Document:

exh42.htm

     

    
      
        

      

      Exhibit
4.2

       

       

      THIS NOTE
AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS (THE “STATE ACTS”), AND MAY NOT BE OFFERED,
SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.

       

      Z
TRIM HOLDINGS, INC.

       

       

      8%
CONVERTIBLE SENIOR SECURED NOTE

       

      DUE
[24 Months from Issuance]

       

       

      Date:
_________, 2009

       

       

                                                                                                                             $_________

       

      For value
received, Z TRIM HOLDINGS, INC., an Illinois corporation (the “Company”), hereby
promises to pay to the order of [INVESTOR], a __________
(together with its successors and permitted assigns, the “Holder”), in
accordance with the terms hereinafter provided, the principal amount of
_______________ ($___________) (the “Principal
Amount”).  The Company is issuing this convertible senior
secured note (this “Note” and,
collectively with all other notes issued in connection with the Offering
Memorandum, the “Notes” or the “2009 Notes”) to the Holder pursuant
to the Subscription Agreement (the “Subscription
Agreement”) executed
and delivered in connection with the Offering Memorandum (the “Private
Offering”).  As used herein, the term “Issuance Date” means
_________, 2009. This Note is one of a series of the 2009 Notes offered by the
Company for up to a maximum principal amount of $5,000,000.

       

       

      The
Company hereby promises to pay to the order of the Holder the Principal Amount
in United States Dollars in immediately available funds to the Holder at the
address of the Holder as set forth in the Security Agreement (as defined below),
or at such other place as the Holder may designate from time to time in writing
to the Company, on [24 months
from issuance] (the “Maturity Date”) or
such earlier date as the Holder elects, with interest to the Holder on the
aggregate unconverted and then outstanding Principal Amount in accordance with
the provisions hereof.  All interest payments under or pursuant to
this Note shall be made in shares of the Common Stock of the
Company   (as defined below).

       

       

      This Note
is secured by a Security Agreement dated the date hereof (the “Security
Agreement”) among
the Company and Holder in favor of the Holder covering certain collateral (the
“Collateral”), all
as more particularly described and provided therein, and is entitled to the
benefits thereof.  The Security Agreement, the Uniform Commercial Code
financing statements on form UCC-1 filed in connection with the Security
Agreement and any and all other documents executed and delivered by the Company
to the Holder under which the Holder is granted Liens on assets of the Company
are collectively referred to as the “Security
Documents.”

       

      ARTICLE
I

       

      THE
NOTE

       

      Section
1.1                                Interest.  Interest
on the Principal Amount of this Note shall commence accruing on the Issuance
Date and shall accrue daily at a rate of eight percent (8%) (the “Interest Rate”) until
payment in full of the Principal Amount and all accrued and unpaid interest and
other amounts which may become due hereunder have been made.  Interest
shall be computed on the basis of a 365-day year and actual days
elapsed.  Accrued interest on the Principal Amount of this Note (the
“Interest
Amount”) shall  be payable to the Holder, on the Maturity Date
in shares of  the common stock  of the Company, par value
$0.0005 per share (the “Common Shares” or
“Common
Stock”).  The number of Common Shares to be issued to the
Holder shall be equal to the result obtained by dividing (x) the Interest Amount
by (y) the Conversion Price (as defined in Section 3.2(a)
below).  Payment of the Interest Amount in Common Shares shall occur
pursuant to Section 3.3.

       

          Section
1.2                                Ranking and
Covenants.

       

                (a)           Except
as set forth on Schedule 1 attached
hereto, no indebtedness of the Company or any subsidiary of the Company is
senior to this Note in right of payment, whether with respect to interest,
damages or upon liquidation or dissolution or otherwise.  Until this
Note is fully paid and discharged in full, the Company shall not, and shall not
permit any subsidiary of the Company to, directly or indirectly, incur any
indebtedness for borrowed money (excluding accounts payable incurred in the
ordinary course of business) unless such indebtedness is expressly subordinated
to this Note pursuant to a written subordination agreement reasonably acceptable
in form, scope and substance to the Holders of not less than a majority of the
then outstanding aggregate principal of the 2009
Notes.  Notwithstanding the foregoing, in addition to the 2009 Notes,
the Company may issue a total of $10 million of 8% convertible senior secured
notes (the “Additional
Offering”) on substantially similar terms and conditions as this Note.
The Notes and any note issued by the Company pursuant to the Additional Offering
shall rank pari passu with the Company’s obligations under this Note and the
Senior Secured 8% Convertible Notes issued by the Company in 2008 (the “2008
Notes”) and may be secured equally and ratably by Liens, on or with respect to
any of the Company’s property or assets now owned or hereafter acquired or any
interest therein or any income or profits therefrom and shall have the benefit,
to the full extent that and with such priority as the obligations under this
Note.

       

       

      (b) Except
for Permitted Liens (as defined in Section 6.14 below) and Liens granted in
connection with the Additional Offering, until this Note is fully paid and
discharged in full, the Company shall not, and shall not permit any subsidiary
of the Company to, directly or indirectly, incur any Lien (as defined in Section
6.14 below) on or with respect to any of the Collateral now owned or hereafter
acquired, or any interest therein or any income or profits therefrom, without
the prior written consent of the Holders of not less than a majority of the then
outstanding aggregate principal on the 2009 Notes.

       

      (c) Until
this Note is fully paid and discharged in full, the Company shall not, and shall
not permit any subsidiary of the Company to, directly or indirectly, without the
prior written consent of the Holders of not less than the majority of the then
outstanding aggregate principal amount of the 2009 Notes, redeem, purchase or
otherwise acquire any of the Company’s capital stock or set aside any monies for
such a redemption, purchase or other acquisition.

       

      (d) The
Company shall perform any and all acts and execute any and all documents
(including, without limitation, the execution, amendment or supplementation of
any financing statement and continuation statement) for filing under the
provisions of the Uniform Commercial Code (the “UCC”), and the rules
and regulations thereunder, or any other statute, rule or regulation of any
applicable jurisdiction which are necessary at the reasonable request of the
Holder or its counsel in order to maintain in favor of the Holder of the Note, a
valid and perfected Lien on and security interest in the
Collateral.

       

       

      Section
1.3                       Payment on Non-Business
Days. Whenever any payment to be made shall be due on a Saturday, Sunday
or a public holiday under the laws of the State of Illinois, such payment may be
due on the next succeeding business day and such next succeeding day shall be
included in the calculation of the Interest Amount on such date.

       

       

      Section
1.4                       Transfers. This Note
may not be sold, transferred or otherwise disposed of by the Holder to any
Person without the express written consent of the Company, which consent shall
not be unreasonably withheld.

       

       

      Section
1.5                       Replacement. Upon
receipt of a duly executed and notarized written statement from the Holder with
respect to the loss, theft or destruction of this Note (or any replacement
hereof) and a standard indemnity reasonably satisfactory to the Company, or, in
the case of a mutilation of this Note, upon surrender and cancellation of such
Note, the Company shall issue a new Note, of like tenor and amount, in lieu of
such lost, stolen, destroyed or mutilated Note.  The Holder hereby
unconditionally agrees to indemnify and hold harmless the Company against any
claims, loss, liabilities, damages and expenses that may arise directly or
indirectly on account of the actual or alleged loss, mutilation, theft or
destruction of the original Note or the issuance of a new Note in exchange for
said Note.

       

      

       

       

      ARTICLE
II

       

       

      EVENTS
OF DEFAULT; REMEDIES

       

       

      Section
2.1                       Events of Default.
The occurrence of any of the following events, which shall have occurred and be
continuing, shall be an “Event of
Default” under
this Note:

       

       

      (a) Any
default in the payment of (i) the Principal Amount or (ii) Interest Amount on,
or liquidated damages in respect of, any Note, in each case free of any claim of
subordination, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default, solely in the case of a default under clause (ii) above, is not cured
within five Trading Days;

       

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

       

      (c) the
Company shall fail for any reason to deliver certificates to a Holder prior to
twentieth Trading Day after a Conversion Date pursuant to and in accordance with
Section 3.3 or the Company shall provide notice to the Holder, including by way
of public announcement, at any time, of its intention not to comply with the
requests for conversion of any Notes in accordance with the terms hereof;
or

       

      (d) default
shall be made in the performance or observance of (i) any covenant,
condition or agreement contained in this Note or any of the other Transaction
Documents (other than a breach by the Company of its obligations to deliver
Common Shares to the Holder upon conversion which breach is addressed in clause
(c) above) which failure is not cured within twenty (20) Trading Days after the
Holders of not less than 20% of the outstanding aggregate principal amount of
the 2009 Notes  deliver written notice to the Company of the
occurrence thereof.

