Document:

Exhibit 10.1-EquityIncentivePlan

Exhibit 10.1

LASALLE HOTEL PROPERTIES 
2014 EQUITY INCENTIVE PLAN

		
	1.
	Establishment, Purpose and Types of Awards

LASALLE HOTEL PROPERTIES, a Maryland real estate investment trust (the “Company”), hereby establishes the LASALLE HOTEL PROPERTIES 2014 EQUITY INCENTIVE PLAN (the “Plan”).  The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people with incentives to improve shareholder value and to contribute to the growth and financial success of the Company through their future services, and (ii) enabling the Company to attract, retain and reward the best-available persons.

The Plan permits the granting of share options (including incentive share options qualifying under Code section 422 and nonstatutory share options), share appreciation rights, restricted or unrestricted share awards, phantom shares, performance awards, other share-based awards, or any combination of the foregoing.

		
	2.
	Definitions

Under this Plan, except where the context otherwise indicates, the following definitions apply:

(a)    “Administrator” means the Board or the committee(s) or officer(s) appointed by the Board that have authority to administer the Plan as provided in Section 3 hereof.

(b)    “Affiliate” means any entity, whether now or hereafter existing, which controls, is controlled by, or is under common control with, the Company (including, but not limited to, joint ventures, limited liability companies, and partnerships).  For this purpose, “control” shall mean ownership of 50% or more of the total combined voting power or value of all classes of shares or interests of the entity, or the power to direct the management and policies of the entity, by contract or otherwise.

(c)    “Award” means any share option, share appreciation right, share award, phantom share award, performance award, incentive award or other share-based award (including LTIP Units or other interests in the Operating Partnership).

(d)    “Board” means the Board of Trustees of the Company.

(e)    “Change in Control” means:  (i) the acquisition (other than from the Company) in one or more transactions by any Person, as defined in this Section 2(e), of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of 50% or more of (A) the then outstanding shares of the securities of the Company, or (B) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of trustees (the “Company Voting Shares”); (ii) the closing of a sale or other conveyance of all or substantially all of the assets of the Company; or (iii) the effective time of any merger, share exchange, consolidation, or other business combination involving the Company if immediately after such transaction persons who hold a majority of the outstanding voting securities entitled to vote generally in the election of directors of the surviving entity (or the entity owning 100% of such surviving entity) are not persons who, immediately prior to such transaction, held the Company Voting Shares; provided, however, if an Award under the Plan or any subplan constitutes “deferred compensation” under Code section 409A, no payment shall be made under such Award on account of a Change in Control unless the occurrence of one or more of the preceding events also constitutes a change in the ownership or effective control of the Company or a change in the ownership of a substantial portion of the Company’s assets, all as determined in accordance with the regulations under Code section 409A.  For purposes of this Section 2(e), a “Person” means any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended, other than: employee benefit plans 

sponsored or maintained by the Company and by entities controlled by the Company or an underwriter of the Common Shares in a registered public offering.

(f)    “Code” means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder.

(g)    “Common Shares” means common shares of beneficial interest of the Company, par value of $0.01 per share.

(h)    “Fair Market Value” means, with respect to a share of the Company’s Common Shares for any purpose on a particular date, the value determined by the Administrator in good faith.  However, if the Common Shares are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and listed for trading on a national exchange or market, “Fair Market Value” means, as applicable, (i) the closing price quoted on the New York Stock Exchange, the NYSE MKT, the Nasdaq Global Select Market, or the Nasdaq Global Market; (ii) the last sale price on the relevant date quoted on the Nasdaq Capital Market; (iii) the average of the high bid and low asked prices on the relevant date quoted on the Nasdaq OTC Bulletin Board Service or by the National Quotation Bureau, Inc. or a comparable service as determined in the Administrator’s discretion; or (iv) if the Common Shares have not been quoted by any of the above, the average of the closing bid and asked prices on the relevant date furnished by a professional market maker for the Common Shares, or by such other source, selected by the Administrator.  If no public trading of the Common Shares occurs on the relevant date but the shares are so listed, then Fair Market Value shall be determined as of the next preceding date on which trading of the Common Shares does occur.  For all purposes under this Plan, the term “relevant date” as used in this Section 2(h) means either the date as of which Fair Market Value is to be determined or the next preceding date on which public trading of the Common Shares occurs, as determined in the Administrator’s discretion.

(i)    “Grant Agreement” means a written document memorializing the terms and conditions of an Award granted pursuant to the Plan and which shall incorporate the terms of the Plan.

(j)    “LTIP Unit” means an “LTIP Unit” as defined in the Operating Partnership’s partnership agreement on the date of grant of the LTIP Unit.  An LTIP Unit granted under the Plan represents the right to receive the benefits, payments or other rights in respect of an LTIP Unit set forth in that partnership agreement on the date of grant, subject to the terms and conditions of the applicable Grant Agreement and that partnership agreement on the date of grant.

(k)    “Operating Partnership” means LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership, or its successor.
(l)    “Performance Goal” means a performance objective that is stated with reference to one or more of the following, alone or in combination: (i) FFO or FFO per share; (ii) adjusted FFO or adjusted FFO per share; (iii) earnings before interest, taxes, depreciation and amortization (“EBITDA”); (iv) adjusted EBITDA; (v) hotel or property EBITDA; (vi) return on equity; (vii) return on capital or invested capital; (viii) total earnings; (ix) earnings per share; (x) earnings growth; (xi) Fair Market Value; (xii) volume weighted average Fair Market Value; (xiii) appreciation in Fair Market Value; (xiv) revenue per available room; (xv) total return or total shareholder return; (xvi) revenues; (xvii) cash flow or cash flow per share; (xviii) operating income; (xix) operating margins; (xx) gross or net profit, EBITDA or hotel EBITDA margins or any of the foregoing on an adjusted basis; (xxi) dividends paid or payable; (xxii) cash or funds available for distribution, including on an adjusted or on a per share basis; or (xxiii) level of expenses, including capital expenses or corporate overhead expenses.  A Performance Goal or objective may be expressed with respect to the Company or one or more hotels.  A Performance Goal or objective may be expressed on an absolute basis or relative to the performance of one or more similarly situated companies or a published index.  When establishing Performance Goals and objectives, the Administrator may exclude any or all special, unusual or extraordinary items as determined under U.S. generally accepted accounting principles, including without limitation, the charges or costs associated with restructurings of the Company, discontinued operations, other unusual or non-

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recurring items and the cumulative effects of accounting changes.  To the extent permitted under Section 162(m) of the Code (for any Award that is intended to constitute “performance based compensation” under Section 162(m) of the Code), the Administrator may also adjust the Performance Goals and objectives as it deems equitable in recognition of unusual or non-recurring events affecting the Company, changes in applicable tax laws or accounting principles or such other factors as the Administrator may determine.

		
	3.
	Administration

(a)    Administration of the Plan.  The Plan shall be administered by the Board or by such committee or committees as may be appointed by the Board from time to time.  To the extent allowed by applicable state law, the Board by resolution may authorize an officer or officers to grant Awards (other than share Awards) to other officers and employees of the Company and its Affiliates, and, to the extent of such authorization, such officer or officers shall be the Administrator.  Notwithstanding the preceding, with respect to Awards granted to members of the Board who are not employees of the Company or an Affiliate, the Plan shall be administered by a committee appointed by the Board and comprised solely of members of the Board who are not employees of the Company or an Affiliate.

(b)    Powers of the Administrator.  The Administrator shall have all the powers vested in it by the terms of the Plan, such powers to include authority, in its sole and absolute discretion, to grant Awards under the Plan, prescribe Grant Agreements evidencing such Awards and establish programs for granting Awards.

The Administrator shall have full power and authority to take all other actions necessary to carry out the purpose and intent of the Plan, including, but not limited to, the authority to:  (i) determine the eligible persons to whom, and the time or times at which Awards shall be granted; (ii) determine the types of Awards to be granted; (iii) determine the number of shares to be covered by or used for reference purposes for each Award; (iv) impose such terms, limitations, restrictions and conditions upon any such Award as the Administrator shall deem appropriate; (v) modify, amend, extend or renew outstanding Awards, or accept the surrender of outstanding Awards and substitute new Awards (provided however, that, except as provided in Sections 6, 7 or 8(d) of the Plan, any modification that would materially adversely affect any outstanding Award shall not be made without the consent of the holder); (vi) accelerate or otherwise change the time in which an Award may be exercised or becomes payable and to waive or accelerate the lapse, in whole or in part, of any restriction or condition with respect to such Award, including, but not limited to, any restriction or condition with respect to the vesting or exercisability of an Award following termination of any grantee’s employment or other relationship with the Company; (vii) establish objectives and conditions, if any, for earning Awards and determining whether Awards will be paid with respect to a performance period; and (viii) for any purpose, including but not limited to, qualifying for preferred tax treatment under foreign tax laws or otherwise complying with the regulatory requirements of local or foreign jurisdictions, to establish, amend, modify, administer or terminate sub‐plans, and prescribe, amend and rescind rules and regulations relating to such sub-plans.

The Administrator shall have full power and authority, in its sole and absolute discretion, to administer, construe and interpret the Plan, Grant Agreements and all other documents relevant to the Plan and Awards issued thereunder, to establish, amend, rescind and interpret such rules, regulations, agreements, guidelines and instruments for the administration of the Plan and for the conduct of its business as the Administrator deems necessary or advisable, and to correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent the Administrator shall deem it desirable to carry it into effect.

