Document:

ex41.htm

    

    Exhibit
4.1

    

    SUBSCRIPTION
AGREEMENT

    

    FOR

    

    Z
TRIM HOLDINGS, INC.

    

    

    Z Trim
Holdings, Inc.

    1011
Campus Drive

    Mundelein,
IL 60060

    

    Ladies
and Gentlemen:

    

    1.           Subscription.

    

    (a)           The
undersigned (the “Purchaser”),
intending to be legally bound, hereby irrevocably agrees to purchase a unit or
units (each, a “Unit” and
collectively, the “Units”) at a purchase
price of $100,000 per Unit, from Z Trim Holdings, Inc., an Illinois corporation
(the “Company”).  Each
Unit consists of a convertible senior secured note, due 24 months from issue
(each a “Note”
and collectively, the “Notes”) convertible
at the rate of $0.26 per share into 384,615 shares of common stock, $.00005 par
value per share (“Common Shares”), of Z
Trim Holdings, Inc., an Illinois corporation (the “Company”), bearing
interest at the rate of 8% per annum, which interest is payable quarterly in
Common Shares at the rate of $0.26 per share, and two five-year warrants, one to
purchase 230,769 Common Shares at $0.01 per share (the “$0.01 Warrants”) and
the other to purchase 153,846 Common Shares at $0.26 per share (the “$0.26 Warrants”, and,
together with the $0.01 Warrants, collectively, the “Warrants”).  This
subscription is submitted to you in accordance with and subject to the terms and
conditions described in this Subscription Agreement, and the Confidential
Private Placement Memorandum of the Company dated June __, 2008, as amended or
supplemented from time to time, including all documents incorporated by
reference therein and all attachments, schedules and exhibits thereto (the
“Memorandum”),
relating to the offering (the “Offering”) by the
Company of a minimum of 14 Units ($1,400,000) (the “Minimum Amount”) and
a maximum of ___ Units ($___________) (the “Maximum
Amount”).

    

    (b)           The
terms of the Offering are more completely described in the Memorandum and such
terms are incorporated herein in their entirety.  Certain capitalized
terms used, but not otherwise defined herein, shall have the respective meanings
provided in the Memorandum.

    

    2.           Payment.  The
Purchaser encloses herewith a check payable to, or will immediately make a wire
transfer payment to, “American Chartered Bank, as Escrow Agent for Z Trim
Holdings, Inc.,” in the full amount of the purchase price of the Units being
subscribed for (the “Subscription
Amount”).  Together with the check for, or wire transfer of,
the full Subscription Amount, the Purchaser is delivering a completed and
executed Omnibus Signature Page to this Subscription Agreement and the
Registration Rights Agreement.

    

    3.           Deposit of
Funds.  All payments made as provided in Section 2 hereof shall
be deposited by the Company as soon as practicable with American Chartered Bank,
as escrow agent (the “Escrow Agent”) or
such other escrow agent appointed by ________ and the Company, in a non-interest
bearing escrow account (the “Escrow
Account”).  In the event that the Company does not succeed in
receiving and accepting subscriptions for the Minimum Amount on or before July
31, 2008, which may be extended for up to two additional 45-day periods at the
discretion of ___________ and the Company, the Company will refund all of the
Purchaser’s Subscription Amount, without interest accrued thereon or deduction
therefrom, and will return the subscription documents to the
Purchaser.  If the Company rejects a Purchaser’s subscription, either
in whole or in part (which decision is in the sole discretion of the Company),
the rejected Subscription Amount or the rejected portion thereof will be
returned promptly to the Purchaser without interest accrued thereon or deduction
therefrom.  The minimum Subscription Amount for a Purchaser in the
Offering is 1 Unit ($100,000); provided, however, that _________ and
the Company, in their sole discretion, may waive such minimum Subscription
Amount requirement from time to time.

    

    4.           Acceptance of
Subscription.  The Purchaser understands and agrees that the
Company in its sole discretion reserves the right to accept or reject this or
any other subscription for the Units, in whole or in part, notwithstanding prior
receipt by the Purchaser of notice of acceptance of this or any other
subscription.  The Company shall have no obligation hereunder until
the Company shall execute and deliver to the Purchaser an executed copy of this
Subscription Agreement.  If Purchaser’s subscription is rejected in
whole, or the Offering is terminated or the Minimum Amount is not subscribed for
and accepted, all funds received from the Purchaser will be returned without
interest, penalty, expense or deduction, and this Subscription Agreement shall
thereafter be of no further force or effect.  If Purchaser’s
subscription is rejected in part, the funds for the rejected portion of such
subscription will be returned without interest, penalty, expense or deduction,
and this Subscription Agreement will continue in full force and effect to the
extent such subscription was accepted.