       

      (e)  a
default or event of default (subject to any grace or cure period provided for in
the applicable agreement, document or instrument) shall occur under (i) any of
the Transaction Documents other than the Notes, or (ii) any other material
agreement, lease, document or instrument to which the Company or any subsidiary
is bound, which default, solely in the case of a default under (ii) above, is
not cured, within 30 Trading Days;

       

      (f) any
representation or warranty made by the Company herein or in the Security
Documents, or any other Transaction Document or other report, financial
statement or certificate made or delivered to the Holder or other holder of
Notes shall prove to have been false or incorrect or breached in a material
respect on the date as of which made; or

       

      (g) the
Company or any subsidiary shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property or assets,
(ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the United States Bankruptcy Code (as
now or hereafter in effect) or under the comparable laws of any jurisdiction
(foreign or domestic), (iv) file a petition seeking to take advantage of
any bankruptcy, insolvency, moratorium, reorganization or other similar law
affecting the enforcement of creditors’ rights generally, (v) acquiesce in
writing to any petition filed against it in an involuntary case under United
States Bankruptcy Code (as now or hereafter in effect) or under the comparable
laws of any jurisdiction (foreign or domestic), (vi) issue a notice of
bankruptcy or winding down of its operations or issue a press release regarding
same, (vii) fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due, (viii) call a meeting of
its creditors with a view to arranging a composition, adjustment or
restructuring of its debts, (ix) by any act or failure to act expressly indicate
its consent to, approval of or acquiescence in any of the foregoing, or (x) take
any corporate or other action for the purpose of effecting any of the
foregoing;

       

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

       

       

      (i)           the
Company or any subsidiary shall default in any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement of the Company in an amount
exceeding $50,000, whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable and such acceleration shall not have been rescinded or annulled
for a period of fifteen days (15) days after there shall have been given written
notice to the Company by the Holders of not less than 20% of the then
outstanding aggregate principal amount of the 2009 Notes;

       

       

      (j)           the
Common Shares shall not be eligible for quotation on or quoted for trading on a
trading market and shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;

       

       

      (k)           the
Company shall redeem or repurchase more than a de minimis number of its
outstanding Common Shares or other equity securities of the Company (other than
redemptions of Conversion Shares and repurchases of Common Shares or other
equity securities of departing officers and directors of the Company; provided
that such repurchases shall not exceed $50,000, in the aggregate, for all
officers and directors during the term of this Note;

       

       

      (l)           any
change in the composition, form of business association or ownership of the
Company, without Holder’s prior consent;

       

       

      (m)           if
the Company ceases conducting its operations as currently in effect as of the
date hereof;

       

       

      (n)           the
Company shall fail for any reason to pay in full the amount of cash due pursuant
to a Buy-In (as hereinafter defined) within five Trading Days after notice
therefore is delivered hereunder or shall fail to pay all amounts owed on
account of an Event of Default within five days of the due date.

       

       

      Section
2.2                                           Remedies Upon An Event of
Default. If an Event of Default shall have occurred and shall be
continuing, and unless the Event of Default shall have been waived in writing by
not less than the Holders of a majority of the then outstanding aggregate
principal amount of the 2009 Notes,  the Holder of this Note may at
any time at its option:

       

       

      (a) demand
that the principal amount of this Note then outstanding shall be converted into
shares of Common Stock at the Conversion Price (as defined in Section 3.2(a)
below) then in effect; or declare immediately due and payable the full Principal
Amount of this Note, together with the Interest Amount and other amounts owing
in respect thereof, in cash; provided, however, that upon
the occurrence of an Event of Default described in paragraphs (g) and (h) of
Section 2.1, the outstanding principal balance and accrued interest hereunder
shall be automatically due and payable.  Commencing five (5) days
after the occurrence of any Event of Default that results in the eventual
acceleration of this Note, the Interest Rate shall accrue at a rate of 13% per
annum, or such lower maximum amount of interest permitted to be charged under
applicable law.  All Notes for which the full amount due hereunder
shall have been paid in accordance herewith shall promptly be surrendered to or
as directed by the Company.  The Holder need not provide and the
Company hereby waives any presentment, demand, protest or other notice of any
kind, and the Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law.   Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder and the
Holder shall have all rights as a Note holder until such time, if any, as the
full payment under this Section shall have been received by it.  No
such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.

       

      (b)           exercise
or otherwise enforce any one or more of the Holder’s rights, powers, privileges,
remedies and interests under this Note, the Security Agreement, or applicable
law.

       

       

      In
connection with the Holder’s exercise of any of its remedies hereunder, the
Company shall use its reasonable best efforts to cooperate with the Holder to
the end that the Holder’s rights hereunder will be effectuated.

       

       

      ARTICLE
III

       

       

      CONVERSION;
ANTI DILUTION

       

       

      Section
3.1                                Conversion.  At
any time on or after the Issuance Date, at the request of the Holder (the “Conversion
Election”), this Note shall be convertible, in whole or in part, into
such number of fully paid and non-assessable Common Shares as is determined by
dividing (x) the outstanding Principal Amount and the Interest Amount then
accrued hereon by (y) the Conversion Price (as defined in Section 3.2(a)
hereof) then in effect (the “Conversion Rate”);
provided, however, that
the Conversion Price, defined below, shall be subject to adjustment as described
in Section 3.4 of this Note.  The Holder shall effect a Conversion
Election by delivering to the Company the form of Notice of Conversion attached
hereto as Exhibit
B (a “Notice of
Conversion”), specifying therein the principal amount of Notes to be
converted and the date on which such conversion is to be effected (a “Conversion Date”). In
no event may the Conversion Date be earlier than the date the Company receives
the Notice of Conversion.  If no Conversion Date is specified, in a
Notice of Conversion, the Conversion Date shall be the date that such Notice of
Conversion is provided hereunder.  To effect Conversion Elections
hereunder, the Holder shall  be required to physically surrender the
Note to the Company.  In the event of a partial conversion the Company
shall issue a new Note in the amount of the remaining principal balance after
taking into account the issuance of the shares on
conversion.  Conversions hereunder shall have the effect of lowering
the outstanding Principal Amount in an amount equal to the applicable
conversion.  The Holder and the Company shall maintain records showing
the Principal Amount converted and the date of such conversions.  The
Company shall deliver any objection to any Notice of Conversion within three (3)
Trading Days of receipt of such Notice of Conversion.  In the event of
any dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error.  The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion of a portion of this
Note, the unpaid and unconverted Principal Amount of this Note may be less than
the amount stated on the face hereof.  However, at the Company’s
request, the Holder shall surrender the Note to the Company within five (5)
Trading Days following such request so that a new Note reflecting the correct
Principal Amount may be issued to Holder. The Company shall not be required to
issue fractional shares and may deliver cash in lieu of fractional
shares.

       

       

          Section
3.2             
Conversion
Price.

       

       

      (a) The term
“Conversion
Price” shall
mean $1.00, subject to adjustment under Section 3.4
hereof.  References herein to the Conversion Price mean the Conversion
Price as from time to time adjusted pursuant to the provisions of Section 3.4
and in effect on the applicable date.

       

      (b) The term
“Conversion
Shares” shall
mean such Common Shares issuable upon conversion of this Note.

       

      Section
3.3                       Mechanics of
Conversion.  Not later than five (5) Trading Days after each
Conversion Date (the last day of each such period, a “Delivery Date”), the
Company or its designated transfer agent, as applicable, shall issue and deliver
to the Depository Trust Company (“DTC”) account on the
Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified in the
Conversion Election, registered in the name of the Holder or its designee, for
the number of Common Shares to which the Holder shall be
entitled.  Notwithstanding the foregoing, in the alternative, not
later than the Delivery Date, the Company shall deliver to the applicable Holder
by express courier a certificate or certificates representing the number of
Conversion Shares being acquired upon the conversion of this
Note.  If, in the case of any Conversion Election such DWAC transfer
or certificate or certificates are not delivered to or as directed by the
applicable Holder by the Delivery Date, the Holder shall be entitled by written
notice to the Company at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion, in which event the
Company shall immediately return this Note tendered for conversion, whereupon
the Company and the Holder shall each be restored to their respective positions
immediately prior to the delivery of such Conversion Election.

       

       

      Section
3.4                       Adjustment of Conversion
Price. The Conversion Price shall be subject to adjustment from time to
time as follows:

       

       

      (a)  Adjustments for Stock Splits
and Combinations. If the Company shall at any time or from time to time
after the Issuance Date, effect a stock split of the outstanding Common Shares,
the applicable Conversion Price in effect immediately prior to the stock split
shall be proportionately decreased.  If the Company shall at any time
or from time to time after the Issuance Date, combine the outstanding shares of
Common Stock, the applicable Conversion Price in effect immediately prior to the
combination shall be proportionately increased.  Any adjustments under
this Section 3.4(a)(i) shall be effective at the close of business on the date
the stock split or combination occurs.

       

       

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

       

       

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

       

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

       

      (c)  Adjustments for
Reclassification, Exchange or Substitution. If the Common Shares issuable
upon conversion of this Note at any time or from time to time after the Issuance
Date shall be changed to the same or different number of shares of any class or
classes of Common Shares, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of shares or stock
dividends provided for in clauses (i) and (ii) of Section 3.4(a), or a
reorganization, merger, consolidation, or sale of assets provided for in Section
3.4(a)(iv)), then, and in each event, an appropriate revision to the Conversion
Price shall be made and provisions shall be made (by adjustments of the
Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock and
other securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of Common Shares into which such Note
might have been converted immediately prior to such reclassification, exchange,
substitution or other change, all subject to further adjustment as provided
herein.

