Document:

f8k073108ex4ii_ea3pacificap.htm

    
      
        Exhibit
4.2

      

      SECURITIES
PURCHASE AGREEMENT

       

      

       

      SECURITIES
PURCHASE AGREEMENT (this “Agreement”), dated as of July
31, 2008, by and among Pacificap Entertainment Holdings, Inc., a Nevada
corporation, with headquarters located at 2361 Campus Drive, Suite 101, Irvine,
California 92612 (the “Company”), and each of the
purchasers set forth on the signature pages hereto (the “Buyers”).

       

      WHEREAS:

       

      A. The
Company and the Buyers are executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by the rules and
regulations as promulgated by the United States Securities and Exchange
Commission (the “SEC”)
under the Securities Act of 1933, as amended (the “1933 Act”);

       

      B. Buyers
desire to purchase and the Company desires to issue and sell, upon the terms and
conditions set forth in this Agreement  12% secured convertible notes of
the Company, in the form attached hereto as Exhibit “A”, in the aggregate
principal amount of One Hundred Fifty Thousand Dollars ($150,000) (together with
any note(s) issued in replacement thereof or as a dividend thereon or otherwise
with respect thereto in accordance with the terms thereof, the “Notes”), convertible into
shares of common stock, par value $.001 per share, of the Company (the “Common
Stock”),  upon the terms and subject to the limitations and
conditions set forth in such Notes and warrants, in the form attached hereto as
Exhibit “B”, to purchase
2,400,000,000 shares of Common Stock (the “Warrants”).

       

      C. Each
Buyer wishes to purchase, upon the terms and conditions stated in this
Agreement, such principal amount of Notes and number of Warrants as is set forth
immediately below its name on the signature pages hereto; and

       

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

       

      NOW THEREFORE, the Company and
each of the Buyers severally (and not jointly) hereby agree as
follows:

       

      1. PURCHASE
AND SALE OF NOTES AND WARRANTS .

       

      a. Purchase
of Notes and Warrants.  On the Closing Date (as defined below),
the Company shall issue and sell to each Buyer and each Buyer severally agrees
to purchase from the Company such principal amount of Notes and number of
Warrants as is set forth immediately below such Buyer’s name on the signature
pages hereto.

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

       

       

      b. Form of
Payment.  On the Closing Date (as defined below),  each
Buyer shall pay the purchase price for the Notes  and the Warrants to
be issued and sold to it at the Closing (as defined below) (the “Purchase Price”) by wire
transfer of immediately available funds to the Company, in accordance with the
Company’s written wiring instructions, against delivery of the Notes in the
principal amount equal to the Purchase Price  and number of Warrants
as is set forth immediately below such Buyer’s name on the signature pages
hereto, and  the Company shall deliver such Notes and Warrants duly
executed on behalf of the Company, to such Buyer, against delivery of such
Purchase Price.

       

      c. Closing
Date.  Subject to the satisfaction (or written waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Notes and the Warrants pursuant to this
Agreement (the “Closing
Date”) shall be 12:00 noon, Eastern Standard Time on July 31, 2008, or
such other mutually agreed upon time.  The closing of the transactions
contemplated by this Agreement (the “Closing”) shall occur on the
Closing Date at such location as may be agreed to by the parties.

       

      d.           Subsequent
Closings.  On a
subsequent date to be agreed to by the parties hereto (the “Funding Date”), the Company
shall issue and sell to the Buyers and the Buyers severally agree to purchase
from the Company an aggregate of Forty Thousand Dollars ($40,000) principal
amount of Notes. On the Funding Date, the Buyers will transfer an aggregate of
$40,000 by wire transfer of immediately available funds to the
Company.  In addition, on the Funding Date, the Company shall deliver
to the Buyers a closing certificate in form and substance satisfactory to the
Buyers.  Notwithstanding the foregoing, either the Company or a
majority-in-interest of the Buyers may terminate their obligations under this
Section 1(d) upon thirty (30) days written notice to the other
party.

       

      2. BUYERS’
REPRESENTATIONS AND WARRANTIES.  Each Buyer severally (and not
jointly) represents and warrants to the Company solely as to such Buyer
that:

       

      a. Investment
Purpose.  As of the date hereof, the Buyer is purchasing the
Notes and the shares of Common Stock issuable upon conversion of or otherwise
pursuant to the Notes (including, without limitation, such additional shares of
Common Stock, if any, as are issuable  on account of interest on the Notes,
 as a result of the events described in Sections 1.3 and 1.4(g) of the
Notes and Section 2(c) of the Registration Rights Agreement or  in payment
of the Standard Liquidated Damages Amount (as defined in Section 2(f) below)
pursuant to this Agreement, such shares of Common Stock being collectively
referred to herein as the “Conversion Shares” and the
Warrants and the shares of Common Stock issuable upon exercise thereof (the
“Warrant Shares”) and,
collectively with the Notes, Warrants and Conversion Shares, (the “Securities”) for its own
account and not with a present view towards the public sale or distribution
thereof, except pursuant to sales registered or exempted from registration under
the 1933 Act; provided, however, that by
making the representations herein, the 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 under the 1933 Act.

       

      b. Accredited
Investor Status.  The Buyer is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D (an “Accredited
Investor”).

       

       

      
        
          
          

        

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

       

      d. Information.  The
Buyer and its advisors, if any, have been, and for so long as the Notes and
Warrants  remain outstanding will continue to be, 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 the Buyer or its advisors.  The Buyer and its advisors,
if any, have been, and for so long as the Notes and Warrants  remain
outstanding will continue to be, afforded the opportunity to ask questions of
the Company.  Notwithstanding the foregoing, the Company has not
disclosed to the Buyer any material nonpublic information and will not disclose
such information unless such information is disclosed to the public prior to or
promptly following such disclosure to the Buyer.  Neither such
inquiries nor any other due diligence investigation conducted by Buyer or any of
its advisors or representatives shall modify, amend or affect Buyer’s right to
rely on the Company’s representations and warranties contained in Section 3
below.  The Buyer understands that its investment in the Securities
involves a significant degree of risk.

       

      e. Governmental
Review.  The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed upon or
made any recommendation or endorsement of the Securities.

       

      f. Transfer
or Re-sale.  The Buyer understands that  except as
provided in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless  the Securities are sold pursuant to an effective registration
statement under the 1933 Act,  the Company shall receive an opinion of
counsel that shall be in form, substance and scope customary for opinions of
counsel in comparable transactions to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from such
registration, which opinion shall be accepted by the Company,  the
Securities are sold or transferred to an “affiliate” (as defined in Rule 144
promulgated under the 1933 Act (or a successor rule) (“Rule 144”)) of the Buyer who
agrees to sell or otherwise transfer the Securities only in accordance with this
Section 2(f) and who is an Accredited Investor,  the Securities are sold
pursuant to Rule 144, or  the Securities are sold pursuant to Regulation S
under the 1933 Act (or a successor rule) (“Regulation S”), and the
Company shall receive an opinion of counsel that shall be in form, substance and
scope customary for opinions of counsel in corporate transactions, which opinion
shall be accepted by the Company; (ii) any sale of such Securities made in
reliance on Rule 144 may be made only in accordance with the terms of said Rule
and further, if said Rule is not applicable, any re-sale of such Securities
under circumstances in which the seller (or the person 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) neither the Company nor
any other person is under any obligation to register such Securities under the
1933 Act or any state securities laws or to comply with the terms and conditions
of any exemption thereunder (in each case, other than pursuant to the
Registration Rights Agreement).  

       

       

      
        
          
          

        

        
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        Notwithstanding
the foregoing or anything else contained herein to the contrary, the Securities
may be pledged as collateral in connection with a bona fide margin account
or other lending arrangement.  In the event that the Company does not
accept the opinion of counsel with respect to the transfer of Securities
pursuant to an exemption from registration, such as Rule 144 or Regulation S,
within three (3) business days of delivery of the opinion to the Company, the
Company shall pay to the Buyer liquidated damages of three percent (3%) of the
outstanding amount of the Notes per month plus accrued and unpaid interest on
the Notes, prorated for partial months, in cash or shares at the option of the
Company (“Standard Liquidated
Damages Amount”).

      

       

      g. Legends.  The
Buyer understands that the Notes and the Warrants and, until such time as the
Conversion Shares and Warrant Shares have been registered under the 1933 Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 or Regulation S without any restriction as to the number of
securities as of a particular date that can then be immediately sold, the
Conversion Shares and Warrant Shares may bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the certificates for such Securities):

       

      “The
securities represented by this certificate have not been registered under the
Securities Act of 1933, as amended.  The securities may not be sold,
transferred or assigned in the absence of an effective registration statement
for the securities under said Act, or an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable transactions, that
registration is not required under said Act or unless sold pursuant to Rule 144
or Regulation S under said Act.”