     

     

     

    
      
        
        

      

      
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    5.           Representations and Warranties of the
Purchaser.  The Purchaser hereby acknowledges, represents,
warrants, and agrees as follows:

    

    (a)           None
of the Units, the Notes, the Warrants or any of the shares of Common Stock
issuable upon conversion of, or payment of interest on, the Notes or issuable
upon exercise of the Warrants offered pursuant to the Memorandum are registered
under the Securities Act of 1933, as amended (the “Securities Act”), or
any state securities laws.  The Purchaser understands that the
offering and sale of the Units is intended to be exempt from registration under
the Securities Act, by virtue of Section 4(2) thereof and the provisions of
Regulation D promulgated thereunder, based, in part, upon the representations,
warranties and agreements of the Purchaser contained in this Subscription
Agreement;

    

    (b)           The
Purchaser and the Purchaser’s attorney, accountant, purchaser representative
and/or tax advisor, if any (collectively, “Advisors”), have
received the Memorandum and all other documents requested by the Purchaser or
its Advisors, if any, have carefully reviewed them and understand the
information contained therein, prior to the execution of this Subscription
Agreement;

    

    (c)           Neither
the Securities and Exchange Commission (the “Commission”) nor any
state securities commission has approved the Units, the Notes, the Warrants or
any of the Common Shares issuable upon conversion of, or payment of interest on,
the Notes or exercise of the Warrants, or passed upon or endorsed the merits of
the Offering or confirmed the accuracy or determined the adequacy of the
Memorandum.  The Memorandum has not been reviewed by any Federal,
state or other regulatory authority;

    

    (d)           All
documents, records, and books pertaining to the investment in the Units
(including, without limitation, the Memorandum) have been made available for
inspection by the Purchaser and its Advisors, if any;

     

     

    
      
        
        

      

      
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    (e)           The
Purchaser and its Advisors, if any, have had a reasonable opportunity to ask
questions of and receive answers from a person or persons acting on behalf of
the Company concerning the offering of the Units and the business, financial
condition, results of operations and prospects of the Company, and all such
questions have been answered by the Company to the full satisfaction of the
Purchaser and its Advisors, if any, and the Purchaser and its Advisors have had
access, through the EDGAR system, to true and complete copies of the Company’s
most recent Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007 (the “10-KSB”), as amended,
and all other reports filed by the Company pursuant to the Securities Exchange
Act of 1934, as amended, since the filing of the 10-KSB and prior to the date
hereof and  have reviewed such filings;

    

    (f)           In
evaluating the suitability of an investment in the Company, the Purchaser has
not relied upon any representation or other information (oral or written) other
than as stated in the Memorandum or as contained in documents so furnished to
the Purchaser or its Advisors, if any, by the Company in writing;

    

    (g)           The
Purchaser is unaware of, is in no way relying on, and did not become aware of
the offering of the Units through or as a result of, any form of general
solicitation or general advertising including, without limitation, any article,
notice, advertisement or other communication published in any newspaper,
magazine or similar media or broadcast over television, radio or over the
Internet, in connection with the offering and sale of the Units and is not
subscribing for Units and did not become aware of the offering of the Units
through or as a result of any seminar or meeting to which the Purchaser was
invited by, or any solicitation of a subscription by, a person not previously
known to the Purchaser in connection with investments in securities
generally;

    

    (h)           The
Purchaser has taken no action which would give rise to any claim by any person
for brokerage commissions, finders’ fees or the like relating to this
Subscription Agreement or the transactions contemplated hereby (other than
commissions to be paid by the Company to _________ as described in the
Memorandum or as otherwise described in the Memorandum);

    

    (i)           The
Purchaser, either alone or together with its Advisor(s), if any, have such
knowledge and experience in financial, tax, and business matters, and, in
particular, investments in securities, so as to enable them to utilize the
information made available to them in connection with the offering of the Units
to evaluate the merits and risks of an investment in the Units and the Company
and to make an informed investment decision with respect thereto;

    

    (j)           The
Purchaser is not relying on the Company, _________ or any of their respective
employees or agents with respect to the legal, tax, economic and related
considerations of an investment in the Units, and the Purchaser has relied on
the advice of, or has consulted with, only its own Advisors;

    

    (k)           The
Purchaser is acquiring the Units solely for such Purchaser’s own account for
investment and not with a view to resale or distribution thereof, in whole or in
part.  The Purchaser has no agreement or arrangement, formal or
informal, with any person to sell or transfer all or any of the Units, the
Notes, the Warrants or Common Shares issuable upon conversion of, or payment of
interest on, the Notes or issuable upon exercise of the Warrants, and the
Purchaser has no plans to enter into any such agreement or
arrangement;

     

     

     

    
      
        
        

      

