Document:

Exhibit 10.1

 

SECURITIES PURCHASE
AGREEMENT

 

SECURITIES
PURCHASE AGREEMENT (the “Agreement”), dated
as of January 3, 2007, among Liquidmetal Technologies, Inc., a Delaware
corporation (the “Company”), and the
investors listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

A.            The Company and each Buyer are executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Rule 144A (“Rule
144A”) of the Securities Act of 1933, as amended (the “1933 Act”), by Section 4(2) of the 1933 Act
and/or Rule 506 of Regulation D (“Regulation
D”) and as promulgated by the United States Securities and Exchange
Commission (the “SEC”) under the
1933 Act;

 

B.            The Company has authorized 8% subordinated
convertible notes of the Company in the form attached hereto as Exhibit A
(together with any subordinated convertible notes issued in replacement thereof
in accordance with the terms thereof, the “Notes”),
which Notes shall be convertible into shares of the Company’s Common Stock, par
value $0.001 per share (the “Common Stock”)
(as converted, the “Conversion Shares”),
in accordance with the terms of the Notes;

 

C.            The Company has authorized warrants in the
form attached hereto as Exhibit B (together with all warrants issued to
the placement agents in connection with the transactions contemplated by this
Agreement, the “Warrants”), which
Warrants shall be exercisable for shares of Common Stock (as exercised, the “Warrant Shares”), in accordance with the
terms of the Warrants;

 

D.            Each Buyer wishes to purchase, and the
Company wishes to sell, upon the terms and conditions stated in this Agreement,
that aggregate principal amount of Notes set forth opposite such Buyer’s name
in column (3) on the Schedule of Buyers (in each case, the “Investment Amount”);

 

E.             Contemporaneously with the execution and
delivery of this Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement, substantially in the form attached hereto as Exhibit
C (the “Registration Rights Agreement”),
pursuant to which the Company has agreed to provide certain registration rights
with respect to the Conversion Shares and the Warrant Shares under the 1933 Act
and the rules and regulations promulgated thereunder, and applicable state
securities laws; and

 

F.             The Notes, the Conversion Shares, the
Warrants, and the Warrant Shares collectively are referred to herein as the “Securities”.

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NOW,
THEREFORE,
the Company and each Buyer hereby agree as follows:

 

1.             PURCHASE AND SALE OF NOTES AND WARRANTS.

 

(a)           Purchase of Notes and Warrants.

 

(i)            Notes and Warrants. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 6(a) and 7(a) below, the Company shall
issue and sell to each Buyer, and each Buyer severally, but not jointly, agrees
to purchase from the Company on the Closing Date (as defined below), a
principal amount of Notes and the Warrants, as is set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers (the
“Closing”). The aggregate
principal amount of Notes to be sold at the Closing pursuant to this Agreement
shall not be less than Fifteen Million Dollars ($15,000,000) and shall not be
more than Thirty Million Dollars ($30,000,000).

 

(ii)           Closing. The Closing shall occur on the Closing Date
at the offices of Foley & Lardner LLP, 100 North Tampa St., Suite 2700,
Tampa, Florida 33602.

 

(iii)          Purchase Price. The purchase price for each Buyer (the “Purchase Price”) of the Notes and Warrants to
be purchased by each such Buyer at the Closing shall be equal to $1.00 for each
$1.00 of principal amount of Notes being purchased by such Buyer at the
Closing.

 

(b)           Closing Date. The date and time of the Closing (the “Closing Date”) shall be 10:00 a.m., New York,
NY Time, on the date hereof, subject to notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Sections 6(a) and 7(a)
below (or such later date as is mutually agreed to by the Company and each
Buyer).

 

(c)           Form of Payment. On the Closing Date, (i) each Buyer shall
pay its Purchase Price to the Company for the Notes and Warrants to be issued
and sold to such Buyer at the Closing, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions, and
(ii) the Company shall deliver to each Buyer the Notes and Warrants which
such Buyer is then purchasing, duly executed on behalf of the Company and
registered in the name of such Buyer or its designee.

 

2.             BUYER’S REPRESENTATIONS
AND WARRANTIES.

 

Each Buyer
represents and warrants with respect to only itself that:

 

(a)           No Public Sale or Distribution. Such Buyer is (i) acquiring the
Notes and Warrants and (ii) upon conversion of the Notes and exercise of the
Warrants will acquire the Conversion Shares and the Warrant Shares issuable
upon conversion of the Notes and the exercise of the Warrants, as the case may
be, for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however,
that by making the representations herein, such Buyer does not agree to hold
any of the Securities for any minimum or other specific term and reserves the
right to dispose of the Securities at any time in accordance with or pursuant
to a registration statement or an exemption from the registration requirements
of the 1933 Act and applicable state securities laws. Such Buyer presently does
not have any agreement or understanding, directly or indirectly, with any
person to distribute any of the Securities.

 

(b)           Qualified Institutional Buyer; Accredited
Investor Status. Such
Buyer is a “qualified institutional buyer” as defined in
Rule 144A under the 1933 Act (a “QIB”)
and/or such Buyer is an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D.

 

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(c)           Transfer
or Resale. In connection with such Buyer’s subsequent
offers to sell, such Buyer (i) will offer the Notes and Warrants for resale
only upon the terms and conditions set forth in this Agreement (the “Exempt Resales”), and (ii) will solicit
offers to buy the Notes and Warrants only from, and will offer and sell the
Notes only to, (A) persons reasonably believed by such Buyer to be QIBs or (B)
persons reasonably believed by such Buyer to be an “accredited investor” as that term is defined
in Rule 501(a) of Regulation D (an “Accredited Investor”) or (C) persons reasonably
believed by such Buyer to be non-U.S. persons referred to in Regulation S under
the 1933 Act (“Non-U.S. Persons”),
and in connection with each such sale, it will take reasonable steps to ensure
that the purchaser of such Notes and Warrants is aware that such sale is being
made in reliance on Rule 144A, Regulation D or Regulation S, as applicable.

 

(d)           General Solicitation. No form of general solicitation or general advertising in violation
of the 1933 Act has been or will be used nor will any offers in any manner
involving a public offering within the meaning of Section 4(2) of the 1933 Act
or, with respect to Notes and Warrants to be sold in reliance on Regulation S,
by means of any directed selling efforts be made by such Buyer or any of its
representatives in connection with the offer and sale of any of the Notes and
Warrants.

 

(e)           Reliance on Exemptions. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of,
and such Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments, and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

 

(f)            Information. Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities which have been requested by such Buyer. Such Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received what such Buyer and its advisors, if any, believe to
be satisfactory answers to any such inquiries. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.

 

(g)           No Governmental Review. Such Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the
Securities or the fairness or suitability of the investment in the Securities
nor have such authorities passed upon or endorsed the merits of the offering of
the Securities.

 

(h)           Restrictions. Such Buyer understands that except as
provided in this Agreement and the Registration Rights Agreement: (i) the
Securities have not been and are not being registered under the 1933 Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall

 

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have delivered to the
Company an opinion of counsel, in a form reasonably acceptable to the Company,
to the effect that such Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
such as Rule 144 or Rule 144A promulgated under the 1933 Act, as amended, (or a
successor rule thereto) (collectively, “Rule
144”); (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance with the terms of Rule 144 and further, if Rule
144 is not applicable, any resale of the Securities under circumstances in
which the seller (or the Person (as defined in Section 3(s)) through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) except as set
forth in the Registration Rights Agreement, neither the Company nor any other
Person is under any obligation to register the Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder. The Securities may be pledged in
connection with a bona fide margin account or other loan secured by the
Securities and such pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and no Buyer effecting a pledge
of Securities shall be required to provide the Company with any notice thereof
or otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document, including, without limitation, this Section 2(h); provided,
that in order to make any sale, transfer or assignment of Securities, such
Buyer and its pledgee makes such disposition in accordance with or pursuant to
a registration statement or an exemption under the 1933 Act.

 

(i)            Legends. Buyer understands that the certificates or
other instruments representing the Notes and the Warrants and, until such time
as the resale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights Agreement,
the stock certificates representing the Conversion Shares and the Warrant
Shares, except as set forth below, shall bear any legend as required by the “blue
sky” laws of any state and a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of such stock
certificates):

 

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

 

The legend set forth above
shall be removed and the Company shall issue a certificate without 

 

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such legend to the holder of
the Securities upon which it is stamped, if, unless otherwise required by state
securities laws, (i) such Securities are registered for resale under the 1933
Act, (ii) in connection with a sale, assignment or other transfer, such holder
provides the Company with an opinion of counsel, in a form reasonably
acceptable to the Company, to the effect that such sale, assignment or transfer
of the Securities may be made without registration under the applicable
requirements of the 1933 Act.

 

(j)            Validity; Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of such Buyer and shall constitute the legal, valid and binding
obligations of such Buyer enforceable against such Buyer in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights and remedies, and
except that any rights to indemnity or contribution under the Transaction
Documents may be limited by federal and state securities laws and public policy
considerations.

 

(k)           No Conflicts. The execution, delivery and performance by
such Buyer of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
will not (i) result in a violation of the organizational documents of such
Buyer or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which such Buyer is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment  or decree (including federal and state securities
laws) applicable to such Buyer, except in the case of clauses (ii) and (iii)
above, for such conflicts, defaults, rights or violations which would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of such Buyer to perform its obligations
hereunder.

 

(l)            Residency. Such Buyer is a resident of that
jurisdiction specified below its address on the Schedule of Buyers. Such Buyer
represents that it was not organized solely for purposes of making an
investment in the Company.

 

(m)          Certain Trading Activities. Such Buyer has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Buyer, engaged in any transactions in the securities of
the Company (including, without limitations, any Short Sales (as defined in
Regulation SHO promulgated under the Exchange Act) involving the Company’s
securities) since the time that such Purchaser was first contacted by the
Company or any other Person regarding an investment in the Company. Such Buyer
covenants that neither it nor any Person acting on its behalf or pursuant to
any understanding with it will engage in any transactions in the securities of
the Company (including Short Sales) prior to the time that the transactions
contemplated by this Agreement are publicly disclosed by the Company. Such
Buyer has maintained, and covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company  pursuant to Section 4(e) such Buyer will
maintain, the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction) and
any information other than the terms of this transaction that the Company
provided to Buyer on a confidential basis.

 

5

 

(n)           No Group. Other than Affiliates of such Buyer who are
also Buyers under this Agreement, such Buyer is not under common control with
or acting in concert with any other Buyer and is not part of a “group.”  No Buyer, together with its Affiliates, will,
following the Closing of the transactions contemplated hereby, beneficially own
more than 10% of the voting power of the Company’s then-outstanding capital
stock.

 

(o)           Buyer Due Diligence. Such Buyer acknowledges that, except for
the matters that are expressly covered by the provisions of this Agreement,
including the exhibits and schedules hereto, such Buyer is relying on its own
investigation and analysis in entering into this Agreement and consummating the
transactions contemplated hereby. Such Buyer is an informed and sophisticated
in the transactions contemplated by this Agreement and has undertaken such
investigation, and has been provided with and has evaluated such documents and
information, as it has deemed necessary in connection with the execution,
delivery and performance of this Agreement. Such Buyer is consummating the
transactions contemplated by this Agreement without any representation or
warranty, expressed or implied, by the Company except as expressly set forth in
this Agreement and the exhibits and schedules hereto. Such
Buyer acknowledges and agrees that the Company does not make and has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 3.

 

3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company
represents and warrants to each of the Buyers that:

 

(a)           Organization and Qualification. The Company and its “Subsidiaries” (which for purposes of this
Agreement means any entity in which the Company, directly or indirectly, owns
capital stock or holds an equity or similar interest) are corporations duly
organized and validly existing in good standing under the laws of the
jurisdiction in which they are incorporated, and have the requisite corporate
power and authorization to own their properties and to carry on their business
as now being conducted. The Company and each Subsidiary is duly qualified as a
foreign corporation to do business and is in good standing in every
jurisdiction in which its ownership of property or the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a Material
Adverse Effect. As used in this Agreement, “Material
Adverse Effect” means any material adverse effect on the business,
properties, assets, operations, results of operations, or condition (financial
or otherwise) of the Company and its Subsidiaries, taken as a whole. The
Company has no Subsidiaries except as set forth on Schedule 3(a) or on
the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

(b)           Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Warrants, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions (as defined in Section 5(b)) and each
of the other agreements entered into by the parties hereto in connection with
the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the 

 

6

 

consummation by the Company
of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Notes and the Warrants and the reservation for
issuance and the issuance of the Conversion Shares and the Warrant Shares issuable
upon conversion, issuance or exercise thereof, as the case may be, have been
duly authorized by the Company’s Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
stockholders. This Agreement and the other Transaction Documents of even date
herewith have been duly executed and delivered by the Company, and constitute
the legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies, and except that any rights to indemnity or contribution
under the Transaction Documents may be limited by federal and state securities
laws and public policy considerations.

 

(c)           Issuance of Securities. The Notes and Warrants are duly
authorized and, upon issuance in accordance with the terms hereof, shall be
free from all taxes, liens and charges with respect to the issue thereof. As of
the Closing, a number of shares of Common Stock shall have been duly authorized
and reserved for issuance which equals the sum of 100% of the number of shares
of Common Stock issuable upon conversion of the Notes and exercise of the
Warrants to be issued at such Closing. Upon conversion, exercise or issuance in
accordance with the Notes and the Warrants, the Conversion Shares and the
Warrant Shares, as the case may be, will be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. Assuming the accuracy of each of the representations
and warranties of the Buyers contained in Section 2, the issuance by the
Company of the Securities is exempt from the registration requirements of
Section 5 of the 1933 Act.

 

(d)           No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Notes and Warrants and reservation for issuance
and issuance of the Conversion Shares and the Warrant Shares) will not (i)
result in a violation of the certificate of incorporation, any certificate of
designations, preferences and rights of any outstanding series of preferred
stock or bylaws of the Company or any of its Subsidiaries or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, except which are the subject of written waivers or
consents which have been obtained or effected on or prior to the Closing Date
or (iii) result in a violation of any law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations and the rules
and regulations of the Principal Market) applicable to the Company or any of
its Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected, except in the case of clauses (ii) and
(iii), for such breaches or defaults as could not reasonably be expected to
have a Material Adverse Effect.

 

7

 

(e)           Consents. Except as disclosed in Schedule 3(e),
the Company is not required to obtain any consent, authorization or order of,
or make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which
the Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the Closing Date (other then filings and
reports relating to the offer and sale of the Securities required under
Regulation D or applicable securities or “Blue Sky” laws as contemplated under
Section 4(b) of this Agreement), and the Company and its Subsidiaries are
unaware of any facts or circumstances which might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant
to the preceding sentence. The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts which
would reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future.

 

(f)            Acknowledgment Regarding
Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of arm’s
length purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and that no Buyer is (i) an officer or director
of the Company, (ii) an “affiliate” of the Company (as defined in Rule 144) or
(iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of
the Common Stock (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”)). The Company further acknowledges that no Buyer is acting as
a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by a Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such Buyer’s
purchase of the Securities.