Notwithstanding any provision of the Plan to the contrary, neither the Board nor the Administrator shall have the authority to take any of the following actions, unless the shareholders of the Company have approved such an action within twelve (12) months prior to such an event: (i) the reduction of the exercise price of any outstanding share option or share appreciation right under the Plan; (ii) the cancellation of any outstanding share option or share appreciation right under the Plan and the grant in substitution therefor of 

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(1) a new share option or share appreciation right under the Plan or another equity plan of the Company covering the same or a different number of Common Shares, (2) a restricted share Award (including a share bonus), (3) an other share-based Award, (4) a phantom share Award, (5) a performance award, (6) cash and/or (7) other valuable consideration (as determined by the Board, in its sole discretion); or (iii) any other action that is treated as a repricing under generally accepted accounting principles. 

(c)    Non-Uniform Determinations.  The Administrator’s determinations under the Plan (including without limitation, determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the Grant Agreements evidencing such Awards) need not be uniform and may be made by the Administrator selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated.

(d)    Limited Liability.  To the maximum extent permitted by law, no member of the Administrator shall be liable for any action taken or decision made in good faith relating to the Plan or any Award thereunder.

(e)    Indemnification.  To the maximum extent permitted by law and by the Company’s charter and by-laws, the members of the Administrator shall be indemnified by the Company in respect of all their activities under the Plan.

(f)    Effect of Administrator’s Decision.  All actions taken and decisions and determinations made by the Administrator on all matters relating to the Plan pursuant to the powers vested in it hereunder shall be in the Administrator’s sole and absolute discretion and shall be conclusive and binding on all parties concerned, including the Company, its shareholders, any participants in the Plan and any other employee, consultant, trustee, or director of the Company, and their respective successors in interest.

		
	4.
	Shares Available for the Plan; Maximum Awards

Subject to adjustments as provided in Section 8(d) of the Plan, the Common Shares that may be issued with respect to Awards granted under the Plan shall not exceed an aggregate of 2,900,000 Common Shares.  Other share-based awards that are LTIP Units shall reduce the maximum aggregate number of Common Shares that may be issued under the Plan on a one-for-one basis, i.e., each LTIP Unit shall be treated as an award of a Common Share.  The Company shall reserve such number of shares for Awards under the Plan, subject to adjustments as provided in Section 8(d) of the Plan.  If any Award, or portion of an Award, under the Plan expires or terminates unexercised, becomes unexercisable, is settled in cash without delivery of Common Shares, or is forfeited or otherwise terminated, surrendered or canceled as to any shares, or if any Common Shares are repurchased by or surrendered to the Company in connection with any Award (whether or not such surrendered shares were acquired pursuant to any Award), or if any shares are withheld by the Company, the shares subject to such Award and the repurchased, surrendered and withheld shares shall thereafter be available for further Awards under the Plan; provided, however, that any such shares that are surrendered to or repurchased or withheld by the Company in connection with any Award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive share options intended to qualify under Code section 422.

Subject to adjustments as provided in Section 8(d) of the Plan, the maximum number of Common Shares subject to Awards of any combination that may be granted during any one fiscal year of the Company to any one individual under this Plan shall be limited to 500,000 shares.  Such per-individual limit shall not be adjusted to effect a restoration of Common Shares with respect to which the related Award is terminated, surrendered or canceled.

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	5.
	Participation

Participation in the Plan shall be open to all employees, officers, trustees and directors of, and other individuals providing bona fide services to or for, the Company, or of any Affiliate of the Company, as may be selected by the Administrator from time to time.  The Administrator may also grant Awards to individuals in connection with hiring, retention or otherwise, prior to the date the individual first performs services for the Company or an Affiliate, provided that such Awards shall not become vested or exercisable, and no shares shall be issued to such individual, prior to the date the individual first commences performance of such services.

		
	6.
	Awards

The Administrator, in its sole discretion, establishes the terms of all Awards granted under the Plan.  Awards may be granted individually or in tandem with other types of Awards, concurrently with or with respect to outstanding Awards.  All Awards are subject to the terms and conditions provided in the Grant Agreement.  

(a)    Share Options.  The Administrator may from time to time grant to eligible participants Awards of incentive share options as that term is defined in Code section 422 or nonstatutory share options; provided, however, that Awards of incentive share options shall be limited to employees of the Company or of any current or hereafter existing “parent corporation” or “subsidiary corporation,” as defined in Code sections 424(e) and (f), respectively, of the Company and any other individuals who are eligible to receive incentive share options under the provisions of Code section 422.  Options must have an exercise price at least equal to Fair Market Value as of the date of grant.  No share option shall be an incentive share option unless so designated by the Administrator at the time of grant or in the Grant Agreement evidencing such share option.

(b)    Share Appreciation Rights.  The Administrator may from time to time grant to eligible participants Awards of Share Appreciation Rights (“SAR”).  A SAR entitles the grantee to receive, subject to the provisions of the Plan and the Grant Agreement, a payment having an aggregate value equal to the product of (i) the excess of (A) the Fair Market Value on the exercise date of one Common Share over (B) the base price per share specified in the Grant Agreement, times (ii) the number of shares specified by the SAR, or portion thereof, which is exercised.  The base price per share specified in the Grant Agreement shall not be less than the Fair Market Value on the grant date.  Payment by the Company of the amount receivable upon any exercise of a SAR may be made by the delivery of Common Shares or cash, or any combination of Common Shares and cash, as determined in the sole discretion of the Administrator.  If upon settlement of the exercise of a SAR a grantee is to receive a portion of such payment in Common Shares, the number of shares shall be determined by dividing such portion by the Fair Market Value of a Common Share on the exercise date.  No fractional shares shall be used for such payment and the Administrator shall determine whether cash shall be given in lieu of such fractional share or whether such fractional share shall be eliminated.

(c)    Share Awards.  The Administrator may from time to time grant restricted or unrestricted share Awards to eligible participants in such amounts, on such terms and conditions, and for such consideration, including no consideration or such minimum consideration as may be required by law, as it shall determine.  Restricted share awards shall become nonforfeitable and transferable upon satisfaction of the terms and conditions established by the Administrator, including the achievement of objectives stated with respect to one or more Performance Goals.  A share Award may be paid in Common Shares, in cash, or in a combination of Common Shares and cash, as determined in the sole discretion of the Administrator.

(d)    Phantom Shares.  The Administrator may from time to time grant Awards to eligible participants denominated in share-equivalent units (“phantom shares”) in such amounts and on such terms and conditions as it shall determine.  Phantom share units granted to a participant shall be credited to a bookkeeping reserve account solely for accounting purposes and shall not require a segregation of any of the Company’s assets.  An Award of phantom shares shall be earned upon satisfaction of the terms and conditions established by the Administrator, including the achievement of objectives stated with respect to one or more Performance Goals.  An Award of phantom shares may be settled in Common Shares, in cash, or in a combination of Common Shares and cash, as determined in the sole discretion of the Administrator.  The 

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grantee shall not have the rights of a shareholder with respect to any Common Shares represented by a phantom share unit solely as a result of the grant of a phantom share unit to the grantee.

(e)    Performance Awards.  The Administrator may, in its discretion, grant performance awards which become payable on account of attainment of one or more performance objectives established by the Administrator, including objectives stated with respect to one or more Performance Goals.  Performance awards may be paid by the delivery of Common Shares or cash, or any combination of Common Shares and cash, as determined in the sole discretion of the Administrator.  

(f)    Other Share-Based Awards.  The Administrator may from time to time grant other share-based awards (including LTIP Units) to eligible participants in such amounts, on such terms and conditions, and for such consideration, including no consideration or such minimum consideration as may be required by law, as it shall determine; provided, however, that the grant of LTIP Units must satisfy the requirements of the partnership agreement of the Operating Partnership as in effect on the date of grant.  Other share-based awards may be denominated in cash, in Common Shares or other securities, in share-equivalent units, in share appreciation units, in securities or debentures convertible into Common Shares, or in any combination of the foregoing and may be paid in Common Shares or other securities, in cash, or in a combination of Common Shares or other securities and cash, all as determined in the sole discretion of the Administrator; provided, however, that the issuance of Common Shares upon the conversion of LTIP Units shall not reduce the number of Common Shares authorized for issuance under the Plan.  Other share-based awards shall be earned or become nonforfeitable and transferable upon satisfaction of the terms and conditions established by the Administrator, including the achievement of objectives stated with respect to one or more Performance Goals.
(g)    Incentive Awards.  The Administrator may from time to time grant incentive awards to eligible participants which, subject to the terms and conditions established by the Administrator entitle the participant to receive a payment from the Company.  An incentive award shall be earned upon satisfaction of the terms and conditions established by the Administrator, including the achievement of objectives stated with respect to one or more Performance Goals.  An incentive award may be paid by the delivery of Common Shares or cash or any combination of Common Shares and cash, as determined in the sole discretion of the Administrator.  Notwithstanding the preceding, no participant may receive incentive award payments in any fiscal year of the Company year exceeding $5,000,000.

Any dividends or dividend equivalent rights that are payable or that may be credited with respect to an Award that does not become nonforfeitable and transferable solely on account of continued employment or service shall be accumulated and paid when and to the extent that the underlying Award becomes nonforfeitable and transferable.  The Administrator may provide that such accumulated dividends and dividend equivalent rights shall be deemed to have been reinvested in additional Common Shares or may be accumulated with or without interest.

