Document:

ex41.htm

    SUBORDINATED
CONVERTIBLE NOTE

     

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE
SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND
17(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND,
ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE
AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS
NOTE.

    

    PNG
VENTURES, INC.

     

    Subordinated Convertible Note

     

    
      	
              Issuance
      Date:  August 19, 2008

            	
              Original
      Principal Amount: U.S. $3,188,235

            

    

    

    FOR VALUE RECEIVED, PNG VENTURES, INC., a Nevada
corporation (the “Company”), hereby promises to
pay to the order of CASTLERIGG
PNG INVESTMENTS LLC or registered assigns (“Holder”) the amount set out
above as the Original Principal Amount (as reduced pursuant to the terms hereof,
pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding
Principal as may be required by Section 2, until the same becomes due and
payable, whether upon the Maturity Date, acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof).  This
Subordinated Convertible Note (including Subordinated Convertible Notes issued
in exchange, transfer or replacement hereof, this “Note”) is a singular Note or
is one of an issue of Subordinated Convertible Notes issued pursuant to the
Securities Purchase Agreement on the Closing Date (collectively, the “Notes” and such other
Subordinated Convertible Notes, the “Other Notes”).  Certain
capitalized terms used herein are defined in Section 27.

     

    (1) PAYMENTS OF
PRINCIPAL.  On the Maturity Date, the Company shall pay to the
Holder an amount in cash representing all outstanding Principal, accrued and
unpaid Interest and accrued and unpaid Late Charges, if any, on such Principal
and Interest.  The “Maturity Date” shall be August 19,
2010, but may be extended at the option of the Holder (i) in the event that, and
for so long as, an Event of Default (as defined in Section 4(a)) shall have
occurred and be continuing on the Maturity Date (as may be extended pursuant to
this Section 1) or any event shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) that with the
passage of time and the failure to cure would result in an Event of Default,
(ii) through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced or
a Change of Control Notice (as defined in Section 5(b)) is delivered prior to
the Maturity Date, and (iii)  subject to clause (ii), for any period
of time in the discretion of Holder through August 19, 2012.  Other
than as specifically permitted by this Note, the Company may not prepay any
portion of the outstanding Principal, accrued and unpaid Interest or accrued and
unpaid Late Charges on Principal and Interest, if any.

     

    (2) INTEREST; INTEREST
RATE.

     

    (a) Interest
on this Note (“Interest”)  shall
accrue at a rate of fifteen percent (15.00%) per annum (the “Interest Rate”), shall be
computed on the basis of a 360-day year comprised of twelve (12) thirty (30) day
months and shall be payable in arrears for each Calendar Quarter on the first
day of the succeeding Calendar Quarter (each, an “Interest Date”); however,
Interest on the Note in the cash amount of $478,235.25, representing Interest
otherwise due and payable through August 19, 2009, shall be prepaid by the
Company on the date hereof as the first Interest Date (the “Prepaid Interest”),
with the next Interest Date thereafter being October 1, 2009, provided the Note
has not been satisfied on or before that date.  Interest shall be
payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in cash;

     

    (b) Prior to
the payment of Interest on an Interest Date, Interest on this Note shall accrue
at the Interest Rate.  From and during the continuance of an Event of
Default, the Interest Rate shall be increased to eighteen percent (18.0%) per
annum. In the event that such Event of Default is subsequently cured, the
increased interest rate referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
and unpaid at such increased rate during the continuance of such Event of
Default shall continue to apply to the extent relating to the days after the
occurrence of such Event of Default through and including the date of cure of
such Event of Default.

     

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

     

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

     

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

     

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

     

    (ii) “Conversion Price” means, as of
any Conversion Date (as defined below) or other date of determination, $10.00,
subject to adjustment as provided herein.

     

    (c) Mechanics of
Conversion.

     

    (i) Optional
Conversion.  To convert any Conversion Amount into shares of
Common Stock on any date (a “Conversion Date”), the Holder
shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior
to 11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company and (B) if required by Section 3(c)(iii), surrender this Note to a
common carrier for delivery to the Company as soon as practicable on or
following such date (or an indemnification undertaking with respect to this Note
in the case of its loss, theft or destruction).  On or before the
(2nd) second
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation (the “Conversion Confirmation”) of
receipt of such Conversion Notice to the Holder and the Company’s Transfer
Agent.  On or before the (3rd) third
Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (X)
provided that the Transfer Agent is participating in the DTC Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system
or (Y) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and deliver to the address as specified in
the Conversion Notice, a certificate, registered in the name of the Holder or
its designee, for the number of shares of Common Stock to which the Holder shall
be entitled.  If this Note is physically surrendered for conversion as
required by Section 3(c)(iii) and the outstanding Principal of this Note is
greater than the Principal portion of the Conversion Amount being converted,
then the Company shall as soon as practicable and in no event later than three
(3) Business Days after receipt of this Note and at its own expense, issue and
deliver to the holder a new Note (in accordance with Section 17(d)) representing
the outstanding Principal not converted.  The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.

     

    (ii) Company’s Failure to Timely
Convert.  If the Company shall fail to issue a certificate to
the Holder or credit the Holder’s balance account with DTC, as applicable, for
the number of shares of Common Stock to which the Holder is entitled upon
conversion of any Conversion Amount on or prior to the date which is three (3)
Business Days after the Conversion Date (a “Conversion Failure”), then (A)
the Company shall pay damages to the Holder for each Trading Day of such
Conversion Failure in an amount equal to 1.5% of the product of (I) the sum of
the number of shares of Common Stock not issued to the Holder on or prior to the
Share Delivery Date and to which the Holder is entitled, multiplied by (II) the
Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the
Holder, upon written notice to the Company, may void its Conversion Notice with
respect to, and retain or have returned, as the case may be, any portion of this
Note that has not been converted pursuant to such Conversion Notice; provided that the
voiding of a Conversion Notice shall not affect the Company’s obligations to
make any payments which have accrued prior to the date of such notice pursuant
to this Section 3(c)(ii) or otherwise.  In addition to the foregoing,
if within three (3) Business Days after the Company’s receipt of the facsimile
copy of a Conversion Notice the Company shall fail to issue and deliver a
certificate to the Holder or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon such
Holder’s conversion of any Conversion Amount, and if on or after the Share
Delivery Date the Holder purchases (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company (a “Buy-In”),
then the Company shall, within three (3) Business Days after the Holder’s
request and in the Holder’s discretion, either (A) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage
commissions and other out of pocket expenses, if any) for the shares of Common
Stock so purchased (the “Buy-In
Price”), at which point the Company’s obligation to issue and deliver
such certificate or to credit the Holder’s balance account with DTC for the
number of shares of Common Stock to which the Holder is entitled upon such
Holder’s conversion of any Conversion Amount shall terminate, or (B) promptly
honor its obligation to deliver to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (1) such number of
shares of Common Stock, times (2) the Closing Bid Price on the Conversion
Date.

     

    (iii) Registration;
Book-Entry.  The Company shall maintain a register (the “Register”) for the recordation
of the names and addresses of the holders of each Note and the principal amount
of the Notes held by such holders (the “Registered
Notes”).  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the
holders of the Notes shall treat each Person whose name is recorded in the
Register as the owner of a Note for all purposes, including, without limitation,
the right to receive payments of Principal and Interest hereunder,
notwithstanding notice to the contrary.  A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or
sale on the Register.  Upon its receipt of a request to assign or sell
all or part of any Registered Note by a Holder, the Company shall record the
information contained therein in the Register and issue one or more new
Registered Notes in the same aggregate principal amount as the principal amount
of the surrendered Registered Note to the designated assignee or transferee
pursuant to Section 17.  Notwithstanding anything to the contrary set
forth in this Note, upon conversion of any portion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically surrender
this Note to the Company unless (A) the full Conversion Amount represented by
this Note is being converted or (B) the Holder has provided the Company with
prior written notice (which notice may be included in a Conversion Notice)
requesting reissuance of this Note upon physical surrender of this
Note.  The Holder and the Company shall maintain records showing the
Principal, Interest and Late Charges, if any, converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

     

    (iv) Pro Rata Conversion;
Disputes.  In the event that the Company receives a Conversion
Notice from more than one holder of Notes for the same Conversion Date and the
Company can convert some, but not all, of such portions of the Notes submitted
for conversion, the Company, subject to Section 3(d), shall convert from each
holder of Notes electing to have Notes converted on such date a pro rata amount
of such holder’s portion of its Notes submitted for conversion based on the
principal amount of Notes submitted for conversion on such date by such holder
relative to the aggregate principal amount of all Notes submitted for conversion
on such date.  In the event of a dispute as to the number of shares of
Common Stock issuable to the Holder in connection with a conversion of this
Note, the Company shall issue to the Holder the number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section
22.

     

    (d) Limitations on
Conversions.

     

    (i) Beneficial
Ownership.  The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any
portion of this Note pursuant to Section 3(a), to the extent that after giving
effect to such conversion, the Holder (together with the Holder’s affiliates)
would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion.  For purposes of the foregoing sentence, the number
of shares of Common Stock beneficially owned by the Holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion of
this Note with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any Other Notes or warrants) subject
to a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for
purposes of this Section 3(d)(i), beneficial ownership shall be calculated in
accordance with Section 13(d) of the 1934 Act.  For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) if the Company is required to file reports pursuant to the
1934 Act, the Company’s most recent Form 10-K, Form 10-Q, Form 8-K or other
public filing with the Securities Exchange Commission, as the case may be, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding.  For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one (1) Business Day confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported.  By written notice to the Company, the Holder may increase
or decrease the Maximum Percentage to any other percentage; provided that (i)
any such increase will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder and not to any other holder of
Notes.

     

    (4) RIGHTS UPON EVENT OF
DEFAULT.