       

      The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by applicable state securities laws, (a)
such Security is registered for sale under an effective registration statement
filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or
Regulation S without any restriction as to the number of securities as of a
particular date that can then be immediately sold, or (b) the Company is
provided with an opinion of counsel, in form, substance and scope customary for
opinions of counsel in comparable transactions, to the effect that a public sale
or transfer of such Security may be made without registration under the 1933
Act, which opinion shall be accepted by the Company so that the sale or transfer
is effected or (c) such holder provides the Company with reasonable assurances
that such Security can be sold pursuant to Rule 144 or Regulation
S.

       

      h. Authorization;
Enforcement. This Agreement and the Registration Rights Agreement have
been duly and validly authorized.  This Agreement has been duly
executed and delivered on behalf of the Buyer, and this Agreement constitutes,
and upon execution and delivery by the Buyer of the Registration Rights
Agreement, such agreement will constitute, valid and binding agreements of the
Buyer enforceable in accordance with their terms.

       

       

      
        
          
          

        

        
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      i. Residency.  The
Buyer is a resident of the jurisdiction set forth immediately below such Buyer’s
name on the signature pages hereto.

       

      3. REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.  The Company represents and
warrants to each Buyer that:

       

      a. Organization
and Qualification.  The Company and each of its Subsidiaries
(as defined below), if any, is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
incorporated, with full power and authority (corporate and other) to own, lease,
use and operate its properties and to carry on its business as and where now
owned, leased, used, operated and conducted.  Schedule 3(a) sets forth a
list of all of the Subsidiaries of the Company and the jurisdiction in which
each is incorporated.  The Company and each of its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership or use of property or the nature of
the business conducted by it makes such qualification necessary, except where
the failure to be so qualified or in good standing would not have a Material
Adverse Effect.  “Material Adverse Effect” means
any material adverse effect on the business, operations, assets, financial
condition or prospects of the Company or its Subsidiaries, if any, taken as a
whole, or on the transactions contemplated hereby or by the agreements or
instruments to be entered into in connection herewith.  “Subsidiaries” means any
corporation or other organization, whether incorporated or unincorporated, in
which the Company owns, directly or indirectly, any equity or other ownership
interest.

       

      b. Authorization;
Enforcement.  (i) The Company has all requisite corporate power
and authority to enter into and perform this Agreement, the Registration Rights
Agreement, the Notes and the Warrants and to consummate the transactions
contemplated hereby and thereby and to issue the Securities, in accordance with
the terms hereof and thereof, (ii) the execution and delivery of this Agreement,
the Registration Rights Agreement, the Notes and the Warrants by the Company and
the consummation by it of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Notes and the Warrants and
the issuance and reservation for issuance of the Conversion Shares and Warrant
Shares issuable upon conversion or exercise thereof) have been duly authorized
by the Company’s Board of Directors and no further consent or authorization of
the Company, its Board of Directors, or its stockholders is required, (iii) this
Agreement has been duly executed and delivered by the Company by its authorized
representative, and such authorized representative is the true and official
representative with authority to sign this Agreement and the other documents
executed in connection herewith and bind the Company accordingly, and (iv) this
Agreement constitutes, and upon execution and delivery by the Company of the
Registration Rights Agreement, the Notes and the Warrants, each of such
instruments will constitute, a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
terms.

       

      c. Capitalization.  As
of the date hereof, the authorized capital stock of the Company consists of
(i) [              
] shares of Common Stock, of which [] shares are issued and outstanding,
[                  
] shares are reserved for issuance pursuant to the Company’s stock option plans,
[             ]
shares are reserved for issuance pursuant to securities (other than the Notes
and the Warrants) exercisable for, or convertible into or exchangeable for
shares of Common Stock and [] shares are reserved for issuance upon conversion
of the Notes and exercise of the Warrants (subject to adjustment pursuant to the
Company’s covenant set forth in Section 4(h) below); and (ii) no shares of
preferred stock, of which no shares are issued and
outstanding.  

       

       

      
        
          
          

        

        
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        All of
such outstanding shares of capital stock are, or upon issuance will be, 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 stockholders of the Company or any liens or encumbrances
imposed through the actions or failure to act of the Company.  Except
as disclosed in Schedule
3(c), as of the effective date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, puts, calls,
rights of first refusal, agreements, understandings, claims or other commitments
or rights of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for any shares of capital stock of the Company
or any of its Subsidiaries, or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its Subsidiaries, (ii) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of its or their securities under the 1933 Act (except
the Registration Rights Agreement) and (iii) there are no anti-dilution or price
adjustment provisions contained in any security issued by the Company (or in any
agreement providing rights to security holders) that will be triggered by the
issuance of the Notes and the Warrants, or the Conversion Shares or Warrant
Shares.  The Company has furnished to the Buyer true and correct
copies of the Company’s Articles of Incorporation as in effect on the date
hereof (“Articles of
Incorporation”), the Company’s By-laws, as in effect on the date hereof
(the “By-laws”), and the
terms of all securities convertible into or exercisable for Common Stock of the
Company and the material rights of the holders thereof in respect
thereto.  The Company shall provide the Buyer with a written update of
this representation signed by the Company’s Chief Executive or Chief Financial
Officer on behalf of the Company as of the Closing Date.

      

       

      d. Issuance
of Shares.  The Conversion Shares and Warrant Shares are duly
authorized and reserved for issuance and, upon conversion of the Notes and
exercise of the Warrants in accordance with their respective terms, will be
validly issued, fully paid and non-assessable, and free from all taxes, liens,
claims and encumbrances with respect to the issue thereof and shall not be
subject to preemptive rights or other similar rights of stockholders of the
Company and will not impose personal liability upon the holder
thereof.

       

      e. Acknowledgment
of Dilution.  The Company understands and acknowledges the
potentially dilutive effect to the Common Stock upon the issuance of the
Conversion Shares and Warrant Shares upon conversion of the Note and exercise of
the Warrants.  The Company further acknowledges that its obligation to
issue Conversion Shares and Warrant Shares upon conversion of the Notes and
exercise of the Warrants in accordance with this Agreement, the Notes and the
Warrants is absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.

       

      f. No
Conflicts.  The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Notes and the Warrants by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance and reservation
for issuance of the Conversion Shares and Warrant Shares) will not (i) conflict
with or result in a violation of any provision of the Articles of Incorporation
or By-laws or 

       

       

      
        
          
          

        

        
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        (ii)
violate or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both
could become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent,
patent license or instrument to which the Company or any of its Subsidiaries is
a party, or (iii)  result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations and regulations of any self-regulatory organizations to which the
Company or its securities are subject) 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 for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse
Effect).  Neither the Company nor any of its Subsidiaries is in
violation of its Articles of Incorporation, By-laws or other organizational
documents and neither the Company nor any of its Subsidiaries is in default (and
no event has occurred which with notice or lapse of time or both could put the
Company or any of its Subsidiaries in default) under, and neither the Company
nor any of its Subsidiaries has taken any action or failed to take any action
that would give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party or by which any property or assets of the
Company or any of its Subsidiaries is bound or affected, except for possible
defaults as would not, individually or in the aggregate, have a Material Adverse
Effect. The businesses of the Company and its Subsidiaries, if any, are not
being conducted, and shall not be conducted so long as a Buyer owns any of the
Securities, in violation of any law, ordinance or regulation of any governmental
entity.  Except as specifically contemplated by this Agreement and as
required under the 1933 Act and any applicable state securities laws, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency, regulatory
agency, self regulatory organization or stock market or any third party in order
for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement and the Notes or the Warrants in
accordance with the terms hereof or thereof or to issue and sell the Notes and
Warrants in accordance with the terms hereof and to issue the Conversion Shares
upon conversion of the Notes and Warrant Shares upon the exercise of the
Warrants. Except as disclosed in Schedule 3(f), 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 date hereof.  The Company is not in violation of the
listing requirements of the Over-the-Counter Bulletin Board (the “OTCBB”) and does not
reasonably anticipate that the Common Stock will be delisted by the OTCBB in the
foreseeable future.  The Company and its Subsidiaries are unaware of
any facts or circumstances which might give rise to any of the
foregoing.

      

       

      g. SEC
Documents; Financial Statements.  Except as disclosed in Schedule 3(g), the Company has
timely 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 Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents (other than exhibits to
such documents) incorporated by reference therein, being hereinafter referred to
herein as the “SEC
Documents”).  

       

       

       

      
        
          
          

        

        
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        The
Company has delivered to each Buyer true and complete copies of the SEC
Documents, except for such exhibits and incorporated documents.  As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and 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 light of
the circumstances under which they were made, not misleading.  None of
the statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings prior the date hereof).  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 United States 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 not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit
adjustments).  Except as set forth in the financial statements of the
Company included in the SEC Documents, the Company has no liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to December 31, 2006 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in such
financial statements, which, individually or in the aggregate, are not material
to the financial condition or operating results of the
Company.