      
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    (l)           The
purchase of the Units represents high risk capital and the Purchaser is able to
afford an investment in a speculative venture having the risks and objectives of
the Company.  The Purchaser must bear the substantial economic risks
of the investment in the Units indefinitely because none of the Units, the
Notes, the Warrants, or the Common Shares issuable upon conversion of, or
payment of interest on, the Notes or exercise of the Warrants may be sold,
hypothecated or otherwise disposed of unless subsequently registered under the
Securities Act and applicable state securities laws or an exemption from such
registration is available.  Legends shall be placed on the securities
included in the Units to the effect that they have not been registered under the
Securities Act or applicable state securities laws and appropriate notations
thereof will be made in the Company’s stock books.  Stop transfer
instructions will be placed with the transfer agent of the securities
constituting the Units.  The Company has agreed that purchasers of the
Units will have, with respect to the Common Shares issuable upon conversion of,
or payment of interest on, the Notes and issuable upon exercise of the Warrants,
the registration rights described in the Registration Rights Agreement in the
form annexed to the Memorandum.  Notwithstanding such registration
rights, it is not anticipated that there will be any market for resale of the
Units, the Notes, the Warrants or any of the Common Shares issuable upon
conversion of, or payment of interest on, the Notes or issuable upon exercise of
the Warrants, and such securities will not be freely transferable at any time in
the foreseeable future;

    

    (m)           The
Purchaser has adequate means of providing for such Purchaser’s current financial
needs and foreseeable contingencies and has no need for liquidity of the
investment in the Units, the Notes, the Warrants or any of the Common Shares
issuable upon conversion of, or payment of interest on, the Notes or issuable
upon exercise of the Warrants for an indefinite period of time;

    

    (n)           The
Purchaser is aware that an investment in the Units involves a number of very
significant risks and has carefully read and considered the matters set forth in
the Memorandum and, in particular, the matters under the caption “Risk Factors”
therein, and, in particular, acknowledges that such risks may materially
adversely affect the Company’s results of operations and future
prospects;

    

    (o)           The
Purchaser is an “accredited investor” as that term is defined in Regulation D
under the Securities Act, and has truthfully and accurately completed the
Accredited Investor Certification contained herein;

    

    (p)           The
Purchaser: (i) if a natural person, represents that the Purchaser has reached
the age of 21 and has full power and authority to execute and deliver this
Subscription Agreement and all other related agreements or certificates and to
carry out the provisions hereof and thereof; (ii) if a corporation, partnership,
or limited liability company or partnership, or association, joint stock
company, trust, unincorporated organization or other entity, represents that
such entity was not formed for the specific purpose of acquiring the Units, such
entity is duly organized, validly existing and in good standing under the laws
of the state of its organization, the consummation of the transactions
contemplated hereby is authorized by, and will not result in a violation of
state law or its charter or other organizational documents, such entity has full
power and authority to execute and deliver this Subscription Agreement and all
other related agreements or certificates and to carry out the provisions hereof
and thereof and to purchase and hold the securities constituting the Units, the
execution and delivery of this Subscription Agreement has been duly authorized
by all necessary action, this Subscription Agreement has been duly executed and
delivered on behalf of such entity and is a legal, valid and binding obligation
of such entity; or (iii) if executing this Subscription Agreement in a
representative or fiduciary capacity, represents that it has full power and
authority to execute and deliver this Subscription Agreement in such capacity
and on behalf of the subscribing individual, ward, partnership, trust, estate,
corporation, or limited liability company or partnership, or other entity for
whom the Purchaser is executing this Subscription Agreement, and such
individual, partnership, ward, trust, estate, corporation, or limited liability
company or partnership, or other entity has full right and power to perform
pursuant to this Subscription Agreement and make an investment in the Company,
and represents that this Subscription Agreement constitutes a legal, valid and
binding obligation of such entity.  The execution and delivery of this
Subscription Agreement will not violate or be in conflict with any order,
judgment, injunction, agreement or controlling document to which the Purchaser
is a party or by which it is bound;

     

     

    
      
        
        

      

      
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    (q)           The
Purchaser and its Advisors, if any, have had the opportunity to obtain any
additional information, to the extent the Company had such information in their
possession or could acquire it without unreasonable effort or expense, necessary
to verify the accuracy of the information contained in the Memorandum and all
documents received or reviewed in connection with the purchase of the Units and
have had the opportunity to have representatives of the Company provide them
with such additional information regarding the terms and conditions of this
particular investment and the financial condition, results of operations,
business and prospects of the Company deemed relevant by the Purchaser or its
Advisors, if any, and all such requested information, to the extent the Company
had such information in its possession or could acquire it without unreasonable
effort or expense, has been provided by the Company in writing to the full
satisfaction of the Purchaser and its Advisors, if any;

    

    (r)           The
Purchaser represents to the Company that any information which the undersigned
has heretofore furnished or is furnishing herewith to the Company or __________
is complete and accurate and may be relied upon by the Company in determining
the availability of an exemption from registration under Federal and state
securities laws in connection with the offering of securities as described in
the Memorandum.  The Purchaser further represents and warrants that it
will notify and supply corrective information to the Company and __________
immediately upon the occurrence of any change therein occurring prior to the
Company’s issuance of the securities contained in the Units;