       

       

      (d)  Adjustments for
Reorganization, Merger, Consolidation or Sales of Assets. If at any time
or from time to time after the Issuance Date there shall be a capital
reorganization of the Company (other than by way of a stock split or combination
of shares or stock dividends or distributions provided for in clauses (a) and
(b) of Section 3.4, or a reclassification, exchange or substitution provided for
in Section 3.4(c), or a merger or consolidation of the Company with or into
another corporation where the holders of outstanding voting securities of the
Company prior to such merger or consolidation do not own over fifty percent
(50%) of the outstanding voting securities of the merged or consolidated entity,
immediately after such merger or consolidation, or any Asset Sale (an “Organic Change”),
then as a part of such Organic Change, (A) if the surviving entity in any
such Organic Change is a public company that is registered pursuant to the
Securities Exchange Act of 1934, as amended, and its  Common Shares is
listed or quoted on a national exchange or the OTC Bulletin Board, an
appropriate revision to the Conversion Price shall be made and provision shall
be made (by adjustments of the Conversion Price) so that the Holder shall have
the right thereafter to convert such Note into the kind and amount of shares of
Common Shares and other securities or property of the Company or any successor
corporation as it would have received as a result of such Organic Change if it
had converted this Note into Common Shares immediately prior to such Organic
Change, and (B) if the surviving entity in any such Organic Change is not a
public company that is registered pursuant to the Securities Exchange Act of
1934, as amended, or its  Common Shares is not listed or quoted on a
national securities exchange or the OTC Bulletin Board, the Holder shall have
the right to demand repayment of the then outstanding aggregate Principal Amount
at 105% of the Principal Amount thereof (“Mandatory
Repayment”).  The Company shall give the Holder at least twenty
(20) day’s prior written notice of any Organic Change, during which time the
Holder shall have the right to convert any portion of the Note into Common
Shares.  In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.4(d) with respect to the rights
of the Holder after the Organic Change to the end that the provisions of this
Section 3.4(d) (including any adjustment in the applicable Conversion Price then
in effect and the number of shares of Common Shares or other securities
deliverable upon conversion of this Note) shall be applied after that event in
as nearly an equivalent manner as may be practicable.

       

      
        

         

        (e)  Computation of Adjusted
Conversion Price. upon the issuance of Additional Shares of Common
Shares Except as hereinafter provided, in case the Company shall at any
time after the date hereof issue or sell any shares of its Common Shares, other
than the issuances or sales referred to in Section 3.4 (g) hereof, for a
consideration per share less than the Conversion Price in effect immediately
prior to the issuance or sale of such shares, or without consideration, then
forthwith upon such issuance or sale, the Conversion Price shall (until another
such issuance or sale) be reduced to the price (calculated to the nearest full
cent) equal to the quotient derived by dividing (A) an amount equal to the sum
of (X) the product of (a) the Conversion Price in effect immediately prior to
such issuance or sale, multiplied by (b) the total number of shares of Common
Shares outstanding immediately prior to such issuance or sale (treating for this
purpose, as outstanding, all shares of Common Shares issuable upon exercise of
options outstanding immediately prior to such issue or upon conversion or
exchange of Convertible Securities (including the  2009 Notes)
outstanding assuming exercise of any outstanding options therefor immediately
prior to such issue), plus (Y) the aggregate of the amount of all consideration,
if any, received by the Company upon such issuance or sale, by (B) the total
number of shares of Common Shares outstanding immediately after such issuance or
sale; provided,
however, that in no event shall the Conversion Price be adjusted pursuant
to this computation to an amount in excess of the Conversion Price in effect
immediately prior to such computation, except in the case of a combination of
outstanding shares of Common Shares, as provided by Section 3.4 (a)
hereof.

         

                    For purposes of any
computation to be made in accordance with this 3.4 (e) the following provisions
shall be applicable:

      

       

      
        (i)        In
case of the issuance or sale of shares of Common Shares for a consideration part
or all of which shall be cash, the amount of the cash consideration, shall be
deemed to be the amount of cash received by the Company for such shares (or, if
shares of Common Shares are offered by the Company for subscription, the
subscription price, or, if either of such securities shall be sold to
underwriters or dealers for public offering without a subscription price, the
public offering price, before deducting therefrom any compensation paid or
discount allowed in the sale, underwriting or purchase thereof by underwriters
or dealers or other persons or entities performing similar services), or any
expenses incurred in connection therewith and less any amounts payable to
security holders or any affiliate thereof, including, without limitation, any
employment agreement, royalty, consulting agreement, covenant not to compete,
earnout or contingent payment right or similar arrangement, agreement or
understanding, whether oral or written; all such amounts shall be valued at the
aggregate amount payable thereunder whether such payments are absolute or
contingent and irrespective of the period or uncertainty of payment, the rate of
interest, if any, or the contingent nature thereof;

         

         

      

      
                        (ii)       In
case of the issuance or sale (otherwise than as a dividend or other
distribution on any Common Shares of the Company) of shares of Common Shares for
a consideration part or all of which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be the value of such
consideration as determined in good faith by the Board of Directors of the
Company;

      

       

      
        (iii)     Shares
of Common Shares issuable by way of dividend or other distribution on any
capital Common Shares of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of Common Shareholders entitled to receive such dividend
or other distribution and shall be deemed to have been issued without
consideration;

         

      

      
        (iv)     The
reclassification of securities of the Company other than shares of Common Shares
into securities including shares of Common Shares shall be deemed to involve the
issuance of such shares of Common Shares for consideration other than cash
immediately prior to the close of business on the date fixed for the
determination of security holders entitled to receive such shares, and the value
of the consideration allocable to such shares of Common Shares shall be
determined as provided in paragraph (b) of this Section 3.4 (e) ;
and

         

      

      
        (v)       The
number of shares of Common Shares at any one time outstanding shall include the
aggregate number of shares issued or issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise of then outstanding options, rights,
warrants, and convertible and exchangeable securities.

        
 

      

      
         

                (f)       Options, Rights, Warrants
and Convertible
and Exchangeable Securities.

         

      

      
        (i)       Subject
to Section 3.4 (g) hereof, in case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Shares, or issue any securities convertible into or exchangeable for shares of
Common Shares, for a consideration per share less than the Conversion Price in
effect immediately prior to the issuance of such options, rights, warrants or
such convertible or exchangeable securities, or without consideration, the
Conversion Price in effect immediately prior to the issuance of such options,
rights, warrants or such convertible or exchangeable securities, as the case may
be, shall be reduced to a price determined by making a computation in accordance
with the provisions of Section 3.4(e)  hereof, provided
that:

        
 

      

      
        (ii)      The
aggregate maximum number of shares of Common Shares, as the case may be,
issuable under such options, rights or warrants shall be deemed to be issued and
outstanding at the time such options, rights or warrants were issued, for a
consideration equal to the minimum purchase price per share provided for in such
options, rights or warrants at the time of issuance, plus the consideration
(determined in the same manner as consideration received on the issue or
sale of shares in accordance with the terms of this Note), if any, received by
the Company for such options, rights or warrants. The aggregate maximum number
of shares of Common Shares issuable upon conversion or exchange of any
convertible or exchangeable securities shall be deemed to be issued and
outstanding at the time of issuance of such securities, and for a consideration
equal to the consideration (determined in the same manner as consideration
received on the issue or sale of shares of Common Shares in accordance with the
terms of this Note ) received by the Company for such securities, plus the
minimum consideration, if any, receivable by the Company upon the conversion or
exchange thereof.   If (I) any change shall occur in the price
per share provided for in any of the options, rights or warrants referred to in
this subsection: (II) any change shall occur in the price per share at which the
securities referred to in this subsection are exchangeable; (III) any of the
options, rights, warrants or exchange rights are exercised in an amount or at a
price different from the assumed aggregate maximum number of shares or the
minimum purchase price provided in this subsection; or (IV) any of the options,
rights, warrants or exchange rights referred to in this subsection expire
without being exercised, then (x) such options, rights, warrants or exchange
rights, as the case may be, shall be deemed to have expired or terminated on the
date when such price change, exercise or expiration became effective in respect
to shares not theretofore issued pursuant to the exercise or exchange thereof,
(y) the Company shall be deemed to have issued upon such date new options,
rights or warrants or exchangeable securities at the new price in respect of the
number of shares issuable upon the exercise of such options, rights or warrants
or the conversion or exchange of such exchangeable securities, and (z) the
adjustment to Conversion Price provided in this subsection shall be recalculated
as if the original issuance causing the prior adjustment to Conversion Price had
not occurred.

         

                (g)       No Adjustment of Conversion
Price in Certain Cases. No adjustment of the Conversion Price shall be
made:

      

       

      

      
        (i)        Upon
issuance or sale of this Note or Common Shares, or the other 2009 Notes and
Common  shares issued in connection herewith pursuant to the
Subscription Agreement, or shares of Common Shares issuable upon exercise of
other options, warrants and convertible securities outstanding as of the date
hereof, including, without limitation, those that are being issued in connection
with the closing of the Private Offering.

         

        

      

      
        (ii)       Upon
the issuance or sale of any shares of capital Common Shares, or the grant of
options exercisable therefor, issued or issuable after the date of this Note, to
directors, officers, employees, advisers and consultants of the Company or any
subsidiary pursuant to any incentive or non-qualified Common Shares option plan
or agreement, Common Shares purchase plan or agreement, Common Shares
restriction agreement or restricted Common Shares plan, employee Common Shares
ownership plan (ESOP), consulting agreement, Common Shares appreciation right
(SAR), Common Shares depreciation right (SDR), bonus Common Shares arrangement,
or such other similar compensatory options, issuances, arrangements, agreements
or plans approved by the Board of Directors of the Company.

