Document:

Filed by Automated Filing Services Inc. (604) 609-0244 - Azco Mining Inc. - Exhibit 4.1

AMENDMENT NO. 1 TO SENIOR SECURED CONVERTIBLE NOTES,

WARRANTS, ADDITIONAL INVESTMENT RIGHTS AND SECURITY AGREEMENT

          This
AMENDMENT NO. 1 TO SENIOR SECURED CONVERTIBLE NOTES, WARRANTS, ADDITIONAL
INVESTMENT RIGHTS AND SECURITY AGREEMENT (this “Amendment”) is made and entered
into as of September 6, 2006, by and among Azco Mining, Inc., a Delaware
corporation (the “Company”), and the purchasers identified on the signature
pages hereto (each, a “Purchaser” and, collectively, the “Purchasers”).

RECITALS

	 	1. 	
      The Company and the Purchasers are parties to a
      Securities Purchase Agreement, dated as of March 20, 2006 (the “Purchase
      Agreement”), pursuant to which the Company issued and sold to the
      Purchasers an aggregate of $2,500,000 of Senior Secured Convertible Notes
      due August 31, 2007 (the “Notes”) and certain Warrants and Additional
      Investment Rights (each as defined in the Purchase Agreement). Capitalized
      terms used and not defined in this Amendment shall have the respective
      meanings set forth in the Purchase Agreement or Notes, as the case may
      be.

	 	 	 
	 	2. 	
      The Company and the Purchasers now wish to further modify
      certain terms of the Notes, Warrants, Additional Investment Rights and
      Security Agreement.

          NOW,
THEREFORE, in consideration of the foregoing Recitals and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and each Purchaser, severally and not jointly, agree
as follows: 

	1. 	
      Amendments and Agreements.

	 	 	 
		1.1. 	
      The Company and each Purchaser agree that Section 2(b)
      of the Notes shall be deleted and replaced in its entirety as
      follows:

                   “(b)
The Company shall pay the principal balance of this Note to the Holder in 12
equal monthly installments (each, a “Monthly Installment”) commencing on
February 1, 2007 and to continue on the first day of each of the 11 months
thereafter, except if such date is not a Trading Day, in which case such
principal shall be payable on the next succeeding Trading Day (each, a
“Principal Payment Date”), until the outstanding principal balance of
this Note has been paid in full. On the Maturity Date, the Company shall pay all
then accrued and unpaid interest on this Note together with the final payment of
principal hereunder.

	 	1.2. 	
      The Maturity Date of the Notes shall be extended from
      August 31, 2007 to January 1, 2008.

	 	 	 
	 	1.3. 	
      The Conversion Price of the Notes and Additional Notes
      shall be reduced from $1.58 per share to $1.00 per share, subject to
      adjustment from time to time pursuant to Section 11 of the Notes and
      Additional Notes, respectively.

	 	 	 
	 	1.4. 	
      The Exercise Price of the Warrants (including the
      Warrants issued under the Additional Investment Rights) shall be reduced
      from $1.58 per share to $1.00 per share, subject to adjustment from time
      to time pursuant to Section 9 of the Warrants.

	 	 	 
	 	1.5. 	
      The principal amount of the Notes shall be increased for
      each Purchaser as set forth on Schedule A hereto so that (i) all
      accrued but unpaid interest until the date hereof, (ii) all interest due
      through February 1, 2007, (iii) liquidated damages due to the Purchasers
      pursuant to the Transaction Documents in the amounts set forth on Schedule
      A hereto, and (iv) the Additional Investment made pursuant to Section
      2.1 shall be added to the outstanding principal amount of the Notes,
      all in accordance with Schedule A hereto.

	 	 	 
	 	1.6. 	
      The Purchasers agree that any amounts due under
      Section 6.1(d) of the Purchase Agreement shall only apply to Events
      following February 1, 2007, except as otherwise set forth in this
      Amendment.

	2. 	
      Additional Investment.

	 	 	 
		2.1. 	
      In connection with the transaction contemplated by this
      Amendment, the Company and the Purchasers agree to purchase an additional
      $1,000,000 of Notes as set forth on Schedule A hereto (the
      “Additional Investment”).

	 	 	 
		2.2. 	
      On the signing of this Amendment, (i) the Company shall
      issue to each Purchaser (x) a new note in the form of Exhibit A
      hereto (the “New Notes”), registered in the name of such Purchaser, in
      the principal amount indicated on Schedule A hereto under the
      heading “New Note Principal Amount”, (y) a new warrant in the form of
      Exhibit B hereto (the “New Warrants”), registered in the name of
      such Purchaser, pursuant to which such Purchaser shall have the right to
      acquire such number of Underlying Shares indicated on Schedule A
      hereto under the heading “New Warrant Shares”, and (z) a new
      additional investment right in the form of Exhibit C hereto (the
      “New Additional Investment Rights”), registered in the name of such
      Purchaser, pursuant to which such Purchaser shall have the right to
      acquire such principal amount of Additional Notes and Additional
      Investment Right Warrants indicated below on Schedule A hereto
      under the headings “New Additional Investment Right – Additional Notes”
      and “New Additional Investment Right – Warrant Shares”, respectively, on
      the terms set forth therein; and (ii) the Purchasers shall deliver or
      cause to be delivered to the Company their respective purchase prices for
      the Additional Investment, in United States dollars and in immediately
      available funds, by wire transfer to an account designated
  in

2

	 		
      writing by the Company for such purpose. The Purchasers
      agree to send to the Company for cancellation the original Notes, Warrants
      and Additional Investment Rights issued under the Purchase Agreement
      within 10 days following the receipt of the New Notes, New Warrants and
      New Additional Investment Rights.

	 	 	 
	 	2.3. 	
      The Purchasers and the Company hereby amend the Security
      Agreement to include the Additional Investment as Secured Obligations (as
      defined in the Security Agreement) of the
Company.

	3. 	
      Registration Rights. To ensure that the
      registration rights of the Purchasers are not adversely affected as a
      result of the transactions contemplated by this Amendment and to provide
      registration rights consistent with the existing registration rights in
      respect of the Common Stock issuable upon exercise of the Securities, the
      parties agree as follows with respect to registration rights.

	 	 	 
		3.1. 	
      The parties hereby confirm that the definition of
      “Registrable Securities” under the Purchase Agreement shall includes (a)
      the shares of Common Stock issuable upon the conversion or exercise of the
      New Notes, New Warrants and New Additional Investment Rights, (b) any
      Common Stock (including Underlying Shares) issued or issuable pursuant to
      the Transaction Documents and this Amendment, together with any securities
      issued or issuable upon any stock split, dividend or other distribution,
      recapitalization or similar event with respect to the foregoing.

	 	 	 
		3.2. 	
      The Company will use commercially reasonable efforts to
      prepare and file a registration statement to cover all shares of Common
      Stock issuable under the Transaction Documents, including the Registrable
      Securities.

	 	 	 
		3.3. 	
      The Filing Date shall be the 60h calendar day
      following the date hereof and the Required Effectiveness Date with respect
      to the initial Registration Statement shall be the earlier of (i)
      150th day following the date hereof and (ii) the fifth Trading
      Day following the date on which the Company is notified by the Commission
      that the initial Registration Statement will not be reviewed or is no
      longer subject to further review and comments. Notwithstanding anything to
      the contrary herein, a breach of this Section 3.3 shall subject the
      Company to amounts due under Section 6.1(d) of the Purchase
      Agreement.