    

    (s)           The
Purchaser has significant prior investment experience, including investment in
non-listed and non-registered securities.  The Purchaser is
knowledgeable about investment considerations in public companies and, in
particular, public companies traded on the American Stock
Exchange.  The Purchaser has a sufficient net worth to sustain a loss
of its entire investment in the Company in the event such a loss should
occur.  The Purchaser’s overall commitment to investments which are
not readily marketable is not excessive in view of the Purchaser’s net worth and
financial circumstances and the purchase of the Units will not cause such
commitment to become excessive.  This investment is a suitable one for
the Purchaser;

    

    (t)           The
Purchaser is satisfied that it has received adequate information with respect to
all matters which it or its Advisors, if any, consider material to its decision
to make this investment;

    

    (u)           The
Purchaser acknowledges that any estimates or forward-looking statements or
projections included in the Memorandum were prepared by the Company in good
faith, but that the attainment of any such projections, estimates or
forward-looking statements cannot be guaranteed by the Company and should not be
relied upon;

     

     

    
      
        
        

      

      
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    (v)           No
oral or written representations have been made, or oral or written information
furnished, to the Purchaser or its Advisors, if any, in connection with the
offering of the Units which are in any way inconsistent with the information
contained in the Memorandum;

    

    (w)           Within
five days after receipt of a request from the Company or __________, the
Purchaser will provide such information and deliver such documents as may
reasonably be necessary to comply with any and all laws and ordinances to which
the Company or __________ is subject;

    

    (x)           The
Purchaser’s substantive relationship with __________ or subagent through which
the Purchaser is subscribing for Units predates __________’s or such subagent’s
contact with the Purchaser regarding an investment in the Units;

    

    (y)           THE
SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR
THE SECURITIES LAWS OF CERTAIN STATES AND ARE BEING OFFERED AND SOLD IN RELIANCE
ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH
LAWS.  THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID
ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.  THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE
MEMORANDUM.  ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL;

    

    (z)           The
Purchaser acknowledges that none of the Notes, the Warrants or the Common Shares
issuable upon conversion of, or payment of interest on, the Notes or issuable
upon exercise of the Warrants have been recommended by any Federal or state
securities commission or regulatory authority.  In making an
investment decision investors must rely on their own examination of the Company
and the terms of the Offering, including the merits and risks
involved.  Furthermore, the foregoing authorities have not confirmed
the accuracy or determined the adequacy of this Subscription
Agreement.  Any representation to the contrary is a criminal
offense.  The Units, the Notes, the Warrants, and the Common Shares
issuable by the Company upon conversion of, or payment of interest on, the Notes
and issuable upon the exercise of the Warrants, are subject to restrictions on
transferability and resale and may not be transferred or resold except as
permitted under the Securities Act, and the applicable state securities laws,
pursuant to registration or exemption therefrom.  Investors should be
aware that they will be required to bear the financial risks of this investment
for an indefinite period of time; and

    

    (aa)           (For ERISA plans
only)    The fiduciary of the ERISA plan (the “Plan”) represents
that such fiduciary has been informed of and understands the Company’s
investment objectives, policies and strategies, and that the decision to invest
“plan assets” (as such term is defined in ERISA) in the Company is consistent
with the provisions of ERISA that require diversification of plan assets and
impose other fiduciary responsibilities.  The Purchaser or Plan
fiduciary (a) is responsible for the decision to invest in the Company; (b) is
independent of the Company and any of its affiliates; (c) is qualified to make
such investment decision; and (d) in making such decision, the Purchaser or Plan
fiduciary has not relied on any advice or recommendation of the Company or any
of its affiliates.

     

     

    
      
        
        

      

      
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    6.           Representations and Warranties of the
Company.  The Company hereby acknowledges, represents,
warrants, and agrees as follows:

    

    (a)           The
Company is duly organized, validly existing and in good standing under the laws
of the State of Illinois.  The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which failure to do so
would have a material adverse effect on the assets, business, properties,
operations, financial condition or prospects of the Company; and

    

    (b)           The
execution and delivery of this Subscription Agreement, the Notes, the Warrants
and the Registration Rights Agreement and the performance by the Company of its
obligations hereunder and thereunder and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by the Company and no
other proceedings on the part of the Company are necessary.  The
person(s) executing this Subscription Agreement, the Notes, the Warrants and the
Registration Rights Agreement on behalf of the Company has all right, power and
authority to execute and deliver such agreements in the name and on behalf of
the Company.  This Subscription Agreement, the Notes, the Warrants and
the Registration Rights Agreement have been duly executed and delivered by the
Company and, assuming the due authorization, execution and delivery hereof by
the subscriber hereto, will constitute the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights of
creditors generally and the availability of equitable remedies.