     

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

     

    (i) the
suspension from trading or failure of the Common Stock to be listed on an
Eligible Market for a period of five (5) consecutive Trading Days or for more
than an aggregate of ten (10) Trading Days in any 365-day period;

     

    (ii) the
Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of shares of Common Stock within ten (10) Business Days after the
applicable Conversion Date or (B) notice, written or oral, to any holder of the
Notes, including by way of public announcement or through any of its agents, at
any time, of its intention not to comply for any reason whatsoever, with a
request for conversion of any Notes into shares of Common Stock that is tendered
in accordance with the provisions of the Notes, other than pursuant to Section
3(d);

     

    (iii) the
Holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that the Holder would be entitled to receive upon a conversion of the full
Conversion Amount of this Note (without regard to any limitations on conversion
set forth in Section 3(d) or otherwise) for ten (10) consecutive Business
Days;

     

    (iv) the
Company’s failure to pay to the Holder any amount of Principal, Interest, Late
Charges or other amounts when and as due under this Note (including, without
limitation, the Company’s failure to pay any redemption payments or amounts
hereunder) or any other Transaction Document (as defined in the Securities
Purchase Agreement) or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated hereby and
thereby to which the Holder is a party, except, in the case of a failure to pay
Interest and Late Charges when and as due, in which case only if such failure
continues for a period of at least five (5) Business Days;

     

    (v) any
default under any Indebtedness of the Company or any of its Subsidiaries (as
defined in Section 3(a) of the Securities Purchase Agreement) involving an
amount in excess of $250,000;

     

    (vi) the
Company’s or any of its Subsidiaries’, (A) commencement of a voluntary case
pursuant to or within the meaning of Title 11, U.S. Code, or any similar
Federal, foreign or state law for the relief of debtors (collectively, “Bankruptcy
Law”),  (B) consent to the entry of an order for relief against
it in an involuntary case under any Bankruptcy Law, (C) consent to the
appointment of a receiver, trustee, assignee, liquidator or similar official (a
“Custodian”) under any
Bankruptcy Law, (D) making of a general assignment for the benefit of its
creditors or (E) admitting in writing that it is generally unable to pay its
debts as they become due;

     

    (vii) a
proceeding or case shall be commenced in respect of the Company, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or composition
or readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of it or of all or any substantial part of its
assets in connection with the liquidation or dissolution of the Company or (iii)
similar relief in respect of it under any law providing for the relief of
debtors, and such proceeding or case described in clause (i), (ii) or (iii)
shall continue undismissed, or unstayed and in effect, for a period of thirty
(30) days or any order for relief shall be entered in an involuntary case under
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Company or
action under the laws of any jurisdiction (foreign or domestic) analogous to any
of the foregoing shall be taken with respect to the Company and shall continue
undismissed, or unstayed and in effect for a period of sixty (60) days;
or

     

    (viii) a final
judgment or judgments for the payment of money aggregating in excess
of  $250,000 are rendered against the Company or any of its
Subsidiaries , and which judgments are not, within sixty (60) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the amounts set forth
above so long as the Company provides the Holder a written statement from such
insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of such
judgment;

     

    (ix) the
Company’s breach of any representation, warranty, covenant or other term or
condition of any Transaction Document, except, in the case of a breach of a
covenant or other term or condition of any Transaction Document which is
curable, only if such breach continues for a period of at least ten (10)
consecutive Business Days following notice to the Company;

     

    (x) the
Company’s breach of any of the terms, conditions or covenants of this Note (not
otherwise covered by Section 4(a)(iv) above,  provided such breach is
not otherwise cured within ten (10) consecutive Business Days following notice
to the Company (only if it is capable of cure); or

     

    (xi) any Event
of Default (as defined in the Other Notes) occurs with respect to any Other
Notes involving an amount in excess of $250,000.

     

    (b) Redemption
Right.  Upon the occurrence of an Event of Default, the Company
shall within one (1) Business Day deliver written notice thereof via facsimile
and overnight courier (an “Event of Default Notice”) to
the Holder.  At any time after the earlier of the Holder’s receipt of
an Event of Default Notice and the Holder becoming aware of an Event of Default,
the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall
indicate the portion of this Note the Holder is electing to
redeem.  Each portion of this Note subject to redemption by the
Company pursuant to this Section 4(b) shall be redeemed by the Company at a
price equal to the greater of (i) the product of (A) the Conversion Amount and
(B) the Redemption Premium and (ii) the product of (A) the Conversion Rate with
respect to such Conversion Amount in effect at such time as the Holder delivers
an Event of Default Redemption Notice and (B) the product of (1) the Equity
Value Redemption Premium and (2) the greatest Closing Sale Price of the Common
Stock beginning on the date immediately preceding such Event of Default and
ending on the date the Holder delivers the Event of Default Redemption Notice
(the “Event of Default
Redemption
Price”).  Redemptions required by this Section 4(b) shall be
made in accordance with the provisions of Section 9.  To the extent
redemptions required by this Section 4(b) are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company; such
redemptions shall be deemed to be voluntary prepayments.  The parties
hereto agree that in the event of the Company’s redemption of any portion of the
Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder.  Accordingly, any Redemption
Premium due under this Section 4(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty. The Holder’s right of conversion shall remain
unaffected following an Event of Default Redemption Notice.

     

    (5) RIGHTS UPON FUNDAMENTAL
TRANSACTION AND CHANGE OF CONTROL.

     

    (a) Assumption.  For
so long as this Note remains outstanding, the Company shall not enter into or be
party to a Fundamental Transaction unless (i)  the Successor Entity assumes
in writing all of the obligations of the Company under this Note and the other
Transaction Documents in accordance with the provisions of this Section 5(a)
pursuant to written agreements in form and substance reasonably satisfactory to
the Required Holders and approved by the Required Holders prior to such
Fundamental Transaction, including agreements to deliver to each holder of Notes
in exchange for such Notes a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to the Notes,
including, without limitation, having a principal amount and interest rate equal
to the principal amounts and the interest rates of the Notes then outstanding
held by such holder, having similar conversion rights and having similar ranking
to the Notes, and satisfactory to the Required Holders and (ii)  the
Successor Entity (including its Parent Entity) is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market (a
“Public Successor
Entity”).  Upon the occurrence of any Fundamental Transaction,
the Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Note
referring to the “Company” shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Note with the same effect as if such
Successor Entity had been named as the Company herein.  Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon conversion or
redemption of this Note at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Company’s Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion or
redemption of the Notes prior to such Fundamental Transaction, such shares of
the publicly traded common stock (or their equivalent) of the Successor Entity
(including its Parent Entity), as adjusted in accordance with the provisions of
this Note.  The provisions of this Section shall apply similarly and
equally to successive Fundamental Transactions and shall be applied without
regard to any limitations on the conversion or redemption of this
Note.

     

    (b) Redemption
Right.    No sooner than fifteen (15) Trading Days
nor later than ten (10) Trading Days prior to the consummation of a Change of
Control, but not prior to the public announcement of such Change of Control, the
Company shall deliver written notice thereof via facsimile and overnight courier
to the Holder (a “Change of
Control Notice”).  At any
time during the period beginning after the Holder’s receipt of a Change of
Control Notice and ending sixty (60) Trading Days after the date of the
consummation of such Change of Control, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof
(“Change of Control Redemption
Notice”) to the Company, which Change of Control Redemption Notice shall
indicate the Conversion Amount the Holder is electing to redeem.  The
portion of this Note subject to redemption pursuant to this Section 5 shall be
redeemed by the Company in cash at a price equal to the greater of (i) the
product of (A) the Redemption Premium and (B) the Conversion Amount being
redeemed and (ii) the product of (A) the Equity Value Redemption Premium and (B)
the product of (1) the Conversion Amount being redeemed multiplied by (2) the
quotient determined by dividing (x) the aggregate cash consideration and the
aggregate cash value of any non-cash consideration per Common Share to be paid
to the holders of the Common Shares, or the Company, if applicable, upon
consummation of the Change of Control (any such non-cash consideration
consisting of marketable securities to be valued at the higher of the Closing
Sale Price of such securities as of the Trading Day immediately prior to, the
Closing Sale Price as of the Trading Day immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price of
the Common Stock immediately prior to the public announcement of such proposed
Change of Control) by (y) the Conversion Price, (the “Change of Control Redemption
Price”).  Redemptions required by this Section 5 shall be made
in accordance with the provisions of Section 9 and shall have
priority to payments to stockholders in connection with a Change of
Control.  To the extent redemptions required by this Section 5(b) are
deemed or determined by a court of competent jurisdiction to be prepayments of
the Note by the Company, such redemptions shall be deemed to be voluntary
prepayments.  Notwithstanding anything to the contrary in this Section
5, but subject to Section 3(d), until the Change of Control Redemption Price
(together with any interest thereon) is paid in full, the Conversion Amount
submitted for redemption under this Section 5(b) (together with any interest
thereon) may be converted, in whole or in part, by the Holder into Common Stock
pursuant to Section 3.  The parties hereto agree that in the event of
the Company’s redemption of any portion of the Note under this Section 5(b), the
Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the
Holder.  Accordingly, any Change of Control redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder’s actual loss of its investment opportunity
and not as a penalty.  The Holder’s right of conversion shall remain
unaffected following an Change of Control Redemption Notice.

     

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

     

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

     

    (b) Other Corporate
Events.  In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate
Event”), the Company shall make appropriate provision to insure that the
Holder will thereafter have the right to receive upon a conversion of this Note,
at the Holder’s option, (i) in addition to the shares of Common Stock receivable
upon such conversion, such securities or other assets to which the Holder would
have been entitled with respect to such shares of Common Stock had such shares
of Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the
convertibility of this Note) or (ii) in lieu of the shares of Common Stock
otherwise receivable upon such conversion, such securities or other assets
received by the holders of shares of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion
rights for the form of such consideration (as opposed to shares of Common Stock)
at a conversion rate for such consideration commensurate with the Conversion
Rate.  Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the Required Holders.  The
provisions of this Section shall apply similarly and equally to successive
Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Note.

     

    (7) RIGHTS UPON ISSUANCE OF
OTHER SECURITIES.

