Document:

exhibit_4-2.htm

    
      

    

    EXHIBIT
4.2

    
 

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”).  THE SECURITIES MAY
NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE
144 OR REGULATION S UNDER SAID ACT.

     

    

     

    CALLABLE
SECURED CONVERTIBLE NOTE

     

    Weston,
Florida

    
      	July 31,
      2008 	
               $50,000

            

    

     

    

    FOR VALUE RECEIVED, CAMELOT ENTERTAINMENT GROUP,
INC., a Delaware Corporation (hereinafter called the “Borrower”), hereby promises to
pay to the order of New Millennium Capital Partners II, LLC or registered
assigns (the “Holder”)
the sum of $50,000, on July 31, 2011 (the “Maturity Date”), and to pay
interest on the unpaid principal balance hereof at the rate of ten percent (10%)
(the “Interest Rate”)
per annum from July 31, 2008 (the “Issue Date”) until the same
becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.  Any amount of principal or interest on this
Note which is not paid when due shall bear interest at the rate of fifteen
percent (15%) per annum from the due date thereof until the same is paid (“Default
Interest”).  Notwithstanding the above, there shall be no
default in the event that the Company is either making cash payments or
permitting monthly conversions as set forth herein. Interest shall commence
accruing on the Issue Date, shall be computed on the basis of a 365-day year and
the actual number of days elapsed and shall be payable quarterly provided that
no interest shall be due and payable for any month in which the Trading Price
(as such term is defined below) is greater than the Initial Market Price as
defined in Section 5.2 for each Trading Day (as such term is defined below) of
the month. All payments due hereunder (to the extent not converted into common
stock, $.001 par value per share (the “Common Stock”) in accordance
with the terms hereof) shall be made in lawful money of the United States of
America.  All payments shall be made at such address as the Holder
shall hereafter give to the Borrower by written notice made in accordance with
the provisions of this Note.  Whenever any amount expressed to be due
by the terms of this Note is due on any day which is not a business day, the
same shall instead be due on the next succeeding day which is a business day
and, in the case of any interest payment date which is not the date on which
this Note is paid in full, the extension of the due date thereof shall not be
taken into account for purposes of determining the amount of interest due on
such date.  As used in this Note, the term “business day” shall mean
any day other than a Saturday, Sunday or a day on which commercial banks in the
city of New York, New York are authorized or required by law or executive order
to remain closed.  Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in that certain
Securities Purchase Agreement dated July 31, 2008, pursuant to which this Note
was originally issued (the “Purchase
Agreement”).

     

    
      
         

      

      
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    This Note
is free from all taxes, liens, claims and encumbrances with respect to the issue
thereof and shall not be subject to preemptive rights or other similar rights of
shareholders of the Borrower and will not impose personal liability upon the
holder thereof.  The obligations of the Borrower under this Note shall
be secured by that certain Security Agreement and that certain Intellectual
Property Security Agreement, each dated July 31, 2008 by and between the
Borrower and the Holder.

     

    The
following terms shall apply to this Note:

     

     

    ARTICLE I.
CONVERSION RIGHTS

     

    1.1    Conversion
Right.

     

    The
Holder shall have the right from time to time, and at any time on or prior to
the earlier of (i) the Maturity Date and (ii) the date of payment of the Default
Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III,
the Optional Prepayment Amount (as defined in Section 5.1 or any payments
pursuant to Section 1.7, each in respect of the remaining outstanding principal
amount of this Note to convert all or any part of the outstanding and unpaid
principal amount of this Note into fully paid and non-assessable shares of
Common Stock, as such Common Stock exists on the Issue Date, or any shares of
capital stock or other securities of the Borrower into which such Common Stock
shall hereafter be changed or reclassified at the conversion
price  (the “Conversion Price”) determined
as provided herein (a “Conversion”); provided, however, that in no
event shall the Holder be entitled to convert any portion of this Note in excess
of that portion of this Note upon conversion of which the sum of (1) the number
of shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Notes or the unexercised
or unconverted portion of any other security of the Borrower (including, without
limitation, the warrants issued by the Borrower pursuant to the Purchase
Agreement) subject to a limitation on conversion or exercise analogous to the
limitations contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with respect to which
the determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock and provided further that the
Holder shall not be entitled to convert any portion of this Note during any
month immediately succeeding a Determination Date on which the Borrower
exercises its prepayment option pursuant to Section 5.2 of this
Note.  For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso.  The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing the Conversion Amount
(as defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A
(the “Notice of
Conversion”), delivered to the Borrower by the Holder in accordance with
Section 1.4 below; provided that the Notice of Conversion is submitted by
facsimile (or by other means resulting in, or reasonably expected to result in,
notice) to the Borrower before 6:00 p.m., New York, New York time on such
conversion date (the “Conversion
Date”).  The term “Conversion Amount” means, with
respect to any conversion
of this Note, the sum of (1) the principal amount of this Note to be converted
in such conversion plus (2) at the
Borrower’s option, accrued and unpaid interest, if any, on such principal amount
at the interest rates provided in this Note to the Conversion Date, provided,
however, that the Company shall have the right to pay any or all interest in
cash plus (3)
at the Borrower’s option, Default Interest, if any, on the amounts referred to
in the immediately preceding clauses (1) and/or (2) plus (4) at the
Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights
Agreement, dated as of July 31, 2008, executed in connection with the initial
issuance of this Note and the other Notes issued on the Issue Date (the “Registration Rights
Agreement”).  The term “Determination Date” means the
last business day of each month after the Issue Date.

     

     

    
      
        
        

      

      
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    1.2    Conversion
Price.

     

    (a)    Calculation
of Conversion Price.  The Conversion
Price shall be the Variable Conversion Price (subject, to equitable adjustments
for stock splits, stock dividends or rights offerings by the Borrower relating
to the Borrower’s securities or the securities of any subsidiary of the
Borrower, combinations, recapitalization, reclassifications, extraordinary
distributions and similar events).  The “Variable Conversion Price”
shall mean the Applicable Percentage (as defined herein) multiplied by the
Market Price (as defined herein).  “Market Price” means the
average of the lowest three (3) Trading Prices (as defined below) for the Common
Stock during the twenty (20) Trading Day period ending one Trading Day prior to
the date the Conversion Notice is sent by the Holder to the Borrower via
facsimile (the “Conversion
Date”).  “Trading Price” means, for any
security as of any date, the intraday trading price on the Over-the-Counter
Bulletin Board, or applicable trading market (the “OTCBB”) as reported by a
reliable reporting service (“Reporting Service”) mutually
acceptable to Borrower and Holder and hereafter designated by Holders of a
majority in interest of the Notes and the Borrower or, if the OTCBB is not the
principal trading market for such security, the intraday trading price of such
security on the principal securities exchange or trading market where such
security is listed or traded or, if no intraday trading price of such security
is available in any of the foregoing manners, the average of the intraday
trading prices of any market makers for such security that are listed in the
“pink sheets” by the National Quotation Bureau, Inc.  If the Trading
Price cannot be calculated for such security on such date in the manner provided
above, the Trading Price shall be the fair market value as mutually determined
by the Borrower and the holders of a majority in interest of the Notes being
converted for which the calculation of the Trading Price is required in order to
determine the Conversion Price of such Notes.  “Trading Day” shall mean any
day on which the Common Stock is traded for any period on the OTCBB, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded.  “Applicable Percentage” shall
mean 50%.

     

    (b)    Conversion
Price During Major Announcements.  Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the event the Borrower
(i) makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any person, group
or entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the  “Announcement Date”), then the
Conversion Price shall, effective upon the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have been applicable
for a Conversion occurring on the Announcement Date and (y) the Conversion Price
that would otherwise be in effect. From and after the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in this
Section 1.2(a).  For purposes hereof,  “Adjusted Conversion Price Termination
Date” shall mean, with respect to any proposed transaction or tender
offer (or takeover scheme) for which a public announcement as contemplated by
this Section 1.2(b) has been made, the date upon which the Borrower (in the case
of clause (i) above) or the person, group or entity (in the case of clause (ii)
above) consummates or publicly announces the termination or abandonment of the
proposed transaction or tender offer (or takeover scheme) which caused this
Section 1.2(b) to become operative.

     

     

    
      
        
        

      

      
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    1.3    Authorized
Shares.  The Borrower
covenants that during the period the conversion right exists and following the
reverse split of the Common Stock, the Borrower will reserve from its authorized
and unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Note and the other Notes issued pursuant to the Purchase
Agreement.  Upon the effectiveness of the reverse split of the Common
Stock, the Borrower is required at all times to have authorized and reserved two
times the number of shares that is actually issuable upon full conversion of the
Notes (based on the Conversion Price of the Notes or the Exercise Price of the
Warrants in effect from time to time) (the “Reserved
Amount”).  The Reserved Amount shall be increased from time to
time in accordance with the Borrower’s obligations pursuant to Section 4(h) of
the Purchase Agreement.  The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and
non-assessable.  In addition, if the Borrower shall issue any
securities or make any change to its capital structure which would change the
number of shares of Common Stock into which the Notes shall be convertible at
the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Notes.  The Borrower (i) acknowledges
that it has irrevocably instructed its transfer agent to issue certificates for
the Common Stock issuable upon conversion of this Note, and (ii) agrees
that its issuance of this Note shall constitute full authority to its officers
and agents who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Note.

