectively, "Liens")
        other
        than Permitted Liens, without the prior written consent of the Holders of
        75% of
        the then outstanding Notes. 

       

      (d) Restricted
        Payments.
        The
        Company shall not, and the Company shall not permit any of its Subsidiaries
        to,
        directly or indirectly, redeem, defease, repurchase, repay or make any payments
        in respect of, by the payment of cash or cash equivalents (in whole or in
        part,
        whether by way of open market purchases, tender offers, private transactions
        or
        otherwise), all or any portion of any Permitted Indebtedness (other than
        this
        Note and the Other Notes), whether by way of payment in respect of principal
        of
        (or premium, if any) or interest on such Indebtedness, if at the time such
        payment is due or is otherwise made or after giving effect to such payment,
        an
        event constituting, or that with the passage of time and without being cured
        would constitute, a Trigger Event has occurred and is continuing.

       

      (e) Restriction
        on Redemption and Cash Dividends.
        Until
        all of the Notes have been converted, redeemed or otherwise satisfied in
        accordance with their terms, the Company shall not, directly or indirectly,
        redeem, repurchase or declare or pay any cash dividend or distribution on
        its
        capital stock without the prior express written consent of the Required
        Holders.

       

      (14) PARTICIPATION.
        The
        Holder, as the holder of this Note, shall be entitled to receive such dividends
        paid and distributions made to the holders of Common Stock to the same extent
        as
        if the Holder had converted this Note into Common Stock (without regard to
        any
        limitations on conversion herein or elsewhere) and had held such shares of
        Common Stock on the record date for such dividends and distributions. Payments
        under the preceding sentence shall be made concurrently with the dividend
        or
        distribution to the holders of Common Stock. 

       

       


      
        
           

        

        
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      (15) VOTE
        TO ISSUE, OR CHANGE THE TERMS OF, NOTES.
        The
        affirmative vote of the Required Holders at a meeting duly called for such
        purpose or the written consent without a meeting of the Required Holders
        shall
        be required for any change or amendment to this Note or the Other Notes.
        No
        consideration shall be offered or paid to any holder of Notes to amend or
        consent to a waiver or modification of the Notes unless the same consideration
        also is offered to all of the holders of Notes.

       

      (16) TRANSFER.
        This
        Note may be offered, sold, assigned or transferred by the Holder without
        the
        consent of the Company, subject only to the provisions of Section 2(f) of
        the
        Securities Purchase Agreement.

       

      (17) REISSUANCE
        OF THIS NOTE.

       

      (a) Transfer.
        If this
        Note is to be transferred, the Holder shall surrender this Note to the Company,
        whereupon the Company will forthwith issue and deliver upon the order of
        the
        Holder a new Note (in accordance with Section 17(d)), registered as the Holder
        may request, representing the outstanding Principal being transferred by
        the
        Holder and, if less then the entire outstanding Principal is being transferred,
        a new Note (in accordance with Section 17(d)) to the Holder representing
        the
        outstanding Principal not being transferred. The Holder and any assignee,
        by
        acceptance of this Note, acknowledge and agree that, by reason of the provisions
        of Section 3(d)(iii) following conversion or redemption of any portion of
        this
        Note, the outstanding Principal represented by this Note may be less than
        the
        Principal stated on the face of this Note.

       

      (b) Lost,
        Stolen or Mutilated Note.
        Upon
        receipt by the Company of evidence reasonably satisfactory to the Company
        of the
        loss, theft, destruction or mutilation of this Note, and, in the case of
        loss,
        theft or destruction, of any indemnification undertaking by the Holder to
        the
        Company in customary form and, in the case of mutilation, upon surrender
        and
        cancellation of this Note, the Company shall execute and deliver to the Holder
        a
        new Note (in accordance with Section 17(d)) representing the outstanding
        Principal.

       

      (c) Note
        Exchangeable for Different Denominations.
        This
        Note is exchangeable, upon the surrender hereof by the Holder at the principal
        office of the Company, for a new Note or Notes (in accordance with Section
        17(d)) representing in the aggregate the outstanding Principal of this Note,
        and
        each such new Note will represent such portion of such outstanding Principal
        as
        is designated by the Holder at the time of such surrender.