		
	7.
	Change in Control

(a)    Impact of a Change in Control.  Upon a Change in Control, the Administrator is authorized to cause (a) outstanding share options and share appreciation rights to become fully exercisable, (ii) outstanding share Awards and other share-based awards to become transferable and nonforfeitable and (iii) outstanding phantom share Awards, performance awards and incentive awards to become earned and nonforfeitable in their entirety.
(b)    Assumption of Awards.  In the event of a Change in Control, the Administrator, in its discretion and without the need for a participant’s consent, may provide that an outstanding Award shall be assumed by, or a substitute award granted by, the surviving entity in the Change in Control.  Such assumed or substituted award shall be of the same type of award as the original Award.  The assumed or substituted award shall have a value, as of the date of the Change in Control, that is substantially equal to the value of the original Award (or the difference between the Fair Market Value and the option exercise price or base 

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price in the case of share options and share appreciation rights) as the Administrator determines is equitably required and such other terms and conditions as may be prescribed by the Administrator.
(c)    Cash-Out Upon Change in Control.  In the event of a Change in Control, the Administrator in is discretion and without the need of a participant’s consent, may provide that each Award shall be canceled in exchange for a payment.  The payment may be in cash, Common Shares or other securities or consideration received by shareholders in the Change in Control transaction.  The amount of the payment shall be an amount that is substantially equal to (i) the amount by which the price per share received by shareholders in the Change in Control exceeds the option exercise price or grant price in the case of share options and share appreciation rights, (ii) the price per share received by shareholders for each Common Share or the value of the securities or other property in which the Award is denominated in the case of share Awards, phantom share Awards, performance Awards and other share-based awards or (iii) the amount payable under an incentive award on account of meeting all Performance Goals or other performance objectives.  If the option exercise price or grant price of a share option or share appreciation right exceeds the price per share received by shareholders in the Change in Control transaction, the share option or share appreciation right may be canceled under this Section 7(c) without any payment to the participant.

		
	8.
	Miscellaneous

(a)    Withholding of Taxes.  Grantees and holders of Awards shall pay to the Company or its Affiliate, or make provision satisfactory to the Administrator for payment of, any taxes required to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability.  The Company or its Affiliate may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the grantee or holder of an Award.  In the event that payment to the Company or its Affiliate of such tax obligations is made in Common Shares, such shares shall be valued at Fair Market Value on the applicable date for such purposes and shall not exceed in amount the minimum statutory tax withholding obligation.

(b)    Loans.  To the extent otherwise permitted by law, the Company or its Affiliate may make or guarantee loans to grantees to assist grantees in exercising Awards and satisfying any withholding tax obligations.

(c)    Transferability.  Except as otherwise determined by the Administrator, and in any event in the case of an incentive share option or a share appreciation right granted with respect to an incentive share option, no Award granted under the Plan shall be transferable by a grantee otherwise than by will or the laws of descent and distribution.  Unless otherwise determined by the Administrator in accord with the provisions of the immediately preceding sentence, an Award may be exercised during the lifetime of the grantee, only by the grantee or, during the period the grantee is under a legal disability, by the grantee’s guardian or legal representative.

(d)    Adjustments for Corporate Transactions and Other Events.

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	(i)
	Share Dividend, Share Split and Reverse Share Split.  In the event of a share dividend of, or share split or reverse share split affecting, the Common Shares, (A) the maximum number of Common Shares as to which Awards may be granted under this Plan and the maximum number of shares with respect to which Awards may be granted during any one fiscal year of the Company to any individual, as provided in Section 4 of the Plan, and (B) the number of shares covered by and the exercise price and other terms of outstanding Awards, shall, without further action of the Board, be adjusted to reflect such event.  The Administrator may make adjustments, in its discretion, to address the treatment of fractional shares and fractional cents that arise with respect to outstanding Awards as a result of the share dividend, share split or reverse share split.

		
	(ii)
	Non-Change in Control Transactions.  Except with respect to the transactions set forth in Section 8(d)(i), in the event of any change affecting the Common Shares, the Company or its capitalization, by reason of a spin-off, split-up, dividend, recapitalization, merger, consolidation or share exchange, other than any such change that is part of a transaction resulting in a Change in Control, the Administrator, in its discretion and without the consent of the holders of the Awards, may make (A) appropriate adjustments to the maximum number and kind of shares reserved for issuance or with respect to which Awards may be granted under the Plan, in the aggregate and with respect to any individual during any one fiscal year of the Company, as provided in Section 4 of the Plan; and (B) any adjustments in outstanding Awards, including but not limited to modifying the number, kind and price of securities subject to Awards.

		
	(iii)
	Unusual or Nonrecurring Events.  The Administrator is authorized to make, in its discretion and without the consent of holders of Awards, adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Administrator determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. 

(e)    Substitution of Awards in Mergers and Acquisitions.  Awards may be granted under the Plan from time to time in substitution for awards held by employees, officers, consultants or directors of entities who become or are about to become employees, officers, consultants or directors of the Company or an Affiliate as the result of a merger or consolidation of the employing entity with the Company or an Affiliate, or the acquisition by the Company or an Affiliate of the assets or stock of the employing entity.  The terms and conditions of any substitute Awards so granted may vary from the terms and conditions set forth herein to the extent that the Administrator deems appropriate at the time of grant to conform the substitute Awards to the provisions of the awards for which they are substituted.  Except as may be required by applicable law or the rules of an exchange on which the Common Shares are listed for trading, substitute awards granted pursuant to this Section 7(e) and the issuance of Common Shares on account of the exercise, conversion or settlement of a substitute award, shall not reduce the number of Common Shares that may be issued under the Plan as provided in Section 4.

(f)    Termination, Amendment and Modification of the Plan.  The Board may amend or terminate the Plan at any time; provided, however, that no amendment may adversely impair the rights of a participant with respect to outstanding Awards without the participant’s consent.  In addition, an amendment will be contingent upon approval of the Company’s stockholders if such approval is required by law or the rules of any exchange on which the Common Shares are listed or if the amendment would (i) materially increase the benefits accruing to participants under the Plan, (ii) materially increase the aggregate number of Common shares that may be issued under the Plan (other than an increase pursuant to Section 8(d)), (iii) materially 

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modify the requirements as to eligibility for participation in the Plan or (iv) except as provided in Section 8(d), reduce the exercise or base price of an outstanding option or SAR or permit a payment in exchange for the cancellation of an option or SAR if on the date of payment the exercise or base price of the option or SAR exceeds Fair Market Value.  Except as otherwise determined by the Board, termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

(g)    Non-Guarantee of Employment or Service.  Nothing in the Plan or in any Grant Agreement thereunder shall confer any right on an individual to continue in the service of the Company or shall interfere in any way with the right of the Company to terminate such service at any time with or without cause or notice and whether or not such termination results in (i) the failure of any Award to vest; (ii) the forfeiture of any unvested or vested portion of any Award; and/or (iii) any other adverse effect on the individual’s interests under the Plan.

(h)    No Trust or Fund Created.  Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a grantee or any other person.  To the extent that any grantee or other person acquires a right to receive payments from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company.

(i)    Governing Law.  The validity, construction and effect of the Plan, of Grant Agreements entered into pursuant to the Plan, and of any rules, regulations, determinations or decisions made by the Administrator relating to the Plan or such Grant Agreements, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with applicable federal laws and the laws of the State of Maryland, without regard to its conflict of laws principles.

(j)    Effective Date; Termination Date.  The Plan is effective as of the date on which the Plan is adopted by the Board, subject to approval of the shareholders within twelve (12) months before or after such date.  No Award shall be granted under the Plan after the close of business on the day immediately preceding the tenth anniversary of the effective date of the Plan, or if earlier, the tenth anniversary of the date this Plan is approved by the shareholders.  Subject to other applicable provisions of the Plan, all Awards made under the Plan prior to such termination of the Plan shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards.

PLAN APPROVAL

Date Approved by the Board: February 17, 2014        

Date Approved by the Shareholders: May 7, 2014        

9Echo Automotive, Inc. - Exhibit 4.1 - Filed by newsfilecorp.com

Execution Version 

SENIOR 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 TO THE HOLDER (IF REQUESTED BY THE
COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE 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)(iii) AND 17(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND,
ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE
AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

ECHO AUTOMOTIVE, INC. 

SENIOR CONVERTIBLE
NOTE

	Issuance Date: May 7, 2014 	Original Principal Amount: U.S. $624,000
  

            FOR
VALUE RECEIVED, Echo Automotive, Inc., a Nevada corporation (the
“Company”), hereby promises to pay to the order of 31 GROUP,
LLC or its 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), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on any outstanding Principal (as
defined below) (as such interest on any outstanding Principal may be reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise) at
the applicable 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 the Maturity Date or
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Senior Convertible Note (this “Note”,
including all Senior Convertible Notes issued in exchange, transfer or
replacement hereof, collectively, the “Notes”) is issued pursuant
to the Securities Purchase Agreement (as defined below) on the Closing Date (as
defined below). Certain capitalized terms used herein are defined in Section 28.