 

(g)           No General Solicitation; Placement Agent’s
Fees. Neither the
Company, nor any of its affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of
the Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for persons engaged by any Buyer or its investment advisor) relating to or
arising out of the transactions contemplated hereby.

 

(h)           No Integrated Offering. None of the Company, its
Subsidiaries, any of their affiliates, and any Person acting on their behalf
has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of any of the Securities under the 1933 Act or cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of any exchange
or automated quotation system on which any of the securities of the Company are
listed or designated.

 

(i)            Rights Agreement. The Company has not
adopted a stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.

 

8

 

(j)            SEC Documents. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it
with the SEC pursuant to the reporting requirements of the Exchange Act (all of
the foregoing filed prior to the date hereof (whether or not required to be
filed), and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “SEC Documents”).
As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and, to the Company’s knowledge, none of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.

 

(k)           Financial Statements. As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may
exclude footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).

 

(l)            Absence of Certain Changes. Except as disclosed in Schedule
3(l) or in the SEC Documents, since September 30, 2006 (i) there has been
no Material Adverse Effect, and (ii) the Company has not (A) declared or
paid any dividends, (B) sold any assets, individually or in the aggregate, in
excess of $250,000 outside of the ordinary course of business, or (C) had capital
expenditures, individually or in the aggregate, in excess of $1,000,000. The
Company has not taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do so. The
Company is not as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing, will not be Insolvent
(as defined below). For purposes of this Section 3(l), “Insolvent” means (i) the present fair
saleable value of the Company’s assets is less than the amount required to pay
the Company’s total Indebtedness (as defined in Section 3(p)), (ii) the Company
is unable to pay its debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured, or (iii)
the Company intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature.

 

(m)          Conduct of Business. Neither the Company nor its Subsidiaries is
in violation of any term of or in default under its Certificate of
Incorporation, Bylaws or their organizational charter or bylaws, respectively.
Except as disclosed in Schedule 3(m), neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries,
and neither the Company nor any of its Subsidiaries will conduct its business
in violation of any of the 

 

9

 

foregoing, except for
possible violations which would not, individually or in the aggregate, have a
Material Adverse Effect. Without limiting the generality of the foregoing, the
Company is not in violation of any of the rules, regulations or requirements of
the OTC Bulletin Board (the “Principal Market”)
other than violations which could not reasonably be expected, individually or
in the aggregate, to have a Material Adverse Effect and has no knowledge of any
facts or circumstances which would reasonably lead to delisting or suspension
of the Common Stock by the Principal Market in the foreseeable future. Except
as disclosed on Schedule 3(m), since January 1, 2006, (i) the Common
Stock has been designated for quotation on the Principal Market, (ii) trading
in the Common Stock has not been suspended by the SEC or the Principal Market
and (iii) the Company has received no communication, written or oral, from the
SEC or the Principal Market regarding the suspension or delisting of the Common
Stock from the Principal Market.

 

(n)           Regulatory Permits. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit.

 

(o)           Equity Capitalization. As of the date hereof, the number
of shares and type of all authorized, issued, and outstanding capital stock of
the Company, and all shares of Common Stock reserved for issuance under the
Plans (as defined below), is set forth in Schedule 3(o). All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. All of such outstanding shares of capital stock
are duly authorized, validly issued, fully paid and nonassessable. No shares of
capital stock of the Company are subject to preemptive rights or any other
similar rights of the shareholders of the Company or any liens or encumbrances
imposed through the actions or failure to act of the Company. Except as
disclosed in the SEC Documents and other than pursuant to this Agreement and as
contemplated by the Company’s employee and director benefit, incentive, or
option plans disclosed in the Company’s SEC Documents (the “Plans”), (i) there
are no outstanding options, warrants, scrip, rights to subscribe for, puts,
calls, rights of first refusal, and (ii) there are no agreements,
understandings, claims, antidilution protection or other commitments or rights
of any character whatsoever that could require the Company to issue additional
shares of capital stock of the Company or adjust the purchase or exercise price
of any such instrument. Except as disclosed in the SEC Documents, there are no
agreements or arrangements (other than the Registration Rights Agreement) under
which the Company is obligated to register the sale of any of its securities
under the 1933 Act.

 

(p)           Indebtedness and Other Contracts. Except as disclosed in Schedule
3(p) or in the SEC Documents, neither the Company nor any of its
Subsidiaries (i) has any outstanding Indebtedness, or (ii) is in violation of
any term of or in default under any contract, agreement or instrument relating
to any Indebtedness, except where such violations and defaults would not
result, individually or in the aggregate, in a Material Adverse Effect. For
purposes of this Agreement:  (x) “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the 

 

10

 

deferred purchase price of
property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising
under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any
Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to any indebtedness, lease, dividend or other obligation of
another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the
obligee of such liability that such liability will be paid or discharged, or
that any agreements relating thereto will be complied with, or that the holders
of such liability will be protected (in whole or in part) against loss with
respect thereto; and (z) “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

 

(q)           Absence of Litigation. Except as disclosed in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation
before or by the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, the Common Stock or any
of the Company’s Subsidiaries that would, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect

 

(r)            Insurance. The Company and each of its Subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as management of the Company believes to
be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for and neither the Company
nor any such Subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect.

 

(s)           Employee Relations. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries is a party to any collective
bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations 

 

11

 

with their employees are
good. No executive officer of the Company (as defined in Rule 501(f) of the
1933 Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer’s employment with the Company. No
executive officer of the Company, to the knowledge of the Company, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any
restrictive covenant. The Company and its Subsidiaries are in compliance with
all federal, state, local and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours, except where failure to be in compliance would not, either individually
or in the aggregate, reasonably be expected to result in a Material Adverse
Effect.

 

(t)            Title. The Company and its Subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(t)
or such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held
under lease by the Company and any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.

 

(u)           Intellectual Property Rights. To the knowledge of the Company and
except as set forth in the SEC Documents, the Company and its Subsidiaries own
or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and other intellectual property rights (“Intellectual Property Rights”) necessary to
conduct their respective businesses as now conducted. The Company does not have
any knowledge of any infringement by the Company or its Subsidiaries of
Intellectual Property Rights of others. Except as set forth in Schedule 3(u),
there is no claim, action or proceeding being made or brought, or to the
knowledge of the Company, being threatened, against the Company or its
Subsidiaries regarding its Intellectual Property Rights which could have a
Material Adverse Effect.

 

(v)           Environmental Laws. The Company and its Subsidiaries (i) are in
material compliance with any and all Environmental Laws (as hereinafter
defined), (ii) have received all material permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in material compliance with all terms and
conditions of any such permit, license or approval where, in each of the
foregoing clauses (i), (ii) and (iii), the failure to so comply could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect. The term “Environmental Laws”
means all federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into
the environment, or 

 

12

 

otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.

 

(w)          Tax Status. The Company and each of its Subsidiaries
(i) has made or filed all federal and state income and all other tax returns,
reports and declarations required by any jurisdiction in which such filings are
required, (ii) has paid all taxes and other governmental assessments and
charges that are owed by it, including all taxes shown or determined to be due
on such returns, reports and declarations, except those being contested in good
faith and for which adequate reserves have been established on the Company’s
books, and (iii) has set aside on its books provision reasonably adequate for
the payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction.

 

(y)           Disclosure. The Company confirms that it has not provided any of the Buyers or
their respective agents or counsel with any information that will constitute material,
nonpublic information on the Closing Date, other than information and
documentation regarding the transactions contemplated by this Agreement, which
information shall be included on the 8-K Filing (as defined in Section 4(e)
below). The Company understands and confirms that each of the Buyers will rely
on the foregoing representations in effecting transactions in securities of the
Company. The Company acknowledges and agrees that no Buyer makes or has made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 2.

 

(z)            Manipulation of Price. The Company has not, and to its knowledge no one acting on its behalf
has, (i) taken, directly or indirectly, any action designed to cause or to
result in, or that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or paid anyone any compensation for soliciting
purchases of, any of the Securities, or (iii) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.

 

(aa)         Internal Accounting and
Disclosure Controls. The Company and each of its
Subsidiaries maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and liabilities
is compared with the existing assets and liabilities at reasonable intervals
and appropriate action is taken with respect to any difference. Except as set
forth in the SEC Documents, the Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the Exchange Act) that
are effective in ensuring that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the rules and forms of the SEC, including, without limitation, controls and 

 

13

 

procedures designed in to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company’s
management, including its principal executive officer or officers and its
principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure. Except as set forth in the SEC Documents,
during the twelve months prior to the date hereof neither the Company nor any
of its Subsidiaries have received any notice or correspondence from any
accountant relating to any potential material weakness in any part of the
system of internal accounting controls of the Company or any of its
Subsidiaries.

 

4.             COVENANTS.

 

(a)           Best Efforts. Each party shall use its best efforts
timely to satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.

 

(b)           Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Buyers on or prior to the Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following the Closing Date.

 

(c)           Reporting Status. With a view to making
available to the Investors (as that term is defined in the Registration Rights
Agreement) the benefits of Rule 144 promulgated under the Securities Act or any
similar rule or regulation of the Commission that may at any time permit the
Investors to sell securities of the Company to the public without registration
(“Rule 144”), the Company shall use its commercially
reasonable efforts to: (i) make and keep public information available, as those
terms are understood and defined in Rule 144; (2) file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and (3) furnish to each Investor, so long
as such Investor owns Registrable Securities (the “Reporting Period”), promptly upon request, (A) a written
statement by the Company, if true, that it has complied with the applicable
reporting requirements of Rule 144, the Securities Act and the Exchange Act,
(B) a copy of the most recent annual or quarterly report of the Company and
copies of such other reports and documents so filed by the Company, (C) the
information required by Rule 144A(d)(4) (or any successor rule) under the
Securities Act, and (D) such other information as may be reasonably requested
to permit the Investors to sell such securities pursuant to Rule 144 without
registration.

 

(d)           Fees. The Company shall be responsible for the
payment of any placement agent’s fees, transfer taxes or stamp duties, financial
advisory fees, or broker’s commissions (other than for Persons engaged by any
Buyer) relating to or arising out of the transactions contemplated hereby. Except
as otherwise set forth in this Agreement or in the Transaction Documents, each
party to this Agreement shall bear its own expenses in connection with the sale
of the Securities to the Buyers.

 

14

 

(e)           Disclosure of Transactions and Other Material
Information. On or
before 8:30 a.m., New York, NY Time, on the
first Business Day following the date hereof, the Company shall file a Current
Report on Form 8-K describing the terms of the transactions contemplated by the
Transaction Documents in the form required by the Exchange Act, and attaching
the material Transaction Documents (including, without limitation, this
Agreement (and all schedules to this Agreement), the form of Note, and the
Registration Rights Agreement) as exhibits to such filing (including all
attachments, the “8-K Filing”). Neither
the Company nor any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval
of any Buyer, to make any press release or other public disclosure with respect
to such transactions (i) in substantial conformity with the 8-K Filing and (ii)
as is required by applicable law and regulations.

 

(f)            Reservation
of Shares. The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, 100%
of the number of shares
of Common Stock issuable upon conversion of the Notes and exercise of the
Warrants being issued at the Closing.

 

(g)           Sales by Buyers. Each Buyer will sell any Securities sold by it in compliance with
applicable prospectus delivery requirements, if any, or otherwise in compliance
with the requirements for an exemption from registration under the Securities
Act and the rules and regulations promulgated thereunder. No Buyer will make
any sale, transfer or other disposition of the Securities in violation of the
federal or state securities laws.

 

(h)           Bank Account Balance;
Payment of 6% Notes. At any time while there are still
outstanding any of the Company’s 6% Senior Secured Notes Due July 29, 2007 (the
“6% Notes”), the Company shall take all
action necessary to have on deposit in the Company’s bank accounts an amount in
cash equal to no less than the then-outstanding principal amount of the 6%
Notes plus all accrued but unpaid interest thereon. On or before the July 29,
2007 maturity date of the 6% Notes, the Company will pay in full all principal
and accrued but unpaid interest of any 6% Notes that are then outstanding, and
the Company will not prior to such maturity date enter into any agreement to
increase the principal amount of the 6% Notes, extend the maturity date of the
6% Notes, or materially increase the Company’s obligations under the 6% Notes.

 

(i)            Debt Repayment. Within five (5) days after the Closing, the Company will pay off all
of its indebtedness other than the indebtedness set forth on Schedule 4(i) and
other than trade debt, capital leases, and equipment financing incurred in the
ordinary course of business.

 

(j)            Like Treatment of
Investors. The terms of Securities issued to Buyers per the terms of this
Agreement and the Transaction Documents shall be identical in all material
respects. In addition, neither the Company nor any of its affiliates shall,
directly or indirectly, pay or cause to be paid any consideration (immediate or
contingent), whether by way of interest, fee, payment for the redemption,
conversion of the Notes or exercise of the Warrants, or otherwise, to any Buyer
or holder of Securities, for or as an inducement to, or in connection with the
solicitation of, any consent, waiver or amendment. of any terms or provisions
of the 

 

15

 

Transaction Documents,
unless such consideration is required to be paid to all Buyers or holders of
Securities bound by such consent, waiver or amendment. The Company shall not,
directly or indirectly, redeem any Securities unless such offer of redemption
is made pro rata to all Buyers or holders of Securities, as the case may be, on
identical terms. For clarification purposes, this provision constitutes a
separate right granted by the Company to each Buyer of Securities and
negotiated separately by each Buyer, is intended for the Company to treat the
Buyers as a class, and shall not in any way be construed as the Buyers acting
in concert or as a group with respect to the purchase, disposition or voting of
Securities or otherwise.

 

(k)           Indemnification.
In consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder
of the Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by any Indemnitee as a result of, or arising
out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company
contained in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby or (c) any cause of action, suit or
claim brought or made against such Indemnitee by a third party (including for
these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (ii) any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Securities, (iii) any disclosure made by such Buyer
pursuant to Section 4(e), or (iv) the status of such Buyer or holder of the
Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities that is permissible under applicable law. Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 5 of the Registration Rights Agreement. Notwithstanding
anything herein to the contrary, the Company shall have no indemnification
obligations to any Buyer hereunder to the extent that an Indemnified Liability
is attributable to the gross negligence or willful misconduct of such Buyer.

 

(l)            Tax Matters. The Buyers and the Company agree that the
Notes and the Warrants constitute an “investment unit” for purposes of Section
1273(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”). The Buyers shall notify the Company
of 

 

16

 

their determination of the
allocation of the issue price of such investment unit among the Notes and the
Warrants in accordance with Section 1273(c)(2) of the Code and Treasury
Regulation Section 1.1273-2(h), and neither the Buyers nor the Company shall
take any position inconsistent with such allocation in any tax return or in any
judicial or administrative proceeding in respect of taxes so long as the same
allocation is made by all Buyers.