       

      (d) Issuance
        of New Notes.
        Whenever the Company is required to issue a new Note pursuant to the terms
        of
        this Note, such new Note (i) shall be of like tenor with this Note, (ii)
        shall
        represent, as indicated on the face of such new Note, the Principal remaining
        outstanding (or in the case of a new Note being issued pursuant to Section
        17(a)
        or Section 17(c), the Principal designated by the Holder which, when added
        to
        the principal represented by the other new Notes issued in connection with
        such
        issuance, does not exceed the Principal remaining outstanding under this
        Note
        immediately prior to such issuance of new Notes), (iii) shall have an issuance
        date, as indicated on the face of such new Note, which is the same as the
        Issuance Date of this Note, (iv) shall have the same rights and conditions
        as
        this Note, and (v) shall represent accrued and unpaid Interest and Late Charges
        on the Principal and Interest of this Note, if any, from the Issuance
        Date.

       

       


      
        
           

        

        
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      (18) 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 and any of the other Transaction Documents
        at
        law or in equity (including a decree of specific performance and/or other
        injunctive relief), and nothing herein shall limit the Holder's right to
        pursue
        actual and consequential 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 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 harm to the Holder and that the remedy at
        law
        for any such breach may be inadequate. The Company therefore agrees that,
        in the
        event of any such breach or threatened breach, specifically including but
        not
        limited to the Company’s failure to adjust the Conversion Price as required
        hereunder following a Dilutive Issuance, the Holder shall be entitled, in
        addition to all other available remedies, to an injunction restraining any
        breach, without the necessity of showing economic loss and without any bond
        or
        other security being required.

       

      (19) PAYMENT
        OF COLLECTION, ENFORCEMENT AND OTHER COSTS.
        If (a)
        this Note is placed in the hands of an attorney for collection or enforcement
        or
        is collected or enforced through any legal proceeding or the Holder otherwise
        takes action to collect amounts due under this Note or to enforce the provisions
        of this Note or (b) there occurs any bankruptcy, reorganization, receivership
        of
        the Company or other proceedings affecting Company creditors' rights and
        involving a claim under this Note, then the Company shall pay the costs incurred
        by the Holder for such collection, enforcement or action or in connection
        with
        such bankruptcy, reorganization, receivership or other proceeding, including,
        but not limited to, financial advisory fees and attorneys' fees and
        disbursements.

       

      (20) CONSTRUCTION;
        HEADINGS.
        This
        Note shall be deemed to be jointly drafted by the Company and all the Purchasers
        and shall not be construed against any person as the drafter hereof. The
        headings of this Note are for convenience of reference and shall not form
        part
        of, or affect the interpretation of, this Note.

       

      (21) 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.

       

       


      
        
           

        

        
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      (22) DISPUTE
        RESOLUTION.
        In the
        case of a dispute as to the determination of the Closing Bid Price, the Closing
        Sale Price or the Weighted Average Price, the determination of the occurrence
        of
        a Dilutive Issuance which would trigger a reset of the Conversion Price,
        the
        determination of the Company entering into an agreement to issue securities
        pursuant to an Equity Line (as defined in the Securities Purchase Agreement),
        the determination of the Company entering into an agreement to issue Variable
        Equity Securities (as defined in the Securities Purchase Agreement) or the
        arithmetic calculation of the Conversion Rate or any Redemption Price, or
        the
        determination of the Company entering into a transaction that would violate
        any
        of the Additional Issuance Restrictions (as defined in the Securities Purchase
        Agreement) the Company shall submit the disputed determinations or arithmetic
        calculations via facsimile within one (1) Business Day of receipt, or deemed
        receipt, of the Conversion Notice or Redemption Notice or other event giving
        rise to such dispute, as the case may be, to the Holder. If the Holder and
        the
        Company are unable to agree upon such determination or calculation within
        one
        (1) Business Day of such disputed determination or arithmetic calculation
        being
        submitted to the Holder, then the Company shall, within one (1) Business
        Day
        submit via facsimile (a) the disputed determination of the Closing Bid Price,
        the Closing Sale Price or the Weighted Average Price to an independent,
        reputable investment bank (which is ranked in the top 10 investment banks
        nationally, by revenue) selected by the Company and approved by the Holder,
        or
        (b) a copy of the disputed agreement or other documentation pursuant to which
        the Holder believes securities may be issued pursuant to an Equity Line or
        as
        Variable Equity Securities, or which Holder believes may be a Dilutive Issuance
        which would trigger a reset of the Conversion Price, or which Holder believes
        may violate the Additional Issuance Restrictions, to an independent law firm
        selected by the Company and approved by Holder or (c) the disputed arithmetic
        calculation of the Conversion Rate or any Redemption Price to the Company's
        independent, outside accountant (which is ranked in the top 10 accounting
        firms
        nationally, by revenue). The Company, at the Company's expense, shall cause
        the
        investment bank, the law firm or the accountant, as the case may be, to perform
        the determinations or calculations and notify the Company and the Holder
        of the
        results no later than five (5) Business Days from the time it receives the
        disputed determinations or calculations. Such investment bank's, law firm’s or
        accountant's determination or calculation, as the case may be, shall be binding
        upon all parties absent demonstrable error. The procedures required by this
        Section 22 are collectively referred to herein as the “Dispute
        Resolution Procedures.”