      

       

      h. Absence
of Certain Changes.  Since December 31, 2006, there has been no
material adverse change and no material adverse development in the assets,
liabilities, business, properties, operations, financial condition, results of
operations or prospects of the Company or any of its Subsidiaries.

       

      i. Absence
of Litigation.  There is no action, suit, claim, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its Subsidiaries, threatened against or affecting the Company
or any of its Subsidiaries, or their officers or directors in their capacity as
such, that could have a Material Adverse Effect.  Schedule 3(i) contains a
complete list and summary description of any pending or threatened proceeding
against or affecting the Company or any of its Subsidiaries, without regard to
whether it would have a Material Adverse Effect.  The Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.

       

      j. Patents,
Copyrights, etc.  The Company and each of its Subsidiaries owns
or possesses the requisite licenses or rights to use all patents, patent
applications, patent rights, inventions, know-how, trade secrets, trademarks,
trademark applications, service marks, service names, trade names and copyrights
(“Intellectual
Property”) necessary to enable it to conduct its business as now operated
(and, except as set forth in Schedule 3(j) hereof, to the
best of the Company’s knowledge, as presently contemplated to be operated in the
future); there is no claim or action by any person pertaining to, or proceeding
pending, or to the Company’s knowledge threatened, which challenges the right of
the Company or of a Subsidiary with respect to any Intellectual Property
necessary to enable it to conduct its business as now operated (and, except as
set forth in Schedule
3(j) hereof, to the best of the Company’s knowledge, as presently

       

       

      
        
          
          

        

        
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        contemplated
to be operated in the future); to the best of the Company’s knowledge, the
Company’s or its Subsidiaries’ current and intended products, services and
processes do not infringe on any Intellectual Property or other rights held by
any person; and the Company is unaware of any facts or circumstances which might
give rise to any of the foregoing.  The Company and each of its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of their Intellectual Property.

      

       

      k. No
Materially Adverse Contracts, Etc.  Neither the Company nor any
of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company’s officers has or is expected in the future to have a
Material Adverse Effect.  Neither the Company nor any of its
Subsidiaries is a party to any contract or agreement which in the judgment of
the Company’s officers has or is expected to have a Material Adverse
Effect.

       

      l. Tax
Status.  Except as set forth on Schedule 3(l), the Company and
each of its Subsidiaries has made or filed all federal, state and foreign income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books provisions reasonably adequate
for the payment of all unpaid and unreported taxes) and has paid all taxes and
other governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions
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, and the officers of the Company know of no basis
for any such claim.  The Company has not executed a waiver with
respect to the statute of limitations relating to the assessment or collection
of any foreign, federal, state or local tax.  Except as set forth on
Schedule 3(l), none of
the Company’s tax returns is presently being audited by any taxing
authority.

       

      m. Certain
Transactions.  Except as set forth on Schedule 3(m) and except for
arm’s length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.

       

       

      
        
          
          

        

        
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      n. Disclosure.  All
information relating to or concerning the Company or any of its Subsidiaries set
forth in this Agreement and provided to the Buyers pursuant to Section 2(d)
hereof and otherwise in connection with the transactions contemplated hereby is
true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading.  No event or circumstance has occurred or exists with
respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed
(assuming for this purpose that the Company’s reports filed under the 1934 Act
are being incorporated into an effective registration statement filed by the
Company under the 1933 Act).

       

      o. Acknowledgment
Regarding Buyers’ Purchase of Securities.  The Company
acknowledges and agrees that the Buyers are acting solely in the capacity of
arm’s length purchasers with respect to this Agreement and the transactions
contemplated hereby.  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 this Agreement and the transactions contemplated
hereby and any statement made by any Buyer or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is not advice or a recommendation and is merely incidental
to the Buyers’ purchase of the Securities.  The Company further
represents to each Buyer that the Company’s decision to enter into this
Agreement has been based solely on the independent evaluation of the Company and
its representatives.

       

      p. No
Integrated Offering.  Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Buyers.  The
issuance of the Securities to the Buyers will not be integrated with any other
issuance of the Company’s securities (past, current or future) for purposes of
any shareholder approval provisions applicable to the Company or its
securities.

       

      q. No
Brokers.  The Company has taken no action which would give rise
to any claim by any person for brokerage commissions, transaction fees or
similar payments relating to this Agreement or the transactions contemplated
hereby.

       

      r. Permits;
Compliance.  The Company and each of its Subsidiaries is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the “Company Permits”), and there
is no action pending or, to the knowledge of the Company, threatened regarding
suspension or cancellation of any of the Company Permits.  Neither the
Company nor any of its Subsidiaries is in conflict with, or in default or
violation of, any of the Company Permits, except for any such conflicts,
defaults or violations which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.  Since
December 31, 2006, neither the Company nor any of its Subsidiaries has received
any notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.

       

       

      
        
          
          

        

        
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      s. Environmental
Matters.

       

      (i) Except as
set forth in Schedule
3(s), there are, to the Company’s knowledge, with respect to the Company
or any of its Subsidiaries or any predecessor of the Company, no past or present
violations of Environmental Laws (as defined below), releases of any material
into the environment, actions, activities, circumstances, conditions, events,
incidents, or contractual obligations which may give rise to any common law
environmental liability or any liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 or similar federal, state,
local or foreign laws and neither the Company nor any of its Subsidiaries has
received any notice with respect to any of the foregoing, nor is any action
pending or, to the Company’s knowledge, threatened in connection with any of the
foregoing.  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 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.

       

      (ii) Other
than those that are or were stored, used or disposed of in compliance with
applicable law, no Hazardous Materials are contained on or about any real
property currently owned, leased or used by the Company or any of its
Subsidiaries, and no Hazardous Materials were released on or about any real
property previously owned, leased or used by the Company or any of its
Subsidiaries during the period the property was owned, leased or used by the
Company or any of its Subsidiaries, except in the normal course of the Company’s
or any of its Subsidiaries’ business.

       

      (iii) Except as
set forth in Schedule
3(s), there are no underground storage tanks on or under any real
property owned, leased or used by the Company or any of its Subsidiaries that
are not in compliance with applicable law.

       

      t. Title to
Property.  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 would
not have a Material Adverse Effect.  Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.

       

       

      
        
          
          

        

        
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      u. Insurance.  Except
as set forth in Schedule
3(u), 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 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.  The Company has provided to Buyer
true and correct copies of all policies relating to directors’ and officers’
liability coverage, errors and omissions coverage, and commercial general
liability coverage.

       

      v. Internal
Accounting Controls.  The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient, in the judgment of
the Company’s board of directors, 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 accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

       

      w. Foreign
Corrupt Practices.  Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any Subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
as amended, or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.

       

      x. Solvency.  The
Company (after giving effect to the transactions contemplated by this Agreement)
is solvent (i.e., its assets have
a fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not, after giving effect to the transaction
contemplated by this Agreement, have the ability to, nor does it intend to take
any action that would impair its ability to, pay its debts from time to time
incurred in connection therewith as such debts mature.  The Company
did not receive a qualified opinion from its auditors with respect to its most
recent fiscal year end and, after giving effect to the transactions contemplated
by this Agreement, does not anticipate or know of any basis upon which its
auditors might issue a qualified opinion in respect of its current fiscal
year.

       

      y. No
Investment Company.  The Company is not, and upon the issuance
and sale of the Securities as contemplated by this Agreement will not be an
“investment company” required to be registered under the Investment Company Act
of 1940 (an “Investment
Company”).  The Company is not controlled by an Investment
Company.

       

       

      
        
          
          

        

        
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      z. Breach of
Representations and Warranties by the Company.  If the Company
breaches any of the representations or warranties set forth in this Section 3,
and in addition to any other remedies available to the Buyers pursuant to this
Agreement, the Company shall pay to the Buyer the Standard Liquidated Damages
Amount in cash or in shares of Common Stock at the option of the Company, until
such breach is cured.  If the Company elects to pay the Standard
Liquidated Damages Amounts in shares of Common Stock, such shares shall be
issued at the Conversion Price at the time of payment.

       

      4. COVENANTS.

       

      a. Best
Efforts.  The parties shall use their best efforts to satisfy
timely each of the conditions described in Section 6 and 7 of this
Agreement.

       

      b. Form D;
Blue Sky Laws.  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 to qualify the Securities for sale to the Buyers at the
applicable 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 each Buyer on or prior to the Closing Date.

       

      c. Reporting Status;
Eligibility to Use Form S-3 or Form

       

      S-1. The Company’s Common
Stock is registered under Section 12(g) of the 1934 Act. The Company represents
and warrants that it meets the requirements for the use of Form S-3 (or if the
Company is not eligible for the use of Form S-3 as of the Filing Date (as
defined in the Registration Rights Agreement), the Company may
use  the form of registration for which it is eligible at that time)
for registration of the sale by the Buyer of the Registrable Securities (as
defined in the Registration Rights Agreement).  So long as the Buyer
beneficially owns any of the Securities, the Company shall timely file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination.  The Company further agrees to file all
reports required to be filed by the Company with the SEC in a timely manner so
as to become eligible, and thereafter to maintain its eligibility, for the use
of Form S-3.  The Company shall issue a press release describing the
materials terms of the transaction contemplated hereby as soon as practicable
following the Closing Date but in no event more than two (2) business days of
the Closing Date, which press release shall be subject to prior review by the
Buyers.  The Company agrees that such press release shall not disclose
the name of the Buyers unless expressly consented to in writing by the Buyers or
unless required by applicable law or regulation, and then only to the extent of
such requirement.