 

(m)          Additional Notes; Variable Securities;
Dilutive Issuances. So
long as any Buyer beneficially owns any Notes, the Company will not issue any
Notes other than to the Buyers as contemplated hereby and will not issue any
other securities that would cause a breach or default under the Notes. For so
long as any Notes or Warrants remain outstanding, the Company shall not, in any
manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or
exchangeable or exercisable for Common Stock at a price which varies or may
vary with the market price of the Common Stock, including by way of one or more
reset(s) to any fixed price, unless the conversion, exchange or exercise price
of any such security cannot be less than the then applicable Conversion Price
(as defined in the Notes) with respect to the Common Stock into which any Note
is convertible; provided that anti-dilution provisions similar to those
contained in the Notes or Warrants (including “full-ratchet” or “weighted-average”
anti-dilutions rights), as well as provisions similar to those contained in the
Notes for the payment of interest or principal in shares of Common Stock solely
at the option of the Company, shall not be deemed for the purposes of this
provision to be securities convertible or exercisable at prices that vary with
the market price of the Common Stock.

 

5.             TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”),
registered in the name of each Buyer or its respective nominee(s), for the
Conversion Shares and the Warrant Shares in such amounts
as specified from time to time by each Buyer to the Company upon conversion of
the Notes or exercise of the Warrants in the form of Exhibit D attached
hereto (the “Irrevocable Transfer Agent
Instructions”). No instruction other than the Irrevocable Transfer
Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(h) hereof, will be given by the
Company to its transfer agent, and that the Conversion Shares and the Warrant
Shares shall otherwise be freely transferable on the books and records of the
Company as and to the extent provided in this Agreement and the other
Transaction Documents. If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Sections 2(c), (h), and (i), the Company shall
permit the transfer and shall promptly instruct its transfer agent to issue one
or more certificates or credit Notes or shares to the applicable balance
accounts at DTC in such name and in such denominations as specified by such
Buyer to effect such sale, transfer or assignment. In the event that such sale,
assignment or transfer involves Securities sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend so long as the
Buyer complies with the terms of Section 2(h) and Section 2(i). The Company
acknowledges that a breach by it of its obligations under this Section 5 will
cause irreparable harm to a Buyer. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a 

 

17

 

breach or threatened breach
by the Company of the provisions of this Section 5, that a Buyer shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and transfer.
Nothing in this Section 5 will affect in any way the Buyer’s obligations and
agreements set forth in Section 4 hereof to comply with all applicable
prospectus delivery requirements, upon resale of the Securities.

 

6.             CONDITIONS TO THE COMPANY’S OBLIGATION TO
SELL. The obligation
of the Company hereunder to issue and sell the Notes and Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion by
providing each Buyer with prior written notice thereof:

 

(a)           Such Buyer shall have executed each of the
Transaction Documents to which it is a party and delivered the same to the
Company.

 

(b)           Such Buyer and each other Buyer shall have
delivered to the Company the Purchase Price for the Notes being purchased by
such Buyer and each other Buyer at the Closing by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company.

 

(c)           The representations and warranties of such
Buyer shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Buyer at or prior to the Closing
Date.

 

7.             CONDITIONS TO EACH BUYER’S OBLIGATION TO
PURCHASE. The
obligation of each Buyer hereunder to purchase the Notes and Warrants at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit
and may be waived by such Buyer at any time in its sole discretion by providing
the Company with prior written notice thereof:

 

(a)           The Company shall have executed and delivered
to such Buyer (i) each of the Transaction Documents and (ii) the Notes and the
Warrants being purchased by such Buyer at the Closing pursuant to this
Agreement.

 

(b)           Such Buyer shall have received the opinion of
Foley & Lardner LLP, the Company’s
counsel, dated as of the Closing Date, in substantially the form of Exhibit E
attached hereto.

 

(c)           The Company shall have delivered to such
Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit
D attached hereto, which instructions shall have been delivered to and
acknowledged in writing by the Company’s transfer agent.

 

(d)           The Company shall have delivered to such
Buyer a certificate evidencing the incorporation and good standing of the
Company issued by the Secretary of State of Delaware, as of a date within 10
days of the Closing Date.

 

18

 

(e)           The Company shall have delivered to such
Buyer a certificate, executed by the Secretary of the Company and dated as of
the Closing Date, as to (i) the resolutions consistent with Section 3(b) as
adopted by the Company’s Board of Directors (the “Resolutions”), (ii) the Certificate of Incorporation and (iii)
the Bylaws, each as in effect at the Closing.

 

(f)            The representations and warranties of the
Company shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at or
prior to the Closing Date.

 

8.             TERMINATION. In the event that the Closing shall not
have occurred with respect to a Buyer on or before five (5) Business Days from
the date hereof due to the Company’s or such Buyer’s failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party.

 

9.             MISCELLANEOUS.

 

(a)           Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of
the State of New York or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the non-exclusive jurisdiction of the state
and federal courts sitting in the City of New York, Borough of Manhattan, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law.

 

(b)           Counterparts. This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original,
not a facsimile signature.

 

19

 

(c)           Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.

 

(d)           Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

 

(e)           Entire Agreement; Amendments. This Agreement supersedes all other
prior oral or written agreements between the Buyers, the Company, their
affiliates and Persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of Notes representing more than one-half of the aggregate
principal amount of the Notes, or, if prior to the Closing Date, the Company
and the Buyers listed on the Schedule of Buyers as being obligated to purchase
at least a majority of the aggregate principal amount of the Notes, and any
amendment to this Agreement made in conformity with the provisions of this
Section 9(e) shall be binding on all Buyers and holders of Notes, as applicable.
No provision hereof may be waived other than by an instrument in writing signed
by the party against whom enforcement is sought. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Notes then outstanding. No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of the
Transaction Documents unless the same consideration also is offered to all of
the parties to the Transaction Documents, holders of Notes. The Company has
not, directly or indirectly, made any agreements with any Buyers relating to
the terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents.

 

(f)            Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by electronic mail or 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:

 

Liquidmetal
Technologies, Inc.

25800 Commercentre Drive, Suite 100

Lake Forest, California  92630

Facsimile: (949) 206-8008

Attention:  Larry Buffington, President
and CEO

Email:  Larry.Buffington@Liquidmetal.com

 

20

 

with a copy (which shall not constitute
notice) to:

 

Foley & Lardner LLP

100 North Tampa Street, Suite 2700

Tampa, Florida  33602

Facsimile:              (813) 221-4210

Attention:              Curt Creely, Esq.

Email:                     ccreely@foley.com

 

If to a Buyer, to its
address, electronic mail address, and facsimile number set forth on the
Schedule of Buyers, with copies to such Buyer’s representatives as set forth on
the Schedule of Buyers, or to such other address and/or facsimile number and/or
to the attention of such other Person as the recipient party has specified by
written notice given to each other party five (5) days prior to the
effectiveness of such change. 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.

 

(g)           Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors
and assigns, including any purchasers of the Notes. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding, including by merger
or consolidation, except pursuant to a Change of Control (as defined in the
Notes).

 

(h)           No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other Person.

 

(i)            Survival. Unless this Agreement is terminated under
Section 8, the representations and warranties of the Company and the Buyers
contained in Sections 2 and 3 and the agreements and covenants set forth in
Sections 4, 5 and 9 shall survive the Closing. Each Buyer shall be responsible
only for its own representations, warranties, agreements and covenants
hereunder.

 

(j)            Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

 

21

 

(k)           Payment Set Aside. To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to any of the other
Transaction Documents or the Buyers enforce or exercise their rights hereunder
or thereunder, and such payment or payments or the proceeds of such enforcement
or exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a
trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

 

(l)            Independent
Nature of Buyers’ Obligations and Rights. The
obligations of each Buyer under any Transaction Document are several and not
joint with the obligations of any other Buyer, and no Buyer shall be
responsible in any way for the performance of the obligations of any other
Buyer under any Transaction Document. Nothing contained herein or in any other
Transaction Document, and no action taken by any Buyer pursuant hereto or
thereto, shall be deemed to constitute the Buyers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Buyer confirms that it has independently participated in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitations, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.

 

22

 

IN WITNESS WHEREOF, each Buyer and the Company have caused have
caused their respective signature page to this Securities Purchase Agreement to
be duly executed as of the date first written above.

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  LIQUIDMETAL TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Larry E. Buffington

  	
   

  
	
   

  	
   

  	
  Name:  Larry E. Buffington

  
	
   

  	
   

  	
  Title:    CEO/President

  

 

[Signature Page to Securities Purchase Agreement]

 

 

IN WITNESS WHEREOF, each Buyer and the Company have
caused their respective signature page to this Securities Purchase Agreement to
be duly executed as of the date first written above.

 

	
   

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  /s/ Diamond Opportunity Fund,
  LLC

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Fort Mason Master, LP

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Fort Mason Partners, LP

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Solomon Strategic Holdings,
  Inc.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ The Tail Wind Fund Ltd.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Abdi Mahamedi

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Whitebox Intermarket
  Partners LP

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ BridgePointe Master Fund
  Ltd.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Rockmore Investment Master
  Fund Ltd.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Castlerigg Master
  Investments Ltd.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Iroquois Master Fund

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Wynnefield Partners Small
  Cap Value, LP

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Wynnefield Partners Small
  Cap Value, LP I

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Wynnefield Small Cap Value
  Offshore Fund, Ltd.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Rodd Friedman

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Eric Brachfeld

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Myron Neugeboren

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Ricardo Salas

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Winvest Venture Partners
  Inc.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Ed Neugeboren

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Gryphon Master Fund, L.P.

  	
   

  
																							

 

[Signature
Page to Securities Purchase Agreement]

 

 

	
   

  	
  /s/ GSSF Master Fund, LP

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Leon Frenkel

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Triage Capital Management
  L.P.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Triage Capital Management B,
  L.P.

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Stratford Partners, LP

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Kenneth Lisiak

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Vestal Venture Capital

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ James Kang

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Kurtis Jang

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Charles Kim

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Chuck Myong

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Hamilton Investment
  Partners, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Rockport Funding, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Jay Deahna

  	
   

  
															

 

 

SCHEDULE OF BUYERS

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  
	
  Buyer

  	
   

  	
  Address, Email and 

  Facsimile Number

  	
   

  	
  Aggregate 

  Principal Amount 

  of Notes

  	
   

  	
  Number of 

  Warrants

  	
   

  	
  Legal Representative’s 

  Address and Facsimile Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Schedule 3 (a)

 

•      Liquidmetal
Golf (a
California corporation)

 

•      Liquidmetal
Korea Co., Ltd. (a
South Korean organized entity)

 

•      Amorphous
Technologies International (Asia) PTE Ltd. 
(an entity organized under Singapore law — Inactive,
dissolution in progress.)

 

•      Weihai
Liquidmetal Company Ltd.  (an
entity organized under Chinese law)

 

 

Schedule
3 (e)

 

None

 

 

Schedule
3 (l)

 

None other than that disclosed in SEC Documents

 

 

Schedule
3 (m)

 

None

 

 

Schedule
3 (o)

 

	
  Shares
  outstanding:

  	
   

  	
  44,261,768

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Options
  Outstanding

  	
   

  	
   

  	
   

  
	
  1996
  Long-Term Incentive Plan

  	
   

  	
  3,257,265

  	
   

  
	
  2002
  Director Plan - 2004

  	
   

  	
  330,000

  	
   

  
	
  2002
  Equity Plan

  	
   

  	
  72,260

  	
   

  
	
  2002
  Equity Plan - 2003

  	
   

  	
  620,873

  	
   

  
	
  2002
  Equity Plan - 2004

  	
   

  	
  2,021,317

  	
   

  
	
  Options
  Not Under a Plan

  	
   

  	
  2,221,508

  	
   

  
	
  Total

  	
   

  	
  8,523,223

  	
   

  

 

 

Schedule
3 (p)

 

None other than that disclosed in SEC Documents

 

 

Schedule
3 (s)

 

None

 

 

Schedule
3 (t)

 

None

 

 

Schedule
3 (u)

 

None

 

 

SCHEDULE 4(i)

 

Debt not required to be paid off after Closing

 

	
  Creditor

  	
   

  	
  Outstanding Principal

  	
   

  
	
  Kookmin Bank

  	
   

  	
  $

  	
  1,746,000

  	
   

  
	
  Hana Financial

  	
   

  	
  $

  	
  1,344,000

  	
   

  
	
  6% Senior
  Convertible Notes Due July 2007

  	
   

  	
  $

  	
  2,113,000

  	
   

  

 

 

EXHIBITS

 

	
  Exhibit A

  	
   

  	
  Form of Note

  
	
  Exhibit B

  	
   

  	
  Form of Warrant

  
	
  Exhibit C

  	
   

  	
  Form of Registration Rights Agreement

  
	
  Exhibit D

  	
   

  	
  Form of Irrevocable Transfer Agent Instructions

  
	
  Exhibit E

  	
   

  	
  Form of Company Counsel Opinion

  

 

 

Exhibit A

 

Filed separately, therefore omitted.

 

 

Exhibit B

 

Filed separately, therefore omitted.

 

 

Exhibit C

 

Filed separately, therefore omitted.

 

 

Exhibit
D

 

TRANSFER
AGENT INSTRUCTIONS

 

LIQUIDMETAL
TECHNOLOGIES, INC.

 

January 3, 2007

 

American Stock Transfer & Trust Company

Attn:  Mr. Joe Wolf

59 Maiden Lane

New York, NY 10038

 

Re:          Private Placement of
Convertible Subordinated Notes

 

Ladies and Gentlemen:

 

This letter refers
to that certain Securities Purchase Agreement, dated as of January 3, 2007 (the
“Securities Purchase Agreement”), by and among Liquidmetal Technologies, Inc.,
a Delaware corporation (the “Company”), and the investors listed on the
Schedule of Buyers attached thereto (collectively, the “Buyers”) pursuant to
which the Company is issuing to the Buyers Convertible Subordinated Notes (the “Notes”),
which are convertible into shares of common stock of the Company, par value
$0.001 per share (the “Common Stock”).

 

The Company hereby
authorizes and instructs you (provided that you are the transfer agent of the
Company at such time):

 

(i)            to establish as of the date of this letter a
reserve of [                  ]
shares of Common Stock for issuance to holders of Notes upon conversion of
their Notes (the “Conversion Share Reserve”). The Conversion Share Reserve
shall be adjusted to appropriately reflect the effect of any stock split,
reverse stock split, stock dividend (including any dividend or distribution of
securities convertible into Common Stock), reorganization, recapitalization,
reclassification, exchange or other like change with respect to Common Stock
occurring on or after the date hereof; and

 

(ii)           to issue shares of Common Stock upon
conversion of the Notes (the “Conversion Shares”) to or upon the order of a Buyer
from time to time upon delivery to you of a properly completed and duly
executed Conversion Notice, in the form attached hereto as Exhibit I,
which has been acknowledged by the Company as indicated by the signature of a
duly authorized officer of the Company thereon.