     

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

     

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

     

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

     

    (iii) Change in Option Price or
Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exchange or exercise of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable or
exercisable for Common Stock increases or decreases at any time, the Conversion
Price in effect at the time of such increase or decrease shall be adjusted to
the Conversion Price which would have been in effect at such time had such
Options or Convertible Securities provided for such increased or decreased
purchase price, additional consideration or changed conversion rate, as the case
may be, at the time initially granted, issued or sold.  For purposes
of this Section 7(a)(iii), if the terms of any Option or Convertible Security
that was outstanding as of the Subscription Date are increased or decreased in
the manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such increase or decrease.  No adjustment shall be made if
such adjustment would result in an increase of the Conversion Price then in
effect.

     

    (iv) Calculation of Consideration
Received.  In case any Option is issued in connection with the
issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such
Options by the parties thereto, the Options will be deemed to have been issued
for a consideration of $.01.  If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor.  If any Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the Company
will be the fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration received by
the Company will be the Closing Sale Price of such securities on the date of
receipt.  If any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be.  The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the Required Holders.  If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair
value of such consideration will be determined within five (5) Business Days
after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Required Holders.  The determination
of such appraiser shall be deemed binding upon all parties absent manifest error
and the fees and expenses of such appraiser shall be borne by the
Company.

     

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

     

    (vi) Voluntary Adjustment By
Company. The Company may at any time during the term of
this Note reduce the then current  Conversion Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.

     

    (b) Adjustment of Conversion
Price upon Issuance of Common Stock after a Qualified
Offering.  Once the Company completes a financing transaction
that results in it having achieved  a “Qualified Offering” (as that
term is defined hereafter), the anti-dilution provisions of Section 7(a) of this
Agreement shall be deemed amended and restated and replaced by the anti-dilution
provisions contained within any one or more of the financing transactions that
constituted the Qualified Offering,  with the selection of such
replacement anti-dilution provisions to be made by and at the discretion of the
Holder. Thereafter, if and whenever the Company issues or sells, or in
accordance with Section 7(a) is deemed to have issued or sold, any shares of
Common Stock (including the issuance or sale of shares of Common Stock owned or
held by or for the account of the Company, but excluding shares of Common Stock
deemed to have been issued or sold by the Company in connection with any
Excluded Securities) for a New
Issuance Price less than the then applicable Conversion Price in effect
immediately prior to such issue or sale or deemed issuance or sale (the
foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance the Conversion
Price then in effect shall be adjusted (reduced but not increased) in accordance
with the then applicable anti-dilution provisions  in effect as
selected above by the Holder. For the purposes of clarity, the existing
anti-dilution provisions in effect under Section 7(a) shall remain in effect
with respect to the financing transaction that resulted in the Company having
achieved  a Qualified Offering.

     

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

     

    (d) Other
Events.  If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company’s
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 8.

     

    (8) OPTIONAL RIGHT OF
REDEMPTION.

     

    (a) At any
time within ninety (90) days after the completion of a Qualified
Offering,  the Company or the Holder shall each have the right to
deliver written notice thereof via facsimile and overnight courier (an “Optional Redemption Notice”)
to the other Party pursuant to which the Company shall have the right to redeem,
and the Holder shall have the right to cause the Company to redeem, all or less
than all of the Note. The Optional Redemption Notice shall specify the amount of
the Note to be redeemed.  Each portion of this Note subject to
redemption  pursuant to this Section 8 shall be redeemed by the
Company at a price equal to the Conversion Amount  (the “Optional Redemption
Price”).  Redemptions required by this Section 8 shall be made
in accordance with the provisions of Section 9.  To the extent
redemptions required by this Section 8 are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company; such
redemptions shall be deemed to be voluntary prepayments.  The Holder’s
right of conversion shall remain unaffected following an Optional Redemption
Notice received by the Holder from the Company.

     

    (9)  REDEMPTION
EVENTS.

     

    (a) Mechanics.  The
Company shall deliver the applicable Event of Default Redemption Price to the
Holder within five (5) Business Days after the Company’s receipt of the Holder’s
Event of Default Redemption Notice.  If the Holder has submitted a
Change of Control Redemption Notice in accordance with Section 5(b), the Company
shall deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five (5)
Business Days after the Company’s receipt of such notice
otherwise.  The Company shall deliver the Optional Redemption Price to
the Holder within five (5) Business Days after receipt of the Optional
Redemption Notice by either Party. In the event of a redemption of less than all
of the Conversion Amount of this Note, the Company shall promptly cause to be
issued and delivered to the Holder a new Note (in accordance with Section 17(d))
representing the outstanding Principal which has not been
redeemed.  In the event that the Company does not pay the applicable
Redemption Price to the Holder within the time period required, at any time
thereafter and until the Company pays such unpaid Redemption Price in full, the
Holder shall have the option, in lieu of redemption, to require the Company to
promptly return to the Holder all or any portion of this Note representing the
Conversion Amount that was submitted for redemption and for which the applicable
Redemption Price (together with any Late Charges thereon) has not been
paid.  Upon the Company’s receipt of such notice, (x) the applicable
Redemption Notice shall be null and void with respect to such Conversion Amount,
(y) the Company shall immediately return or reinstate this Note, or issue a new
Note (in accordance with Section 17(d)) to the Holder representing the sum of
such Conversion Amount to be redeemed together with accrued and unpaid Interest
with respect to such Conversion Amount and accrued and unpaid Late Charges with
respect to such Conversion Amount and Interest and (z) the Conversion Price of
this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the applicable Redemption
Notice is voided and (B) the lowest Closing Bid Price of the Common Stock during
the period beginning on and including the date on which the applicable
Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided.  The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.

     

    (b) Redemption by Other
Holders.  Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event
or occurrence substantially similar to the events or occurrences described in
Section 4(b),  5(b), or Section 8 (each, an “Other Redemption Notice”), the
Company shall immediately, but no later than one (1) Business Day of its receipt
thereof, forward to the Holder by facsimile a copy of such notice.  If
the Company receives a Redemption Notice and one or more Other Redemption
Notices, during the seven (7) Business Day period beginning on and including the
date which is three (3) Business Days prior to the Company’s receipt of the
Holder’s Redemption Notice and ending on and including the date which is three
(3) Business Days after the Company’s receipt of the Holder’s Redemption Notice
and the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven Business Day period.

     

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

     

    (11) RESERVATION OF AUTHORIZED
SHARES.

     

    (a) Reservation.  The
Company shall initially reserve out of its authorized and unissued Common Stock
a number of shares of Common Stock for each of the Notes equal to 130% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of
the Issuance Date.  So long
as any of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, 130% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding; provided that at no
time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve
Amount”).  The initial number of shares of Common Stock
reserved for conversions of the Notes and each increase in the number of shares
so reserved shall be allocated pro rata among the holders of the Notes based on
the principal amount of the Notes held by each holder at the Closing (as defined
in the Securities Purchase Agreement) or increase in the number of reserved
shares, as the case may be (the “Authorized Share
Allocation”).  In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share
Allocation.  Any shares of Common Stock reserved and allocated to any
Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.

     

    (b) Insufficient Authorized
Shares.  If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then
outstanding.  Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than seventy-five (75) days
after the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders (or have a written consent of shareholders executed
by the requisite number of shareholders required to approve the action) for the
approval of an increase in the number of authorized shares of Common Stock and
the Noteholders shall vote any and all shares of Common Stock owned by them in
favor of such action.  In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best
efforts to solicit its stockholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

     

    (12) VOTING
RIGHTS.  The Holder shall have no voting rights as the holder
of this Note, except (a) as required by law, including, but not limited to, the
Nevada Revised Statutes,
and (b) as expressly provided in this Note.

     

    (13) COVENANTS.  So
long as this Note is outstanding:

     

    (a) Rank.                      All
payments due under this Note (a) shall rank pari passu with all Other
Notes, (b) shall rank junior to the amounts due under: (i) the Company’s Amended
and Restated Credit Agreement with Fourth Third, LLC, (ii) the Indebtedness owed
by the Company to Greenfield Commercial Credit, LLC; and (iii) the 12%
Subordinated Secured Convertible Promissory Note from the Company to Black
Forest International, LLC (collectively, the “Senior Debt”) and (c) shall be
senior to all other Indebtedness of the Company and its Subsidiaries, other than
the Senior Debt.

     

    (b) Incurrence of
Indebtedness.  The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, incur or guarantee,
assume or suffer to exist any Indebtedness, other than the Indebtedness
evidenced by this Note and the Other Notes and other Permitted
Indebtedness.

     

    (c) Existence of
Liens.  The Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted
Liens.

     

    (d) Restricted
Payments.  The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness (other than the Notes and the Senior Debt), whether by
way of payment in respect of principal of (or premium, if any) or interest on,
such Indebtedness if at the time such payment is due or is otherwise made or,
after giving effect to such payment, an event constituting, or that with the
passage of time and without being cured would constitute, an Event of Default
has occurred and is continuing.

     

    (e) Restriction on Redemption
and Cash Dividends.  Until all of the Notes have been
converted, redeemed or otherwise satisfied in accordance with their terms, the
Company shall not, directly or indirectly, redeem, repurchase or declare or pay
any cash dividend or distribution on its capital stock without the prior express
written consent of the Required Holders, except as otherwise permitted within
Section 4(j) of the Securities Purchase Agreement.

     

    (f) Use of Proceeds. The Company will use the
proceeds from the sale of the Notes substantially as set forth in Section 4(d)
of the Securities Purchase Agreement.

     

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

     

    (15) VOTE TO ISSUE, OR CHANGE THE
TERMS OF, NOTES.  The affirmative vote at a meeting duly called
for such purpose or the written consent without a meeting of the Required
Holders shall be required for any change or amendment to this Note or the Other
Notes, and any such change agreed to shall be binding on all Noteholders and the
Company may rely conclusively on evidence of such action having been
taken.

     

    (16) TRANSFER.  This
Note and any shares of Common Stock issued upon conversion of this Note may be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, subject only to the provisions of Section 2(f) of the Securities
Purchase Agreement.

