Document:

Exhibit 4.2

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD
UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN
CONNECTION WITH SUCH OFFER OR SALE.

 

THIS NOTE DOES NOT
REQUIRE PHYSICAL SURRENDER HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT,
REDEMPTION OR CONVERSION HEREOF. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT
OF THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT SHOWN BELOW.

 

 

 

EARTH
BIOFUELS, INC.

 

8% SENIOR CONVERTIBLE NOTE

 

 

	
  New York, New York

  	
  $5,000,000

  

Issue Date:  June 7, 2006

 

FOR VALUE
RECEIVED, EARTH BIOFUELS, INC., a
Delaware corporation (the “Company”), hereby promises to pay to
the order of CASTLERIGG MASTER
INVESTMENTS LTD. or its permitted successors or assigns (the “Holder”) the sum of FIVE MILLION AND
00/100 DOLLARS ($5,000,000) in same day funds, on or before the Maturity Date
(as defined below). Upon the occurrence of the Conversion Trigger Event (as
defined below), the Holder may convert principal of and interest accrued on this
Note into shares (“Conversion Shares”) of the
Company’s common stock, par value $.001 per share (the “Common
Stock”), on the terms set forth herein.

 

The Company has issued
this Note pursuant to a Securities Purchase Agreement, dated as of June 7, 2006
(the “Securities Purchase Agreement”).
The Notes issued by the Company pursuant to the Securities Purchase Agreement,
including this Note, are collectively referred to herein as the “Notes”.

 

The following terms shall
apply to this Note:

 

1.                                       DEFINITIONS.

 

“Approved Stock Plan” means any
employee benefit plan which has been approved by the Board of Directors of the
Company (including a majority of the independent

 

 

members of the
Board), pursuant to which the Company’s securities may be issued to any
employee, officer, director or consultant for services provided to the Company.

 

“Business Day” means any day other than a Saturday, a Sunday or a day
on which the New York Stock Exchange is closed or on which banks are authorized
by law to close in New York, New York.

 

“Change of Control” means the
existence or occurrence of any of the following: (a) the sale, conveyance or
disposition of all or substantially all of the assets of the Company; (b) the
effectuation of a transaction or series of transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of; (c) the
consolidation, merger or other business combination of the Company with or into
any other entity, immediately following which the prior stockholders of the
Company fail to own, directly or indirectly, at least fifty percent (50%) of
the surviving entity; (d) a transaction or series of transactions in which any
Person or group acquires more than fifty percent (50%) of the voting equity of
the Company; and (e) the Continuing Directors do not at any time constitute at
least a majority of the Board of Directors of the Company.

 

“Common Stock Equivalent” means,
collectively, Options and Convertible Securities.\

 

“Continuing Director”
means at any date a member of the Company’s Board of Directors (i) who was a
member of such board on the date of the Securities Purchase Agreement or (ii)
who was nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company’s Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election or such lesser number comprising a majority of a
nominating committee if authority for such nominations or elections has been
delegated to a nominating committee whose authority and composition have been
approved by at least a majority of the directors who were continuing directors
at the time such committee was formed.

 

“Conversion Price” means, as
of any date, the lower of the Fixed Conversion Price and the Floating
Conversion Price on such date, subject to adjustment as provided herein.

 

“Conversion Trigger Event”
means that, as of the Initial Maturity Date, this Note has not been repaid in
full either (i) in cash or (ii) through an Exchange effected in accordance with
Section 2(c) below.

 

“Convertible Securities” means
any stock or securities (other than Options) of the Company convertible into or
exercisable or exchangeable for Common Stock.

 

“Debt” means as to any Person at any
time: (a) all indebtedness, liabilities and obligations of such Person for
borrowed money; (b) all indebtedness, liabilities and obligations of such
Person to pay the deferred purchase price of Property or services, except trade
accounts payable of such Person arising in the ordinary course of business that
are not past due by more than 90 days; (c) all capital lease obligations of such
Person; (d) all Debt of others guaranteed by such Person; (e) all indebtedness,
liabilities and obligations secured by a Lien (other than a Permitted Lien)
existing on Property owned by such Person, whether or not the indebtedness,
liabilities or

 

2

 

obligations
secured thereby have been assumed by such Person or are non-recourse to
such Person; (f) all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers’ acceptances,
surety or other bonds and similar instruments; and (g) all liabilities and
obligations of such Person to redeem or retire shares of capital stock of such
Person (other than the Company’s obligation to redeem the Securities under the
circumstances specified therein). Debt shall not include any liability for (i)
federal, state, local or other taxes imposed by a Governmental Authority, (ii)
endorsements of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business or (iii) any indebtedness that
has been fully and finally defeased in accordance with the terms of the
documents governing such indebtedness.

 

“Default Interest Rate” means the
lower of sixteen (16%) and the maximum rate permitted by applicable law or by
the applicable rules or regulations of any governmental agency or of any stock
exchange or other self-regulatory organization having jurisdiction over the
Company or the trading of its securities.

 

“Exchange” means that all outstanding
principal of and interest (and other amounts) accrued on this Note have been exchanged for the securities issued in a New
Offering on a dollar-for-dollar basis and otherwise with the same terms granted
to other purchasers in the New Offering.

 

“Fixed Conversion Price” means
the greater of (i) the Floor Price and (ii) seventy five percent (75%) of the
Market Price on the Initial Maturity Date; in either case, subject to
adjustment as provided herein.

 

“Floating Conversion Price”
means, as of any date, the greater of (i) the Floor Price and (ii) seventy five
percent (75%) of the Market Price on such date; in either case, subject to
adjustment as provided herein.

 

“Floor Price” means the least
of (i) $1.00, (ii) the lowest floor price for any conversion or exercise price
in any other security of the Company issued after the date hereof, and (iii)
the lowest per share consideration for which the Company issues or
sells, or in accordance with Section 5(e)(ii) is
deemed to have issued or sold, any shares of Common Stock.

 

“Governmental Authority” means any
nation or government, any state, provincial or political subdivision thereof
and any entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including without
limitation any stock exchange, securities market or self-regulatory
organization.

 

“Initial Maturity Date” means the
ninetieth (90th) calendar
day following the Issue Date.

 

“Issue Date” means the date on which
this Note is issued pursuant to the Securities Purchase Agreement.

 

“Lien” and “Permitted
Lien” shall have the respective meanings set forth in the
Securities Purchase Agreement.

 

3

 

“Liquidation Event” means the (x) institution
of any insolvency or bankruptcy proceedings, or any receivership, liquidation,
reorganization or other similar proceedings in connection therewith, relative
to the Company, the Company Subsidiaries
or to its or their creditors, as such, or to its or their assets, or (y) the
dissolution or other winding up of the Company
or the Company Subsidiaries, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy proceedings, or (z) any
assignment for the benefit of creditors or any marshalling of the material
assets or material liabilities of the Company
or any Company Subsidiary.

 

“Major Transaction” means a merger,
consolidation, business combination, tender offer, exchange of shares,
recapitalization, reorganization, redemption or other similar event, as a
result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities or other assets of the Company or another entity or the Company
shall sell all or substantially all of its assets.

 

“Market Price” means, as of a
particular date, the lower of (i) the average of daily VWAP for each of the
five (5) consecutive Trading Days occurring immediately prior to (but not
including) such date and (ii) the daily VWAP on the Trading Day occurring
immediately prior to (but not including) such date.

 

“Maturity Date” means the Initial Maturity
Date and, if the Holder exercises the Maturity
Extension Option, the Subsequent Maturity Date.

 

“Maturity Extension Option” has the meaning set forth in Section 2(b) below.

 

“New Offering” means a private
offering and sale by the Company of its equity securities with gross cash
proceeds to the Company of at least the principal amount of this Note.

 

“Obligations” shall have the meaning
set forth in Section 2(a) below.

 

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

 

“Person” means any individual,
corporation, trust, association, company, partnership, joint venture, limited
liability company, joint stock company, Governmental Authority or other entity.

 

“Principal Market” means the
principal securities exchange or market on which the Common Stock is listed or
traded.

 

“Registrable Securities” has the
meaning set forth in the Registration Rights Agreement.

 

“Registration Rights Agreement” means
the agreement between the Holder and the Company pursuant to which the Company
has agreed to register the shares of Common Stock issuable under the Notes and
the Warrants.

 

4

 

“Registration Statement” means the
Registration Statement (as defined in the Registration Rights Agreement)
covering the resale of the Conversion Shares issuable under this Note.

 

“Subsequent Maturity Date” means the
one hundred and eightieth (180th)
calendar day following the Issue Date.

 

“Trading Day” means a Business
Day on which shares of Common Stock is purchased and sold on the Principal
Market.

 

“VWAP” on a Trading Day means
the volume weighted average price of the Common Stock for such Trading Day on
the Principal Market as reported by Bloomberg Financial Markets or, if
Bloomberg Financial Markets is not then reporting such prices, by a comparable
reporting service of national reputation selected by the Holders and reasonably
satisfactory to the Company.  If VWAP
cannot be calculated for the Common Stock on such Trading Day on any of the
foregoing bases, then the Company shall submit such calculation to an
independent investment banking firm of national reputation reasonably
acceptable to the Investors, and shall cause such investment banking firm to
perform such determination and notify the Company and the Investors of the
results of determination no later than two (2) Business Days from the time such
calculation was submitted to it by the Company. 
All such determinations shall be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period.

 

“Warrants” means the warrants issued
pursuant to the Securities Purchase Agreement.

 

All definitions
contained in this Note are equally applicable to the singular and plural forms
of the terms defined.  The words “hereof”,
“herein” and “hereunder” and words of similar import referring to this Note refer
to this Note as a whole and not to any particular provision of this Note. Any
capitalized term used but not defined herein has the meaning specified in the
Securities Purchase Agreement.

 

2.                                       MATURITY DATE; EXTENSION OF MATURITY.

 

(a)                                  Initial
Maturity Date.  On the Initial
Maturity Date, and subject to the Maturity Extension Option (as defined below),
the Company shall pay to the Holder all principal of and interest (and other
amounts) accrued on this Note (collectively, the “Obligations”)
either (i) in cash or (ii) to the extent permitted through an Exchange in
accordance with Section 2(c) below.

