Document:

Exhibit
10.120

NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE
SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
 THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
 NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES.

VCAMPUS CORPORATION

WARRANT TO PURCHASE COMMON STOCK

Warrant No.:
W-09222006-01

Number of Shares of Common Stock: 2,500,000

Date of Issuance: September 25, 2006 (“Issuance
Date”)

VCampus
Corporation, a Delaware corporation (the “Company”),
hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Gottbetter Capital Master, Ltd.,
the registered holder hereof or its permitted assigns (the “Holder”), is entitled, subject to the terms
set forth below, to purchase from the Company, at the Exercise Price (as
defined below) then in effect, upon surrender of this Warrant to Purchase
Common Stock (including any Warrants to Purchase Common Stock issued in
exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after the date hereof,
but not after 11:59 p.m., New York Time, on the Expiration Date (as defined
below), Two Million Five Hundred Thousand (2,500,000) fully paid nonassessable
shares of Common Stock (as defined below) (the “Warrant Shares”).  Except as otherwise defined herein,
capitalized terms in this Warrant shall have the meanings set forth in Section
15.  This Warrant is one of the Warrants to purchase Common Stock (the “SPA Warrants”) issued pursuant to Section 1
of that certain Securities Purchase Agreement, dated as of September 25, 2006
(the “Subscription Date”), by and
among the Company and the investors (the “Buyers”)
referred to therein (the “Securities Purchase
Agreement”).

1.             EXERCISE OF WARRANT.

(a)           Mechanics of Exercise.
 Subject to the terms and conditions hereof (including, without
limitation, the limitations set forth in Section 1(f)), this Warrant may be
exercised by the Holder on any day on or after the date hereof, in whole or in
part, by (i) delivery of a written notice, in the form attached hereto as Exhibit
A (the “Exercise Notice”), of
the Holder’s election to exercise this Warrant and (ii) (A) payment to the
Company of an amount equal to the applicable Exercise Price multiplied by the
number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or by
wire transfer of immediately

 

available funds or
(B) by notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 1(d)).  The Holder shall not be
required to deliver the original Warrant in order to effect an exercise
hereunder.  Execution and delivery of the Exercise Notice with respect to
less than all of the Warrant Shares shall have the same effect as cancellation
of the original Warrant and issuance of a new Warrant evidencing the right to
purchase the remaining number of Warrant Shares.  On or before the first
(1st)
Business Day following the date on which the Company has received each of the
Exercise Notice and the Aggregate Exercise Price (or notice of a Cashless
Exercise) (the “Exercise Delivery Documents”),
the Company shall transmit by facsimile an acknowledgment of confirmation of
receipt of the Exercise Delivery Documents to the Holder and the Company’s
transfer agent (the “Transfer Agent”).
 On or before the second (2nd)
Business Day following the date on which the Company has received all of the
Exercise Delivery Documents (the “Share
Delivery Date”), the Company shall (X) provided the Warrant Shares
are then eligible to be issued without a restrictive legend and provided that
the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer
Program or the Warrant Shares are not then eligible to be issued without a
restrictive legend, upon the request of the Holder, credit such aggregate
number of Warrant Shares to which the Holder is entitled pursuant to such
exercise to the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system, or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
dispatch by overnight courier to the address as specified in the Exercise
Notice, a certificate, registered in the Company’s share register in the name
of the Holder or its designee, for the number of shares of Common Stock to
which the Holder is entitled pursuant to such exercise.  Upon delivery of
the Exercise Delivery Documents, the Holder shall be deemed for all corporate
purposes to have become the holder of record of the Warrant Shares with respect
to which this Warrant has been exercised, irrespective of the date such Warrant
Shares are credited to the Holder’s DTC account or the date of delivery of the
certificates evidencing such Warrant Shares as the case may be.  If this
Warrant is submitted in connection with any exercise pursuant to this Section
1(a) and the number of Warrant Shares represented by this Warrant submitted for
exercise is greater than the number of Warrant Shares being acquired upon an
exercise, then the Company shall as soon as practicable and in no event later
than three Business Days after any exercise and at its own expense, issue, a
new Warrant (in accordance with Section 7(d)) representing the right to
purchase the number of Warrant Shares purchasable immediately prior to such
exercise under this Warrant, less the number of Warrant Shares with respect to
which this Warrant is exercised.  No fractional shares of Common Stock are
to be issued upon the exercise of this Warrant, but rather the number of shares
of Common Stock to be issued shall be rounded up to the nearest whole number.
 The Company shall pay any and all taxes which may be payable with respect
to the issuance and delivery of Warrant Shares upon exercise of this Warrant.

(b)           Exercise Price.  For
purposes of this Warrant, “Exercise Price”
means $0.30, subject to adjustment as provided herein.

(c)           Company’s Failure to Timely
Deliver Securities.  If within three (3) Trading Days after the
Company’s receipt of the facsimile copy of a Exercise Notice the Company shall
fail to issue and deliver a certificate to the Holder and register such shares
of Common Stock on the Company’s share register or credit the Holder’s balance
account with DTC for the number of shares of Common Stock to which the Holder
is entitled upon the Holder’s exercise hereunder,

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and if on or after
such Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of shares of Common Stock issuable upon such exercise that the Holder
anticipated receiving from the Company (a  “Buy-In” ), then the Company
shall, within three (3) Business Days after the Holder’s request and in the
Holder’s discretion, either (i) pay cash to the Holder in an amount equal to
the Holder’s total purchase price (including customary brokerage commissions,
if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the
Company’s obligation to deliver such certificate (and to issue such Warrant
Shares) shall terminate, or (ii) promptly honor its obligation to deliver to
the Holder a certificate or certificates representing such Warrant Shares and
pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In
Price over the product of (A) such number of shares of Common Stock, times (B)
the Closing Bid Price on the date of exercise. 
Nothing herein shall limit the holder’s right to pursue actual damages
for the Company’s failure to maintain a sufficient number of authorized shares
of Common Stock or to otherwise issue shares of Common Stock upon exercise of
this Warrant in accordance with the terms hereof, and the holder shall have the
right to pursue all remedies available at law or in equity (including a decree
of specific performance and/or injunctive relief).

(d)           Cashless Exercise.  Notwithstanding anything contained
herein to the contrary, if a Registration Statement (as defined in the
Registration Rights Agreement) covering the Warrant Shares that are the subject
of the Exercise Notice (the “Unavailable
Warrant Shares”) is not available for the resale of such Unavailable
Warrant Shares, the Holder may, in its sole discretion, exercise this Warrant
in whole or in part and, in lieu of making the cash payment otherwise
contemplated to be made to the Company upon such exercise in payment of the Aggregate
Exercise Price, elect instead to receive upon such exercise the “Net Number” of
shares of Common Stock determined according to the following formula (a “Cashless Exercise”):

Net Number = (A x B) -
(A x C)

B

For
purposes of the foregoing formula:

A                                      =              the total number of shares with
respect to which this Warrant is then being exercised.

B                                        =              the average Closing Sale Price of
the shares of Common Stock (as reported by Bloomberg) over the 3 most recent
trading days immediately preceding the date of the Exercise Notice.

C                                        =              the Exercise Price then in effect
for the applicable Warrant Shares at the time of such exercise.

(e)           Disputes.  In the case of
a dispute as to the determination of the Exercise Price or the arithmetic
calculation of the Warrant Shares, the Company shall promptly issue to the
Holder the number of Warrant Shares that are not disputed and resolve such
dispute in accordance with Section 12.

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(f)            Limitations on Exercises.

(1)           Beneficial Ownership.
 The Company shall not effect the exercise of this Warrant, and the Holder
shall not have the right to exercise this Warrant, to the extent that after
giving effect to such exercise, such Person (together with such Person’s
affiliates) would beneficially own (directly or indirectly through Warrant Shares
or otherwise) in excess of 4.99% of the shares of Common Stock outstanding
immediately after giving effect to such exercise.  For purposes of the
foregoing sentence, the aggregate number of shares of Common Stock beneficially
owned (directly or indirectly through Warrant Shares or otherwise) by such
Person and its affiliates shall include the number of shares of Common Stock
issuable upon exercise of this Warrant with respect to which the determination
of such sentence is being made, but shall exclude shares of Common Stock which
would be issuable upon (i) exercise of the remaining, unexercised portion of
this Warrant beneficially owned by such Person and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company beneficially owned by such Person and its affiliates
(including, without limitation, any convertible notes or convertible preferred
stock or warrants) subject to a limitation on conversion or exercise analogous
to the limitation contained herein.  Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.  For purposes of this Warrant, in determining the number
of outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company’s most
recent Form 10-KSB, Form 10-QSB, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission, as the case may be, (2) a
more recent public announcement by the Company or (3) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common
Stock outstanding.  For any reason at any time, upon the written request
of the Holder, the Company shall within two Business Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding.
 In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Company, including the SPA Securities and the SPA Warrants, by the Holder
and its affiliates since the date as of which such number of outstanding shares
of Common Stock was reported.  By written notice to the Company, the
Holder may from time to time increase or decrease the Maximum Percentage
specified in such notice; provided that (i) any such increase will not be
effective until the sixty-first (61st) day after such notice is delivered to
the Company, and (ii) any such increase or decrease will apply only to the
Holder and not to any other holder of SPA Warrants.