    

    7.           Indemnification.  The
Purchaser agrees to indemnify and hold harmless the Company, __________ and
their respective officers, directors, employees, agents, control persons and
affiliates from and against all losses, liabilities, claims, damages, costs,
fees and expenses whatsoever (including, but not limited to, any and all
expenses incurred in investigating, preparing or defending against any
litigation commenced or threatened) based upon or arising out of any actual or
alleged false acknowledgment, representation or warranty, or misrepresentation
or omission to state a material fact, or breach by the Purchaser of any covenant
or agreement made by the Purchaser herein or in any other document delivered in
connection with this Subscription Agreement.

    

    8.           Irrevocability; Binding
Effect.  The Purchaser hereby acknowledges and agrees that the
subscription hereunder is irrevocable by the Purchaser, except as required by
applicable law, and that this Subscription Agreement shall survive the death or
disability of the Purchaser and shall be binding upon and inure to the benefit
of the parties and their heirs, executors, administrators, successors, legal
representatives, and permitted assigns.  If the Purchaser is more than
one person, the obligations of the Purchaser hereunder shall be joint and
several and the agreements, representations, warranties, and acknowledgments
herein shall be deemed to be made by and be binding upon each such person and
such person’s heirs, executors, administrators, successors, legal
representatives, and permitted assigns.

    

    9.           Modification.  This
Subscription Agreement shall not be modified or waived except by an instrument
in writing signed by the party against whom any such modification or waiver is
sought.

    

    10.           Notices.  Any notice
or other communication required or permitted to be given hereunder shall be in
writing and shall be mailed by certified mail, return receipt requested, or
delivered against receipt to the party to whom it is to be given (a) if to the
Company, at the address set forth above or (b) if to the Purchaser, at the
address set forth on the signature page hereof (or, in either case, to such
other address as the party shall have furnished in writing in accordance with
the provisions of this Section 10).  Any notice or other communication
given by certified mail shall be deemed given at the time of certification
thereof, except for a notice changing a party’s address which shall be deemed
given at the time of receipt thereof.

    

    11.           Assignability.  This
Subscription Agreement and the rights, interests and obligations hereunder are
not transferable or assignable by the Purchaser and the transfer or assignment
of the Units, the Notes, the Warrants and the shares of Common Stock issuable by
the Company upon conversion of, or payment of interest on, the Notes or upon
exercise of the Warrants shall be made only in accordance with all applicable
laws.

     

     

    
      
        
        

      

      
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    12.           Applicable Law.  This Subscription
Agreement shall be governed by and construed under the laws of the State of
Illinois as applied to agreements among Illinois residents entered into and to
be performed entirely within Illinois.  Each of the parties hereto
(1) agree that any legal suit, action or proceeding arising out of or
relating to this Agreement shall be instituted exclusively in the 19th
Judicial Circuit Court of Lake County, Illinois, or in the United States
District Court for the Northern District of Illinois, (2) waive any
objection which the Company may have now or hereafter to the venue of any such
suit, action or proceeding, and (3) irrevocably consent to the jurisdiction
of the 19th
Judicial Circuit Court of Lake County, Illinois, and the United States District
Court for the Northern District of Illinois in any such suit, action or
proceeding.  Each of the parties hereto further agrees to accept and
acknowledge service of any and all process which may be served in any such suit,
action or proceeding in the 19th
Judicial Circuit Court of Lake County, Illinois, or in the United States
District Court for the Northern District of Illinois and agrees that service of
process upon it mailed by certified mail to its address shall be deemed in every
respect effective service of process upon it, in any such suit, action or
proceeding.  THE PARTIES HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
THIS SUBSCRIPTION AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED
HEREBY.

    

    13.           Blue Sky
Qualification.  The purchase of Units under this Subscription
Agreement is expressly conditioned upon the exemption from qualification of the
offer and sale of the Units from applicable Federal and state securities
laws.  The Company shall not be required to qualify this transaction
under the securities laws of any jurisdiction and, should qualification be
necessary, the Company shall be released from any and all obligations to
maintain its offer, and may rescind any sale contracted, in the
jurisdiction.

    

    14.           Use of
Pronouns.  All pronouns and any variations thereof used herein
shall be deemed to refer to the masculine, feminine, neuter, singular or plural
as the identity of the person or persons referred to may require.

    

    15.           Confidentiality.  The
Purchaser acknowledges and agrees that any information or data the Purchaser has
acquired from or about the Company, not otherwise properly in the public domain,
was received in confidence.  The Purchaser agrees not to divulge,
communicate or disclose, except as may be required by law or for the performance
of this Subscription Agreement, or use to the detriment of the Company or for
the benefit of any other person or persons, or misuse in any way, any
confidential information of the Company, including any scientific, technical,
trade or business secrets of the Company and any scientific, technical, trade or
business materials that are treated by the Company as confidential or
proprietary, including, but not limited to, ideas, discoveries, inventions,
developments and improvements belonging to the Company and confidential
information obtained by or given to the Company about or belonging to third
parties.