 

(b)                                 Subsequent
Maturity Date; Extension.  In the
event that the Company does not pay the entire amount of the Obligations on the
Initial Maturity Date either (i) in cash or (ii) to the extent permitted through
an Exchange in accordance with Section 2(c)
below, the Holder shall have the option to extend the Maturity Date as to all
or any part of the Obligations from the Initial Maturity Date to the Subsequent
Maturity Date (the “Maturity Extension Option”).
If the Holder exercises the Maturity Extension Option, the Obligations shall
become due on the Subsequent Maturity Date instead of the Initial Maturity Date,
and Interest (and any other amounts) shall continue to accrue hereon through
the full and final payment (through cash or an Exchange) of all

 

5

 

Obligations. In order to
exercise the Maturity Extension Option, the Holder must deliver written notice
thereof no later than the fifth (5th)
Business Day prior to the Initial Maturity Date specifying the amount of
Obligations to which the Maturity Extension Option applies. If the Holder does
not exercise the Maturity Extension Option, the Obligations shall be deemed due
and payable on the Initial Maturity Date. Any Obligations (including accrued
and unpaid Interest) not paid in full when due shall bear interest at the
Default Interest Rate from the due date through the date on which payment in
full is made.

 

(c)                                  Exchange.
The Company must deliver written notice of
the Exchange (including the proposed date and expected gross proceeds thereof)
to the Holder at least five (5) Business Days (the “Exchange
Notice Date”) prior to the closing date of the New Offering (the
“Exchange Date”).  In order to pay the Obligations
through an Exchange, the Company must have
received notice from the Holder at least one (1) Business Day prior to the Exchange Date that such
Holder has elected to have the Obligations paid through an Exchange (an “Exchange Election”). On the Exchange
Date, if
the Holder has made an Exchange Election, this Note shall be automatically exchanged for a
portion of the securities issued in a New Offering, such Exchange to be
effected on a dollar-for-dollar
basis so that each dollar of Obligations (including all Interest accrued
through the Exchange Date) shall be deemed payment for the securities issued in
the New Offering on the same terms and conditions granted to other purchasers
in the New Offering. Unless and until an Exchange occurs (or payment in full of
all Obligations is made in cash), the Holder shall have all of its rights and
remedies hereunder (including without limitation its right to convert this Note
if the Conversion Trigger Event has occurred) through the Exchange Date (or the
date on which payment in full is made).

 

(d)                                 Remedies for Non-payment.  Until
all Obligations have been paid in full, either in cash or through an Exchange effected
in accordance with Section 2(c) above, the Holder shall have all rights and
remedies set forth in this Note and the other Transaction Documents and which
it may otherwise have under any law or in equity with respect to amounts due
and unpaid hereunder. The Holder and its permitted successors and assigns shall
be entitled to enforce such rights specifically, to recover damages by reason
of any non-payment of the Obligations when due or the breach of any provision
of this Note or the Transaction Documents and to exercise all other rights
granted by law or in equity, if available. The Company recognizes and agrees
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under this Note, any remedy at law may prove to be inadequate
relief to the Holder and, therefore, the Holder shall be entitled to seek
temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages and without posting a bond or other
security.

 

3.                                       INTEREST.

 

This Note shall bear
interest on the unpaid principal amount hereof (“Interest”)
at an annual rate equal to eight percent (8%);
provided, however, that if a New
Offering is not completed within sixty (60) calendar days following the Issue
Date, Interest shall be computed at an annual rate of twelve percent (12%),
such computation to be retroactive to the Issue Date as though Interest had accrued
from such date at an annual rate of twelve percent. Interest shall be computed
on the basis of a 360-day year and calculated using the actual number of days
elapsed since the Issue Date, and if not timely paid as provided herein,
compounded monthly until paid.

 

 

6

4.                                       CONVERSION.

 

(a)                                  Right
to Convert.  If the Conversion
Trigger Event occurs, the Holder shall have the right to convert, at any time thereafter
and from time to time until the Obligations are paid in full, (i) all or any
part of the outstanding and unpaid principal amount of this Note and (ii) at
the Holder’s option, in its sole discretion, all or any part of unpaid Interest
(and any other amounts) accrued hereon, into such number of fully paid and
non-assessable Conversion Shares as is determined in accordance with the terms
hereof (a “Conversion”).

 

(b)
                              Conversion
Notice.  In order to convert
principal of (and, if the Holder so elects, Interest accrued on) this Note, the
Holder shall send by facsimile transmission, at any time prior to 5:00 p.m.,
eastern time, on the Business Day on which the Holder wishes to effect such
Conversion (the “Conversion Date”), a properly
completed notice of conversion to the Company, in the form set forth on Annex I hereto, stating the amount
of principal (and accrued Interest, if applicable) to be converted and a
calculation of the number of shares of Common Stock issuable upon such
Conversion (a “Conversion Notice”).  The Conversion Notice shall also state the name or names (with
address) in which the shares of Common Stock that are issuable on such
conversion shall be issued.  The
Holder shall not be required to physically surrender this Note to the Company
in order to effect a Conversion. The Company shall maintain a record showing,
at any given time, the unpaid principal amount of this Note and the date of
each Conversion or other payment of principal hereof.  The Holder shall amend Annex
II hereto upon any such Conversion or payment of principal to
reflect the unpaid principal amount hereof. 
In the case of a dispute as to the number of Conversion Shares issuable
upon a Conversion (including without limitation as a result of adjustments to
the Fixed Conversion Price made in accordance with Section
4 below), the Company shall promptly issue to the Holder the
number of Conversion Shares that are not disputed and shall submit the disputed
calculations to a certified public accounting firm of national recognition
(other than the Company’s independent accountants) within two (2) Business Days
of receipt of the Holder’s Conversion Notice. The Company shall use its best
efforts to cause such accountants to calculate the Fixed Conversion Price as
provided herein and to notify the Company and the Holder of the results in
writing no later than two (2) Business Days following the day on which such
accountant received the disputed calculations (the “Dispute
Procedure”). Such accountant’s calculation shall be deemed conclusive
absent manifest error. The fees of any such accountant shall be borne by the
party whose calculations are most at variance with those of such accountant.

 

(c)                                  Number
of Conversion Shares; Conversion Price. 
The number of Conversion Shares to be delivered by the Company pursuant
to a Conversion shall be equal to the principal amount of (and, if the Holder
so elects, Interest and any other amounts accrued on) this Note being converted divided by the Conversion
Price in effect on the Conversion Date.

 

(d)                                 Delivery
of Common Stock Upon Conversion. 
Upon receipt of a Conversion Notice, the Company shall, no later than
the close of business on the third (3rd) Business Day following the Conversion
Date set forth in such Conversion Notice (the “Delivery
Date”), issue and deliver or cause to be delivered to the Holder
the number of Conversion Shares determined pursuant to Section
3(c) above, provided, however, that any Conversion Shares that are the subject of
a Dispute Procedure shall be delivered no later than the close of business on
the third (3rd) Business Day following the determination made pursuant thereto.
The Company shall effect delivery of
Conversion Shares to the Holder, as long as the Company’s designated
transfer agent or co-transfer agent in the United States for the Common Stock
(the “Transfer Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer program (“FAST”), by

 

7

 

crediting
the account of the Holder or its nominee at DTC (as specified in the applicable
Conversion Notice) with the number of Conversion Shares required to be
delivered, no later than the close of business on such Delivery Date. In the
event that the Transfer Agent is not a participant in FAST or if the Holder so
specifies in a Conversion Notice or otherwise in writing on or before the
Conversion Date, the Company shall effect delivery of Conversion Shares by
delivering to the Holder or its nominee physical certificates representing such
Conversion Shares, no later than the close of business on such Delivery Date. If
any Conversion would create a fractional Conversion Share, such fractional
Conversion Share shall be disregarded and the number of Conversion Shares
issuable upon such Conversion, in the aggregate, shall be the nearest whole
number of Conversion Shares.  Conversion
Shares delivered to the Holder shall not contain any restrictive legend unless
such legend is required pursuant to the terms of the Securities Purchase Agreement.

 

(e)                                  Failure
to Deliver Conversion Shares.

 

(i)                                     In
the event that the Company fails for any reason to deliver to the Holder the
number of Conversion Shares specified in a Conversion Notice (without any
restrictive legend to the extent permitted by the terms of the Securities
Purchase Agreement) on or before the second (2nd)
Business Day following the Delivery Date therefor (a “Conversion
Default”), the Holder shall
have the right to receive from the Company an amount equal to (i)
(N/365) multiplied by (ii) the principal amount of, and any Interest
accrued on, this Note represented by the Conversion Shares which remain the
subject of such Conversion Default multiplied by (iii) the Default
Interest Rate, where “N” equals the number of days elapsed between the original
Delivery Date of such Conversion Shares and the date on which such Conversion
Default has been cured. In the event that shares of Common Stock are purchased
by or on behalf of the Holder in order to make
delivery on a sale effected in anticipation of receiving Conversion Shares upon
a Conversion, the Holder shall have the right to receive from the Company, in
addition to the foregoing amounts, (i) the aggregate amount paid by or on
behalf of the Holder for such shares of Common Stock minus (ii) the
aggregate amount of net proceeds, if any, received by the Holder from the sale
of the Conversion Shares issued by the Company pursuant to such Conversion. Amounts payable under this Section 4(e)(i)
shall be paid to the Holder in immediately
available funds on or before the fifth (5th) Business Day following written
notice from the Holder to the Company specifying the amount owed to it by the
Company pursuant to this Section 4(e)(i).

 

(ii)                                  In
addition to its rights under Section 4(e)(i)
above, upon a Conversion Default, the Conversion Price applicable to the
applicable Conversion shall be automatically be adjusted to the lower of (i)
the Conversion Price in effect on the Conversion Date and (ii) the lowest
Conversion Price occurring from the first date of such Conversion Default
through the date on which all Conversion Shares to which the Holder is entitled
have been delivered in accordance with the terms of this Note.  The Holder shall have the right to pursue all
other remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).

 

(f)                                    Limitations
on Right to Convert.  In no event
shall the Holder be permitted to convert principal of or Interest on this Note if, upon such
conversion, (x) the number of Conversion Shares to be issued pursuant to such
Conversion plus (y) the number of shares of Common Stock beneficially
owned by the Holder (other than Common Stock which may be deemed beneficially
owned except for being subject to a limitation on conversion or exercise
analogous to the limitation

 

8

 

contained in this Section 4(f)) would exceed 4.99% of
the number of shares of Common Stock then issued and outstanding, it being the
intent of the Company and the Holder that the Holder not be deemed at any time
to have the power to vote or dispose of greater than 4.99% of the number of
shares of Common Stock issued and outstanding at any time. Nothing contained
herein shall be deemed to restrict the right of the Holder to convert such
excess principal amount at such time as such Conversion will not violate the
provisions of this Section4(f). As used herein, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and the rules thereunder. 
To the extent that the limitation contained in this Section4(f) applies (and without limiting any rights the Company may otherwise
have), the Company may rely on the Holder’s determination of whether this Note
is convertible pursuant to the terms hereof,
the Company shall have no obligation whatsoever to verify or confirm the
accuracy of such determination, and the submission of a Conversion Notice by
the Holder shall be deemed to be the Holder’s representation that this Note is
convertible pursuant to the terms hereof.  The Company shall have no
liability to any person if the Holder’s determination of whether this Note is
convertible pursuant to the terms hereof is incorrect.