 

You
acknowledge and agree that so long as you have previously received (a) written
confirmation from the Company’s outside legal counsel that either (i) a registration
statement covering resales of the Conversion Shares has been declared effective
by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) that sales of the
Conversion Shares may be made in conformity with Rule 144 under the Securities
Act and (b) if applicable, a copy of such registration statement, then within
two (2) business days of your receipt of the Conversion Notice, you shall issue
the certificates representing the Conversion Shares, as applicable, and such
certificates shall not bear any legend restricting transfer of the Conversion
Shares thereby and should not be subject to any stop-transfer restriction; provided,
however, that if such Conversion Shares are not registered for resale
under the Securities Act or able to be sold under Rule 144, then, the
certificates for such Conversion Shares shall bear the following legend:

 

 

“THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE
TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.”

 

A form of written
confirmation from the Company’s legal counsel that a registration statement
covering resales of the Conversion Shares has been declared effective by the
SEC under the Securities Act is attached hereto as Exhibit II.

 

These instructions
may not be rescinded or revoked other than by means of a communication signed
by the Company.

 

Please execute this
letter in the space indicated to acknowledge your agreement to act in
accordance with these instructions. Should you have any questions concerning
this matter, please contact Curt Creely of Foley & Lardner LLP, our outside
legal counsel, at (813) 225-4122.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
  LIQUIDMETAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Young Ham

  
	
   

  	
   

  	
  Chief Financial Officer

  

 

 

THE FOREGOING INSTRUCTIONS ARE

ACKNOWLEDGED AND AGREED TO

 

this        day of January, 2007

 

	
  AMERICAN
  STOCK TRANSFER & TRUST COMPANY

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

Enclosures

 

2

 

EXHIBIT I

 

LIQUIDMETAL TECHNOLOGIES, INC.

CONVERSION NOTICE

 

Reference is made to the Convertible Subordinated Note (the “Note”) issued to the undersigned by
Liquidmetal Technologies, Inc. (the “Company”).
In accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Common Stock, par value $0.001 per share (the “Common Stock”), of the Company as of the
date specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount
to be converted:

 

The undersigned hereby certifies to the Company that the undersigned’s
conversion of the amount set forth above in accordance with Section 3(a) of the
Note will not directly result in the undersigned (together with the undersigned’s
affiliates) beneficially owning in excess of 4.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion,
calculated in accordance with Section 3(d)(i) of the Note; provided that if the
undersigned has previously waived the 4.99% beneficial ownership limitation
upon no less than sixty one (61) days prior written notice, the undersigned
certifies to the Company that the undersigned’s conversion of the amount set
forth above will not directly result in the undersigned (together with the
undersigned’s affiliates) beneficially owning in excess of 9.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion, calculated in accordance with Section 3(d)(i) of the Note.

 

Please confirm the following information:

 

Conversion Price: 

 

Number of shares of Common
Stock to be issued:

 

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

 

Issue to:

 

 

Facsimile Number:

 

Authorization:

 

	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
  Dated:

  	
   

  

 

Account Number:                

(if electronic book
entry transfer)

 

Transaction Code Number:

(if electronic book
entry transfer)

 

4

 

ACKNOWLEDGMENT

 

The Company hereby
acknowledges this Conversion Notice and hereby directs American Stock Transfer
& Trust Co. to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated January 3, 2007 from
the Company.

 

	
   

  	
  LIQUIDMETAL TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

5

 

EXHIBIT II

 

FORM
OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

 

American Stock Transfer & Trust Company

Attn:  Mr. Joe Wolf

59 Maiden Lane

New York, NY 10038

 

Re:          Liquidmetal Technologies, Inc.

 

Ladies and Gentlemen:

 

We are counsel to
Liquidmetal Technologies, Inc., a Delaware corporation (the “Company”), and
have represented the Company in connection with the negotiation and execution
of that certain Securities Purchase Agreement, dated as of January 3, 2007, by
and among the investors named on the Schedule of Buyers attached thereto (the “Buyers”)
and the Company (the “Purchase Agreement”). Upon the terms and subject to the
conditions of the Purchase Agreement, the Company has issued to the Buyers its
convertible subordinated notes (the “Notes”) convertible into shares of the
Company’s Common Stock, par value $0.001 per share (the “Common Stock”). Pursuant
to the Purchase Agreement, the Company entered into a Registration Rights
Agreement with the Buyers, dated as of January 3, 2007 (the “Registration
Rights Agreement”), pursuant to which the Company agreed, among other things,
to register the resale of the Registrable Securities (as defined in the
Registration Rights Agreement), including the shares of its Common Stock
issuable upon conversion of the Notes under the Securities Act of 1933, as
amended (the “Securities Act”). In connection with the Company’s obligations
under the Registration Rights Agreement, on               
      , 2007, the Company filed the Registration
Statement on Form S-1 (File No. 333-                  )
(the “Registration Statement”) with the Securities and Exchange Commission (the
“SEC”) relating to the Registrable Securities which names each of the Buyers as
a selling stockholder thereunder.

 

In connection with
the Registration Statement, we advise you that a member of the SEC’s staff has
advised us by telephone that the SEC has entered an order declaring the
Registration Statement effective under the Securities Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS], and we have no knowledge,
after telephonic inquiry of a member of the SEC’s staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the Securities Act pursuant to the
Registration Statement.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  [COMPANY’S COUNSEL]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  

 

CC:          [LIST
NAMES OF BUYERS]

 

6

 

Exhibit E

 

	
   

  	
   

  	
  ATTORNEYS AT LAW

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  100 NORTH TAMPA STREET, SUITE 2700

  
	
   

  	
   

  	
  TAMPA, FL 33602-5810

  
	
   

  	
   

  	
  P.O. BOX 3391

  
	
  January
  3, 2007

  	
   

  	
  TAMPA, FL 33601-3391

  
	
   

  	
   

  	
  813.229.2300 TEL

  
	
   

  	
   

  	
  813.221.4210 FAX

  
	
   

  	
   

  	
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  CLIENT/MATTER NUMBER

  
	
   

  	
   

  	
  078489-0103

  

 

To the Addressees
Set Forth on

Attached Schedule A

 

Re:          Liquidmetal Technologies, Inc.

 

Ladies and Gentlemen:

 

We have acted as
counsel to Liquidmetal Technologies, Inc., a Delaware corporation (the “Company”),
in connection with the transactions contemplated by the Securities Purchase
Agreement, dated as of the date hereof (the “Purchase Agreement”), among
the Company and the persons and entities set forth in Schedule A hereto
(the “Purchasers”). This letter is being delivered to you pursuant to
Section 7(b) of the Purchase Agreement. Capitalized terms not otherwise defined
in this letter shall have the respective meanings ascribed to them in the
Purchase Agreement.

 

In rendering this
opinion, we have examined (i) the Purchase Agreement, the Notes, the Warrants,
and the Registration Rights Agreement (collectively, the “Transaction
Documents”), (ii) a copy of the Certificate of Incorporation of the Company
certified by the Secretary of the State of Delaware on December 28, 2006 (the “Certificate”),
(iii) a certificate of good standing with respect to the Company issued by the
Delaware Secretary of State dated December 28, 2006, (iv) a copy of the Bylaws
of the Company certified by the Secretary of the Company on or about the date
of this letter (the “Bylaws”), and (v) a copy of the resolutions of the
Board of Directors of the Company adopted on December 28, 2006, as certified by
the Secretary of the Company on the date of this letter. We have also
considered such matters of law and of fact, including the examination of
originals or copies, certified or otherwise identified to our satisfaction, of
such records and documents of the Company, certificates of officers, directors
and representatives of the Company, certificates of public officials and such
other documents as we have deemed appropriate as a basis for the opinions set
forth below. We also have relied upon the factual representations made by the
Company in the Transaction Documents. We have made no attempt to independently
verify the factual statements and representations contained in certificates or
in the Transaction Documents.

 

As to the
incorporation and good standing of the Company under the laws of the State of
Delaware, we have relied solely on certificates from the Delaware Secretary of
State dated December 28, 2006, which we assume remain accurate as of the date
of this letter.

 

Our opinion in
paragraph 4 concerning the validity, binding effect, and enforceability of the
Transaction Documents means that (i) the Transaction Documents constitute
effective contracts under applicable law, and (ii) subject to the remainder of
this paragraph, a remedy will be 

 

	
  BOSTON

  	
  LOS ANGELES

  	
  SACRAMENTO

  	
  TALLAHASSEE

  
	
  BRUSSELS

  	
  MADISON

  	
  SAN DIEGO

  	
  TAMPA

  
	
  CHICAGO

  	
  MILWAUKEE

  	
  SAN DIEGO/DEL
  MAR

  	
  TOKYO

  
	
  DETROIT

  	
  NEW YORK

  	
  SAN FRANCISCO

  	
  WASHINGTON,
  D.C.

  
	
  JACKSONVILLE

  	
  ORLANDO

  	
  SILICON VALLEY

  	
   

  

 

 

available to the
applicable party if the Company is in material default under the Transaction
Documents to obtain the practical realization of benefits contemplated by the
Purchase Agreement. This opinion does not mean that (a) any particular remedy
is available upon a material default, or (b) every provision of the Transaction
Documents will be upheld or enforced in any or each circumstance by a court.
Furthermore, the validity, binding effect and enforceability of the Transaction
Documents may be limited or otherwise affected by (y) bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar statutes,
rules, regulations or other laws affecting the enforcement of creditors’ rights
and remedies generally and (z) the unavailability of, or limitation on the
availability of, specific performance or injunctive relief or a particular
right or remedy (whether in a proceeding in equity or at law) because of an
equitable principle or a requirement as to commercial reasonableness,
conscionability, or good faith.

 

The opinions set
forth in this letter are limited solely to the laws of the State of Florida,
the Delaware General Corporation Law and the federal laws of the United States
of America, and we express no opinion as to the laws of any other jurisdiction.
We note that the Transaction Documents provide that they are governed by the
laws of the State of New York, and we have assumed, with your permission, that
laws of the State of New York are the same as the laws of the State of Florida
in all relevant respects. This letter has been prepared and is to be construed
in accordance with the Reports on Standards for Opinions of Florida Legal
Counsel for Business and Real Estate Transactions (September 1998) (the “Report”),
and the Report is incorporated by reference in this letter.

 

In rendering
the opinions set forth below, we have made the following assumptions, in
addition to the other assumptions set forth in this letter: (i) the genuineness
of all signatures other than those on behalf of the Company; (ii) the
authenticity and completeness of all documents submitted to us as originals;
(iii) the conformity to originals of all documents and instruments submitted to
us as photostatic copies, and the authenticity and completeness of the
originals of such latter documents;  (iv)
the legal capacity of each natural person; (v) the legal existence of all
parties to the Transaction Documents other than the Company; (vi) the power and
authority of each person other than the Company to execute, deliver and perform
each document executed and delivered and to do each other act done or to be
done by such person; (vii) the authorization, execution, and delivery by each
person other than the Company of each document executed and delivered or to be
executed and delivered by such person; (viii) the legality, validity, binding
effect, and enforceability as to each person other than the Company of each
document executed and delivered or to be executed and delivered and of each
other act done or to be done by such person; (ix) the payment of all required
documentary stamps, taxes and fees imposed upon the execution, filing or
recording of documents; (x) that there have been no undisclosed modifications
of any documents reviewed by us in connection with the rendering of the opinion
and no undisclosed prior waiver of any right or remedy contained in any of the
documents; (xi) the truthfulness of each statement as to all factual matters
contained in any document reviewed by us in connection with this opinion; (xii)
the accuracy on the date of the opinion as well as on the date stated in all
governmental certifications of each statement as to each factual matter
contained in such governmental certifications; 
(xiii) that with respect to the Transaction Documents, there has been no
mutual mistake of fact and there exists no fraud or duress; and (xiv) the
constitutionality and validity of all relevant laws, regulations and agency
actions.

 

2

 

For
purposes of this opinion, “to our knowledge” or “known to us” means the actual
current conscious awareness of those attorneys in our firm who have given
substantive attention to the transactions contemplated by the Transaction
Documents, without independent investigation to determine the existence or
absence of any facts or circumstances.

 

Based on the foregoing, and subject to the
qualifications, assumptions and limitations set forth herein, we are of the
opinion that:

 

1.             The
Company is a corporation incorporated and in good standing under the laws of
the State of Delaware.

 

2.             The
Company has all requisite corporate power and authority to execute, deliver and
perform the Transaction Documents, to issue, sell and deliver the Notes, the
Warrants, the Conversion Shares, and the Warrant Shares pursuant to the
Transaction Documents and to carry out and perform its obligations under, and
to consummate the transactions contemplated by, the Transaction Documents.

 

3.             All
corporate action on the part of the Company necessary for the authorization,
execution and delivery by the Company of the Transaction Documents, the
authorization, issuance, sale and delivery of the Notes and the Warrants
pursuant to the Purchase Agreement, the issuance and delivery the Conversion
Shares and Warrant Shares, and the consummation by the Company of the transactions
contemplated by the Transaction Documents has been duly taken.

 

4.             The
Transaction Documents have been duly and validly executed and delivered by the
Company and constitute the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with their terms, except (a) that
such enforceability may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors’ rights in general and (b) that the
remedies of specific performance and injunctive and other forms of injunctive
relief may be subject to equitable defenses.

 

5.             The
authorized capital stock of the Company as of the date hereof is 100,000,000
shares of common stock, par value $.001 per share, and 10,000,000 shares of
preferred stock, par value $.001 per share. The Conversion Shares and Warrant
Shares to be issued to the Purchasers have been duly authorized and, when
issued and paid for in accordance with the terms of the Transaction Documents,
will be validly issued, fully paid and nonassessable and no subject to any
preemptive rights. The issuance of the Notes and the Warrants has been duly
authorized, and when issued and paid for in accordance with the terms of the
Transaction Documents, such securities will be validly issued. The shares of
Common Stock issuable upon conversion of the Notes and exercise of the Warrants
have been duly reserved, and when issued in accordance with the terms of the
Notes and Warrants, as applicable, will be validly issued, fully paid and
nonassessable and not subject to any preemptive rights.

 

3

 

6.             Assuming
(i) the accuracy of the information provided by the purchasers in the
Transaction Documents including the relevant information with respect to the
status of each purchaser (each, a “Purchaser” and collectively, the “Purchasers”)
as an “accredited investor” within the meaning of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”), (ii) that the
Placement Agent has complied in all respects with the requirements of Section
4(2) of the Securities Act (including, without limitation, the provisions of
Regulation D promulgated thereunder), (iii) the absence of any form of general
solicitation or general advertising with respect to the offer or sale of the
Securities, (iv) the registration or qualification of the Placement Agent as a
broker-dealer in each jurisdiction in which the Placement Agent has placed or
attempted to place the Securities, (v) the observance of all limitations on
resale of the Securities, and (vi) the timely filing of a Form D with respect
to the offer or sale of the Securities, the issuance and sale of the Securities
by the Company to the Purchasers is exempt from registration under the
Securities Act by virtue of Regulation D promulgated thereunder.