     

    If, at
any time a Holder of this Note submits a Notice of Conversion, and the Borrower
does not have sufficient authorized but unissued shares of Common Stock
available to effect such conversion in accordance with the provisions of this
Article I (a “Conversion
Default”), subject to Section 4.8, the Borrower shall issue to the Holder
all of the shares of Common Stock which are then available to effect such
conversion.  The portion of this Note which the Holder included in its
Conversion Notice and which exceeds the amount which is then convertible into
available shares of Common Stock (the “Excess Amount”) shall,
notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the Holder’s
option at any time after) the date additional shares of Common Stock are
authorized by the Borrower to permit such conversion,
at which time the Conversion Price in respect thereof shall be the lesser of (i)
the Conversion Price on the Conversion Default Date (as defined below) and (ii)
the Conversion Price on the Conversion Date thereafter elected by the Holder in
respect thereof.  In addition, the Borrower shall pay to the Holder
payments (“Conversion Default
Payments”) for a Conversion Default in the amount of (x) the sum of (1) the then
outstanding principal amount of this Note plus (2) accrued and
unpaid interest on the unpaid principal amount of this Note through the
Authorization Date (as defined below) plus (3) Default
Interest, if any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y)
..24, multiplied
by (z) (N/365), where N = the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion Default (the “Conversion Default Date”) to
the date (the “Authorization
Date”) that the Borrower authorizes a sufficient number of shares of
Common Stock to effect conversion of the full outstanding principal balance of
this Note.  The Borrower shall use its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable following the
earlier of (i) such time that the Holder notifies the Borrower or that the
Borrower otherwise becomes aware that there are or likely will be insufficient
authorized and unissued shares to allow full conversion thereof and (ii) a
Conversion Default.  The Borrower shall send notice to the Holder of
the authorization of additional shares of Common Stock, the Authorization Date
and the amount of Holder’s accrued Conversion Default Payments.  The
accrued Conversion Default Payments for each calendar month shall be paid in
cash or shall be convertible into Common Stock (at such time as there are
sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Borrower’s option, as follows:

     

     

    
      
        
        

      

      
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    (a)    In the event
Holder elects to take such payment in cash, cash payment shall be made to Holder
by the fifth (5th) day of
the month following the month in which it has accrued; and

     

    (b)    In the event
Holder elects to take such payment in Common Stock, the Holder may convert such
payment amount into Common Stock at the Conversion Price (as in effect at the
time of conversion) at any time after the fifth day of the month following the
month in which it has accrued in accordance with the terms of this Article I (so
long as there is then a sufficient number of authorized shares of Common
Stock).

     

    The
Holder’s election shall be made in writing to the Borrower at any time prior to
6:00 p.m., New York, New York time, on the third day of the month following the
month in which Conversion Default payments have accrued.  If no
election is made, the Holder shall be deemed to have elected to receive
cash.  Nothing herein shall limit the Holder’s right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Borrower’s failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including degree of specific performance and/or
injunctive relief).

     

    1.4    Method of
Conversion.

     

    (a)    Mechanics
of Conversion.  Subject to
Section 1.1, this Note may be converted by the Holder in whole or in part at any
time from time to time after the Issue Date, by (A) submitting to the
Borrower a Notice of Conversion (by facsimile or other reasonable means of
communication dispatched on the Conversion Date prior to 6:00 p.m., New York,
New York
time) and (B) subject to Section 1.4(b), surrendering this Note at the
principal office of the Borrower.

     

    (b)    Surrender
of Note Upon Conversion.  Notwithstanding
anything to the contrary set forth herein, upon conversion of this Note in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Borrower unless the entire unpaid principal amount of
this Note is so converted.  The Holder and the Borrower shall maintain
records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Borrower, so as not to require physical surrender of this Note
upon each such conversion.  In the event of any dispute or
discrepancy, such records of the Borrower shall be controlling and determinative
in the absence of manifest error.  Notwithstanding the foregoing, if
any portion of this Note is converted as aforesaid, the Holder may not transfer
this Note unless the Holder first physically surrenders this Note to the
Borrower, whereupon the Borrower will forthwith issue and deliver upon the order
of the Holder a new Note of like tenor, registered as the Holder (upon payment
by the Holder of any applicable transfer taxes) may request, representing in the
aggregate the remaining unpaid principal amount of this Note.  The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion of a portion
of this Note, the unpaid and unconverted principal amount of this Note
represented by this Note may be less than the amount stated on the face
hereof.

     

     

    
      
         

      

      
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    (c)    Payment
of Taxes.  The Borrower
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock or other
securities or property on conversion of this Note in a name other than that of
the Holder (or in street name), and the Borrower shall not be required to issue
or deliver any such shares or other securities or property unless and until the
person or persons (other than the Holder or the custodian in whose street name
such shares are to be held for the Holder’s account) requesting the issuance
thereof shall have paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has been
paid.

     

    (d)    Delivery
of Common Stock Upon Conversion.  Upon receipt by
the Borrower from the Holder of a facsimile transmission (or other reasonable
means of communication) of a Notice of Conversion meeting the requirements for
conversion as provided in this Section 1.4, the Borrower shall issue and deliver
or cause to be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion within three (3)
business days after such receipt (and, solely in the case of conversion of the
entire unpaid principal amount hereof, surrender of this Note) (such second
business day being hereinafter referred to as the “Deadline”) in accordance with
the terms hereof and the Purchase Agreement (including, without limitation, in
accordance with the requirements of Section 2(g) of the Purchase Agreement that
certificates for shares of Common Stock issued on or after the effective date of
the Registration Statement upon conversion of this Note shall not bear any
restrictive legend).

     

    (e)    Obligation
of Borrower to Deliver Common Stock.  Upon receipt by
the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the
amount of accrued and unpaid interest on this Note shall be reduced to reflect
such conversion, and, unless the Borrower defaults on its obligations under this
Article I, all rights with respect to the portion of this Note being so
converted shall forthwith terminate except the right to receive the Common Stock
or other securities, cash or other assets, as herein provided, on such
conversion.  If the Holder shall have given a Notice of Conversion as
provided herein, the Borrower’s obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective of the
absence of any action by the Holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Borrower to the holder of record, or
any setoff, counterclaim, recoupment, limitation or termination, or any breach
or alleged breach by the Holder of any obligation to the Borrower, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such
conversion.  The Conversion Date specified in the Notice of Conversion
shall be the Conversion Date so long as the Notice of Conversion is received by
the Borrower before 6:00 p.m., New York, New York time, on such
date.

     

     

    
      
        
        

      

      
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    (f)    Delivery
of Common Stock by Electronic Transfer.  In lieu of
delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower’s transfer agent is participating in the
Depository Trust Company (“DTC”) Fast Automated
Securities Transfer (“FAST”) program, upon request
of the Holder and its compliance with the provisions contained in Section 1.1
and in this Section 1.4, the Borrower shall use its best efforts to cause its
transfer agent to electronically transmit the Common Stock issuable upon
conversion to the Holder by crediting the account of Holder’s Prime Broker with
DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.

     

    (g)    Failure
to Deliver Common Stock Prior to Deadline.  Without in any
way limiting the Holder’s right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the
Common Stock issuable upon conversion of this Note is more than five (5)
business days after the Deadline as the result of actions or inactions by the
Company (other than a failure due to the circumstances described in Section 1.3
above, which failure shall be governed by such Section) the Borrower shall pay
to the Holder $2,000 per day in cash, for each day beyond the Deadline that the
Borrower fails to deliver such Common Stock.  Such cash amount shall
be paid to Holder by the fifth day of the month following the month in which it
has accrued or, at the option of the Holder (by written notice to the Borrower
by the first day of the month following the month in which it has accrued),
shall be added to the principal amount of this Note, in which event interest
shall accrue thereon in accordance with the terms of this Note and such
additional principal amount shall be convertible into Common Stock in accordance
with the terms of this Note.

     

    1.5    Concerning
the Shares.  The shares of
Common Stock issuable upon conversion of this Note may not be sold or
transferred unless  (i) such shares are sold pursuant to an effective
registration statement under the Act or (ii) the Borrower or its transfer agent
shall have been furnished with an opinion of  counsel (which opinion
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that the shares to be sold or transferred
may be sold or transferred pursuant to an exemption from such registration or
(iii) such shares are sold or transferred pursuant to Rule 144 under the
Act (or a successor
rule) (“Rule 144”) or
(iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of
the Borrower who agrees to sell or otherwise transfer the shares only in
accordance with this Section 1.5 and who is an Accredited Investor (as defined
in the Purchase Agreement).  Except as otherwise provided in the
Purchase Agreement (and subject to the removal provisions set forth below),
until such time as the shares of Common Stock issuable upon conversion of this
Note have been registered under the Act as contemplated by the Registration
Rights Agreement or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold, each certificate for shares of Common Stock issuable upon
conversion of this Note that has not been so included in an effective
registration statement or that has not been sold pursuant to an effective
registration statement or an exemption that permits removal of the legend, shall
bear a legend substantially in the following form, as appropriate:

     

     

    
      
        
        

      

      
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    “THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.  THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR
REGULATION S UNDER SAID ACT.”

     

    The
legend set forth above shall be removed and the Borrower shall issue to the
Holder a new certificate therefor free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Common Stock
may be made without registration under the Act and the shares are so sold or
transferred, (ii) such Holder provides the Borrower or its transfer agent with
reasonable assurances that the Common Stock issuable upon conversion of this
Note (to the extent such securities are deemed to have been acquired on the same
date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock
issuable upon conversion of this Note, such security is registered for sale by
the Holder under an effective registration statement filed under the Act or
otherwise may be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be immediately
sold.  Nothing in this Note shall (i) limit the Borrower’s obligation
under the Registration Rights Agreement or (ii) affect in any way the Holder’s
obligations to comply with applicable prospectus delivery requirements upon the
resale of the securities referred to herein.