       

      (23) NOTICES;
        PAYMENTS.

       

      (a) Notices.
        Whenever notice is required to be given under this Note, unless otherwise
        provided herein, such notice shall be given in accordance with Section 9(f)
        of
        the Securities Purchase Agreement. The Company shall provide the Holder with
        prompt written notice of all actions taken pursuant to this Note, including
        in
        reasonable detail a description of such action and the reason therefore.
        Without
        limiting the generality of the foregoing, the Company will give written notice
        to the Holder (i) immediately upon any adjustment of the Conversion Price,
        setting forth in reasonable detail, and certifying, the calculation of such
        adjustment and (ii) at least twenty (20) days prior to the date on which
        the
        Company closes its books or takes a record (A) with respect to any dividend
        or
        distribution upon the Common Stock, (B) with respect to any pro rata
        subscription offer to holders of Common Stock or (C) for determining rights
        to
        vote with respect to any Fundamental Transaction, dissolution or liquidation,
        provided in each case that such information shall be made known to the public
        prior to or in conjunction with such notice being provided to the
        Holder.

       

       


      
        
           

        

        
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      (b) Payments.
        Whenever any payment of cash is to be made by the Company to any Person pursuant
        to this Note, such payment shall be made in lawful money of the United States
        of
        America by a check drawn on the account of the Company and sent via overnight
        courier service to such Person at such address as previously provided to
        the
        Company in writing (which address, in the case of each of the Purchasers,
        shall
        initially be as set forth on the Schedule of Buyers attached to the Securities
        Purchase Agreement); provided that the Holder may elect to receive a payment
        of
        cash via wire transfer of immediately available funds by providing the Company
        with prior written notice setting out such request and the Holder's wire
        transfer instructions. Whenever any amount expressed to be due by the terms
        of
        this Note is due on any day which is not a Business Day, the same shall instead
        be due on the next succeeding day which is a Business Day and, in the case
        of
        any Interest Date which is not the date on which this Note is paid in full,
        the
        extension of the due date thereof shall not be taken into account for purposes
        of determining the amount of Interest due on such date. Any amount of Principal
        or other amounts due under the Transaction Documents which is not paid when
        due
        shall result in a late charge being incurred and payable by the Company in
        an
        amount equal to interest on such amount at the rate of eighteen percent (18.0%)
        per annum from the date such amount was due until the same is paid in full
        ("Late
        Charge").

       

      (24) CANCELLATION.
        After
        all Principal, accrued Interest and other amounts at any time owed on this
        Note
        have been paid in full, this Note shall automatically be deemed canceled,
        shall
        be surrendered to the Company for cancellation and shall not be
        reissued.

       

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

       