 

7.             The
execution, delivery and performance by the Company of, and the compliance by
the Company with the terms of, the Transaction Documents and the issuance, sale
and delivery of the Notes, Conversion Shares, Warrants, and Warrant Shares
pursuant to the Purchase Agreement do not (a) conflict with or result in a
violation of any provision of the Certificate or Bylaws, (b) conflict with or
result in a violation of any provision of law, rule, or regulation known to us
to be applicable to the Company,  or (c)
to our knowledge, conflict with, result in a breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or result in or permit the termination or modification of, any
agreement, instrument, order, writ, judgment or decree known to us to which the
Company is a party or is subject.

 

8.             To our
knowledge, no consent, license, permit, waiver, approval or authorization of,
or designation, declaration, registration or filing with, any court,
governmental or regulatory authority, or self-regulatory organization, is
required in connection with the valid execution, delivery and performance by
the Company of the Transaction Documents, or the offer, sale, issuance or
delivery of the Notes, Conversion Shares, Warrants, or Warrant Shares or the
consummation of the transactions contemplated thereby.

 

This opinion letter is provided to you for
your exclusive use solely in connection with the Transaction Documents and the
transactions contemplated thereby and may not be relied upon by any person
other than you or for any other purpose without our prior written consent. This
opinion letter may not be used, quoted, referred to, copied, published, or
relied upon by, or furnished to, any other person without our prior written
consent. This opinion letter speaks only as of the date hereof and to its
addressee and we have no responsibility or obligation to update this opinion,
to consider its applicability or correctness to other than its addressees, or
to take into account changes in law, facts or any other developments of which
we may later become aware.

 

	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  DRAFT

  
	
   

  	
   

  
	
   

  	
  Foley &
  Lardner LLP

  

 

4

 

SCHEDULE A

 

[to be inserted]

 

[to be inserted]Exhibit 10.2

 

NEITHER THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. ANY
TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,
INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED
BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF
MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION
3(c)(iii) OF THIS NOTE.

 

CONVERTIBLE SUBORDINATED NOTE

 

	
  Issuance Date: January 3,
  2007

  	
   

  	
  Principal: U.S.
  $[                      ]

  

 

FOR VALUE RECEIVED, LIQUIDMETAL TECHNOLOGIES, INC., a Delaware
corporation (the “Company”),
hereby promises to pay to the order of [INSERT HOLDER] or registered assigns (“Holder”) the amount set out above as the
Principal (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on
any outstanding Principal at the rate of interest as determined pursuant to
Section 2, from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due
and payable, whether upon an Interest Date (as defined below), the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Convertible Subordinated Note (including all
Convertible Subordinated Notes issued in exchange, transfer or replacement
hereof, this “Note”) is one of an
issue of Convertible Subordinated Notes (collectively, the “Notes” and such other Convertible
Subordinated Notes, the “Other Notes”)
issued on the Issuance Date pursuant to the Securities Purchase Agreement (as
defined below). Certain capitalized terms are defined in Section 29.

 

(1)           MATURITY AND AMORTIZATION PAYMENTS.

 

(a)           Payment on Maturity. On January 3, 2010 (the “Maturity Date”), the Holder shall
surrender this Note to the Company and the Company shall pay to the Holder an
amount in cash representing all outstanding Principal and accrued and unpaid
Interest, and following receipt of such payment, the Holder shall mark this
Note as “Cancelled” and shall 

 

 

surrender such cancelled
Note to the Company by courier, registered mail, or other traceable means. Beginning
on the first day of the eighteenth (18th) calendar month following
the calendar month in which the Issuance Date occurs, the Company may, upon
thirty (30) calendar days prior written notice to Holder and at the sole
election of the Company, prepay this Note in whole or in part for a cash
redemption price equal to One Hundred Five Percent (105%) of the the portion of
the principal amount being redeemed plus all accrued and unpaid interest on the
portion of the principal amount being redeemed, provided that following such
notice the Holder may convert all or any part of the portion of the Note to be
redeemed so long as the Company receives a duly executed Conversion Notice
pursuant to Section 3 of this Note prior to the date on which prepayment is
actually made.

 

(b)           Amortization Payments. Beginning on July 31, 2008 and at
the end of each month thereafter (each, an “Amortization
Date”) until there is no outstanding Principal of this Note, the
Company shall redeem $[                  ]
[1/36th of the original Principal amount of this
Note] of this Note (each, an “Amortization Redemption
Amount”). If the Company is unable to redeem all Principal and
Interest with respect to all Amortization Redemption Amounts on this Note and
the Other Notes, then the Company shall redeem a pro rata amount from each
holder of the Notes (including the Holder) based on the principal amount of the
Notes subject to payment of an Amortization Redemption Amount on such
Amortization Date pursuant to this Note and the Other Notes.

 

(c)           Payment of Amortization Redemption Amount. The Company shall pay the
Amortization Redemption Amount in cash in accordance with the provisions of
Section 12; provided, however, that if the Conditions to Amortization
Conversion (as defined below) are satisfied or waived in writing by the Holder
and the Company provides the Amortization Conversion Notice (as defined below),
then the Company shall have the right to require the Holder to convert all or
any such portion of the Amortization Redemption Amount designated in the
Amortization Conversion Notice into fully paid, validly issued and
nonassessable shares of Common Stock in accordance with the applicable
provisions of Section 3(c)(i). The Company may exercise its right to require
conversion under this Section 1(c) by delivering at least 20 Trading Days prior
to such Amortization Date a written notice thereof by facsimile and overnight
courier to all, but not less than all, of the holders of Notes and the Transfer
Agent that specifically describes the portion of the Amortization Redemption
Amount for this Note and the Other Notes that will be paid in Common Stock (the
“Amortization Conversion Notice” and
the date all of the holders received such notice is referred to as the “Amortization Conversion Notice Date”). The
Amortization Conversion Notice shall be irrevocable; provided; that if
any of the Conditions to Amortization Conversion is not satisfied on the
applicable Amortization Date or waived by the Holder, the Company will
notwithstanding delivery of the Amortization Conversion Notice be required to
pay the Amortization Redemption Amount in cash. The conversion price applicable
to an Amortization Conversion (the “Amortization Price”) that is being paid in
Common Stock pursuant to this Section 1(c) shall be 90% of the Weighted Average
Price of the Common Stock for the 20 consecutive Trading Days immediately
preceding the Amortization Date. For purposes of this Section 1(c), “Conditions to Amortization Conversion”
means the following conditions:
(i) the Common Stock shall be 

 

2

 

traded on the Principal Market, the NASDAQ Gobal Market or NASDAQ
Capital Market, or the American Stock Exchange on the applicable Amortization
Date, (ii) on the Amortization Date, either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities then outstanding, together with the Common Stock to be issued on
such Amortization Date, in accordance with the terms of the Registration Rights
Agreement or (y) all shares of Common Stock issuable upon conversion of the
Notes shall be eligible for sale without restriction and without the need for
registration under any applicable federal or state securities laws, (iii) an
Authorized Share Failure shall not be in effect on the Amortization Date; and
(iv) any such payment of the Amortization Redemption Amount in Common Stock
shall not consist of more than 20% of the total dollar volume traded in the
Common Stock for the 20 Trading Days prior to the Amortization Date.

 

(2)           INTEREST; INTEREST RATE. Interest on this Note shall
commence accruing on the Issuance Date and shall be computed on the basis of a
365-day year and actual days elapsed and shall be payable in arrears on the
first day of each Calendar Quarter and on the Maturity Date during the period
beginning on the Issuance Date and ending on, and including, the Maturity Date
(each, an “Interest Date”) with
the first Interest Date being April 1, 2007. Interest shall be payable on each
Interest Date at the option of the Company (i) in cash at the rate of 8.00% per
annum (the “Cash Interest Rate”) or
(ii) at the rate of 10.00% per annum (the “Note
Interest Rate”, and referred to sometimes herein as the “Interest Rate”) in the form of an
additional Convertible Subordinated Note in the form of this Note in the
principal amount of such Interest. Prior to the payment of Interest on an
Interest Date, Interest on this Note shall accrue at the Cash Interest Rate and
be payable by way of inclusion of the Interest in the Conversion Amount in
accordance with Section 3(b)(i). From and after the occurrence of an Event of
Default, the Interest Rate shall be increased so that the Cash Interest Rate
shall be twelve percent (12.00%) per annum and the Note Interest Rate per annum
shall be fifteen percent (15%) per annum. In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of
such Event of Default shall continue to apply to the extent relating to the
days after the occurrence of such Event of Default through and including the
date of cure of such Event of Default. Notwithstanding the foregoing, the
Company may not elect to pay interest at the Note Interest Rate and issue
additional Convertible Subordinated Notes in the principal amount of such
Interest unless either (i) the Registration Statement or Registration
Statements required pursuant to the Registration Rights Agreement shall be
effective and available for the sale of all of the then-outstanding Registrable
Securities, together with the Common Stock issuable upon conversion of such
additional Convertible Subordinated Notes in accordance with the terms of the
Registration Rights Agreement or (ii) all shares of Common Stock issuable upon
conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws.

 

(3)           CONVERSION OF NOTES. This Note shall be convertible into shares
of the Company’s common stock, par value $0.001 per share (the “Common Stock”), on the terms and
conditions set forth in this Section 3.

 

3

 

(a)           Conversion Right. Subject to the provisions of Section 3(d),
at any time or times on or after the Issuance Date, the Holder shall be
entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined below) in increments of at least $50,000 of Principal (or such
lesser amount if such amount represents the remaining Principal amount) into
fully paid and nonassessable shares of Common Stock in accordance with Section
3(c), at the Conversion Rate (as defined below). The Company shall not issue
any fraction of a share of Common Stock upon any conversion. If the issuance
would result in the issuance of a fraction of a share of Common Stock, the
Company shall round such fraction of a share of Common Stock up to the nearest
whole share. The Company shall pay any and all taxes that may be payable with
respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount.

 

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

 

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

 

(ii)           “Conversion Price” means, as of any Conversion Date (as
defined below) or other date of determination, and subject to adjustment as
provided herein, $1.55.

 

(c)           Mechanics of Conversion.

 

(i)            Optional Conversion. To convert any Conversion Amount into
shares of  Common Stock on any date (a “Conversion Date”), the Holder shall (A)
transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00
p.m., New York Time, on such date, a copy of an executed notice of conversion
in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required by
Section 3(c)(iii), surrender this Note to a common carrier for delivery to the
Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction). On or before the first Business Day following the date of receipt
of a Conversion Notice, the Company shall transmit by facsimile a confirmation
of receipt of such Conversion Notice to the Holder and the Company’s transfer
agent (the “Transfer Agent”). On
or before the second Business Day following the date of receipt of a Conversion
Notice (the “Share Delivery Date”),
the Company shall (X) credit such aggregate number of shares of Common Stock to
which the Holder shall be entitled to the Holder’s or its designee’s balance
account with Depository Trust Company (“DTC”)
through its Deposit Withdrawal At Custodian system or (Y) if the Transfer Agent
is not participating in DTC Fast Automated Securities 

 

4

 

Transfer Program,
issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled. If this
Note is physically surrendered for conversion as required by Section 3(c)(iii)
and the outstanding Principal of this Note is greater than the Principal portion
of the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than five Business Days after receipt of this
Note and at its own expense, issue and deliver to the holder a new Note (in
accordance with Section 19(d)) representing the outstanding Principal not
converted. The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of this Note shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the Conversion
Date.

 

(ii)           Company’s Failure to Timely Convert. If the Company shall fail to issue
a certificate to the Holder or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon
conversion of any Conversion Amount on or prior to the date which is five
Business Days after the Conversion Date (a “Conversion
Failure”), then (A) the Company shall pay liquidated damages to the
Holder for each day of such Conversion Failure in an amount equal to 1.0% of the product of (I) the sum of the
number of shares of Common Stock not issued to the Holder on or prior to the
Share Delivery Date and to which the Holder is entitled, and (II) the Closing
Sale Price of the Common Stock on the Share Delivery Date and (B) the Holder,
upon written notice to the Company, may void its Conversion Notice with respect
to, and retain or have returned, as the case may be, any portion of this Note
that has not been converted pursuant to such Conversion Notice; provided that
the voiding of a Conversion Notice shall not affect the Company’s obligations
to make any payments which have accrued prior to the date of such notice
pursuant to this Section 3(c)(ii) or otherwise. In addition to the foregoing,
if within three (3) Trading Days after the Company’s receipt of the facsimile
copy of a Conversion Notice the Company shall fail to issue and deliver a
certificate to the Holder or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon such
holder’s conversion of any Conversion Amount, and if on or after such Trading
Day the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by the Holder of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company (a “Buy-In”), then the
Company shall, within five (5) Business Days after the Holder’s request and in
the Holder’s discretion, either (i) pay cash to the Holder in an amount equal
to the Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased
(the “Buy-In Price”), at which
point the Company’s obligation to deliver such certificate (and to issue such
Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver
to the Holder a certificate or certificates representing such Common Stock and
pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In
Price over the product of (A) such number of shares of Common Stock, times (B)
the Closing Bid Price on the Conversion Date.

 

5

 

(iii)          Book-Entry. Notwithstanding anything to the contrary
set forth herein, upon conversion of any portion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically surrender
this Note to the Company unless (A) the full Conversion Amount represented by
this Note is being converted or (B) the Holder has provided the Company with
prior written notice (which notice may be included in a Conversion Notice)
requesting physical surrender and reissue of this Note. The Holder and the
Company shall maintain records showing the Principal and Interest converted and
the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Note upon conversion.

 

(iv)          Pro Rata Conversion; Disputes. In the event that the Company
receives a Conversion Notice from more than one holder of Notes for the same
Conversion Date and the Company can convert some, but not all, of such portions
of the Notes submitted for conversion, the Company, subject to Section 3(d),
shall convert from each holder of Notes electing to have Notes converted on
such date a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. In the event of a dispute as to
the number of shares of Common Stock issuable to the Holder in connection with
a conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 24.

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership. Unless waived by the Holder upon no less
than sixty one (61) days prior written notice to the Company, the Company shall
not effect any conversion of this Note pursuant to Section 3(a) to the extent
that after giving effect to such conversion the Holder (together with the
Holder’s affiliates) would beneficially own in excess of 4.99% of the number of
shares of Common Stock outstanding immediately after giving effect to such
conversion. Even if the Holder waives the limitation set forth in the preceding
sentence, the Company shall in no event effect any conversion of this Note, and
the Holder of this Note shall not have the right to convert any portion of this
Note pursuant to Section 3(a), to the extent that after giving effect to such
conversion, the Holder (together with the Holder’s affiliates) would
beneficially own in excess of 9.99% of the number of shares of Common Stock
outstanding immediately after giving effect to such conversion. For purposes of
the foregoing sentences, the number of shares of Common Stock beneficially
owned by the Holder and its affiliates shall include the number of shares of
Common Stock issuable upon conversion of this Note with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Note beneficially owned by the Holder
or any of its affiliates 

 

6

 

and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities
of the Company (including, without limitation, any Other Notes or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the Holder or any of its affiliates. Except
as set forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended. For purposes of this Section
3(d)(i), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a more
recent public announcement by the Company or (z) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common
Stock outstanding. For any reason at any time, upon the written or oral request
of the Holder, the Company shall within two Business Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding. In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Note, by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported.