     

    (17) REISSUANCE OF THIS
NOTE.

     

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

     

    (b) Lost, Stolen or Mutilated
Note.  Upon receipt by the Company of an affidavit and
agreement of indemnity from a record Noteholder in a form  reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 17(d)) representing the outstanding Principal.

     

    (c) Note Exchangeable for
Different Denominations.  This Note is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Note or Notes (in accordance with Section 17(d) representing in the aggregate
the outstanding Principal of this Note, and each such new Note will represent
such portion of such outstanding Principal as is designated by the Holder at the
time of such surrender.

     

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

     

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

     

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

     

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

     

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

     

    (22) DISPUTE
RESOLUTION.  In the case of a dispute as to the determination
of (a) the Closing Bid Price, the Closing Sale Price or the Weighted Average
Price or (b) the arithmetic calculation of the Conversion Rate or any Redemption
Price, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within three (3) Business Day of receipt, or deemed
receipt, of the Conversion Notice or Redemption Notice or other event giving
rise to such dispute, as the case may be, to the Holder.  If the
Holder and the Company are unable to agree upon such determination or
calculation within three (3) Business Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within one (1) Business Day submit via facsimile (a) the disputed determination
of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price
to an independent, reputable investment bank selected by the Company and
approved by the Holder or (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company’s independent, outside
accountant.  The Company, at the Company’s expense, shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

     

    (23) NOTICES;
PAYMENTS.

     

    (a) Notices.  Whenever
notice is required to be given under this Note, unless otherwise provided
herein, such notice shall be given in accordance with Section 10(f) of the
Securities Purchase Agreement.  The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason
therefor.  Without limiting the generality of the foregoing, the
Company will give written notice to the Holder (i) immediately upon any
adjustment of the Conversion Price, setting forth in reasonable detail, and
certifying, the calculation of such adjustment and (ii) at least twenty (20)
days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.

     

    (b) Payments.  Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier
service to such Person at such address as previously provided to the Company in
writing (which address, in the case of each of the Purchasers, shall initially
be as set forth on the Schedule of Buyers attached to the Securities Purchase
Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with prior
written notice setting out such request and the Holder’s wire transfer
instructions.  Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a Business Day, the same shall instead
be due on the next succeeding day which is a Business Day and, in the case of
any Interest Date which is not the date on which this Note is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of Interest due on such date.  Any amount of
Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of eighteen percent (18%) per annum from the date such amount
was due until the same is paid in full (“Late Charge”).

     

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

     

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

     

    (26) GOVERNING
LAW.  This Note shall be construed and enforced in
accor­dance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.  The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, County of New York, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law.  In the event that any provision of this Note 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 such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision of this Note.  Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder.  THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     

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

     

    (a) “Approved Stock Plan” means any
employee benefit plan which has been approved by the Board of Directors of the
Company (which shall include the affirmative approval of all independent
directors, if any) , pursuant to which the Company’s securities may be issued to
any employee, officer or director or consultants for services provided to the
Company.

     

    (b) “Bloomberg” means Bloomberg
Financial Markets.

     

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

     

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

     

    (e)  “Change of Control” means any
Fundamental Transaction other than (i) any reorganization, recapitalization or
reclassification of the Common Stock in which holders of the Company’s voting
power immediately prior to such reorganization, recapitalization or
reclassification continue after such reorganization, recapitalization or
reclassification to hold publicly traded securities and, directly or indirectly,
the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other
than a corporation) of such entity or entities, or (ii) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company.

     

    (f) “Closing Bid Price” and “Closing Sale Price” means, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the
Closing Bid Price or the Closing Sale Price cannot be calculated for a security
on a particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 22, subject to appropriate adjustment for any stock split, stock
dividend, stock combination or other similar transaction that proportionately
decreases or increases the Common Stock after the date hereof.

     

    (g) “Closing Date” shall have the
meaning set forth in the Securities Purchase Agreement which corresponds to the
date this Note and the Other Notes were initially issued pursuant to the terms
of the Securities Purchase Agreement.

     

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

     

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

     

    (j) “Eligible Market” means the
Principal Market, The New York Stock Exchange, Inc., the American Stock
Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market or The
NASDAQ Capital Market, OTC Bulletin Board or the Pink Sheets, or any market that
is a successor to any of the foregoing.

     

    (k) “Equity Value Redemption
Premium” means (i) for any Event of Default Notice delivered or required
to be delivered in connection with an Event of Default, 120%; or (ii) for any
Change of Control Notice delivered or required to be delivered in connection
with a Change of Control, 120%.

     

    (l) “Excluded Securities” means any
Common Stock issued or issuable: (i) in connection with any Approved Stock Plan;
(ii) upon conversion of the Notes or the exercise of the
Warrants;  (iii) upon exercise of any Options or Convertible
Securities which have been issued and are outstanding on the day immediately
preceding the Subscription Date, provided that the terms of such Options or
Convertible Securities are not amended, modified or changed on or after the
Subscription Date; (iv) securities issued pursuant to acquisitions or strategic
acquisition related transactions that are approved by a majority of the
disinterested directors of the Company, and provided any such issuance be to a
Person which is, itself, or through its subsidiaries, an operating company in a
business synergistic with the business of the Company and in which the Company
receives benefits in addition to the investment of funds, but shall not include
a transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities;  (v) in connection with the issuance of securities
disclosed in the Company’s Form 8-K dated June 30, 2008, as filed with the SEC
on July 7, 2008, and as amended on August 6, 2008; and (vi) the 7,000,000 shares
of the Company’s Common Stock issued in the name of Earth Biofuels,
Inc..

     

    (m) “Fundamental Transaction”
means that the Company shall, directly or indirectly, in one or more
related transactions, (i) consolidate or merge with or into (whether or not the
Company is the surviving corporation) another Person or Persons, or (ii) sell,
assign, transfer, convey or otherwise dispose of or exclusively license or lease
all or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than 50% of the outstanding shares
of Voting Stock (not including: (a) any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer; and (b) the
7,000,000 shares of Common Stock issued in the name of Earth Biofuels, Inc.), or
(iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of the outstanding shares of Voting Stock (not including any
shares of Voting Stock held by the other Person or other Persons making or party
to, or associated or affiliated with the other Persons making or party to, such
stock purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its Common Stock or (vi) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock
of the Company.

     

    (n) “GAAP” means United States
generally accepted accounting principles, consistently applied.

     

    (o) “Indebtedness” of any Person
means, without duplication (i) all indebtedness for borrowed money, (ii) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in
accordance with GAAP (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with GAAP, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii)
all indebtedness referred to in clauses (i) through (vi) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (viii) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i)
through (vii) above.

     

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

     

    (q) “Parent Entity” of a Person
means an entity that, directly or indirectly, controls the applicable Person and
whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

     

    (r) “Permitted Indebtedness” means
(i) Indebtedness evidenced by this Note and the Other Notes; (ii) Indebtedness
described on Schedule 3(s) to the Securities Purchase Agreement; (iii)
Indebtedness incurred solely for the purpose of financing the acquisition or
lease of any Equipment (as defined in the Security Agreement) by the Company or
any of its Subsidiaries, including Capital Lease Obligations with no recourse
other than to such Equipment; (iv) the Senior Debt; and (v) renewals, extensions
and refinancing of any Indebtedness described in clauses (i) or (iii) of this
subsection.

     

    (s) “Permitted Liens” means (i) any
Lien for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or
delinquent, (iii) any Lien created by operation of law, such as materialmen’s
liens, mechanics’ liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (iv) Liens
(A) upon or in any equipment acquired or held by the Company or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment, or (B) existing on such equipment at the time of its acquisition,
provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (v) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (i) and (iv) above, provided
that any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the Indebtedness
being extended, renewed or refinanced does not increase, (vi) leases or
subleases and licenses and sublicenses granted to others in the ordinary course
of the Company’s business, not interfering in any material respect with the
business of the Company and its Subsidiaries taken as a whole, (vii) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payments of custom duties in connection with the importation of goods, (viii)
Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Section 4(a), and (ix) Liens securing the
Company’s obligations under the Permitted Indebtedness, including the Senior
Debt.

     

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

     

    (u) “Principal Market” means the
principal market, exchange or automated quotation system upon which the shares
of the Company’s Common Stock trade, including the OTC Bulletin Board or the
Pink Sheets.

     

    (v) “Qualified Offering” means, the
combination of any one or more transactions in which the Company sells, grants,
issues or disposes of any of the Company’s debt, equity or equity equivalent
securities, including without limitation any debt, preferred stock or other
instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of
Common Stock or Common Stock equivalents, which, commencing after the Closing
Date, generate aggregate gross proceeds of $15,000,000 or more.

     

    (w) “Redemption Notices” means,
collectively, any Event of Default Redemption Notices, any Change of Control
Redemption Notices, or any Optional Redemption Notices ( each of the foregoing,
individually, a Redemption Notice.)

     

    (x) “Redemption Premium” means (i)
in the case of the Events of Default described in Section 4(a)(i) - (v) and
(viii) - (xi), 125%; (ii) in the case of the Events of Default described in
Section 4(a)(vi) - (vii), 100%; or (iii) in the case of a Redemption under
Section 5(b) of this Agreement, 120%.

     

    (y) “Redemption Prices” means,
collectively, the Event of Default Redemption Price, the Change of Control
Redemption Price, the Company Optional Redemption Price and the Holder Optional
Redemption Price, each of the foregoing, individually, a Redemption
Price.

     

    (z)  “Required Holders” mean the
holders of Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding.

     

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

     

    (bb) “Securities Purchase Agreement”
means that certain securities purchase agreement dated as of the Subscription
Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes and Warrants.

     

    (cc) “Subscription Date” means
August 19, 2008.

     

    (dd) “Successor Entity” means the
Person, which may be the Company, formed by, resulting from or surviving any
Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded
entity whose common stock or equivalent equity security is quoted or listed for
trading on an Eligible Market, Successor Entity shall mean such Person’s Parent
Entity.