(g)           Insufficient Authorized Shares.
 If at any time while any of the Warrants remain outstanding the Company
does not have a sufficient number of authorized and unreserved shares of Common
Stock to satisfy its obligation to reserve for issuance upon exercise of the
Warrants at least a number of shares of Common Stock equal to 100% of the
number of shares of Common

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Stock as shall
from time to time be necessary to effect the exercise of all of the Warrants
then outstanding  (the “Required Reserve
Amount”) (an “Authorized Share
Failure”), then the Company shall immediately take all action
necessary to increase the Company’s authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount
for the Warrants then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than ninety (90) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock.  In connection with such meeting, the
Company shall provide each stockholder with a proxy statement and shall use its
reasonable best efforts to solicit its stockholders’ approval of such increase
in authorized shares of Common Stock and to cause its board of directors to
recommend to the stockholders that they approve such proposal.

2.             ADJUSTMENT OF EXERCISE PRICE AND
NUMBER OF WARRANT SHARES.

The
Exercise Price and the number of Warrant Shares shall be adjusted from time to
time as follows:

(a)           Adjustment upon Issuance of Shares
of Common Stock.  If and whenever on or after the Subscription Date
and for so long as the Holder’s Note remains outstanding, the Company issues or
sells, or in accordance with this Section 2 is deemed to have issued or sold,
any shares of Common Stock (including the issuance or sale of shares of Common
Stock owned or held by or for the account of the Company, but excluding shares
of Common Stock deemed to have been issued by the Company in connection with
any Excluded Securities (as defined in the Securities Purchase Agreement) for a
consideration per share (the “New Issuance
Price”) less than a price (the “Applicable
Price”) equal to the Exercise Price in effect immediately prior to such
issue or sale or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then immediately
after such Dilutive Issuance, the Exercise Price then in effect shall be
reduced to an amount equal to the New Issuance Price.  Upon each such
adjustment of the Exercise Price hereunder, the number of Warrant Shares shall
remain the same.  For purposes of determining the adjusted Exercise Price
under this Section 2(a), the following shall be applicable:

(i)                                     Issuance
of Options.  If the Company in any manner grants any Options (other
than Excluded Securities) and the lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon
conversion, exercise or exchange of any Convertible Securities issuable upon exercise
of any such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share.  For purposes of this Section 2(a)(i), the “lowest price per share
for which one share of Common Stock is issuable upon exercise of such Options
or upon conversion, exercise or exchange of such Convertible Securities” shall
be equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common

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                                                Stock
upon the granting or sale of the Option, upon exercise of the Option and upon
conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option.  No further adjustment of the Exercise Price or
number of Warrant Shares shall be made upon the actual issuance of such shares
of Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such shares of Common Stock upon
conversion, exercise or exchange of such Convertible Securities.

(ii)                                  Issuance
of Convertible Securities.  If the Company in any manner issues or
sells any Convertible Securities (other than Excluded Securities) and the
lowest price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof is less than the Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share.  For the purposes of this
Section 2(a)(ii), the “lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange” shall be equal to
the sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to one share of Common Stock upon the issuance or
sale of the Convertible Security and upon conversion, exercise or exchange of
such Convertible Security.  No further adjustment of the Exercise Price
shall be made upon the actual issuance of such shares of Common Stock upon
conversion, exercise or exchange of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of this Warrant has been or is to be made pursuant
to other provisions of this Section 2(a), no further adjustment of the Exercise
Price shall be made by reason of such issue or sale.

(iii)                               Change
in Option Price or Rate of Conversion. 
 If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion, exercise or exchange
of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exercisable or exchangeable for shares of Common Stock
increases or decreases at any time, the Exercise Price in effect at the time of
such increase or decrease shall be adjusted to the Exercise Price which would
have been in effect at such time had such Options or Convertible Securities
provided for such increased or decreased purchase price, additional
consideration or increased or decreased conversion rate, as the case may be, at
the time initially granted, issued or sold.  For purposes of this Section
2(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the shares of Common Stock deemed
issuable upon exercise, conversion or

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                                                exchange
thereof shall be deemed to have been issued as of the date of such increase or
decrease.  No adjustment shall be made if
such adjustment would increase the applicable Exercise Price by an amount in
excess of the exercise price of the Option or Convertible Security giving rise
to the adjustment.  Notwithstanding
anything to the contrary herein, in no event shall an adjustment to the
Exercise Price be made retroactively with respect to any portion of the Warrant
exercised into Common Stock.

(iv)                              Calculation
of Consideration Received.  In case any Option is issued in connection
with the issue or sale of other securities of the Company, together comprising
one integrated transaction in which no specific consideration is allocated to
such Options by the parties thereto, the Options will be deemed to have been
issued for a consideration as determined in good faith by the Board of
Directors of the Company.  If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the amount
received by the Company therefor.  If any shares of Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Closing Sale Price of such security on the date of receipt.
 If any shares of Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such shares of
Common Stock, Options or Convertible Securities, as the case may be.  The
fair value of any consideration other than cash or securities will be
determined jointly by the Company and the Required Holders.  If such
parties are unable to reach agreement within ten (10) days after the occurrence
of an event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders.  The determination of such appraiser shall be final and
binding upon all parties absent manifest error and the fees and expenses of
such appraiser shall be borne by the Company.

(v)                                 Record
Date.  If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them (A) to receive a dividend
or other distribution payable in shares of Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase shares of 

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                                                Common
Stock, Options or Convertible Securities, then such record date will be deemed
to be the date of the issue or sale of the shares of Common Stock deemed to
have been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.

(b)           Adjustment upon Subdivision or
Combination of Common Stock.  If the Company at any time on or after
the Subscription Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced and the
number of Warrant Shares will be proportionately increased.  If the
Company at any time on or after the Subscription Date  combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of Warrant Shares will be
proportionately decreased.  Any adjustment under this Section 2(b) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.

(c)           Other Events.  If any
event occurs of the type contemplated by the provisions of this Section 2 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of Warrant Shares
so as to protect the rights of the Holder.

3.             RIGHTS UPON DISTRIBUTION OF ASSETS.

If the Company
shall declare or make any dividend or other distribution of its assets (or
rights to acquire its assets) to holders of shares of Common Stock, by way of
return of capital or otherwise (including, without limitation, any distribution
of cash, stock or other securities, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement, scheme of arrangement or
other similar transaction) (a “Distribution”),
at any time after the issuance of this Warrant, then, in each such case:

(a)           any Exercise Price in effect
immediately prior to the close of business on the record date fixed for the
determination of holders of shares of Common Stock entitled to receive the
Distribution shall be reduced, effective as of the close of business on such
record date, to a price determined by multiplying such Exercise Price by a
fraction of which (i) the numerator shall be the Closing Bid Price of the
shares of Common Stock on the trading day immediately preceding such record
date minus the value of the Distribution (as determined in good faith by the
Company’s Board of Directors) applicable to one share of Common Stock, and (ii)
the denominator shall be the Closing Bid Price of the shares of Common Stock on
the trading day immediately preceding such record date; and

(b)           the number of Warrant Shares shall
remain the same.

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4.             PURCHASE RIGHTS; FUNDAMENTAL
TRANSACTIONS.