         

        

      

      
        (iii)
Upon the issuance of any shares of capital Common Shares or the grant of
warrants or options (or the exercise thereof) as consideration for mergers,
acquisitions, strategic alliances and other commercial transactions, other than
in connection with a financing transaction.

         

        

      

      
        (iv)      If
the amount of said adjustment shall be less than one cent ($0.01) per security
issuable upon exercise of this Note; provided, however,
that in such case any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least one cent ($0.01) per security issuable upon
exercise of this Note.

         

        

      

      
        (v)       No
adjustment in the Conversion Price of the Note shall be made as a result of an
issuance or deemed issuance of additional shares of Common Shares if the
corporation receives a notice from the holders of the Notes representing not
less than a majority of the then outstanding aggregate  principal
amount of all such Notes , agreeing that no such adjustment shall be made as the
result of the issuance or deemed issuance of such additional shares of
Common Stock.

         

                (h)     Obligation Absolute; Partial
Liquidated Damages.  The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.4 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against
impairment.  If the Company fails for any reason to deliver to the
Holder any certificate or certificates required pursuant to Section 3.3 by the
fifth Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of
Principal Amount being converted, $5 per Trading Day (increasing to $10 per
Trading Day after five Trading Days after such damages begin to accrue) for each
Trading Day after such fifth Trading Day until such certificates are
delivered.  The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Note in accordance with the terms
hereof are absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person
of any obligation to the Company or any violation or alleged violation of law by
the Holder or any other Person, and irrespective of any other circumstance which
might otherwise limit such obligation of the Company to the Holder in connection
with the issuance of Conversion Shares.  In the event a Holder shall
elect to convert any or all of the outstanding Principal Amount hereof, the
Company may not refuse conversion based on any claim that such Holder or any one
associated or affiliated with such Holder has been engaged in any violation of
law, violation of an agreement to which such Holder is a party or for any reason
whatsoever, unless, an injunction from a court, or notice, restraining and
adjoining conversion of all or part of said Notes shall have issued and the
Company posts a surety bond for the benefit of such Holder in an amount equal to
one hundred percent (100%) of the amount of the Principal Amount of the Notes
that the Holder has elected to convert, which bond shall remain in effect until
the completion of arbitration/litigation of the dispute and the proceeds of
which shall be payable to such Holder (as liquidated damages) in the event it
obtains judgment.  In the absence of an injunction precluding the
same, the Company shall issue Conversion Shares or, if applicable, cash or other
property as required hereunder.  Nothing herein shall limit a Holder’s
right to pursue actual damages or declare an Event of Default pursuant to
Section 2 herein for the Company’s failure to deliver Conversion Shares within
the period specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief.  Likewise,
nothing herein shall prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

      

       

       

      (i)     Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion.  In
addition to any other rights available to the Holder, if the Company fails for
any reason to deliver to the Holder any certificate or certificates required
pursuant to Section 3.3 by the fifth Trading Day after the Conversion Date, and
if after such fifth Trading Day the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise) Common Shares to deliver
in satisfaction of a sale by such Holder of the Conversion Shares which the
Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (i) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Shares so purchased exceeds (y) the product of (1) the aggregate number of
Common shares that such Holder anticipated receiving from the conversion at
issue multiplied by (2) the actual sale price of the Common Shares at the time
of the sale (including brokerage commissions, if any) giving rise to such
purchase obligation and (ii) at the option of the Holder, either reissue Notes
in principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of Common Shares that would have been issued
had the Company timely complied with its delivery requirements under Section
3.3.

       

       

      (j)     Certificates as to
Adjustments. Upon occurrence of each adjustment or readjustment of the
Conversion Price or number of Common Shares issuable upon conversion of this
Note pursuant to this Section 3.4, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based.  The Company shall, upon written request of the
Holder, at any time, furnish or cause to be furnished to the Holder a like
certificate setting forth such adjustments and readjustments, the applicable
Conversion Price in effect at the time, and the number of Common Shares and the
amount, if any, of other securities or property which at the time would be
received upon the conversion of this Note.  Notwithstanding the
foregoing, the Company shall not be obligated to deliver a certificate unless
such certificate would reflect an increase or decrease of at least one percent
(1%) of such adjusted amount.

       

       

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

       

       

      (l)           Fractional
Shares.  No fractional shares of Common Shares shall be issued
upon conversion of this Note.  In lieu of any fractional shares to
which the Holder would otherwise be entitled, the Company shall pay in cash any
remainder resulting from after the number of whole Common Shares is determined
as a result of any conversion.  If the Company elects not, or is
unable, to make such a cash payment, the Holder shall be entitled to receive, in
lieu of the final fraction of a Common Share, one whole Common
Share.

       

       

      (m)           Reservation of Common
Shares.  The Company shall at all times when this Note shall be
outstanding, reserve and keep available out of its authorized but unissued
Common Shares, solely for the purpose of issuance upon conversion of the Notes
and payment of the Interest Amount on the Notes, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of Common Shares as shall from
time to time be sufficient to effect the conversion of this Note, taking into
account the adjustments and restrictions of Section 3.4.  The Company
shall, from time to time in accordance with Illinois law, increase the
authorized number of Common Shares if at any time the unissued number of
authorized Common Shares shall not be sufficient to satisfy the Company’s
obligations under this Section 3.4(m).  The Company covenants that all
Common Shares that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable.

       

       

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

       

       

      Section
3.6                       Calculations.  All
calculations under this ARTICLE III shall be made to the nearest cent or the
nearest 1/100th of a
Common Share, as the case may be.  The number of Common Shares
outstanding at any given time shall not include the Common Shares owned by or
held by or for the account of the Company, and the description of any such
Common Shares shall be considered on issue or sale of Common
Shares.  For purposes of this ARTICLE III, the number of Common Shares
deemed to be issued and outstanding as of a given date shall be the sum of the
number of Common Shares (excluding treasury shares, if any) issued and
outstanding.

       

       

      ARTICLE
IV

       

       

      NEGATIVE
COVENANTS

       

       

      Section
4.                      Negative
Covenants.  So long as any portion of this Note is outstanding,
the Company will not and will not, unless waived in writing by the Holders of
not less than a majority of the then outstanding aggregate principal amount of
the 2009 Notes, permit any of its subsidiaries to directly or
indirectly:

       

       

      (a)           Consistent
with Section 1.2, enter into, create, incur, assume or suffer to exist any
indebtedness or Liens of any kind, on or with respect to any of its property or
assets or Collateral now owned or hereafter acquired or any interest therein or
any income or profits therefrom that is senior to, subordinated to or pari passu
with, in any respect, the Company’s obligations under the Notes other than
obligations under the 2008 Notes and the Additional Offering;

       

       

      (b)           Consistent
with Section 1.2, repay, repurchase or offer to repay, repurchase, make any
payment in respect of or otherwise acquire any of its Common Shares or other
equity securities;

       

       

      (d)           amend
its certificate of incorporation, bylaws or charter documents so as to adversely
affect any rights of the Holder, without approval of the Holders of not less
than a majority of the then outstanding aggregate principal amount of the 2009
Notes;

       

       

      (e)           create
or acquire any subsidiary after the date hereof unless (i) such subsidiary is a
wholly-owned subsidiary of the Company and (ii) such subsidiary becomes party to
the Security Documents (either by executing a counterpart thereof or an
assumption or joinder agreement in respect thereof) and, to the extent required
by the Holder, satisfied each condition of this Agreement as if such subsidiary
were a subsidiary on the Issuance Date;

       

       

      (f)           engage
in any transactions with any officer, director, employee or any affiliate of the
Company, including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of $10,000
other than (i) for payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company and (iii) for
other employee benefits, including stock option agreements under any stock
option plan of the Company;

       

       

      (g)           consummate
any Organic Change without the prior consent of the Holders of not less than a
majority of the then outstanding aggregate principal amount of the 2009 Notes;
or

       

       

      (h)           enter
into any agreement with respect to any of the foregoing.

       

       

      ARTICLE
V

       

       

      AFFIRMATIVE
COVENANTS

       

       

      Section
5.                      Affirmative
Covenants.  The Company shall adhere to and use the proceeds
received of the sale of the Notes for operating expenses and working capital as
Company management deems appropriate.

       

       

      ARTICLE
VI

       

       

      MISCELLANEOUS

       

       

                       Section
6.1       Notices.

       

       

      (a)           Any
notice, demand, request, waiver or other communication required or permitted to
be given hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and shall be delivered personally, by facsimile, or sent by
a nationally recognized overnight courier service, addressed to the Company at
the address set forth above, facsimile number 847.549.6028, Attn: Steve Cohen,
or such other address or facsimile number as the Company may specify for such
purposes by notice to the Holders delivered in accordance with this
Section.  Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile number or address of such
Holder appearing on the books and records of the Company, or if no such
facsimile number or address appears, at the principal place of business of the
Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section prior to 5:30 p.m. (Chicago City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section later than 5:30 p.m. (Chicago City time) on any date and earlier
than 11:59 p.m. (Chicago City time) on such date (iii) the second Trading Day
following the date of mailing, if sent by nationally recognized overnight
courier services, or (iv) upon actual receipt by the party to whom such notice
is required to be given.