            1.     
    PAYMENTS OF PRINCIPAL. On the Maturity Date, the
Company shall pay to the Holder an amount in cash representing all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges (as
defined in Section 23(c)) on such Principal and Interest (as adjusted with
respect to any Note Reduction (as defined in Section 12)). Other than as
specifically permitted by this Note, the Company may not prepay any portion of
the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges on Principal and Interest, if any. 

           
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 twelve 30-day months and shall be
payable in cash on the Maturity Date or any applicable Redemption Date, subject
to adjustment with respect to any Note Reduction. 

                       (b)        
Prior to the payment of Interest on the Maturity Date or any applicable
Redemption Date, Interest on this Note shall accrue at the Interest Rate and be
payable by way of inclusion of the Interest in the Conversion Amount on
each Conversion Date in accordance with Section 3(b)(i). From and after the
occurrence and during the continuance of any Event of Default, the Interest Rate
shall automatically be increased to eighteen percent (18.0%) per annum. 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 calendar day
immediately following the date of such cure; provided that the Interest as
calculated and unpaid 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
such cure of such Event of Default. 

            3.         
CONVERSION OF NOTES. This Note shall be convertible into validly issued,
fully paid and non-assessable shares of Common Stock (as defined below), 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 earlier to occur of (x) the date that the Initial
Registration Statement (as defined in the Registration Rights Agreement) is
declared effective by the SEC and (y) November 7, 2014, the Holder shall be
entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined below) into validly issued, fully paid and non-assessable 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
transfer, stamp, issuance and similar 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”). 

2

                          (i)       
“Conversion Amount” means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, plus all accrued and unpaid Interest with respect to such portion of
the Principal amount and accrued and unpaid Late Charges with respect to such
portion of such Principal and such Interest. 

                          (ii)     
 “Conversion Price” means, for any date of determination, the
lesser of (A) the product of (x) the arithmetic average of the lowest three (3)
trade prices of the Common Stock during the ten (10) consecutive Trading Days
ending and including the Trading Day immediately preceding the applicable
Conversion Date (the “Variable Conversion Base Price”) and (y)
sixty-five percent (65%), and (B) $0.15 (as adjusted for stock splits, stock
dividends, stock combinations or other similar transactions). All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction during any such measuring period.

           
(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
deliver (whether via facsimile or otherwise), 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. If required by Section 3(c)(iii), the Holder
shall 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 as contemplated by
Section 17(b)). On or before the first (1st) Trading Day following
the date of receipt of a Conversion Notice, the Company shall transmit by
facsimile an acknowledgment of confirmation, in the form attached hereto as
Exhibit II, of receipt of such Conversion Notice to the Holder and the
Company’s transfer agent (the “Transfer Agent”) . On or before the
second (2nd) Trading Day following the date of receipt of a
Conversion Notice, the Company shall (1) provided that the Transfer Agent is
participating in The Depository Trust Company’s (“DTC”) Fast
Automated Securities Transfer Program and such shares of Common Stock may be
issued without restrictive legend in accordance with Section 4.4 of the
Securities Purchase Agreement, 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 at Custodian system or
(2) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program or such shares of Common Stock may not be issued
without restrictive legend in accordance with Section 4.4 of the Securities
Purchase Agreement, issue and deliver (via reputable overnight courier) 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 (3)
Trading Days after receipt of this Note and at its own expense, issue and
deliver to the Holder (or its designee) a new Note (in accordance with Section
17(d)) representing the outstanding Principal not converted. The Person or
Persons entitled to receive the shares of Common Stock issuable upon a
conversion of this Note shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on the Conversion Date. 

3

                          (ii)     
 Company’s Failure to Timely Convert. If the Company shall fail, for
any reason or for no reason, to issue to the Holder within three (3) Trading
Days after the Company’s receipt of a Conversion Notice (whether via facsimile
or otherwise) (the “Share Delivery Deadline”), a certificate for the
number of shares of Common Stock to which the Holder is entitled and register
such shares of Common Stock on the Company’s share register or to credit the
Holder’s or its designee’s balance account with DTC for such number of shares of
Common Stock to which the Holder is entitled upon the Holder’s conversion of any
Conversion Amount (as the case may be) (a “Conversion Failure”) then, in
addition to all other remedies available to the Holder, (1) the Company shall
pay in cash to the Holder on each day after such Share Delivery Deadline that
the issuance of such shares of Common Stock is not timely effected an amount
equal to 2% of the product of (A) the sum of the number of shares of Common
Stock not issued to the Holder on a timely basis and to which the Holder is
entitled multiplied by (B) the Closing Sale Price of the Common Stock on the
Trading Day immediately preceding the last possible date which the Company could
have issued such shares of Common Stock to the Holder without violating Section
3(c)(i) and (2) the Holder, upon written notice to the Company, may void its
Conversion Notice with respect to, and retain or have returned (as the case may
be) any portion of this Note that has not been converted pursuant to such
Conversion Notice, provided that the voiding of a Conversion Notice shall not
affect the Company’s obligations to make any payments which have accrued prior
to the date of such notice pursuant to this Section 3(c)(ii) or otherwise. In
addition to the foregoing, if on or prior to the Share Delivery Deadline, 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 or its designee’s balance account with DTC for the number of shares of
Common Stock to which the Holder is entitled upon the Holder’s conversion
hereunder (as the case may be), and if on or after such Share Delivery Deadline
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 all or any
portion of the number of shares of Common Stock, or a sale of a number of shares
of Common Stock equal to all or any portion of the number of shares of Common
Stock, issuable upon such conversion that the Holder so anticipated receiving
from the Company, then, in addition to all other remedies available to the
Holder, the Company shall, within three (3) Business Days after receipt of the
Holder’s request and in the Holder’s discretion, either: (I) pay cash to the
Holder in an amount equal to the Holder’s total purchase price (including
brokerage commissions and other out-of-pocket expenses, if any) for the shares
of Common Stock so purchased (including, without limitation, by any other Person
in respect, or on behalf, of the Holder) (the “Buy-In Price”), at which
point the Company’s obligation to so issue and deliver such certificate 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
conversion hereunder (as the case may be) (and to issue such shares of Common
Stock) shall terminate, or (II) promptly honor its obligation to so issue and
deliver to the Holder a certificate or certificates representing such shares of
Common Stock 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
conversion hereunder (as the case may be) and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (x)
such number of shares of Common Stock multiplied by (y) the lowest Closing Sale
Price of the Common Stock on any Trading Day during the period commencing on the
date of the applicable Conversion Notice and ending on the date of such issuance
and payment under this clause (II). 

4

                          (iii)    
 Book-Entry. Notwithstanding anything to the contrary set forth in
this Section 3, following 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 (in which event this Note shall be delivered to the
Company following conversion thereof as contemplated by Section 3(c)(i)) or (B)
the Holder has provided the Company with prior written notice (which notice may
be included in a Conversion Notice) requesting reissuance of this Note upon
physical surrender of this Note. The Holder and the Company shall maintain
records showing the Principal, Interest and Late Charges converted and/or paid
and/or adjusted (as the case may be) and the dates of such conversions and/or
payments and/or adjustments (as the case may be) 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)     
 Pro Rata Conversion; 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 22. 

                          (d)        
 Limitations on Conversions. Notwithstanding anything to the
contrary contained in this Note, this Note shall not be convertible by the
Holder hereof, and the Company shall not effect any conversion of this Note or
otherwise issue any shares of Common Stock pursuant hereto, to the extent (but
only to the extent) that after giving effect to such conversion or other share
issuance hereunder the Holder (together with its affiliates) would beneficially
own in excess of 4.99% (the “Maximum Percentage”) of the Common
Stock. To the extent the above limitation applies, the determination of whether
this Note shall be convertible (vis-à-vis other convertible, exercisable or
exchangeable securities owned by the Holder or any of its affiliates) and of
which such securities shall be convertible, exercisable or exchangeable (as
among all such securities owned by the Holder and its affiliates) shall, subject
to such Maximum Percentage limitation, be determined on the basis of the first
submission to the Company for conversion, exercise or exchange (as the case may
be). No prior inability to convert this Note, or to issue shares of Common
Stock, pursuant to this paragraph shall have any effect on the applicability of
the provisions of this paragraph with respect to any subsequent determination of
convertibility. For purposes of this paragraph, beneficial
ownership and all determinations and calculations (including, without
limitation, with respect to calculations of percentage ownership) shall be
determined in accordance with Section 13(d) of the 1934 Act (as defined in the
Securities Purchase Agreement) and the rules and regulations promulgated
thereunder. The provisions of this paragraph shall be implemented in a manner
otherwise than in strict conformity with the terms of this paragraph to correct
this paragraph (or any portion hereof) which may be defective or inconsistent
with the intended Maximum Percentage beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to such Maximum Percentage limitation. The limitations contained in
this paragraph shall apply to a successor Holder of this Note. The holders of
Common Stock shall be third party beneficiaries of this paragraph and the
Company may not waive this paragraph without the consent of holders of a
majority of its Common Stock. For any reason at any time, upon the written or
oral request of the Holder, the Company shall within one (1) Business Day
confirm orally and in writing to the Holder the number of shares of Common Stock
then outstanding, including by virtue of any prior conversion or exercise of
convertible or exercisable securities into Common Stock, including, without
limitation, pursuant to this Note or securities issued pursuant to the
Securities Purchase Agreement. By written notice to the Company, at any time the
Holder may increase or decrease the Maximum Percentage to any other percentage
not in excess of 9.99% specified in such notice; provided that (i) any such
increase will not be effective until the 61st day after such notice is delivered
to the Company, and (ii) any such increase or decrease will apply only to the
Holder sending such notice and not to any other holder of Notes. 