 

(ii)           Principal Market Regulation. The Company shall not be obligated
to issue any shares of Common Stock upon conversion of this Note if the
issuance of such shares of Common Stock would exceed that number of shares of
Common Stock that the Company may issue upon conversion of the Notes without
breaching the Company’s obligations under the rules or regulations of the
Principal Market (the “Exchange Cap”),
except that such limitation shall not apply in the event that the Company (A)
obtains the approval of its stockholders as required by the applicable rules of
the Principal Market for issuances of Common Stock in excess of such amount or
(B) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of the Notes representing at least a majority of the principal amounts
of the Notes then outstanding. Until such approval or written opinion is
obtained, no purchaser of the Notes pursuant to the Securities Purchase
Agreement (the “Purchasers”) shall
be issued, upon conversion of Notes, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to such Purchaser
pursuant to the Securities Purchase Agreement on the Issuance Date and the
denominator of which is the aggregate principal amount of all Notes issued to
the Purchasers pursuant to the Securities Purchase Agreement on the Issuance
Date (with respect to each Purchaser, the “Exchange
Cap Allocation”). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser’s Notes, the transferee shall be
allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such transferee.
In the event that any holder of Notes shall convert all of such holder’s Notes
into a number of shares of Common Stock which, in the aggregate, is less than
such holder’s Exchange Cap Allocation, then the difference between such 

 

7

 

holder’s Exchange
Cap Allocation and the number of shares of Common Stock actually issued to such
holder shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of Notes on a pro rata basis in proportion to the aggregate
principal amount of the Notes then held by each such holder.

 

(4)           RIGHTS UPON EVENT OF DEFAULT.

 

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

 

(i)            the Company’s failure to pay to the Holder
any amount of Principal or Interest when and as due under this Note if such
failure continues for a period of at least five Business Days;

 

(ii)           the Company’s failure to pay to the Holder
any amounts other than Principal or Interest when and as due under this Note,
the Securities Purchase Agreement, or the Registration Rights Agreement, which failure
is not cured within five Business Days after notice of such default sent by the
Holder to the Company;

 

(iii)          any default under, redemption of or acceleration
prior to maturity of any Indebtedness (as defined below) of the Company or any
of its Subsidiaries (as defined in the Securities Purchase Agreement) other
than with respect to any Other Notes and the Senior Indebtedness; provided that
in the case of a payment default of such Indebtedness, such default is not
cured within applicable cure periods; further provided that in the case of a
non-payment default of such Indebtedness that has not resulted in an
acceleration or redemption of such Indebtedness prior to its maturity, only
upon acceleration or redemption of such Indebtedness;

 

(iv)          the Company shall fail to observe or perform
any other material covenant or agreement contained in the Securities Purchase
Agreement, which failure is not cured within ten Business Days after notice of
such default sent by the Holder to the Company;

 

(v)           the Company or any of its Subsidiaries,
pursuant to or within the meaning of Title 11, U.S. Code, or any similar
Federal or state law for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”),  or (D) makes a general assignment for the
benefit of its creditors;

 

(vi)          a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that (A) is for relief against the
Company or any of its Subsidiaries in an involuntary case that remains
undismissed for a period of 90 days, (B) appoints a Custodian of the Company or
any of its Subsidiaries that remains undischarged or unstayed for a period of
90 days, or (C) orders the liquidation of the Company or any of its
Subsidiaries;

 

8

 

(vii)         a final judgment or judgments for the payment
of money aggregating in excess of $500,000 are rendered against the Company or
any of its Subsidiaries and which judgments are not, within 60 days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within 60 days after the expiration of such stay; provided, however,
that any judgment which is covered by insurance or an indemnity from a credit
worthy party shall not be included in calculating the $500,000 amount set forth
above;

 

(viii)        any breach or failure to comply with Section
15 of this Note; or

 

(ix)           any Event of Default (as defined in the Other
Notes) occurs with respect to any Other Notes.

 

(b)           Redemption Right. Promptly after the occurrence of an Event
of Default with respect to this Note or any Other Note, the Company shall
deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At
any time after the earlier of the Holder’s receipt of an Event of Default
Notice and the Holder becoming aware of an Event of Default, the Holder may
require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the “Event of Default
Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem. Each portion of this Note subject to redemption by the
Company pursuant to this Section 4(b) shall be redeemed by the Company at a
price equal to the greater of (i) the Conversion Amount to be redeemed and (ii)
the product of (A) the Conversion Rate with respect to such Conversion Amount
in effect at such time as the Holder delivers an Event of Default Redemption Notice
and (B) the Closing Sale Price of the Common Stock on the date immediately
preceding such Event of Default (the “Event
of Default Redemption Price”). Redemptions required by this Section
4(b) shall be made in accordance with the provisions of Section 12.

 

(5)           RIGHTS UPON CHANGE OF CONTROL.

 

(a)           Change of Control. Each of the following events shall
constitute a “Change of Control”:

 

(i)            the consolidation, merger or other business
combination (including, without limitation, a reorganization or recapitalization)
of the Company with or into another Person (other than (A) a consolidation,
merger or other business combination (including, without limitation,
reorganization or recapitalization) in which holders of the Company’s voting
power immediately prior to the transaction continue after the transaction to
hold, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or entities,
or (B) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Company);

 

9

 

(ii)           the sale or transfer of all or substantially
all of the Company’s assets; or

 

(iii)          a purchase, tender or exchange offer made to
and accepted by the holders of more than the 50% of the outstanding shares of
Common Stock.

 

No sooner than 15 days nor
later than 10 days prior to the consummation of a Change of Control, but not
prior to the public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile and overnight courier to the
Holder (a “Change of Control Notice”).

 

(b)           Assumption. Prior to the consummation of any Change of
Control, the Company will secure from any Person purchasing the Company’s
assets or Common Stock or any successor resulting from such Change of Control
(in each case, an “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then outstanding) to deliver to each holder of Notes in exchange for such
Notes, a security of the Acquiring Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder, and
satisfactory to the holders of Notes representing at least a majority of the
principal amount of the Notes then outstanding. In the event that an Acquiring
Entity is directly or indirectly controlled by a company or entity whose common
stock or similar equity interest is listed, designated or quoted on a
securities exchange or trading market, the holders of Notes representing at
least a majority of the aggregate principal amount of the Notes then
outstanding may elect to treat such Person as the Acquiring Entity for purposes
of this Section 5(b).

 

(c)           Redemption Right. At any time during the period beginning
after the Holder’s receipt of a Change of Control Notice and ending on the date
of the consummation of such Change of Control (or, in the event a Change of
Control Notice is not delivered at least 10 days prior to a Change of Control,
at any time on or after the date which is 10 days prior to a Change of Control
and ending ten days after the consummation of such Change of Control), the
Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (“Change of
Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing
to redeem; provided, however, that the Company shall not be under any
obligation to redeem all or any portion of this Note or to deliver the
applicable Change of Control Redemption Price unless and until the applicable
Change of Control is consummated. The portion of this Note subject to
redemption pursuant to this Section 5 shall be redeemed by the Company in cash
at a price equal to the greater of (i) the sum of (x) the product of (A) the
Applicable Percentage (as defined below) and (B) the Conversion Amount being
redeemed and (y) the amount of any accrued but unpaid Interest on such
Conversion Amount being redeemed through the date of such redemption payment
and (ii) the product of (x) the Applicable Percentage and (y) the sum of (1)
the product of (A) the Conversion Amount being redeemed multiplied by (B) the 

 

10

 

quotient determined by dividing (I) the aggregate cash consideration
and the aggregate cash value of any non-cash consideration per Common Share to
be paid to the holders of the Common Shares upon consummation of the Change of
Control (any such non-cash consideration in the form of securities to be valued
at the higher of the Closing Sale Price of such securities as of the Trading
Day immediately prior to the consummation of such Change of Control, the
Closing Sale Price on the Trading Day immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price on
the Trading Day immediately prior to the public announcement of such proposed
Change of Control) by (II) the Conversion Price plus (2) the amount of any
accrued but unpaid Interest on such Conversion Amount being redeemed through
the date of such redemption payment, (the “Change
of Control Redemption Price”). Redemptions required by this Section
5(c) shall be made in accordance with the provisions of Section 12 and shall
have priority to payments to stockholders in connection with a Change of
Control. For purposes of this Note, the term “Applicable
Percentage” means 120% if the Change of Control is consummated on or
before the first (1st) anniversary of the Issuance Date, 115% if the
Change of Control is consummated after the first (1st) anniversary
of the Issuance Date but on or before the second (2nd) anniversary
of the Issuance Date, and 110% if the Change of Control is consummated at any
time after the second (2nd) anniversary of the Issuance Date.

 

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

 

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

 

(b)           Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for Common Stock (a “Corporate
Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon a conversion of this
Note, (i) in addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder would have been
entitled with respect to such shares of Common Stock had such shares of Common
Stock been held by the Holder upon the consummation of such Corporate Event or
(ii) in lieu of the shares of Common Stock otherwise receivable upon such 

 

11

 

conversion, such securities
or other assets received by the holders of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion
rights for the form of such consideration (as opposed to shares of Common
Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in
a form and substance satisfactory to the holders of Notes representing at least
a majority of the aggregate principal amount of the Notes then outstanding.

 

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

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

 

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

 

(ii)           Issuance of Convertible Securities. If the Company in any manner issues
or sells any Convertible Securities and the lowest price per share for which
one share of Common Stock is issuable upon such conversion or exchange or
exercise thereof is less than the 

 

12

 

Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the issuance of sale of such
Convertible Securities for such price per share. For the purposes of this
Section 7(a)(ii), the “price per share for which one share of Common Stock is
issuable upon such conversion or exchange or exercise” shall be equal to the
sum of the lowest amounts of consideration (if any) received or receivable by
the Company with respect to any one share of Common Stock upon the issuance or
sale of the Convertible Security and upon the conversion or exchange or
exercise of such Convertible Security. No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Conversion Price had been or are to be made
pursuant to other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale. Notwithstanding
anything in this Note to the contrary, in the event that the Company agrees to
decrease the conversion price of any of its 7% Convertible Secured Promissory
Notes due August 2007 in connection with an agreement by the holder of any such
notes to convert the same, such decrease in the conversion price will not
result in any adjustment to the Conversion Price pursuant to this Section 7(a)
of this Note.

 

(iii)          Change in Option Price or Rate of Conversion.
If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion, 
exchange or exercise of any Convertible Securities, or the rate at which
any Convertible Securities are convertible into or exchangeable or exercisable
for Common Stock changes at any time, the Conversion Price in effect at the
time of such change shall be adjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold.

 

(iv)          Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the Company will be
the fair value of such consideration, except where such consideration consists
of securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of
receipt. If any Common Stock, Options or Convertible Securities are issued to
the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity, the amount of 

 

13

 

consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the holders of Notes representing at least a majority of the
principal amounts of the Notes then outstanding. If such parties are unable to
reach agreement within ten days after the occurrence of an event requiring
valuation (the “Valuation Event”),
the fair value of such consideration will be determined within five Business Days
after the tenth day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the holders of Notes representing
at least a majority of the principal amounts of the Notes then outstanding. The
determination of such appraiser shall be deemed binding upon all parties absent
manifest error and the fees and expenses of such appraiser shall be borne
equally by the Company, on the hand, and the holders of the Notes, on the other
hand.

 

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

 

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

 

(c)           Other Events. If any event occurs of the type
contemplated by the provisions of this Section 7 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company’s Board of Directors will make an appropriate adjustment in
the Conversion Price so as to protect the rights of the Holder under this Note;
provided that no such adjustment will increase the Conversion Price as
otherwise determined pursuant to this Section 7.

 

(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION.    (a) Mandatory Conversion. If at any
time from and after the Issuance Date, the Weighted Average Price of the Common
Stock exceeds 250% of the Conversion Price as of the Issuance Date 

 

14

 

(subject to appropriate adjustments for stock splits, stock dividends,
stock combinations and other similar transactions after the Issuance Date) for
each of any 20 consecutive Trading Days (the “Mandatory
Conversion Measuring Period”) and the Conditions to Mandatory
Conversion (as set forth in Section 9(c)) are satisfied or waived in writing by
the Holder, the Company shall have the right to require the Holder to convert
all or any such portion of the Conversion Amount of this Note designated in the
Mandatory Conversion Notice into fully paid, validly issued and nonassessable
shares of Common Stock in accordance with Section 3(c) hereof at the Conversion
Rate as of the Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The Company may
exercise its right to require conversion under this Section 9(a) by delivering
within not more than five Trading Days following the end of such Mandatory
Conversion Measuring Period a written notice thereof by facsimile and overnight
courier to all, but not less than all, of the holders of Notes and the Transfer
Agent (the “Mandatory Conversion Notice”
and the date all of the holders received such notice is referred to as the “Mandatory Conversion Notice Date”). The
Mandatory Conversion Notice shall be irrevocable.

 

(b)           Pro Rata Conversion Requirement. If the Company elects to cause a
conversion of all or any portion of the Conversion Amount of this Note pursuant
to Section 9(a), then it must simultaneously take the same action with respect
to the Other Notes (except that the Company is not required to take the same
action with respect to the Other Notes to the extent limited by Section 3(d) in
this Note or similar provisions under the Other Notes). If the Company elects
to cause the conversion of this Note pursuant to Section 9(a) (or similar
provisions under the Other Notes) with respect to less than all of the
Conversion Amounts of the Notes then outstanding, then the Company shall
require conversion of a Conversion Amount from each of the holders of the Notes
equal to the product of (I) the aggregate Conversion Amount of Notes which the
Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Notes purchased by such holder pursuant to
the Securities Purchase Agreement and the denominator of which is the sum of
the aggregate principal amount of the Notes and purchased by all holders
pursuant to the Securities Purchase Agreement (except to the extent limited by
Section 3(d) in this Note or similar provisions under the Other Notes) (such
fraction with respect to each holder is referred to as its “Allocation Percentage,” and such amount
with respect to each holder is referred to as its “Pro Rata Conversion Amount”). In the event that the initial
holder of any Notes shall sell or otherwise transfer any of such holder’s
Notes, the transferee shall be allocated a pro rata portion of such holder’s
Allocation Percentage. The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section
9(a), which Trading Day shall be at least 10 Business Days but not more than 60
Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the
aggregate Conversion Amount of the Notes which the Company has elected to be
subject to mandatory conversion from all of the holders of the Notes pursuant
to this Section 9 (and analogous provisions under the Other Notes), (iii) each
holder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes the
Company has elected to cause to be converted pursuant to this Section 9 (and
analogous provisions under the Other Notes) and (iv) the number of shares of
Common Stock to be issued to such Holder as of the 

 

15

 

Mandatory Conversion Date. All Conversion Amounts converted by the
Holder after the Mandatory Conversion Notice Date shall reduce the Conversion
Amount of this Note required to be converted on the Mandatory Conversion Date. If
the Company has elected a Mandatory Conversion, the mechanics of conversion set
forth in Section 3(c) shall apply, to the extent applicable, as if the Company
and the Transfer Agent had received from the Holder on the Mandatory Conversion
Date a Conversion Notice with respect to the Conversion Amount being converted
pursuant to the Mandatory Conversion.