       

       

      (b)            The
Company will give written notice to the Holder at least twenty (20) days prior
to the date on which the Company takes a record (i) with respect to any
dividend or distribution upon the Common Shares, (ii) with respect to any
pro rata subscription offer to holders of Common Shares or (z) for
determining rights to vote with respect to any Organic Change, dissolution,
liquidation or winding-up but in no event shall such notice be provided to the
Holder prior to such information being made known to the public.  The
Company also will give written notice to the Holder at least twenty (20) days
prior to the date on which any Organic Change, dissolution, liquidation or
winding-up will take place but in no event shall such notice be provided to the
Holder prior to such information being made known to the public.  The
Holder is entitled to convert Notes during the 20-day period commencing the date
of such notice to the effective date of the event triggering such
notice.

       

       

      Section
6.2                                Governing Law; Consent to
Jurisdiction.  The parties acknowledge and agree that any
claim, controversy, dispute or action relating in any way to this agreement or
the subject matter of this agreement shall be governed solely by the laws of the
State of Illlinois , without regard to any conflict of laws
doctrines.  The parties irrevocably consent to being served with legal
process issued from the state and federal courts located in
Illlinois  and irrevocably consent to the exclusive personal
jurisdiction of the federal and state courts situated in the State of Illlinois
..  The parties irrevocably waive any objections to the personal
jurisdiction of these courts.  Said courts shall have sole and
exclusive jurisdiction over any and all claims, controversies, disputes and
actions which in any way relate to this Note or the subject matter of this
agreement.  The parties also irrevocably waive any objections that
these courts constitute an oppressive, unfair, or inconvenient forum and agree
not to seek to change venue on these grounds or any other
grounds.  Nothing in this Section 6.2 shall affect or limit any right
to serve process in any other manner permitted by law.

       

       

      Section
6.3                                Absolute
Obligation.  Except as expressly provided herein, no provision
of this Note shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the Principal Amount, the Interest Amount,
and liquidated damages, if any, on this Note at the time, place, and rate, and
in the coin or currency, herein prescribed.  This Note is a direct
debt obligation of the Company.  This Note ranks pari passu with all
other Notes now or hereinafter issued under the terms set forth
herein.

       

       

      Section
6.4                                Security
Interest.  This note is a direct debt obligation of the Company
and, pursuant to the Security Agreement, is secured by a  perfected
security interest in all of the assets of the Company for the benefit of the
Holders.   This Note ranks pari passu with the Senior Secured 8%
Convertible Notes issued by the Company  in 2008 (the “2008
Notes”).

       

       

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

       

       

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

       

       

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

       

       

      Section
6.8                                Amendments and
Waivers.  This Note may  be modified or amended by
means of a writing executed by the Company and the Holder.  In
addition, this Note may be amended, and the observance of any term of this Note
may be waived, with (and only with) the written consent of Holders
of  a majority of the then outstanding principal amount of the 2009
Notes.  Any amendment or waiver effected in accordance with this
Section 6.8 shall be binding upon each Holder  (whether or not such
Holder consented to any such amendment or waiver).

       

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

       

       

      “THIS
NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS (THE “STATE ACTS”), AND MAY NOT BE OFFERED,
SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHICATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.”

       

       

      

       

      Section
6.10                                Failure or Indulgence Not
Waiver.  No failure or delay on the part of the Holder in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right,
power or privilege, nor shall any waiver by the Holder of any such right or
rights on any one occasion be deemed a waiver of the same right or rights on any
future occasion.

       

       

      Section
6.11                                Company’s
Waivers.

       

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

       

       

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

       

       

      Section
6.12                                Seniority.  This
Note is senior in right of payment to any and all other indebtedness of the
Company except the  2008 Notes with which it ranks pari passu.
..

       

       

      Section
6.13                                Definitions.  For
the purposes hereof, the following term shall have the following
meaning:

       

       

      “Asset Sale” means (i)
in one or more transactions, the sale, lease, conveyance or other disposition of
any assets or rights other than in the ordinary course of business, and (ii) the
sale of debt or equity interests in any of the Company’s
subsidiaries.

       

       

      “Lien” means any mortgage,
charge, pledge, lien (statutory or other), security interest, hypothecation,
assignment for security, claim or preference or priority or other encumbrance
upon or with respect to any property of any kind.  A Person shall be
deemed to own subject to a Lien any property which such Person has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.

       

       

      “Offering Memorandum”
means that certain Confidential Private Placement Memorandum of the Company,
dated March 11, 2009.

       

       

      “Permitted Liens” shall
have the meaning given such term in the Security Agreement. “Person” shall have the meaning
given such term in the Security Agreement.

       

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

       

      

       

       

      Section
6.14                                Usury. All agreements
between the Company and the Holder are hereby expressly limited to provide that
in no contingency or event whatsoever, whether by reason of acceleration of
maturity of the indebtedness evidenced hereby or otherwise, shall the amount
paid or agreed to be paid to the Holder for the use, forbearance or detention of
the indebtedness evidenced hereby exceed the maximum amount which the Holder is
permitted to receive under applicable law.  If, from any circumstances
whatsoever, fulfillment of any provision hereof, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then, ipso facto, the obligation to be fulfilled shall
automatically be reduced to the limit of such validity, and if from any
circumstance the Holder shall ever receive as interest an amount which would
exceed the highest lawful rate, such amount which would be excessive interest
shall be applied to the reduction of the principal balance of any of the
Company’s obligations to the Holder, and not to the payment of interest
hereunder.  To the extent permitted by applicable law, all sums paid
or agreed to be paid for the use, forbearance or detention of the indebtedness
evidenced by this Note shall be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full, to the end
that the rate or amount of interest on account of such indebtedness does not
exceed any applicable usury ceiling.

       

      (a) As used
herein, the term “applicable law” shall mean all applicable provisions of
constitutions, statutes, laws, rules and regulations in effect as of the date
hereof, provided, however, that in the event there is a change in such
applicable law which results in a higher permissible rate of interest, then this
Note shall be governed by such new law as of its effective date.  This
provision shall control every other provision of all agreements between the
Company and the Holder.

       

      

       

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

       

       

      Z TRIM
HOLDINGS, INC.

       

       

      By:                                                                           

       

       

      Print
Name:

       

       

      Title:

       

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      EXHIBIT
A

       

      WIRE
INSTRUCTIONS

       

       

      Payee:                                                                                                                                          

       

       

      Bank:

       

       

      Address:                                                                                                                                

       

       

      Bank
No.:                                                                                                                                

       

       

      Account
No.:                                

       

       

      Account
Name:                                                                                                                                

       

      

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      EXHIBIT
B

       

       

      FORM
OF NOTICE OF CONVERSION INTO SHARES OF COMMON STOCK

       

       

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

       

       

      The
undersigned hereby irrevocably elects to convert $_____ of the principal amount
of the above Note into Common Shares of Z TRIM HOLDINGS, INC. (the “Company”) according
to the conditions hereof, as of the date written below.

       

       

      Date of
Conversion:

       

       

      Applicable
Conversion Price:

       

       

      Signature:                                                                                                                                          

       

       

      [Print
Name]:

       

       

      Address:                                                                                                                                          

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Schedule
1

       

      Existing
Indebtedness

       

      Any
indebtedness pursuant to any Liens listed on Schedule 2.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      Schedule
2

       

       

      Liens

       

      
        	
                Vendor

              	
                Description of Lease

              	
                Dates

              
	 
      	 
      	 
      

      

       

      Imaagetee,L.P.                                           Konica
C6500 Pro
Entry                                                                           36
month
lease           (printer/copier)                                 
beginning  5/30/07exh43.htm

     

    
      
        

      

      Exhibit
4.3

      

      
        THE
SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED BY THE HOLDER HEREOF FOR
ITS OWN ACCOUNT FOR INVESTMENT WITH NO INTENTION OF MAKING OR CAUSING TO BE MADE
A PUBLIC DISTRIBUTION OF ALL OR ANY PORTION THEREOF. SUCH SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED, EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.

         

        

      

      
        

         

        No.                                                                               ,
2009

         

        

      

      
        

         

        Z TRIM
HOLDINGS, INC. FORM OF WARRANT TO PURCHASE COMMON STOCK

         

      

      
        Void
after                                  ,
2014

         

        

      

      
         

        Z Trim
holdings, inc., an Illinois corporation (the "Company"), hereby certifies
that, for value
received,   ______________________________  (including
any successors and assigns, "Holder"), is entitled,
subject to the terms set forth below, to purchase from the Company at any time
or from time to time before 5:00 PM Central time, on___________, 2014; (the
"Expiration Date"),
fully paid and nonassessable shares of Common Stock (the "Warrant Shares") under the
terms set forth herein.

      

       

      This
Warrant is issued pursuant to that certain Subscription Agreement dated
_________, 2009 by and between the Company and the Holder (the "Subscription Agreement")
that was executed and delivered in connection with that certain
Confidential Private Placement Memorandum of the Company dated March 25, 2009
(the "Private Offering"). This Warrant is
one of a series of warrants issued as part of the Private Offerings
(collectively, the “Warrants”).