     

     

     

    
      
        
        

      

      
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    16.           Miscellaneous.

    

    (a)           This
Subscription Agreement, together with the Notes, the Warrants and the
Registration Rights Agreement, constitute the entire agreement between the
Purchaser and the Company with respect to the subject matter hereof and
supersede all prior oral or written agreements and understandings, if any,
relating to the subject matter hereof.  The terms and provisions of
this Subscription Agreement may be waived, or consent for the departure
therefrom granted, only by a written document executed by the party entitled to
the benefits of such terms or provisions.

    

    (b)           Each
of the Purchaser’s and the Company’s representations and warranties made in this
Subscription Agreement shall survive the execution and delivery hereof and
delivery of the Notes, the Warrants and the Common Shares issuable upon
conversion of, or payment of interest on, the Notes and issuable upon the
exercise of the Warrants.

    

    (c)           Each
of the parties hereto shall pay its own fees and expenses (including the fees of
any attorneys, accountants, appraisers or others engaged by such party) in
connection with this Subscription Agreement and the transactions contemplated
hereby whether or not the transactions contemplated hereby are
consummated.

    

    (d)           This
Subscription Agreement may be executed in one or more counterparts each of which
shall be deemed an original, but all of which shall together constitute one and
the same instrument.

    

    (e)           Each
provision of this Subscription Agreement shall be considered separable and, if
for any reason any provision or provisions hereof are determined to be invalid
or contrary to applicable law, such invalidity or illegality shall not impair
the operation of or affect the remaining portions of this Subscription
Agreement.

    

    (f)           Paragraph
titles are for descriptive purposes only and shall not control or alter the
meaning of this Subscription Agreement as set forth in the text.

    

    17.           Omnibus Signature
Page.  This Subscription Agreement is intended to be read and
construed in conjunction with the Registration Rights Agreement pertaining to
the issuance by the Company of the shares of Common Stock and Warrants to
subscribers pursuant to the Memorandum.  Accordingly, pursuant to the
terms and conditions of this Subscription Agreement and such related agreements
it is hereby agreed that the execution by the Purchaser of this Subscription
Agreement, in the place set forth herein, shall constitute agreement to be bound
by the terms and conditions hereof and the terms and conditions of the
Registration Rights Agreement, with the same effect as if each of such separate,
but related agreement, were separately signed.

    

     

    [REMAINDER
OF THIS PAGE IS BLANK]

    

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    

    ANTI-MONEY
LAUNDERING REQUIREMENTS

    

    

    
      	
              The
      USA PATRIOT Act

            	 	
              What
      is money laundering?

            	 	
              How
      big is the problem and why is it important?

            
	
               

              The
      USA PATRIOT Act is designed to detect, deter, and punish terrorists in the
      United States and abroad.  The Act imposes new anti-money
      laundering requirements on brokerage firms and financial
      institutions.  Since April 24, 2002 all brokerage firms have
      been required to have new, comprehensive anti-money laundering
      programs.

               

              To
      help you understand theses efforts, we want to provide you with some
      information about money laundering and our steps to implement the USA
      PATRIOT Act.

            	 	
               

              Money
      laundering is the process of disguising illegally obtained money so that
      the funds appear to come from legitimate sources or
      activities.  Money laundering occurs in connection with a wide
      variety of crimes, including illegal arms sales, drug trafficking,
      robbery, fraud, racketeering, and terrorism.

            	 	
               

              The
      use of the U.S. financial system by criminals to facilitate terrorism or
      other crimes could well taint our financial markets.  According
      to the U.S. State Department, one recent estimate puts the amount of
      worldwide money laundering activity at $1 trillion a
  year.

            

    

    

    
      	
              What
      are we required to do to eliminate money laundering?

            
	
               

              Under
      new rules required by the USA PATRIOT Act, our anti-money laundering
      program must designate a special compliance officer, set up employee
      training, conduct independent audits, and establish policies and
      procedures to detect and report suspicious transaction and ensure
      compliance with the new laws.

            	
               

              As
      part of our required program, we may ask you to provide various
      identification documents or other information.  Until you
      provide the information or documents we need, we may not be able to effect
      any transactions for you.

            

    

    

    

    

    

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    

    Z
TRIM HOLDINGS, INC.

    OMNIBUS
SIGNATURE PAGE TO

    SUBSCRIPTION
AGREEMENT, REGISTRATION RIGHTS AGREEMENT, AND SECURITY AGREEMENT

    

    Purchaser
hereby elects to purchase a total of ______ Units at a price of $100,000 per
Unit (NOTE: to be completed by the Purchaser).