(a)           Purchase Rights.  In
addition to any adjustments pursuant to Section 2 above, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property pro rata to the
record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the proportionate number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on the exercise
of this Warrant) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of shares of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

(b)           Fundamental Transactions.
 The Company shall not enter into or be party to a Fundamental Transaction
unless the Successor Entity assumes in writing all of the obligations of the
Company under this Warrant and the other Transaction Documents in accordance
with the provisions of this Section (4)(b) pursuant to written agreements
including agreements to deliver to each holder of Warrants in exchange for such
Warrants a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant, including, without
limitation, an adjusted exercise price calculated based on the value for the
shares of Common Stock reflected by the terms of such Fundamental Transaction,
and exercisable for a corresponding number of shares of capital stock
equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of
this Warrant) prior to such Fundamental Transaction, and satisfactory to the
Required Holders.  Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Warrant
referring to the “Company” shall refer instead to the Successor Entity), and
may exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Warrant with the same effect as if such
Successor Entity had been named as the Company herein.  Upon consummation
of the Fundamental Transaction, the Successor Entity shall deliver to the
Holder confirmation that there shall be issued upon exercise of this Warrant at
any time after the consummation of the Fundamental Transaction, in lieu of the
shares of the Common Stock (or other securities, cash, assets or other
property) issuable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of the Common Stock (or its equivalent) of the
Successor Entity (including its Parent Entity) which the Holder would have been
entitled to receive upon the happening of such Fundamental Transaction had this
Warrant been converted immediately prior to such Fundamental Transaction, as
adjusted in accordance with the provisions of this Warrant.  In addition
to and not in substitution for any other rights hereunder, prior to the
consummation of any Fundamental Transaction pursuant to which holders of shares
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate
provision to insure that the Holder will thereafter have the right to receive
upon an exercise of this Warrant at any time after the consummation of the
Fundamental Transaction but prior to the Expiration Date, in lieu of the shares
of the Common Stock (or other securities, cash, assets or other property)
issuable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of stock, securities,

 9
 

 

cash, assets or
any other property whatsoever (including warrants or other purchase or
subscription rights) which the Holder would have been entitled to receive upon
the happening of such Fundamental Transaction had the Warrant been exercised
immediately prior to such Fundamental Transaction. Provisions made pursuant to
the preceding sentence shall be in the form and substance reasonably
satisfactory to the Required Holders. 
The provisions of this Section shall apply similarly and equally to
successive Fundamental Transactions and Corporate Events and shall be applied
without regard to any limitations on the exercise of this Warrant.

(c)           Notwithstanding the foregoing and the
provisions of Section 4(b) above, in the event of a Fundamental Transaction
where the Successor Entity is not a Public Successor, if the Holder has not
exercised the Warrant in full prior to the consummation of the Fundamental
Transaction, then the Company may enter into a Fundamental Transaction pursuant
to which the Holder shall receive, simultaneously with the consummation of the
Fundamental Transaction, in lieu of the warrant referred to in Section 4(b)
cash in the amount equal to the value of the remaining unexercised portion of
this Warrant on the date of such consummation, which value shall be determined
by multiplying the number of Warrant Shares represented by the unexercised
portion of the Warrant by the positive difference between (i) the Closing Bid
Price on the Business Day prior to the consummation of the Fundamental
Transaction and (ii) the Exercise Price.

5.             NONCIRCUMVENTION.

The Company hereby
covenants and agrees that the Company will not, by amendment of its Articles of
Incorporation, Bylaws or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action knowingly, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the Holder.  Without
limiting the generality of the foregoing, the Company (i) shall not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect,
(ii) shall take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and nonassessable
shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so
long as any of the SPA Warrants are outstanding, take all action necessary to
reserve and keep available out of its authorized and unissued shares of Common
Stock, solely for the purpose of effecting the exercise of the SPA Warrants,
100% of the number of shares of Common Stock as shall from time to time be
necessary to effect the exercise of the SPA Warrants then outstanding (without
regard to any limitations on exercise).

6.             WARRANT HOLDER NOT DEEMED A
STOCKHOLDER.

Except as
otherwise specifically provided herein, the Holder, solely in such Person’s
capacity as a holder of this Warrant, shall not be entitled to vote or receive
dividends or be deemed the holder of share capital of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the Holder, solely in such Person’s capacity as the Holder of this
Warrant, any of the rights of a shareholder of the Company or any right to
vote, give or

 10
 

 

withhold consent
to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or otherwise,
prior to the issuance to the Holder of the Warrant Shares which such Person is
then entitled to receive upon the due exercise of this Warrant.  In
addition, nothing contained in this Warrant shall be construed as imposing any
liabilities on the Holder to purchase any securities (upon exercise of this
Warrant or otherwise) or as a shareholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company, whether
such liabilities are asserted by the Company or by creditors at the Company.
 Notwithstanding this Section 6, the Company shall provide the Holder with
copies of the same notices and other information given to the shareholders of
the Company generally, contemporaneously with the giving thereof to the shareholders.

7.             REISSUANCE OF WARRANTS.

(a)           Transfer of Warrant.  If
this Warrant is to be transferred, the Holder shall surrender this Warrant to
the Company, whereupon the Company will issue promptly following satisfaction
of the transfer provisions contained in the Securities Purchase Agreement and
deliver upon the order of the Holder a new Warrant (in accordance with Section
7(d)), in the name of the validly registered assignee or transferee,
representing the right to purchase the number of Warrant Shares being
transferred by the Holder and, if less then the total number of Warrant Shares
then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number
of Warrant Shares not being transferred.

(b)           Lost, Stolen or Mutilated Warrant.
 Upon 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 loss, theft or destruction, of any indemnification undertaking by
the Holder to the Company in customary form and, in the case of mutilation,
upon surrender and cancellation of this Warrant, the Company shall execute and
deliver to the Holder a new Warrant (in accordance with Section 7(d))
representing the right to purchase the Warrant Shares then underlying this
Warrant.

(c)           Exchangeable for Multiple Warrants.
 This Warrant is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Company, for a new Warrant or Warrants (in
accordance with Section 7(d)) in minimum amounts of  no less than 50,000 Warrant Shares each
representing in the aggregate the right to purchase the number of Warrant
Shares then underlying this Warrant, and each such new Warrant will represent
the right to purchase such portion of such Warrant Shares as is designated by
the Holder at the time of such surrender; provided, however, that no Warrants
for fractional shares of Common Stock shall be given.

(d)           Issuance of New Warrants.
 Whenever the Company is required to issue a new Warrant pursuant to the
terms of this Warrant, such new Warrant (i) shall be of like tenor with this
Warrant, (ii) shall represent, as indicated on the face of such new Warrant,
the right to purchase the Warrant Shares then underlying this Warrant (or in
the case of a new Warrant being issued pursuant to Section 7(a) or Section
7(c), the Warrant Shares designated by the Holder which, when added to the
number of shares of Common Stock underlying the other new

 11
 

 

Warrants issued in
connection with such issuance, does not exceed the number of Warrant Shares
then underlying this Warrant), (iii) shall have an effective issuance date, as
indicated on the face of such new Warrant which is the same as the Issuance
Date, and (iv) shall have the same rights and conditions as this Warrant.

8.             NOTICES.

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

9.             AMENDMENT AND WAIVER.

Except as
otherwise provided herein, the provisions of this Warrant may be amended and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company has obtained the
written consent of the Required Holders; provided that, except as provided
herein, no such action may increase the exercise price of any SPA Warrant or
decrease the number of shares or class of stock obtainable upon exercise of any
SPA Warrant without the written consent of the Holder.  No such amendment
shall be effective to the extent that it applies to less than all of the
holders of the SPA Warrants then outstanding.

10.           GOVERNING LAW.

This Warrant shall
be governed by and construed and enforced in accordance with, and all questions
concerning the construction, validity, interpretation and performance of this
Warrant shall be governed by, the internal laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of New
York.

11.           CONSTRUCTION; HEADINGS.

This Warrant shall
be deemed to be jointly drafted by the Company and all the Buyers and shall not
be construed against any person as the drafter hereof.  The headings of
this Warrant are for convenience of reference and shall not form part of, or
affect the interpretation of, this Warrant.

 

 12

 

12.           DISPUTE RESOLUTION.

In the case of a
dispute as to the determination of the Exercise Price or the arithmetic
calculation of the Warrant Shares, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within two Business
Days of receipt of the Exercise Notice giving rise to such dispute, as the case
may be, to the Holder.  If the Holder and the Company are unable to agree
upon such determination or calculation of the Exercise Price or the Warrant
Shares within three Business Days of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within two
Business Days submit via facsimile (a) the disputed determination of the
Exercise Price to an independent, reputable investment bank selected by the
Company and approved by the Holder (such approval not to be unreasonably
withheld or delayed) or (b) the disputed arithmetic calculation of the Warrant
Shares to the Company’s independent, outside accountant.  The Company shall
cause at its expense the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than ten Business Days from the time it receives
the disputed determinations or calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

13.           REMEDIES, OTHER OBLIGATIONS, BREACHES
AND INJUNCTIVE RELIEF.

The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant and the other Transaction Documents, at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder to
pursue actual damages for any failure by the Company to comply with the terms
of this Warrant.  The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate.  The Company
therefore agrees that, in the event of any such breach or threatened breach,
the holder of this Warrant shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

14.           TRANSFER.

This Warrant may
be offered for sale, sold, transferred or assigned without the consent of the
Company, except as may otherwise be required by Section 2(f) of the Securities
Purchase Agreement.