     

    1.6    Effect of Certain
Events.

     

    (a)    Effect of
Merger, Consolidation, Etc.  At the option of
the Holder, the sale, conveyance or disposition of all or substantially all of
the assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of the
Borrower is disposed of, or the consolidation, merger or other business
combination of the Borrower with or into any other Person (as defined below) or
Persons when the Borrower is not the survivor shall either:  (i) be
deemed to be an Event of
Default (as defined in Article III) pursuant to which the Borrower shall be
required to pay to the Holder upon the consummation of and as a condition to
such transaction an amount equal to the Default Amount (as defined in Article
III) or (ii) be treated pursuant to Section 1.6(b) hereof.  “Person” shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.

     

     

    
      
        
        

      

      
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    (b)    Adjustment
Due to Merger, Consolidation, Etc.  Other than the
contemplated reverse split of the Common Stock of the Borrower, if, at any time when
this Note is issued and outstanding and prior to conversion of all of the Notes,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Borrower shall be changed into the same or a different number of
shares of another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or substantially all
of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have
the right to receive upon conversion of this Note, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction
(without regard to any limitations on conversion set forth herein), and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion
hereof.  The Borrower shall not effect any transaction described in
this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty
(30) days prior written notice (but in any event at least fifteen (15) days
prior written notice) of the record date of the special meeting of shareholders
to approve, or if there is no such record date, the consummation of, such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the Holder shall be
entitled to convert this Note) and (b) the resulting successor or acquiring
entity (if not the Borrower) assumes by written instrument the obligations of
this Section 1.6(b).  The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers or share
exchanges.

     

    (c)    Adjustment
Due to Distribution.  If the Borrower
shall declare or make any distribution of its assets (or rights to acquire its
assets) to holders of Common Stock as a dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution to the
Borrower’s shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off) (a “Distribution”), then the
Holder of this Note shall be entitled, upon any conversion of this Note after
the date of record for determining shareholders entitled to such Distribution,
to receive the amount of such assets which would have been payable to the Holder
with respect to the shares of Common Stock issuable upon such conversion had
such Holder been the holder of such shares of Common Stock on the record date
for the determination of shareholders entitled to such
Distribution.

     

    (d)    Adjustment
Due to Dilutive Issuance.  If, at any time
when any Notes are issued and outstanding, the Borrower issues or sells, or in
accordance with this Section 1.6(d)
hereof is deemed to have issued or sold, any shares of Common Stock for no
consideration or for a consideration per share (before deduction of reasonable
expenses or commissions or underwriting discounts or allowances in connection
therewith) less than the Conversion Price in effect on the date of such issuance
(or deemed issuance) of such shares of Common Stock (a “Dilutive Issuance”), then
immediately upon the Dilutive Issuance, the Conversion Price will be reduced to
the amount of the consideration per share received by the Borrower in such
Dilutive Issuance; provided that only
one adjustment will be made for each Dilutive Issuance.

     

     

    
      
        
        

      

      
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    The
Borrower shall be deemed to have issued or sold shares of Common Stock if the
Borrower in any manner issues or grants any warrants, rights or options (not
including employee stock option plans or stock issued in connection with
employment agreements or stock issued pursuant to existing contractual
obligations), whether or not immediately exercisable, to subscribe for or to
purchase Common Stock or other securities convertible into or exchangeable for
Common Stock (“Convertible
Securities”) (such warrants, rights and options to purchase Common Stock
or Convertible Securities are hereinafter referred to as “Options”) and the price per
share for which Common Stock is issuable upon the exercise of such Options is
less than the Conversion Price then in effect, then the Conversion Price shall
be equal to such price per share.  For purposes of the preceding
sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Options” is determined by dividing (i) the total amount, if
any, received or receivable by the Borrower as consideration for the issuance or
granting of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if
applicable).  No further adjustment to the Conversion Price will be
made upon the actual issuance of such Common Stock upon the exercise of such
Options or upon the conversion or exchange of Convertible Securities issuable
upon exercise of such Options.

     

    Additionally,
the Borrower shall be deemed to have issued or sold shares of Common Stock if
the Borrower in any manner issues or sells any Convertible Securities, whether
or not immediately convertible (other than where the same are issuable upon the
exercise of Options), and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Conversion Price then in
effect, then the Conversion Price shall be equal to such price per
share.  For the purposes of the preceding sentence, the “price per
share for which Common Stock is issuable upon such conversion or exchange” is
determined by dividing (i) the total amount, if any, received or receivable by
the Borrower as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Borrower upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii)
the maximum total number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities.  No further adjustment
to the Conversion Price will be made upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.

     

    
      
         

      

      
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    (e)    Purchase
Rights.  If, at any time
when any Notes are issued and outstanding, the Borrower issues any convertible
securities or rights to purchase stock, warrants, securities or other property
(the “Purchase Rights”)
pro rata to the record holders of any class of Common Stock, then the Holder of
this Note will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

     

    (f)    Notice of
Adjustments.  Upon the
occurrence of each adjustment or readjustment of the Conversion Price as a
result of the events described in this Section 1.6, the Borrower, at its
expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to the Holder of a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based.  The Borrower shall, upon the written request
at any time of the Holder, furnish to such Holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the amount, if any,
of other securities or property which at the time would be received upon
conversion of the Note.

     

    1.7    Trading
Market Limitations.
Unless permitted by the applicable rules and regulations of the principal
securities market on which the Common Stock is then listed or traded, in no
event shall the Borrower issue upon conversion of or otherwise pursuant to this
Note and the other Notes issued pursuant to the Purchase Agreement more than the
maximum number of shares of Common Stock that the Borrower can issue pursuant to
any rule of the principal United States securities market on which the Common
Stock is then traded (the “Maximum Share Amount”), which
shall be 4.99% of the total shares outstanding on the Closing Date (as defined
in the Purchase Agreement), subject to equitable adjustment from time to time
for stock splits, stock dividends, combinations, capital reorganizations and
similar events relating to the Common Stock occurring after the date
hereof.  Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the “Maximum Conversion Date”), if
the Borrower fails to use its best efforts to eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Borrower or any of its securities on the Borrower’s ability to issue shares
of Common Stock in excess of the Maximum Share Amount (a “Trading Market Prepayment
Event”), in lieu of any further right to convert this Note, and in full
satisfaction of the Borrower’s obligations under this Note, the Borrower shall
pay to the Holder, within fifteen (15) business days of the Maximum Conversion
Date (the “Trading Market
Prepayment Date”), an amount equal to 130% times the sum of (a) the then
outstanding principal amount of this Note immediately following the Maximum
Conversion Date, plus (b) accrued and
unpaid interest on the unpaid principal amount of this Note to the Trading
Market Prepayment Date, plus (c) Default
Interest, if any, on the amounts referred to in clause (a) and/or (b) above,
plus (d) any
optional amounts that may be added thereto at the Maximum Conversion Date by the
Holder in accordance with the terms hereof (the then outstanding principal
amount of this Note immediately following the Maximum Conversion Date, plus the amounts
referred to in clauses (b), (c) and (d) above shall collectively be referred
to as the
“Remaining Convertible
Amount”).  With respect to each Holder of Notes, the Maximum
Share Amount shall refer to such Holder’s pro rata share thereof
determined in accordance with Section 4.8 below.  In the event that
the sum of (x) the aggregate number of shares of Common Stock issued upon
conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement plus
(y) the aggregate number of shares of Common Stock that remain issuable upon
conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement, represents at least one hundred percent (100%) of the Maximum Share
Amount (the “Triggering
Event”), the Borrower will use its best efforts to seek and obtain
Shareholder Approval (or obtain such other relief as will allow conversions
hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion
Date.  As used herein, “Shareholder Approval” means
approval by the shareholders of the Borrower to authorize the issuance of the
full number of shares of Common Stock which would be issuable upon full
conversion of the then outstanding Notes but for the Maximum Share
Amount.

     

     

    
      
        
        

      

      
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    1.8    Status as
Shareholder.  Upon submission
of a Notice of Conversion by a Holder, (i) the shares covered thereby (other
than the shares, if any, which cannot be issued because their issuance would
exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share
Amount) shall be deemed converted into shares of Common Stock and (ii) the
Holder’s rights as a Holder of such converted portion of this Note shall cease
and terminate, excepting only the right to receive certificates for such shares
of Common Stock and to any remedies provided herein or otherwise available at
law or in equity to such Holder because of a failure by the Borrower to comply
with the terms  of this Note.  Notwithstanding the
foregoing, if a Holder has not received certificates for all shares of Common
Stock prior to the tenth (10th) business day after the expiration of the
Deadline with respect to a conversion of any portion of this Note for any
reason, then (unless the Holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Borrower) the Holder shall regain the
rights of a Holder of this Note with respect to such unconverted portions of
this Note and the Borrower shall, as soon as practicable, return such
unconverted Note to the Holder or, if the Note has not been surrendered, adjust
its records to reflect that such portion of this Note has not been
converted.  In all cases, the Holder shall retain all of its rights
and remedies (including, without limitation, (i) the right to receive Conversion
Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to
have the Conversion Price with respect to subsequent conversions determined in
accordance with Section 1.3) for the Borrower’s failure to convert this
Note.