     

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

     

    (ff) “Transaction Documents” mean
the “Transaction Documents” as defined in the Securities Purchase
Agreement.

     

    (gg) “Voting Stock” of a Person
means capital stock of such Person of the class or classes pursuant to which the
holders thereof have the general voting power to elect, or the general power to
appoint, at least a majority of the board of directors, managers or trustees of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

     

    (hh) “Warrants” has the meaning
ascribed to such term in the Securities Purchase Agreement, and shall include
all warrants issued in exchange therefor or replacement thereof.

     

    (ii) “Weighted Average Price” means,
for any security as of any date, the dollar volume-weighted average price for
such security on the Principal Market during the period beginning at 9:30:01
a.m., New York Time (or such other time as the Principal Market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg through its “Volume at
Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as such market publicly announces is the official close
of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
price is reported for such security by Bloomberg for such hours, the average of
the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the “pink sheets” by Pink Sheets
LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted
Average Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Weighted Average Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 22, subject to appropriate adjustment for any stock split, stock
dividend, stock combination or other similar transaction that proportionately
decreases or increases the Common Stock during the applicable calculation
period.

     

    (28) DISCLOSURE. Upon
receipt or delivery by the Company of any notice in accordance with the terms of
this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information
relating to the Company or its Subsidiaries, the Company shall within one (1)
Business Day after any such receipt or delivery publicly disclose such material,
nonpublic information on a Current Report on Form 8-K or
otherwise.  In the event that the Company believes that a notice
contains material, nonpublic information relating to the Company or its
Subsidiaries, the Company so shall indicate to such Holder contemporaneously
with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do
not constitute material, nonpublic information relating to the Company or its
Subsidiaries.

     

    [Signature
Page Follows]

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

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

     

    

    
      	
              PNG
      VENTURES, Inc.

            
	
              By:                    /s/ Kevin
      Markey                                            

            
	
              Name:  Kevin
      Markey

            
	
              Title:    Chief
      Executive Officer

            

    

    

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    

    EXHIBIT
I

     

    

     

    PNG
VENTURES, INC.

     

    CONVERSION
NOTICE

     

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

     

    
      	
              Date
      of Conversion:

            	 
      
	
              Aggregate
      Conversion Amount to be converted:

            	 
      
	
              Please
      confirm the following information:

            
	
              Conversion
      Price:

            	 
      
	
              Number
      of shares of Common Stock to be issued:

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

            
	
              Issue
      to:

            	 
      
	 
      	 
      
	 
      	 
      
	
              Facsimile
      Number:

            	 
      
	
              Authorization:

            	 
      
	
              By:

            	 
      
	
              Title:

            	 
      
	
              Dated:

            	 
      
	
              Account
      Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      
	
              Transaction
      Code Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      
	 
      	 
      

    

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

     

    ACKNOWLEDGMENT

     

    The
Company hereby acknowledges this Conversion Notice and hereby directs Action
Stock Transfer Corporation to issue the above
indicated number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated August 19, 2008 from the Company and acknowledged and agreed
to by Action Stock Transfer Corporation.

     

    

    
      	
              PNG
      VENTURES, INC.

            
	
              By:                    /s/ Kevin
      Markey                            

            
	
              Name:  Kevin
      Markey

            
	
              Title:    Chief
      Executive Officerex42.htm

    

     

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISEABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

     

    PNG
VENTURES, INC.

     

    Warrant
To Purchase Common Stock

     

    

    

    Number of
Shares of Common Stock: Total—797,059

    Date of
Issuance: August 19, 2008 ("Issuance Date")

    

     

    PNG
VENTURES, Inc., a Nevada corporation, (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, CASTLERIGG PNG INVESTMENTS LLC, the registered holder
hereof or its permitted assigns (the "Holder"), is entitled, subject
to the terms set forth below, to purchase from the Company, at the Exercise
Price (as defined below) then in effect, upon surrender of this Warrant to
Purchase Common Stock (including any Warrants to purchase Common Stock issued in
exchange, transfer or replacement hereof, the "Warrant"), at any time or
times on or after the date hereof, but not after 11:59 p.m., New York time, on
the Expiration Date (as defined below), seven hundred and ninety seven thousand
and fifty nine (797,059) fully paid nonassessable shares of Common Stock (as
defined below) (the
"Warrant
Shares").  Except as otherwise defined herein, capitalized
terms in this Warrant shall have the meanings set forth in Section
16.  This Warrant is one of the Warrants to purchase Common Stock (the
"SPA Warrants") issued
pursuant to Section 1 of that certain Securities Purchase Agreement, dated as of
August 19, 2008 (the "Subscription Date"), by and
among the Company and the investors (the "Buyers") referred to therein
(the "Securities Purchase
Agreement"), and to the extent applicable, is subject to the terms of the
Securities Purchase Agreement.

     

    1. EXERCISE OF
WARRANT.

     

    (a) Mechanics of
Exercise.  Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)), this
Warrant may be exercised by the Holder on any day on or after the date hereof in
whole or in part, by (i) delivery of a written notice, in the form attached
hereto as Exhibit
A (the "Exercise
Notice"), of the Holder's election to exercise this Warrant and
(ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this
Warrant is being exercised (the "Aggregate Exercise Price") in
cash or wire transfer of immediately available funds or (B) by notifying the
Company that this Warrant is being exercised pursuant to a Cashless Exercise (as
defined in Section 1(d)).  The Holder shall not be required to deliver
the original Warrant in order to effect an exercise
hereunder.  Execution and delivery of the Exercise Notice with respect
to less than all of the Warrant Shares shall have the same effect as
cancellation of the original Warrant and issuance of a new Warrant evidencing
the right to purchase the remaining number of Warrant Shares.  On or
before the first Business Day following the date on which the Company has
received each of the Exercise Notice and the Aggregate Exercise Price (or notice
of a Cashless Exercise) (the "Exercise Delivery Documents"),
the Company shall transmit by facsimile an acknowledgment of confirmation of
receipt of the Exercise Delivery Documents to the Holder and the Company's
transfer agent (the "Transfer
Agent").  On or before the third Trading Day following the date
on which the Company has received all of the Exercise Delivery Documents (the
"Share Delivery Date"),
the Company shall (X) provided that: (i) the Company’s Transfer Agent is
participating in The Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, and (ii) the public resale of the Warrant Shares is
permissible under the Act, upon the request of the Holder, credit such aggregate
number of shares of Common Stock to which the Holder is entitled pursuant to
such exercise to the Holder's or its designee's balance account with DTC through
its Deposit Withdrawal Agent Commission system, or (Y) if the Transfer Agent is
not participating in the DTC Fast Automated Securities Transfer Program, or if
the Warrant Shares are not eligible for public resale under the
Act,  deliver to be received no later than the Share Delivery Date, to
the address as specified in the Exercise Notice, a certificate, registered in
the Company's share register in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder is entitled pursuant to
such exercise.  Upon delivery of the Exercise Notice and Aggregate
Exercise Price referred to in clause (ii)(A) above or notification to the
Company of a Cashless Exercise referred to in Section 1(d), the Holder shall be
deemed for all corporate purposes to have become the holder of record of the
Warrant Shares with respect to which this Warrant has been exercised,
irrespective of the date of delivery of the certificates evidencing such Warrant
Shares.  If this Warrant is submitted in connection with any exercise
pursuant to this Section 1(a) and the number of Warrant Shares represented by
this Warrant submitted for exercise is greater than the number of Warrant Shares
being acquired upon an exercise, then the Company shall as soon as practicable
and in no event later than three Business Days after any exercise and at its own
expense, issue a new Warrant (in accordance with Section 7(d)) representing the
right to purchase the number of Warrant Shares purchasable immediately prior to
such exercise under this Warrant, less the number of Warrant Shares with respect
to which this Warrant is exercised.  No fractional shares of Common
Stock are to be issued upon the exercise of this Warrant, but rather the number
of shares of Common Stock to be issued shall be rounded up to the nearest whole
number.  The Company shall pay any and all taxes which may be payable
with respect to the issuance and delivery of Warrant Shares upon exercise of
this Warrant.

     

    (b) Exercise
Price.  For purposes of this Warrant, "Exercise Price" means $10.00
per share, as subject to adjustment herein.

     

    (c) Company's Failure to Timely
Deliver Securities. If the Company shall fail for any reason or for no
reason to issue to the Holder within three (3) Trading Days of receipt of the
Exercise Delivery Documents, a certificate for the number of shares of Common
Stock to which the Holder is entitled and register such shares of Common Stock
on the Company's share register or to credit the Holder's balance account with
DTC for such number of shares of Common Stock to which the Holder is entitled
upon the Holder's exercise of this Warrant, then, in addition to all other
remedies available to the Holder, the Company shall pay in cash to the Holder on
each day after such third Trading Day that the
issuance of such shares of Common Stock is not timely effected an amount equal
to 1.5% of the product of (A) the sum of the number of shares of Common Stock
not issued to the Holder on a timely basis and to which the Holder is entitled
and (B) the Closing Sale Price of the shares of Common Stock on the Trading Day
immediately preceding the last possible date which the Company could have issued
such shares of Common Stock to the Holder without violating Section
1(a).  In addition, if within three (3) Trading Days after the
Company's receipt of the facsimile copy of a Exercise Notice the Company shall
fail to issue and deliver a certificate to the Holder and register such shares
of Common Stock on the Company's share register or credit the Holder's balance
account with DTC for the number of shares of Common Stock to which the Holder is
entitled upon such Holder's exercise hereunder, and if on or after such Trading
Day the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of shares of
Common Stock issuable upon such exercise that the Holder anticipated receiving
from the Company (a "Buy-In"), then the Company
shall, within three Business Days after the Holder's request and in the Holder's
discretion, either (i) pay cash to the Holder in an amount equal to the Holder's
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased (the "Buy-In Price"), at which point
the Company's obligation to deliver such certificate (and to issue such shares
of Common Stock) or credit such Holder's balance account with DTC shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such shares of Common Stock or credit
such Holder's balance account with DTC and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of shares of Common Stock, times (B) the Closing Bid Price on the date of
exercise.