	4. 	
      Continued Validity of Transaction Documents under the
      Purchase Agreement; Waiver of Prior Defaults. The parties hereto agree
      that the Purchase Agreement and the other Transaction Documents entered
      into in connection therewith (as amended by this Amendment), remain in
      full force and effect, modified to the extent and only to the extent
      necessary to give effect to this Amendment and the transactions herein
      contemplated. The parties agree that any default or event of default that
      has occurred, prior to the effective date hereof, under any of the
      Transaction Documents is waived by each of the
  Purchasers.

3

	5. 	
      Representations and Warranties.

	 	 	 
		5.1. 	
      The Company hereby represents and warrants to the
      Purchasers that each of the representations and warrants set forth in
      Section 3.1 of the Purchase Agreement are true and correct as of
      the date hereof.

	 	 	 
		5.2. 	
      Each Purchaser hereby, as to itself only and for no other
      Purchaser, represents and warrants to the Company that each of the
      representations and warrants set forth in Section 3.2 of the
      Purchase Agreement are true and correct as of the date hereof.

	 	 	 
	6. 	
      Miscellaneous.

	 	 	 
		6.1. 	
      Fees and Expenses. The Company has agreed to
      reimburse Cranshire Capital, L.P. (“Cranshire”), $20,000 for its legal
      fees and expenses in connection with this Amendment. In lieu of the
      foregoing payment, Cranshire may retain such amount at the closing. Except
      for the foregoing, each party hereto will bear the fees and expenses of
      its own counsel and advisors in connection with the negotiation and
      entering into of this Amendment. The Company shall pay all transfer agent
      fees, stamp taxes and other taxes and duties levied in connection with the
      issuance of any Securities.

	 	 	 
		6.2. 	
      Entire Agreement. This Amendment and the
      Transaction Documents, together with the exhibits and schedules thereto,
      contain the entire understanding of the parties with respect to the
      subject matter hereof and supersede all prior agreements and
      understandings, oral or written, with respect to such matters, which the
      parties acknowledge have been merged into such documents, exhibits and
      schedules.

	 	 	 
		6.3. 	
      Equal Treatment of Purchasers. No consideration
      shall be offered or paid to any person to amend or consent to a waiver or
      modification of any provision of any of the Transaction Documents unless
      the same consideration is also offered to all of the parties to the
      Transaction Documents. For clarification purposes, this provision
      constitutes a separate right granted to each Purchaser by the Company and
      negotiated separately by each Purchaser, and is intended to treat for the
      Company and the Purchasers as a class and shall not in any way be
      construed as the Purchasers acting in concert or as a group with respect
      to the purchase, disposition or voting of Securities or
  otherwise.

	 	 	 
		6.4. 	
      Public Announcement. The Company shall, by 9 a.m.
      Eastern time on September 7, 2006, issue a press release disclosing the
      material terms of the transactions contemplated hereby and by 4:30 p.m.
      Eastern time on the first Business Day following the date hereof, file a
      Current Report on Form 8-K, attaching such press release and this
      Amendment thereto, each reasonably acceptable to each Purchaser. The
      Company and each Purchaser shall consult with each other in issuing any
      other press releases with respect to the transactions contemplated hereby,
      and neither the Company nor any Purchaser shall issue any such press
      release or otherwise make any such public statement without the prior
      consent of

4

	 		
      the Company, with respect to any press release of any
      Purchaser, or without the prior consent of each Purchaser, with respect to
      any press release of the Company, which consent shall not unreasonably be
      withheld, except if such disclosure is required by law, in which case the
      disclosing party shall promptly provide the other party with prior notice
      of such public statement or communication. Notwithstanding the foregoing,
      the Company shall not publicly disclose the name of any Purchaser, or
      include the name of any Purchaser in any filing with the Commission or any
      regulatory agency or Trading Market, without the prior written consent of
      such Purchaser, except (i) as required by federal securities law in
      connection with the registration statement contemplated by the Purchase
      Agreement and (ii) to the extent such disclosure is required by law or
      Trading Market regulations, in which case the Company shall provide the
      Purchasers with prior notice of such disclosure permitted under subclause
      (i) or (ii).

	 	 	 
	 	6.5. 	
      Notices. Any and all notices or other
      communications or deliveries required or permitted to be provided
      hereunder shall be in writing and shall be deemed given and effective as
      specified in the Purchase Agreement. The address for such notices and
      communications shall be as set forth on the signature pages attached to
      the Purchase Agreement.

	 	 	 
	 	6.6. 	
      Amendments; Waivers. No provision of this
      Amendment may be waived or amended except in a written instrument signed,
      in the case of an amendment, by the Company and each Purchaser or, in the
      case of a waiver, by the party against whom enforcement of any such waiver
      is sought. No waiver of any default with respect to any provision,
      condition or requirement of this Amendment shall be deemed to be a
      continuing waiver in the future or a waiver of any subsequent default or a
      waiver of any other provision, condition or requirement hereof, nor shall
      any delay or omission of either party to exercise any right hereunder in
      any manner impair the exercise of any such right.

	 	 	 
	 	6.7. 	
      Amendment Controls. If any topic is addressed both
      in the Purchase Agreement (or any document related thereto) and in this
      Amendment, this Amendment shall control.

	 	 	 
	 	6.8. 	
      Construction. The headings herein are for
      convenience only, do not constitute a part of this Amendment and shall not
      be deemed to limit or affect any of the provisions hereof. The language
      used in this Amendment will be deemed to be the language chosen by the
      parties to express their mutual intent, and no rules of strict
      construction will be applied against any party.

	 	 	 
	 	6.9. 	
      Governing Law. All questions concerning the
      construction, validity, enforcement and interpretation of this Amendment
      shall be governed by and construed and enforced in accordance with the
      internal laws of the State of New York, without regard to the principles
      of conflicts of law thereof. The parties agree that Section 7.9 of
      the Purchase Agreement shall apply to this Amendment as if set forth in
      its entirety herein.

5

	 	6.10. 	
      Survival. The representations and warranties
      contained herein shall survive the delivery, exercise and/or conversion of
      the securities, as applicable for the applicable statue of
    limitations.

	 	 	 
	 	6.11. 	
      Execution. This Amendment may be executed in two
      or more counterparts, all of which when taken together shall be considered
      one and the same document and shall become effective when counterparts
      have been signed by each party and delivered to the other party, it being
      understood that both parties need not sign the same counterpart.

	 	 	 
	 	6.12. 	
      Severability. If any provision of this Amendment
      is held to be invalid or unenforceable in any respect, the validity and
      enforceability of the remaining terms and provisions of this Amendment
      shall not in any way be affected or impaired thereby and the parties will
      attempt to agree upon a valid and enforceable provision that is a
      reasonable substitute therefor, and upon so agreeing, shall incorporate
      such substitute provision in this Amendment.