     

     

    ARTICLE II. CERTAIN
COVENANTS

     

    2.1    Distributions
on Capital Stock.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not
without the Holder’s written consent (a) pay, declare or set apart for such
payment, any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or (b) directly or
indirectly or through any subsidiary make any other payment or distribution in
respect of its capital stock except for distributions pursuant to any
shareholders’ rights plan which is approved by a majority of the Borrower’s
disinterested directors.

     

    
      
         

      

      
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    2.2    Restriction
on Stock Repurchases.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not
without the Holder’s written consent, which shall not be unreasonably withheld,
redeem, repurchase or otherwise acquire (whether for cash or in exchange for
property or other securities or otherwise) in any one transaction or series of
related transactions any shares of capital stock of the Borrower or any
warrants, rights or options to purchase or acquire any such shares.

     

    2.3    Borrowings.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, create, incur, assume or suffer to exist
any liability for borrowed money, except (a) borrowings in existence or
committed on the date hereof and of which the Borrower has informed Holder in
writing prior to the date hereof, (b) indebtedness to trade creditors or
financial institutions incurred in the ordinary course of business or (c)
borrowings, the proceeds of which shall be used to repay this Note.

     

    2.4    Sale of
Assets.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, sell, lease or otherwise dispose of any
significant portion of its assets outside the ordinary course of
business.  Any consent to the disposition of any assets may be
conditioned on a specified use of the proceeds of disposition.

     

    2.5    Advances
and Loans.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, lend money, give credit or make advances
to any person, firm, joint venture or corporation, including, without
limitation, officers, directors, employees, subsidiaries and affiliates of the
Borrower, except loans, credits or advances (a) in existence or committed on the
date hereof and which the Borrower has informed Holder in writing prior to the
date hereof, (b) made in the ordinary course of business or (c) not in excess of
$500,000.

     

    2.6    Contingent
Liabilities.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, which shall not be unreasonably withheld,
assume, guarantee, endorse, contingently agree to purchase or otherwise become
liable upon the obligation of any person, firm, partnership, joint venture or
corporation, except by the endorsement of negotiable instruments for deposit or
collection and except assumptions, guarantees, endorsements and contingencies
(a) in existence or committed on the date hereof and which the Borrower has
informed Holder in writing prior to the date hereof, and (b) similar
transactions in the ordinary course of business.

     

    2.7    Exceptions. Notwithstanding the above, the above
covenants shall not apply to two of the Company’s two wholly owned subsidiaries,
Camelot Film Group, Inc. and Camelot Studio Group, Inc. and any activities
conducted by the Company on behalf of these subsidiaries.

     

     

    ARTICLE III. EVENTS
OF DEFAULT

     

    If any of
the following events of default (each, an “Event of Default”) shall
occur:

     

    
      
         

      

      
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    3.1    Failure
to Pay Principal or Interest.  The Borrower
fails to pay the principal hereof or interest thereon when due on this Note,
whether at maturity, upon a Trading Market Prepayment Event pursuant to Section
1.7, upon acceleration or otherwise;

     

    3.2    Conversion
and the Shares.  The Borrower
fails to issue shares of Common Stock to the Holder (or announces or threatens
that it will not honor its obligation to do so) upon exercise by the Holder of
the conversion rights of the Holder in accordance with the terms of this Note
(for a period of at least sixty (60) days, if such failure is solely as a result
of the circumstances governed by Section 1.3 and the Borrower is using its best
efforts to authorize a sufficient number of shares of Common Stock as soon as
practicable), fails to transfer or cause its transfer agent to transfer
(electronically or in certificated form) any certificate for shares of Common
Stock issued to the Holder upon conversion of or otherwise pursuant to this Note
as and when required by this Note or the Registration Rights Agreement, or fails
to remove any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate for any shares of Common Stock issued to
the Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for three (3) days after the Borrower shall
have been notified thereof in writing by the Holder;

     

    3.3    Failure
to Timely File Registration or Effect Registration.  The Borrower
fails to file the Registration Statement within ten (10) days following the
Investor Demand (as defined in the Purchase Agreement) the Company does not use
its best efforts and respond to comments from the SEC regarding its Registration
Statement in a timely manner) or such Registration Statement lapses in effect
(or sales cannot otherwise be made thereunder effective, whether by reason of
the Borrower’s failure to amend or supplement the prospectus included therein in
accordance with the Registration Rights Agreement or otherwise) for more than
ten (10) consecutive days or twenty (20) days in any twelve month period after
the Registration Statement becomes effective;

     

    3.4    Breach of
Covenants.  The Borrower
breaches any material covenant or other material term or condition contained in
Sections 1.3, 1.6 or 1.7 of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j)
or 5 of the Purchase Agreement and such breach continues for a period of ten
(10) days after written notice thereof to the Borrower from the
Holder;

     

    3.5    Breach of
Representations and Warranties.  Any
representation or warranty of the Borrower made herein or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith (including, without limitation, the Purchase Agreement and the
Registration Rights Agreement), shall be false or misleading in any material
respect when made and the breach of which has (or with the passage of time will
have) a material adverse effect on the rights of the Holder with respect to this
Note, the Purchase Agreement or the Registration Rights Agreement;

     

    3.6    Receiver
or Trustee.  The Borrower or
any subsidiary of the Borrower, except for Camelot Film Group, Inc. and Camelot
Studio Group, Inc., shall make an assignment for the benefit of creditors, or
apply for or consent to the appointment of a receiver or trustee for
it or for
a substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed;

     

     

    
      
        
        

      

      
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    3.7    Judgments.  Any money
judgment, writ or similar process shall be entered or filed against the Borrower
or any subsidiary of the Borrower, except for Camelot Film Group, Inc. and
Camelot Studio Group, Inc., or any of its property or other assets for more than
$250,000, and shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the Holder, which consent will
not be unreasonably withheld;

     

    3.8    Bankruptcy.  Bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
relief under any bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Borrower or any subsidiary of the Borrower, except
for Camelot Film Group, Inc. and Camelot Studio Group, Inc.;

     

    3.9    Delisting
of Common Stock.  The Borrower
shall fail to maintain the listing of the Common Stock on at least one of the
OTCBB or an equivalent replacement exchange, the Nasdaq National Market, the
Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock
Exchange; or

     

    3.10     Default
Under Other Notes.  An Event of
Default has occurred and has not been cured in a timely manner and is continuing
under any of the other Notes issued pursuant to the Purchase Agreement, then,
upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Notes issued pursuant to the Purchase Agreement exercisable through
the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and upon the
occurrence of an Event of Default specified in Section 3.6 or 3.8, the Notes
shall become immediately due and payable and the Borrower shall pay to the
Holder, in full satisfaction of its obligations hereunder, an amount equal to
the greater of (i) 140% times the sum of (w) the then
outstanding principal amount of this Note plus (x) accrued and
unpaid interest on the unpaid principal amount of this Note to the date of
payment (the “Mandatory
Prepayment Date”) plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
“Default Sum”) or (ii)
the “parity value” of the Default Sum to be prepaid, where parity value means
(a) the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
“Conversion Date” for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the
highest Closing Price for the Common Stock during the period beginning on the
date of first occurrence of the Event of Default and ending one day prior to the
Mandatory Prepayment Date (the “Default Amount”) and all other
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, legal fees and expenses,
of collection, and the Holder shall be entitled to exercise all other rights and
remedies available
at law or in equity.  If the Borrower fails to pay the Default Amount
within five (5) business days of written notice that such amount is due and
payable, then the Holder shall have the right at any time, so long as the
Borrower remains in default (and so long and to the extent that there are
sufficient authorized shares), to require the Borrower, upon written notice, to
immediately issue, in lieu of the Default Amount, the number of shares of Common
Stock of the Borrower equal to the Default Amount divided by the Conversion
Price then in effect.

     

     

    
      
        
        

      

      
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    ARTICLE IV.
MISCELLANEOUS

     

    4.1    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 privileges.  All
rights and remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies otherwise available.

     

    4.2    Notices.  Any notice herein
required or permitted to be given shall be in writing and may be personally
served or delivered by courier or sent by United States mail and shall be deemed
to have been given upon receipt if personally served (which shall include
telephone line facsimile transmission) or sent by courier or three (3) days
after being deposited in the United States mail, certified, with postage
pre-paid and properly addressed, if sent by mail.  For the purposes
hereof, the address of the Holder shall be as shown on the records of the
Borrower; and the address of the Borrower shall be 130 Vantis, Suite 140, Aliso
Viejo, CA 92656, facsimile number: (949)
334-2951.  Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein
provided.

     

    4.3    Amendments.  This Note and any
provision hereof may only be amended by an instrument in writing signed by the
Borrower and the Holder.  The term “Note” and all reference thereto,
as used throughout this instrument, shall mean this instrument (and the other
Notes issued pursuant to the Purchase Agreement) as originally executed, or if
later amended or supplemented, then as so amended or supplemented.

     

    4.4    Assignability.  This Note shall
be binding upon the Borrower and its successors and assigns, and shall inure to
be the benefit of the Holder and its successors and assigns.  Each
transferee of this Note must be an “accredited investor” (as defined in Rule
501(a) of the 1933 Act).  Notwithstanding anything in this Note to the
contrary, this Note may be pledged as collateral in connection with a bona fide margin account
or other lending arrangement.

     

    4.5    Cost of
Collection.  If default is
made in the payment of this Note, the Borrower shall pay the Holder hereof costs
of collection, including reasonable attorneys’ fees.