     

    (d) Cashless Exercise.
 Notwithstanding
anything contained herein to the contrary, if a registration statement covering
the resale of the Warrant Shares that are the subject of the Exercise Notice
(the "Unavailable Warrant
Shares") is not available for the resale of such Unavailable Warrant
Shares, the Holder may, in its sole discretion, exercise this Warrant in whole
or in part and, in lieu of making the cash payment otherwise contemplated to be
made to the Company upon such exercise in payment of the Aggregate Exercise
Price, elect instead to receive upon such exercise the "Net Number" of shares of
Common Stock determined according to the following formula (a "Cashless
Exercise"):

     

    Net Number = (A x B) - (A x
C)

     

    B

     

    For purposes of the foregoing
formula:

     

    A= the
total number of shares with respect to which this Warrant is then being
exercised.

     

    B= the
Average Market Price of the shares of Common Stock (as reported by Bloomberg) on
the date immediately preceding the date of the Exercise Notice.

     

    C= the
Exercise Price then in effect for the applicable Warrant Shares at the time of
such exercise.

     

    (e) Disputes.  In
the case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the Holder the number of Warrant Shares that are not disputed and resolve
such dispute in accordance with Section 12.

     

    (f) Limitations on
Exercises.

     

    (i) Beneficial
Ownership.  The Company shall not effect the exercise of this
Warrant, and the Holder shall not have the right to exercise this Warrant, to
the extent that after giving effect to such exercise, such Person (together with
such Person's affiliates) would beneficially own in excess of 9.99% (the "Maximum Percentage") of the
shares of Common Stock outstanding immediately after giving effect to such
exercise.  For purposes of the foregoing sentence, the aggregate
number of shares of Common Stock beneficially owned by such Person and its
affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude shares of Common Stock which would be
issuable upon (A) exercise of the remaining, unexercised portion of this Warrant
beneficially owned by such Person and its affiliates and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company beneficially owned by such Person and its affiliates (including,
without limitation, any convertible notes or convertible preferred stock or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein.  Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended (the "Exchange
Act").  For purposes of this Warrant, in determining the number
of outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) (in the event the Company
files reports under the Exchange Act), the Company's most recent Form 10-K,
10-KSB, Form 10-Q, 10-QSB, Current Report on Form 8-K or other public filing
with the Securities and Exchange Commission, as the case may be, (2) a more
recent public announcement by the Company or (3) any other notice by the Company
or the Transfer Agent setting forth the number of shares of Common Stock
outstanding.  For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one (1) Business Day confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including the SPA Securities and the SPA Warrants, by
the Holder and its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported.  By written notice to
the Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder and not to any other holder of SPA
Warrants.

     

    2. ADJUSTMENT OF EXERCISE PRICE
AND NUMBER OF WARRANT SHARES.  The Exercise Price and the
number of Warrant Shares shall be adjusted from time to time as
follows:

     

    (a) Adjustment upon Issuance of
shares of Common Stock.  If and whenever on or after the
Subscription Date, and subject to the terms of Section 2(b) hereafter, the
Company issues or sells, or in accordance with this Section 2 is deemed to have
issued or sold, any shares of Common Stock (including the issuance or sale of
shares of Common Stock owned or held by or for the account of the Company, but
excluding shares of Common Stock deemed to have been issued by the Company in
connection with any Excluded Securities) for a consideration per share (the
"New Issuance Price")
less than the Exercise Price (the "Applicable Price") in effect
immediately prior to such issue or sale or deemed issuance or sale (the
foregoing a "Dilutive
Issuance"), then immediately after such Dilutive Issuance, the Exercise
Price then in effect shall be reduced to an amount equal to the New Issuance
Price.  No adjustments shall be made, however, under 2(a) upon the
issuance of Excluded Securities.  Upon each such adjustment of the
Exercise Price hereunder, the number of Warrant Shares shall be adjusted to the
number of shares of Common Stock determined by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.  For purposes of determining the adjusted Exercise Price
under this Section 2(a), the following shall be applicable:

     

    (i) Issuance of
Options.  If the Company in any manner grants any Options and
the lowest price per share for which one share of Common Stock is issuable upon
the exercise of any such Option or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option is less than
the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share.  For
purposes of this Section 2(a)(i), the "lowest price per share for which one
share of Common Stock is issuable upon exercise of such Options or upon
conversion, exercise or exchange of such Convertible Securities issuable upon
exercise of any such Options" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option.  No further adjustment
of the Exercise Price or number of Warrant Shares shall be made upon the actual
issuance of such shares of Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such shares of
Common Stock upon conversion, exercise or exchange of such Convertible
Securities.

     

    (ii) Issuance of Convertible
Securities.  If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 2(a)(ii), the "lowest price
per share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to one
share of Common Stock upon the issuance or sale of the Convertible Security and
upon conversion, exercise or exchange of such Convertible
Security.  No further adjustment of the Exercise Price or number of
Warrant Shares shall be made upon the actual issuance of such shares of Common
Stock upon conversion, exercise or exchange of such Convertible Securities, and
if any such issue or sale of such Convertible Securities is made upon exercise
of any Options for which adjustment of this Warrant has been or is to be made
pursuant to other provisions of this Section 2(a), no further adjustment of the
Exercise Price or number of Warrant Shares shall be made by reason of such issue
or sale. Notwithstanding the above, the issuance of Common Stock upon the
conversion of the Company’s Series C Preferred Stock, shall be deemed to be an
issuance of shares under Section 2(a) above, and the consideration received
shall be the conversion price then in effect.

     

    (iii) Change in Option Price or
Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exercise or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exercisable or
exchangeable for shares of Common Stock increases or decreases at any time, the
Exercise Price and the number of Warrant Shares in effect at the time of such
increase or decrease shall be adjusted to the Exercise Price and the number of
Warrant Shares which would have been in effect at such time had such Options or
Convertible Securities provided for such increased or decreased purchase price,
additional consideration or increased or decreased conversion rate, as the case
may be, at the time initially granted, issued or sold.  For purposes
of this Section 2(a)(iii), if the terms of any Option or Convertible Security
that were outstanding as of the date of issuance of this Warrant are increased
or decreased in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the shares of Common Stock deemed
issuable upon exercise, conversion or exchange thereof shall be deemed to have
been issued as of the date of such increase or decrease.  No
adjustment pursuant to this Section 2(a)(iii) shall be made if such adjustment
would result in an increase of the Exercise Price then in effect or a decrease
in the number of Warrant Shares.

     

    (iv) Calculation of Consideration
Received.  In case any Option is issued in connection with the
issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such
Options by the parties thereto, the Options will be deemed to have been issued
for a consideration of $0.01.  If any shares of Common Stock, Options
or Convertible Securities are issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor.  If any shares of Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of publicly traded securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
security on the date of receipt.  If any shares of Common Stock,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be the fair value
of such portion of the net assets and business of the non-surviving entity as is
attributable to such shares of Common Stock, Options or Convertible Securities,
as the case may be.  The fair value of any consideration other than
cash or publicly traded securities will be determined jointly by the Company and
the Required Holders.  If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation (the
"Valuation Event"), the
fair value of such consideration will be determined within five (5) Business
Days after the tenth day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required
Holders.  The determination of such appraiser shall be final and
binding upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne by the Company.

     

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

     

    (vi) Voluntary Adjustment By
Company. The Company may at any time during the term of
this Warrant reduce the then current Exercise Price to any amount and
for any period of time deemed appropriate by the Board of Directors of the
Company. 

     

    (b) Adjustment upon Issuance of
shares of Common Stock after a Qualified Offering.  Once the
Company completes a transaction that results in it having achieved
a  “Qualified Offering” (as that term is defined hereafter), the
anti-dilution provisions of Section 2(a) of this Warrant shall be deemed amended
and restated and replaced by the anti-dilution provisions contained within any
one or more of the financing transactions that constituted the Qualified
Offering, with the selection of such replacement anti-dilution provisions to be
made by and at the discretion of the Holder. Thereafter, if and whenever the
Company  issues or sells, or in accordance with this Section 2 is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
by the Company in connection with any Excluded Securities) for a New Issuance Price less than
the Exercise Price in effect immediately prior to such issue or sale or deemed
issuance or sale (the foregoing a "Dilutive Issuance"), then
immediately after such Dilutive Issuance, the Exercise Price then in effect
shall be adjusted (reduced but not increased) in accordance with the then
applicable anti-dilution provisions in effect as selected above by the Holder.
For the purposes of clarity, the existing anti-dilution provisions in effect
under Section 2(a) shall remain in effect with respect to the transaction that
resulted in the Company having achieved a Qualified Offering.

     

    (c) Adjustment upon Subdivision
or Combination of shares of Common Stock.  If the Company at
any time on or after the Subscription Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of Warrant Shares will be proportionately increased.  If
the Company at any time on or after the Subscription Date  combines
(by combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately
decreased.  Any adjustment under this Section 2(b) shall become
effective at the close of business on the date the subdivision or combination
becomes effective.

     

    (d) Other
Events.  If any event occurs of the type contemplated by the
provisions of this Section 2 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of Warrant Shares so as to protect the rights of the Holder; provided
that no such adjustment pursuant to this Section 2(d) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant
to this Section 2.