	 	 	 
	 	6.13. 	
      Independent Nature of Purchasers’ Obligations and
      Rights. The obligations of each Purchaser hereunder are several and
      not joint with the obligations of any other Purchaser, and no Purchaser
      shall be responsible in any way for the performance of the obligations of
      any other Purchaser. Nothing contained herein, and no action taken by any
      Purchaser pursuant hereto, shall be deemed to constitute the Purchasers as
      a partnership, an association, a joint venture or any other kind of
      entity, or create a presumption that the Purchasers are in any way acting
      in concert or as a group with respect to such obligations or the
      transactions contemplated hereby. Each Purchaser shall be entitled to
      independently protect and enforce its rights, including, without
      limitation, the rights arising out of this Amendment and it shall not be
      necessary for any other Purchaser to be joined as an additional party in
      any proceeding for such purpose. The Purchasers have not relied upon the
      same legal counsel in their review and negotiation of this Amendment. The
      Company has elected to provide all Purchasers with the same terms and form
      of Amendment for the convenience of the Company and not because it was
      required or requested to do so by the Purchasers. Each Purchaser
      represents that it has been represented by its own separate legal counsel
      in its review and negotiations of this Amendment and each party represents
      and confirms that Malhotra & Associates LLP represents only Cranshire
      in connection with this Amendment.

(Signature Pages Follow)

6

          IN
  WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed
  by their respective authorized signatories as of the date first indicated above.

AZCO MINING, INC.

  

By ________________________________________________

  Name: 

  Title: 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 
SIGNATURE PAGE
FOR PURCHASERS FOLLOWS]

7

          IN
WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed
by their respective authorized signatories as of the date first indicated
above.

 

	Name of Investing Entity:
      _________________________________________________________________________________
	Signature of Authorized Signatory of Investing
      Entity:
  ___________________________________________________________
	Name of Authorized Signatory:
      _____________________________________________________________________________
	Title of Authorized Signatory:
      ______________________________________________________________________________
	Email Address of Authorized
      Entity:__________________________________________________________________________

8

Schedule A

	
Purchaser 	Original
      
Principal 
Amount 
of Notes 	Interest 
added
      to 
Principal 
Amount 	Liquidated
      
Damages 
added to 
Principal
      
Amount 	
Additional
      
Investment 	New Note
      
Principal 
Amount 	New 
Warrant
      
Shares 	New
      
Additional 
Investment
Right-
      
Additional 
Notes 	New
      
Additional 
Investment 
Right-
      
Warrant 
Shares 
	Cranshire 
Capital, 
L.P. 	$750,000 

	$46,307 

	$30,000 

	$300,000 

	$1,126,307 

	563,154 

	$563,154 

	281,577 

	Iroquois 
Master 
Fund, Ltd. 	$750,000 

	$46,307 

	$30,000 

	$300,000 

	$1,126,307 

	563,154 

	$563,154 

	281,577 

	Lilac 
Ventures 
Master 
Fund 	$250,000 

	$15,436 

	$10,000 

	$100,000 

	$375,436 

	187,718 

	$187,718 

	93,859 

	Crestview 
Capital 
Master, 
LLC 	$400,000 

	$24,697 

	$16,000 

	$160,000 

	$600,697 

	300,349 

	300,349 

	150,176 

	Bristol 
Investment 
Fund, Ltd. 	$350,000 

	$21,610 

	$14,000 

	$140,000 

	$525,610 

	262,805 

	$262,805 

	131,403Filed by Automated Filing Services Inc. (604) 609-0244 - Azco Mining Inc. - Exhibit 4.2

Execution Version

Exhibit A

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS. NOTWITHSTANDING THE
FOREGOING, THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.

	No.
      [                                
      ] 	$[                               
      ] 
	Date:   September __, 2006 	  

AZCO MINING, INC.
SENIOR SECURED CONVERTIBLE NOTE
DUE 
January 1, 2008

          THIS
NOTE is one of a series of duly authorized and issued Notes of Azco Mining,
Inc., a Delaware corporation (the “Company”), designated as its Senior
Secured Convertible Notes due January 1, 2008, in the aggregate principal amount
of $[ ]1 (the “Notes”), subject to increase pursuant to the
terms of a certain Additional Investment Right of even date herewith.

          FOR
VALUE RECEIVED, the Company promises to pay to the order of [Holder] or its
registered assigns (the “Holder”), the principal sum of [__________]
$(__________), on January 1, 2008 (the “Maturity Date”), or such earlier
date as the Notes are required or permitted to be repaid as provided hereunder,
and to pay interest to the Holder on the unconverted and then outstanding
principal amount of this Note in accordance with the provisions hereof. The
principal amount of this Note may be increased as set forth in Section 2(c)
below. Notwithstanding the foregoing, the Company hereby unconditionally
promises to pay to the order of the Holder interest on any principal or interest
payable hereunder that shall not be paid in full when due, whether at the time
of any stated interest payment date or maturity or by prepayment, acceleration
or declaration or otherwise, for the period from and including the due date of
such payment to but excluding the date the same is paid in full, at a rate of
18% per annum (but in no event in excess of the maximum rate permitted under
applicable law). 

_________________________
1 Set forth on Schedule
A of Amendment No.1 dated September 6, 2006

          Interest
payable under this Note shall be computed on the basis of a year of 360 days and
actual days elapsed (including the first day but excluding the last day)
occurring in the period for which interest is payable. 

          Payments
of principal and interest shall be made in lawful money of the United States of
America to the Holder at its address as provided in Section 15 or by wire
transfer to such account specified from time to time by the Holder hereof for
such purpose as provided in Section 15.

          1.      Definitions.
In addition to the terms defined elsewhere in this Note, (a) capitalized terms
that are not otherwise defined herein have the meanings given to such terms in
the Securities Purchase Agreement, dated as of March 20, 2006, among the Company
and the Purchasers identified therein (the “Purchase Agreement”), and (b)
the following terms have the meanings indicated:

          “Company
Prepayment Price” for any Notes which shall be subject to prepayment
pursuant to Section 8(a), shall equal the sum of: (i) the 110% of the principal
amount of Notes to be prepaid, plus all accrued and unpaid interest thereon, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such Notes.

          “Conversion
Date” means the date a Conversion Notice is delivered to the Company
together with the Conversion Schedule pursuant to Section 6(a).

          “Conversion
Notice” means a written notice in the form attached hereto as Schedule
1.

          “Conversion
Price” means $1.00 per share, subject to adjustment from time to time
pursuant to Section 11.

          “Equity
Conditions” means, with respect to a specified issuance of Common Stock,
that each of the following conditions is satisfied: (i) the number of authorized
but unissued and otherwise unreserved shares of Common Stock is sufficient for
such issuance; (ii) such shares of Common Stock are registered for resale by the
Holder and may be sold by the Holder pursuant to an effective Registration
Statement covering the Underlying Shares or all such shares may be sold without
volume restrictions pursuant to Rule 144(k) under the Securities Act; (iii) the
Common Stock is listed or quoted (and is not suspended from trading) on an
Eligible Market and such shares of Common Stock are approved for listing upon
issuance; (iv) such issuance would be permitted in full without violating
Section 6(b) hereof or the rules or regulations of any Trading Market;
(v) no Bankruptcy Event has occurred; (vi) the Company is not in default with
respect to any material obligation hereunder or under any other Transaction
Document; and (vii) no public announcement of a pending or proposed Change of
Control transaction has occurred that has not been consummated.

          “Event
Equity Value” means 115% of the average of the Closing Prices for the five
Trading Days preceding the date of delivery of the notice requiring payment of
the Event Equity Value, provided that if the Company does not make such
required payment (together with any other payments, expenses and liquidated
damages then due and payable under the Transaction Documents) when due or, in
the event the Company 

2

disputes in good faith the occurrence
of the Triggering Event pursuant to which such notice relates, does not instead
deposit such required payment (together with such other payments, expenses and
liquidated damages then due) in escrow with an independent third-party escrow
agent within five Trading Days of the date such required payment is due, then
the Event Equity Value shall be 115% of the greater of (a) the average of the
Closing Prices for the five Trading Days preceding the date of delivery of the
notice requiring payment of the Event Equity Value and (b) the average of the
Closing Prices for the five Trading Days preceding the date on which such
required payment (together with such other payments, expenses and liquidated
damages) is paid in full.