       

      d. Use of
Proceeds.  The Company shall use the proceeds from the sale of
the Notes and the Warrants in the manner set forth in Schedule 4(d) attached hereto
and made a part hereof and shall not, directly or indirectly, use such proceeds
for any loan to or investment in any other corporation, partnership, enterprise
or other person (except in connection with its currently existing direct or
indirect Subsidiaries)

       

       

      
        
          
          

        

        
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      e. Future
Offerings.  Subject to the exceptions described below, the
Company will not, without the prior written consent of a majority-in-interest of
the Buyers, not to be unreasonably withheld, negotiate or contract with any
party to obtain additional equity financing (including debt financing with an
equity component) that involves (A) the issuance of Common Stock at a discount
to the market price of the Common Stock on the date of issuance (taking into
account the value of any warrants or options to acquire Common Stock issued in
connection therewith) or (B) the issuance of convertible securities that are
convertible into an indeterminate number of shares of Common Stock or (C) the
issuance of warrants during the period (the “Lock-up Period”) beginning on
the Closing Date and ending on the later of (i) two hundred seventy (270) days
from the Closing Date and (ii) ninety (90) days from the date the Registration
Statement (as defined in the Registration Rights Agreement) is declared
effective (plus any days in which sales cannot be made
thereunder).  In addition, subject to the exceptions described below,
the Company will not conduct any equity financing (including debt with an equity
component) (“Future
Offerings”) during the period beginning on the Closing Date and ending
two (2) years after the end of the Lock-up Period unless it shall have first
delivered to each Buyer, at least twenty (20) business days prior to the closing
of such Future Offering, written notice describing the proposed Future Offering,
including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection therewith, and providing each Buyer an option
during the fifteen (15) day period following delivery of such notice to purchase
its pro rata share (based on the ratio that the aggregate principal amount of
Notes purchased by it hereunder bears to the aggregate principal amount of Notes
purchased hereunder) of the securities being offered in the Future Offering on
the same terms as contemplated by such Future Offering (the limitations referred
to in this sentence and the preceding sentence are collectively referred to as
the “Capital Raising
Limitations”).  In the event the terms
and conditions of a proposed Future Offering are amended in any respect after
delivery of the notice to the Buyers concerning the proposed Future Offering,
the Company shall deliver a new notice to each Buyer describing the amended
terms and conditions of the proposed Future Offering and each Buyer thereafter
shall have an option during the fifteen (15) day period following delivery of
such new notice to purchase its pro rata share of the securities being offered
on the same terms as contemplated by such proposed Future Offering, as
amended.  The foregoing sentence shall apply to successive amendments
to the terms and conditions of any proposed Future Offering.  The
Capital Raising Limitations shall not apply to any transaction involving (i)
issuances of securities in a firm commitment underwritten public offering
(excluding a continuous offering pursuant to Rule 415 under the 1933 Act) or
(ii) issuances of securities as consideration for a merger, consolidation or
purchase of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or license
by the Company.  The Capital Raising Limitations also shall not apply
to the issuance of securities upon exercise or conversion of the Company’s
options, warrants or other convertible securities outstanding as of the date
hereof or to the grant of additional options or warrants, or the issuance of
additional securities, under any Company stock option or restricted stock plan
approved by the shareholders of the Company.

       

      f. Expenses.  At
the Closing, the Company shall reimburse Buyers for expenses incurred by them in
connection with the negotiation, preparation, execution, delivery and
performance of this Agreement and the other agreements to be executed in
connection herewith (“Documents”), including, without limitation, attorneys’ and
consultants’ fees and expenses, transfer agent fees, fees for stock quotation
services, fees relating to any amendments or modifications of the Documents or
any consents or waivers of provisions in the Documents, fees for the preparation
of opinions of counsel, escrow fees, and costs of restructuring the transactions
contemplated by the Documents.  

       

       

      
        
          
          

        

        
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        When
possible, the Company must pay these fees directly, otherwise the Company must
make immediate payment for reimbursement to the Buyers for all fees and expenses
immediately upon written notice by the Buyer or the submission of an invoice by
the Buyer  If the Company fails to reimburse the Buyer in full within
three (3) business days of the written notice or submission of invoice by the
Buyer, the Company shall pay interest on the total amount of fees to be
reimbursed at a rate of 15% per annum.

      

       

      g. Financial
Information.  The Company agrees to send the following reports
to each Buyer until such Buyer transfers, assigns, or sells all of the
Securities:  within ten (10) days after the filing with the SEC, a copy of
its Annual Report on Form 10-K its Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K;  within one (1) day after release, copies of
all press releases issued by the Company or any of its Subsidiaries; and
 contemporaneously with the making available or giving to the stockholders
of the Company, copies of any notices or other information the Company makes
available or gives to such stockholders.

       

      h. Authorization
and Reservation of Shares.  The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the full conversion or exercise of the
outstanding Notes and Warrants and issuance of the Conversion Shares and
Warrants in connection therewith (based on the Conversion Price of the Notes or
Exercise Price of the Warrants in effect from time to time) and as otherwise
required by the Notes.  The Company shall not reduce the number of
shares of Common Stock reserved for issuance upon conversion of Notes and
exercise of the Warrants without the consent of each Buyer.  The
Company shall at all times maintain the number of shares of Common Stock so
reserved for issuance at an amount (“Reserved Amount”) equal to no
less than two (2) times the number that is then actually issuable upon full
conversion of the Notes and upon Exercise of the Warrants (based on the
Conversion Price of the Notes or the Exercise Price of the Warrants in effect
from time to time).  If at any time the number of shares of Common
Stock authorized and reserved for issuance (“Authorized and Reserved
Shares”) is below the Reserved Amount, the Company will promptly take all
corporate action necessary to authorize and reserve a sufficient number of
shares, including, without limitation, calling a special meeting of stockholders
to authorize additional shares to meet the Company’s obligations under this
Section 4(h), in the case of an insufficient number of authorized shares, obtain
stockholder approval of an increase in such authorized number of shares, and
voting the management shares of the Company in favor of an increase in the
authorized shares of the Company to ensure that the number of authorized shares
is sufficient to meet the Reserved Amount.  If the Company fails to
obtain such stockholder approval within thirty (30) days following the date on
which the number of Reserved Amount exceeds the Authorized and Reserved Shares,
the Company shall pay to the Borrower the Standard Liquidated Damages Amount, in
cash or in shares of Common Stock at the option of the Buyer.  If the
Buyer elects to be paid the Standard Liquidated Damages Amount in shares of
Common Stock, such shares shall be issued at the Conversion Price at the time of
payment.  

       

       

      
        
          
          

        

        
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        In order
to ensure that the Company has authorized a sufficient amount of shares to meet
the Reserved Amount at all times, the Company must deliver to the Buyer at the
end of every month a list detailing (1) the current amount of shares authorized
by the Company and reserved for the Buyer; and (2) amount of shares issuable
upon conversion of the Notes and upon exercise of the Warrants and as payment of
interest accrued on the Notes for one year.  If the Company fails to
provide such list within five (5) business days of the end of each month, the
Company shall pay the Standard Liquidated Damages Amount, in cash or in shares
of Common Stock at the option of the Buyer, until the list is
delivered.  If the Buyer elects to be paid the Standard Liquidated
Damages Amount in shares of Common Stock, such shares shall be issued at the
Conversion Price at the time of payment.

      

       

      i. Listing.  The
Company shall promptly secure the listing of the Conversion Shares and Warrant
Shares upon each national securities exchange or automated quotation system, if
any, upon which shares of Common Stock are then listed (subject to official
notice of issuance) and, so long as any Buyer owns any of the Securities, shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all Conversion Shares and Warrant Shares from time to time issuable
upon conversion of the Notes or exercise of the Warrants.  The Company
will obtain and, so long as any Buyer owns any of the Securities, maintain the
listing and trading of its Common Stock on the OTCBB or any equivalent
replacement exchange, the Nasdaq National Market (“Nasdaq”), the Nasdaq SmallCap
Market (“Nasdaq
SmallCap”), the New York Stock Exchange (“NYSE”), or the American Stock
Exchange (“AMEX”) and
will comply in all respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the Financial Industry Regulatory
Authority (“FINRA”) and
such exchanges, as applicable.  The Company shall promptly provide to
each Buyer copies of any notices it receives from the OTCBB and any other
exchanges or quotation systems on which the Common Stock is then listed
regarding the continued eligibility of the Common Stock for listing on such
exchanges and quotation systems.