5

           
4.          RIGHTS UPON EVENT OF
DEFAULT. 

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

                          (i)       
the suspension from trading or the failure of the Common Stock to be trading or
listed (as applicable) on an Eligible Market for a period of ten (10)
consecutive days or for more than an aggregate of thirty (30) days in any
365-day period; 

                          (ii)      
the Company’s or any Subsidiary’s (as defined in the Securities Purchase
Agreement) failure to pay to the Holder any amount of Principal, Interest, Late
Charges or other amounts when and as due under this Note (including, without
limitation, the Company’s or any Subsidiary’s failure to pay any redemption
payments or amounts hereunder) 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, except, in the case of a failure to pay Interest and Late
Charges when and as due, in which case only if such failure remains uncured for
a period of at least ten (10) Business Days; 

                          (iii)     
the occurrence of any default under, redemption of or acceleration prior to
maturity of an aggregate of any Indebtedness (as defined in the Securities
Purchase Agreement) of the Company or any of its Subsidiaries which remains uncured for a period of at least ten
(10) Business Days; 

6

                          (iv)      
bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for the relief of debtors shall be instituted by or against the
Company or any Subsidiary and, if instituted against the Company or any
Subsidiary by a third party, shall not be dismissed within forty-five (45) days
of their initiation; 

                          (v)       
the commencement by the Company or any Subsidiary of a voluntary case or
proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree, order, judgment or other similar document in respect of
the Company or any Subsidiary in an involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a Uniform Commercial Code foreclosure sale or any other similar action
under federal, state or foreign law; 

                          (vi)      
the entry by a court of (i) a decree, order, judgment or other similar document
in respect of the Company or any Subsidiary of a voluntary or involuntary case
or proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or (ii) a decree, order,
judgment or other similar document adjudging the Company or any Subsidiary as
bankrupt or insolvent, or approving as properly filed a petition seeking
liquidation, reorganization, arrangement, adjustment or composition of or in
respect of the Company or any Subsidiary under any applicable federal, state or
foreign law or (iii) a decree, order, judgment or other similar document
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or any Subsidiary or of any substantial
part of its property, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree, order, judgment or other similar
document or any such other decree, order, judgment or other similar document
unstayed and in effect for a period of thirty (30) consecutive days; 

                          (vii)    
 a final judgment or judgments for the payment of money aggregating in
excess of $100,000 are rendered against the Company and/or any of its
Subsidiaries and which judgments are not, within thirty (30) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within forty-five (45) days after the
expiration of such stay; provided, however, any judgment which is covered by
insurance or an indemnity from a credit worthy party shall not be included in
calculating the $100,000 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 or
such Subsidiary (as the case may be) will receive the proceeds of such insurance
or indemnity within thirty (30) days of the issuance of such judgment; 

7

                          (viii)    
the Company and/or any Subsidiary, individually or in the aggregate, either (i)
fails to pay, when due, or within any applicable grace period, any payment with
respect to any Indebtedness in excess of $100,000 due to any third party (other
than, with respect to unsecured Indebtedness only, payments contested by the
Company and/or such Subsidiary (as the case may be) in good faith by proper
proceedings and with respect to which adequate reserves have been set aside for
the payment thereof in accordance with GAAP) or is otherwise in breach or
violation of any agreement for monies owed or owing in an amount in excess of
$100,000, which breach or violation permits the other party thereto to declare a
default or otherwise accelerate amounts due thereunder, or (ii) suffer to exist
any other circumstance or event that would, with or without the passage of time
or the giving of notice, result in a default or event of default under any
agreement binding the Company or any Subsidiary, which default or event of
default would or is likely to have a material adverse effect on the business,
assets, operations (including results thereof), liabilities, properties,
condition (including financial condition) or prospects of the Company or any of
its Subsidiaries, individually or in the aggregate; 

                          (ix)       other
than as specifically set forth in another clause of this Section 4(a), the
Company or any Subsidiary breaches any representation, warranty, covenant or
other term or condition of any Transaction Document, except, in the case of a
breach of a covenant or other term or condition that is curable, only if such
breach remains uncured for a period of ten (10) consecutive Trading Days; 

                          (x)        any
Material Adverse Effect (as defined in the Securities Purchase Agreement)
occurs; or 

                         
(xi)       any Change of Control occurs. 

                          (b)       
Notice of an Event of Default; Redemption Right. Upon the occurrence of
an Event of Default with respect to this Note, the Company shall within one (1)
Business Day deliver written notice thereof via facsimile and overnight courier
(with next day delivery specified) (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, at any time during the period
commencing on the date the Holder first becomes aware of such Event of Default
through and including the twentieth Trading Day after the later of (x) the date
the Holder receives the applicable Event of Default Notice with respect thereto
and (y) the date such Event of Default has been cured, 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 the greater of (i) the product of (A) the Conversion Amount to be
redeemed multiplied by (B) the Redemption Premium and (ii) the product of (X)
the Conversion Rate with respect to the Conversion Amount in effect at such time
as the Holder delivers an Event of Default Redemption Notice multiplied by (Y)
the product of (1) the Redemption Premium multiplied by (2) the greatest Closing
Sale Price of the Common Stock on any Trading Day during the period commencing
on the date immediately preceding such Event of Default and ending on the date
the Company makes the entire payment required to be made under this Section 4(b)
(the “Event of Default Redemption Price”).
Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 10. To the extent redemptions required by this Section
4(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of this Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
4, but subject to Section 3(d), until the Event of Default Redemption Price
(together with any Late Charges thereon) is paid in full, the Conversion Amount
submitted for redemption under this Section 4(b) (together with any Late Charges
thereon) may be converted, in whole or in part, by the Holder into Common Stock
pursuant to the terms of this Note. In the event of the Company’s redemption of
any portion of this 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. 

8

            5.         
RIGHTS UPON FUNDAMENTAL TRANSACTION; OTHER CORPORATE EVENTS. 

                          (a)       
Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 5(a) pursuant to written
agreements in form and substance satisfactory to the Holder and approved by the
Holder prior to such Fundamental Transaction, including agreements to deliver to
each holder of Notes in exchange for such Notes a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to the Notes, including, without limitation, having a principal amount
and interest rate equal to the principal amounts then outstanding and the
interest rates of the Notes held by such holder, having similar conversion
rights as the Notes and having similar ranking to the Notes, and satisfactory to
the Holder and (ii) the Successor Entity (including its Parent Entity) is a
publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market. 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 and the other Transaction Documents 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 and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of a 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 such Fundamental Transaction, in lieu of the shares of the
Company’s Common Stock (or other securities, cash, assets or other property
(except such items still issuable under Section 14, which shall continue to be
receivable thereafter) issuable upon the conversion or redemption of the Notes
prior to such Fundamental Transaction, such shares of the publicly traded common
stock (or their equivalent) of the Successor Entity (including its Parent
Entity) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Note been converted immediately prior
to such Fundamental Transaction (without regard to any limitations on the
conversion of this Note), as adjusted in accordance with the provisions of this
Note. Notwithstanding the foregoing, the Holder may elect, at its sole option,
by delivery of written notice to the Company to waive this Section 5(a) to
permit the Fundamental Transaction without the assumption of this Note.

9

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

                          (c)       
The provisions of this Section 5 shall apply similarly and equally to successive
Fundamental Transactions and Corporate Events and shall be applied without
regard to any limitations on the conversion of this Note. 

           
6.          [Intentionally
Omitted] 

            7.         
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 action as may be required to protect the
rights of the Holder of this Note. Without limiting the generality of the
foregoing, the Company (i) shall not increase the par value of any shares of
Common Stock receivable upon conversion of this Note above the Conversion 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 conversion of
this Note, and (iii) shall, so long as any of the Notes 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
conversion of the Notes, the maximum number of shares of Common Stock as shall
from time to time be necessary to effect the conversion of the Notes then
outstanding (without regard to any limitations on conversion). 

10

           
8.          RESERVATION OF
AUTHORIZED SHARES. 

                          (a)       
Reservation. So long as any of the Notes are outstanding, the Company
shall take all action necessary to reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Notes, a number of shares of Common Stock, as of any date of
determination, for each of the Notes in accordance with the following formula:

          P

------------------  x 3 = Share Reserve 
     (T
x B) 

P = The aggregate Purchase Price (as
defined the Securities Purchase Agreement) of the Notes issued on or prior to
such date of determination; 

T = The applicable Variable Conversion
Base Price as of such date of determination; 

B = 0.85; 

provided, that, the Share Reserve shall in no event be less
than 150% 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 (without
regard to any limitations on conversions) (the “Required Reserve
Amount”). 