          “Original
Issue Date” means the date of the first issuance of any Notes, regardless of
the number of transfers of any particular Note.

          "Principal
Payment Date" means any date on which payment of a principal amount of this
Note shall be due and payable by the Company in accordance with Section 9.

          “Triggering
Event” means any of the following events: (a) the Common Stock is not listed
or quoted, or is suspended from trading, on an Eligible Market for a period of
five or more Trading Days (which need not be consecutive Trading Days); (b) the
Company fails for any reason to deliver a certificate evidencing any Securities
to a Purchaser within five Trading Days after delivery of such certificate is
required pursuant to any Transaction Document or the exercise or conversion
rights of the Holders pursuant to any Transaction Document are otherwise
suspended for any reason; (c) the Company fails to have available a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock available to issue Underlying Shares upon any exercise of the Note; (d) at
any time after the Closing Date, any Common Stock issuable pursuant to the
Transaction Documents is not listed on an Eligible Market; (e) the Company
effects or publicly announces its intention to effect any exchange,
recapitalization or other transaction that effectively requires or rewards
physical delivery of certificates evidencing the Common Stock; (f) the
effectiveness of the Registration Statement lapses for any reason or the Holder
shall not be permitted to resell any Underlying Shares under the Registration
Statement, in either case, for five or more Trading Days (which need not be
consecutive Trading Days); (g) the Company fails to make any cash payment
required under the Transaction Documents and such failure is not cured within
five days after notice of such default is first given to the Company by a
Purchaser; or (h) the Company defaults in the timely performance of any other
obligation under the Transaction Documents and such default continues uncured
for a period of 30 days after the date on which notice of such default is first
given to the Company by a Purchaser (it being understood that no prior notice
need be given in the case of a default that cannot reasonably be cured within 30
days).

          2.      Principal
and Interest.

                         (a)      The
Company shall pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Note at a rate equal to 7% per annum,
compounded quarterly, and commencing February 1, 2007. Interest shall be payable
quarterly in 

3

arrears on each March 31, June 30, September 30 and December
31, except if such date is not a Trading Day, in which case such interest shall
be payable on the next succeeding Trading Day (each, an “Interest Payment
Date”). The first Interest Payment Date shall be March 31, 2007. No interest
shall be due and payable from the date hereof until February 1, 2007.

                         (b)      The
Company shall pay the principal balance of this Note to the Holder in 12 equal
monthly installments (each, a “Monthly Installment”) commencing on
February 1, 2007 and to continue on the first day of each of the 11 months
thereafter, except if such date is not a Trading Day, in which case such
principal shall be payable on the next succeeding Trading Day (each, a
“Principal Payment Date”), until the outstanding principal balance of
this Note has been paid in full. On the Maturity Date, the Company shall pay all
then accrued and unpaid interest on this Note together with the final payment of
principal hereunder.

                         (c)     
Subject to the conditions and limitations set forth below, the Company may pay
interest or principal on this Note in (i) cash or (ii) shares of Common Stock.
The Company must deliver written notice to the Holder indicating the manner in
which it intends to pay interest or principal at least 45 Trading Days prior to
each Interest Payment Date or Principal Payment Date, as applicable, but the
Company may indicate in any such notice that the election contained therein
shall continue for subsequent Interest Payment Dates or Principal Payment Dates
until revised. Failure to timely provide such written notice shall be deemed an
election by the Company to pay the amount of any interest or principal in
cash.

                         (d)      Notwithstanding
the foregoing, the Company may not pay interest or principal by issuing shares
of Common Stock unless all of the Equity Conditions are then satisfied with
respect to all shares of Common Stock then issuable upon conversion of all
outstanding Notes. If the Company is required to pay interest in cash on any
Interest Payment Date but fails to do so, the Holder may (but shall not be
required to) treat such interest as if it had been added to the principal amount
of this Note as of such Interest Payment Date or accept any number of shares of
Common Stock in lieu of such interest payment.

                         (e)      In
the event that the Company elects to pay interest or principal on any Interest
Payment Date or Principal Payment Date, as applicable, in shares of Common
Stock, the number of shares of Common Stock to be issued to each Holder as such
interest or principal shall be (i) with respect to interest, determined by
dividing the aggregate amount of interest then payable to such Holder by the
Market Price (as defined below) as of the applicable Interest Payment Date, and
rounding up to the nearest whole share (the “Actual Interest Share
Amount”), (ii) with respect to principal determined by dividing the total
principal then payable to such Holder by the lower of (y) the Conversion Price
(as adjusted in accordance herewith) and (z) the Market Price as of the
applicable Principal Payment Date, and rounding up to the nearest whole share
(the “Actual Principal Share Amount”), and (iii) paid to such Holder in
accordance with Section 2(f) below. The term “Market Price” shall mean
90% of the arithmetic average of the ten lowest VWAPs during the 20 Trading Days
immediately preceding such Interest Payment Date or Principal Payment Date, as
the case may be (not including such date).

                         (f)     
In the event that any interest or principal is paid in Common Stock, the Company
shall on the 23rd Trading Day preceding such Interest Payment Date or
Principal Payment Date (i) issue and deliver to such Holder a certificate to be
applied against the Common 

4

Stock issuable on such Interest Payment Date or Principal
Payment Date, free of restrictive legends, registered in the name of the Holder
or its designee, for the number of shares of Common Stock equal to the total
amount of interest or principal, as the case may, then payable to such Holder on
such Interest Payment Date or Principal Payment Date, divided by the Conversion
Price (the “Projected Share Amount”), or (ii) at all times after the
Holder has notified the Company that this clause (ii) shall apply, credit the
Projected Share Amount to the Holder’s or its designee’s balance account with
The Depository Trust Company through its Deposit Withdrawal Agent Commission
System. On the Interest Payment Date or Principal Payment Date, the Company
shall issue additional shares of Common Stock in an amount equal to the excess
of the Actual Interest Share Amount or Actual Principal Share Amount, as the
case may be, exceeds the Projected Share Amount and the Holder shall return to
the Company within 5 business days any excess shares of Common Stock if the
Projected Share Amount exceeds the Actual Interest Share Amount or Actual
Principal Share Amount, as the case may be.

                         (g)     
The Notes may not be repaid in whole or part absent written consent from the
Holder.

          3.     
Ranking and Covenants.

          (a)      Except
as set forth in Schedule 3.1(dd) or as otherwise permitted in Section
4.10(a) of the Purchase Agreement (the “Existing Indebtedness”), no
indebtedness of the Company is senior to this Note in right of payment, whether
with respect to interest, damages or upon liquidation or dissolution or
otherwise. Other than the Existing Indebtedness and any renewal, refinancing or
replacement thereof that does not exceed the aggregate amount of the Existing
Indebtedness and the borrowing availability under the related credit or loan
agreements on the date hereof, the Company will not, and will not permit any
Subsidiary to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, that is senior in any respect to
the Company’s obligations under the Notes, other than indebtedness secured by
purchase money security interests (which will be senior only as to the
underlying assets covered thereby) and indebtedness under capital lease
obligations (which will be senior only as to the assets covered thereby).