      
1.           Number
of Warrant Shares; Exercise Price. This Warrant shall evidence the right
of the
Holder to purchase up to    Warrant Shares at an initial
exercise price per Warrant Share of
$1.50 per share (the "Exercise
Price"), subject to adjustment as provided in Section 7
below.

      
        

        2.           Definitions. As used
herein the following terms, unless the context otherwise requires,
have the following respective meanings:

      

       

      (a) The term
"Common Stock" shall
mean the common stock, par value $.00005
per share, of the Company.

      
        

        (b) The term
"Company" shall include
any company which shall succeed to or assume
the obligations of the Company hereunder.

      

      
        

        (c) The term
"Corporate Transaction"
shall mean (i) a sale, lease transfer or conveyance
of all or substantially all of the assets of the Company; (ii) a consolidation
of the Company
with, or merger of the Company with or into, another corporation or other
business entity in which the stockholders of the Company immediately prior to
such consolidation or merger own less than 50% of the voting power of the
surviving entity immediately after such consolidation or merger; or (iii) any
transaction or series of related transactions to which the Company is a party in
which in excess of 50% of the Company's voting power is transferred, excluding
any consolidation or merger effected exclusively to change the domicile of the
Company.

      

       

      (d)       The
term "Stock"
shall mean (i) Common Stock or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value.

       

      3.   Exercise Date;
Expiration. Subject to the terms hereof, this Warrant may be exercised
by the Holder at any time or from time to time before the Expiration Date (the
"Exercise
Period").

      
        

        4.   Exercise of Warrant: Partial
Exercise. This Warrant
may be exercised in full by the
Holder by surrender of this Warrant, together with the Holder's duly executed
form of subscription
attached hereto as Exhibit A, to the
Company at its principal office, accompanied by payment,
in cash or by certified or official bank check payable to the order of the
Company, of the
aggregate exercise price (as determined above) of the number of Warrant Shares
to be purchased
hereunder. The exercise of this Warrant pursuant to this Section 4 shall be
deemed to have been effected immediately prior to the close of business on the
business day on which this Warrant is surrendered to the Company as provided in
this Section 4, and at such time the person in whose name any certificate for
Warrant Shares shall be issuable upon such exercise shall be deemed to be the
record holder of such Warrant Shares for all purposes. As soon as practicable
after the exercise of this Warrant, the Company at its expense will cause to be
issued in the name of and delivered to the Holder, or as the Holder may direct,
a certificate or certificates for the number of fully paid and nonassessable
full shares of Warrant Shares to which the Holder shall be entitled on such
exercise, together with cash, in lieu of any fraction of a share, equal to
such fraction of the current fair market value of one full Warrant Share as
determined in good faith by the Board of Directors, and, if applicable, a new
warrant evidencing the balance of the shares remaining subject to the
Warrant.

      

      
        

        5.   Net
Issuance.

      

      
        

        (a)       Right to Convert.
Only in the event that there is not in effect on or before the first anniversary
of the date of this Warrant a registration statement with the SEC covering the
Warrant Shares, in addition to and without limiting the rights of the Holder
under the terms of this Warrant, the Holder shall have the right to convert this
Warrant (the "Conversion
Right") into Warrant Shares as provided in this Section 5 at any time or
from time to time beginning on the first anniversary of the date of this Warrant
and ending at the expiration of the Exercise Period. Upon exercise of the
Conversion Right with respect to shares subject to the Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the Holder (without
payment by the Holder of any exercise price or any cash or other consideration)
that number of fully paid and nonassessable Warrant Shares computed using the
following formula:

         

      

      
        
          	
                   
      

                	
                  X =
      Y (A - B) A

                

        

         

      

      
        Where:                     X
=     the number of shares of Warrant Shares to be delivered
to the Holder;

         

      

      
                          
Y =     the number of Converted Warrant
Shares;

      

      
         

           
A =     the fair market value of one Warrant Share on the
Conversion Date (as defined below); and

         

                    B =
     the Exercise Price (as adjusted on the Conversion
Date).

      

       

      No
fractional shares shall be issuable upon exercise of the Conversion Right, and
if the number of shares to be issued determined in accordance with the foregoing
formula is other than a whole number, the Company shall pay to the Holder an
amount in cash equal to the fair market value of the resulting fractional share
on the Conversion Date (as defined below). Shares issued pursuant to the
Conversion Right shall be treated as if they were issued upon the exercise of
the Warrant.

       

      (b) Method of Exercise.
The Conversion Right may be exercised by the Holder by
the surrender of the Warrant at the principal office of the Company together
with a written
statement specifying that the Holder thereby intends to exercise the Conversion
Right and
indicating the total number of shares under the Warrant that the Holder is
exercising through the Conversion Right. Such conversion shall be effective upon
receipt by the Company of the Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion Date").
Certificates for the shares issuable upon exercise of the Conversion
Right shall be delivered to the Holder promptly following the Conversion
Date.

      
        

        (c) Determination of Fair Market
Value. For purposes of this Section 5, fair market
value of a Warrant Share on the Conversion Date shall be determined as
follows:

      

      
        

         

        (i)       If
this Warrant is to be exercised contingent upon and effective immediately
prior to the initial public offering of the Company's Common Stock pursuant to
an effective registration statement under the Securities Act of 1933, as amended
(an "Initial Public
Offering"), the
fair market value of a Warrant Share shall be deemed to be equal to the product
of (x) the number of shares of Common Stock into which such Warrant Share is
then convertible and (y) the price to the public of the shares of Common Stock
sold in the Initial Public Offering as set forth on the front cover of the final
prospectus relating to the Initial Public Offering;

      

       

      (ii)      If
the Common Stock is traded on a stock exchange or the Nasdaq Stock Market (or a
similar national quotation system), the fair market value of a Warrant Share
shall be deemed to be the product of (x) the average of the closing selling
prices of the Common Stock on the stock exchange or system determined by the
Board to be the primary market for the Common Stock over the ten (10) trading
day period ending on the date prior to the Conversion Date, as such prices are
officially quoted in the composite tape of transactions on such exchange or
system and (y) the number of shares of Common Stock into which such Warrant
Share is convertible at the date of calculation;

       

      (iii)     If
the Common Stock is traded over-the-counter, the fair market value of
a Warrant Share shall be deemed to be the product of (x) the average of the
closing bid prices (or, if such information is available, the closing selling
prices) of the Common Stock over the ten (10) trading day period ending on the
date prior to the Conversion Date, as such prices are reported by the National
Association of Securities Dealers through its NASDAQ system, the
over-the-counter Bulletin Board System or any successor system and (y) the
number of shares of Common Stock into which such Warrant Share is convertible at
the date of calculation; and

       

      (iv)      If
there is no public market for the Common Stock, then the fair market value of a
Warrant Share shall be determined by the Board of Directors of the Company in
good faith and, upon request of the Holder, the Board (or a representative
thereof) shall, as promptly as reasonably practicable but in any event not later
than 15 days after such request, notify the Holder of the Fair Market Value per
share of Common Stock.

       

      6.   Intentionally
Omitted.

      
        

        7.   Adjustments to Conversion
Price. For the purposes of this Section 7, the term Exercise
Price shall mean the Exercise Price per share set forth on the first page of
this Warrant as
adjusted from time to time pursuant to the provisions of this Section 7. The
number and kind of
Warrant Shares (or any shares of stock or other securities which may be)
issuable upon the exercise
of this Warrant and the Exercise Price hereunder shall be subject to adjustment
from time to
time upon the happening of certain events, as follows:

      

      

      (a) Splits and
Subdivisions. In the event the Company should at any time or from time
to time fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of the holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as the "Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Common Stock or Common Stock Equivalents, then, as of such
record date (or the date of such distribution, split or subdivision if no record
date is fixed), the Exercise Price shall be appropriately decreased and the
number of Warrant Shares for which this Warrant is exercisable shall be
appropriately increased in proportion to such increase of outstanding
shares.

      
        

        (b) Combination of
Shares. If the number of shares of Common Stock outstanding
at any time after the date hereof is decreased by a combination of the
outstanding shares of
Common Stock, the Exercise Price shall be appropriately increased and the number
of Warrant
Shares for which this Warrant is exercisable shall be appropriately decreased in
proportion
to such decrease in outstanding shares.

      

      
        

        (c) Reclassification or
Reorganization. If the Warrant Shares issuable upon the
exercise of this Warrant shall be changed into the same or different number of
shares of any class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a split, subdivision or stock dividend
provided for in Section 7(a) above or a combination of shares provided for in
Section 7(b) above, or a reorganization, merger or consolidation provided for in
Section 7(d) below, then and in each such event the Holder shall be entitled to
receive upon the exercise of this Warrant the kind and amount of shares of stock
and other securities and property receivable upon such reorganization,
reclassification or other change, to which a holder of the number of Warrant
Shares issuable upon the exercise of this Warrant would have received if this
Warrant had been exercised immediately prior to such reorganization,
reclassification or other change, all subject to further adjustment as provided
herein.