      (26) GOVERNING
        LAW; JURISDICTION; SEVERABILITY; JURY TRIAL.
        This
        Note shall be construed and enforced in accordance with, and all questions
        concerning the construction, validity, interpretation and performance of
        this
        Note shall be governed by, the internal laws of the State of New York, without
        giving effect to any choice of law or conflict of law provision or rule (whether
        of the State of New York or any other jurisdictions) that would cause the
        application of the laws of any jurisdictions other than the State of New
        York.
        The Company hereby irrevocably submits to the exclusive jurisdiction of the
        state and federal courts sitting in The City of New York, Borough of Manhattan,
        for the adjudication of any dispute hereunder or in connection herewith or
        with
        any transaction contemplated hereby or discussed herein, and hereby irrevocably
        waives, and agrees not to assert in any suit, action or proceeding, any claim
        that it is not personally subject to the jurisdiction of any such court,
        that
        such suit, action or proceeding is brought in an inconvenient forum or that
        the
        venue of such suit, action or proceeding is improper. Nothing contained herein
        shall be deemed to limit in any way any right to serve process in any manner
        permitted by law. In the event that any provision of this Note is invalid
        or
        unenforceable under any applicable statute or rule of law, then such provision
        shall be deemed inoperative to the extent that it may conflict therewith
        and
        shall be deemed modified to conform with such statute or rule of law. Any
        such
        provision which may prove invalid or unenforceable under any law shall not
        affect the validity or enforceability of any other provision of this Note.
        Nothing contained herein shall be deemed or operate to preclude the Holder
        from
        bringing suit or taking other legal action against the Company in any other
        jurisdiction to collect on the Company's obligations to the Holder, to realize
        on any collateral or any other security for such obligations, or to enforce
        a
        judgment or other court ruling in favor of the Holder. THE
        COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
        REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
        CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
        HEREBY.

       

       


      
        
           

        

        
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      (27) CERTAIN
        DEFINITIONS.
        For
        purposes of this Note, the following terms shall have the following
        meanings:

       

      (a) "Approved
        Stock Plan"
        means
        any employee benefit plan which has been or hereafter is approved by the
        Board
        of Directors of the Company, pursuant to which the Company's securities may
        be
        issued to any employee, officer or director for services provided to the
        Company.

       

      (b) "Bloomberg"
        means
        Bloomberg Financial Markets.

       

      (c) "Business
        Day"
        means
        any day other than Saturday, Sunday or other day on which commercial banks
        in
        The City of New York are authorized or required by law to remain
        closed.

       

      (d) "Change
        of Control"
        means
        any Fundamental Transaction other than (A) any reorganization, recapitalization
        or reclassification of Common Stock, in which holders of the Company's voting
        power immediately prior to such reorganization, recapitalization or
        reclassification continue after such reorganization, recapitalization or
        reclassification to hold publicly traded securities and, directly or indirectly,
        the voting power of the surviving entity or entities necessary to elect a
        majority of the members of the board of directors (or their equivalent if
        other
        than a corporation) of such entity or entities, or (B) pursuant to a migratory
        merger effected solely for the purpose of changing the jurisdiction of
        incorporation of the Company.

       

      (e) "Closing
        Bid Price"
        and
        "Closing
        Sale Price"
        means,
        for any security as of any date, the last closing bid price and last closing
        trade price, respectively, for such security on the Principal Market, as
        reported by Bloomberg, or, if the Principal Market begins to operate on an
        extended hours basis and does not designate the closing bid price or the
        closing
        trade price, as the case may be, then the last bid price or last trade price,
        respectively, of such security prior to 4:00:00 p.m., New York Time, as reported
        by Bloomberg, or, if the Principal Market is not the principal securities
        exchange or trading market for such security, the last closing bid price
        or last
        trade price, respectively, of such security on the principal securities exchange
        or trading market where such security is listed or traded as reported by
        Bloomberg, or if the foregoing do not apply, the last closing bid price or
        last
        trade price, respectively, of such security in the over-the-counter market
        on
        the electronic bulletin board for such security as reported by Bloomberg,
        or, if
        no closing bid price or last trade price, respectively, is reported for such
        security by Bloomberg, the average of the bid prices, or the ask prices,
        respectively, of any market makers for such security as reported in the "pink
        sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
        If
        the Closing Bid Price or the Closing Sale Price cannot be calculated for
        a
        security on a particular date on any of the foregoing bases, the Closing
        Bid
        Price or the Closing Sale Price, as the case may be, of such security on
        such
        date shall be the fair market value as mutually determined by the Company
        and
        the Holder. If the Company and the Holder are unable to agree upon the fair
        market value of such security, then such dispute shall be resolved pursuant
        to
        Section 22. All such determinations to be appropriately adjusted for any
        stock
        dividend, stock split, stock combination or other similar transaction during
        the
        applicable calculation period.

       

       


      
        
           

        

        
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      (f) "Closing
        Date"
        shall
        have the meaning set forth in the Securities Purchase Agreement, which date
        is
        the date the Company initially issued Notes pursuant to the terms of the
        Securities Purchase Agreement.