 

(c)           Conditions to Mandatory Conversion. For purposes of this Section 9, “Conditions to Mandatory Conversion” means the following conditions: (i) during the
period beginning on the date that is six months prior to the Mandatory
Conversion Date and ending on and including the Mandatory Conversion Date, the
Company shall have delivered shares of Common Stock upon any conversion of
Conversion Amounts as set forth in Section 3(c)(i); (ii) on each day during the
period beginning on the first Trading Day of the Mandatory Conversion Measuring
Period and ending on and including the Mandatory Conversion Date, the Common
Stock shall be traded on the Principal Market, the NASDAQ Global Market or
Global Select Market, the NASDAQ Capital Market, the New York Stock Exchange,
or the American Stock Exchange; (iii) on the Mandatory Conversion Date either
(x) the Registration Statement or Registration Statements required pursuant to
the Registration Rights Agreement shall be effective and available for the sale
for all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state securities
laws; (iv) on the Mandatory Conversion Date, an Authorized Share Failure shall
not be in effect; and (v) any such payment of the Conversion Amount in Common
Stock shall not consist of more than 20% of the total dollar volume traded in
the Common Stock for the 20 Trading Days prior to the Mandatory Conversion Date.

 

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

 

(11)         RESERVATION OF AUTHORIZED SHARES.

 

(a)           Reservation. The Company shall initially reserve out of
its authorized and unissued Common Stock a number of shares of Common Stock for
each of the Notes equal to 100% of the Conversion Rate with respect to the
Conversion Amount of each such Note as of the Issuance Date. Thereafter, the
Company, so long as any of the Notes are outstanding, shall use commercially
reasonable efforts to reserve and keep available out of its authorized and
unissued Common Stock, solely for the purpose of effecting the conversion of
the Notes, 100% of the number of shares of Common Stock as shall from time to
time be necessary 

 

16

 

to effect the conversion of all of the Notes then outstanding (without
regard to any limitations on conversions) (the “Required Reserve Amount”). The number of shares of Common
Stock reserved for conversions of the Notes shall be allocated pro rata among
the holders of the Notes based on the principal amount of the Notes held by
each holder at the time of Issuance Date or increase in the number of reserved
shares, as the case may be (the “Authorized
Share Allocation”). In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation. Any
shares of Common Stock reserved and allocated to any Person which ceases to
hold any Notes shall be allocated to the remaining holders of Notes, pro rata
based on the principal amount of the Notes then held by such holders.

 

(b)           Insufficient Authorized Shares. If at any time while any of the
Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Notes at least a number of shares
of Common Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the
Company shall as soon as practicable use commercially reasonable efforts to
increase the Company’s authorized shares of Common Stock to an amount
sufficient to allow the Company to reserve the Required Reserve Amount for the
Notes then outstanding.

 

(12)         HOLDER’S REDEMPTIONS.

 

(a)           Mechanics. In the event that the Holder has sent an
Event of Default Redemption Notice or a Change of Control Redemption Notice to
the Company pursuant to Section 4(b) or Section 5(c), respectively (each, a “Redemption Notice”), the Holder shall
promptly submit this Note to the Company. If the Holder has submitted an Event
of Default Redemption Notice in accordance with Section 4(b), the Company shall
deliver the applicable Event of Default Redemption Price to the Holder within
five Business Days after the Company’s receipt of the Holder’s Event of Default
Redemption Notice. If the Holder has submitted a Change of Control Redemption
Notice in accordance with Section 5(c), the Company shall deliver the
applicable Change of Control Redemption Price to the Holder concurrently with
the consummation of such Change of Control if such notice is received prior to
the consummation of such Change of Control and within five Business Days after
the Company’s receipt of such notice if such notice is received after the
consummation of such Change of Control. With respect to an Amortization
Redemption, the Company shall deliver the applicable Amortization Redemption Amount
to the Holder within five Business Days after the end of the applicable month
for such Amortization Redemption. In the event of a redemption of less than all
of the Conversion Amount of this Note, the Company shall promptly cause to be
issued and delivered to the Holder, at the Holder’s request, a new Note (in
accordance with Section 19(d)) representing the outstanding Principal which has
not been redeemed. In the event that the Company does not pay the Event of
Default Redemption Price, the Change of Control Redemption Price, or the Amortization
Redemption Amount (each, the “Redemption
Price”), as applicable, to the Holder (or deliver any Common Stock
to be issued pursuant to a Redemption Notice) within the time period required,
at any time thereafter and until the Company pays such 

 

17

 

unpaid Redemption Price (and issues any Common Stock required pursuant
to a Redemption Notice) in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Note representing the Conversion Amount that was submitted for
redemption and for which the applicable Redemption Price (or any Common Stock
required to be issued pursuant to a Redemption Notice) has not been paid. Upon the
Company’s receipt of such notice, (x) the Redemption Notice shall be null and
void with respect to such Conversion Amount, (y) the Company shall immediately
return this Note, or issue a new Note (in accordance with Section 19(d)) to the
Holder representing such Conversion Amount and (z) the Conversion Price of this
Note or such new Notes shall be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the Redemption Notice is voided and (B)
the Closing Bid Price on the date on which the Redemption Notice is voided.

 

(b)           Redemption by Other Holders. Upon the Company’s receipt of
notice from any of the holders of the Other Notes for redemption or repayment
as a result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) or Section 5(c) (each, an “Other Redemption Notice”), the Company
shall immediately forward to the Holder by facsimile a copy of such notice. If
the Company receives a Redemption Notice and one or more Other Redemption
Notices during the seven Business Day period beginning on and including the
date which is three Business Days prior to the Company’s receipt of the Holder’s
Redemption Notice and ending on and including the date which is three Business
Days after the Company’s receipt of the Holder’s Redemption Notice and the
Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven Business Day period, then the Company shall redeem a pro rata
amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company during
such seven Business Day period.

 

(13)         SUBORDINATION TO SENIOR INDEBTEDNESS.

 

(a)           General. The Company and the Holder covenant and
agree that this Note shall be subject to the provisions of this Section 13 and
to the extent and in the manner set forth in this Section 13, the indebtedness
represented by this Note and the payment of Principal, Interest, the Redemption
Price, and any redemption amount, liquidated damages, fees, expenses, or any
other amounts in respect of this Note are hereby expressly made subordinate and
junior and subject in right of payment to the prior payment in full in cash of
all Senior Indebtedness of the Company now outstanding or hereinafter incurred.

 

(b)           No Payment if Senior Notes are Outstanding or
if Default in other Senior Indebtedness.

 

(i)            No cash payment on account of Principal or
Redemption Price of, or Interest on, this Note or any other payment payable
with respect to this Note shall be made, and no portion of this Note shall be
redeemed or purchased directly or indirectly by the 

 

18

 

Company, unless and
until the Senior Notes have been satisfied in full (whether the Senior Notes
have been satisfied through cash payment or conversion); provided, however,
that nothing in this paragraph shall limit the redemption of this Note with
shares of Common Stock pursuant to Section 1(c) of this Note or the conversion
of this Note by the Holder in accordance with the terms hereof.

 

(ii)           In addition to the preceding clause (i), no
cash payment on account of Principal or Redemption Price of, or Interest on, this
Note or any other payment payable with respect to this Note shall be made, and
no portion of this Note shall be redeemed or purchased directly or indirectly
by the Company, if at the time of such payment or purchase or immediately after
giving effect thereto, (A) a default in the payment of principal, premium, if
any, interest or other obligations in respect of any Senior Indebtedness, other
than the Senior Notes, having either an outstanding principal balance or a
commitment to lend greater than $500,000 (“Designated Senior Debt”)
occurs and is continuing (or, in the case of Senior Indebtedness for which
there is a period of grace, in the event of such a default that continues beyond
the period of grace, if any, specified in the instrument evidencing such Senior
Indebtedness) (a “Payment Default”),
unless and until such Payment Default shall have been cured or waived or shall
have ceased to exist or (B) the Company shall have received notice (a “Payment Blockage Notice”) from the holder or holders of
Designated Senior Debt that there exists under such Designated Senior Debt a
default, which shall not have been cured or waived, permitting the holder or
holders thereof to declare such Designated Senior Debt due and payable, but
only for the period (the “Payment Blockage Period”)
commencing on the date of receipt of the Payment Blockage Notice and ending on
the earlier of (a) the date such default shall have been cured or waived, or (b)
the 180th day immediately following the Company’s receipt of such Payment
Blockage Notice. The Company shall resume payments on and distributions in
respect of this Note, including any past scheduled payments of the principal of
(and premium, if any) and interest on this Note to which the Holder would have
been entitled but for the provisions of this Section 13(b)(ii) in the case of a
Payment Default, within five (5) Business Days of the date upon which such
Payment Default is cured or waived or ceases to exist (and if payment is made
within such time period, any Event of Default with respect to such nonpayment
shall be cured). In addition, notwithstanding clauses (A) and (B) of this
subsection (ii), unless the holders of Designated Senior Debt shall have accelerated
the maturity of such Designated Senior Debt or there is a Payment Default, the
Company shall resume payments on this Note within (5) Business Days after the
end of each Payment Blockage Period. In any consecutive 365-day period, there
shall be (i) no more than three Payment Blockage Notices given in the aggregate
on this Note and the Other Notes, irrespective of the number of defaults with
respect to Designated Senior Debt during such period, and (ii) at least 90 days
during which no Payment Blockage Period shall be in effect.

 

(c)           Payment upon Dissolution, Etc. In the event of any bankruptcy,
insolvency, reorganization, receivership, composition, assignment for benefit
of creditors or other similar proceeding initiated by or against the Company or
any dissolution or winding up or 

 

19

 

total or partial liquidation or reorganization of the Company (being
hereinafter referred to as a “Proceeding”),
the Holder agrees that such Holder shall, upon request of a holder of Senior
Indebtedness, and at such holder of Senior Indebtedness’ own expense, take all
reasonable actions (including but not limited to the execution and filing of
documents and the giving of testimony in any Proceeding, whether or not such
testimony could have been compelled by process) necessary to prove the full
amount of all its claims in any Proceeding, and the Holder shall not waive any
claim in any Proceeding without the written consent of such holder. If the
Holder does not file a proper proof of claim or proof of debt in the form
required in any Proceeding at least thirty (30) days before the expiration of
the time to file such claim, the holders of any Senior Indebtedness are hereby
authorized to file an appropriate claim for and on behalf of the Holder.

 

The Holder shall retain the
right to vote and otherwise act with respect to the claims under this Note
(including, without limitation, the right to vote to accept or reject any plan
of partial or complete liquidation, reorganization, arrangement, composition or
extension); provided that the Holder shall
not vote with respect to any such plan or take any other action in any way so
as to (i) contest the validity of any Senior Indebtedness or any collateral
therefor or guaranties thereof, (ii) contest the relative rights and duties of
any of the lenders under the Senior Indebtedness established in any instruments
or agreement creating or evidencing the Senior Indebtedness with respect to any
of such collateral or guaranties, or (iii) contest the Holders’ obligations and
agreements set forth in this Section 13.

 

Upon payment or distribution
to creditors in a Proceeding of assets of the Company of any kind or character,
whether in cash, property or securities, all principal and interest due upon
any Senior Indebtedness shall first be paid in full before the Holder shall be
entitled to receive or, if received, to retain any payment or distribution on
account of this Note, and upon any such Proceeding, any payment or distribution
of assets of the Company of any kind or character, whether in cash, property or
securities, to which the Holder would be entitled except for the provisions of
this Section 13 shall be paid by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, or by the Holder who shall have received such payment or
distribution, directly to the holders of the Senior Indebtedness (pro rata to
each such holder on the basis of the respective amounts of such Senior
Indebtedness held by such holder) or their representatives to the extent
necessary to pay all such Senior Indebtedness in full after giving effect to
any concurrent payment or distribution to or for the holders of such Senior
Indebtedness, before any payment or distribution is made to the Holder or any
holders of the Notes.

 

(d)           Payments on Notes. Subject to Sections 13(b) and 13(c), the
Company may make regularly scheduled payments of the Principal of, or Interest
on, this Note or any other payment payable with respect to this Note, if at the
time of payment, and immediately after giving effect thereto, there exists no
Payment Default or a Payment Blockage Period (whether with respect to any of
the Senior Notes or any other Designated Senior Debt).

 

20

 

(e)           Certain Rights. Nothing contained in this Section 13 or
elsewhere in this Note is intended to or shall impair, as among the Company,
its creditors including the holders of Senior Indebtedness and the Holder, the
right, which is absolute and unconditional, of the Holder to convert this Note
in accordance herewith.

 

(f)            Subrogation. Subject to payment in full in cash of all
Senior Indebtedness, the rights of the Holder shall be subrogated to the rights
of the holders of Senior Indebtedness to receive payments or distributions of
the assets of the Company made on such Senior Indebtedness until all principal
and interest on this Note shall be paid in full in cash; and for purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which the Holder would be
entitled except for the subordination provisions of this Section 13 shall, as
between the Holder and the Company and/or its creditors other than the holders
of the Senior Indebtedness, be deemed to be a payment on account of the Senior
Indebtedness.

 

(g)           Rights of Holders Unimpaired. The provisions of this Section 13
are and are intended solely for the purposes of defining the relative rights of
the Holder and the holders of Senior Indebtedness and nothing in this Section
13 shall impair, as between the Company and the Holder, the obligation of the
Company, which is unconditional and absolute, to pay to the Holder the
principal thereof (and premium, if any) and interest thereon, in accordance
with the terms of this Note.

 

(h)           Holders of Senior Indebtedness. These provisions regarding
subordination will constitute a continuing offer to all Persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness; such provisions are made for the benefit of the holders of Senior
Indebtedness, and such holders are hereby made obligees under such provisions
to the same extent as if they were named therein, and they or any of them may
proceed to enforce such subordination and no amendment or modification of the
provisions contained herein shall diminish the rights of such holders unless
such holders have agreed in writing thereto. The holders of Senior Indebtedness
may, at any time and from time to time, without the consent of or notice to the
Holder, without incurring responsibility to the Holder and without impairing or
releasing the subordination provisions of this Section 13, (i) subject to the
limitations set forth herein, increase the amount of, change the manner, terms
or place of payment of, or renew or alter, any Senior Indebtedness, or
otherwise amend, modify, restate or supplement the same (provided that any such
modified indebtedness continues to be constitute Senior Indebedness within the
meaning of this Agreement and further provided that the principal amount of the
Senior Notes shall not be increased), (ii) sell, exchange or release any
collateral mortgaged, pledged or otherwise securing the Senior Indebtedness,
(iii) release any Person liable in any manner for the Senior Indebtedness and
(iv) exercise or refrain from exercising any rights against the Company or any
other Person.