     

    4.6    Governing
Law.  THIS NOTE SHALL
BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE
BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND UNITED
STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE
ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A
PARTY MAILED BY FIRST CLASS MAIL CERTIFIED MAIL RETURN RECEIPT REQUEST SHALL BE
DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH
SUIT OR PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES
AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL
BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH
JUDGMENT OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT
PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES
AND EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN
CONNECTION WITH SUCH DISPUTE.

     

     

    
      
        
        

      

      
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    4.7    Certain
Amounts.  Whenever pursuant
to this Note the Borrower is required to pay an amount in excess of the
outstanding principal amount (or the portion thereof required to be paid at that
time) plus accrued and unpaid interest plus Default Interest on such interest,
the Borrower and the Holder agree that the actual damages to the Holder from the
receipt of cash payment on this Note may be difficult to determine and the
amount to be so paid by the Borrower represents stipulated damages and not a
penalty and is intended to compensate the Holder in part for loss of the
opportunity to convert this Note and to earn a return from the sale of shares of
Common Stock acquired upon conversion of this Note at a price in excess of the
price paid for such shares pursuant to this Note.  The Borrower and
the Holder hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a cash
payment without the opportunity to convert this Note into shares of Common
Stock.

     

    4.8    Allocations
of Maximum Share Amount and Reserved Amount.  The Maximum Share
Amount and Reserved Amount shall be allocated pro rata among the Holders of
Notes based on the principal amount of such Notes issued to each
Holder.  Each increase to the Maximum Share Amount and Reserved Amount
shall be allocated pro rata among the Holders of Notes based on the principal
amount of such Notes held by each Holder at the time of the increase in the
Maximum Share Amount or Reserved Amount.  In the event a Holder shall
sell or otherwise transfer any of such Holder’s Notes, each transferee shall be
allocated a pro rata portion of such transferor’s Maximum Share Amount and
Reserved Amount.  Any portion of the Maximum Share Amount or Reserved
Amount which remains allocated to any person or entity which does not hold any
Notes shall be allocated to the remaining Holders of Notes, pro rata based on
the principal amount of such Notes then held by such Holders.

     

    4.9    Damages
Shares.  The shares of
Common Stock that may be issuable to the Holder pursuant to Sections 1.3 and
1.4(g) hereof and pursuant to Section 2(c) of the Registration
Rights Agreement (“Damages
Shares”) shall be treated as Common Stock issuable upon conversion of
this Note for all purposes hereof and shall be subject to all of the limitations
and afforded all of the rights of the other shares of Common Stock issuable
hereunder, including without limitation, the right to be included in the
Registration Statement filed pursuant to the Registration Rights
Agreement.  For purposes of calculating interest payable on the
outstanding principal amount hereof, except as otherwise provided herein,
amounts convertible into Damages Shares (“Damages Amounts”) shall not
bear interest but must be converted prior to the conversion of any outstanding
principal amount hereof, until the outstanding Damages Amounts is
zero.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    4.10 
  Denominations.  At the request of
the Holder, upon surrender of this Note, the Borrower shall promptly issue new
Notes in the aggregate outstanding principal amount hereof, in the form hereof,
in such denominations of at least $50,000 as the Holder shall
request.

     

    4.11         Purchase
Agreement.  By its acceptance
of this Note, each Holder agrees to be bound by the applicable terms of the
Purchase Agreement.

     

    4.12         Notice of
Corporate Events.  Except as
otherwise provided below, the Holder of this Note shall have no rights as a
Holder of Common Stock unless and only to the extent that it converts this Note
into Common Stock. The Borrower shall provide the Holder with prior notification
of any meeting of the Borrower’s shareholders (and copies of proxy materials and
other information sent to shareholders).  In the event of any taking
by the Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Borrower or any proposed
liquidation, dissolution or winding up of the Borrower, the Borrower shall mail
a notice to the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such
time.  The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
4.12.

     

    4.13        
Remedies.  The Borrower
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder, by vitiating the intent and purpose of the
transaction contemplated hereby.  Accordingly, the Borrower
acknowledges that the remedy at law for a breach of its obligations under this
Note will be inadequate and agrees, in the event of a breach or threatened
breach by the Borrower of the provisions of this Note, that the Holder shall be
entitled, in addition to all other available remedies at law or in equity, and
in addition to the penalties assessable herein, to an injunction or injunctions
restraining, preventing or curing any breach of this Note and to enforce
specifically the terms and provisions thereof, without
the necessity of showing economic loss and without any bond or other security
being required.

     

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    ARTICLE
V. CALL
OPTION

     

    5.1    Call
Option.  Notwithstanding
anything to the contrary contained in this Article V, so long as  no Event
of Default or Trading Market Prepayment Event shall have occurred and be
continuing,  the Borrower has a sufficient number of authorized shares of
Common Stock reserved for issuance upon conversion of the Notes as described
herein, then at any time after the Issue Date, and  the Common Stock is
trading at  the Initial Market Price as adjusted, the Borrower shall
have the right, exercisable on not less than three (3) Trading Days prior
written notice to the Holders of the Notes (which notice may not be sent to the
Holders of the Notes until the Borrower is permitted to prepay the Notes
pursuant to this Section 5.1), to prepay all of the outstanding Notes in
accordance with this Section 5.1.  Any notice of prepayment hereunder
(an “Optional
Prepayment”) shall be delivered to the Holders of the Notes at their
registered addresses appearing on the books and records of the Borrower and
shall state (1) that the Borrower is exercising its right to prepay all of the
Notes issued on the Issue Date and (2) the date of prepayment (the “Optional Prepayment
Notice”).  On the date fixed for prepayment (the “Optional Prepayment Date”),
the Borrower shall make payment of the Optional Prepayment Amount (as defined
below) to or upon the order of the Holders as specified by the Holders in
writing to the Borrower at least one (1) business day prior to the Optional
Prepayment Date.  If the Borrower exercises its right to prepay the
Notes, the Borrower shall make payment to the holders of an amount in cash (the
“Optional Prepayment
Amount”) equal to either (i) 120% (for prepayments occurring within
thirty (30) days of the Issue Date), (ii) 130% for prepayments occurring
between thirty-one (31) and sixty  (60) days of the Issue Date, or
(iii) 140% (for prepayments occurring after the sixtieth (60th) day
following the Issue Date), multiplied by the sum of (w) the then outstanding
principal amount of this Note plus (x) accrued
and unpaid interest on the unpaid principal amount of this Note to the Optional
Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
“Optional Prepayment
Sum”). Notwithstanding notice of an Optional Prepayment, the Holders
shall at all times prior to the Optional Prepayment Date maintain the right to
convert all or any portion of the Notes in accordance with Article I and any
portion of Notes so converted after receipt of an Optional Prepayment Notice and
prior to the Optional Prepayment Date set forth in such notice and payment of
the aggregate Optional Prepayment Amount shall be deducted from the principal
amount of Notes which are otherwise subject to prepayment pursuant to such
notice.  If the Borrower delivers an Optional Prepayment Notice and
fails to pay the Optional Prepayment Amount due to the Holders of the Notes
within two (2) business days following the Optional Prepayment Date, the
Borrower shall forever forfeit its right to redeem the Notes pursuant to this
Section 5.1.

     

     

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    5.2    Partial
Call Option.  Notwithstanding anything to the contrary
contained in this Article V, in the event that the Trading Price of the Common
Stock, as reported by the Reporting Service, for each day of the month ending on
any Determination Date is below the Initial
Market Price, the Borrower may, at its option, prepay a portion of the
outstanding principal amount of the Notes equal to 104% of the principal amount
hereof divided by thirty-six (36) plus one month’s interest. The term “Initial Market Price” shall
mean 100% of the volume weighted average price (VWAP) of the company’s Common
stock for the five days immediately after the effective date of the contemplated
reverse of the Common Stock of the Borrower  and readjusted on a
quarterly basis during the term. Notwithstanding the foregoing, in no event
shall the Initial Market Price be less than the original Initial Market Price
established as adjusted following the contemplated reverse of the Common Stock
of the Borrower.

     

    

     

    

     

    

     

    

     

    

     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, Borrower
has caused this Note to be signed in its name by its duly authorized officer
this 31st day of
July, 2008.

     

     

    
      
        	 	CAMELOT ENTERTAINMENT GROUP,
      INC.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ 
      Robert P. Atwell	 
	 	 	Robert
      P. Atwell	 
	 	 	Chief
      Executive Officer	 
	 	 	 	 

      

    

    

     

     

     

     

     

    
 

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    EXHIBIT
A

     

    NOTICE
OF CONVERSION

     

    (To be
Executed by the Registered Holder

     

    in order
to Convert the Notes)

     

    The
undersigned hereby irrevocably elects to convert $__________ principal amount of
the Note (defined below) into shares of common stock, par value $.001 per share
(“Common Stock”), of
Camelot Entertainment Group, Inc, a Delaware Corporation (the “Borrower”) according to the
conditions of the convertible Notes of the Borrower dated as of July 31, 2008
(the “Notes”), as of the
date written below.  If securities are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such
certificates.  No fee will be charged to the Holder for any
conversion, except for transfer taxes, if any.  A copy of each Note is
attached hereto (or evidence of loss, theft or destruction
thereof).

     

    The
Borrower shall electronically transmit the Common Stock issuable pursuant to
this Notice of Conversion to the account of the undersigned or its nominee with
DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).