     

    3. RIGHTS UPON DISTRIBUTION OF
ASSETS.  If the Company shall declare or make any dividend or
other distribution of its assets (or rights to acquire its assets) to holders of
shares of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at any time
after the issuance of this Warrant, then, in each such case:

     

    (a) any
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of shares of Common Stock
entitled to receive the Distribution shall be reduced, effective as of the close
of business on such record date, to a price determined by multiplying such
Exercise Price by a fraction of which (i) the numerator shall be the Closing Bid
Price of the shares of Common Stock on the Trading Day immediately preceding
such record date minus the value of the Distribution (as determined in good
faith by the Company's Board of Directors) applicable to one share of Common
Stock, and (ii) the denominator shall be the Closing Bid Price of the shares of
Common Stock on the Trading Day immediately preceding such record date;
and

     

    

    (b) the
number of Warrant Shares shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of
business on the record date fixed for the determination of holders of shares of
Common Stock entitled to receive the Distribution multiplied by the reciprocal
of the fraction set forth in the immediately preceding paragraph (a); provided
that in the event that the Distribution is of shares of common stock ("Other Shares of Common Stock")
of a company whose common shares are traded on a national securities exchange or
a national automated quotation system, then the Holder may elect to receive a
warrant to purchase Other Shares of Common Stock in lieu of an increase in the
number of Warrant Shares, the terms of which shall be identical to those of this
Warrant, except that such warrant shall be exercisable into the number of shares
of Other Shares of Common Stock that would have been payable to the Holder
pursuant to the Distribution had the Holder exercised this Warrant immediately
prior to such record date and with an aggregate exercise price equal to the
product of the amount by which the exercise price of this Warrant was decreased
with respect to the Distribution pursuant to the terms of the immediately
preceding paragraph (a) and the number of Warrant Shares calculated in
accordance with the first part of this paragraph (b).

     

    4. PURCHASE RIGHTS; FUNDAMENTAL
TRANSACTIONS; PURCHASE OF WARRANT.

     

    (a) Purchase
Rights.  In addition to any adjustments pursuant to Section 2
above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of shares of Common
Stock (the "Purchase
Rights"), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) 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
shares of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.

     

    (b) Fundamental
Transactions.  The Company shall not enter into or be party to
a Fundamental Transaction unless (i)  the Successor Entity assumes in
writing all of the obligations of the Company under this Warrant and the other
Transaction Documents in accordance with the provisions of this Section (4)(b)
pursuant to written agreements in form and substance satisfactory to the
Required Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each holder of Warrants in
exchange for such Warrants a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to this Warrant,
including, without limitation, an adjusted exercise price equal to the value for
the shares of Common Stock reflected by the terms of such Fundamental
Transaction, and exercisable for a corresponding number of shares of capital
stock equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of
this Warrant) prior to such Fundamental Transaction, and satisfactory to the
Required Holders and (ii) the Successor Entity (including its Parent
Entity) is a publicly traded corporation whose common stock is quoted on or
listed for trading on an Eligible Market.  Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant referring to the "Company" shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under this
Warrant with the same effect as if such Successor Entity had been named as the
Company herein.  Upon consummation of the Fundamental Transaction, the
Successor Entity shall deliver to the Holder confirmation that there shall be
issued upon exercise of this Warrant at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of the Common Stock (or other
securities, cash, assets or other property) purchasable upon the exercise of the
Warrant prior to such Fundamental Transaction, such shares of stock, securities,
cash, assets or any other property whatsoever (including warrants or other
purchase or subscription rights) which the Holder would have been entitled to
receive upon the happening of such Fundamental Transaction had this Warrant been
converted immediately prior to such Fundamental Transaction, as adjusted in
accordance with the provisions of this Warrant.  In addition to and
not in substitution for any other rights hereunder, prior to the consummation of
any Fundamental Transaction pursuant to which holders of shares of Common Stock
are entitled to receive securities or other assets with respect to or in
exchange for shares of Common Stock (a "Corporate Event"), the Company
shall make appropriate provision to insure that the Holder will thereafter have
the right to receive upon an exercise of this Warrant at any time after the
consummation of the Fundamental Transaction but prior to the Expiration Date, in
lieu of the shares of the Common Stock (or other securities, cash, assets or
other property) purchasable upon the exercise of the Warrant prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had the Warrant been exercised immediately prior
to such Fundamental Transaction.  Provision made pursuant to the
preceding sentence shall be in a form and substance reasonably satisfactory to
the Required Holders.  The provisions of this Section shall apply
similarly and equally to successive Fundamental Transactions and Corporate
Events and shall be applied without regard to any limitations on the exercise of
this Warrant.

     

    (c) Purchase of
Warrants.  Notwithstanding the foregoing and the provisions of
Section 4(b) above, in the event of a Fundamental Transaction, at the request of
the Holder delivered before the 90th day after such Fundamental Transaction, the
Holder shall have the right to require the Company (or the Successor Entity), to
purchase this Warrant from the Holder by paying to the Holder, within five (5)
Business Days after such request (or, if later, on the effective date of the
Fundamental Transaction), in lieu of the warrant referred to in Section 4(b),
cash in an amount equal to the Black Scholes Value of the remaining unexercised
portion of this Warrant as of the Black Scholes Value Determination
Date.

     

    5. WARRANT HOLDER NOT DEEMED A
STOCKHOLDER.  Except as otherwise specifically provided herein,
the Holder, solely in such Person's capacity as a holder of this Warrant, shall
not be entitled to vote or receive dividends or be deemed the holder of share
capital of the Company for any purpose, nor shall anything contained in this
Warrant be construed to confer upon the Holder, solely in such Person's capacity
as the Holder of this Warrant, any of the rights of a shareholder of the Company
or any right to vote, give or withhold consent to any corporate action (whether
any reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise), receive notice of meetings, receive dividends
or subscription rights, or otherwise, prior to the issuance to the Holder of the
Warrant Shares which such Person is then entitled to receive upon the due
exercise of this Warrant.  In addition, nothing contained in this
Warrant shall be construed as imposing any liabilities on the Holder to purchase
any securities (upon exercise of this Warrant or otherwise) or as a shareholder
of the Company, whether such liabilities are asserted by the Company or by
creditors of the Company.  Notwithstanding this Section 5, the Company
shall provide the Holder with copies of the same notices and other information
given to the shareholders of the Company generally, contemporaneously with the
giving thereof to the shareholders.

     

    6. NONCIRCUMVENTION AND
DILUTIVE ISSUANCES.

     

    (a) Noncircumvention.                                           The
Company hereby covenants and agrees that the Company will not, by amendment of
its Articles of Incorporation, Bylaws or through any reorganization, transfer of
assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale
of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the
Holder.  Without limiting the generality of the foregoing, the Company
(i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, (ii) shall take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and
(iii) shall, so long as any of the SPA Warrants are outstanding, take all action
necessary to reserve and keep available out of its authorized and unissued
shares of Common Stock, solely for the purpose of effecting the exercise of the
SPA Warrants, 130% of the number of shares of Common Stock as shall from time to
time be necessary to effect the exercise of the SPA Warrants then outstanding
(without regard to any limitations on exercise).

     

    7. REISSUANCE OF
WARRANTS.

     

    (a) Transfer of
Warrant.  If this Warrant is to be transferred, the Holder
shall surrender this Warrant to the Company, whereupon the Company will
forthwith issue and deliver upon the order of the Holder a new Warrant (in
accordance with Section 7(d)), registered as the Holder may request,
representing the right to purchase the number of Warrant Shares being
transferred by the Holder and, if less then the total number of Warrant Shares
then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number
of Warrant Shares not being transferred.

     

    (b) Lost, Stolen or Mutilated
Warrant.  Upon receipt by the Company of an affidavit and
agreement of indemnity in a form  reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and, in
the case of loss, theft or destruction, of any indemnification undertaking by
the Holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of this Warrant, the Company shall execute and
deliver to the Holder a new Warrant (in accordance with Section 7(d))
representing the right to purchase the Warrant Shares then underlying this
Warrant.

     

    (c) Exchangeable for Multiple
Warrants.  This Warrant is exchangeable, upon the surrender
hereof by the Holder at the principal office of the Company, for a new Warrant
or Warrants (in accordance with Section 7(d)) representing in the aggregate the
right to purchase the number of Warrant Shares then underlying this Warrant, and
each such new Warrant will represent the right to purchase such portion of such
Warrant Shares as is designated by the Holder at the time of such surrender;
provided, however, that no Warrants for fractional shares of Common Stock shall
be given.

     

    (d) Issuance of New
Warrants.  Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added
to the number of shares of Common Stock underlying the other new Warrants issued
in connection with such issuance, does not exceed the number of Warrant Shares
then underlying this Warrant), (iii) shall have an issuance date, as indicated
on the face of such new Warrant which is the same as the Issuance Date, and (iv)
shall have the same rights and conditions as this Warrant.

     

    8. NOTICES.  Whenever
notice is required to be given under this Warrant, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement.  The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Warrant,
including in reasonable detail a description of such action and the reason
therefore.  Without limiting the generality of the foregoing, the
Company will give written notice to the Holder (i) immediately upon any
adjustment of the Exercise Price, setting forth in reasonable detail, and
certifying, the calculation of such adjustment and (ii) at least fifteen days
prior to the date on which the Company closes its books or takes a record (A)
with respect to any dividend or distribution upon the shares of Common Stock,
(B) with respect to any grants, issuances or sales of any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
to holders of shares of Common Stock or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in
each case that such information shall be made known to the public prior to or in
conjunction with such notice being provided to the Holder.

     

    9. AMENDMENT AND
WAIVER.  Except as otherwise provided herein, the provisions of
this Warrant may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Required Holders;
provided that no such action may increase the exercise price of any SPA Warrant
or decrease the number of shares or class of stock obtainable upon exercise of
any SPA Warrant without the written consent of the Holder.  No such
amendment shall be effective to the extent that it applies to less than all of
the holders of the SPA Warrants then outstanding.

     

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

     

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

     

    12. DISPUTE
RESOLUTION.  In the case of a dispute as to the determination
of the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within two Business Days of receipt of the Exercise Notice giving rise
to such dispute, as the case may be, to the Holder.  If the Holder and
the Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within two Business Days submit via facsimile (a) the disputed
determination of the Exercise Price to an independent, reputable investment bank
selected by the Company and approved by the Holder  or (b) the
disputed arithmetic calculation of the Warrant Shares to the Company's
independent, outside accountant.  The Company shall cause at its
expense the investment bank or the accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the Holder of the
results no later than ten Business Days from the time it receives the disputed
determinations or calculations.  Such investment bank's or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

     

    13. REMEDIES, OTHER OBLIGATIONS,
BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this
Warrant shall be cumulative and in addition to all other remedies available
under this Warrant and the other Transaction Documents, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit the right of the Holder right to pursue actual
damages for any failure by the Company to comply with the terms of this
Warrant.  The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate.  The Company
therefore agrees that, in the event of any such breach or threatened breach, the
holder of this Warrant shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being
required.