 

5.                                       ADJUSTMENTS TO FIXED CONVERSION PRICE.

 

(a)                                  Stock
Splits, Stock Interests, Etc.  If, at
any time on or after the Issue Date, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination, reclassification or other
similar event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Company shall notify the Company’s transfer agent of such
change on or before the effective date thereof.

 

(b)                                 Major
Transactions.  If, at any time after
the Issue Date, any Major Transaction shall occur, then the Holder shall
thereafter have the right to receive upon Conversion, in lieu of the shares of
Common Stock otherwise issuable, such shares of publicly traded stock,
securities and/or other property as would have been issued or payable upon such
Major Transaction with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon Conversion had such Major
Transaction not taken place (without giving effect to any limitations on such
Conversion contained in this Note or the Securities Purchase Agreement). The
Company shall not effect any Major Transaction unless (i) the Holder has
received written notice of such transaction at least thirty (30) days prior
thereto (which period shall be increased to sixty one (61) days if, at such
time, without giving effect to the limitation on conversion contained in Section 4(f) hereof, the Holder
would beneficially own more than 4.9% of the Common Stock then outstanding, and
the Holder has notified the Company in writing of such circumstance) but in no
event later than fifteen (15) days prior to the record date for the
determination of stockholders entitled to vote with respect thereto; provided, however, that
the Company shall publicly disclose the material terms of any such Major
Transaction on or before the date on which it delivers notice of a Major
Transaction to the Holder, and (ii) the resulting successor or acquiring entity
(if not the Company) assumes by written instrument (in form and substance
reasonable satisfactory to the Holder) the obligations of the Company under
this Note (including, without limitation, the obligation to make payments of
Interest accrued but unpaid through the date of such consolidation, merger or
sale and accruing thereafter).  The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available

 

9

 

for issuance upon conversion
of this Note as of the date of such transaction, and shall similarly apply to
successive Major Transactions.

 

(c)                                  Distributions.  If, at any time after the Issue Date, the
Company declares or makes any distribution of cash or any other assets (or
rights to acquire such assets) to holders of Common Stock, including without
limitation any dividend or distribution to the Company’s stockholders in shares
(or rights to acquire shares) of capital stock of a subsidiary) (a “Distribution”), the Company
shall deliver written notice of such Distribution (a “Distribution Notice”) to the Holder at least fifteen
(15) days prior to the earlier to occur of (i) the record date for determining
stockholders entitled to such Distribution (the “Record
Date”) and (ii) the date on which such Distribution is made (the
“Distribution Date”)(the earlier of
such dates being referred to as the “Determination Date”).  Upon receipt of the Distribution Notice, the
Holder shall promptly (but in no event later than three (3) Business Days)
notify the Company whether it has elected (A) to receive the same amount and
type of assets (including, without limitation, cash) being distributed as
though the Holder were, on the Determination Date, a holder of a number of
shares of Common Stock into which this Note is convertible as of such
Determination Date (such number of shares to be determined without giving
effect to any limitations on such conversion) or (B) upon any exercise of this
Note on or after the Distribution Date, to reduce the Conversion Price
applicable to such conversion by reducing the Conversion Price in effect on the
Business Day immediately preceding the Record Date by an amount equal to the
fair market value of the assets to be distributed divided by the number
of shares of Common Stock as to which such Distribution is to be made, such
fair market value to be reasonably determined in good faith by the independent
members of the Company’s Board of Directors. 
Upon receipt of such election notice from the Holder, the Company shall
timely effectuate the transaction or adjustment contemplated in the foregoing clause (A) or (B), as applicable.  If the Holder does not notify the Company of
its election pursuant to the preceding sentence on or prior to the
Determination Date, the Holder shall be deemed to have elected clause (A) of
the preceding sentence.

 

(d)                                 Convertible
Securities; Options.  If, at any time
after the Issue Date, the Company issues Convertible Securities or Options to
the record holders of the Common Stock, whether or not such Convertible
Securities or Options are immediately convertible, exercisable or exchangeable,
then the Holders shall be entitled, upon any Conversion of this Note after the
date of record for determining stockholders entitled to receive such
Convertible Securities or Options (or if no such record is taken, the date on
which such Convertible Securities or Options are issued), to receive the
aggregate number of Convertible Securities or Options which the Holder would
have received with respect to the shares of Common Stock issuable upon such
conversion (without giving effect to any limitations on such Conversion
contained in this Note or the Securities Purchase Agreement) had the Holder
been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to receive such Convertible Securities
or Options (or if no such record is taken, the date on which such Convertible
Securities or Options were issued).

 

(e)                                  Dilutive
Issuances.

 

(i)                                     Adjustment
Upon Dilutive Issuance.  If, at any
time after the Issue Date, the Company issues or sells, or in accordance with Section 5(e)(ii) is deemed to have
issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Fixed Conversion Price on the date of
such issuance or sale (or deemed issuance or sale) (a

 

10

 

“Dilutive Issuance”), then the Fixed Conversion Price
shall be adjusted so as to equal the consideration received or receivable by the
Company (on a per share basis) for the additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the
case of a deemed issuance or sale, shall be calculated in accordance with Section 5(e)(ii) below).  Notwithstanding the foregoing, no adjustment
shall be made pursuant hereto if such adjustment would result in an increase in
the Fixed Conversion Price.

 

(ii)                                  Effect
On Fixed Conversion Price Of Certain Events.  For purposes of determining the adjusted Fixed
Conversion Price under Section 5(e)(i),
the following will be applicable:

 

(A)                              Issuance
Of Options.  If the Company issues or
sells any Options, whether or not immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such Options (and
the price of any conversion of Convertible Securities, if applicable) is less
than the Fixed Conversion Price in effect on the date of issuance or sale of
such Options, then the maximum total number of shares of Common Stock issuable
upon the exercise of all such Options (assuming full conversion, exercise or
exchange of Convertible Securities, if applicable) shall, as of the date of the
issuance or sale 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” shall be determined by dividing (x) the
total amount, if any, received or receivable by the Company as consideration
for the issuance or sale 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, exercise or exchange
thereof (determined in accordance with the calculation method set forth in Section 5(e)(ii)(B) below) at the
time such Convertible Securities first become convertible, exercisable or
exchangeable, by (y) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Options (assuming full conversion,
exercise or exchange of Convertible Securities, if applicable). No further adjustment
to the Fixed Conversion Price shall be made upon the actual issuance of such
Common Stock upon the exercise of such Options or upon the conversion, exercise
or exchange of Convertible Securities issuable upon exercise of such Options.

 

(B)                                Issuance
Of Convertible Securities.  If the
Company issues or sells any Convertible Securities, whether or not immediately
convertible, exercisable or exchangeable, and the price per share for which
Common Stock is issuable upon such conversion, exercise or exchange is less
than the Fixed Conversion Price in effect on the date of issuance or sale of
such Convertible Securities, then the maximum total number of shares of Common
Stock issuable upon the conversion, exercise or exchange of all such
Convertible Securities shall, as of the date of the issuance or sale of such
Convertible Securities, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. If the Convertible Securities so
issued or sold do not have a fluctuating conversion or exercise price or
exchange ratio, then for the purposes of the immediately preceding sentence,
the “price per share for which Common Stock is issuable upon such conversion,
exercise or exchange” shall be determined by dividing (A) the total

 

11

 

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, exercise or
exchange thereof (determined in accordance with the calculation method set
forth in this Section 5(e)(ii)(B)) at the
time such Convertible Securities first become convertible, exercisable or
exchangeable, by (B) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. If the Convertible Securities so issued or sold have a fluctuating
conversion or exercise price or exchange ratio (a “Variable Rate Convertible Security”), then for purposes
of the first sentence of this Section 5(e)(ii)(B),
the “price per share for which Common Stock is issuable upon such conversion,
exercise or exchange” shall be deemed to be the lowest price per share which
would be applicable (assuming all holding period and other conditions to any
discounts contained in such Variable Rate Convertible Security have been
satisfied) if the conversion price of such Variable Rate Convertible Security
on the date of issuance or sale thereof were equal to the actual conversion
price on such date (or such higher minimum conversion price if such Variable
Rate Convertible Security is subject to a minimum conversion price) (the “Assumed Variable Market Price”),
and, further, if the conversion price of such Variable Rate Convertible
Security at any time or times thereafter is less than or equal to the Assumed
Variable Market Price last used for making any adjustment under this Section 5(e) with respect to any
Variable Rate Convertible Security, the Fixed Conversion Price in effect at
such time shall be readjusted to equal the Fixed Conversion Price which would
have resulted if the Assumed Variable Market Price at the time of issuance of
the Variable Rate Convertible Security had been equal to the actual conversion
price of such Variable Rate Convertible Security existing at the time of the
adjustment required by this sentence; provided, however,
that if the conversion or exercise price or exchange ratio of a Convertible Security
may fluctuate solely as a result of provisions designed to protect against
dilution, such Convertible Security shall not be deemed to be a Variable Rate
Convertible Security.  No further
adjustment to the Fixed Conversion Price shall be made upon the actual issuance
of such Common Stock upon conversion, exercise or exchange of such Convertible
Securities.

 

(C)                                Change
In Option Price Or Conversion Rate. 
If there is a change at any time in (x) the amount of additional
consideration payable to the Company upon the exercise of any Options; (y) the
amount of additional consideration, if any, payable to the Company upon the
conversion, exercise or exchange of any Convertible Securities; or (z) the rate
at which any Convertible Securities are convertible into or exercisable or
exchangeable for Common Stock (in each such case, other than under or by reason
of provisions designed to protect against dilution), the Fixed Conversion Price
in effect at the time of such change shall be readjusted to the Fixed Conversion
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, exercise or exchange rate, as the case may
be, at the time initially issued or sold.