     

    Name of
DTC Prime
Broker:                                                                                                                     

    Account
Number:                                                                                                                     

     

    In lieu
of receiving shares of Common Stock issuable pursuant to this Notice of
Conversion by way of a DWAC Transfer, the undersigned hereby requests that the
Borrower issue a certificate or certificates for the number of shares of Common
Stock set forth below (which numbers are based on the Holder’s calculation
attached hereto) in the name(s) specified immediately below or, if additional
space is necessary, on an attachment hereto:

     

    Name:                                                                                                                     

    Address:                                                                                                                     

     

    The
undersigned represents and warrants that all offers and sales by the undersigned
of the securities issuable to the undersigned upon conversion of the Notes shall
be made pursuant to registration of the securities under the Securities Act of
1933, as amended (the “Act”), or pursuant to an
exemption from registration under the Act.

     

    Date of
Conversion: ___________________________

    Applicable
Conversion Price: ____________________

    Number of
Shares of Common Stock to be Issued Pursuant to

    Conversion
of the Notes: ______________

    Signature:
___________________________________

    Name:
______________________________________

    Address:
____________________________________

    The
Borrower shall issue and deliver shares of Common Stock to an overnight courier
not later than five business days following receipt of the original Note(s) to
be converted, and shall make payments pursuant to the Notes for the number of
business days such issuance and delivery is late.

    
 

    
      A-1exhibit_4-3.htm

    
      

    

     

    
      THIS
WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGIS­TERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.  EXCEPT
AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE AGREEMENT DATED AS OF
JULY 31, 2008, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRA­TION
STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM,
SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD
PURSUANT TO RULE 144 OR REGULATION S UNDER SUCH ACT.

       

      Right to
Purchase 20,000,000 Shares of Common Stock, par value $.001 per
share

       

      STOCK
PURCHASE WARRANT

       

      THIS CERTIFIES THAT, for value
received, New Millennium Capital Partners II, LLC or its registered assigns, is
entitled to purchase from Camelot Entertainment Group
Inc., a Delaware Corporation (the “Company”), at any time or from
time to time during the period specified in Paragraph 2 hereof, 20,000,000
fully paid and nonassessable shares of the Company’s Common Stock, par value
$.001 per share (the “Common
Stock”), at an exercise price per share equal to $.01 (the “Exercise
Price”).  The term “Warrant Shares,” as used herein, refers to
the shares of Common Stock purchasable hereunder.  The Warrant Shares
and the Exercise Price are subject to adjustment as provided in Paragraph 4
hereof.  The term “Warrants” means this Warrant and the other warrants
issued pursuant to that certain Securities Purchase Agreement, dated July 31,
2008, by and among the Company and the Buyers listed on the execution page
thereof (the “Securities
Purchase Agreement”).

       

      This
Warrant is subject to the following terms, provisions, and
conditions:

       

      1.    Manner of Exercise; Issuance
of Certificates; Payment for Shares.

       

       

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

       

      
        Subject
to the provisions hereof, this Warrant may be exercised by the holder hereof, in
whole or in part, by the surrender of this Warrant, together with a completed
exercise agreement in the form attached hereto (the “Exercise Agreement”), to the
Company during normal business hours on any business day at the Company’s
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), and upon (i) payment to the
Company in cash, by certified or offi­cial bank check or by wire transfer
for the account of the Company of the Exercise Price for the Warrant Shares
specified in the Exercise Agreement or (ii) delivery to the Company of a written
notice of an election to effect a “Cashless Exercise” (as defined in Section
10(c) below) for the Warrant Shares specified in the Exercise
Agreement.  The Warrant Shares so purchased shall be deemed to be
issued to the holder hereof or such holder’s designee, as the record owner of
such shares, as of the close of business on the date on which this Warrant shall
have been surrendered, the completed Exercise Agreement shall have been
deliv­ered, and payment shall have been made for such shares as set forth
above.  Certifi­cates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in the Exercise Agreement,
shall be delivered to the holder hereof within a reasonable time, not exceeding
five (5) business days, after this Warrant shall have been so
exercised.  The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of such holder or such other name as shall be designated by such
holder.  If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, at the time
of delivery of such certificates, deliver to the holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised.  In addition to all other available remedies
at law or in equity, if the Company fails to deliver certificates for the
Warrant Shares within five (5) business days after this Warrant is exercised,
then the Company shall pay to the holder in cash a penalty (the “Penalty”) equal
to 2% of the number of Warrant Shares that the holder is entitled to multiplied
by the Market Price (as hereinafter defined) for each day that the Company fails
to deliver certificates for the Warrant Shares.  For example, if the
holder is entitled to 100,000 Warrant Shares and the Market Price is $2.00, then
the Company shall pay to the holder $4,000 for each day that the Company fails
to deliver certificates for the Warrant Shares.  The Penalty shall be
paid to the holder by the fifth day of the month following the month in which it
has accrued.

      

       

      Notwithstanding
anything in this Warrant to the contrary, in no event shall the holder of this
Warrant be entitled to exercise a number of Warrants (or portions thereof) in
excess of the number of Warrants (or portions thereof) upon exercise of which
the sum of (i) the number of shares of Common Stock beneficially owned by the
holder and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unexercised Warrants and the
unexercised or unconverted portion of any other securities of the Company
(including the Notes (as defined in the Securities Purchase Agreement)) subject
to a limitation on conversion or exercise analogous to the limitation contained
herein) and (ii) the number of shares of Common Stock issuable upon exercise of
the Warrants (or portions thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by the
holder and its affiliates of more than 4.9% of the outstanding shares of Common
Stock.  For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (i) of the preceding
sentence.  Notwithstanding anything to the contrary contained herein,
the limitation on exercise of this Warrant set forth herein may not be amended
without (i) the written consent of the holder hereof and the Company and (ii)
the approval of a majority of shareholders of the Company.

       

      2.    Period of
Exercise.

       

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

       

      This
Warrant is exercisable at any time or from time to time on or after the date on
which this Warrant is issued and delivered pursuant to the terms of the
Securities Purchase Agreement and before 6:00 p.m., New York, New York time on
the seventh (7th)
anniversary of the date of issuance (the “Exercise
Period”).

       

      3.    Certain Agreements of the
Company.

       

      
        The
Company hereby covenants and agrees as follows:

      

       

      (a)           Shares to
be Fully Paid.  All Warrant
Shares will, upon issuance in accordance with the terms of this Warrant, be
validly issued, fully paid, and nonassessable and free from all taxes, liens,
and charges with respect to the issue thereof.

       

      (b)           Reservation
of Shares.  During the
Exercise Period, the Company shall at all times have authorized, and reserved
for the purpose of issuance upon exercise of this Warrant, a suf­ficient
number of shares of Common Stock to provide for the exercise of this
Warrant.

       

      (c)           Listing.  The Company shall
promptly secure the listing of the shares of Common Stock issuable upon exercise
of the Warrant upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, as the case may be, and shall maintain such listing
of, any other shares of capital stock of the Company issuable upon the exercise
of this Warrant if and so long as any shares of the same class shall be listed
on such national securities exchange or automated quotation system.

       

      (d)           Certain
Actions Prohibited.  The Company will
not, by amendment of its charter or through any re­organi­zation,
transfer of assets, consolidation, mer­ger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed by it hereunder,
but will at all times in good faith assist in the carrying out of all the
provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the holder of this Warrant in order to protect the
exercise privilege of the holder of this Warrant against dilu­tion or other
impairment, consistent with the tenor and purpose of this
Warrant.  Without limiting the general­ity of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) will take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this
Warrant.

       

      (e)           Successors
and Assigns.  This Warrant will
be binding upon any entity succeeding to the Company by merger, consolidation,
or acquisition of all or sub­stantially all the Company’s
assets.

      4.           Antidilution Provisions.

       

      During
the Exercise Period, the Exercise Price and the number of Warrant Shares shall
be subject to adjustment from time to time as provided in this Paragraph
4.

       

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

       

      In the
event that any adjustment of the Exercise Price as required herein results in a
fraction of a cent, such Exercise Price shall be rounded up to the nearest
cent.

       

      (a)           Adjustment
of Exercise Price and Number of Shares upon Issuance of Common Stock.  Except as
otherwise provided in Paragraphs 4(c) and 4(e) hereof, if and whenever on or
after the date of issuance of this Warrant, the Company issues or sells, or in
accordance with Paragraph 4(b) hereof is deemed to have issued or sold, any
shares of Common Stock for no consideration or for a consideration per share
(before deduction of reasonable expenses or commissions or underwriting
discounts or allowances in connection therewith) less than the Market Price on
the date of issuance (a “Dilutive Issuance”), then immediately upon the Dilutive
Issuance, the Exercise Price will be reduced to a price determined by
multiplying the Exercise Price in effect immediately prior to the Dilutive
Issuance by a fraction, (i) the numerator of which is an amount equal to the sum
of (x) the number of shares of Common Stock actually outstanding immediately
prior to the Dilutive Issuance, plus (y) the quotient of the aggregate
consideration, calculated as set forth in Paragraph 4(b) hereof, received by the
Company upon such Dilutive Issuance divided by the Market Price in effect
immediately prior to the Dilutive Issuance, and (ii) the denominator of which is
the total number of shares of Common Stock Deemed Outstanding (as defined below)
immediately after the Dilutive Issuance.

       

      (b)           Effect on
Exercise Price of Certain Events.  For purposes of
determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:

       

      (i)           Issuance
of Rights or Options.  If the Company in
any manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities convertible into or exchangeable for Common Stock (“Convertible
Securities”) (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as “Options”) and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance or grant of such Options,
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options will, as of the date of the issuance or grant of
such Options, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share.  For purposes of the preceding
sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Options” is determined by dividing (i) the total amount, if
any, received or receivable by the Company as consideration for the issuance or
granting of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if
applicable).  No further adjustment to the Exercise Price will be made
upon the actual issuance of such Common Stock upon the
exercise of such Options or upon the conversion or exchange of Convertible
Securities issuable upon exercise of such Options.