       

      (g) "Contingent
        Obligation"
        means,
        as to any Person, any direct or indirect liability, contingent or otherwise,
        of
        that Person with respect to any indebtedness, lease, dividend or other
        obligation of another Person if the primary purpose or intent of the Person
        incurring such liability, or the primary effect thereof, is to provide assurance
        to the obligee of such liability that such liability will be paid or discharged,
        or that any agreements relating thereto will be complied with, or that the
        holders of such liability will be protected (in whole or in part) against
        loss
        with respect thereto.

       

      (h) “Convertible
        Notes”
has
        the
        meaning ascribed to such term in the Securities Purchase Agreement, and shall
        include all notes issued in exchange thereof or replacement
        thereof.

       

      (i) "Convertible
        Securities"
        means
        any stock or securities (other than Options) directly or indirectly convertible
        into or exercisable or exchangeable for Common Stock.

       

      (j) "Eligible
        Market"
        means
        The New York Stock Exchange, Inc., the American Stock Exchange, The NASDAQ
        Global Select Market, The NASDAQ Global Market, The NASDAQ Capital Market,
        or
        the NASD’s OTC Bulletin Board.

       

      (k) "Excluded
        Securities"
        means
        any Common Stock issued or issuable: (i) issued in connection with Securities
        Purchase Agreement (ii) in connection with any Approved Stock Plan; (iii)
        upon
        conversion of the Series A Notes or Series B Notes or the exercise of the
        Series
        A Warrants or the Series B Warrants; (iv) upon conversion of any Options
        or
        Convertible Securities which are outstanding on the day immediately preceding
        the Subscription Date, provided that the terms of such Options or Convertible
        Securities are not amended, modified or changed on or after the Subscription
        Date; (v) in connection with mergers, acquisitions, strategic business
        partnerships or joint ventures, in each case with non-affiliated third parties
        and otherwise on an arm's-length basis, the primary purpose of which is not
        to
        raise additional capital; and (vi) upon the issuance of Options or the exercise
        of any Options issued to financial institutions in connection with commercial
        credit agreements or issuance of non-convertible debt by the Company, each
        of
        which the primary purpose is not to raise additional capital.

       


      
        
           

        

        
          24

          
            

          

        

        
           

        

      


      (l) "Fundamental
        Transaction"
        means
        that the Company shall, directly or indirectly, in one or more related
        transactions, (i) consolidate or merge with or into (whether or not the Company
        is the surviving corporation) another Person or Persons, or (ii) sell, assign,
        transfer, convey or otherwise dispose of all or substantially all of the
        properties or assets of the Company to another Person, or (iii) allow another
        Person to make a purchase, tender or exchange offer that is accepted by the
        holders of more than the 50% of the outstanding shares of Voting Stock (not
        including any shares of Voting Stock held by the Person or Persons making
        or
        party to, or associated or affiliated with the Persons making or party to,
        such
        purchase, tender or exchange offer), or (iv) consummate a stock purchase
        agreement or other business combination (including, without limitation, a
        reorganization, recapitalization, spin-off or scheme of arrangement) with
        another Person whereby such other Person acquires more than the 50% of the
        outstanding shares of Voting Stock (not including any shares of Voting Stock
        held by the other Person or other Persons making or party to, or associated
        or
        affiliated with the other Persons making or party to, such stock purchase
        agreement or other business combination), (v) reorganize, recapitalize or
        reclassify its Common Stock or (vi) any "person" or "group" (as these terms
        are
        used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
        shall
        become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
        Act),
        directly or indirectly, of 50% of the aggregate ordinary voting power
        represented by issued and outstanding Common Stock.

       

      (m) "GAAP"
        means
        United States generally accepted accounting principles, consistently
        applied.