 

(D)                               Calculation
Of Consideration Received.  If any
Common Stock, Options or Convertible Securities are issued or sold for cash,
the consideration received therefor will be the amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration part or all of which

 

12

 

shall be other than cash,
including in the case of a strategic or similar arrangement in which the other
entity will provide services to the Company, purchase services from the Company
or otherwise provide intangible consideration to the Company, the amount of the
consideration other than cash received by the Company (including the net
present value of the consideration expected by the Company for the provided or
purchased services) shall be the fair market value of such consideration. In
case any Common Stock, Options or Convertible Securities are issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor will be deemed to
be the fair market 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 independent members of the
Company’s Board of Directors shall calculate reasonably and in good faith,
using standard commercial valuation methods appropriate for valuing such
assets, the fair market value of any consideration.

 

(iii)                               Exceptions
To Adjustment Of Fixed Conversion Price. 
Notwithstanding the foregoing, no adjustment to the Fixed Conversion
Price shall be made pursuant to this Section 5(e)
upon the issuance of any Excluded Securities.

 

(iv)                              Notice
Of Adjustments.  Upon the occurrence
of each adjustment or readjustment of the Fixed Conversion Price pursuant to
this Section 5(e) resulting in a change
in the Fixed Conversion Price by more than one percent (1%), or any change in
the number or type of stock, securities and/or other property issuable upon
Conversion of this Note, the Company, at its expense, shall promptly compute
such adjustment, readjustment or change and prepare and furnish to the Holder a
certificate setting forth such adjustment, readjustment or change and showing
in detail the facts upon which such adjustment, readjustment or change is
based.  The Company shall, upon the
written request at any time of the Holder, furnish to the Holder a like
certificate setting forth (i) such adjustment, readjustment or change, (ii) the
Fixed 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 this Note.

 

6.                                       EVENTS OF DEFAULT; ACCELERATION.

 

(a)                                  Acceleration.  In the event that an Event of Default (as
defined below) or a Change of Control occurs, the Holder shall have the right,
upon written notice to the Company (an “Acceleration Notice”),
to require that all or any portion of the unpaid principal amount of this Note,
plus all accrued and unpaid Interest (and any other amounts) thereon, plus an
amount equal to twenty percent (20%) of the principal amount of this Note, be
immediately paid in full in cash.  The Acceleration
Notice shall specify the date on which all Obligations must be paid, (the “Acceleration Date”), which date may
be the Business Day on which the Acceleration Notice is delivered to the
Company, and the amount of principal and Interest (and other amounts) to be
accelerated. The Holder must deliver an Acceleration Notice no later than the
close of business on the thirtieth (30th) Business
Day immediately following the Business Day on which an Event of Default is no
longer continuing; provided, however, that with respect to a Change of Control, the
Holder must deliver an Acceleration Notice no later than the close of business
on the thirtieth (30th)Business Day following the
date on which the Change of Control is effected or when it is publicly
announced, whichever is later.  The
Company will make public disclosure of an Event of Default, consistent with the

 

13

 

requirements of Form
8-K.  Additionally, the Company will make
public disclosure of any prepayment of this Note.

 

(b)                                 Payment.
Upon delivery of an Acceleration Notice to the Company, the Company shall pay all
outstanding Obligations in full on the Acceleration Date.  If the Company fails to pay the Obligations
in full on the Acceleration Date, the Holder shall be entitled to interest
thereon at the Default Interest Rate from the Acceleration Date until the date
on which all Obligations have been paid in full.

 

(c)                                  Events
of Default.  Each of the following
events shall be deemed an “Event of Default”:

 

(i)                                     a
Liquidation Event occurs or is publicly announced;

 

(ii)                                  the
Company breaches or provides notice of its intent to breach, in a material
respect, any covenant or other material term or condition of this Note
(including without limitation any payment obligation thereunder) or any other
Transaction Document, including but not limited to the Company’s failure to
deliver Conversion Shares and Warrant Shares on or before the required delivery
date therefor;

 

(iii)                               any
representation or warranty made by the Company in this Note or any other
Transaction Document was inaccurate or misleading in any material respect as of
the date such representation or warranty was made; and

 

(iv)                              a
default occurs or is declared, or any amounts are accelerated, under or with
respect to any instrument that evidences Debt of the Company or any of its
Subsidiaries in a principal amount exceeding $100,000.

 

7.                                       PREPAYMENT.

 

The
Company shall be entitled to prepay principal of and interest (and any other
amounts) accrued on this Note, at any time without the prior written consent of
the Holder, either in cash or, if the Holder so elects in accordance with Section 2(c), through an Exchange; provided, however, that,
except as otherwise permitted by this Section 7, if the Holder exercises the Maturity Extension
Option, the Company may not prepay this Note prior to the Subsequent Maturity
Date without the prior consent of the Holder, which consent may be withheld for
any reason (or no reason) in the Holder’s sole discretion.  If the Holder does not elect to participate in the Exchange and (x) the
Company receives gross proceeds less than $40 million from any
New Offering on or after the Initial Maturity Date or (y) the Company receives gross
proceeds greater than $40 million from any New Offering at any time, the
Company must prepay this Note in full and in cash on the date the New Offering
is consummated or within two (2) Business Days thereafter.

 

14

 

8.                                       MISCELLANEOUS.

 

(a)                                  Failure
to Exercise Rights 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 any other or
further exercise thereof. All rights and remedies of the Holder hereunder are
cumulative and not exclusive of any rights or remedies otherwise available. In
the event that the Company does not pay any amount of the Obligations when such
amount becomes due (either in cash or through an Exchange in accordance with Section
2(c)), the Company shall bear
all costs incurred by the Holder in collecting such amount, including without
limitation reasonable legal fees and expenses.

 

(b)                                 Notices.
Any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Note must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:

 

	
  if to the Company:

  
	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite
  403,

  
	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  
	
  with a copy (for
  informational purposes only) to:

  
	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  

 

and if to the Holder, to
the address and facsimile number as to which the Holder has notified the
Company in writing. Written confirmation of receipt (A) given by the recipient
of such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from
an overnight courier service in accordance with clause (i), (ii) or (iii)
above, respectively.

 

(c)                                Amendments.  No amendment, modification or other change
to, or waiver of any provision of, this Note may be made unless such amendment,
modification or change is (A) set forth in writing and is signed by the Company
and the Holder and (B) agreed to in writing by the holders of at least
sixty-six percent (66%) of the unpaid principal amount of the Notes, it being

 

15

 

understood that,
notwithstanding anything to the contrary contained in any Note, upon the
satisfaction of the conditions described in (A) and (B) above, each Note
(including any Note held by the Holder who did not execute the agreement
specified in (B) above) shall be deemed to incorporate any amendment,
modification, change or waiver effected thereby as of the effective date
thereof.

 

(d)                               Transfer
of Note.  The Holder may sell,
transfer or otherwise dispose of all or any part of this Note (including
without limitation pursuant to a pledge) to any person or entity as long as
such sale, transfer or disposition is the subject of an effective registration
statement under the Securities Act of 1933, as amended, and applicable state
securities laws, or is exempt from registration thereunder, and is otherwise
made in accordance with the applicable provisions of the Securities Purchase
Agreement.  From and after the date of
any such sale, transfer or disposition, the transferee hereof shall be deemed
to be the holder of a Note in the principal amount acquired by such transferee,
and the Company shall, as promptly as practicable, issue and deliver to such
transferee a new Note identical in all respects to this Note, in the name of
such transferee. The Company shall be entitled to treat the original Holder as
the holder of this entire Note unless and until it receives written notice of
the sale, transfer or disposition hereof.

 

(e)                                Lost
or Stolen Note.  Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of this Note,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Company, and upon surrender and cancellation of
the Note, if mutilated, the Company shall execute and deliver to the Holder a
new Note identical in all respects to this Note.

 

(f)                                  Governing
Law.  This Note shall be governed by
and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed
entirely within the State of New York.

 

(g)                                 Successors and Assigns.  The
terms and conditions of this Note
shall inure to the benefit of and be binding upon the respective successors
(whether by merger or otherwise) and permitted assigns of the Company and the
Holder. The Company may not assign its rights or obligations under this Note except as specifically required or permitted
pursuant to the terms hereof.

 

(h)                                 Usury.  This Note is subject to the express
condition that at no time shall the Company be obligated or required to pay
interest hereunder at a rate which could subject the Holder to either civil or
criminal liability as a result of being in excess of the maximum interest rate
which the Company is permitted by applicable law to contract or agree to
pay.  If by the terms of this Note, the Company is at any time required or
obligated to pay interest hereunder at a rate in excess of such maximum rate,
the rate of interest under this Note shall be deemed to be immediately reduced
to such maximum rate and the interest payable shall be computed at such maximum
rate and all prior interest payments in excess of such maximum rate shall be
applied and shall be deemed to have been payments in reduction of the principal
balance of this Note.

 

 

 

 

[Signature Page to Follow]

 

16

 

IN WITNESS
WHEREOF, the Company has caused this Note to be signed in its name by its duly
authorized officer on the date first above written.

 

EARTH
BIOFUELS, INC.

 

 

	
  By:

  	
   

  
	
  Name:

  
	
  Title:

  

 

17

 

ANNEX I

 

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal of the 8% Senior
Convertible Note (the “Note”)
issued by EARTH BIOFUELS, INC. (the “Company”) into shares of common
stock (“Common Stock”) of the Company
according to the terms and conditions of the Note. Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth
in the Note.

 

 

	
   

  	
  Date
  of Conversion:

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal
  Amount of

  
	
   

  	
  Note
  to be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Amount
  of Interest

  
	
   

  	
  to
  be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Number
  of Shares of

  
	
   

  	
  Common
  Stock to be Issued:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name
  of Holder:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
								

 

Holder
Requests Delivery to be made:
(check one)

 

	
  o

  	
  By
  Delivery of Physical Certificates to the Above Address

  
	
   

  	
   

  
	
  o

  	
  Through
  Depository Trust Corporation

  
	
   

  	
  (Account
  

  	
   

  	
  )

  

 

 

ANNEX II

 

Schedule of

Decreases

of Principal
Amount

 

 

 

	
  Principal

  	
   

  	
  Amount
  of

  	
   

  	
   

  
	
  Balance

  	
   

  	
  Decrease

  	
   

  	
  Date

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $5,000,000Exhibit 4.3

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE  NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE
EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION
WITH SUCH OFFER OR SALE.

 

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER
HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT, REDEMPTION OR CONVERSION HEREOF.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE
PRINCIPAL AMOUNT SHOWN BELOW.

 

 

 

EARTH BIOFUELS, INC.