 

(i)            Proceeds Held in Trust. In the event that notwithstanding
the foregoing, any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (including, without
limitation, by way of setoff or otherwise) prohibited by the provisions hereof
shall be received by the Holder before all Senior 

 

21

 

Indebtedness if paid in full in cash, such payment or distribution
shall be held in trust for the benefit of and shall be paid over or delivered
to the holders of Senior Indebtedness, as their respective interests may
appear, as calculated by the Company, for application to, or to be held as
collateral for, the payment of any Senior Indebtedness remaining unpaid to the
extent necessary to pay all Senior Indebtedness in full in cash after giving
effect to any concurrent payment or distribution to or for the holders of such
Senior Indebtedness.

 

(j)            Blockage of Remedies. During any Payment Default or any Payment
Blockage Period, if an Event of Default has occurred and is continuing under
this Note, the Holder will not commence or join with any creditor of the
Company in asserting or commencing any proceedings to collect or enforce its
rights hereunder or take any action to foreclose or realize upon the
indebtedness hereunder for a period beginning on the date of such Event of
Default and ending on the first to occur of (i) the date that is 180 days
following the date that the holders of the Senior Indebtedness are notified of
such Event of Default or (ii) the date such Payment Default is cured, waived or
ceases to exist or the date such Payment Blockage Period ends, as the case may
be; provided, however, that until all of the Senior Indebtedness
shall have been paid in full in cash, any payments, distributions or proceeds
received by the Holder resulting from the exercise of any action to collect or
enforce any right or remedy available to the Holder shall be subject to the
terms of this Note.

 

(k)           Subsequent Senior Indebtedness Requested
Modifications. In
connection with the incurrence of any future Senior Indebtedness, the Holder
agrees that it shall act reasonably and negotiate in good faith any
modifications to the provisions of this Section 13 reasonably requested by the
holder of such Senior Indebtedness; provided that nothing in this section shall
restrict the holders of Notes representing at least a majority of the aggregate
principal amount of the Notes then outstanding from changing or amending this
Section 13 pursuant to Section 17 hereof.

 

(l)            Failure to Make Payment. In the event that the Company is
prohibited or restricted from making any payment required under under this Note
by reason of the provisions of this Section 13, such prohibition or restriction
shall not preclude the failure to make such payment from being an Event of
Default under Section 4(a) of this Note.

 

(14)         VOTING RIGHTS. The Holder shall have no voting rights as
the holder of this Note, except as required by law, including but not limited
to the Delaware General Corporation Law, and as expressly provided in this
Note.

 

(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

(a)           Rank.      All payments due under this
Note (a) shall rank pari passu
with all Other Notes (“Pari Passu
Indebtedness”), (b) shall be subordinate in right of payment to the
prior payment of all existing and future Senior Indebtedness and (c) shall be
senior to all other Indebtedness of the Company and its Subsidiaries, other
than Senior Indebtedness and Pari Passu Indebtedness.

 

22

 

(b)           Incurrence of Senior
Indebtedness. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness which shall rank senior to the Notes other than Senior
Indebtedness.

 

(c)           Existence of Liens. So
long as this Note is outstanding, the Company shall not, and the Company shall
not permit any of its Subsidiaries to, directly or indirectly, allow or suffer
to exist any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens. As used
herein, “Permitted Liens” means
(i) Liens incurred to secure Senior Indebtedness, (ii) Liens on fixed or
capital assets acquired, constructed or improved by the Company or any
Subsidiary, to the extent of Indebtedness incurred within thirty days for such
acquisition, construction or improvement and incurred within thirty days of
such acquisition, construction or improvement, (iii) purchase money Liens, or
(iv) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and
other similar Liens imposed by law.

 

(d)           Restricted Payments. The
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, redeem, defease, repurchase, repay or make any payments
in respect of, by the payment of cash or cash equivalents (in whole or in part,
whether by way of open market purchases, tender offers, private transactions or
otherwise), all or any portion of any Indebtedness, other than Senior
Indebtedness or Pari Passu Indebtedness, whether by way of payment in respect
of principal of (or premium, if any) or interest on, such Indebtedness if at
the time such payment is due or is otherwise made or, after giving effect to
such payment, an event constituting an Event of Default has occurred and is
continuing.

 

(16)         PARTICIPATION. The Holder, as the holder of this Note,
shall be entitled to such dividends paid and distributions made to the holders
of Common Stock (each, a “Distribution”),
in each such case to the extent of the Distribution as if the Holder had
converted this Note into Common Stock (without regard to any limitations on
conversion herein or elsewhere) and had held such shares of Common Stock on the
record date for such dividends and distributions. Payments (if any) under the
preceding sentence shall be made concurrently with the dividend or distribution
to the holders of Common Stock.

 

(17)         VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting
duly called for such purpose or the written consent without a meeting, of the
holders of Notes representing not less than a majority of the aggregate
principal amount of the then outstanding Notes, shall be required for any
change or amendment to this Note or the Other Notes provided such change or
amendment is consented to by the Company, which such consent may be granted or
withheld in the sole discretion of the Company.

 

23

 

(18)         TRANSFER. This Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement.

 

(19)         REISSUANCE OF THIS NOTE.

 

(a)           Transfer. If this Note is to be transferred, the
Holder shall surrender this Note to the Company, whereupon the Company will
forthwith issue and deliver upon the order of the Holder a new Note (in
accordance with Section 19(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 19(d)) to the Holder representing the outstanding Principal not
being transferred. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
and this Section 19(a), following conversion or redemption of any portion of
this Note, the outstanding Principal represented by this Note may be less than
the Principal stated on the face of this Note.

 

(b)           Lost, Stolen or Mutilated Note. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Note, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
and, in the case of mutilation, upon surrender and cancellation of this Note,
the Company shall execute and deliver to the Holder a new Note (in accordance
with Section 19(d)) representing the outstanding Principal.

 

(c)           Note Exchangeable for Different Denominations. This Note is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a
new Note or Notes (in accordance with Section 19(d) and in principal amounts of
at least $100,000) representing in the aggregate the outstanding Principal of
this Note, and each such new Note will represent such portion of such
outstanding Principal as is designated by the Holder at the time of such
surrender.

 

(d)           Issuance of New Notes. Whenever the Company is required to
issue a new Note pursuant to the terms of this Note, such new Note (i) shall be
of like tenor with this Note, (ii) shall represent, as indicated on the face of
such new Note, the Principal remaining outstanding (or in the case of a new
Note being issued pursuant to Section 19(a) or Section 19(c), the Principal
designated by the Holder which, when added to the principal represented by the
other new Notes issued in connection with such issuance, does not exceed the
Principal remaining outstanding under this Note immediately prior to such
issuance of new Notes), (iii) shall have an issuance date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note,
(iv) shall have the same rights and conditions as this Note, and (v) shall
represent accrued Interest on the Principal and Interest of this Note, from the
Issuance Date.

 

24

 

(20)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note, the
Securities Purchase Agreement and the Registration Rights Agreement, at law or
in equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder’s right to pursue actual and
consequential damages for any failure by the Company to comply with the terms
of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

 

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

 

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

 

(23)         FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.

 

(24)         DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Redemption Price or the arithmetic calculation of the
Conversion Rate or the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one Business Day
of receipt of the Conversion Notice or Redemption Notice or other event giving
rise to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation within one
Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one Business Day submit
via facsimile (a) the disputed determination of the Closing Bid Price or the
Closing Sale Price to an independent, reputable investment bank 

 

25

 

selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or the Redemption Price to the
Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices. Whenever notice is required to be given
under this Note, unless otherwise provided herein, such notice shall be given
in accordance with Section 9(f) of the Securities Purchase Agreement. The
Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Note, including in reasonable detail a description of
such action and the reason therefore. Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable
detail, and certifying, the calculation of such adjustment and (ii) at least
twenty  days prior to the date on which
the Company closes its books or takes a record (A) with respect to any dividend
or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Change of Control, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder. Notwithstanding
the foregoing, Section 4(i) of the Securities Purchase Agreement shall apply to
all notices given pursuant to this Note.

 

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

 

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

 

26

 

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

 

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

 

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

 

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

 

(b)           “Bloomberg”
means Bloomberg Financial Markets.

 

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

 

(d)           “Calendar Quarter” means each of: the period beginning
on and including January 1 and ending on and including March 31; the period
beginning on and including April 1 and ending on and including June 30; the
period beginning on and including July 1 and ending on and including September
30; and the period beginning on and including October 1 and ending on and
including December 31.

 

(e)           “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date,
the last closing bid price and last closing trade price, respectively, for such
security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not designate
the closing bid price or the closing trade price, as the case may be, then the
last bid price or last trade price, respectively, of such security prior to
4:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market
is not the principal securities exchange or trading market for such security,
the last closing bid price or last trade price, respectively, of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply,
the last closing bid price or last trade price, respectively, of such security
in the over-the-counter market on the electronic bulletin board for such
security as 

 

27

 

reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case
may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the
Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 24. All such determinations
to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation
period.

 

(f)            “Common
Stock Deemed Outstanding” shall mean, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus (i) the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, plus (ii) the number of
shares of Common Stock issuable upon conversion or exercise of the Senior Notes
and all Convertible Securities outstanding on the Issuance Date, plus (iii) the
number of shares of Common Stock reserved for issuance pursuant to Approved
Stock Plans, but excluding any shares of Common Stock issuable upon conversion
of the Notes or the Other Notes.

 

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

 

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

 

(i)            “Excluded Securities” means any shares of Common Stock
issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon
conversion of the Senior Notes, the Notes, and the Other Notes; (iii) upon
conversion of any Options or Convertible Securities which are outstanding on
the Issuance Date, (iv) pursuant to or in connection with commercial credit
arrangements, equipment lease financings, acquisitions of other assets or
businesses, strategic transactions not primarily for financing purposes, or
similar transactions into which the Company may enter with a non-affiliate.

 

28

 

(j)            “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary course of
business), (C) all reimbursement or payment obligations with respect to letters
of credit, surety bonds and other similar instruments, (D) all obligations
evidenced by notes, bonds, debentures or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to repossession
or sale of such property), (F) all monetary obligations under any leasing or
similar arrangement which, in connection with generally accepted accounting
principles, consistently applied for the periods covered thereby, is classified
as a capital lease, (G) off-balance sheet liabilities retained in connection
with asset securitization programs, synthetic leases, sale and leaseback
transactions or other similar obligations arising with respect to any other
transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheet of such Person and its subsidiaries, and (H) all indebtedness referred to
in clauses (A) through (G) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (I) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (H) above.

 

(k)           “Issuance Date” means January 3, 2007.

 

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

 

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

 

(n)           “Principal
Market” means the OTC Bulletin Board.

 

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

 

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

 

(q)           “Securities Purchase
Agreement” means
that certain securities purchase agreement between the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes and the Warrants.

 

29

 

(r)            “Senior Indebtedness” means the principal of (and premium,
if any), interest on, and all fees and other amounts (including, without
limitation, any reasonable costs, enforcement expenses (including reasonable
legal fees and disbursements, collateral protection expenses and other
reimbursement or indemnity obligations relating thereto)), and all other
obligations of the Company under (i) the agreements or instruments evidencing
the Senior Notes (together with any renewals, refundings, exchanges,
refinancings, or other extensions thereof), (ii) any of the agreements or
instruments evidencing any Indebtedness of the Company and its Subsidiaries
arising after the Issuance Date to an unaffiliated, third-party commercial
lender (together with any renewals, refundings, refinancings or other
extensions thereof) for purposes of purchasing equipment (which debt shall be
secured only by the assets purchased with such financing), and (iii) Indebtedness
secured by up to a maximum of eighty five percent (85%) of the Company’s
accounts receivable and/or up to sixty percent (60%) of the value of the
Company’s inventory. For the avoidance of doubt, Senior Indebtedness shall not
include the debt which is required to be paid by the Company pursuant to
Section 4(i) of the Securities Purchase Agreement.

 

(s)           “Senior Notes” means the Company’s 6% Senior Secured Notes
Due July 29, 2007 and, until required to be paid under Section 4(i) of the
Securities Purchase Agreement, the Company’s 7% Senior Secured Convertible
Notes Due August 2007.

 

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

 

(u)           “Warrants” means the warrants issued under the
Securities Purchase Agreement to the initial holders of the Notes.

 

(v)           “Weighted Average Price” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly announces is the official open
of trading), and ending at 4:00:00 p.m., New York Time (or such other time as
the Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its “Volume at Price” functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of 

 

30

 

trading), and ending at 4:00:00 p.m., New York Time (or such other time
as such market publicly announces is the official close of trading) as reported
by Bloomberg, or, if no dollar volume-weighted average price is reported for
such security by Bloomberg for such hours, the average of the highest closing
bid price and the lowest closing ask price of any of the market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 24. All such
determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.

 

[Signature Page Follows]

 

31

 

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

 

	
   

  	
  LIQUIDMETAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Young Ham

  
	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  
	
   

  	
   

  	
   

  
					

 

 

EXHIBIT I

 

LIQUIDMETAL TECHNOLOGIES, INC.

CONVERSION NOTICE

 

Reference is made to the
Convertible Subordinated Note (the “Note”)
issued to the undersigned by Liquidmetal Technologies, Inc. (the “Company”). In accordance with and pursuant
to the Note, the undersigned hereby elects to convert the Conversion Amount (as
defined in the Note) of the Note indicated below into shares of Common Stock,
par value $0.001 per share (the “Common Stock”),
of the Company as of the date specified below.

 

Date of Conversion:

 

Aggregate Conversion
Amount to be converted:

 

The undersigned  hereby certifies to the Company that the undersigned’s
conversion of the amount set forth above in accordance with Section 3(a) of the
Note will not directly result in the undersigned (together with the undersigned’s
affiliates) beneficially owning in excess of 4.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion,
calculated in accordance with Section 3(d)(i) of the Note; provided that if the
undersigned has previously waived the 4.99% beneficial ownership limitation
upon no less than sixty one (61) days prior written notice, the undersigned
certifies to the Company that the undersigned’s conversion of the amount set
forth above will not directly result in the undersigned (together with the
undersigned’s affiliates) beneficially owning in excess of 9.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion, calculated in accordance with Section 3(d)(i) of the Note.

 

Please confirm the following
information:

 

Conversion Price:

 

Number of shares of Common
Stock to be issued:

 

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

 

Issue to:

 

 

 

Facsimile Number:

 

Authorization:

 

	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  
	
  Dated:

  	
   

  
					

 

Account Number:

(if electronic book entry transfer)

 

Transaction Code
Number:

(if electronic book entry transfer)

 

 

ACKNOWLEDGMENT

 

The Company hereby
acknowledges this Conversion Notice and hereby directs American Stock Transfer
& Trust Co. to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated January 3, 2007 from the
Company.

 

	
   

  	
  LIQUIDMETAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

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