       

      (n) "Indebtedness"
        of any
        Person means, without duplication (i) all indebtedness for borrowed money,
        (ii)
        all obligations issued, undertaken or assumed as the deferred purchase price
        of
        property or services, including (without limitation) "capital leases" in
        accordance with generally accepted accounting principles (other than trade
        payables entered into in the ordinary course of business), (iii) all
        reimbursement or payment obligations with respect to letters of credit, surety
        bonds and other similar instruments, (iv) all obligations evidenced by notes,
        bonds, debentures or similar instruments, including obligations so evidenced
        incurred in connection with the acquisition of property, assets or businesses,
        (v) all indebtedness created or arising under any conditional sale or other
        title retention agreement, or incurred as financing, in either case with
        respect
        to any property or assets acquired with the proceeds of such indebtedness
        (even
        though the rights and remedies of the seller or bank under such agreement
        in the
        Trigger Event are limited to repossession or sale of such property), (vi)
        all
        monetary obligations under any leasing or similar arrangement which, in
        connection with generally accepted accounting principles, consistently applied
        for the periods covered thereby, is classified as a capital lease, (vii)
        all
        indebtedness referred to in clauses (i) through (vi) above secured by (or
        for
        which the holder of such Indebtedness has an existing right, contingent or
        otherwise, to be secured by) any mortgage, lien, pledge, charge, security
        interest or other encumbrance upon or in any property or assets (including
        accounts and contract rights) owned by any Person, even though the Person
        which
        owns such assets or property has not assumed or become liable for the payment
        of
        such indebtedness, and (viii) all Contingent Obligations in respect of
        indebtedness or obligations of others of the kinds referred to in clauses
        (i)
        through (vii) above. Indebtedness shall not, however, include any Indebtedness
        incurred in the ordinary course of the Company’s business, unless otherwise
        referred to in this Section 27(o). 

       

      (o) "Options"
        means
        any rights, warrants or options to subscribe for or purchase shares of Common
        Stock or Convertible Securities.

       

      (p) "Parent
        Entity"
        of a
        Person means an entity that, directly or indirectly, controls the applicable
        Person and whose common stock or equivalent equity security is quoted or
        listed
        on an Eligible Market, or, if there is more than one such Person or Parent
        Entity, the Person or Parent Entity with the largest public market
        capitalization as of the date of consummation of the Fundamental
        Transaction.

       

       


      
        
           

        

        
          25

          
            

          

        

        
           

        

      


      (q) "Permitted
        Indebtedness"
        means
        (i) the Indebtedness evidenced by this Note and the Other Notes, and (ii)
        bonds
        required to be posted by the company to obtain regulatory permits, licenses
        or
        insurance as part of conducting its business.

       

      (r) "Permitted
        Liens"
        means
        (i) any Lien for taxes not yet due or delinquent or being contested in good
        faith by appropriate proceedings for which adequate reserves have been
        established in accordance with GAAP, (ii) any statutory Lien arising in the
        ordinary course of business by operation of law with respect to a liability
        that
        is not yet due or delinquent, (iii) any Lien created by operation of law,
        such
        as materialmen’s liens, mechanics' liens and other similar liens, arising in the
        ordinary course of business with respect to a liability that is not yet due
        or
        delinquent or that are being contested in good faith by appropriate proceedings,
        (iv) Liens (A) upon or in any equipment acquired or held by the Company or
        any
        of its Subsidiaries to secure the purchase price of such equipment or
        indebtedness incurred solely for the purpose of financing the acquisition
        or
        lease of such equipment, or (B) existing on such equipment at the time of
        its
        acquisition, provided that the Lien is confined solely to the property so
        acquired and improvements thereon, and the proceeds of such equipment, (v)
        Liens
        incurred in connection with the extension, renewal or refinancing of the
        indebtedness secured by Liens of the type described in clauses (i) and (iv)
        above, provided that any extension, renewal or replacement Lien shall be
        limited
        to the property encumbered by the existing Lien and the principal amount
        of the
        Indebtedness being extended, renewed or refinanced does not increase, (vi)
        leases or subleases and licenses and sublicenses granted to others in the
        ordinary course of the Company's business, not interfering in any material
        respect with the business of the Company and its Subsidiaries taken as a
        whole,
        (vii) Liens in favor of customs and revenue authorities arising as a matter
        of
        law to secure payments of custom duties in connection with the importation
        of
        goods, and (viii) Liens arising from judgments, decrees or attachments in
        circumstances not constituting a Trigger Event under Section
        4(a)(vi).

       

      (s) "Person"
        means
        an individual or legal entity, including but not limited to a corporation,
        a
        limited liability company, a partnership, a joint venture, a trust, an
        unincorporated organization and a government or any department or agency
        thereof. 

       

      (t) "Principal
        Market"
        means
        the NASD OTC Bulletin Board.