 

8% SENIOR CONVERTIBLE NOTE

 

 

	
  New
  York, New York

  	
  $2,500,000

  

Issue
Date:  June 7, 2006

 

FOR VALUE RECEIVED, EARTH BIOFUELS, INC., a
Delaware corporation (the “Company”), hereby promises to pay to
the order of CAPITAL VENTURES INTERNATIONAL or its permitted successors or assigns (the “Holder”) the sum of TWO MILLION FIVE
HUNDRED THOUSAND AND 00/100 DOLLARS ($2,500,000) in same day funds, on or
before the Maturity Date (as defined below). Upon the occurrence of the Conversion
Trigger Event (as defined below), the Holder may convert principal of and
interest accrued on this Note into shares (“Conversion
Shares”) of the Company’s common stock, par value $.001 per
share (the “Common Stock”), on the terms
set forth herein.

 

The Company has issued this Note pursuant to a
Securities Purchase Agreement, dated as of June 7, 2006 (the “Securities Purchase Agreement”). The
Notes issued by the Company pursuant to the Securities Purchase Agreement,
including this Note, are collectively referred to herein as the “Notes”.

 

The following terms shall apply to this Note:

 

1.             DEFINITIONS.

 

“Approved Stock Plan” means any
employee benefit plan which has been approved by the Board of Directors of the
Company (including a majority of the independent

 

 

members of the
Board), pursuant to which the Company’s securities may be issued to any
employee, officer, director or consultant for services provided to the Company.

 

“Business Day” means any day other than a Saturday, a Sunday or a day
on which the New York Stock Exchange is closed or on which banks are authorized
by law to close in New York, New York.

 

“Change of Control” means the
existence or occurrence of any of the following: (a) the sale, conveyance or
disposition of all or substantially all of the assets of the Company; (b) the
effectuation of a transaction or series of transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of; (c) the
consolidation, merger or other business combination of the Company with or into
any other entity, immediately following which the prior stockholders of the
Company fail to own, directly or indirectly, at least fifty percent (50%) of
the surviving entity; (d) a transaction or series of transactions in which any
Person or group acquires more than fifty percent (50%) of the voting equity of
the Company; and (e) the Continuing Directors do not at any time constitute at
least a majority of the Board of Directors of the Company.

 

“Common
Stock Equivalent” means, collectively, Options and Convertible
Securities.

 

“Continuing
Director” means at any date a member of the Company’s Board of
Directors (i) who was a member of such board on the date of the Securities
Purchase Agreement or (ii) who was nominated or elected by at least a majority
of the directors who were Continuing Directors at the time of such nomination
or election or whose election to the Company’s Board of Directors was
recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or such lesser
number comprising a majority of a nominating committee if authority for such
nominations or elections has been delegated to a nominating committee whose
authority and composition have been approved by at least a majority of the directors
who were continuing directors at the time such committee was formed.

 

“Conversion
Price” means, as of any date, the lower of the Fixed Conversion
Price and the Floating Conversion Price on such date, subject to adjustment as
provided herein.

 

“Conversion
Trigger Event” means that, as of the Initial Maturity Date, this
Note has not been repaid in full either (i) in cash or (ii) through an Exchange
effected in accordance with Section 2(c)
below.

 

“Convertible Securities” means any stock or
securities (other than Options) of the Company convertible into or exercisable
or exchangeable for Common Stock.

 

“Debt” means as to any Person at any
time: (a) all indebtedness, liabilities and obligations of such Person for
borrowed money; (b) all indebtedness, liabilities and obligations of such
Person to pay the deferred purchase price of Property or services, except trade
accounts payable of such Person arising in the ordinary course of business that
are not past due by more than 90 days; (c) all capital lease obligations of
such Person; (d) all Debt of others guaranteed by such Person; (e) all
indebtedness, liabilities and obligations secured by a Lien (other than a
Permitted Lien) existing on Property owned by such Person, whether or not the
indebtedness, liabilities or

 

2

 

obligations
secured thereby have been assumed by such Person or are non-recourse to
such Person; (f) all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers’ acceptances,
surety or other bonds and similar instruments; and (g) all liabilities and
obligations of such Person to redeem or retire shares of capital stock of such
Person (other than the Company’s obligation to redeem the Securities under the
circumstances specified therein). Debt shall not include any liability for (i)
federal, state, local or other taxes imposed by a Governmental Authority, (ii)
endorsements of negotiable instruments for deposit or collection or similar transactions
in the ordinary course of business or (iii) any indebtedness that has been
fully and finally defeased in accordance with the terms of the documents governing
such indebtedness.

 

“Default Interest Rate” means the
lower of sixteen (16%) and the maximum rate permitted by applicable law or by
the applicable rules or regulations of any governmental agency or of any stock
exchange or other self-regulatory organization having jurisdiction over the
Company or the trading of its securities.

 

“Exchange” means that all outstanding
principal of and interest (and other amounts) accrued on this Note have been exchanged for the securities issued in a New
Offering on a dollar-for-dollar basis and otherwise with the same terms granted
to other purchasers in the New Offering.

 

“Fixed
Conversion Price” means the greater of (i) the Floor Price and
(ii) seventy five percent (75%) of the Market Price on the Initial Maturity
Date; in either case, subject to adjustment as provided herein.

 

“Floating
Conversion Price” means, as of any date, the greater of (i) the
Floor Price and (ii) seventy five percent (75%) of the Market Price on such
date; in either case, subject to adjustment as provided herein.

 

“Floor
Price” means the least of (i) $1.00, (ii) the lowest floor price
for any conversion or exercise price in any other security of the Company issued
after the date hereof, and (iii) the lowest per share consideration for which the Company issues or sells, or in
accordance with Section 5(e)(ii) is deemed to
have issued or sold, any shares of Common Stock.

 

“Governmental Authority” means any
nation or government, any state, provincial or political subdivision thereof
and any entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including without
limitation any stock exchange, securities market or self-regulatory
organization.

 

“Initial Maturity Date” means the
ninetieth (90th) calendar day following the Issue Date.

 

“Issue Date” means the date on which
this Note is issued pursuant to the Securities Purchase Agreement.

 

“Lien” and “Permitted Lien” shall have the
respective meanings set forth in the Securities Purchase Agreement.

 

3

 

“Liquidation Event”
means the (x) institution of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Company,
the Company Subsidiaries or to its or their creditors, as such, or to
its or their assets, or (y) the dissolution or other winding up of the Company or the Company Subsidiaries, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy
proceedings, or (z) any assignment for the benefit of creditors or any
marshalling of the material assets or material liabilities of the Company or any Company Subsidiary.

 

“Major Transaction” means a merger,
consolidation, business combination, tender offer, exchange of shares,
recapitalization, reorganization, redemption or other similar event, as a
result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities or other assets of the Company or another entity or the Company
shall sell all or substantially all of its assets.

 

“Market Price”
means, as of a particular date, the lower of (i) the average of daily VWAP for
each of the five (5) consecutive Trading Days occurring immediately prior to
(but not including) such date and (ii) the daily VWAP on the Trading Day
occurring immediately prior to (but not including) such date.

 

“Maturity Date”
means the Initial Maturity Date and, if the Holder exercises the Maturity Extension Option, the Subsequent Maturity
Date.

 

“Maturity Extension Option” has the meaning set forth in Section 2(b)
below.

 

“New Offering”
means a private offering and sale by the Company of its equity securities with
gross cash proceeds to the Company of at least the principal amount of this
Note.

 

“Obligations”
shall have the meaning set forth in Section 2(a)
below.

 

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

 

“Person”
means any individual, corporation, trust, association, company, partnership,
joint venture, limited liability company, joint stock company, Governmental
Authority or other entity.

 

“Principal Market” means the
principal securities exchange or market on which the Common Stock is listed or
traded.

 

“Registrable Securities” has the
meaning set forth in the Registration Rights Agreement.

 

“Registration Rights
Agreement” means the agreement between the Holder and the
Company pursuant to which the Company has agreed to register the shares of
Common Stock issuable under the Notes and the Warrants.

 

4

 

“Registration Statement”
means the Registration Statement (as defined in the Registration Rights
Agreement) covering the resale of the Conversion Shares issuable under this Note.

 

“Subsequent Maturity Date” means the
one hundred and eightieth (180th) calendar day following the Issue Date.

 

“Trading
Day” means a Business Day on which shares of Common Stock is
purchased and sold on the Principal Market.

 

“VWAP”
on a Trading Day means the volume weighted average price of the Common Stock
for such Trading Day on the Principal Market as reported by Bloomberg Financial
Markets or, if Bloomberg Financial Markets is not then reporting such prices,
by a comparable reporting service of national reputation selected by the
Holders and reasonably satisfactory to the Company.  If VWAP cannot be calculated for the Common
Stock on such Trading Day on any of the foregoing bases, then the Company shall
submit such calculation to an independent investment banking firm of national
reputation reasonably acceptable to the Investors, and shall cause such
investment banking firm to perform such determination and notify the Company
and the Investors of the results of determination no later than two (2)
Business Days from the time such calculation was submitted to it by the
Company.  All such determinations shall
be appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.

 

“Warrants”
means the warrants issued pursuant to the Securities Purchase Agreement.

 

All definitions contained in this Note are equally
applicable to the singular and plural forms of the terms defined.  The words “hereof”, “herein” and “hereunder”
and words of similar import referring to this Note refer to this Note as a
whole and not to any particular provision of this Note. Any capitalized term used
but not defined herein has the meaning specified in the Securities Purchase
Agreement.

 

2.             MATURITY DATE; EXTENSION OF MATURITY.

 

(a)           Initial
Maturity Date.  On the Initial
Maturity Date, and subject to the Maturity Extension Option (as defined below),
the Company shall pay to the Holder all principal of and interest (and other
amounts) accrued on this Note (collectively, the “Obligations”)
either (i) in cash or (ii) to the extent permitted through an Exchange in
accordance with Section 2(c) below.