    

    

    Date
(NOTE: To be completed by the Purchaser): __________________, 2008

    

    If the
Purchaser is an INDIVIDUAL, and if purchased as JOINT TENANTS, as TENANTS IN
COMMON, or as COMMUNITY PROPERTY:

     

    
      	 
      	 
      	 
      	 
      	 
      
	 
      	
              Print
      Name(s) 

            	 
      	
              Social
      Security Number(s)

            	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              Signature(s)
      of Purchaser(s)    

            	 
      	
              Signature

            	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              Date 

            	 
      	
              Address

            	 
      

    

    

    If the
Purchaser is a PARTNERSHIP, CORPORATION, LIMITED LIABILITY COMPANY or
TRUST:

     

    
      	 
      	 
      	 
      	 
      	 
      
	 
      	
              Name
      of Partnership,  

              Corporation,
      Limited

              Liability
      Company or Trust

            	 
      	
              Federal
      Taxpayer

              Identification
      Number

            	 
      
	 
      	 
      	 
      	 
      	 
      

    

     

    
      	
              By: 

            	
                 

            	 
      	 
      	 
      
	 
      	
              Name:   

            	 
      	
              State
      of Organization

            	 
      
	 
      	
              Title:

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              Date 

            	 
      	
              Address

            	 
      

    

     

    

    Z
TRIM HOLDINGS,
INC.                                                                                                

    

    
      	 
      	 
      	 
      	 
      	 
      	 
      
	
              By:

            	
              /s/

            	 
      	 
      	 
      	 
      
	 
      	
              Authorized
      Officer    

            	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      

    

    

     

     

     

    11ex42.htm

     

     

    Exhibit
4.2

     

    THIS NOTE
AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS (THE “STATE ACTS”), AND MAY NOT BE OFFERED,
SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.

     

    

     

    Z
TRIM HOLDINGS, INC.

     

    8%
CONVERTIBLE SENIOR SECURED NOTE

    DUE
[24 Months from Issuance]

     

    

     

    Date:
_________,
2008                                                                                                                       $_________

    For value
received, Z TRIM HOLDINGS, INC., an Illinois corporation (the “Company”), hereby
promises to pay to the order of [INVESTOR], a __________
(together with its successors and permitted assigns, the “Holder”), in
accordance with the terms hereinafter provided, the principal amount of
_______________ ($___________) (the “Principal
Amount”).  The Company is issuing this convertible senior
secured note (this “Note” and,
collectively with all other notes issued in connection with the Offering
Memorandum, the “Notes”) to the Holder pursuant
to the Subscription Agreement (the “Subscription
Agreement”) executed
and delivered in connection with the Offering Memorandum (the “Private
Offering”).  As used herein, the term “Issuance Date” means
_________, 2008.

     

    The
Company hereby promises to pay to the order of the Holder the Principal Amount
in United States Dollars in immediately available funds to the Holder at the
address of the Holder as set forth in the Security Agreement (as defined below),
or at such other place as the Holder may designate from time to time in writing
to the Company, on [24 months
from issuance] (the “Maturity Date”) or
such earlier date as the Holder elects, with interest to the Holder on the
aggregate unconverted and then outstanding Principal Amount in accordance with
the provisions hereof.  All interest payments under or pursuant to
this Note shall be made in Common Shares (as defined below) pursuant to Section
1.1 hereof.

     

    This Note
is secured by a Security Agreement dated the date hereof (the “Security
Agreement”) among
the Company and Holder in favor of the Holder covering certain collateral (the
“Collateral”), all
as more particularly described and provided therein, and is entitled to the
benefits thereof.  The Security Agreement, the Uniform Commercial Code
financing statements on form UCC-1 filed in connection with the Security
Agreement and any and all other documents executed and delivered by the Company
to the Holder under which the Holder is granted Liens on assets of the Company
are collectively referred to as the “Security
Documents.”

    

    ARTICLE
I THE NOTE

     

    Section
1.1                                Interest.  Interest
on the Principal Amount of this Note shall commence accruing on the Issuance
Date and shall accrue daily at a rate of eight percent (8%) per annum (the
“Interest
Rate”) until payment in full of the Principal Amount and all accrued and
unpaid interest and other amounts which may become due hereunder have been
made.  Interest shall be computed on the basis of a 365-day year and
actual days elapsed.  Accrued interest on the Principal Amount of this
Note (the “Interest
Amount”) shall either be payable to the Holder, on the Maturity Date or
quarterly at the Holder’s option in shares of common stock of the Company, par
value $0.0005 per share (the “Common
Shares”).  The number of Common Shares to be issued to the
Holder shall be equal to the result obtained by dividing (x) the Interest Amount
by (y) the Conversion Price (as defined in Section 3.2(a)
below).  Payment of the Interest Amount in Common Shares shall occur
pursuant to Section 3.3.