       

      (u) "Redemption
        Notices"
        means,
        collectively, the Trigger Event Redemption Notices and the Change of Control
        Redemption Notices, each of the foregoing, individually, a Redemption
        Notice.

       

      (v) "Redemption
        Premium"
        means
        (i) in the case of the Trigger Events described in Section 4(a)(i) - (v)
        and
        (viii) - (xiv), 125% during the first twelve months that this Note is
        outstanding and 115% thereafter or (ii) in the case of the Trigger Events
        described in Section 4(a)(vi) - (vii), 100%.

       

       


      
        
           

        

        
          26

          
            

          

        

        
           

        

      


      (w) "Redemption
        Prices"
        means,
        collectively, the Trigger Event Redemption Price and the Change of Control
        Redemption Price, each of the foregoing, individually, a Redemption
        Price.

       

      (x) "Required
        Holders"
        means,
        in the event that there remains fifteen percent (15%) or more of the original
        dollar amount of the Notes issued still outstanding, holders of Notes
        representing at least seventy-five percent (75%) of the aggregate principal
        amount of the Notes then outstanding.

       

      (y) "SEC"
        means
        the United States Securities and Exchange Commission. 

       

      (z) "Securities
        Purchase Agreement"
        means
        that certain securities purchase agreement dated as of the Subscription Date
        by
        and among the Company and the initial holders of the Notes pursuant to which
        the
        Company issued the Notes and the Warrants.

       

      (aa) “Series
        A Conversion Price”
        means
        $0.40, subject to adjustment in accordance with the Series A Notes.

       

      (bb) "Subscription
        Date"
        means
        May __, 2007.

       

      (cc) "Subsidiary"
        means
        any entity in which the Company, directly or indirectly, owns any of the
        capital
        stock or holds an equity or similar interest. 

       

      (dd) "Successor
        Entity"
        means
        the Person, which may be the Company, formed by, resulting from or surviving
        any
        Fundamental Transaction or the Person with which such Fundamental Transaction
        shall have been made, provided that if such Person is not a publicly traded
        entity whose common stock or equivalent equity security is quoted or listed
        for
        trading on an Eligible Market, Successor Entity shall mean such Person's
        Parent
        Entity.

       

      (ee) "Trading
        Day"
        means
        any day on which the Common Stock is traded on the Principal Market, or,
        if the
        Principal Market is not the principal trading market for the Common Stock,
        then
        on the principal securities exchange or securities market on which the Common
        Stock is then traded; provided that "Trading Day" shall not include any day
        on
        which the Common Stock is scheduled to trade on such exchange or market for
        less
        than 4.5 hours or any day that the Common Stock is suspended from trading
        during
        the final hour of trading on such exchange or market (or if such exchange
        or
        market does not designate in advance the closing time of trading on such
        exchange or market, then during the hour ending at 4:00:00 p.m., New York
        Time).

       

      (ff) "Voting
        Stock"
        of a
        Person means capital stock of such Person of the class or classes pursuant
        to
        which the holders thereof have the general voting power to elect, or the
        general
        power to appoint, at least a majority of the board of directors, managers
        or
        trustees of such Person (irrespective of whether or not at the time capital
        stock of any other class or classes shall have or might have voting power
        by
        reason of the happening of any contingency).

       

      (gg) "Warrants"
        has the
        meaning ascribed to such term in the Securities Purchase Agreement, and shall
        include all warrants issued in exchange therefor or replacement
        thereof.

       

       


      
        
           

        

        
          27

          
            

          

        

        
           

        

      


      (hh) "Weighted
        Average Price"
        means,
        for any security as of any date, the dollar volume-weighted average price
        for
        such security on the Principal Market during the period beginning at 9:30:01
        a.m., New York Time (or such other time as the Principal Market publicly
        announces is the official open of trading), and ending at 4:00:00 p.m., New
        York
        Time (or such other time as the Principal Market publicly announces is the
        official close of trading) as reported by Bloomberg through its "Volume at
        Price" functions, or, if the foregoing does not apply, the dollar
        volume-weighted average price of such security in the over-the-counter market
        on
        the electronic bulletin board for such security during the period beginning
        at
        9:30:01 a.m., New York Time (or such other time as such market publicly
        announces is the official open of trading), and ending at 4:00:00 p.m., New
        York
        Time (or such other time as such market publicly announces is the official
        close
        of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
        price is reported for such security by Bloomberg for such hours, the average
        of
        the highest closing bid price and the lowest closing ask price of any of
        the
        market makers for such security as reported in the "pink sheets" by Pink
        Sheets
        LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average
        Price cannot be calculated for a security on a particular date on any of
        the
        foregoing bases, the Weighted Average Price of such security on such date
        shall
        be the fair market value as mutually determined by the Company and the Holder.
        If the Company and the Holder are unable to agree upon the fair market value
        of
        such security, then such dispute shall be resolved pursuant to Section 22.
        All
        such determinations to be appropriately adjusted for any stock dividend,
        stock
        split, stock combination or other similar transaction during the applicable
        calculation period.