 

(b)           Subsequent
Maturity Date; Extension.  In the
event that the Company does not pay the entire amount of the Obligations on the
Initial Maturity Date either (i) in cash or (ii) to the extent permitted through
an Exchange in accordance with Section 2(c)
below, the Holder shall have the option to extend the Maturity Date as to all
or any part of the Obligations from the Initial Maturity Date to the Subsequent
Maturity Date (the “Maturity Extension Option”).
If the Holder exercises the Maturity Extension Option, the Obligations shall
become due on the Subsequent Maturity Date instead of the Initial Maturity Date,
and Interest (and any other amounts) shall continue to accrue hereon through
the full and final payment (through cash or an Exchange) of all

 

5

 

Obligations. In order to exercise the Maturity Extension Option, the
Holder must deliver written notice thereof no later than the fifth (5th) Business
Day prior to the Initial Maturity Date specifying the amount of Obligations to
which the Maturity Extension Option applies. If the Holder does not exercise
the Maturity Extension Option, the Obligations shall be deemed due and payable
on the Initial Maturity Date. Any Obligations (including accrued and unpaid Interest)
not paid in full when due shall bear interest at the Default Interest Rate from
the due date through the date on which payment in full is made.

 

(c)           Exchange.
The Company must deliver written notice of
the Exchange (including the proposed date and expected gross proceeds thereof)
to the Holder at least five (5) Business Days (the “Exchange
Notice Date”) prior to the closing date of the New Offering (the
“Exchange Date”).  In order to pay the Obligations
through an Exchange, the Company must have
received notice from the Holder at least one (1) Business Day prior to the Exchange Date that such Holder has elected to have the Obligations paid
through an Exchange (an “Exchange Election”).
On the Exchange Date, if the Holder has made an
Exchange Election, this Note shall be
automatically exchanged for a portion of the securities issued in a New
Offering, such Exchange to be effected on a dollar-for-dollar basis so that each
dollar of Obligations (including all Interest accrued through the Exchange
Date) shall be deemed payment for the securities issued in the New Offering on
the same terms and conditions granted to other purchasers in the New Offering.
Unless and until an Exchange occurs (or payment in full of all Obligations is
made in cash), the Holder shall have all of its rights and remedies hereunder
(including without limitation its right to convert this Note if the Conversion
Trigger Event has occurred) through the Exchange Date (or the date on which
payment in full is made).

 

(d)           Remedies for Non-payment.  Until all Obligations have been paid in full,
either in cash or through an Exchange effected in accordance with Section 2(c) above, the Holder
shall have all rights and remedies set forth in this Note and the other
Transaction Documents and which it may otherwise have under any law or in
equity with respect to amounts due and unpaid hereunder. The Holder and its
permitted successors and assigns shall be entitled to enforce such rights
specifically, to recover damages by reason of any non-payment of the
Obligations when due or the breach of any provision of this Note or the
Transaction Documents and to exercise all other rights granted by law or in
equity, if available. The Company recognizes and agrees that in the event that
it fails to perform, observe, or discharge any or all of its obligations under
this Note, any remedy at law may prove to be inadequate relief to the Holder
and, therefore, the Holder shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.

 

3.             INTEREST.

 

This Note shall bear interest on the unpaid principal
amount hereof (“Interest”) at an annual rate
equal to eight percent (8%); provided, however, that if a New Offering is not completed
within sixty (60) calendar days following the Issue Date, Interest shall be
computed at an annual rate of twelve percent (12%), such computation to be
retroactive to the Issue Date as though Interest had accrued from such date at
an annual rate of twelve percent. Interest shall be computed on the
basis of a 360-day year and calculated using the actual number of days elapsed
since the Issue Date, and if not timely paid as provided herein, compounded monthly
until paid.

 

 

6

 

4.             CONVERSION.

 

(a)           Right to Convert.  If the Conversion Trigger Event occurs, the
Holder shall have the right to convert, at any time thereafter and from time to
time until the Obligations are paid in full, (i) all or any part of the
outstanding and unpaid principal amount of this Note and (ii) at the Holder’s
option, in its sole discretion, all or any part of unpaid Interest (and any
other amounts) accrued hereon, into such number of fully paid and
non-assessable Conversion Shares as is determined in accordance with the terms
hereof (a “Conversion”).

 

(b)           Conversion
Notice.  In order to convert principal of (and, if the
Holder so elects, Interest accrued on) this Note, the Holder shall send by
facsimile transmission, at any time prior to 5:00 p.m., eastern time, on the
Business Day on which the Holder wishes to effect such Conversion (the “Conversion Date”), a properly
completed notice of conversion to the Company, in the form set forth on Annex I hereto, stating the amount
of principal (and accrued Interest, if applicable) to be converted and a
calculation of the number of shares of Common Stock issuable upon such
Conversion (a “Conversion Notice”).  The Conversion Notice shall also state the name or names (with
address) in which the shares of Common Stock that are issuable on such
conversion shall be issued.  The
Holder shall not be required to physically surrender this Note to the Company
in order to effect a Conversion. The Company shall maintain a record showing,
at any given time, the unpaid principal amount of this Note and the date of
each Conversion or other payment of principal hereof.  The Holder shall amend Annex
II hereto upon any such Conversion or payment of principal to
reflect the unpaid principal amount hereof. 
In the case of a dispute as to the number of Conversion Shares issuable
upon a Conversion (including without limitation as a result of adjustments to
the Fixed Conversion Price made in accordance with Section
4 below), the Company shall promptly issue to the Holder the
number of Conversion Shares that are not disputed and shall submit the disputed
calculations to a certified public accounting firm of national recognition
(other than the Company’s independent accountants) within two (2) Business Days
of receipt of the Holder’s Conversion Notice. The Company shall use its best
efforts to cause such accountants to calculate the Fixed Conversion Price as
provided herein and to notify the Company and the Holder of the results in
writing no later than two (2) Business Days following the day on which such
accountant received the disputed calculations (the “Dispute
Procedure”). Such accountant’s calculation shall be deemed conclusive
absent manifest error. The fees of any such accountant shall be borne by the
party whose calculations are most at variance with those of such accountant.

 

(c)           Number
of Conversion Shares; Conversion Price. 
The number of Conversion Shares to be delivered by the Company pursuant
to a Conversion shall be equal to the principal amount of (and, if the Holder
so elects, Interest and any other amounts accrued on) this Note being converted divided by the Conversion
Price in effect on the Conversion Date.

 

(d)           Delivery
of Common Stock Upon Conversion. 
Upon receipt of a Conversion Notice, the Company shall, no later than
the close of business on the third (3rd) Business Day following the Conversion
Date set forth in such Conversion Notice (the “Delivery
Date”), issue and deliver or cause to be delivered to the Holder
the number of Conversion Shares determined pursuant to Section
3(c) above, provided, however, that any Conversion Shares that are the subject of
a Dispute Procedure shall be delivered no later than the close of business on
the third (3rd) Business Day following the determination made pursuant thereto.
The Company shall effect delivery of
Conversion Shares to the Holder, as long as the Company’s designated
transfer agent or co-transfer agent in the United States for the Common Stock
(the “Transfer Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer program (“FAST”), by

 

7

 

crediting the account of the Holder or its nominee at DTC (as specified
in the applicable Conversion Notice) with the number of Conversion Shares
required to be delivered, no later than the close of business on such Delivery
Date. In the event that the Transfer Agent is not a participant in FAST or if
the Holder so specifies in a Conversion Notice or otherwise in writing on or
before the Conversion Date, the Company shall effect delivery of Conversion
Shares by delivering to the Holder or its nominee physical certificates
representing such Conversion Shares, no later than the close of business on
such Delivery Date. If
any Conversion would create a fractional Conversion Share, such fractional
Conversion Share shall be disregarded and the number of Conversion Shares issuable
upon such Conversion, in the aggregate, shall be the nearest whole number of
Conversion Shares.  Conversion Shares
delivered to the Holder shall not contain any restrictive legend unless such
legend is required pursuant to the terms of the Securities Purchase Agreement.

 

(e)           Failure
to Deliver Conversion Shares.

 

(i)            In
the event that the Company fails for any reason to deliver to the Holder the
number of Conversion Shares specified in a Conversion Notice (without any
restrictive legend to the extent permitted by the terms of the Securities
Purchase Agreement) on or before the second (2nd) Business Day following the Delivery
Date therefor (a “Conversion Default”), the Holder shall have the right to receive from the
Company an amount equal to (i) (N/365) multiplied by (ii) the
principal amount of, and any Interest accrued on, this Note represented by the
Conversion Shares which remain the subject of such Conversion Default multiplied
by (iii) the Default Interest Rate, where “N” equals the number of days
elapsed between the original Delivery Date of such Conversion Shares and the
date on which such Conversion Default has been cured. In the event that shares
of Common Stock are purchased by or on behalf of the Holder in order to make delivery on a sale effected in
anticipation of receiving Conversion Shares upon a Conversion, the Holder shall
have the right to receive from the Company, in addition to the foregoing
amounts, (i) the aggregate amount paid by or on behalf of the Holder for such shares
of Common Stock minus (ii) the aggregate amount of net proceeds, if any,
received by the Holder from the sale of the Conversion Shares issued by the
Company pursuant to such Conversion. Amounts
payable under this Section 4(e)(i)  shall be paid to the Holder in immediately
available funds on or before the fifth (5th) Business Day following written
notice from the Holder to the Company specifying the amount owed to it by the
Company pursuant to this Section 4(e)(i).

 

(ii)           In
addition to its rights under Section 4(e)(i)
above, upon a Conversion Default, the Conversion Price applicable to the
applicable Conversion shall be automatically be adjusted to the lower of (i)
the Conversion Price in effect on the Conversion Date and (ii) the lowest
Conversion Price occurring from the first date of such Conversion Default
through the date on which all Conversion Shares to which the Holder is entitled
have been delivered in accordance with the terms of this Note.  The Holder shall have the right to pursue all
other remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).

 

(f)            Limitations
on Right to Convert.  In no event
shall the Holder be permitted to convert principal of or Interest on this Note if, upon such
conversion, (x) the number of Conversion Shares to be issued pursuant to such
Conversion plus (y) the number of shares of Common Stock beneficially
owned by the Holder (other than Common Stock which may be deemed beneficially
owned except for being subject to a limitation on conversion or exercise
analogous to the limitation

 

8

 

contained in this Section 4(f)) would exceed 4.99% of
the number of shares of Common Stock then issued and outstanding, it being the
intent of the Company and the Holder that the Holder not be deemed at any time
to have the power to vote or dispose of greater than 4.99% of the number of
shares of Common Stock issued and outstanding at any time. Nothing contained
herein shall be deemed to restrict the right of the Holder to convert such
excess principal amount at such time as such Conversion will not violate the
provisions of this Section4(f). As used herein, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and the rules thereunder. 
To the extent that the limitation contained in this Section4(f) applies (and without limiting any rights the Company may otherwise
have), the Company may rely on the Holder’s determination of whether this Note
is convertible pursuant to the terms hereof,
the Company shall have no obligation whatsoever to verify or confirm the
accuracy of such determination, and the submission of a Conversion Notice by
the Holder shall be deemed to be the Holder’s representation that this Note is
convertible pursuant to the terms hereof.  The Company shall have no
liability to any person if the Holder’s determination of whether this Note is
convertible pursuant to the terms hereof is incorrect.