       

      j. Corporate
Existence.  So long as a Buyer beneficially owns any Notes or
Warrants, the Company shall maintain its corporate existence and shall not sell
all or substantially all of the Company’s assets, except in the event of a
merger or consolidation or sale of all or substantially all of the Company’s
assets, where the surviving or successor entity in such transaction (i) assumes
the Company’s obligations hereunder and under the agreements and instruments
entered into in connection herewith and (ii) is a publicly traded corporation
whose Common Stock is listed for trading on the OTCBB, Nasdaq, Nasdaq SmallCap,
NYSE or AMEX.

       

      k. No
Integration.  The Company shall not make any offers or sales of
any security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the 1933
Act or cause the offering of the Securities to be integrated with any other
offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.

       

      l. Key Man
Insurance.  The Company shall
use its best efforts to obtain, on or before five (5) business days from the
date hereof, key man life insurance on all of the Company’s officers and
division heads.

       

       

      
        
          
          

        

        
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      m. Breach of
Covenants.  If the Company
breaches any of the covenants set forth in this Section 4, and in addition to
any other remedies available to the Buyers pursuant to this Agreement, the
Company shall pay to the Buyers the Standard Liquidated Damages Amount, in cash
or in shares of Common Stock at the option of the Company, until such breach is
cured.  If the Company elects to pay the Standard Liquidated Damages
Amount in shares, such shares shall be issued at the Conversion Price at the
time of payment.

       

      5. TRANSFER
AGENT INSTRUCTIONS.  The Company shall issue irrevocable
instructions to its transfer agent to issue certificates, registered in the name
of each Buyer or its nominee, for the Conversion Shares and 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 accordance with the terms
thereof (the “Irrevocable
Transfer Agent Instructions”).  Prior to registration of the
Conversion Shares and Warrant Shares under the 1933 Act or the date on which the
Conversion Shares and Warrant Shares may be sold pursuant to Rule 144 without
any restriction as to the number of Securities as of a particular date that can
then be immediately sold, all such certificates shall bear the restrictive
legend specified in Section 2(g) of this Agreement.  The Company
warrants that 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(f) hereof (in the case of the Conversion Shares and
Warrant Shares, prior to registration of the Conversion Shares and Warrant
Shares under the 1933 Act or the date on which the Conversion Shares and Warrant
Shares may be sold pursuant to Rule 144 without any restriction as to the number
of Securities as of a particular date that can then be immediately sold), will
be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights
Agreement.  Nothing in this Section shall affect in any way the
Buyer’s obligations and agreement set forth in Section 2(g) hereof to comply
with all applicable prospectus delivery requirements, if any, upon re-sale of
the Securities.  If a Buyer provides the Company with (i) an opinion
of counsel in form, substance and scope customary for opinions in comparable
transactions, to the effect that a public sale or transfer of such Securities
may be made without registration under the 1933 Act and such sale or transfer is
effected or (ii) the Buyer provides reasonable assurances that the Securities
can be sold pursuant to Rule 144, the Company shall permit the transfer, and, in
the case of the Conversion Shares, promptly instruct its transfer agent to issue
one or more certificates, free from restrictive legend, in such name and in such
denominations as specified by such Buyer.  The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
the Buyers, by vitiating the intent and purpose of the transactions contemplated
hereby.  Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5 may be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section, that the Buyers shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach and
requiring immediate transfer, without the necessity of showing economic loss and
without any bond or other security being required.

       

       

      
        
          
          

        

        
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      6. CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.  The obligation of the
Company hereunder to issue and sell the Notes and Warrants to a Buyer at the
Closing is subject to the satisfaction, at or before the Closing Date of each of
the following conditions thereto, 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:

       

      a. The
applicable Buyer shall have executed this Agreement and the Registration Rights
Agreement, and delivered the same to the Company.

       

      b. The
applicable Buyer shall have delivered the Purchase Price in accordance with
Section 1(b) above.

       

      c. The
representations and warranties of the applicable 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 the applicable 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 the applicable Buyer at or prior to the Closing Date.

       

      d. No
litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.

       

      7. CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE.  The obligation of each
Buyer hereunder to purchase the Notes and Warrant 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 such Buyer’s sole benefit and
may be waived by such Buyer at any time in its sole discretion:

       

      a. The
Company shall have executed this Agreement and the Registration Rights
Agreement, and delivered the same to the Buyer.

       

      b. The
Company shall have delivered to such Buyer duly executed Notes (in such
denominations as the Buyer shall request) and Warrants in accordance with
Section 1(b) above.

       

      c. The
Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a
majority-in-interest of the Buyers, shall have been delivered to and
acknowledged in writing by the Company’s Transfer Agent.

       

      d. 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 such 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
this Agreement to be performed, satisfied or complied with by the Company at or
prior to the Closing Date.  

       

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

         

         

        The Buyer
shall have received a certificate or certificates, executed by the chief
executive officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company’s
Articles of Incorporation, By-laws and Board of Directors’ resolutions relating
to the transactions contemplated hereby.

      

       

      e. No
litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.

       

      f. No event
shall have occurred which could reasonably be expected to have a Material
Adverse Effect on the Company.

       

      g. The
Conversion Shares and Warrant Shares shall have been authorized for quotation on
the OTCBB and trading in the Common Stock on the OTCBB shall not have been
suspended by the SEC or the OTCBB.

       

      h. The Buyer
shall have received an opinion of the Company’s counsel, dated as of the Closing
Date, in form, scope and substance reasonably satisfactory to the Buyer and in
substantially the same form as Exhibit “D” attached
hereto.

       

      i. The Buyer
shall have received an officer’s certificate described in Section 3(c) above,
dated as of the Closing Date.

       

      8. GOVERNING
LAW; MISCELLANEOUS.

       

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

       

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

       

       

       

      b. Counterparts;
Signatures by Facsimile.  This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other
party.  This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.

       

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

       

      d. Severability.  In
the event that any provision of this Agreement is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law.  Any provision
hereof which may prove invalid or unenforceable under any law shall not affect
the validity or enforceability of any other provision hereof.

       

      e. Entire
Agreement; Amendments.  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 the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters.  No
provision of this Agreement may be waived or amended other than by an instrument
in writing signed by the party to be charged with enforcement.

       

      f. Notices.  Any
notices required or permitted to be given under the terms of this Agreement
shall be sent by certified or registered mail (return receipt requested) or
delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile and shall be effective five (5) days after being placed
in the mail, if mailed by regular United States mail, or upon receipt, if
delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile, in each case addressed to a party.  The
addresses for such communications shall be:

       

      If to the
Company:

      

      
        	
                 
      

              	
                Pacificap
      Entertainment Holdings, Inc.

              

      

      
        	
                 
      

              	
                2361
      Campus Drive, Suite 101

              

      

      
        	
                 
      

              	
                Irvine,
      California, 92612

              

      

      
        	
                 
      

              	
                Attention:
      Mark Schaftlein, President

              

      

      
        	
                 
      

              	
                Telephone:  949-833-9001

              

      

      
        	
                 
      

              	
                Facsimile:   949-833-8211

              

      

      

       

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

       

       

       

      With a
copy to:

       

             Sichenzia Ross Friedman Ference
LLP

             1065 Avenue of the
Americas

             New York, New York
10018

             Attention:  Gregory
Sichenzia, Esq.

             Telephone:  212-930-9700

             Facsimile:   212-930-9725

       

      If to a
Buyer:  To the address set forth immediately below such Buyer’s name
on the signature pages hereto.

       

      With copy
to:

      

             Ballard Spahr Andrews &
Ingersoll, LLP

             1735 Market
Street

             51st
Floor

             Philadelphia,
Pennsylvania  19103

             Attention:  Gerald
J. Guarcini, Esq.

             Telephone:  215-864-8625

             Facsimile:   215-864-8999

       

      Each
party shall provide notice to the other party of any change in
address.

       

      g. Successors
and Assigns.  This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and assigns.  Neither
the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the
other.  Notwithstanding the foregoing, subject to Section 2(f),
any Buyer may assign its rights hereunder to any person that purchases
Securities in a private transaction from a Buyer or to any of its “affiliates,”
as that term is defined under the 1934 Act, without the consent of the Company;
and provided further, that the Buyers shall not assign this Agreement or any
rights or obligations hereunder until the Registration Debentures and
Registration warrants are purchased by the Buyers.

       

      h. 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.  The
representations and warranties of the Company and the agreements and covenants
set forth in Sections 3, 4, 5 and 8 shall survive the closing hereunder
notwithstanding any due diligence investigation conducted by or on behalf of the
Buyers.  The Company agrees to indemnify and hold harmless each of the
Buyers and all their officers, directors, employees and agents for loss or
damage arising as a result of or related to any breach or alleged breach by the
Company of any of its representations, warranties and covenants set forth in
Sections 3 and 4 hereof or any of its covenants and obligations under this
Agreement or the Registration Rights Agreement, including advancement of
expenses as they are incurred.