     

    14. TRANSFER; REGISTRATION
RIGHTS.  This Warrant may be offered for sale, sold,
transferred or assigned without the consent of the Company, except as may
otherwise be required by Sections 2(h) and 2(i) of the Securities Purchase
Agreement. The Company has agreed to grant registration rights associated with
the registration of the re-offer of the Warrant Shares in the manner, and
subject to the provisions of the Securities Purchase Agreement, and the terms of
this Warrant shall at all times remain subject to such registration rights,
regardless of whether this Warrant is transferred by the original
Holder.

     

    15. SEVERABILITY.  If
any provision of this Warrant is prohibited by law or otherwise determined to be
invalid or unenforceable by a court of competent jurisdiction, the provision
that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable,
and the invalidity or unenforceability of such provision shall not affect the
validity of the remaining provisions of this Warrant so long as this Warrant as
so modified continues to express, without material change, the original
intentions of the parties as to the subject matter hereof and the prohibited
nature, invalidity or unenforceability of the provision(s) in question does not
substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise be
conferred upon the parties.  The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to
that of the prohibited, invalid or unenforceable provision(s).

     

    16. CERTAIN
DEFINITIONS.  For purposes of this Warrant, the following terms
shall have the following meanings:

     

    (a) "Approved Stock Plan" means any
employee benefit plan which has been approved by the Board of Directors of the
Company (which shall include the affirmative approval of all independent
directors, if any) , pursuant to which the Company’s securities may be issued to
any employee, officer or director or consultants for services provided to the
Company.

     

    (b) “Average Market Price” means,
for any given date, the lesser of : (i) the arithmetic average of the lowest
Weighted Average Price of the Common Stock during the fifteen (15) consecutive
Trading Days ending on
the Trading Day
immediately prior to such given date (the “Measuring Period”) and (ii)
the arithmetic average of the lowest Weighted Average Price of the Common Stock
during any three (3) consecutive Trading Day period during the
Measuring Period;
provided, that all such determinations shall be subject to appropriate
adjustment for any stock split, stock dividend, stock combination or other
similar transaction that proportionately decreases or increases the Common Stock
during such periods.

     

    (c) "Black Scholes Value" means the
value of this Warrant based on the Black and Scholes Option Pricing Model
obtained from the "OV" function on Bloomberg determined for pricing purposes, at
the election of the Holder, as of either: (i) the day of closing of the
applicable Fundamental Transaction; (ii) the date of this Warrant; or (iii) the
date the Holder requests the purchase of this Warrant (such date referred to as
the “Black Scholes Value
Determination Date”) and reflecting (i) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term
of this Warrant as of such date of request and (ii) an expected volatility equal
to the greater of 100% and the 100 day volatility obtained from the HVT function
on Bloomberg as of the day immediately following the Black Scholes Value Determination
Date.

     

    (d) "Bloomberg" means Bloomberg
Financial Markets.

     

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

     

    (f) "Closing Bid Price" and "Closing Sale Price" means, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the "pink sheets" by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the
Closing Bid Price or the Closing Sale Price cannot be calculated for a security
on a particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 12.  All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination or other similar
transaction during the applicable calculation period.

     

    (g) "Common Stock" means
(i) the Company's shares of Common Stock, par value $0.001 per share,
and (ii) any share capital into which such Common Stock shall have been
changed or any share capital resulting from a reclassification of such Common
Stock.

     

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

     

    (i) "Eligible Market" means the
Principal Market, the American Stock Exchange, The New York Stock Exchange,
Inc., The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ
Capital Market.

     

    (j) "Excluded Securities" means any
Common Stock issued or issuable: (i) in connection with any Approved Stock Plan;
(ii) upon conversion of the SPA Securities or the exercise of the SPA Warrants;
(iii) in connection with the payment of any Interest Shares on the SPA
Securities;  (iv) upon exercise of any Options or Convertible
Securities which are outstanding on the day immediately preceding the
Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date; (iv) pursuant to acquisitions or strategic acquisition related
transactions that are approved by a majority of the disinterested directors of
the Company, and provided any such issuance be to a Person which is, itself, or
through its subsidiaries, an operating company in a business synergistic with
the business of the Company and in which the Company receives benefits in
addition to the investment of funds, but shall not include a transaction in
which the Company is issuing securities primarily for the purpose of raising
capital or to an entity whose primary business is investing in securities; (v)
in connection with the issuance of securities disclosed in the Company’s Form
8-K dated June 30, 2008, as filed with the SEC on July 7, 2008, as amended on
August 6, 2008; and (vi) the 7,000,000 shares of the Company’s Common Stock
issued in the name of earth Biofuels, inc..

     

    (k) "Expiration Date" means the
date ten (10) years after the Closing Date.

     

    (l) "Fundamental Transaction" means
that the Company shall directly or indirectly, in one or more related
transactions, (i) consolidate or merge with or into (whether or not the Company
is the surviving corporation) another Person, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or
assets of the Company to another Person, or (iii) allow another Person to make a
purchase, tender or exchange offer that is accepted by the holders of more than
the 50% of either the outstanding shares of Common Stock (not including (a) any
shares of Common Stock held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such purchase,
tender or exchange offer; and (b) the 7,000,000 shares of the Company’s Common
Stock issued in the name of Earth Biofuels, Inc.), or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person whereby such other Person acquires more than the 50% of the
outstanding shares of Common Stock (not including any shares of Common Stock
held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock purchase
agreement or other business combination), or (v) reorganize, recapitalize or
reclassify its Common Stock, or (vi) any "person" or "group" (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act), become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of 50% of the aggregate ordinary voting power represented by
issued and outstanding Common Stock.

     

    (m) "Options" means any rights,
warrants or options to subscribe for or purchase shares of Common Stock or
Convertible Securities.

     

    (n) "Parent Entity" of a Person
means an entity that, directly or indirectly, controls the applicable Person and
whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

     

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

     

    (p) "Principal Market" means the
principal market, exchange or automated quotation system upon which the shares
of the Company’s Common Stock trade or will trade, including the OTC Bulletin
Board or the Pink Sheets.

     

    (q) “Qualified Offering” means, the
combination of any one or more transactions in which the Company sells, grants,
issues or disposes of any of the Company’s debt, equity or equity equivalent
securities, including without limitation any debt, preferred stock or other
instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of
Common Stock or Common Stock equivalents, which, commencing after the Closing
Date, generate aggregate gross proceeds of $15,000,000 or more.

     

    (r) "Required Holders" means the
holders of the SPA Warrants representing at least a majority of shares of Common
Stock underlying the SPA Warrants then outstanding.

     

    (s) "SPA Securities" means the
Notes issued pursuant to the Securities Purchase Agreement.

     

    (t) "Successor Entity" means the
Person (or, if so elected by the Required Holders, the Parent Entity) formed by,
resulting from or surviving any Fundamental Transaction or the Person (or, if so
elected by the Required Holders, the Parent Entity) with which such Fundamental
Transaction shall have been entered into.

     

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

     

    (v) "Weighted Average Price" means,
for any security as of any date, the dollar volume-weighted average price for
such security on the Principal Market during the period beginning at 9:30:01
a.m., New York Time (or such other time as the Principal Market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg through its "Volume at
Price" functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as such market publicly announces is the official close
of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
price is reported for such security by Bloomberg for such hours, the average of
the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the "pink sheets" by Pink Sheets
LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted
Average Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Weighted Average Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 12.  All such determinations are to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar
transaction during the applicable calculation period.

     

    

     

    [Signature
Page Follows]

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

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

    

    

    
      	
              PNG
      VENTURES, INC.

            

    

    

    

    By:                           /s/
Kevin
Markey                                                   

    Name:                       Kevin
Markey

    Title:                        Chief
Executive Officer

     

     

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

     EXHIBIT
A

    EXERCISE
NOTICE

    TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

    WARRANT
TO PURCHASE COMMON STOCK

    

    
      	
               
      

            	
              PNG
      VENTURES, INC.

            

    

    

    The undersigned holder hereby exercises
the right to purchase _________________ of the shares of Common Stock ("Warrant Shares") of PNG
Ventures, Inc., a Nevada corporation (the "Company"), evidenced by the
attached Warrant to Purchase Common Stock (the "Warrant").  Capitalized
terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.

    

    1.           Form
of Exercise Price.  The Holder intends that payment of the Exercise
Price shall be made as:

    

    
      	
               
      

            	
              ____________

            	
              a
      "Cash
      Exercise" with respect to _________________ Warrant Shares;
      and/or

            

    

    

    
      	
               
      

            	
              ____________

            	
              a
      "Cashless
      Exercise" with respect to _______________ Warrant
      Shares.

            

    

    

    

    2.           Payment
of Exercise Price.  In the event that the holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the
Warrant.

    

    3.           Delivery
of Warrant Shares.  The Company shall deliver to the holder __________
Warrant Shares in accordance with the terms of the Warrant.

    

    

    Date:
_______________ __, ______

    

    

       Name
of Registered Holder

    

    By:           

    Name:

    Title:

    

    

    

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

    
 

    

    ACKNOWLEDGMENT

    

    

    The Company hereby acknowledges this
Exercise Notice and hereby directs Action Stock Transfer Corporation, the
Company’s transfer agent,
to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated August 19, 2008 from the
Company and acknowledged and agreed to by Action Stock Transfer
Corporation.

    

    PNG VENTURES, INC.

    

    

    

                    By:       /s/
Kevin
Markey                                                                    

    Name:  Kevin
Markey

    Title:    Chief
Executive Officer

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