15.           CERTAIN DEFINITIONS.

For purposes of
this Warrant, the following terms shall have the following meanings:

(a)           “Bloomberg”
means Bloomberg Financial Markets.

 13
 

 

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

(c)           “Closing
Bid Price” and “Closing Sale Price”
means, for any security as of any date, the last closing bid price and last
closing trade price, respectively, for such security on the Principal Market,
as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the
closing trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m., New York Time, as
reported by Bloomberg, or, if the Principal Market is not the principal securities
exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing do not apply, the last closing bid price or
last trade price, respectively, of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg,
or, if no closing bid price or last trade price, respectively, is reported for
such security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
 If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on
such date shall be the fair market value as mutually determined by the Company
and the Holder.  If the Company and the Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved
pursuant to Section 12.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

(d)           “Common
Stock” means (i) the Company’s shares of Common Stock, par
value $0.01 per share, and (ii) any share capital into which such Common
Stock shall have been changed or any share capital resulting from a
reclassification of such Common Stock.

(e)           “Convertible
Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
shares of Common Stock.

(f)            “Eligible
Market” means the Principal Market, The New York Stock Exchange,
Inc., the Nasdaq National Market, the Nasdaq Capital Market or the American
Stock Exchange.

(g)           “Expiration
Date” means the date sixty months after the Issuance Date or, if
such date falls on a day other than a Business Day or on which trading does not
take place on the Principal Market (a “Holiday”),
the next date that is not a Holiday.

(h)           “Fundamental
Transaction” means that the Company shall, directly or indirectly,
in one or more related transactions (other than as a result of the transactions
contemplated by the Transaction Documents), (i) consolidate or merge with or
into (whether or not the Company is the surviving corporation) another Person
pursuant to which the holders of the Company’s stock prior to the merger hold
less than 50% of the voting power of the surviving entity in the merger, or
(ii) sell, assign, transfer, convey or otherwise dispose of all or

 14
 

 

substantially all
of the properties or assets of the Company to another Person, or (iii) allow
another Person to make a purchase, tender or exchange offer that is accepted by
the holders of more than the 50% of either the outstanding shares of Common
Stock (not including any shares of Common Stock held by the Person or Persons
making or party to, or associated or affiliated with the Persons making or
party to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), (v) reorganize, recapitalize
or reclassify its Common Stock (other than a forward or reverse stock split),
or (vi) any “person” or “group” (as these terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 50% of the aggregate ordinary voting power represented by issued
and outstanding Common Stock.

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

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

(k)           “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

(l)            “Principal
Market” means the Over-the-Counter Bulletin Board.

(m)          “Registration
Rights Agreement” means that certain registration rights agreement
by and among the Company and the Buyers.

(n)           “Required
Holders” means the holders of the SPA Warrants representing at least
a majority of shares of Common Stock underlying the SPA Warrants then
outstanding.

(o)           “SPA
Securities” means the Notes issued pursuant to the Securities
Purchase Agreement.

(p)           “Successor
Entity” means the Person (or, if so elected by the Required Holders,
the Parent Entity) formed by, resulting from or surviving any Fundamental
Transaction or the Person (or, if so elected by the Required Holders, the
Parent Entity) with which such Fundamental Transaction shall have been entered
into.

 15
 

 

[Signature
Page Follows]

 16
 

 

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

	
  VCAMPUS CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 17

 

E

E

EXHIBIT A

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

VCAMPUS CORPORATION

The undersigned holder hereby exercises the right to
purchase                                   
of the shares of Common Stock (“Warrant
Shares”) of VCampus Corporation, a Delaware corporation (the “Company”),
evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).  Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth
in the Warrant.

1.  Form of Exercise Price.  The Holder
intends that payment of the Exercise Price shall be made as:

a “Cash Exercise”
with respect to                                 Warrant
Shares; and/or

a “Cashless Exercise”
with respect to                                 
Warrant Shares.

2.  Payment of Exercise Price.  In the
event that the holder has elected a Cash Exercise with respect to some or all
of the Warrant Shares to be issued pursuant hereto, the holder shall pay the
Aggregate Exercise Price in the sum of $                                       
to the Company in accordance with the terms of the Warrant.

3.  Delivery of Warrant Shares.  The
Company shall deliver to the holder                          
Warrant Shares in accordance with the terms of the Warrant.

4.  Delivery of Warrant.  The Registered
Holder shall deliver the Warrant to the Company.

Date:                            
           ,                     

   Name of Registered Holder

	
  

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 18
 

 

ACKNOWLEDGMENT

The
Company hereby acknowledges this Exercise Notice and hereby directs American
Stock Transfer and Trust Company to issue the above indicated number of shares
of Common Stock in accordance with the Transfer Agent Instructions dated                        
       , 2006 from the Company and
acknowledged and agreed to by American Stock Transfer and Trust Company.

	
  

  	
  VCAMPUS CORPORATION

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  

 

 19Exhibit
10.121

[FORM OF SENIOR SECURED CONVERTIBLE NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO
RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.  ANY
TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,
INCLUDING SECTIONS 3(c)(ii) AND 20(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED
BY THIS NOTE AND, ACCORDINGLY, THE NUMBER OF SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

VCAMPUS CORPORATION

SENIOR SECURED CONVERTIBLE NOTE

	
  Issuance Date:  September 25, 2006

  	
   

  	
  Original Principal Amount: U.S. $3,000,000

  

 

FOR VALUE RECEIVED, VCampus Corporation, a Delaware corporation
(the “Company”), hereby promises
to pay to Gottbetter Capital Master, Ltd. or registered assigns (“Holder”) the amount set out above as the
Original Principal Amount (as reduced pursuant to the terms hereof pursuant to
redemption, conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), on any Installment
Date with respect to the Installment Amount due on such Installment Date,
acceleration, redemption or otherwise (in each case in accordance with the
terms hereof) and to pay interest (“Interest”)
on any outstanding Principal at a rate per annum equal to the Interest Rate (as
defined below), from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due
and payable, whether upon an Interest Date (as defined below), any Installment
Date, or the Maturity Date, acceleration, conversion, redemption or otherwise
(in each case in accordance with the terms hereof).  This Senior Secured
Convertible Note (including all Senior Secured Convertible Notes issued in
exchange, transfer or replacement hereof, this “Note”) issued pursuant to the Securities Purchase Agreement
(as defined below).  Certain capitalized terms are defined in Section 28.

1.             PAYMENTS OF PRINCIPAL; MATURITY.
 On each Installment Date commencing                    ,
2007, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date in cash by wire transfer of immediately
available funds.  The “Maturity Date”
shall be
                   ,
2009.

 

2.             INTEREST; INTEREST RATE.

(a)  Interest on this Note shall commence accruing
on the Issuance Date and shall be computed on the basis of a 360-day year and
actual days elapsed and shall be payable in arrears for each Calendar Month
during the period beginning on the Issuance Date and ending on, and including,
the Maturity Date (each, an “Interest Date”)
with the first Interest Date being [   
], 2006.  Interest shall be payable on each Interest Date, to the
record holder of this Note on the applicable Interest Date, in cash (“Cash Interest”).

(b)  From and after the occurrence of an Event of
Default, the Interest Rate shall be increased to fifteen percent (15%).
 In the event that such Event of Default is subsequently cured, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated at such
increased rate during the continuance of such Event of Default shall continue
to apply to the extent relating to the days after the occurrence of such Event
of Default through and including the date of cure of such Event of Default.

3.             CONVERSION OF NOTES.
 This Note shall be convertible into shares of common stock of the
Company, par value $0.01 per share (the “Common
Stock”), on the terms and conditions set forth in this Section 3.

(a)  Conversion Right.  Subject to the
provisions of Section 3(d), at any time or times on or after the Issuance Date,
the Holder shall be entitled to convert any portion of the outstanding and
unpaid Conversion Amount (as defined below) into fully paid and nonassessable
shares of Common Stock in accordance with Section 3(c), at the Conversion Rate
(as defined below).  The Company shall not issue any fraction of a share
of Common Stock upon any conversion.  If the issuance would result in the
issuance of a fraction of a share of Common Stock, the Company shall round such
fraction of a share of Common Stock up to the nearest whole share.  The
Company shall pay any and all taxes that may be payable with respect to the
issuance and delivery of Common Stock upon conversion of any Conversion Amount.

(b)  Conversion Rate.  The number of
shares of Common Stock issuable upon conversion of any Conversion Amount
pursuant to Section 3(a) shall be determined by dividing (x) such Conversion
Amount by (y) the Conversion Price (the “Conversion
Rate”).

(i)            “Conversion
Amount” means the portion of the Principal to be converted, redeemed
or otherwise with respect to which this determination is being made.