       

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

       

       

       

      j. Publicity.  The
Company and each of the Buyers shall have the right to review a reasonable
period of time before issuance of any press releases, SEC, OTCBB or FINRA
filings, 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 each of the Buyers, to
make any press release or SEC, OTCBB (or other applicable trading market) or
FINRA filings with respect to such transactions as is required by applicable law
and regulations (although each of the Buyers shall be consulted by the Company
in connection with any such press release prior to its release and shall be
provided with a copy thereof and be given an opportunity to comment
thereon).

       

      k. 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
the 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.

       

      l. No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

       

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

       

      

       

      

       

      

       

      [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

       

       

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

       

       

       

      IN WITNESS WHEREOF, the
undersigned Buyers and the Company have caused this Agreement to be duly
executed as of the date first above written.

       

      

      

      PACIFICAP
ENTERTAINMENT HOLDINGS, INC.

      

      

      ________________________________

      Mark
Schaftlein

      President

      
 

      NEW
MILLENNIUM CAPITAL PARTNERS II, LLC

       

      By:  First
Street Manager II, LLP

       

      ____________________________________

       

      Corey S.
Ribotsky

      Manager

       

      

      

      RESIDENCE:         New
York

      

      ADDRESS:            1044
Northern Boulevard

      Suite 302

      Roslyn, New York 11576

                  
Facsimile:          (516)
739-7115

                  
Telephone:       (516) 739-7110

       

      AGGREGATE
SUBSCRIPTION AMOUNT:

       

      
        
          	
                  Aggregate
      Principal Amount of Notes:

                	 	$	66,000	 
	
                  Number
      of Warrants:

                	 	 	1,440,000,000	 
	
                  Aggregate
      Purchase Price:

                	 	$	66,000	 

        

      

       

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      AJW
PARTNERS, LLC

      By:  SMS
Group, LLC

      

      

      ______________________________________

      Corey S.
Ribotsky

      Manager

       

      RESIDENCE:  Delaware

      

      ADDRESS:            1044
Northern Boulevard

      Suite 302

      Roslyn, New York 11576

                   Facsimile:   (516)
739-7115

               
 Telephone:  (516) 739-7110

      

      AGGREGATE
SUBSCRIPTION AMOUNT:

       

      
        
          
            	
                    Aggregate
      Principal Amount of Notes:

                  	 	$	22,000	 
	
                    Number
      of Warrants:

                  	 	 	480,000,000	 
	
                    Aggregate
      Purchase Price:

                  	 	$	22,000	 

          

        

         

         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

         

         

      

      AJW
MASTER FUND, LTD.

      By:  First
Street Manager II, LLC

      

      

      ______________________________________

      Corey S.
Ribotsky

      Manager

       

      RESIDENCE:         Cayman
Islands

      

      ADDRESS:            AJW
Master Fund, Ltd.

                                     
P.O. Box 32021 SMB

                                     
Grand
Cayman, Cayman Island, B.W.I.

      

      AGGREGATE
SUBSCRIPTION AMOUNT:

       

      
        
          
            	
                    Aggregate
      Principal Amount of Notes:

                  	 	$	22,000	 
	
                    Number
      of Warrants:

                  	 	 	480,000,000	 
	
                    Aggregate
      Purchase Price:

                  	 	$	22,000f8k073108ex4iii_ea3pacificap.htm

    
      Exhibit
4.3

    

    
       

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

       

      

       

      CALLABLE
SECURED CONVERTIBLE NOTE

       

      
         

        
          
            	
                    Irvine,
      California

                  	 
      
	
                    July
      31, 2008

                  	
                    $66,000

                  

          

        

         

      

       

      FOR VALUE
RECEIVED, PACIFICAP ENTERTAINMENT HOLDINGS, INC., a Nevada corporation
(hereinafter called the “Borrower”), hereby promises to
pay to the order of NEW MILLENNIUM CAPITAL PARTNERS II, LLC or registered
assigns (the “Holder”)
the sum of $66,000, on  July 31, 2011 (the “Maturity Date”), and to pay
interest on the unpaid principal balance hereof at the rate of twelve percent
(12%) per annum from July 31, 2008 (the “Issue Date”) until the same
becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.  Any amount of principal or interest on this
Note which is not paid when due shall bear interest at the rate of fifteen
percent (15%) per annum from the due date thereof until the same is paid (“Default
Interest”).  Interest shall commence accruing on the issue
date, shall be computed on the basis of a 365-day year and the actual number of
days elapsed and shall be payable, quarterly on March 31, June 30,
September 30 and December 31 of each year beginning on the last day of the
first full quarter after the Issue Date.  All payments due hereunder
(to the extent not converted into common stock, $.001 par value per share, of
the Borrower (the “Common
Stock”) in accordance with the terms hereof) shall be made in lawful
money of the United States of America.  All payments shall be made at
such address as the Holder shall hereafter give to the Borrower by written
notice made in accordance with the provisions of this Note.  Whenever
any amount expressed to be due by the terms of this Note is due on any day which
is not a business day, the same shall instead be due on the next succeeding day
which is a business day and, in the case of any interest payment date which is
not the date on which this Note is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining the amount
of interest due on such date.  As used in this Note, the term
“business day” shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are authorized or
required by law or executive order to remain closed.  Each capitalized
term used herein, and not otherwise defined, shall have the meaning ascribed
thereto in that certain Securities Purchase Agreement, dated July 31, 2008,
pursuant to which this Note was originally issued (the “Purchase
Agreement”).

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

       

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

       

      The
following terms shall apply to this Note:

       

       

      ARTICLE
I.  CONVERSION RIGHTS

       

      1.1 Conversion
Right.  The Holder shall
have the right from time to time, and at any time on or prior to the earlier of
(i) the Maturity Date and (ii) the date of payment of the Default Amount (as
defined in Article III) pursuant to Section 1.6(a) or Article III, the Optional
Prepayment Amount (as defined in Section 5.1 or any payments pursuant to Section
1.7, each in respect of the remaining outstanding principal amount of this Note
to convert all or any part of the outstanding and unpaid principal amount of
this Note into fully paid and non-assessable shares of Common Stock, as such
Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall hereafter be
changed or reclassified at the conversion price  (the “Conversion Price”) determined
as provided herein (a “Conversion”); provided, however, that in no
event shall the Holder be entitled to convert any portion of this Note in excess
of that portion of this Note upon conversion of which the sum of (1) the number
of shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Notes or the unexercised
or unconverted portion of any other security of the Borrower subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (2) the number of shares of Common Stock issuable upon the
conversion of the portion of this Note with respect to which the determination
of this proviso is being made, would result in beneficial ownership by the
Holder and its affiliates of more than 4.9% of the outstanding shares of Common
Stock.  For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso.  The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing the Conversion Amount
(as defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A
(the “Notice of
Conversion”), delivered to the Borrower by the Holder in accordance with
Section 1.4 below; provided that the Notice of Conversion is submitted by
facsimile (or by other means resulting in, or reasonably expected to result in,
notice) to the Borrower before 6:00 p.m., New York, New York time on such
conversion date (the “Conversion
Date”).  

       

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

         

         

        The term
“Conversion Amount”
means, with respect to any conversion of this Note, the sum of (1) the principal
amount of this Note to be converted in such conversion plus (2) accrued and
unpaid interest, if any, on such principal amount at the interest rates provided
in this Note to the Conversion Date plus (3) Default
Interest, if any, on the amounts referred to in the immediately preceding
clauses (1) and/or (2) plus (4) at the
Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights
Agreement, dated as of July 31, 2008, executed in connection with the initial
issuance of this Note and the other Notes issued on the Issue Date (the “Registration Rights
Agreement”).

      

       

      1.2 Conversion
Price.

       

      (a) Calculation
of Conversion Price.  The Conversion
Price shall be the lesser of (i) the Variable Conversion Price (as defined
herein) and (ii) the Fixed Conversion Price (as defined herein) (subject, in
each case, to equitable adjustments for stock splits, stock dividends or rights
offerings by the Borrower relating to the Borrower’s securities or the
securities of any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar
events).  The “Variable Conversion Price”
shall mean the Applicable Percentage (as defined herein) multiplied by the
Market Price (as defined herein).  “Market Price” means the
average of the lowest three (3) Trading Prices (as defined below) for the Common
Stock during the twenty (20) Trading Day period ending one Trading Day prior to
the date the Conversion Notice is sent by the Holder to the Borrower via
facsimile (the “Conversion
Date”).  “Trading Price” means, for any
security as of any date, the intraday trading price on the Over-the-Counter
Bulletin Board (the “OTCBB”) as reported by a
reliable reporting service mutually acceptable to and hereafter designated by
Holders of a majority in interest of the Notes and the Borrower or, if the OTCBB
is not the principal trading market for such security, the intraday trading
price of such security on the principal securities exchange or trading market
where such security is listed or traded or, if no intraday trading price of such
security is available in any of the foregoing manners, the average of the
intraday trading prices of any market makers for such security that are listed
in the “pink sheets” by the National Quotation Bureau, Inc.  If the
Trading Price cannot be calculated for such security on such date in the manner
provided above, the Trading Price shall be the fair market value as mutually
determined by the Borrower and the holders of a majority in interest of the
Notes being converted for which the calculation of the Trading Price is required
in order to determine the Conversion Price of such Notes.  “Trading Day” shall mean any
day on which the Common Stock is traded for any period on the OTCBB, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded.  “Applicable Percentage” shall
mean 25.0%.  The “Fixed Conversion Price” shall
mean $.02.