 

5.             ADJUSTMENTS TO FIXED CONVERSION
PRICE.

 

(a)           Stock
Splits, Stock Interests, Etc.  If, at
any time on or after the Issue Date, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination, reclassification or other
similar event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Company shall notify the Company’s transfer agent of such
change on or before the effective date thereof.

 

(b)           Major
Transactions.  If, at any time after
the Issue Date, any Major Transaction shall occur, then the Holder shall
thereafter have the right to receive upon Conversion, in lieu of the shares of
Common Stock otherwise issuable, such shares of publicly traded stock,
securities and/or other property as would have been issued or payable upon such
Major Transaction with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon Conversion had such Major
Transaction not taken place (without giving effect to any limitations on such
Conversion contained in this Note or the Securities Purchase Agreement). The
Company shall not effect any Major Transaction unless (i) the Holder has
received written notice of such transaction at least thirty (30) days prior
thereto (which period shall be increased to sixty one (61) days if, at such
time, without giving effect to the limitation on conversion contained in Section 4(f) hereof, the Holder
would beneficially own more than 4.9% of the Common Stock then outstanding, and
the Holder has notified the Company in writing of such circumstance) but in no
event later than fifteen (15) days prior to the record date for the
determination of stockholders entitled to vote with respect thereto; provided, however, that
the Company shall publicly disclose the material terms of any such Major
Transaction on or before the date on which it delivers notice of a Major
Transaction to the Holder, and (ii) the resulting successor or acquiring entity
(if not the Company) assumes by written instrument (in form and substance
reasonable satisfactory to the Holder) the obligations of the Company under
this Note (including, without limitation, the obligation to make payments of
Interest accrued but unpaid through the date of such consolidation, merger or
sale and accruing thereafter).  The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available

 

9

 

for issuance upon
conversion of this Note as of the date of such transaction, and shall similarly
apply to successive Major Transactions.

 

(c)           Distributions.  If, at any time after the Issue Date, the
Company declares or makes any distribution of cash or any other assets (or
rights to acquire such assets) to holders of Common Stock, including without
limitation any dividend or distribution to the Company’s stockholders in shares
(or rights to acquire shares) of capital stock of a subsidiary) (a “Distribution”), the Company
shall deliver written notice of such Distribution (a “Distribution Notice”) to the Holder at least fifteen
(15) days prior to the earlier to occur of (i) the record date for determining
stockholders entitled to such Distribution (the “Record
Date”) and (ii) the date on which such Distribution is made (the
“Distribution Date”)(the earlier of
such dates being referred to as the “Determination Date”).  Upon receipt of the Distribution Notice, the
Holder shall promptly (but in no event later than three (3) Business Days)
notify the Company whether it has elected (A) to receive the same amount and
type of assets (including, without limitation, cash) being distributed as
though the Holder were, on the Determination Date, a holder of a number of
shares of Common Stock into which this Note is convertible as of such
Determination Date (such number of shares to be determined without giving
effect to any limitations on such conversion) or (B) upon any exercise of this
Note on or after the Distribution Date, to reduce the Conversion Price
applicable to such conversion by reducing the Conversion Price in effect on the
Business Day immediately preceding the Record Date by an amount equal to the
fair market value of the assets to be distributed divided by the number
of shares of Common Stock as to which such Distribution is to be made, such
fair market value to be reasonably determined in good faith by the independent
members of the Company’s Board of Directors. 
Upon receipt of such election notice from the Holder, the Company shall
timely effectuate the transaction or adjustment contemplated in the foregoing clause (A) or (B), as applicable.  If the Holder does not notify the Company of
its election pursuant to the preceding sentence on or prior to the
Determination Date, the Holder shall be deemed to have elected clause (A) of
the preceding sentence.

 

(d)           Convertible
Securities; Options.  If, at any time
after the Issue Date, the Company issues Convertible Securities or Options to
the record holders of the Common Stock, whether or not such Convertible
Securities or Options are immediately convertible, exercisable or exchangeable,
then the Holders shall be entitled, upon any Conversion of this Note after the
date of record for determining stockholders entitled to receive such
Convertible Securities or Options (or if no such record is taken, the date on
which such Convertible Securities or Options are issued), to receive the
aggregate number of Convertible Securities or Options which the Holder would
have received with respect to the shares of Common Stock issuable upon such conversion
(without giving effect to any limitations on such Conversion contained in this Note
or the Securities Purchase Agreement) had the Holder been the holder of such
shares of Common Stock on the record date for the determination of stockholders
entitled to receive such Convertible Securities or Options (or if no such
record is taken, the date on which such Convertible Securities or Options were
issued).

 

(e)           Dilutive
Issuances.

 

(i)            Adjustment
Upon Dilutive Issuance.  If, at any
time after the Issue Date, the Company issues or sells, or in accordance with Section 5(e)(ii) is deemed to have
issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Fixed Conversion Price on the date of
such issuance or sale (or deemed issuance or sale) (a

 

10

 

“Dilutive Issuance”), then the
Fixed Conversion Price shall be adjusted so as to equal the consideration
received or receivable by the Company (on a per share basis) for the additional
shares of Common Stock so issued, sold or deemed issued or sold in such
Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be
calculated in accordance with Section 5(e)(ii)
below).  Notwithstanding the foregoing, no
adjustment shall be made pursuant hereto if such adjustment would result in an
increase in the Fixed Conversion Price.

 

(ii)           Effect
On Fixed Conversion Price Of Certain Events.  For purposes of determining the adjusted Fixed
Conversion Price under Section 5(e)(i),
the following will be applicable:

 

(A)          Issuance
Of Options.  If the Company issues or
sells any Options, whether or not immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such Options (and
the price of any conversion of Convertible Securities, if applicable) is less
than the Fixed Conversion Price in effect on the date of issuance or sale of
such Options, then the maximum total number of shares of Common Stock issuable
upon the exercise of all such Options (assuming full conversion, exercise or
exchange of Convertible Securities, if applicable) shall, as of the date of the
issuance or sale 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” shall be determined by dividing (x) the
total amount, if any, received or receivable by the Company as consideration
for the issuance or sale 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, exercise or exchange
thereof (determined in accordance with the calculation method set forth in Section 5(e)(ii)(B) below) at the
time such Convertible Securities first become convertible, exercisable or
exchangeable, by (y) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Options (assuming full conversion,
exercise or exchange of Convertible Securities, if applicable). No further
adjustment to the Fixed Conversion Price shall be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion,
exercise or exchange of Convertible Securities issuable upon exercise of such Options.

 

(B)           Issuance
Of Convertible Securities.  If the
Company issues or sells any Convertible Securities, whether or not immediately
convertible, exercisable or exchangeable, and the price per share for which
Common Stock is issuable upon such conversion, exercise or exchange is less
than the Fixed Conversion Price in effect on the date of issuance or sale of
such Convertible Securities, then the maximum total number of shares of Common
Stock issuable upon the conversion, exercise or exchange of all such Convertible
Securities shall, as of the date of the issuance or sale of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. If the Convertible Securities so issued or
sold do not have a fluctuating conversion or exercise price or exchange ratio,
then for the purposes of the immediately preceding sentence, the “price per
share for which Common Stock is issuable upon such conversion, exercise or
exchange” shall be determined by dividing (A) the total

 

11

 

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, exercise or exchange thereof (determined in
accordance with the calculation method set forth in this Section
5(e)(ii)(B)) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (B) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. If the Convertible Securities so
issued or sold have a fluctuating conversion or exercise price or exchange
ratio (a “Variable Rate Convertible
Security”), then for purposes of the first sentence of this Section 5(e)(ii)(B), the “price per
share for which Common Stock is issuable upon such conversion, exercise or
exchange” shall be deemed to be the lowest price per share which would be
applicable (assuming all holding period and other conditions to any discounts
contained in such Variable Rate Convertible Security have been satisfied) if
the conversion price of such Variable Rate Convertible Security on the date of
issuance or sale thereof were equal to the actual conversion price on such date
(or such higher minimum conversion price if such Variable Rate Convertible
Security is subject to a minimum conversion price) (the “Assumed Variable Market Price”),
and, further, if the conversion price of such Variable Rate Convertible
Security at any time or times thereafter is less than or equal to the Assumed
Variable Market Price last used for making any adjustment under this Section 5(e) with respect to any
Variable Rate Convertible Security, the Fixed Conversion Price in effect at
such time shall be readjusted to equal the Fixed Conversion Price which would
have resulted if the Assumed Variable Market Price at the time of issuance of
the Variable Rate Convertible Security had been equal to the actual conversion
price of such Variable Rate Convertible Security existing at the time of the
adjustment required by this sentence; provided, however,
that if the conversion or exercise price or exchange ratio of a Convertible
Security may fluctuate solely as a result of provisions designed to protect
against dilution, such Convertible Security shall not be deemed to be a
Variable Rate Convertible Security.  No
further adjustment to the Fixed Conversion Price shall be made upon the actual
issuance of such Common Stock upon conversion, exercise or exchange of such
Convertible Securities.

 

(C)           Change
In Option Price Or Conversion Rate. 
If there is a change at any time in (x) the amount of additional
consideration payable to the Company upon the exercise of any Options; (y) the
amount of additional consideration, if any, payable to the Company upon the
conversion, exercise or exchange of any Convertible Securities; or (z) the rate
at which any Convertible Securities are convertible into or exercisable or
exchangeable for Common Stock (in each such case, other than under or by reason
of provisions designed to protect against dilution), the Fixed Conversion Price
in effect at the time of such change shall be readjusted to the Fixed
Conversion 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, exercise or exchange rate, as
the case may be, at the time initially issued or sold.

 

(D)          Calculation
Of Consideration Received.  If any
Common Stock, Options or Convertible Securities are issued or sold for cash,
the consideration received therefor will be the amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration part or all of which

 

12

 

shall be other than cash, including in the case of a
strategic or similar arrangement in which the other entity will provide
services to the Company, purchase services from the Company or otherwise
provide intangible consideration to the Company, the amount of the
consideration other than cash received by the Company (including the net
present value of the consideration expected by the Company for the provided or
purchased services) shall be the fair market value of such consideration. In
case any Common Stock, Options or Convertible Securities are issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor will be deemed to
be the fair market 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 independent members of the
Company’s Board of Directors shall calculate reasonably and in good faith,
using standard commercial valuation methods appropriate for valuing such
assets, the fair market value of any consideration.