       

      (28) DISCLOSURE.
        Upon
        receipt or delivery by the Company of any notice in accordance with the terms
        of
        this Note, unless the Company has in good faith determined that the matters
        relating to such notice do not constitute material, nonpublic information
        relating to the Company or its Subsidiaries, the Company shall within four
        (4)
        Business Days after any such receipt or delivery publicly disclose such
        material, nonpublic information on a Current Report on Form 8-K or otherwise.
        In
        the event that the Company believes that a notice contains material, nonpublic
        information, relating to the Company or its Subsidiaries, the Company shall
        indicate to the Holder contemporaneously with delivery of such notice, and
        in
        the absence of any such indication, the Holder shall be allowed to presume
        that
        all matters relating to such notice do not constitute material, nonpublic
        information relating to the Company or its Subsidiaries.

       

       

       

       

      [Signature
        Page Follows]

       

      


       


      
        
           

        

        
          28

          
            

          

        

        
           

        

      


      IN
        WITNESS WHEREOF, the Company has caused this Note to be duly executed as
        of the
        Issuance Date set out above.

       

      
        	 	
                nCOAT,
                  INC.

                 

              
	 	
                By:

              	                                                                             
                
	 	
                Name:

              	 
	 	
                Title:
                  

              	 


      

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       


      
        
           

        

        
          
          

          
            

          

        

        
           

        

      


      EXHIBIT
        I

       

      


       

      nCOAT,
        INC.

       

      CONVERSION
        NOTICE

       

      Reference
        is made to the Series B Convertible Note (the "Series
        B Note")
        issued
        to the undersigned by nCOAT, Inc. (the "Company").
        In
        accordance with and pursuant to the Note, the undersigned hereby elects to
        convert the Conversion Amount (as defined in the Note) of the Note indicated
        below into shares of Common Stock par value $0.0001 per share (the "Common
        Stock")
        of the
        Company, as of the date specified below.

       

      

         

        Date
          of
          Conversion: 
______________________________________________________________________________________________

         

        Aggregate
          Conversion Amount to be converted: 
_________________________________________________________________________

         

        Please
          confirm the following information:

         

        Conversion
          Price: 
________________________________________________________________________________________________

         

        Number
          of
          shares of Common Stock to be
          issued: ________________________________________________________________________

         

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

         

        Issue
          to: 
_______________________________________________________________________________________________________

                          
           
_______________________________________________________________________________________________________

                            
          _______________________________________________________________________________________________________


         

        Facsimile
          Number: 
_______________________________________________________________________________________________

         

        Authorization: 
          ___________________________________________________________________________________________________

         

        By: 
          ________________________________________________________________________________________________________

         

        Title: 
          ____________________________________________________________________________________________________

         

        Dated: ____________________________________________________________________________________________________________

         

        Account
          Number: 
________________________________________________________________________________________________

        (if
          electronic book entry transfer)

         

        Transaction
          Code Number: 
_________________________________________________________________________________________

        (if
          electronic book entry transfer)

      

       

       

       

       


      
        
           

        

        
          
          

          
            

          

        

        
           

        

      


      ACKNOWLEDGMENT

       

      The
        Company hereby acknowledges this Conversion Notice and hereby directs Nevada
        Agency & Trust Company to issue the above-indicated number of shares of
        Common Stock in accordance with the Transfer Agent Instructions dated May
        __,
        2007 from the Company and acknowledged and agreed to by Nevada Agency &
Trust Company.

      


      


      
        	 	
                nCOAT,
                  INC.

                 

              
	 	
                By:

              	                                                                                         
                
	 	
                Name:

              	 
	 	
                Title:

              	 


      

      
 

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      31