          (b)     
So long as any Notes are outstanding, neither the Company nor any Subsidiary
shall, directly or indirectly, (i) redeem, purchase or otherwise acquire any
capital stock or set aside any monies for such a redemption, purchase or other
acquisition or (ii) issue any Floating Price Security (as defined in Section
10(d)(ii)). 

          (c)      The
Company covenants that it will at all times reserve and keep available out of
its authorized but unissued and otherwise unreserved Common Stock, solely for
the purpose of enabling it to issue Underlying Shares as required hereunder, the
number of Underlying Shares which are then issuable and deliverable upon the
conversion of (and otherwise in respect of) this entire Note (taking into
account the adjustments set forth in Section 10 and disregarding any
limitations set forth in Section 6(b)), free from preemptive rights or
any other contingent purchase rights of Persons other than the Holder. The
Company covenants that all Underlying Shares so issuable and deliverable shall,
upon issuance in accordance with the terms hereof, be duly and validly
authorized and issued and fully paid and nonassessable.

5

          4.     
Registration of Notes. The Company shall register the Notes upon records
to be maintained by the Company for that purpose (the “Note Register”) in
the name of each record holder thereof from time to time. The Company may deem
and treat the registered Holder of this Note as the absolute owner hereof for
the purpose of any conversion hereof or any payment of interest or principal
hereon, and for all other purposes, absent actual notice to the contrary.

          5.      Registration
of Transfers and Exchanges. The Company shall register the transfer of any
portion of this Note in the Note Register upon surrender of this Note to the
Company at its address for notice set forth herein. Upon any such registration
or transfer, a new Note, in substantially the form of this Note (any such new
Note, a “New Note”), evidencing the portion of this Note so transferred
shall be issued to the transferee and a New Note evidencing the remaining
portion of this Note not so transferred, if any, shall be issued to the
transferring Holder. The acceptance of the New Note by the transferee thereof
shall be deemed the acceptance by such transferee of all of the rights and
obligations of a holder of a Note. This Note is exchangeable for an equal
aggregate principal amount of Notes of different authorized denominations, as
requested by the Holder surrendering the same. No service charge or other fee
will be imposed in connection with any such registration of transfer or
exchange.

          6.     
Conversion.

          (a)      At
the Option of the Holder. All or any portion of this Note shall be
convertible into shares of Common Stock (subject to the limitations set forth in
Section 6(b)), at the option of the Holder, at any time and from time to
time from and after the Original Issue Date. The number of Underlying Shares
issuable upon any conversion hereunder shall equal the outstanding principal
amount of this Note to be converted, plus the amount of any accrued but unpaid
interest on this Note through the Conversion Date, divided by the Conversion
Price on the Conversion Date. The Holder shall effect conversions under this
Section 6(a) by delivering to the Company a Conversion Notice together
with a schedule in the form of Schedule 2 attached hereto (the
“Conversion Schedule”). If the Holder is converting less than all of the
principal amount of this Note, or if a conversion hereunder may not be effected
in full due to the application of Section 6(b), the Company shall honor
such conversion to the extent permissible hereunder and shall promptly deliver
to the Holder a Conversion Schedule indicating the principal amount (and accrued
interest) which has not been converted.

          (b)     
Certain Conversion Restrictions. 

               Relating
to the Number of Shares.

          (A) Subject
to Section 6(b)(i)(B), the number of shares of Common Stock that may be acquired
by a Holder upon any conversion of Notes (or otherwise in respect hereof) shall
be limited to the extent necessary to insure that, following such conversion (or
other issuance), the total number of shares of Common Stock then beneficially
owned by such Holder and its Affiliates and any other Persons whose beneficial
ownership of Common Stock would be aggregated with such Holder’s for purposes of
Section 13(d) of the Exchange Act, does not exceed 4.999% (the “Threshold
Percentage”) or 9.999% (the “Maximum Percentage”) of the total number
of issued and outstanding shares of Common Stock (including for such purpose the
shares of Common Stock issuable upon 

6

such conversion). For such purposes,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder. Each delivery
of a Conversion Notice hereunder will constitute a representation by the
applicable Holder that it has evaluated the limitations set forth in this
Section 6(b)(i)(A) and has determined that issuance of the full number of
Underlying Shares issuable in respect of such Conversion Notice does not violate
the restrictions contained in this Section 6(b)(i)(A).

          (B)
Notwithstanding the provisions of Section 6(b)(i)(A), by written notice to the
Company, the Holder shall have the right (x) at any time and from time to time
to reduce its Maximum Percentage immediately upon notice to the Company in the
event and only to the extent that Section 16 of the Exchange Act or the rules
promulgated thereunder (or any successor statute or rules) is changed to reduce
the beneficial ownership percentage threshold thereunder to a percentage less
than 9.999% and (y) at any time and from time to time, to waive the provisions
of this Section insofar as they relate to the Threshold Percentage or to
increase its Threshold Percentage (but not in excess of the Maximum Percentage)
unless the Holder shall have, by written instrument delivered to the Company,
irrevocably waived its rights to so increase its Threshold Percentage, but (i)
any such waiver or increase will not be effective until the 61st day after such
notice is delivered to the Company, and (ii) any such waiver or increase or
decrease will apply only to the Holder and not to any other holder of Notes.

          (C) If
the Company is listed on an Eligible Market and for so long as the Company is
listed on such Eligible Market, if the Company has not previously obtained
Shareholder Approval (as defined below), then the Company may not issue in
excess of the Issuable Maximum upon conversions of the Notes. The "Issuable
Maximum" means a number of shares equal to 19.99% of the of the Company's
outstanding shares on the Closing Date. Each Holder shall be entitled to a
portion of the Issuable Maximum equal to the quotient obtained by dividing: (x)
the principal amount of Notes issued and sold to such Holder on the Original
Issue Date by (y) the aggregate principal amount of Notes issued and sold by the
Company on the Original Issue Date. If any Holder shall no longer hold Notes,
then such Holder's remaining portion of the Issuable Maximum shall be allocated
pro-rata among the remaining Holders. If on any Conversion Date: (A) the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding principal amount of Notes would
exceed the Issuable Maximum, and (B) the Company shall not have previously
obtained the vote of shareholders, as may be required by the applicable rules
and regulations of its Trading Market (or any successor entity) applicable to
approve the issuance of shares of Common Stock in excess of the Issuable Maximum
pursuant to the terms hereof (the "Shareholder Approval"), then, the
Company shall issue to the converting Holder a number of shares of Common Stock
equal to such Holder's pro-rata portion (which shall be calculated pursuant to
the terms hereof) of the Issuable Maximum and, with respect to the remainder of
the principal amount of Notes then held by such Holder for which a conversion
would result in an issuance of shares of Common Stock in excess of such Holder's
pro-rata portion (which shall be calculated pursuant to the terms hereof) of the
Issuable Maximum (the "Excess Principal Amount"), the applicable Holder
shall have the right to require the Company to either: (1) obtain the
Shareholder Approval applicable to such issuance 

7

as soon as is possible, but in any
event not later than the 60th day after such request, or (2) pay cash, in an
amount equal to the Excess Principal Amount (and accrued and unpaid interest
thereon). If a Holder shall have elected the first option pursuant to the
immediately preceding sentence and the Company shall have failed to obtain the
Shareholder Approval on or prior to the 60th day after such request, then within
three (3) days of such 90th day, the Company shall pay cash to such Holder an
amount equal to Excess Principal Amount (and accrued and unpaid interest
thereon). Notwithstanding anything herein to the contrary, if on any date other
than a Conversion Date: (A) the aggregate number of shares of Common Stock that
would then be issuable upon conversion in full of all then outstanding principal
amount of Notes would exceed the Issuable Maximum, and (B) the Company shall not
have previously obtained the Shareholder Approval, then, the Holder shall be
entitled to require the Company to pay to it in cash an amount equal to the
principal amount of Notes (and accrued and unpaid interest thereon) then held by
such Holder for which a potential conversion on such date would result in an
issuance of shares of Common Stock in excess of such Holder's pro-rata portion
(which shall be calculated pursuant to the terms hereof) of the Issuable
Maximum. The outstanding principal amount of Notes shall be reduced by the
Excess Principal Amount upon the Holder’s receipt of the Excess Principal Amount
pursuant to the terms hereof. The Company and the Holder understand and agree
that shares of Common Stock issued to and then held by the Holder as a result of
conversions of Notes shall not be entitled to cast votes on any resolution to
obtain Shareholder Approval pursuant hereto.