                          (b)       
Insufficient Authorized Shares. If, notwithstanding Section 8(a), and not
in limitation thereof, at any time while any of the Notes remain outstanding the
Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon conversion
of the Notes at least a number of shares of Common Stock equal to the Required
Reserve Amount (an “Authorized Share Failure”), then the Company
shall immediately take all action necessary to increase the Company’s authorized
shares of Common Stock to an amount sufficient to allow the Company to reserve
the Required Reserve Amount for the Notes then outstanding. Without limiting the
generality of the foregoing sentence, as soon as practicable after the date of
the occurrence of an Authorized Share Failure, but in no event later than sixty
(60) days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its stockholders for the approval of an increase in the
number of authorized shares of Common Stock. In connection with such meeting,
the Company shall provide each stockholder with a proxy statement and shall use
its best efforts to solicit its stockholders’ approval of such increase in
authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they
approve such proposal. In the event that the Company is prohibited from issuing
shares of Common Stock upon any conversion due to the failure by the Company to
have sufficient shares of Common Stock available out of the authorized but
unissued shares of Common Stock (such unavailable number of shares of Common
Stock, the “Authorization Failure Shares”), in lieu of delivering
such Authorization Failure Shares to the Holder, the Company shall pay cash in
exchange for the redemption of such portion of the Conversion Amount convertible
into such Authorized Failure Shares at a price equal to the sum of (i) the
product of (x) such number of Authorization Failure Shares and (y) the greatest
Closing Sale Price of the Common Stock on any Trading Day during the period
commencing on the date the Holder delivers the applicable Conversion Notice with
respect to such Authorization Failure Shares to the Company and ending on the
date of such issuance and payment under this Section 8(b) and (ii) to the extent
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 Authorization
Failure Shares, any brokerage commissions and other out-of-pocket expenses, if
any, of the Holder incurred in connection therewith. Nothing contained in
Section 8(a) or this Section 8(b) shall limit any obligations of the Company
under any provision of the Securities Purchase Agreement. 

11

            9.         
COMPANY OPTIONAL REDEMPTION. At any time after the Issuance Date, the
Company shall have the right to redeem all, but not less than all, of the
Conversion Amount then remaining under this Note (the “Company Optional
Redemption Amount”) on the Company Optional Redemption Date (as defined
below) (a “Company Optional Redemption”). The portion of this Note
subject to redemption pursuant to this Section 9 shall be redeemed by the
Company in cash at a price (the “Company Optional Redemption
Price”) equal to 135% of the Conversion Amount of this Note then
outstanding. The Company may exercise its right to require redemption under this
Section 9 by delivering an irrevocable written notice thereof by facsimile and
overnight courier to the Holder (the “Company Optional Redemption
Notice” and the date the Holder receives such notice is referred to as
the “Company Optional Redemption Notice Date”). The Company may
deliver only one Company Optional Redemption Notice in any ninety (90) day
period. The Company Optional Redemption Notice shall (x) state the date on which
the Company Optional Redemption shall occur (the “Company Optional
Redemption Date”) which date shall not be less than sixty (60) calendar
days nor more than ninety (90) calendar days following the Company Optional
Redemption Notice Date, and (y) state the aggregate Conversion Amount of the
Notes which is being redeemed in such Company Optional Redemption from the
Holder pursuant to this Section 9 on the Company Optional Redemption Date.
Notwithstanding anything herein to the contrary, at any time prior to the date
the Company Optional Redemption Price is paid, in full, the Company Optional
Redemption Amount may be converted, in whole or in part, by the Holder into
shares of Common Stock pursuant to Section 3. All Conversion Amounts converted
by the Holder after the Company Optional Redemption Notice Date shall reduce the
Company Optional Redemption Amount of this Note required to be redeemed on the
Company Optional Redemption Date. Redemptions made pursuant to this Section 9
shall be made in accordance with Section 10. 

           
10.        REDEMPTIONS. 

                          (a)       
Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder in cash within five (5) Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice. The
Company shall deliver the applicable Company Optional Redemption Price to the
Holder in cash on the applicable Company Optional Redemption Date. In the event
of a redemption of less than all of the Conversion Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder a new Note
(in accordance with Section 17(d)) representing the outstanding Principal which
has not been redeemed. 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. 

12

            11.       
VOTING RIGHTS. The Holder shall have no voting rights as the holder of
this Note, except as required by law (including, without limitation, Chapter 78
of the Nevada Revised Statutes) and as expressly provided in this Note. 

           
12.        NOTE REDUCTIONS.

                          (a)       
Filing Date Reduction. As of the Trading Day immediately following the
Filing Deadline (as such term is defined in the Registration Rights Agreement),
if (i) the Company has properly filed a registration statement with the SEC on
or prior to the Filing Deadline covering the resale by the Holder of all of the
shares of Common Stock issued or issuable upon conversion of this Note or
otherwise pursuant to the terms of this Note in accordance with the 1933 Act and
the Registration Rights Agreement and (ii) no Event of Default or an event that
with the passage of time or giving of notice would constitute an Event of
Default has occurred on or prior to such date, then $75,000 of the outstanding
Principal hereunder (together with any accrued and unpaid Interest with respect
to such portion of the Principal amount and accrued and unpaid Late Charges with
respect to such portion of such Principal and such Interest) shall be
automatically extinguished and shall no longer remain outstanding hereunder
without any payment thereof by the Company. 

                          (b)       
Effective Date Reduction. As of the Trading Day immediately following the
Effectiveness Deadline (as such term is defined in the Registration Rights
Agreement), if (i) the Company has filed a registration statement with the SEC
that has been declared effective by the SEC on or prior to the Effectiveness
Deadline and the prospectus contained therein is available for use by the Holder
for the resale by the Holder of all of the shares of Common Stock issued or
issuable upon conversion of this Note or otherwise pursuant to the terms of this
Note and (ii) no Event of Default or an event that with the passage of time or
giving of notice would constitute an Event of Default has occurred on or prior
to such date, then $125,000 of the outstanding Principal hereunder (together
with any accrued and unpaid Interest with respect to such portion of the
Principal amount and accrued and unpaid Late Charges with respect to such
portion of such Principal and such Interest) shall be automatically extinguished
and shall no longer remain outstanding hereunder without any payment thereof by
the Company. 

                          (c)       
Disputes. In the event of a dispute as to the arithmetic calculation of
any Note Reduction, the Company and the Holder shall resolve such dispute in
accordance with Section 22. 

13

            13.       
COVENANTS. Until all of the Notes have been converted, redeemed or
otherwise satisfied in accordance with their terms: 

                          (a)       
Rank. All payments due under this Note shall be senior to all other
Indebtedness of the Company and its Subsidiaries; provided, however, in the
event the Principal and Interest of this Note is reduced to below $50,000 as a
result of conversion, redemption or otherwise, this Note shall then rank pari
passu with all other Indebtedness of the Company and its Subsidiaries. 

                          (b)       
Incurrence of Indebtedness. Unless and until the Company has strictly
complied with the provisions of Section 10 of the Securities Purchase Agreement,
the Company shall not, and the Company shall cause each of its Subsidiaries to
not, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness (other than (i) the Indebtedness evidenced by this Note and (ii)
other Permitted Indebtedness). 

                          (c)       
Existence of Liens. The Company shall not, and the Company shall cause
each of its Subsidiaries to not, 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. The Company shall not, and the Company shall cause
each of its Subsidiaries to not, 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
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, (i) an event
constituting an Event of Default has occurred and is continuing or (ii) an event
that with the passage of time and without being cured would constitute an Event
of Default has occurred and is continuing. 

                          (e)       
Restricted Issuances. The Company shall not, directly or indirectly,
without the prior written consent of the holders of a majority in aggregate
principal amount of the Notes then outstanding, (i) issue any Notes (other than
as contemplated by the Securities Purchase Agreement and the Notes) or (ii)
issue any other securities that would cause a breach or default under the
Notes.

                          (f)       
Restriction on Redemption and Cash Dividends. The Company shall not, and
the Company shall cause each of its Subsidiaries to not, directly or indirectly,
redeem, repurchase or declare or pay any cash dividend or distribution on any of
its capital stock. 

                          (g)       
Restriction on Transfer of Assets. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, sell,
lease, license, assign, transfer, spin-off, split-off, close, convey or
otherwise dispose of any assets or rights of the Company or any Subsidiary owned
or hereafter acquired whether in a single transaction or a series of related
transactions, other than (i) sales, leases, licenses, assignments, transfers,
conveyances and other dispositions of such assets or rights by
the Company and its Subsidiaries in the ordinary course of business and (ii)
sales of inventory in the ordinary course of business. 

14

                          (h)       
Maturity of Indebtedness. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, permit any
Indebtedness of the Company or any of the Subsidiaries to mature or accelerate
prior to the Maturity Date. 

                          (i)       
Change in Nature of Business. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, engage in
any material line of business substantially different from those lines of
business conducted by the Company and each of its Subsidiaries on the Issuance
Date or any business substantially related or incidental thereto. The Company
shall not, and the Company shall cause each of its Subsidiaries to not, directly
or indirectly, modify its or their corporate structure or purpose. 

                          (j)       
Preservation of Existence, Etc. The Company shall maintain and preserve,
and cause each of its Subsidiaries to maintain and preserve, its existence,
rights and privileges, and become or remain, and cause each of its Subsidiaries
to become or remain, duly qualified and in good standing in each jurisdiction in
which the character of the properties owned or leased by it or in which the
transaction of its business makes such qualification necessary. 

                          (k)       
Maintenance of Properties, Etc. The Company shall maintain and preserve,
and cause each of its Subsidiaries to maintain and preserve, all of its
properties which are necessary or useful in the proper conduct of its business
in good working order and condition, ordinary wear and tear excepted, and
comply, and cause each of its Subsidiaries to comply, at all times with the
provisions of all leases to which it is a party as lessee or under which it
occupies property, so as to prevent any loss or forfeiture thereof or
thereunder. 