(ii)           “Conversion
Price” means, as of any Conversion Date (as defined below) or other
date of determination, $0.30 (appropriately adjusted for any stock split, stock
dividend, stock combination or other similar transaction that proportionately
decreases or increases the Common Stock).

 2
 

 

(c)  Mechanics of Conversion.

(i)            Optional
Conversion.  To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I  (the “Conversion
Notice”) to the Company and (B) if required by Section 3(c)(iv),
surrender this Note to a nationally recognized overnight delivery service for
delivery to the Company (or an indemnification undertaking with respect to this
Note in the case of its loss, theft or destruction).  On or before the
next Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such Conversion
Notice to the Holder and the Transfer Agent.  On or before the second (2nd) Trading Day following the
date of receipt of a Conversion Notice (the “Share
Delivery Date”), the Company shall (1) (X) provided the shares are
then eligible to be issued without a restrictive legend and that the Transfer
Agent is participating in the Fast Automated Securities Transfer Program of DTC
credit such aggregate number of shares of Common Stock to which the Holder
shall be entitled to the Holder’s or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer
Agent is not participating in the DTC Fast Automated Securities Transfer
Program or the shares are not then eligible to be issued without a restrictive
legend, issue and deliver to the address as specified in the Conversion Notice,
a certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled.
 If this Note is physically surrendered for conversion as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than
the Principal portion of the Conversion Amount being converted, then the
Company shall as soon as practicable and in no event later than three Business
Days after receipt of this Note and at its own expense, issue and deliver to
the holder a new Note (in accordance with Section 18(d)) representing the
outstanding Principal not converted.  The Person or Persons entitled to
receive the shares of Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.  In the event of a partial
conversion of this Note pursuant hereto, the principal amount converted shall
be deducted from the Installment Amounts relating to the next earliest
Installment Dates.

(ii)           Company’s
Failure to Timely Convert.  If within three (3) Trading Days after the
Company’s receipt of the facsimile copy of a Conversion Notice, the Company
shall fail to issue and deliver a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon such holder’s conversion of any Conversion
Amount (a “Conversion Failure”),
and if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) a number of shares of Common Stock equal to the
number of shares subject to the Conversion Failure in order to deliver same in
satisfaction of a sale by the Holder of the number of shares of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company (a “Buy-In”), then the Company shall, within three (3)
Business Days after the Holder’s request and provision of trade confirmations
and in the Holder’s discretion, either (i) pay cash to the Holder in an amount
equal to the Holder’s total purchase price (including customary brokerage
commissions and other actual and reasonable out-of-pocket expenses, if any) for
the shares of Common Stock so purchased (the “Buy-In Price”), at
which point the Company’s obligation to deliver such certificate (and to issue
such Common Stock) shall terminate, or (ii) promptly honor its obligation to
deliver to the Holder a certificate or certificates representing such Common

 3
 

 

Stock
and pay cash to the Holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Closing Bid Price on the Conversion Date.

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

(iv)          Disputes.
 In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 23.

(d)  Limitations on Conversions.

(i)            Beneficial Ownership.
 The Company shall not effect any conversion of this Note, and the Holder
of this Note (including any successor, transferee or assignee) shall not have
the right to convert any portion of this Note pursuant to Section 3(a), to the
extent that after giving effect to such conversion, the Holder (together with
the Holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the number of
shares of Common Stock outstanding immediately after giving effect to such
conversion.  For purposes of the foregoing sentence, the number of shares
of Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of this
Note with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable
upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other

 4
 

 

securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended.  For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-KSB, Form 10-K, Form
10-QSB, Form 10-Q or Form 8-K, as the case may be (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
 For any reason at any time, during regular business hours of the Company
and upon the written request of the Holder, the Company shall within two (2)
Business Days confirm in writing to the Holder the number of shares of Common
Stock then outstanding.  In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Note, by the Holder or
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  By written notice to the Company, the Holder
may increase or decrease the Maximum Percentage to any other percentage
specified in such notice; provided that (i) any such increase will not be effective
until the sixty-first (61st ) day after such
notice is delivered to the Company, and (ii) any such increase or decrease will
apply only to the Holder and not to any other holder of Notes.

4.             RIGHTS UPON EVENT OF DEFAULT.

(a)  Event of Default.  Each of the
following events shall constitute an “Event
of Default “:

(i)            the failure of the applicable
Registration Statement required to be filed pursuant to the Registration Rights
Agreement to be declared effective by the SEC on or prior to the date that is thirty
(30) days after the applicable Effectiveness Deadline (as defined in the
Registration Rights Agreement), or, while the applicable Registration Statement
is required to be maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the applicable Registration
Statement lapses for any reason (including, without limitation, the issuance of
a stop order but excluding by reason of any fault, breach or omission of the
Holder) or is unavailable to any holder of the Notes but excluding by reason of
any fault, breach or omission of the Holder for sale of all of such holder’s
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive days or for
more than an aggregate of thirty (30) days in any 365-day period (other than
days during an Allowable Grace Period (as defined in the Registration Rights
Agreement));

(ii)           the suspension from trading or
failure of the Common Stock to be listed on the Principal Market or on an
Eligible Market for a period of five (5) consecutive

 5
 

 

Trading Days or for more
than an aggregate of ten (10) Trading Days in any 365-day period;

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

(iv)          at any time following the tenth (10th) consecutive Business Day
that the authorized number of shares is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion of
one hundred percent (100%) of the full Conversion Amount of this Note (without
regard to any limitations on conversion set forth in Section 3(d) or
otherwise);

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

(vi)          any default under, redemption of or
acceleration prior to maturity of any Indebtedness (other than the Indebtedness
owed to SIAR Capital and related investors in the March 2004 financing and the
August 2006 bridge financing) in excess of $250,000, in the aggregate, of the
Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement);

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

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

(ix)           a final judgment or judgments for the
payment of money aggregating in excess of $500,000 are rendered against the
Company or any of its Subsidiaries and

 6
 

 

which judgments are not,
within sixty (60) days after the entry thereof, bonded, discharged or stayed
pending appeal, or are not discharged within sixty (60) days after the
expiration of such stay; provided, however, that any judgment which is covered
by insurance or an indemnity from a credit worthy party shall not be included
in calculating the $500,000 amount set forth above so long as the Company
provides the Holder a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the Holder) to the
effect that such judgment is covered by insurance or an indemnity and the
Company will be entitled to receive the proceeds of such insurance or indemnity
promptly after the issuance of such judgment;

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

(xi)           any breach or failure in any respect
to comply with (x) Section 15 of this Note or (y) any of the Potential Partner
Conditions; or

(xii)          the inability of the Common Stock to
be transferred with DTC through the Deposit Withdrawal at Custodian system.

(b)  Redemption Right.  Upon the occurrence
of an Event of Default with respect to this Note, the Company shall within two
(2) Business Days after the day on which the Company is aware of the Event of
Default deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder.
 At any time after the earlier of the Holder’s receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the “Event of Default
Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem.  Each portion of this Note subject to redemption by
the Company pursuant to this Section 4(b) shall be redeemed by the Company at a
price equal to 100% of the Conversion Amount to be redeemed and (y) the
Redemption Premium (the “Event of Default
Redemption Price”).  Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 12.  To the
extent redemptions required by this Section 4(b) are deemed or determined by a
court of competent jurisdiction to be prepayments of the Note by the Company,
such redemptions shall be deemed to be voluntary prepayments.  The parties
hereto agree that in the event of the Company’s redemption of any portion of
the Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder.  Accordingly, any Redemption
Premium due under this Section 4(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty.

5.             RIGHTS UPON FUNDAMENTAL
TRANSACTION AND CHANGE OF CONTROL.

(a)  Assumption.  The Company shall not
enter into or be party to a Fundamental Transaction unless the Successor Entity
assumes in writing all of the obligations of the Company

 7
 

 

under this Note
and the other Transaction Documents in accordance with the provisions of this
Section 5(a) pursuant to written agreements including agreements to deliver to
each holder of Notes in exchange for such Notes a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts and the interest rates
of the Notes held by such holder, having similar conversion rights as the Notes
and having similar ranking to the Notes, and reasonably satisfactory to the
Required Holders.  Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Note
referring to the “Company” shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Note with the same effect as if such
Successor Entity had been named as the Company herein.  Upon consummation
of the Fundamental Transaction, the Successor Entity shall deliver to the
Holder confirmation that there shall be issued upon conversion or redemption of
this Note at any time after the consummation of the Fundamental Transaction, in
lieu of the shares of Common Stock (or other securities, cash, assets or other
property) issuable upon the conversion of the Notes prior to such Fundamental
Transaction, such shares of common stock (or their equivalent) of the Successor
Entity, as adjusted in accordance with the provisions of this Note.  The
provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
on the conversion of this Note.