       

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

       

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

         

         

        From and
after the Adjusted Conversion Price Termination Date, the Conversion Price shall
be determined as set forth in this Section 1.2(a).  For purposes
hereof,  “Adjusted
Conversion Price Termination Date” shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this Section 1.2(b) has been made, the date upon
which the Borrower (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) consummates or publicly announces the
termination or abandonment of the proposed transaction or tender offer (or
takeover scheme) which caused this Section 1.2(b) to become
operative.

      

       

      1.3 Authorized
Shares.  Subject to the
Stockholder Approval, the Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Note and the other Notes issued pursuant to the Purchase
Agreement.  The Borrower is required at all times to have authorized
and reserved two (2) times the number of shares that is actually issuable upon
full conversion of the Notes (based on the Conversion Price of the Notes or the
Exercise Price of the Warrants in effect from time to time) (the “Reserved
Amount”).  The Reserved Amount shall be increased from time to
time in accordance with the Borrower’s obligations pursuant to Section 4(h) of
the Purchase Agreement.  The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and
non-assessable.  In addition, if the Borrower shall issue any
securities or make any change to its capital structure which would change the
number of shares of Common Stock into which the Notes shall be convertible at
the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Notes.  The Borrower (i) acknowledges
that it has irrevocably instructed its transfer agent to issue certificates for
the Common Stock issuable upon conversion of this Note, and (ii) agrees
that its issuance of this Note shall constitute full authority to its officers
and agents who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Note.

       

      If, at
any time a Holder of this Note submits a Notice of Conversion, and the Borrower
does not have sufficient authorized but unissued shares of Common Stock
available to effect such conversion in accordance with the provisions of this
Article I (a “Conversion
Default”), subject to Section 4.8, the Borrower shall issue to the Holder
all of the shares of Common Stock which are then available to effect such
conversion.  The portion of this Note which the Holder included in its
Conversion Notice and which exceeds the amount which is then convertible into
available shares of Common Stock (the “Excess Amount”) shall,
notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the Holder’s
option at any time after) the date additional shares of Common Stock are
authorized by the Borrower to permit such conversion, at which time the
Conversion Price in respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Default Date (as defined below) and (ii) the Conversion
Price on the Conversion Date thereafter elected by the Holder in respect
thereof.  

       

       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

         

         

        In
addition, the Borrower shall pay to the Holder payments (“Conversion Default Payments”)
for a Conversion Default in the amount of (x) the sum of (1) the then
outstanding principal amount of this Note plus (2) accrued and
unpaid interest on the unpaid principal amount of this Note through the
Authorization Date (as defined below) plus (3) Default
Interest, if any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y)
..24, multiplied
by (z) (N/365), where N = the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion Default (the “Conversion Default Date”) to
the date (the “Authorization
Date”) that the Borrower authorizes a sufficient number of shares of
Common Stock to effect conversion of the full outstanding principal balance of
this Note.  The Borrower shall use its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable following the
earlier of (i) such time that the Holder notifies the Borrower or that the
Borrower otherwise becomes aware that there are or likely will be insufficient
authorized and unissued shares to allow full conversion thereof and (ii) a
Conversion Default.  The Borrower shall send notice to the Holder of
the authorization of additional shares of Common Stock, the Authorization Date
and the amount of Holder’s accrued Conversion Default Payments.  The
accrued Conversion Default Payments for each calendar month shall be paid in
cash or shall be convertible into Common Stock (at such time as there are
sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Borrower’s option, as follows:

      

       

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

       

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

       

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

       

      1.4 Method of
Conversion.

       

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

       

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

       

       

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

       

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

       

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

       

      (e) Obligation
of Borrower to Deliver Common Stock.  Upon receipt by
the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid interest on
this Note shall be reduced to reflect such conversion, and, unless the Borrower
defaults on its obligations under this Article I, all rights with respect to the
portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion.  

       

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

         

         

        If the
Holder shall have given a Notice of Conversion as provided herein, the
Borrower’s obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of the absence of any action
by the Holder to enforce the same, any waiver or consent with respect to any
provision thereof, the recovery of any judgment against any person or any action
to enforce the same, any failure or delay in the enforcement of any other
obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion.  The Conversion Date
specified in the Notice of Conversion shall be the Conversion Date so long as
the Notice of Conversion is received by the Borrower before 6:00 p.m., New York,
New York time, on such date.

      

       

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

       

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

       

      1.5 Concerning
the Shares.  The shares of
Common Stock issuable upon conversion of this Note may not be sold or
transferred unless  (i) such shares are sold pursuant to an effective
registration statement under the Act or (ii) the Borrower or its transfer agent
shall have been furnished with an opinion of  counsel (which opinion
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that the shares to be sold or transferred
may be sold or transferred pursuant to an exemption from such registration or
(iii) such shares are sold or transferred pursuant to Rule 144 under the
Act (or a successor rule) (“Rule 144”) or (iv) such shares
are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who
agrees to sell or otherwise transfer the shares only in accordance with this
Section 1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement).  

       

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

         

         

        Except as
otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock
issuable upon conversion of this Note have been registered under the Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold, each certificate for
shares of Common Stock issuable upon conversion of this Note that has not been
so included in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the following form,
as appropriate:

      

       

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

       

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

       

      1.6 Effect of Certain
Events.

       

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

       

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

       

       

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

       

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

       

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

       

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

       

       

       

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

       

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

       

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

       

       

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

       

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

       

      1.7 Trading
Market Limitations.
Unless permitted by the applicable rules and regulations of the principal
securities market on which the Common Stock is then listed or traded, in no
event shall the Borrower issue upon conversion of or otherwise pursuant to this
Note and the other Notes issued pursuant to the Purchase Agreement more than the
maximum number of shares of Common Stock that the Borrower can issue pursuant to
any rule of the principal United States securities market on which the Common
Stock is then traded (the “Maximum Share Amount”), which
shall be 19.99% of the total shares outstanding on the Closing Date (as defined
in the Purchase Agreement), subject to equitable adjustment from time to time
for stock splits, stock dividends, combinations, capital reorganizations and
similar events relating to the Common Stock occurring after the date
hereof.  Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the “Maximum Conversion Date”), if
the Borrower fails to eliminate any prohibitions under applicable law or the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Borrower or any of
its securities on the Borrower’s ability to issue shares of Common Stock in
excess of the Maximum Share Amount (a “Trading Market Prepayment
Event”), in lieu of any further right to convert this Note, and in full
satisfaction of the Borrower’s obligations under this Note, the Borrower shall
pay to the Holder, within fifteen (15) business days of the Maximum Conversion
Date (the “Trading Market
Prepayment Date”), an amount equal to 130% times the sum of (a) the then
outstanding principal amount of this Note immediately following the Maximum
Conversion Date, plus (b) accrued and
unpaid interest on the unpaid principal amount of this Note to the Trading
Market Prepayment Date, plus (c) Default
Interest, if any, on the amounts referred to in clause (a) and/or (b) above,
plus (d) any
optional amounts that may be added thereto at the Maximum Conversion Date by the
Holder in accordance with the terms hereof (the then outstanding principal
amount of this Note immediately following the Maximum Conversion Date, plus the amounts
referred to in clauses (b), (c) and (d) above shall collectively be referred to
as the “Remaining Convertible
Amount”).  With respect to each Holder of Notes, the Maximum
Share Amount shall refer to such Holder’s pro rata share thereof
determined in accordance with Section 4.8 below.  

       

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

         

         

        In the
event that the sum of (x) the aggregate number of shares of Common Stock issued
upon conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement plus
(y) the aggregate number of shares of Common Stock that remain issuable upon
conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement, represents at least one hundred percent (100%) of the Maximum Share
Amount (the “Triggering
Event”), the Borrower will use its best efforts to seek and obtain
Shareholder Approval (or obtain such other relief as will allow conversions
hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion
Date.  As used herein, “Shareholder Approval” means
approval by the stockholders of the Borrower to authorize the issuance of the
full number of shares of Common Stock which would be issuable upon full
conversion of the then outstanding Notes but for the Maximum Share
Amount.