                          (l)        Maintenance
of Intellectual Property. The Company will, and will cause each of its
Subsidiaries to, take all action necessary or advisable to maintain all of the
Intellectual Property Rights of the Company and/or any of its Subsidiaries that
are necessary or material to the conduct of its business in full force and
effect. 

                          (m)       
Maintenance of Insurance. The Company shall maintain, and cause each of
its Subsidiaries to maintain, insurance with responsible and reputable insurance
companies or associations (including, without limitation, comprehensive general
liability, hazard, rent and business interruption insurance) with respect to its
properties (including all real properties leased or owned by it) and business,
in such amounts and covering such risks as is required by any governmental
authority having jurisdiction with respect thereto or as is carried generally in
accordance with sound business practice by companies in similar businesses
similarly situated. 

                          (n)       
Transactions with Affiliates. The Company shall not, nor shall it permit
any of its Subsidiaries to, enter into, renew, extend or be a party to, any
transaction or series of related transactions (including, without limitation,
the purchase, sale, lease, transfer or exchange of property or assets of any
kind or the rendering of services of any kind) with any affiliate, except in the
ordinary course of business in a manner and to an extent consistent with past
practice and necessary or desirable for the prudent operation of its business,
for fair consideration and on terms no less favorable to it or its
Subsidiaries than would be obtainable in a comparable arm’s length transaction
with a Person that is not an affiliate thereof. 

15

            14.       
PARTICIPATION. Upon any conversion of this Note, the Holder shall be
entitled to receive such dividends paid and distributions made to the holders of
Common Stock from and after the Issuance Date to the same extent as if the
Holder had effected such conversion and had held such shares of Common Stock
(issued or to be issued in such conversion) on the record date for such
dividends and distributions. Payments under the preceding sentence shall be made
on or prior to the applicable Share Delivery Deadline with respect to such
conversion. 

            15.       
AMENDING THE TERMS OF THIS NOTE. The prior written consent of the Holder
shall be required for any change or amendment to this Note. 

            16.       
TRANSFER. This Note and any shares of Common Stock issued upon conversion
of this Note may be offered, sold, assigned or transferred by the Holder without
the consent of the Company, subject only to the provisions of Section 4.4 of the
Securities Purchase Agreement. 

           
17.        REISSUANCE OF THIS NOTE.

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

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

                          (c)       
Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Note or Notes (in accordance with Section 17(d) and in principal
amounts of at least $1,000) 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 17(a) or Section 17(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date. 

16

            18.       
REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative
and in addition to all other remedies available under this Note and any of the
other Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. The Company covenants to the
Holder that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any such breach or any such threatened breach, without the necessity
of showing economic loss and without any bond or other security being required.
The Company shall provide all information and documentation to the Holder that
is requested by the Holder to enable the Holder to confirm the Company’s
compliance with the terms and conditions of this Note. 

            19.       
PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, without limitation,
attorneys’ fees and disbursements. The Company expressly acknowledges and agrees
that no amounts due under this Note shall be affected, or limited, by the fact
that the purchase price paid for this Note was less than the original Principal
amount hereof. 

            20.       
CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted
by the Company and the Holder 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. Terms
used in this Note but defined in the other Transaction Documents shall have the
meanings ascribed to such terms on the Closing Date in such other Transaction Documents unless otherwise consented to
in writing by the Holder. 

17

            21.       
FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege. No waiver shall be effective unless it is in writing
and signed by an authorized representative of the waiving party. 

            22.       
DISPUTE RESOLUTION. In the case of a dispute as to the determination of
the Conversion Price (including, without limitation, any disputed adjustment
thereto or any dispute as to whether any issuance or sale or deemed issuance or
sale was an issuance or sale or deemed issuance or sale of Excluded Securities),
the Company Conversion Price, any Redemption Price, the Closing Bid Price, the
Closing Sale Price or fair market value (as the case may be) or the arithmetic
calculation of the Conversion Rate, any Note Reduction or the applicable
Redemption Price (as the case may be), the Company or the Holder (as the case
may be) shall submit the disputed determinations or arithmetic calculations (as
the case may be) via facsimile (i) within two (2) Business Days after receipt of
the applicable notice giving rise to such dispute to the Company or the Holder
(as the case may be) or (ii) if no notice gave rise to such dispute, at any time
after the Holder learned of the circumstances giving rise to such dispute. If
the Holder and the Company are unable to agree upon such determination or
calculation within two (2) Business Days of such disputed determination or
arithmetic calculation (as the case may be) being submitted to the Company or
the Holder (as the case may be), then the Company shall, within two (2) Business
Days, submit via facsimile (a) the disputed determination of the Conversion
Price, the Company Conversion Price, any Redemption Price, the Closing Bid
Price, the Closing Sale Price or fair market value (as the case may be) to an
independent, reputable investment bank selected by the Company and approved by
the Holder or (b) the disputed arithmetic calculation of the Conversion Rate,
any Note Reduction or any Redemption Price (as the case may be) to an
independent, outside accountant selected by the Holder that is reasonably
acceptable to the Company. The Company shall cause at its expense the investment
bank or the accountant (as the case may be) to perform the determinations or
calculations (as the case may be) and notify the Company and the Holder of the
results no later than ten (10) Business Days from the time it receives such
disputed determinations or calculations (as the case may be). Such investment
bank’s or accountant’s determination or calculation (as the case may be) shall
be binding upon all parties absent demonstrable error. 

           
23.        NOTICES; CURRENCY;
PAYMENTS. 

                          (a)       
Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section
9(f) of the Securities Purchase Agreement. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Conversion
Price, setting forth in reasonable detail, and certifying, the calculation of
such adjustment and (ii) at least fifteen (15) 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 grant, 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. 

18

                          (b)       
Currency. All dollar amounts referred to in this Note are in United
States Dollars (“U.S. Dollars”), and all amounts owing under this
Note shall be paid in U.S. Dollars. All amounts denominated in other currencies
(if any) shall be converted into the U.S. Dollar equivalent amount in accordance
with the Exchange Rate on the date of calculation. “Exchange
Rate” means, in relation to any amount of currency to be
converted into U.S. Dollars pursuant to this Note, the U.S. Dollar exchange rate
as published in the Wall Street Journal on the relevant date of calculation (it
being understood and agreed that where an amount is calculated with reference
to, or over, a period of time, the date of calculation shall be the final date
of such period of time). 

                          (c)       
Payments. Whenever any payment of cash is to be made by the Company to
any Person pursuant to this Note, unless otherwise expressly set forth herein,
such payment shall be made in lawful money of the United States of America by a
certified 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, 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. Any amount of
Principal or other amounts due under the Transaction Documents which is not paid
when due (solely to the extent such amount is not then accruing interest at the
Default Rate) shall result in a late charge being incurred and payable by the
Company in an amount equal to interest on such amount at the rate of eighteen
percent (18%) per annum from the date such amount was due until the same is paid
in full (“Late Charge”). 

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

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

            26.       
GOVERNING LAW. 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 Illinois, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Illinois or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of Illinois. The Company hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in Chicago, Illinois, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Company
in any other jurisdiction to collect on the Company’s obligations to the Holder,
to realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court ruling in favor of the Holder. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, 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. 

19

            27.       
MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to establish
or require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Company to the Holder and thus refunded to the Company. 

            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 prior to or subsequent to
the date hereof pursuant to which shares of Common Stock and standard options to
purchase Common Stock may be issued to any employee, officer or director for
services provided to the Company in their capacity as such.

                         
(b)        “Bloomberg” means
Bloomberg, L.P. 

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

                          (d)       
“Change of Control” means any Fundamental Transaction other than
(i) any merger of the Company or any of its, direct or indirect, wholly-owned
Subsidiaries with or into any of the foregoing Persons, (ii) any reorganization,
recapitalization or reclassification of the shares of Common Stock in which
holders of the Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, are, in all material respects, the holders of the voting
power of the surviving entity (or entities with the authority or voting power to elect the members of the
board of directors (or their equivalent if other than a corporation) of such
entity or entities) after such reorganization, recapitalization or
reclassification, (iii) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company or any of
its Subsidiaries or (iv) any Fundamental Transaction described on Schedule 28(g)
attached hereto). 

20

                          (e)       
“Closing Bid Price” and “Closing Sale Price” means,
for any security as of any date, the last closing bid price and last closing
trade price, respectively, for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing
trade price (as the case may be) then the last bid price or last trade price,
respectively, of such security prior to 4:00:00 p.m., New York time, as reported
by Bloomberg, or, if the Principal Market is not the principal securities
exchange or trading market for such security, the last closing bid price or last
trade price, respectively, of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price or last
trade price, respectively, of such security in the over-the-counter market on
the electronic bulletin board for such security as reported by Bloomberg, or, if
no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink
sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). 

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

                          (g)       
“Common Stock” means (i) the Company’s common stock, $0.001 par
value per share, and (ii) any capital stock into which such common stock shall
have been changed or any share capital resulting from a reclassification of such
common stock. 

                          (h)       
“Convertible Securities” means any stock or other security (other
than Options) that is at any time and under any circumstances, directly or
indirectly, convertible into, exercisable or exchangeable for, or which
otherwise entitles the holder thereof to acquire, any shares of Common Stock.