(b)  Change of Control; Redemption Right.
 No sooner than fifteen (15) days nor later than ten (10) days prior to
the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of Control Notice”).  At any
time during the period beginning after the Holder’s receipt of a Change of
Control Notice and ending ten (10) Trading Days after the consummation of such
Change of Control, the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (“Change of Control Redemption Notice”) to
the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem.  The portion of this
Note subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (i) the product of the
Change of Control Premium and the product of (x) the sum of the Conversion
Amount being redeemed and any accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest and (y) the quotient determined by dividing (A)
the Closing Sale Price of the Common Stock immediately following the public
announcement of such proposed Change of Control by (B) the Conversion Price and
(ii) 125% of the sum of the Conversion Amount being redeemed and any accrued
and unpaid Interest with respect to such Conversion Amount subject to such
Change of Control Redemption and accrued and unpaid Late Charges with respect
to such Conversion Amount and Interest (the “Change
of Control Redemption Price”).  Redemptions required by this
Section 5 shall be made in accordance with the provisions of Section 12 and
shall have priority to payments to shareholders in connection with a Change of
Control.  To the extent redemptions required by this Section 5(b) are
deemed or determined by a court of competent jurisdiction to be prepayments of
the Note by the Company, such redemptions shall be deemed to be voluntary
prepayments.

 

 8

 

 Notwithstanding
anything to the contrary in this Section 5, until the Change of Control
Redemption Price (together with any interest thereon) is paid in full, the
Conversion Amount submitted for redemption under this Section 5(c) may be
converted, in whole or in part, by the Holder into shares of Common Stock, or
in the event the Conversion Date is after the consummation of the Change of
Control, shares of publicly traded common stock (or their equivalent) of the
Successor Entity pursuant to Section 3.  The parties hereto agree that in
the event of the Company’s redemption of any portion of the Note under this
Section 5(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder.  Accordingly, any redemption premium due under this
Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder’s actual loss of its investment opportunity
and not as a penalty.

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

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

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

 9
 

 

7.             RIGHTS UPON ISSUANCE OF OTHER
SECURITIES.

(a)  Adjustment of Conversion Price upon
Issuance of Common Stock.  If at any time after the Subscription Date
and so long as this Note or any portion thereof remains outstanding, the
Company issues or sells, or in accordance with this Section 7(a) is deemed to
have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company,
but excluding shares of Common Stock deemed to have been issued or sold by the
Company in connection with any Excluded Securities) for a consideration per
share (the “New Issuance Price”)
less than a price (the “Applicable Price”)
equal to Conversion Price in effect immediately prior to such issue or sale
(the foregoing a “Dilutive Issuance”),
then immediately after such Dilutive Issuance, the Conversion Price then in
effect shall be reduced to the New Issuance Price.  For purposes of
determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

(i)            Issuance of Options.  If
the Company in any manner grants or sells any Options (other than Excluded
Securities) and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or exchange
or exercise of any Convertible Securities issuable upon exercise of such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share.  For
purposes of this Section 7(a)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to
any one share of Common Stock upon granting or sale of the Option, upon
exercise of the Option and upon conversion or exchange or exercise of any
Convertible Security issuable upon exercise of such Option.  No further
adjustment of the Conversion Price shall be made upon the actual issuance of such
share of Common Stock or of such Convertible Securities upon the exercise of
such Options or upon the actual issuance of such Common Stock upon conversion
or exchange or exercise of such Convertible Securities.

(ii)           Issuance of Convertible Securities.
 If the Company in any manner issues or sells any Convertible Securities
(other than Excluded Securities) and the lowest price per share for which one
share of Common Stock is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such Convertible Securities for
such price per share.  For the purposes of this Section 7(a)(ii), the “lowest
price per share for which one share of Common Stock is issuable upon such
conversion or exchange or exercise” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange or exercise of such
Convertible Security.  No further adjustment of the

 10
 

 

Conversion Price shall be
made upon the actual issuance of such share of Common Stock upon conversion or
exchange or exercise of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.

(iii)          Change in Option Price or Rate of
Conversion.  If the purchase price provided for in any Options, the
additional consideration, if any, payable upon the issue, conversion,
 exchange or exercise of any Convertible Securities, or the rate at which
any Convertible Securities are convertible into or exchangeable or exercisable
for Common Stock changes at any time, the Conversion Price in effect at the
time of such change shall be adjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold.
 For purposes of this Section 7(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the Subscription Date are changed
in the manner described in the immediately preceding sentence, then such Option
or Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change.  No adjustment shall
be made if such adjustment would increase the applicable Conversion Price by an
amount in excess of the exercise price of the Option or Convertible Security
giving rise to the adjustment.  Notwithstanding
anything to the contrary herein, in no event shall an adjustment to the
Conversion Price be made retroactively with respect to any portion of the Note
converted to Common Stock or repaid in Common Stock prior to the actual date of
the dilutive issuance or change.

(iv)          Calculation of Consideration
Received.  In case any Option is issued in connection with the issue
or sale of other securities of the Company, together comprising one integrated
transaction in which no specific consideration is allocated to such Options by
the parties thereto, the Options will be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of the
Company.  If any Common Stock, Options or Convertible Securities are
issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor will be deemed to be the net amount received by
the Company therefor.  If any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount
of the consideration other than cash received by the Company will be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Closing Sale Price of such securities on the date of receipt.
 If any Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which the Company
is the surviving entity, the amount of consideration therefor will be deemed to
be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be.  The fair value of any
consideration other than cash or

 11
 

 

securities will be
determined jointly by the Company and the Required Holders.  If such
parties are unable to reach agreement within ten (10) days after the occurrence
of an event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders.  The determination of such appraiser shall be deemed
binding upon all parties absent manifest error and the fees and expenses of
such appraiser shall be borne by the Company.

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

(b)  Adjustment of Conversion Price upon
Subdivision or Combination of Common Stock.  If the Company at any
time on or after the Subscription Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision will be proportionately reduced.
 If the Company at any time on or after the Subscription Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.

(c)  Other Events.  If any event occurs
of the type contemplated by the provisions of this Section 7 but not expressly
provided for by such provisions (including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the Holder
under this Note.

8.             COMPANY RIGHT OF REDEMPTION.

(a)  General. The Company at its option
shall have the right to redeem, with three (3) Business Days advance written
notice (the “Company Redemption Notice”), a
portion or all of the outstanding principal of the Note.  The Holder may convert after the Company
Redemption Notice is received and until the Company Redemption Price is
received by the Holder.  The redemption
price shall be One Hundred and Twenty percent (120%) of the face amount
redeemed plus accrued interest (the “Company  Redemption Price”). 
The Company shall pay the Company Redemption Price on all redemption
payments made pursuant to this Section of the Note.  For all payments under this Note, the payment
of the Company Redemption Price by the Company shall be in addition to any
accrued interest due.

 12
 

 

(b)  Mechanics of Company Redemption.
 If the Company elects to redeem the Note in accordance with Section 8(a),
then the Company Redemption Price, if any, which is to be paid to the Holder,
shall be paid, by wire transfer of immediately available funds, in an amount in
cash equal to 100% of the Company Redemption Price.  If the Company fails
to deliver the Company Redemption Price on such date, then at the option of the
Holder designated in writing to the Company (any such designation, “Conversion Notice” for purposes of
this Note), the Holder may require the Company to convert all or any part of
the Company Redemption Amount at the Conversion Price.  Conversions
required by this Section 8(b) shall be made in accordance with the provisions
of Section 3(c).  Notwithstanding anything to the contrary in this Section
8(b), but subject to Section 3(d), until the Company Redemption Price (together
with any interest thereon) is paid in full, the Company Redemption Price
(together with any interest thereon) may be converted, in whole or in part, by
the Holder into Common Stock pursuant to Section 3.

9.             SECURITY.  This Note is
secured to the extent and in the manner set forth in the Security Documents (as
defined in the Securities Purchase Agreement).

10.           NONCIRCUMVENTION.  The
Company hereby covenants and agrees that the Company will not, by amendment of
its Articles of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
reasonable action as may be required to protect the rights of the Holder of
this Note.

11.           RESERVATION OF AUTHORIZED SHARES.

(a)  Reservation.  The Company
initially shall reserve out of its authorized and unissued Common Stock a
number of shares of Common Stock for each of the Notes equal to 100% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of
the Issuance Date.  So long as any of the Notes are outstanding, the
Company shall take all action necessary to reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Notes, 100% of the number of shares of Common Stock as
shall from time to time be necessary to effect the conversion of all of the
Notes then outstanding; provided that at no time shall the number of shares of
Common Stock so reserved be less than the number of shares required to be
reserved in the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”).