      

      
        

        (d) Merger or
Consolidation. If at any time or from time to time there shall be a
capital reclassification or reorganization of the Warrant Shares or a Corporate
Transaction (other
than a subdivision, combination, reclassification or exchange of shares provided
for elsewhere
in this Section 7) of the Company, then as a part of such reorganization or
Corporate Transaction,
adequate provision shall be made so that the Holder shall thereafter be entitled
to receive
upon the exercise of this Warrant, the number of shares of stock or other
securities or property
of the Company, resulting from such reorganization, recapitalization or
Corporate Transaction
to which a holder of the number of Warrant Shares issuable upon the exercise of
this Warrant would have received if this Warrant had been exercised immediately
prior to such reorganization
or Corporate Transaction. In any such case, the Company will make appropriate
provision
to insure that the provisions of this Section 7(d) hereof will thereafter be
applicable as nearly as may be in relation to any shares of stock or securities
thereafter deliverable upon the exercise of this Warrant. The Company shall not
effect any such Corporate Transaction unless prior to or simultaneously with the
consummation thereof the successor corporation (if other than the Company)
resulting from such Corporate Transaction or the corporation purchasing or
acquiring such assets or other appropriate corporation or entity shall assume
the obligation to deliver to the Holder, at the last address of the Holder
appearing on the books of the Company, such shares of stock, securities or
assets as, in accordance with the foregoing provisions, the Holder may be
entitled to purchase, and the other obligations under this Warrant. The
provisions of this Section 7(d) shall similarly apply to successive
reorganizations, reclassifications, or Corporate
Transactions.

      

      
        

        (e) Computation of Adjusted
Exercise Price. Except as hereinafter provided, in case
the Company shall at any time after the date hereof issue or sell any shares of
its Stock, other
than the issuances or sales referred to in Section 7(h) hereof, for a
consideration per share less than the Exercise Price in effect immediately prior
to the issuance or sale of such shares, or without consideration, then forthwith
upon such issuance or sale, the Exercise Price shall (until another such
issuance or sale) be reduced to the price (calculated to the nearest full cent)
equal to the quotient derived by dividing (A) an amount equal to the sum of (X)
the product of (a) the Exercise Price in effect immediately prior to such
issuance or sale, multiplied by (b) the total number of shares of Stock
outstanding immediately prior to such issuance or sale (treating for this
purpose, as outstanding, all shares of Common Stock issuable upon exercise of
options outstanding immediately prior to such issue or upon conversion or
exchange of Convertible Securities (including the Warrants) outstanding assuming
exercise of any outstanding options therefor immediately prior to such
issue), plus (Y) the aggregate of the amount of all consideration, if any,
received by the Company upon such issuance or sale, by (B) the total number of
shares of Stock outstanding immediately after such issuance or sale; provided, however, that in
no event shall the Exercise Price be adjusted pursuant to this computation to an
amount in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Stock,
as provided by Section 7(b) hereof.

      

      
        

                For purposes of any
computation to be made in accordance with this Section 7(e), the following
provisions shall be applicable:

        
                (i)        In
case of the issuance or sale of shares of Stock for a consideration part or all
of which shall be cash, the amount of the cash consideration, shall be deemed to
be the amount of cash received by the Company for such shares (or, if shares of
Stock are offered by the Company for subscription, the subscription price, or,
if either of such securities shall be sold to underwriters or dealers for public
offering without a subscription price, the public offering price, before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or other persons or
entities performing similar services), or any expenses incurred in connection
therewith and less any amounts payable to security holders or any affiliate
thereof, including, without limitation, any employment agreement, royalty,
consulting agreement, covenant not to compete, earnout or contingent payment
right or similar arrangement, agreement or understanding, whether oral or
written; all such amounts shall be valued at the aggregate amount payable
thereunder whether such payments are absolute or contingent and irrespective of
the period or uncertainty of payment, the rate of interest, if any, or the
contingent nature thereof;

      

       

                      (ii)       In
case of the issuance or sale (otherwise than as a dividend or other distribution
on any stock of the Company) of shares of Stock for a consideration part or all
of which shall be other than cash, the amount of the consideration therefor
other than cash shall be deemed to be the value of such consideration as
determined in good faith by the Board of Directors of the Company;

       

      
        (iii)     Shares
of Stock issuable by way of dividend or other distribution on any capital stock
of the Company shall be deemed to have been issued immediately after the opening
of business on the day following the record date for the determination of
stockholders entitled to receive such dividend or other distribution and shall
be deemed to have been issued without consideration;

         

      

      
        (iv)     The
reclassification of securities of the Company other than shares of Stock into
securities including shares of Stock shall be deemed to involve the issuance of
such shares of Stock for consideration other than cash immediately prior to the
close of business on the date fixed for the determination of security holders
entitled to receive such shares, and the value of the consideration allocable to
such shares of Stock shall be determined as provided in paragraph (ii) of this
Section 7(e); and

         

      

      
        (v)       The
number of shares of Stock at any one time outstanding shall include the
aggregate number of shares issued or issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise of then outstanding options, rights,
warrants, and convertible and exchangeable securities.

         

        (f)       Options, Rights, Warrants
and Convertible
and Exchangeable Securities.

      

       

       

      
        (i)       Subject
to Section 7(h) hereof, in case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Stock, or
issue any securities convertible into or exchangeable for shares of Stock, for a
consideration per share less than the Exercise Price in effect immediately prior
to the issuance of such options, rights, warrants or such convertible or
exchangeable securities, or without consideration, the Exercise Price in effect
immediately prior to the issuance of such options, rights, warrants or such
convertible or exchangeable securities, as the case may be, shall be reduced to
a price determined by making a computation in accordance with the provisions of
Section 7(e) hereof, provided that:

         

      

      
        (ii)      The
aggregate maximum number of shares of Stock, as the case may be, issuable under
such options, rights or warrants shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration (determined in the same
manner as consideration received on the issue or sale of shares in accordance
with the terms of this Warrant), if any, received by the Company for such
options, rights or warrants. The aggregate maximum number of shares of Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Stock in accordance with the terms of this Warrant) received by the
Company for such securities, plus the minimum consideration, if any, receivable
by the Company upon the conversion or exchange thereof.   If (I)
any change shall occur in the price per share provided for in any of the
options, rights or warrants referred to in this subsection: (II) any change
shall occur in the price per share at which the securities referred to in this
subsection are exchangeable; (III) any of the options, rights, warrants or
exchange rights are exercised in an amount or at a price different from the
assumed aggregate maximum number of shares or the minimum purchase price
provided in this subsection; or (IV) any of the options, rights, warrants or
exchange rights referred to in this subsection expire without being exercised,
then (x) such options, rights, warrants or exchange rights, as the case may be,
shall be deemed to have expired or terminated on the date when such price
change, exercise or expiration became effective in respect to shares not
theretofore issued pursuant to the exercise or exchange thereof, (y) the Company
shall be deemed to have issued upon such date new options, rights or warrants or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such exchangeable securities, and (z) the adjustment to Exercise
Price provided in this subsection shall be recalculated as if the original
issuance causing the prior adjustment to Exercise Price had not
occurred.

         

        (g)      Adjustment in Number of
Warrant Shares. Upon each adjustment of the Exercise Price pursuant to
the provisions of this Section 7, the number of Warrant Shares issuable upon the
exercise of this Warrant shall be adjusted to the nearest full amount by
multiplying a number equal to the Exercise Price in effect immediately prior to
such adjustment by the number of Warrant Shares issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.

      

       

      (h)       No Adjustment of Exercise
Price in Certain Cases. No adjustment of the Exercise Price shall be
made:

       

                      (i)        Upon
issuance or sale of this Warrant or Warrant Shares, or the other warrants and
warrant shares issued in connection herewith pursuant to the Subscription
Agreement, or shares of Common Stock issuable upon exercise of other options,
warrants and convertible securities outstanding as of the date hereof,
including, without limitation, those that are being issued in connection with
the closing of the Private Offering.

       

      
        (ii)       Upon
the issuance or sale of any shares of capital stock, or the grant of options
exercisable therefor, issued or issuable after the date of this Warrant, to
directors, officers, employees, advisers and consultants of the Company or any
subsidiary pursuant to any incentive or non-qualified stock option plan or
agreement, stock purchase plan or agreement, stock restriction agreement or
restricted stock plan, employee stock ownership plan (ESOP), consulting
agreement, stock appreciation right (SAR), stock depreciation right (SDR), bonus
stock arrangement, or such other similar compensatory options, issuances,
arrangements, agreements or plans approved by the Board of Directors of the
Company.

         

      

      
        (iii)
Upon the issuance of any shares of capital stock or the grant of warrants or
options (or the exercise thereof) as consideration for mergers, acquisitions,
strategic alliances and other commercial transactions, other than in connection
with a financing transaction.

         

      

      
        (iv)      If
the amount of said adjustment shall be less than one cent ($0.01) per security
issuable upon exercise of this Warrant; provided, however,
that in such case any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least one cent ($0.01) per security issuable upon
exercise of this Warrant.

         

        (i)       No
adjustment in the exercise price of the Warrant shall be made as a result of an
issuance or deemed issuance of additional shares of common stock if the
corporation receives a notice from the holders of the Warrants representing not
less than a majority of the Warrant Shares subject to all such Warrants,
agreeing that no such adjustment shall be made as the result of the issuance or
deemed issuance of such additional shares of stock.