                          (i)       
“Eligible Market” means the OTC Bulletin Board, The NASDAQ Global
Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York
Stock Exchange, NYSE Arca, the NYSE MKT, the OTCQX Marketplace or the OTCQB
Marketplace operated by OTC Markets Group Inc. (or any successor to any of the
foregoing). 

                          (j)       
“Excluded Securities” means any (i) shares of Common Stock or
standard options to purchase Common Stock to directors, officers or employees of
the Company in their capacity as such pursuant to an Approved Stock Plan (as
defined below), provided that (A) all such issuances (taking into account the
shares of Common Stock issuable upon exercise of such options granted after the
date of this Note, but not such shares issuable upon exercise of such options
granted before the date of this Note) after the date hereof pursuant to this
clause (i) do not, in the aggregate, exceed more than 5.0% of the Common Stock
issued and outstanding immediately prior to the date hereof and (B) the exercise price
of any such options is not lowered, none of such options are amended to increase
the number of shares issuable thereunder and none of the terms or conditions of
any such options are otherwise materially changed in any manner that adversely
affects the Holder; (ii) shares of Common Stock issued upon the conversion or
exercise of Convertible Securities (other than standard options to purchase
Common Stock issued pursuant to an Approved Stock Plan that are covered by
clause (i) above) issued prior to the date hereof, provided that the conversion
price of any such Convertible Securities (other than standard options to
purchase Common Stock issued pursuant to an Approved Stock Plan that are covered
by clause (i) above) is not lowered, none of such Convertible Securities (other
than standard options to purchase Common Stock issued pursuant to an Approved
Stock Plan that are covered by clause (i) above) are amended to increase the
number of shares issuable thereunder or extend the maturity date or expiration
date of such Convertible Securities (other than standard options to purchase
Common Stock issued pursuant to an Approved Stock Plan that are covered by
clause (i) above) and none of the terms or conditions of any such Convertible
Securities (other than standard options to purchase Common Stock issued pursuant
to an Approved Stock Plan that are covered by clause (i) above) are otherwise
materially changed in any manner that adversely affects the Holder; (iii) the
shares of Common Stock issuable upon conversion of the Notes or otherwise
pursuant to the terms of the Notes and (iv) any shares of Common Stock issued to
the Holder or any of its affiliates. 

21

                          (k)       
“Fundamental Transaction” means that (i) the Company or any of its
Subsidiaries shall, directly or indirectly, in one or more related transactions,
(1) consolidate or merge with or into (whether or not the Company or any of its
Subsidiaries is the surviving corporation) any other Person, or (2) sell, lease,
license, assign, transfer, convey or otherwise dispose of all or substantially
all of its respective properties or assets to any other Person, or (3) allow any
other Person to make a purchase, tender or exchange offer that is accepted by
the holders of more than 50% of the outstanding shares of Voting Stock of the
Company (not including any shares of Voting Stock of the Company 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 (4)
consummate a stock or share purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with any other Person whereby such other Person acquires
more than 50% of the outstanding shares of Voting Stock of the Company (not
including any shares of Voting Stock of the Company 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 or share purchase agreement or other
business combination), or (ii) any “person” or “group” (as these terms are used
for purposes of Sections 13(d) and 14(d) of the 1934 Act and the rules and
regulations promulgated thereunder) is or shall become the “beneficial owner”
(as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of
the aggregate ordinary voting power represented by issued and outstanding Voting
Stock of the Company. 

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

                          (m)       
“Interest Rate” means eight percent (8%) per
annum, as may be adjusted from time to time in accordance with Section 2. 

22

                          (n)       
“Maturity Date” shall mean May 7, 2016;
provided, however, the Maturity Date may be extended at the option of the Holder
(i) in the event that, and for so long as, an Event of Default shall have
occurred and be continuing or any event shall have occurred and be continuing
that with the passage of time and the failure to cure would result in an Event
of Default or (ii) through the date that is twenty (20) Business Days after the
consummation of a Fundamental Transaction in the event that a Fundamental
Transaction is publicly announced or a Fundamental Transaction Notice is
delivered prior to the Maturity Date, provided further that if a Holder elects
to convert some or all of this Note pursuant to Section 3 hereof, and the
Conversion Amount would be limited pursuant to Section 3(d) hereunder, the
Maturity Date shall automatically be extended until such time as such provision
shall not limit the conversion of this Note. 

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

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

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

                          (r)       
“Permitted Indebtedness” means (i) Indebtedness evidenced by this
Note, (ii) Indebtedness described on Schedule 13(b) attached hereto and
(iii) Indebtedness secured by Permitted Liens described in clauses (iv) and (v)
of the definition of Permitted Liens, in an aggregate amount not to exceed
$100,000. 

                          (s)       
“Permitted Liens” means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen’s liens, mechanics’ liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the
purchase price of such equipment or indebtedness incurred solely for the purpose
of financing the acquisition or lease of such equipment, or (B) existing on such
equipment at the time of its acquisition, provided that the Lien is confined
solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, (v) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in clause
(iv) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the Indebtedness being extended, renewed or refinanced does not increase, and
(vi) Liens securing the Company’s obligations under the Notes. 

23

                          (t)       
“Principal Market” means, as of any date of determination, the
principal securities exchange or securities market on which the Common Stock is
then traded. 

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

                          (v)       
“Redemption Premium” means (i) in the case of the Events of
Default described in Section 4(a) (other than Sections 4(a)(iv) through
4(a)(vi)), 135% or (ii) in the case of the Events of Default described in
Sections 4(a)(iv) through 4(a)(vi), 100%. 

                          (w)       
“Redemption Prices” means, collectively, Event of Default
Redemption Prices, and the Company Optional Redemption Prices and each of the
foregoing, individually, a “Redemption Price.” 

                          (x)       
“Registration Rights Agreement” means that certain registration
rights agreement, dated as of the Closing Date, by and between the Company and
the Holder relating to, among other things, the registration of the resale of
the Common Stock issuable upon conversion of the Notes or otherwise pursuant to
the terms of the Notes, as may be amended from time to time. 

                          (y)       
“SEC” means the United States Securities and Exchange Commission
or the successor thereto. 

                          (z)       
“Securities Purchase Agreement” means that certain Securities
Purchase Agreement, dated as of the Closing Date, by and between the Company and
the Holder pursuant to which the Company issued this Note, as may be amended
from time to time. 

                          (aa)     
“Subsidiaries” shall have the meaning as set forth in the
Securities Purchase Agreement. 

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

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

24

                          (dd)     
“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, trustees or other similar governing body 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). 

            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,
non-public information relating to the Company or any of its Subsidiaries, the
Company shall within one (1) Business Day after any such receipt or delivery
publicly disclose such material, non-public information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice
contains material, non-public information relating to the Company or any of its
Subsidiaries, the Company so shall indicate to such 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, non-public information relating to the Company or its
Subsidiaries. Nothing contained in this Section 29 shall limit any obligations
of the Company, or any rights of the Holder, under Section 4.3 of the Securities
Purchase Agreement. 

[signature page follows] 

25

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

ECHO
AUTOMOTIVE, INC. 

 

	 	By:    
      _________________________________ 
	 	           Name:
    
	 	           Title:
    

 

 

 

Senior Secured Convertible Note - Signature Page 

EXHIBIT I 

ECHO AUTOMOTIVE, INC. 
CONVERSION NOTICE

      
     Reference is made to the Senior Convertible Note
(the “Note”) issued to the undersigned by Echo Automotive, Inc., a
Nevada corporation (the “Company”). In accordance with and
pursuant to the Note, the undersigned hereby elects to convert the Conversion
Amount (as defined in the Note) of the Note indicated below into shares of
Common Stock, $0.001 par value per share (the “Common Stock”), of
the Company, as of the date specified below Capitalized terms not defined herein
shall have the meaning as set forth in the Note. 

Date of Conversion:
________________________________________________________________________________________

	 	         Aggregate Principal to be
      converted: 	 
	 	  	 
	 	         Aggregate accrued and
      unpaid Interest and 	 
	 	         accrued and unpaid Late
      Charges with 	 
	 	         respect to such portion
      of the Aggregate 	 
	 	         Principal and such
      Aggregate Interest to be 	 
	 	         converted: 	 
	 	  	 
	 	AGGREGATE CONVERSION AMOUNT 	 
	 	TO BE CONVERTED: 	 

Please confirm the following information: 

Conversion Price:
__________________________________________________________________________________________

Number of shares of Common Stock 
to
be
issued:          __________________________________________________________________________________________

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

Issue to:  
________________________________________________________________________________________________

                  
________________________________________________________________________________________________

                  
________________________________________________________________________________________________

Facsimile Number:
__________________________________________________________________________________________

Holder:     
________________________________________________________________________________________________

By:
______________________________________________________________________________________________

Title:
____________________________________________________________________________________________

Dated:
______________________________________________________________________________________________________

Account Number:
_______________________________________________________________________________________
(if
electronic book entry transfer) 

Transaction Code Number:
________________________________________________________________________________
(if
electronic book entry transfer) 

ACKNOWLEDGMENT 

      
     The Company hereby acknowledges this Conversion
Notice and hereby directs _________________ to issue the above indicated number
of shares of Common Stock in accordance with the Transfer Agent Instructions
dated _____________, 20__ from the Company and acknowledged and agreed to by
________________________. 

ECHO
AUTOMOTIVE, INC. 

 

	 	By:    
      _________________________________ 
	 	           Name:
    
	 	           Title:

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