      

       

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

       

       

      ARTICLE
II.   CERTAIN COVENANTS

       

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

       

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

       

       

       

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

       

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

       

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

       

      2.5 Advances
and Loans.  So long as the
Borrower shall have any obligation under this Note, the Borrower shall not,
without the Holder’s written consent, lend money, give credit or make advances
to any person, firm, joint venture or corporation, including, without
limitation, officers, directors, employees, subsidiaries and affiliates of the
Borrower, except loans, credits or advances (a) in existence or committed on the
date hereof and which the Borrower has informed Holder in writing prior to the
date hereof, (b) made in the ordinary course of business or (c) not in excess of
$50,000.

       

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

       

       

      ARTICLE
III.   EVENTS OF DEFAULT

       

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

       

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

       

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

       

       

      3.2 Conversion
and the Shares.  The Borrower
fails to issue shares of Common Stock to the Holder (or announces or threatens
that it will not honor its obligation to do so) upon exercise by the Holder of
the conversion rights of the Holder in accordance with the terms of this Note
(for a period of at least sixty (60) days, if such failure is solely as a result
of the circumstances governed by Section 1.3 and the Borrower is using its best
efforts to authorize a sufficient number of shares of Common Stock as soon as
practicable), fails to transfer or cause its transfer agent to transfer
(electronically or in certificated form) any certificate for shares of Common
Stock issued to the Holder upon conversion of or otherwise pursuant to this Note
as and when required by this Note or the Registration Rights Agreement, or fails
to remove any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate for any shares of Common Stock issued to
the Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Borrower shall
have been notified thereof in writing by the Holder;

       

      3.3 Failure
to Timely File Registration or Effect Registration.  The Borrower
fails to file the Registration Statement within ten (10) days following an
Investor Demand or obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement within ninety (90) days following the
Filing Date or such Registration Statement lapses in effect (or sales cannot
otherwise be made thereunder effective, whether by reason of the Borrower’s
failure to amend or supplement the prospectus included therein in accordance
with the Registration Rights Agreement or otherwise) for more than twenty (20)
consecutive days or forty (40) days in any twelve (12) month period after the
Registration Statement becomes effective;

       

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

       

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

       

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

       

      3.7 Judgments.  Any money
judgment, writ or similar process shall be entered or filed against the Borrower
or any subsidiary of the Borrower or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period
of twenty (20) days unless otherwise consented to by the Holder, which consent
will not be unreasonably withheld;

       

       

      
        
          
          

        

        
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      3.8 Bankruptcy.  Bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
relief under any bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Borrower or any subsidiary of the
Borrower;

       

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

       

      3.10 Default
Under Other Notes.  An Event of
Default has occurred and is continuing under any of the other Notes issued
pursuant to the Purchase Agreement,

       

      then,
upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Notes issued pursuant to the Purchase Agreement exercisable through
the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and upon the
occurrence of an Event of Default specified in Section 3.6 or 3.8, the Notes
shall become immediately due and payable and the Borrower shall pay to the
Holder, in full satisfaction of its obligations hereunder, an amount equal to
the greater of (i) 130% times the sum of (w) the then
outstanding principal amount of this Note plus (x) accrued and
unpaid interest on the unpaid principal amount of this Note to the date of
payment (the “Mandatory
Prepayment Date”) plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
“Default Sum”) or (ii)
the “parity value” of the Default Sum to be prepaid, where parity value means
(a) the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
“Conversion Date” for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the
highest Closing Price for the Common Stock during the period beginning on the
date of first occurrence of the Event of Default and ending one day prior to the
Mandatory Prepayment Date (the “Default Amount”) and all other
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, legal fees and expenses,
of collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or in equity.  If the Borrower fails to pay
the Default Amount within five (5) business days of written notice that such
amount is due and payable, then the Holder shall have the right at any time, so
long as the Borrower remains in default (and so long and to the extent that
there are sufficient authorized shares), to require the Borrower, upon written
notice, to immediately issue, in lieu of the Default Amount, the number of
shares of Common Stock of the Borrower equal to the Default Amount divided by
the Conversion Price then in effect.

       

       

       

      
        
          
          

        

        
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      ARTICLE
IV.   MISCELLANEOUS

       

      4.1 Failure
or Indulgence Not Waiver.  No failure or
delay on the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges.  All
rights and remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies otherwise available.

       

      4.2 Notices.  Any notice herein
required or permitted to be given shall be in writing and may be personally
served or delivered by courier or sent by United States mail and shall be deemed
to have been given upon receipt if personally served (which shall include
telephone line facsimile transmission) or sent by courier or three (3) days
after being deposited in the United States mail, certified, with postage
pre-paid and properly addressed, if sent by mail.  For the purposes
hereof, the address of the Holder shall be as shown on the records of the
Borrower; and the address of the Borrower shall be 2361 Campus Drive, Suite 101,
Irvine, California 92612, facsimile number: 949-833-8211.  Both the
Holder and the Borrower may change the address for service by service of written
notice to the other as herein provided.

       

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

       

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

       

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

       

      4.6 Governing
Law.  THIS NOTE SHALL
BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE
BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES
FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING
UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A
PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING.  

       

       

      
        
          
          

        

        
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        NOTHING
HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW.  BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE
JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED
IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL
MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’
FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.

      

       

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

       

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

       

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

       

       

      
        
          
          

        

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

       

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

       

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

       

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

       

       

      ARTICLE
V.  CALL OPTION

       

      5.1 Call
Option.  Notwithstanding
anything to the contrary contained in this Article V, so long as  no Event
of Default or Trading Market Prepayment Event shall have occurred and be
continuing,  the Borrower has a sufficient number of authorized shares of
Common Stock reserved for issuance upon full conversion of the Notes, then at
any time after the Issue Date, and  the Common Stock is trading at or below
$.00081 per share, the Borrower shall have the right, exercisable on not less
than ten (10) Trading Days prior written notice to the Holders of the Notes
(which notice may not be sent to the Holders of the Notes until the Borrower is
permitted to prepay the Notes pursuant to this Section 5.1), to prepay all of
the outstanding Notes in accordance with this Section
5.1.  

       

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

         

         

        Any
notice of prepayment hereunder (an “Optional Prepayment”) shall be
delivered to the Holders of the Notes at their registered addresses appearing on
the books and records of the Borrower and shall state (1) that the Borrower is
exercising its right to prepay all of the Notes issued on the Issue Date and (2)
the date of prepayment (the “Optional Prepayment
Notice”).  On the date fixed for prepayment (the “Optional Prepayment Date”),
the Borrower shall make payment of the Optional Prepayment Amount (as defined
below) to or upon the order of the Holders as specified by the Holders in
writing to the Borrower at least one (1) business day prior to the Optional
Prepayment Date.  If the Borrower exercises its right to prepay the
Notes, the Borrower shall make payment to the holders of an amount in cash (the
“Optional Prepayment
Amount”) equal to either (i) 130% (for prepayments occurring within
thirty (30) days of the Issue Date), (ii) 140% for prepayments occurring
between thirty-one (31) and sixty (60) days of the Issue Date, or (iii) 150%
(for prepayments occurring after the sixtieth (60th) day
following the Issue Date), multiplied by the sum of (w) the then outstanding
principal amount of this Note plus (x) accrued
and unpaid interest on the unpaid principal amount of this Note to the Optional
Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
“Optional Prepayment
Sum”). Notwithstanding notice of an Optional Prepayment, the Holders
shall at all times prior to the Optional Prepayment Date maintain the right to
convert all or any portion of the Notes in accordance with Article I and any
portion of Notes so converted after receipt of an Optional Prepayment Notice and
prior to the Optional Prepayment Date set forth in such notice and payment of
the aggregate Optional Prepayment Amount shall be deducted from the principal
amount of Notes which are otherwise subject to prepayment pursuant to such
notice.  If the Borrower delivers an Optional Prepayment Notice and
fails to pay the Optional Prepayment Amount due to the Holders of the Notes
within two (2) business days following the Optional Prepayment Date, the
Borrower shall forever forfeit its right to redeem the Notes pursuant to this
Section 5.1.

      

       

      

       

      

       

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

       

      

      PACIFICAP
ENTERTAINMENT HOLDINGS, INC.

      

      

      

      By:           ______________________________

      Mark Schaftlein

      President

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

       

      EXHIBIT
A

       

      NOTICE
OF CONVERSION

       

      (To be
Executed by the Registered Holder

      in order
to Convert the Notes)

       

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

       

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

       

      Name of
DTC Prime
Broker: ____________________________________                                                                                                                    

      Account
Number:   __________________________________________                                                                                                                  

       

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

       

      Name:    ___________________________________________________                                                                                                                 

      Address:    _________________________________________________                                                                                                                 

       

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

       

      Date of
Conversion:___________________________

      Applicable
Conversion Price:____________________

      Number of
Shares of Common Stock to be Issued Pursuant to

      Conversion
of the Notes:______________

      Signature:___________________________________

      Name:______________________________________

      Address:____________________________________

       

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

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