          7.      Mechanics
of Conversion.

          (a)      Upon
conversion of this Note, the Company shall promptly (but in no event later than
three Trading Days after the Conversion Date) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate a certificate for the Underlying
Shares issuable upon such conversion, free of restrictive legends unless a
registration statement covering the resale of the Underlying Shares and naming
the Holder as a selling stockholder thereunder is not then effective and such
Underlying Shares are not then freely transferable without volume restrictions
pursuant to Rule 144 under the Securities Act. The Holder, or any Person so
designated by the Holder to receive Underlying Shares, shall be deemed to have
become holder of record of such Underlying Shares as of the Conversion Date. The
Company shall, upon request of the Holder, use its best efforts to deliver
Underlying Shares hereunder electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. 

          (b)     
The Holder shall not be required to deliver the original Note in order to effect
a conversion hereunder. Execution and delivery of the Conversion Notice shall
have the same effect as cancellation of the original Note and issuance of a New
Note representing the remaining outstanding principal amount. Upon surrender of
this Note following one or more partial conversions, the Company shall promptly
deliver to the Holder a New Note representing the remaining outstanding
principal amount.

          (c)      The
Company’s obligations to issue and deliver Underlying Shares upon conversion of
this Note in accordance with the terms hereof are absolute and unconditional,

8

irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any set-off, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other Person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with the
issuance of such Underlying Shares.

          (d)     
If by the third Trading Day after a Conversion Date the Company fails to deliver
to the Holder such Underlying Shares in such amounts and in the manner required
pursuant to Section 7(a), then the Holder will have the right to rescind
such conversion.

          (e)     
If by the third Trading Day after a Conversion Date the Company fails to deliver
to the Holder such Underlying Shares in such amounts and in the manner required
pursuant to Section 7(a), and if after such third Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by such Holder of the Underlying Shares which
the Holder anticipated receiving upon such conversion (a “Buy-In”), then
the Company shall either (i) pay cash to such Purchaser in an amount equal to
such Purchaser's total purchase price (including brokerage commissions, if any)
for the shares of Common Stock so purchased (the “Buy-In Price”), at
which point the Company's obligation to deliver such certificate (and to issue
such Common Stock) shall terminate, or (ii) promptly honor its obligation to
deliver to such Purchaser a certificate or certificates representing such Common
Stock and pay cash to such Purchaser in an amount equal to the excess (if any)
of the Buy-In Price over the product of (A) such number of shares of Common
Stock, times (B) the Closing Price on the date of the event giving rise to the
Company's obligation to deliver such certificate.

          8.     
Prepayment.

          (a)      Upon
delivery of a written notice to the Holder (a “Company Prepayment Notice”
and the date such notice is delivered by the Company, the “Company Notice
Date”), the Company shall be entitled to prepay all or any portion of the
outstanding principal amount of this Note plus any accrued and unpaid interest
thereon for an amount in cash equal to the Company Prepayment Price.
Notwithstanding anything to the contrary, the Company shall only be entitled to
deliver a Company Prepayment Notice pursuant to the terms hereof if (i) the
Equity Conditions are satisfied with respect to all shares of Common Stock
issuable pursuant to the Transaction Documents on the Company Notice Date and
(ii) the VWAP of the Common Stock for each of the ten consecutive Trading Days
immediately preceding the Company Notice Date is greater than or equal to 300%
of the Conversion Price. If any of the Equity Conditions shall cease to be in
effect during the period between the Company Notice Date and the date the
Company Prepayment Price is paid in full, then the Holder subject to such
prepayment may elect, by written notice to the Company given at any time after
any of the Equity Conditions shall cease to be in effect, to invalidate ab
initio such optional prepayment, notwithstanding anything herein contained
to the contrary. The Holder may, within 5 Trading Days of its receipt of the
Company Prepayment Notice, convert any portion of the outstanding principal
amount of this Note and any accrued and unpaid interest thereon subject to a
Company Prepayment Notice. Once delivered, the Company shall not be entitled to
rescind a Company Prepayment Notice.

9

          (b)      The
Company Prepayment Price shall be due on the 5th Trading Day
immediately following the Company Notice Date. Any such prepayment shall be free
of any claim of subordination. If any portion of the Company Prepayment Price
shall not be timely paid by the Company, interest shall accrue thereon at the
rate of 18% per annum (or the maximum rate permitted by applicable law,
whichever is less) until the Company Prepayment Price plus all such interest is
paid in full, which payment shall constitute liquidated damages and not a
penalty. In addition, if any portion of the Company Prepayment Price remains
unpaid after such date, the Holder subject to such prepayment may elect by
written notice to the Company to invalidate ab initio such Company
Prepayment Notice with respect to the unpaid amount, notwithstanding anything
herein contained to the contrary and no interest shall be owed to the Holder in
respect thereof. If the Holder makes such an election, the principal amount of
this Note, together with the accrued and unpaid interest thereon shall be
reinstated with respect to such unpaid amount and the Company shall no longer
have any prepayment rights under this Section 8.

          (c)      Notwithstanding
anything to the contrary herein, the Company may not elect a prepayment pursuant
to Section 8(a)(i) unless the Company makes such prepayment election to all of
the Holders on a pro rata basis, based on such Holders then outstanding
principal amount of Notes.

          9.      Events
of Default.

          (a)      “Event
of Default” means any one of the following events (whatever the reason and
whether it shall be voluntary or involuntary or effected by operation of law or
pursuant to any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):

                    (i)      any
default in the payment (free of any claim of subordination) of principal,
interest or liquidated damages in respect of any Notes, as and when the same
becomes due and payable (whether on a date specified for the payment of interest
or the date on which the obligations under the Note mature or by acceleration,
redemption, prepayment or otherwise);

                    (ii)      the
Company or any Subsidiary defaults in any of its obligations under any other
note or any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by
which there may be secured or evidenced, any indebtedness for borrowed money or
money due under any long term leasing or factoring arrangement of the Company or
any Subsidiary in an amount exceeding $500,000, whether such indebtedness now
exists or is hereafter created, and such default results in such indebtedness
becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable;

                    (iii)      the
occurrence of a Triggering Event; or

                    (iv)     
the occurrence of a Bankruptcy Event.