(b)  Insufficient Authorized Shares.
 If at any time while any of the Notes remain outstanding the Company does
not have a sufficient number of authorized and unreserved shares of Common
Stock to satisfy its obligation to reserve for issuance upon conversion of the
Notes at least a number of shares of Common Stock equal to the Required Reserve
Amount (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow
the Company to reserve the Required Reserve Amount for the Notes then
outstanding.  Without limiting the generality of the foregoing sentence,
as soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than ninety (90) days after the

 13
 

 

occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its shareholders
for the approval of an increase in the number of authorized shares of Common
Stock.  In connection with such meeting, the Company shall provide each shareholder
with a proxy or information statement and shall use its reasonable best efforts
to solicit its shareholders’ approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
shareholders that they approve such proposal.

12.           HOLDER’S REDEMPTIONS.
 The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Business Days after the Company’s receipt
of the Holder’s Event of Default Redemption Notice.  If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section
5(b), the Company shall deliver the applicable Change of Control Redemption
Price to the Holder concurrently with the consummation of such Change of
Control if such notice is received prior to the consummation of such Change of
Control and within five (5) Business Days after the Company’s receipt of such
notice otherwise.  In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed.  In
the event that the Company does not pay the applicable Redemption Price to the
Holder within the time period required, at any time thereafter and until the
Company pays such unpaid Redemption Price in full, the Holder shall have the
option, in lieu of redemption, to require the Company to promptly return to the
Holder all or any portion of this Note representing the Conversion Amount that
was submitted for redemption and for which the applicable Redemption Price
(together with any Late Charges thereon) has not been paid.  Upon the
Company’s receipt of such notice, (x) the applicable Redemption Notice shall be
null and void with respect to such Conversion Amount, and (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with Section
18(d)) to the Holder representing the sum of such Conversion Amount to be
redeemed together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest.  The Holder’s delivery of a notice voiding
a Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.

13.           RESTRICTION ON REDEMPTION AND CASH
DIVIDENDS.  Until all of the Notes have been converted, redeemed or
otherwise satisfied in accordance with their terms, the Company shall not,
directly or indirectly, redeem, repurchase or declare or pay any cash dividend
or distribution on its Common Stock without the prior express written consent
of the Required Holders.

14.           VOTING RIGHTS.  The
Holder shall have no voting rights as the holder of this Note, except as
required by law, including but not limited to Chapter 78 of the Delaware Revised
Statutes, and as expressly provided in this Note.

 14
 

 

15.           COVENANTS.

(a)  Rank. 
All payments due under this Note shall be senior to all other
Indebtedness (other than Senior Indebtedness) of the Company and its
Subsidiaries.

(b)  Incurrence of Indebtedness.  So
long as this Note is outstanding, the Company shall not, and the Company shall
not permit any of its Subsidiaries to, directly or indirectly, incur or
guarantee, assume or suffer to exist any Indebtedness, other than (i) the
Indebtedness evidenced by this Note and (ii) Permitted Indebtedness.

(c)  Existence of Liens.  So long as
this Note is outstanding, the Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, allow or suffer to
exist any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.

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

(e)  Subsidiary Internal Accounting Controls.
 So long as this Note is outstanding, the Company and each of its
Subsidiaries shall maintain, in all material respects, a system of internal
accounting controls consistent with the Internal Accounting Controls (as
defined in the Securities Purchase Agreement).

16.           VOTE TO ISSUE, OR CHANGE THE TERMS
OF, NOTES.  The affirmative vote at a meeting duly called for such
purpose or the written consent without a meeting of the Required Holders shall
be required for any change or amendment to this Note.

17.           TRANSFER.  The Holder
acknowledges and agrees that this Note may only be offered, sold, assigned or
transferred by the Holder without the consent of the Company, provided that the
provisions of Section 2(f) of the Securities Purchase Agreement are complied
with in all respects.

18.           REISSUANCE OF THIS NOTE.

(a)  Transfer.  If this Note is to be
transferred, the Holder shall surrender this Note to the Company, whereupon the
Company will issue, promptly following the satisfaction of the provisions of
Section 2(f) of the Securities Purchase Agreement, and deliver upon the order
of the Holder a new Note (in accordance with

 15
 

 

Section 18(d)), in
the name of the validly registered assigns or transferee, representing the
outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 18(d)) to the Holder representing the outstanding Principal not
being transferred.  The Holder and any assignee, by acceptance of this
Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(ii) and this Section 18(a), following conversion or redemption of any
portion of this Note, the outstanding Principal represented by this Note may be
less than the Principal stated on the face of this Note.

(b)  Lost, Stolen or Mutilated Note.
 Upon receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Note, and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of this Note, the Company shall execute and deliver
to the Holder a new Note (in accordance with Section 18(d)) representing the
outstanding Principal.

(c)  Note Exchangeable for Different
Denominations.  This Note is exchangeable, upon the surrender hereof
by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section (d) and in principal amounts of at least $100,000)
representing in the aggregate the outstanding Principal of this Note, and each
such new Note will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

(d)  Issuance of New Notes.  Whenever
the Company is required to issue a new Note pursuant to the terms of this Note,
such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as
indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 18(a) or Section
18(c), the Principal designated by the Holder which, when added to the
principal represented by the other new Notes issued in connection with such
issuance, does not exceed the Principal remaining outstanding under this Note
immediately prior to such issuance of new Notes), (iii) shall have an issuance
date, as indicated on the face of such new Note, which is the same as the
Issuance Date of this Note, and (iv) shall have the same rights and conditions
as this Note.

(e)  Registered Instrument.  This Note is a registered instrument and is
not a bearer instrument.  The Note is
registered as to both Principal and Interest with the Company and its Transfer
Agent and all payments hereunder shall be made to the named Holder or, in the
event of a transfer, to the transferee identified in the record of ownership of
the Note maintained by the Holder on behalf of the Company and the Transfer
Agent. Transfer of this Note may not be effected except in accordance with the
provisions of the Note and the Securities Purchase Agreement.

19.           REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in
this Note shall be cumulative and in addition to all other remedies available
under this Note and any of the other Transaction Documents at law or in equity
(including a decree of specific performance and/or other injunctive relief),
and nothing herein shall limit the Holder’s right to pursue actual and
consequential damages for any failure by the Company to comply with the terms
of this Note.  Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly
provided herein, be

 16
 

 

subject to any
other obligation of the Company (or the performance thereof).  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate.  The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach, without
the necessity of showing economic loss and without any bond or other security
being required.

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

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

22.           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.

23.           DISPUTE RESOLUTION.  In
the case of a dispute as to the determination of the Closing Bid Price, the
Closing Sale Price or the Weighted Average Price or the arithmetic calculation
of the Conversion Rate or any Redemption Price, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two (2)
Business Days of receipt of the Conversion Notice or Redemption Notice or other
event giving rise to such dispute, as the case may be, to the Holder.  If
the Holder and the Company are unable to agree upon such determination or
calculation within one (1) Business Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within one (1) Business Day submit via facsimile (a) the disputed determination
of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price
to an independent, reputable investment bank selected by the Company and
approved by the Holder  (such approval not to be unreasonably withheld or
delayed) or (b) the disputed arithmetic calculation of the Conversion Rate or
any Redemption Price to the Company’s independent, outside accountant.
 The Company, at the Company’s expense, shall cause the investment bank or
the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

 

 17

 

 

24.           NOTICES; PAYMENTS.

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

(b)  Payments.  Whenever any payment of
cash is to be made by the Company to any Person pursuant to this Note, such
payment shall be made in lawful money of the United States of America by a
check drawn on the account of the Company and sent via overnight courier
service to such Person at such address as previously provided to the Company in
writing (which address, in the case of each of the Purchasers, shall initially
be as set forth on the Schedule of Buyers attached to the Securities Purchase
Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with
prior written notice setting out such request and the Holder’s wire transfer
instructions.  Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a Business Day, the same shall instead
be due on the next succeeding day which is a Business Day and, in the case of
any Interest Date which is not the date on which this Note is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of Interest due on such date.

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

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

27.           GOVERNING LAW; JURISDICTION; JURY
TRIAL.  This Note shall be construed and enforced in accordance with,
and all questions concerning the construction, validity, interpretation and
performance of this Note shall be governed by, the internal laws of the State
of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than
the State of New York.  The Company hereby

 18
 

 

irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in The City of New York, Borough of Manhattan, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper.  The Company hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address it set forth on the signature page hereto and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.  In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule
of law, then such provision shall be deemed inoperative to the extent that it
may conflict therewith and shall be deemed modified to conform with such
statute or rule of law.  Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of this Note.  Nothing contained herein shall be
deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Company in any other jurisdiction to collect on the
Company’s obligations to the Holder, to realize on any collateral or any other
security for such obligations, or to enforce a judgment or other court ruling
in favor of the Holder.   THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.