       

       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

       

      (ii)           Issuance
of Convertible Securities.  If the Company in
any manner issues or sells any Convertible Securities, whether or not
immediately convertible (other than where the same are issuable upon the
exercise of Options) and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities will, as of the
date of the issuance of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per
share.  For the purposes of the preceding sentence, the “price per
share for which Common Stock is issuable upon such conversion or exchange” is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii)
the maximum total number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities.  No further adjustment
to the Exercise Price will be made upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible Securities.

       

      (iii)           Change in
Option Price or Conversion Rate.  If there is a
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the conversion or exchange of
any Convertible Securities; or (iii) the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock (other than
under or by reason of provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change will be readjusted to the
Exercise Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.

       

      (iv)           Treatment
of Expired Options and Unexercised Convertible Securities.  If, in any case,
the total number of shares of Common Stock issuable upon exercise of any Option
or upon conversion or exchange of any Convertible Securities is not, in fact,
issued and the rights to exercise such Option or to convert or exchange such
Convertible Securities shall have expired or terminated, the Exercise Price then
in effect will be readjusted to the Exercise Price which would have been in
effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination (other than in respect of the actual number of shares
of Common Stock issued upon exercise or conversion thereof), never been
issued.

       

      (v)           Calculation
of Consideration Received.  If any Common
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or
sale.  In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration
part or all of which shall be other than cash, the amount of the consideration
other than cash received by the Company will be the fair value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Company will be the Market
Price thereof as of the date of receipt.  In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be.  The fair value of any consideration other than cash or
securities will be determined in good faith by the Board of Directors of the
Company.

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

       

      (vi)           Exceptions
to Adjustment of Exercise Price.  No adjustment to
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities granted, issued and outstanding on the date of
issuance of this Warrant; (ii) upon the grant or exercise of any stock or
options which may hereafter be granted or exercised under any employee benefit
plan, stock option plan or restricted stock plan of the Company now existing or
to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the independent members of the Board of
Directors of the Company or a majority of the members of a committee of
independent directors established for such purpose; or (iii) upon the exercise
of the Warrants.

       

      (c)           Subdivision
or Combination of Common Stock.  If the Company at
any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced.  If the
Company at any time combines (by reverse stock split, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a smaller number of shares, then, after the date of
record for effecting such combination, the Exercise Price in effect immediately
prior to such combination will be proportionately increased.

       

      (d)           Adjustment
in Number of Shares.  Upon each
adjustment of the Exercise Price pursuant to the provisions of this Paragraph 4,
the number of shares of Common Stock issuable upon exercise of this Warrant
shall be adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.

       

      (e)           Consolidation,
Merger or Sale.  In case of any
consolidation of the Company with, or merger of the Company into any other
corporation, or in case of any sale or conveyance of all or substantially all of
the assets of the Company other than in connection with a plan of complete
liquidation of the Company, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon
exercise of this Warrant had such consolidation, merger or sale or conveyance
not taken place.  In any such case, the Company will make appropriate
provision to insure that the provisions of this Paragraph 4 hereof will
thereafter be applicable as nearly as may be in relation to any shares of stock
or securities thereafter deliverable upon the exercise of this
Warrant.  The Company will not effect any consolidation, merger or
sale or conveyance unless prior to the consummation thereof, the successor
corporation (if other than the Company) assumes by written instrument the
obligations under this Paragraph 4 and the obligations to deliver to the holder
of this Warrant such shares of stock, securities or assets as, in accordance
with the foregoing provisions, the holder may be entitled to
acquire.

       

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

       

      (f)           Distribution
of Assets.  In case the
Company shall declare or make any distribution of its assets (including cash) to
holders of Common Stock as a partial liquidating dividend, by way of return of
capital or otherwise, then, after the date of record for determining
shareholders entitled to such distribution, but prior to the date of
distribution, the holder of this Warrant shall be entitled upon exercise of this
Warrant for the purchase of any or all of the shares of Common Stock subject
hereto, to receive the amount of such assets which would have been payable to
the holder had such holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such
distribution.

       

      (g)           Notice of
Adjustment.  Upon the
occurrence of any event which requires any adjustment of the Exercise Price,
then, and in each such case, the Company shall give notice thereof to the holder
of this Warrant, which notice shall state the Exercise Price resulting from such
adjustment and the increase or decrease in the number of Warrant Shares
purchasable at such price upon exercise, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is
based.  Such calculation shall be certified by the Chief Financial
Officer of the Company.

       

      (h)           Minimum
Adjustment of Exercise Price.  No adjustment of
the Exercise Price shall be made in an amount of less than 1% of the Exercise
Price in effect at the time such adjustment is otherwise required to be made,
but any such lesser adjustment shall be carried forward and shall be made at the
time and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.

       

      (i)           No
Fractional Shares.  No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant, but
the Company shall pay a cash adjustment in respect of any fractional share which
would otherwise be issuable in an amount equal to the same fraction of the
Market Price of a share of Common Stock on the date of such
exercise.

       

      (j)           Other
Notices.  In case at any
time:

       

      (i)           the
Company shall declare any dividend upon the Common Stock payable in shares of
stock of any class or make any other distribution (including dividends or
distributions payable in cash out of retained earnings) to the holders of the
Common Stock;

       

      (ii)          the
Company shall offer for subscription pro rata to the holders of the Common Stock
any additional shares of stock of any class or other rights;

      (iii)         there
shall be any capital reorganiza­tion of the Company, or reclassification of
the Common Stock, or consolidation or merger of the Company with or into, or
sale of all or substan­tially all its assets to, another corporation or
entity; or

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

       

      (iv)          there
shall be a voluntary or involun­tary dissolution, liquidation or winding up
of the Company; then, in each such case, the Company shall give to the holder of
this Warrant (a) notice of the date on which the books of the Company shall
close or a record shall be taken for determining the holders of Common Stock
entitled to receive any such divi­dend, distribution, or subscription rights
or for determining the holders of Common Stock entitled to vote in respect of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, notice of the date (or, if not then known, a
reasonable approximation thereof by the Company) when the same shall take
place.  Such notice shall also specify the date on which the holders
of Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization,
re­classification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be.  Such notice shall be given at least
30 days prior to the record date or the date on which the Company’s books are
closed in respect thereto.  Failure to give any such notice or any
defect therein shall not affect the validity of the proceedings referred to in
clauses (i), (ii), (iii) and (iv) above.

       

      (k)           Certain
Events.  If any event
occurs of the type contemplated by the adjustment provisions of this Paragraph 4
but not expressly provided for by such provisions, the Company will give notice
of such event as provided in Paragraph 4(g) hereof, and the Company’s Board of
Directors will make an appropriate adjustment in the Exercise Price and the
number of shares of Common Stock acquirable upon exercise of this Warrant so
that the rights of the holder shall be neither enhanced nor diminished by such
event.

       

      (l)           Certain
Definitions.

       

      (i)           “Common
Stock Deemed Outstanding” shall mean the number of
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) pursuant to Paragraph
4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon
the exercise of Options, as of the date of such issuance or grant of such
Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum
total number of shares of Common Stock issuable upon conversion or exchange of
Convertible Securities, as of the date of issuance of such Convertible
Securities, if any.

       

      (ii)          “Market
Price,” as of any
date, (i) means the average of the last reported sale prices for the shares of
Common Stock on the OTCBB for the five (5) Trading Days immediately preceding
such date as reported by Bloomberg, or (ii) if the OTCBB is not the principal
trading market for the shares of Common Stock, the average of the last reported
sale prices on the principal trading market for the Common Stock during the same
period as reported by Bloomberg, or (iii) if market value cannot be calculated
as of such date on any of the foregoing bases, the Market Price shall be the
fair market value as reasonably determined in good faith by (a) the Board of
Directors of the Company or, at the option of a majority-in-interest of the
holders of the outstanding Warrants by (b) an independent investment bank of
nationally recognized
standing in the valuation of businesses similar to the business of the
corporation. The manner of determining the Market Price of the Common Stock set
forth in the foregoing definition shall apply with respect to any other security
in respect of which a determination as to market value must be made
hereunder.

       

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

       

      (iii)        “Common
Stock,” for
purposes of this Paragraph 4, includes the Common Stock, par value $.001 per
share, and any additional class of stock of the Company having no preference as
to dividends or distributions on liquidation, provided that the shares
purchasable pursuant to this Warrant shall include only shares of Common Stock,
par value $.001 per share, in respect of which this Warrant is exercisable, or
shares resulting from any subdivision or combination of such Common Stock, or in
the case of any reorganization, reclassification, consolidation, merger, or sale
of the character referred to in Paragraph 4(e) hereof, the stock or other
securities or property provided for in such Paragraph.

       

      5.    Issue
Tax.

       

      
        The
issuance of certificates for Warrant Shares upon the exercise of this Warrant
shall be made without charge to the holder of this Warrant or such shares for
any issuance tax or other costs in respect thereof, provided that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than the holder of this Warrant.