          (b)     
At any time or times following the occurrence of an Event of Default, the Holder
shall have the option to elect, by notice to the Company (an “Event
Notice”), to require the 

10

Company to repurchase all or any portion of (i) the outstanding
principal amount of this Note, at a repurchase price equal to the greater of (A)
115% of such outstanding principal amount, plus all accrued but unpaid interest
thereon through the date of payment, or (B) the Event Equity Value of the
Underlying Shares issuable upon conversion of such principal amount and all such
accrued but unpaid interest thereon, and (ii) any Underlying Shares issued to
such Holder upon conversion of Notes and then owned by the Holder, at a price
per share equal to the Event Equity Value of such issuable and issued Underlying
Shares. The aggregate amount payable pursuant to the preceding sentence is
referred to as the “Event Price.” The Company shall pay the Event Price
to the Holder no later than the third Trading Day following the date of delivery
of the Event Notice, and upon receipt thereof the Holder shall deliver this Note
and certificates evidencing any Underlying Shares so repurchased to the Company
(to the extent such certificates have been delivered to the Holder).

          (c)      Upon
the occurrence of any Bankruptcy Event, all amounts pursuant to Section
9(b) shall immediately become due and payable in full in cash, without
any further action by the Holder.

          (d)      In
connection with any Event of Default, the Holder need not provide and the
Company hereby waives any presentment, demand, protest or other notice of any
kind, and the Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Any such declaration may be rescinded and
annulled by the Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereto.

          10.     
Charges, Taxes and Expenses. Issuance of certificates for Underlying
Shares upon conversion of (or otherwise in respect of) this Note shall be made
without charge to the Holder for any issue or transfer tax, withholding tax,
transfer agent fee or other incidental tax or expense in respect of the issuance
of such certificate, all of which taxes and expenses shall be paid by the
Company; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Underlying Shares or Notes in a name other
than that of the Holder. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Note or
receiving Underlying Shares in respect hereof.

          11.     
Certain Adjustments. The Conversion Price is subject to adjustment from
time to time as set forth in this Section 11.

          (a)     
Stock Dividends and Splits. If the Company, at any time while this Note
is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes
a distribution on any class of capital stock that is payable in shares of Common
Stock, (ii) subdivides outstanding shares of Common Stock into a larger number
of shares, or (iii) combines outstanding shares of Common Stock into a smaller
number of shares, then in each such case the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to clause (i) of this
Section 10(a) shall become effective immediately 

11

after the record date for the determination of stockholders
entitled to receive such dividend or distribution, and any adjustment pursuant
to clause (ii) or (iii) of this Section 11(a) shall become effective
immediately after the effective date of such subdivision or combination.

          (b)     
Pro Rata Distributions. If the Company, at any time while this Note is
outstanding, distributes to all holders of Common Stock (i) evidences of its
indebtedness, (ii) any security (other than a distribution of Common Stock
described in Section 11(c)), (iii) rights or warrants to subscribe for or
purchase any security, or (iv) cash or any other asset (in each case,
“Distributed Property”), then, at the request of the Holder delivered
before the 90th day after the record date fixed for determination of
stockholders entitled to receive such distribution, the Company will deliver to
the Holder, within five Trading Days after such request (or, if later, on the
effective date of such distribution), the Distributed Property that the Holder
would have been entitled to receive in respect of the Underlying Shares for
which this Note could have been converted immediately prior to such record date.
If such Distributed Property is not delivered to the Holder pursuant to the
preceding sentence, upon any conversion of this Note that occurs after such
record date, the Holder shall be entitled to receive, in addition to the
Underlying Shares otherwise issuable upon such conversion, the Distributed
Property that the Holder would have been entitled to receive in respect of such
number of Underlying Shares had the Holder been the record holder of such
Underlying Shares immediately prior to such record date.

          (c)      Fundamental
Changes. If, at any time while this Note is outstanding, (i) the Company
effects any merger or consolidation of the Company with or into another Person,
(ii) the Company effects any sale of all or substantially all of its assets in
one or more transactions, (iii) any tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (iv) the Company effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(other than as a result of a subdivision or combination of shares of Common
Stock described in Section 11(a)) (in any such case, a “Fundamental
Change”), then upon any subsequent conversion of this Note, the Holder shall
have the right to receive, for each Underlying Share that would have been
issuable upon such conversion absent such Fundamental Change, the same kind and
amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Change if it had been, immediately prior
to such Fundamental Change, the holder of one share of Common Stock (the
“Alternate Consideration”). If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Change, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Note following such
Fundamental Change. In the event of a Fundamental Change, the Company or the
successor or purchasing Person, as the case may be, shall execute with the
Holder a written agreement providing that:

          (x)     
this Note shall thereafter entitle the Holder to purchase the Alternate
Consideration,

          (y)     
in the case of any such successor or purchasing Person, upon such consolidation,
merger, statutory exchange, combination, sale or conveyance such 

12

successor or purchasing Person shall be
jointly and severally liable with the Company for the performance of all of the
Company's obligations under this Warrant and the Purchase Agreement, and 

          (z)     
if registration or qualification is required under the Exchange Act or
applicable state law for the public resale by the Holder of shares of stock and
other securities so issuable upon exercise of this Warrant, such registration or
qualification shall be completed prior to such reclassification, change,
consolidation, merger, statutory exchange, combination or sale.

If, in the case of any Fundamental Change, the Alternate
Consideration includes shares of stock, other securities, other property or
assets of a Person other than the Company or any such successor or purchasing
Person, as the case may be, in such Fundamental Change, then such written
agreement shall also be executed by such other Person and shall contain such
additional provisions to protect the interests of the Holder as the Board of
Directors of the Company shall reasonably consider necessary by reason of the
foregoing. At the Holder’s request, any successor to the Company or surviving
Person in such Fundamental Change shall issue to the Holder a new Note
consistent with the foregoing provisions and evidencing the Holder’s right to
convert such Note into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Change is effected shall include terms requiring
any such successor or surviving Person to comply with the provisions of this
Section 11(c) and insuring that this Note (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Change. If any Fundamental Change constitutes or results in a
Change of Control, then at the request of the Holder delivered before the 90th
day after such Fundamental Change, the Company (or any such successor or
surviving entity) will purchase this Note from the Holder for a purchase price,
payable in cash within five Trading Days after such request (or, if later, on
the effective date of the Fundamental Transaction), equal to the Black Scholes
value of the remaining unexercised portion of this Note on the date of such
request. 

          (d)      Subsequent
Equity Sales.

                    (i)     
If, at any time while this Note is outstanding, the Company or any Subsidiary
issues additional shares of Common Stock or rights, warrants, options or other
securities or debt convertible, exercisable or exchangeable for shares of Common
Stock or otherwise entitling any Person to acquire shares of Common Stock
(collectively, “Common Stock Equivalents”) at an effective net price to
the Company per share of Common Stock (the “Effective Price”) less than
the Conversion Price (as adjusted hereunder to such date), then the Conversion
Price shall be reduced to equal the Effective Price. If, at any time while this
Note is outstanding, the Company or any Subsidiary issues Common Stock or Common
Stock Equivalents at an Effective Price greater than the Conversion Price (as
adjusted hereunder to such date) but less than the average Closing Price over
the five Trading Days prior to such issuance (the “Adjustment Price”),
then the Conversion Price shall be reduced to equal the product of (A) the
Conversion Price in effect immediately prior to such issuance of Common Stock or
Common Stock Equivalents times (B) a fraction, the numerator of which is the sum
of (1) the number of shares of Common Stock outstanding immediately prior to
such issuance, plus (2) the number of shares of Common Stock which the aggregate
Effective Price of 

13

the Common Stock issued (or deemed to
be issued) would purchase at the Adjustment Price, and the denominator of which
is the aggregate number of shares of Common Stock outstanding or deemed to be
outstanding immediately after such issuance. For purposes of this paragraph, in
connection with any issuance of any Common Stock Equivalents, (A) the maximum
number of shares of Common Stock potentially issuable at any time upon
conversion, exercise or exchange of such Common Stock Equivalents (the
“Deemed Number”) shall be deemed to be outstanding upon issuance of such
Common Stock Equivalents, (B) the Effective Price applicable to such Common
Stock shall equal the minimum dollar value of consideration payable to the
Company to purchase such Common Stock Equivalents and to convert, exercise or
exchange them into Common Stock (net of any discounts, fees, commissions and
other expenses), divided by the Deemed Number, and (C) no further adjustment
shall be made to the Conversion Price upon the actual issuance of Common Stock
upon conversion, exercise or exchange of such Common Stock Equivalents.