 

(iii)          Exceptions To Adjustment Of Fixed
Conversion Price.  Notwithstanding
the foregoing, no adjustment to the Fixed Conversion Price shall be made
pursuant to this Section 5(e) upon the
issuance of any Excluded Securities.

 

 (iv)         Notice Of Adjustments.  Upon the occurrence of each adjustment or
readjustment of the Fixed Conversion Price pursuant to this Section 5(e) resulting in a change
in the Fixed Conversion Price by more than one percent (1%), or any change in
the number or type of stock, securities and/or other property issuable upon
Conversion of this Note, the Company, at its expense, shall promptly compute
such adjustment, readjustment or change and prepare and furnish to the Holder a
certificate setting forth such adjustment, readjustment or change and showing
in detail the facts upon which such adjustment, readjustment or change is
based.  The Company shall, upon the
written request at any time of the Holder, furnish to the Holder a like
certificate setting forth (i) such adjustment, readjustment or change, (ii) the
Fixed 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 this Note.

 

6.             EVENTS OF DEFAULT; ACCELERATION.

 

(a)           Acceleration.  In the event that an Event of Default (as
defined below) or a Change of Control occurs, the Holder shall have the right,
upon written notice to the Company (an “Acceleration Notice”),
to require that all or any portion of the unpaid principal amount of this Note,
plus all accrued and unpaid Interest (and any other amounts) thereon, plus an
amount equal to twenty percent (20%) of the principal amount of this Note, be
immediately paid in full in cash.  The Acceleration
Notice shall specify the date on which all Obligations must be paid, (the “Acceleration Date”), which date may
be the Business Day on which the Acceleration Notice is delivered to the
Company, and the amount of principal and Interest (and other amounts) to be
accelerated. The Holder must deliver an Acceleration Notice no later than the
close of business on the thirtieth (30th) Business Day immediately following the
Business Day on which an Event of Default is no longer continuing; provided, however, that
with respect to a Change of Control, the Holder must deliver an Acceleration
Notice no later than the close of business on the thirtieth (30th)Business
Day following the date on which the Change of Control is effected or when it is
publicly announced, whichever is later. 
The Company will make public disclosure of an Event of Default,
consistent with the

 

13

 

requirements of
Form 8-K.  Additionally, the Company will
make public disclosure of any prepayment of this Note.

 

(b)  Payment.
Upon delivery of an Acceleration Notice to the Company, the Company shall pay all
outstanding Obligations in full on the Acceleration Date.  If the Company fails to pay the Obligations
in full on the Acceleration Date, the Holder shall be entitled to interest
thereon at the Default Interest Rate from the Acceleration Date until the date
on which all Obligations have been paid in full.

 

(c)           Events
of Default.  Each of the following
events shall be deemed an “Event of Default”:

 

(i)            a
Liquidation Event occurs or is publicly announced;

 

(ii)           the
Company breaches or provides notice of its intent to breach, in a material
respect, any covenant or other material term or condition of this Note
(including without limitation any payment obligation thereunder) or any other
Transaction Document, including but not limited to the Company’s failure to
deliver Conversion Shares and Warrant Shares on or before the required delivery
date therefor;

 

(iii)          any
representation or warranty made by the Company in this Note or any other
Transaction Document was inaccurate or misleading in any material respect as of
the date such representation or warranty was made; and

 

(iv)          a
default occurs or is declared, or any amounts are accelerated, under or with
respect to any instrument that evidences Debt of the Company or any of its
Subsidiaries in a principal amount exceeding $100,000.

 

7.             PREPAYMENT.

 

The Company shall be entitled to
prepay principal of and interest (and any other amounts) accrued on this Note, at
any time without the prior written consent of the Holder, either in cash or, if
the Holder so elects in accordance with Section 2(c),
through an Exchange; provided, however,
that, except as otherwise permitted by this Section
7, if the Holder exercises the Maturity Extension Option,
the Company may not prepay this Note prior to the Subsequent Maturity Date
without the prior consent of the Holder, which consent may be withheld for any
reason (or no reason) in the Holder’s sole discretion.  If the Holder does not elect
to participate in the Exchange and (x) the Company receives gross proceeds
less than $40 million from any New Offering on or after the Initial Maturity
Date or (y) the Company receives gross proceeds greater than $40 million from
any New Offering at any time, the Company must prepay this Note in full and in
cash on the date the New Offering is consummated or within two (2) Business
Days thereafter.

 

14

 

8.             MISCELLANEOUS.

 

(a)           Failure to Exercise Rights 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 any other or further exercise
thereof. All rights and remedies of the Holder hereunder are cumulative and not
exclusive of any rights or remedies otherwise available. In the event that the
Company does not pay any amount of the Obligations when such amount becomes due
(either in cash or through an Exchange in
accordance with Section  2(c)),
the Company shall bear all costs incurred by the Holder in collecting such
amount, including without limitation reasonable legal fees and expenses.

 

(b)           Notices. Any notices,
consents, waivers or other communications required or permitted to be given
under the terms of this Note must be in writing and will be deemed to have been
delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when
sent by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
Business Day after deposit with an overnight courier service, in each case
properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:

 

	
  if to the
  Company:

  
	
   

  
	
  Earth Biofuels,
  Inc.

  
	
  3001 Knox
  Street, Suite 403,

  
	
  Dallas, Texas
  75205

  
	
  Telephone:

  	
  214.389.9800

  
	
  Facsimile:

  	
  214.389.9806

  
	
  Attention:

  	
  Dennis
  McLaughlin

  
	
   

  
	
  with a copy (for
  informational purposes only) to:

  
	
   

  
	
  Scheef &
  Stone, LLP

  
	
  Telephone:

  	
  214.706.4200

  
	
  Facsimile:

  	
  214.706.4242

  
	
  Attention:

  	
  Roger A. Crabb,
  Esq.

  

 

and if to the
Holder, to the address and facsimile number as to which the Holder has notified
the Company in writing. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt
from an overnight courier service in accordance with clause (i), (ii) or (iii)
above, respectively.

 

(c)           Amendments.  No amendment, modification or other change
to, or waiver of any provision of, this Note may be made unless such amendment,
modification or change is (A) set forth in writing and is signed by the Company
and the Holder and (B) agreed to in writing by the holders of at least
sixty-six percent (66%) of the unpaid principal amount of the Notes, it being

 

15

 

understood that,
notwithstanding anything to the contrary contained in any Note, upon the
satisfaction of the conditions described in (A) and (B) above, each Note
(including any Note held by the Holder who did not execute the agreement
specified in (B) above) shall be deemed to incorporate any amendment,
modification, change or waiver effected thereby as of the effective date
thereof.

 

(d)           Transfer of Note.  The Holder may sell, transfer or otherwise
dispose of all or any part of this Note (including without limitation pursuant to
a pledge) to any person or entity as long as such sale, transfer or disposition
is the subject of an effective registration statement under the Securities Act
of 1933, as amended, and applicable state securities laws, or is exempt from
registration thereunder, and is otherwise made in accordance with the
applicable provisions of the Securities Purchase Agreement.  From and after the date of any such sale,
transfer or disposition, the transferee hereof shall be deemed to be the holder
of a Note in the principal amount acquired by such transferee, and the Company
shall, as promptly as practicable, issue and deliver to such transferee a new Note
identical in all respects to this Note, in the name of such transferee. The
Company shall be entitled to treat the original Holder as the holder of this
entire Note unless and until it receives written notice of the sale, transfer
or disposition hereof.

 

(e)           Lost or Stolen Note.  Upon receipt by the Company of evidence of
the loss, theft, destruction or mutilation of this Note, and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Company, and upon surrender and cancellation of the Note, if mutilated, the
Company shall execute and deliver to the Holder a new Note identical in all
respects to this Note.

 

(f)            Governing Law.  This Note shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within the
State of New York.

 

(g)           Successors and Assigns.  The terms and conditions of this Note
shall inure to the benefit of and be binding upon the respective successors
(whether by merger or otherwise) and permitted assigns of the Company and the
Holder. The Company may not assign its rights or obligations under this Note except as specifically required or permitted
pursuant to the terms hereof.

 

(h)           Usury.  This Note is subject to the express
condition that at no time shall the Company be obligated or required to pay
interest hereunder at a rate which could subject the Holder to either civil or
criminal liability as a result of being in excess of the maximum interest rate
which the Company is permitted by applicable law to contract or agree to
pay.  If by the terms of this Note, the Company is at any time required or
obligated to pay interest hereunder at a rate in excess of such maximum rate,
the rate of interest under this Note shall be deemed to be immediately reduced
to such maximum rate and the interest payable shall be computed at such maximum
rate and all prior interest payments in excess of such maximum rate shall be
applied and shall be deemed to have been payments in reduction of the principal
balance of this Note.

 

 

 

 

[Signature Page to Follow]

 

16

 

IN WITNESS WHEREOF, the Company has caused this Note
to be signed in its name by its duly authorized officer on the date first above
written.

 

EARTH BIOFUELS, INC.

 

 

	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
			

 

17

 

ANNEX I

 

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to
convert principal of the 8% Senior Convertible Note (the “Note”)
issued by EARTH
BIOFUELS, INC. (the “Company”)
into shares of common stock (“Common Stock”)
of the Company according to the terms and conditions of the Note. Capitalized
terms used herein and not otherwise defined shall have the respective meanings
set forth in the Note.

 

 

	
   

  	
   

  	
  Date of Conversion:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Principal Amount of

  	
   

  
	
   

  	
   

  	
  Note to be Converted:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Amount of Interest

  	
   

  
	
   

  	
   

  	
  to be Converted:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Number of Shares of

  	
   

  
	
   

  	
   

  	
  Common Stock to be Issued:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name of Holder:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  
									

 

Holder Requests Delivery to be made: (check one)

 

	
  o

  	
  By Delivery of Physical Certificates to the Above Address

  
	
   

  	
   

  
	
  o

  	
  Through Depository Trust Corporation

  
	
   

  	
  (Account

  	
   

  	
  )

  

 

 

ANNEX II

 

Schedule of

Decreases

of Principal
Amount

 

 

 

	
  Principal

  	
   

  	
  Amount
  of

  	
   

  	
   

  
	
  Balance

  	
   

  	
  Decrease

  	
   

  	
  Date

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $2,500,000

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