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

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

(b)           “Bloomberg” means Bloomberg Financial
Markets.

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

(d)           “Calendar Month” means the period beginning
on and including the first of each calendar month and ending on and including
the last day of such calendar month.

(e)           “Change of Control” means any Fundamental Transaction
other than (i) any reorganization, recapitalization or reclassification of the
Common Stock in which holders of the Company’s voting power immediately prior
to such reorganization, recapitalization or reclassification continue after
such reorganization, recapitalization or reclassification to hold

 19
 

 

securities
and, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or entities,
or (ii) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Company.

(f)            “Change of Control Premium” means (i) 120%
or (ii) 110% in the event of a Change of Control involving consideration paid
to holders of the Company’s Common Stock where the consideration per share of
the Company’s Common Stock to be received by the holders thereof is greater (as
to amounts other than cash, as determined reasonably and in good faith by the
Board of Directors of the Company) than 200% of the Conversion Price as of the
Initial Issuance Date (as adjusted for stock splits, stock dividends, reverse
stock splits, recapitalizations, reclassifications and similar events).

(g)           “Closing Bid Price” and “Closing Sale Price” means, for any security
as of any date, the last closing bid price and last closing trade price,
respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by
Bloomberg, or, if the Principal Market is not the principal securities exchange
or trading market for such security, the last closing bid price or last trade
price, respectively, of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price or last
trade price, respectively, of such security in the over-the-counter market on
the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
 If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on
such date shall be the fair market value as mutually determined by the Company
and the Holder.  If the Company and the Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved
pursuant to Section 23.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

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

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

 20
 

 

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

(k)           “Eligible Market” means, the Principal
Market, The New York Stock Exchange, Inc., the Nasdaq Capital Market, the
Nasdaq National Market or the American Stock Exchange.

(l)            “Excluded Securities” means any Common Stock
issued or issuable: (i) in connection with any Approved Stock Plan up to a
maximum of twenty percent (20%) of the outstanding Common Stock; (ii) upon
conversion of, or in exchange for, the Notes or the exercise of the Warrants or
otherwise issued in connection with the transactions contemplated in the
Purchase Agreement; (iii) pursuant to a bona fide firm commitment underwritten
public offering with a nationally recognized underwriter which generates gross
proceeds to the Company in excess of $20,000,000 (other than an “at-the-market
offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”);
(iv) in connection with any acquisition by the Company, whether through an
acquisition of stock or a merger of any business, assets or technologies the
primary purpose of which is not to raise equity capital; (v) securities issued
in connection with corporate partnering transactions on terms approved by the
Board of Directors of the Company and the primary purpose of which is not to
raise equity capital; (vi) upon conversion or exercise of any Options or
Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date; and (v) by the Company with the prior approval of the Required Holders.

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

 21
 

 

(n)           “GAAP” means United States generally
accepted accounting principles, consistently applied.

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

(p)           “Initial Issuance Date” means September 25,
2006.

(q)           “Installment Amount” means with respect to
any Installment Date, the lesser of $136,363.63 or such other lesser amount
calculated based on the remaining principal due hereunder.  For the
avoidance of doubt, any accrued and unpaid interest which may be paid pursuant
to this definition shall be deducted from the total interest to be paid on any
subsequent Interest Payment Date.  In the event the Holder shall sell or
otherwise transfer any portion of this Note, the transferee shall be allocated
a pro rata portion of the each unpaid Installment Amount hereunder.

(r)            “Installment Date” means the first day of
each calendar month.

(s)           “Interest Rate” means ten percent (10%) per
annum, subject to periodic adjustment pursuant to Section 2.

(t)            “Options” means any rights, warrants or
options to subscribe for or purchase Common Stock or Convertible Securities.

 22
 

 

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

(v)           “Permitted Indebtedness” means (A)
Indebtedness incurred by the Company that is made expressly subordinate in
right of payment to the Indebtedness evidenced by this Note, as reflected in a
written agreement acceptable to the Holder and approved by the Holder in
writing (which approval shall not be unreasonably delayed), and which Indebtedness
does not provide at any time for the payment, prepayment, repayment, repurchase
or defeasance, directly or indirectly, of any principal or premium, if any,
thereon until ninety-one (91) days after the Maturity Date or later, (B)
Permitted Senior Indebtedness secured by Permitted Liens, (C) Indebtedness to
trade creditors incurred in the ordinary course of business, and (D)
extensions, refinancings and renewals of any items of Permitted Indebtedness,
provided that the principal amount is not increased or the terms modified to
impose more burdensome terms upon the Company or its Subsidiary, as the case
may be.

(w)          “Permitted Liens” means (i) any Lien for
taxes not yet due or delinquent or being contested in good faith by appropriate
proceedings for which adequate reserves have been established in accordance
with GAAP, (ii) any statutory Lien arising in the ordinary course of business
by operation of law with respect to a liability that is not yet due or
delinquent, (iii) any Lien created by operation of law, such as materialmen’s
liens, mechanics’ liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (iv) Liens
securing the Company’s obligations under the Notes, (v) Liens (A) upon or in
any equipment (as defined in the Security Agreement) acquired or held by the
Company or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition or lease of such equipment, or (B) existing on such equipment at
the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment, (vi) the existing Liens securing the Company’s obligations under the
Permitted Senior Indebtedness; (vii) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (i) and (v) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the Indebtedness being extended, renewed or
refinanced does not increase, (viii) leases or subleases and licenses and
sublicenses granted to others in the ordinary course of the Company’s business,
not interfering in any material respect with the business of the Company and
its Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of custom duties in
connection with the importation of goods; (x) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default
under Section 4(a)(ix) and (x) Liens with respect to Indebtedness not
individually in excess of $50,000 or in the aggregate in excess of $250,000,
which individually and in aggregate are not material to the Company.

 23
 

 

(x)            “Permitted Senior Indebtedness” means the obligations to SIAR
Capital and the other investors pursuant to the Company’s March 2004 financing
and any line of credit with the Company’s bank for up to $500,000.

(y)           “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity  and a government or any
department or agency thereof.

(z)            “Potential Partner Conditions” means at any
time during the period commencing on the date of the consummation of any
material transaction between the Company and a Person and ending on the first
anniversary of the Closing Date, there shall be no disclosure that any
executive officer of such Person has (i) exhibited dishonesty in the
performance of his or her duties, which is materially and demonstrably
injurious to the Company; or (ii) been convicted of (x) a felony under the laws
of the United States or any state thereof or (y) a misdemeanor involving moral
turpitude, in each case, which is materially and demonstrably injurious to the
Company.

(aa)         “Principal Market” means Over-the-Counter
Bulletin Board.

(bb)         “Redemption Notices” means, collectively,
the Event of Default Redemption Notices, Change of Control Redemption Notices,
the Company Redemption Notice, and, each of the foregoing, individually, a
Redemption Notice.

(cc)         “Redemption Premium” means 120%.

(dd)         “Redemption Prices” means, collectively, the
Event of Default Redemption Price, Change of Control Redemption Price, and the
Company Redemption Amount, the Holder Optional Redemption Price and the Holder
Partial Redemption Price and, each of the foregoing, individually, a Redemption
Price.

(ee)         “Registration Rights Agreement” means that
certain registration rights agreement between the Company and the initial
holders of the Notes relating to, among other things, the registration of the
resale of the Common Stock issuable upon conversion of the Notes and exercise
of the Warrants.

(ff)           “Required Holders” means the holders of
Notes representing at least a majority of the aggregate principal amount of the
Notes then outstanding.

(gg)         “SEC” means the United States Securities and
Exchange Commission.

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

(ii)           “Subscription Date” means September 25,
2006

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

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

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

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

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

 25
 

 

29.           DISCLOSURE. Upon receipt or
delivery by the Company of any notice in accordance with the terms of this
Note, unless the Company has in good faith determined that the matters relating
to such notice do not constitute material, nonpublic information relating to
the Company or its Subsidiaries, the Company shall within two (2) Business Days
after any such receipt or delivery publicly disclose such material, nonpublic
information on a Current Report on Form 8-K or otherwise. In the event that the
Company believes that a notice contains material, nonpublic information,
relating to the Company or its Subsidiaries, the Company shall indicate to the
Holder contemporaneously with delivery of such notice, and in the absence of
any such indication, the Holder shall be allowed to presume that all matters
relating to such notice do not constitute material, nonpublic information
relating to the Company or its Subsidiaries.

[Signature Page
Follows]

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

 

	
     

  	
  VCAMPUS CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
     

  	
  By:

  	
   

  
	
     

  	
  Name:

  	
   

  
	
     

  	
  Title:

  	
   

  

 

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