                    (ii)      If,
at any time while this Note is outstanding, the Company or any Subsidiary issues
Common Stock Equivalents with an Effective Price or a number of underlying
shares that floats or resets or otherwise varies or is subject to adjustment
based (directly or indirectly) on market prices of the Common Stock (a
“Floating Price Security”), then for purposes of applying the preceding
paragraph in connection with any subsequent conversion, the Effective Price will
be determined separately on each Conversion Date and will be deemed to equal the
lowest Effective Price at which any holder of such Floating Price Security is
entitled to acquire Common Stock on such Conversion Date (regardless of whether
any such holder actually acquires any shares on such date).

                    (iii)      Notwithstanding
the foregoing, no adjustment will be made under this paragraph (d) in respect of
Excluded Stock. the issuance of securities in connection with a bona fide joint
venture or development agreement or strategic partnership or similar agreement
approved by the Company’s board of directors, the primary purpose of which is
not to raise equity capital.

          (e)      Calculations.
All calculations under this Section 11 shall be made to the nearest cent
or the nearest 1/100th of a share, as applicable. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.

          (f)      Notice
of Adjustments. Upon the occurrence of each adjustment pursuant to this
Section 11, the Company at its expense will promptly compute such
adjustment in accordance with the terms hereof and prepare and deliver to the
Holder a certificate describing in reasonable detail such adjustment and the
transactions giving rise thereto, including all facts upon which such adjustment
is based.

          (g)     
Notice of Corporate Events. If the Company (i) declares a dividend or any
other distribution of cash, securities or other property in respect of its
Common Stock, including without limitation any granting of rights or warrants to
subscribe for or purchase any capital 

14

stock of the Company or any Subsidiary, (ii) authorizes or
approves, enters into any agreement contemplating or solicits stockholder
approval for any Fundamental Change or (iii) authorizes the voluntary
dissolution, liquidation or winding up of the affairs of the Company, then the
Company shall deliver to the Holder a notice describing the material terms and
conditions of such transaction, at least 20 Trading Days prior to the applicable
record or effective date on which a Person would need to hold Common Stock in
order to participate in or vote with respect to such transaction, and the
Company will take all steps reasonably necessary in order to insure that the
Holder is given the practical opportunity to convert this Note prior to such
time so as to participate in or vote with respect to such transaction; provided,
however, that the failure to deliver such notice or any defect therein shall not
affect the validity of the corporate action required to be described in such
notice. 

          12.      No
Fractional Shares. The Company shall not issue or cause to be issued
fractional Underlying Shares on conversion of this Note. If any fraction of an
Underlying Share would, except for the provisions of this Section 12, be
issuable upon conversion of this Note, the number of Underlying Shares to be
issued will be rounded up to the nearest whole share.

          13.     
Notices. Any and all notices or other communications or deliveries
hereunder (including any Conversion Notice) shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section 13 prior to 6:30 p.m. (New York City time) on a
Trading Day, (ii) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section 10 on a day that is not a Trading Day or later
than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (i) if to
the Company, to Azco Mining, Inc., 7239 N El Mirage Road, Glendale, AZ 85307,
facsimile: 623-935-0781, attention W. Pierce Carson, or (ii) if to the Holder,
to the address or facsimile number appearing on the Company’s Noteholder records
or such other address or facsimile number as the Holder may provide to the
Company in accordance with this Section 13.

          14.      Miscellaneous.

          (a)      This
Note shall be binding on and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. The Company shall not be
permitted to assign this Note.

          (b)     
Subject to Section 14(a), nothing in this Note shall be construed to give
to any person or corporation other than the Company and the Holder any legal or
equitable right, remedy or cause under this Note.

          (c)     
GOVERNING LAW; VENUE; WAIVER
OF JURY TRIAL. ALL QUESTIONS
CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICTS OF LAW THEREOF. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND 

15

FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF
MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN
(INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS),
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 IMPROPER. EACH PARTY
HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS
BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF
VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF
DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS
AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED
TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.
THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

          (d)      The
headings herein are for convenience only, do not constitute a part of this Note
and shall not be deemed to limit or affect any of the provisions hereof.

          (e)      In
case any one or more of the provisions of this Note shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Note shall not in any way be affected or impaired
thereby and the parties will attempt in good faith to agree upon a valid and
enforceable provision which shall be a commercially reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Note.

          (f)     
In the event of any stock split, subdivision, dividend or distribution payable
in shares of Common Stock (or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly shares of Common
Stock), combination or other similar recapitalization or event occurring after
the date hereof, each reference in this Note to a price shall be amended to
appropriately account for such event.

          (g)      No
provision of this Note may be waived or amended except in a written instrument
signed, in the case of an amendment, by the Company and the Holder or, or, in
the case of a waiver, by the Holder. No waiver of any default with respect to
any provision, condition or requirement of this Note shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right. 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 
SIGNATURE PAGE
FOLLOWS]

16

          IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly
authorized officer as of the date first above indicated.

AZCO MINING, INC.

By
________________________________________________
Name: 
Title: 

17

Schedule 1

FORM OF CONVERSION NOTICE

(To be executed by the registered Holder
 in order to
convert Note)

The undersigned hereby elects to convert the specified
principal amount of Senior Secured Convertible Notes (the “Notes”) into
shares of common stock, no par value (the “Common Stock”), of Azco
Mining, Inc., a Delaware corporation, according to the conditions hereof, as of
the date written below.

	 	 	 
	 	Date to Effect Conversion 	 
	 	 	 
	 	 	 
	 	Principal amount of Notes owned
      prior to conversion 	 
	 	 	 
	 	 	 
	 	Principal amount of Notes to be
      converted 	 
	 	(including accrued but unpaid
      interest thereon) 	 
	 	 	 
	 	 	 
	 	Number of shares of Common Stock
      to be Issued 	 
	 	 	 
	 	 	 
	 	Applicable Conversion Price 	 
	 	 	 
	 	 	 
	 	Principal amount of Notes owned
      subsequent to Conversion 	 
	 	 	 
	 	 	 
	 	Name of Holder 	 
	 	 	 
	 	By 	 
	 	Name: 	 
	 	Title: 	 

Schedule 2

CONVERSION SCHEDULE

This Conversion Schedule reflects conversions of the Senior
Secured Convertible Notes issued by Azco Mining, Inc.

  	

        Date of Conversion 	

        Amount of Conversion 	Aggregate Principal Amount 

        Remaining Subsequent to Conversion 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 

19

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