      

       

      6.    No Rights or Liabilities as
a Shareholder.

       

      
        This
Warrant shall not entitle the holder hereof to any voting rights or other rights
as a shareholder of the Company.  No provision of this Warrant, in the
absence of affirmative action by the holder hereof to purchase Warrant Shares,
and no mere enumeration herein of the rights or privileges of the holder hereof,
shall give rise to any liability of such holder for the Exercise Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.

      

       

      7.    Transfer, Exchange, and
Replacement of Warrant.

       

      (a)           Restriction
on Transfer.  This Warrant and
the rights granted to the holder hereof are transferable, in whole or in part,
upon surrender of this Warrant, together with a properly executed assignment in
the form attached hereto, at the office or agency of the Company referred to in
Paragraph 7(e) below, pro­vided, however, that any transfer or
assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof
and to the applicable provisions of the Securities Purchase
Agreement.  Until due presentment for registration of transfer on the
books of the Company, the Company may treat the registered holder hereof as the
owner and holder hereof for all purposes, and the Company shall not be affected
by any notice to the con­trary.

       

      (b)           Warrant
Exchangeable for Different Denomina­tions.  This Warrant is
exchange­able, upon the surrender hereof by the holder hereof at the office
or agency of the Company referred to in Paragraph 7(e) below, for new Warrants
of like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the holder hereof at the time of such surrender.

       

      (c)           Replacement
of Warrant.  Upon receipt of
evi­dence reasonably satisfactory to the Company of the loss, theft,
destruction, or mutilation of this Warrant and, in the case of any such loss,
theft, or destruc­tion, upon delivery of an indemnity agreement
reasonably
satisfactory in form and amount to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Warrant of like
tenor.

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

       

      (d)           Cancellation;
Payment of Expenses.  Upon the
surrender of this Warrant in connection with any trans­fer, exchange, or
replacement as provided in this Paragraph 7, this Warrant shall be promptly
canceled by the Company.  The Company shall pay all taxes (other than
securities transfer taxes) and all other expenses (other than legal expenses, if
any, incurred by the holder or transferees) and charges payable in connection
with the preparation, execution, and delivery of Warrants pursuant to this
Paragraph 7.

       

      (e)           Register.  The Company shall
maintain, at its principal executive offices (or such other office or agency of
the Company as it may designate by notice to the holder hereof), a register for
this Warrant, in which the Company shall record the name and address of the
person in whose name this Warrant has been issued, as well as the name and
address of each transferee and each prior owner of this Warrant.

       

      (f)           Exercise
or Transfer Without Registration.  If, at the time
of the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the “Securities Act”) and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Securities Act and under applicable state securities or blue sky laws, (ii)
that the holder or transferee execute and deliver to the Company an investment
letter in form and substance acceptable to the Company and (iii) that the
transferee be an “accredited investor” as defined in Rule 501(a) promulgated
under the Securities Act; provided that no such opinion, letter or status as an
“accredited investor” shall be required in connection with a transfer pursuant
to Rule 144 under the Securities Act.  The first holder of this
Warrant, by taking and holding the same, represents to the Company that such
holder is acquiring this Warrant for investment and not with a view to the
distribution thereof.

       

      8.    Notices.

       

      
         All
notices, requests, and other communications required or permitted to be given or
delivered hereunder to the holder of this Warrant shall be in writing, and shall
be personally delivered, or shall be sent by certified or registered mail or by
recognized overnight mail courier, postage prepaid and addressed, to such holder
at the address shown for such holder on the books of the Company, or at such
other address as shall have been furnished to the Company by notice from such
holder.  All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the Company shall be in writing,
and shall be personally delivered, or shall be sent by certified or registered
mail or by recognized overnight mail courier, postage prepaid and addressed, to
the office of the Company at 130 Vantis, Suite 140, Aliso Viejo, CA 92656,
Attention: Chief Executive Officer, or at such other address as shall have been
furnished to the holder of this Warrant by notice from the
Company.  Any such notice, request, or other communication may be sent
by facsimile, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail or by recognized
overnight mail courier as provided above.  All notices, requests, and
other communications
shall be deemed to have been given either at the time of the receipt thereof by
the person entitled to re­ceive such notice at the address of such person
for purposes of this Paragraph 9, or, if mailed by registered or certified mail
or with a recognized overnight mail courier upon deposit with the United States
Post Office or such overnight mail courier, if postage is prepaid and the
mailing is properly addressed, as the case may be.

         

         

        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

      

       

      9.    Governing
Law.

       

      
        THIS
WARRANT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF
LAWS.  THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION
OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT
TO ANY DISPUTE ARISING UNDER THIS WARRANT, THE AGREEMENTS ENTERED INTO IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH
PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE
THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED
IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES AGREE THAT
A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT
OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN
ANY DISPUTE ARISING UNDER THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND
EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN
CONNECTION WITH SUCH DISPUTE.

      

       

      10.         
Miscellaneous.

       

      (a)           Amendments.  This Warrant and
any provision hereof may only be amended by an instrument in writing signed by
the Company and the holder hereof.

       

      (b)           Descriptive
Headings.  The descriptive
headings of the several paragraphs of this Warrant are in­serted for
purposes of reference only, and shall not affect the meaning or construction of
any of the provisions hereof.

       

      (c)           Cashless
Exercise.  Notwithstanding
anything to the contrary contained in this Warrant, this Warrant may be
exercised by presentation and surrender of this Warrant to the Company at its
principal executive offices with a written notice of the holder’s intention to
effect a cashless exercise, including a calculation of the number of shares of
Common Stock to be issued upon such exercise in accordance with the terms hereof
(a “Cashless Exercise”).  In the event of a Cashless Exercise, in lieu
of paying the Exercise Price in cash, the holder shall surrender this Warrant
for that number of shares of Common Stock determined by multiplying the number
of Warrant Shares to which it would otherwise be entitled by a fraction, the
numerator of which shall be the difference between the then current Market Price
per share of the Common Stock and the Exercise Price,  and the
denominator of which shall be the then current Market Price per share of Common
Stock.  For example, if the holder is exercising 100,000 Warrants with
a per Warrant exercise price of $0.75 per share through a cashless exercise when
the Common Stock’s current Market Price per share is $2.00 per share, then upon
such Cashless Exercise the holder will receive 62,500 shares of Common
Stock.

       

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

       

      (d)           Remedies.  The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holder, by vitiating the intent and purpose of the
transaction contemplated hereby.  Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Warrant will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Warrant, that the holder shall
be entitled, in addition to all other available remedies at law or in equity,
and in addition to the penalties assessable herein, to an injunction or
injunctions restraining, preventing or curing any breach of this Warrant and to
enforce specifically the terms and provisions thereof, without the necessity of
showing economic loss and without any bond or other security being
required.

       

      

       

      

       

      

       

      

       

      

       

      

       

      [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

      IN WITNESS WHEREOF, the
Company has caused this Warrant to be signed by its duly authorized
officer.

       

       

      
        
          	 	Camelot Entertainment Group
      Inc.	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/  
      Robert P.
      Atwell	 
	 	 	Robert
      P. Atwell	 
	 	 	Chief
      Executive Officer and President	 
	 	 	 	 

        

      

      

       

      Dated as
of July 31, 2008

       

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

      FORM
OF EXERCISE AGREEMENT

       

      

       

      Dated:  ________ __,
200_

       

      

       

      To:           ______________________

       

      

       

      

       

      The
undersigned, pursuant to the provisions set forth in the within Warrant, hereby
agrees to purchase ________ shares of Common Stock covered by such Warrant, and
makes pay­ment herewith in full therefor at the price per share provided by
such Warrant in cash or by certified or official bank check in the amount of, or
by surrender of securities issued by the Company (including a portion of the
Warrant) having a market value (in the case of a portion of this Warrant,
determined in accordance with Section 10(c) of the Warrant) equal to
$_________.  Please issue a certificate or certifi­cates for such
shares of Common Stock in the name of and pay any cash for any fractional share
to:

       

       

      
      

       

      
        	 	Name:  _____________________________________
	 	 
	 	Signature:
      __________________________________
	 	Address:
      ___________________________________
	 	                
      ___________________________________
	 	 	 
	 	Note:	

                The
      above signature should correspond exactly with the name on the face of the
      within Warrant, if applicable.

              

      

       

      

      and, if
said number of shares of Common Stock shall not be all the shares purchasable
under the within Warrant, a new Warrant is to be issued in the name of said
undersigned covering the balance of the shares purchasable thereunder less any
frac­tion of a share paid in cash.

       

      
        
           

        

        
          A-1

          
            

          

        

        
           

        

      

      FORM
OF ASSIGNMENT

      

       

      

       

      FOR VALUE RECEIVED, the
undersigned hereby sells, assigns, and transfers all the rights of the
undersigned under the within Warrant, with respect to the number of shares of
Common Stock covered thereby set forth hereinbelow, to:

      

       

      
        	Name
      of Assignee	
                 Address

              	 No of
Shares

      

       

       

       

       

      , and
hereby irrevocably constitutes and appoints ___________________________________
as agent and attorney-in-fact to trans­fer said Warrant on the books of the
within-named corporation, with full power of substitution in the
premises.

       

      

       

      Dated:                      ________
__, 200_

       

       

      
      

       

      
        	In the presence
      of:       	 	__________________________________
	 	Name:	__________________________________
	 	 
	 	Signature:	__________________________________
	 	Title of Signing
      Officer or Agent (if any):
	 	Address	__________________________________
	 	 	__________________________________
	 	 	__________________________________
	 	 	 
	 	Note:	
                The above signature
      should correspond exactly with the name on the face of the within Warrant,
      if applicable.

              

      

       

       

      
        A-2

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