      

       

      (j)            Notice of Record Dates:
Adjustments. In the event of an Initial Public Offering or a Corporate
Transaction, the Company shall provide to the Holder twenty (20) days advance
written notice of such Initial Public Offering or Corporate Transaction. The
Company shall promptly notify the Holder in writing of each adjustment or
readjustment of the Exercise Price hereunder and the number of Warrant Shares
issuable upon the exercise of this Warrant. Such notice shall state the
adjustment or readjustment and show in reasonable detail the facts on which that
adjustment or readjustment is based.

       

      8. Intentionally
omitted.

      
        

        9.     Replacement of
Warrants. On receipt by the Company of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case
of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of any
such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute
and deliver to the Holder, in lieu thereof, a new Warrant of like
tenor.

         

        10.     No Rights or Liability as a
Stockholder. This Warrant does not entitle the Holder hereof to
any voting rights or other rights as a stockholder of the Company. No provisions
hereof,
in the absence of affirmative action by the Holder to purchase Warrant Shares,
and no enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder as
a stockholder of the Company.

      

      
        

         

        11.     Miscellaneous.

      

      
        

        (a)           Transfer of Warrant;
Permitted Designees. The Holder agrees not to make any disposition of
this Warrant, the Warrant Shares or any rights hereunder without the prior
written consent of the Company. Any such permitted transfer must be made by the
Holder in person or by duly authorized attorney, upon delivery of this Warrant
and the form of assignment attached hereto as Exhibit B to any such
permitted transferee. As a condition precedent to such transfer, the transferee
shall sign an investment letter in form and substance satisfactory to the
Company. Subject to the foregoing, the provisions of this Warrant shall inure to
the benefit of and be binding upon any successor to the Company and shall extend
to any holder hereof. Notwithstanding anything contained herein, the Company
shall, upon written instructions to be delivered to the Company within fifteen
(15) business days following the date hereof, transfer all or a portion of this
Warrant to officers, directors, employees and other registered agents or
associated persons of the Holder (collectively, "Permitted
Designees”) in
accordance with this Section 11; provided, however, the Company shall not be
required to issue such Warrants to any person who is not an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act of 1933, as amended, and provided, further, such transfer must be in
compliance with applicable Federal and state securities laws. Each Permitted
Designee shall be required to execute fully and completely the Investor
Representation Letter in the form attached hereto as Exhibit C prior to
the issuance of the Warrant to such person.

      

       

      (b)     Titles and Subtitles.
The titles and subtitles used in this Warrant are for convenience
only and are not to be considered in construing or interpreting this
Warrant.

      
        

        (c)     Notices. Any notice
required or permitted to be given to a party pursuant to the provisions of this
Warrant shall be in writing and shall be effective and deemed given to such
party under this Warrant on the earliest of the following: (a) the date of
personal delivery; (b) two (2) business days after transmission by facsimile,
addressed to the other party at its facsimile number, with confirmation of
transmission; (c) four (4) business days after deposit with a return receipt
express courier for United States deliveries; or (d) five (5) business days
after deposit in the United States mail by registered or certified mail (return
receipt requested) for United States deliveries. All notices not delivered
personally or by facsimile will be sent with postage and/or other charges
prepaid and properly addressed to such party at the address set forth on the
signature page hereto, or at such other address as such party may designate by
ten (10) days advance written notice to the other party hereto. Notices to the
Company will be marked "Attention: Chief Financial Officer."

      

      
        

        (d)     Attorneys' Fees. If
any action at law or in equity is necessary to enforce or
interpret the terms of this Warrant, the prevailing party shall be entitled to
reasonable attorneys'
fees, costs and disbursements in addition to any other relief to which such
party may be
entitled.

      

      
        

        (e)     Amendments and
Waivers. In addition to the provision for waiver of an exercise price
adjustment set forth in Section 7 (i) above, any term of this Warrant may be
amended and the observance of any term of this Warrant may be waived (either
generally or in a particular instance and either retroactively or prospectively)
with the written consent of the Holder and the Company. Any amendment or waiver
effected in accordance with this Section 10(e) shall be binding upon the Holder
of this Warrant (and of any securities into which this Warrant is convertible),
each future holder of all such securities, and the Company.

         

        (f)           Severability. If one
or more provisions of this Warrant are held to be unenforceable under applicable
law, such provision shall be excluded from this Warrant and the balance of the
Warrant shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

      

       

      (g)           Governing Law. This
Warrant shall be governed by and construed and enforced in accordance with the
laws of the State of Illinois, without giving effect to its conflicts of laws
principles.

       

      (h)                 
 Counterparts. This
Warrant may be executed in any number of counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

       

      

      
        

         

        [REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK]

         

        

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      
        In
witness whereof, the Company has caused this Warrant to be executed by its duly
authorized officer as of the date first written above.

         

        

      

      
        

         

        Z
TRIM HOLDINGS INC.,

         

        

      

      
        an
Illinois corporation

         

        

      

      
        

         

        By:.

         

        

      

      
        Name:
Steven J. Cohen Title: Chief Executive Officer

         

        

      

      
        

         

        
          	
                   
      

                	
                  Address:    1011
      Campus Drive Mundelein, IL 60060

                

        

         

        

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      
        EXHIBIT A

         

        

      

      
        FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)

         

        

      

      
        

         

        To:      Z
TRIM HOLDINGS INC.

         

        

      

      
        

         

        The
undersigned, pursuant to the provisions set forth in the attached Warrant,
hereby

         

        

      

      
        irrevocably
elects to (a)
purchase                                                                shares
of the Common Stock covered by such Warrant

         

        

      

      
        and
herewith makes payment of
$                                                                ,
representing the full purchase price for such

         

        

      

      
        shares at
the price per share provided for in such Warrant, or (b) exercise such Warrant
for

         

        

      

      
        shares purchasable under the Warrant
pursuant to the Net Issue Exercise provisions of

         

        

      

      
        Section 5
of such Warrant.

         

        

      

      
        

         

        Please
issue a certificate or certificates
representing                                                                                                shares
in the name of the

         

        

      

      
        

         

        undersigned
or in such other name or names as are specified below:

         

        

      

      
        

         

        (Name)

         

        

      

      
        

         

        (Address)

         

        

      

      
        The
undersigned represents that the aforesaid shares are being acquired for the
account of the undersigned for investment and not with a view to, or for resale
in connection with, the distribution thereof and that the undersigned has no
present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.

         

        

      

      
        

         

        (Signature
must conform in all respects to name of the Holder as specified on the face of
the Warrant)

         

        

      

      
        

         

        (Print
Name)

         

        

      

      
        

         

        (Address)
Dated:

         

        

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      
        EXHIBIT B FORM OF
ASSIGNMENT

         

        

      

      
        

         

        (To
assign the foregoing Warrant, execute this form and supply required information.
Do not use this form to purchase shares.)

         

        

      

      
        

         

        for value
received, the foregoing Warrant and all rights evidenced thereby are hereby
assigned to:

         

        

      

      
        

         

        Name:                                                                                                                          

         

        

      

      
        (Please
Print)

         

        

      

      
        Address:                                                                  

         

        

      

      
        (Please
Print)

         

        

      

      
        

         

        Dated:                            ,
20_

         

        

      

      
        

         

        Holder's

         

        

      

      
        Signature:                                                                                

         

        

      

      
        

         

        Holder's
Address:

         

        

      

      
        

         

        NOTE: The signature to this
Form of Assignment must correspond with the name as it appears on the face of
the Warrant, without alteration or enlargement or any change whatever. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing
Warrant.

         

        

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      
        EXHIBIT
C

         

        

      

      
        

         

        FORM OF INVESTOR
REPRESENTATION LETTER

         

        

      

      
        

         

        DATE

         

      

      
        Z Trim
Holdings Inc. 1011 Campus Drive Mundelein, IL 60060

         

      

      
        Gentlemen:

         

      

      
        In
connection with my receipt of warrants ("Warrants") to purchase the number of
shares of common stock referred to below, I hereby represent, warrant and
covenant as follows:

         

        1.   Check
each one which is applicable:

      

       

      I am an
"accredited investor" within the meaning of Regulation D promulgated under the
Securities
Act of 1933 (the "Act");  I
have such knowledge and experience in financial, tax, and business matters so as
to utilize
information made available to me in order to evaluate the merits and risks of an
investment decision with respect there

      
         

        2.           I
have had the opportunity to ask questions and receive and review such answers
and information concerning Z Trim Holdings Inc. (the "Issuer") as I have deemed
pertinent;

         

         

      

      
        3.          I
am not relying on the Issuer respecting the tax and other economic
considerations of an investment in the Issuer;

         

      

      
         

        4.           I
am acquiring the Warrants and the underlying securities related thereto solely
for my own
account for investment and not with a view to resale or distribution. I
acknowledge that neither the Warrants nor the underlying securities have been
registered under the Act and may not be resold except pursuant to an effective
registration statement thereunder or an exemption therefrom;

      

       

       

      
        Name:

         

      

      
         

        Holder of
Warrants to purchase shares of
common stock of Z Trim Holdings Inc. pursuant to the terms of the Common Stock
Purchase Warrant of even date herewith

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