     

     

     

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

     

     

    Section
1.2                                Ranking and
Covenants.

     

    (a)           Except
as set forth on Schedule 1 attached
hereto, no indebtedness of the Company or any subsidiary of the Company is
senior to this Note in right of payment, whether with respect to interest,
damages or upon liquidation or dissolution or otherwise.  Until this
Note is fully paid and discharged in full, the Company shall not, and shall not
permit any subsidiary of the Company to, directly or indirectly, incur any
indebtedness for borrowed money (excluding accounts payable incurred in the
ordinary course of business) unless such indebtedness is expressly subordinated
to this Note pursuant to a written subordination agreement acceptable in form,
scope and substance to the Holder in its sole and absolute
discretion.  Notwithstanding the foregoing, the Company may enter into
an additional $__________ offering of 8% convertible senior secured notes (the
“Additional
Offering”) on substantially similar terms and conditions as this Note,
except that such notes shall be convertible for Common Shares at the lower of
$.50 per share or the volume weighted average price of the Common Shares on the
primary trading market on which the Common Shares are listed or quoted, for the
ten (10) trading day period ending on October 1, 2008.  The Notes and
any note issued by the Company pursuant to the Additional Offering shall rank
pari passu with the Company’s obligations under this Note and may be secured
equally and ratably by Liens, on or with respect to any of the Company’s
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom and shall have the benefit, to the full extent
that and with such priority as the obligations under this Note.

     

    (b) Except
for Permitted Liens (as defined in Section 6.14 below) and Liens granted in
connection with the Additional Offering, until this Note is fully paid and
discharged in full, the Company shall not, and shall not permit any subsidiary
of the Company to, directly or indirectly, incur any Lien (as defined in Section
6.14 below) on or with respect to any of the Collateral now owned or hereafter
acquired, or any interest therein or any income or profits therefrom, without
the prior written consent of the Holder.

     

    (c) Until
this Note is fully paid and discharged in full, the Company shall not, and shall
not permit any subsidiary of the Company to, directly or indirectly, without the
prior written consent of the Holder, redeem, purchase or otherwise acquire any
of the Company’s capital stock or set aside any monies for such a redemption,
purchase or other acquisition.

     

    (d) The
Company shall perform any and all acts and execute any and all documents
(including, without limitation, the execution, amendment or supplementation of
any financing statement and continuation statement) for filing under the
provisions of the Uniform Commercial Code (the “UCC”), and the rules
and regulations thereunder, or any other statute, rule or regulation of any
applicable jurisdiction which are necessary at the request of the Holder or its
counsel in order to maintain in favor of the Holder of the Note, a valid and
perfected Lien on and security interest in the Collateral.

     

    Section
1.3                                  Payment on Non-Business
Days. Whenever any payment to be made shall be due on a Saturday, Sunday
or a public holiday under the laws of the State of Illinois, such payment may be
due on the next succeeding business day and such next succeeding day shall be
included in the calculation of the Interest Amount on such date.

     

    Section
1.4                                  Transfers. This Note
may not be sold, transferred or otherwise disposed of by the Holder to any
Person without the express written consent of the Company, which consent shall
not be unreasonably withheld.

     

    Section
1.5                                  Replacement. Upon
receipt of a duly executed and notarized written statement from the Holder with
respect to the loss, theft or destruction of this Note (or any replacement
hereof) and a standard indemnity reasonably satisfactory to the Company, or, in
the case of a mutilation of this Note, upon surrender and cancellation of such
Note, the Company shall issue a new Note, of like tenor and amount, in lieu of
such lost, stolen, destroyed or mutilated Note.  The Holder hereby
unconditionally agrees to indemnify and hold harmless the Company against any
claims, loss, liabilities, damages and expenses that may arise directly or
indirectly on account of the actual or alleged loss, mutilation, theft or
destruction of the original Note or the issuance of a new Note in exchange for
said Note.

    

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    ARTICLE
II

     

    EVENTS
OF DEFAULT; REMEDIES

     

    Section
2.1                                  Events of Default.
The occurrence of any of the following events shall be an “Event of
Default” under
this Note:

     

    (a) Any
default in the payment of (i) the Principal Amount or (ii) Interest Amount on,
or liquidated damages in respect of, any Note, in each case free of any claim of
subordination, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default, solely in the case of a default under clause (ii) above, is not cured
within five Trading Days;

     

    (b) the
Company’s notice to the Holder, including by way of public announcement, at any
time, of its inability to comply or its intention not to comply with proper
requests for conversion of this Note into Common Shares; or

     

    (c) the
Company shall fail for any reason to deliver certificates to a Holder prior to
the fifth Trading Day after a Conversion Date pursuant to and in accordance with
Section 3.3 or the Company shall provide notice to the Holder, including by way
of public announcement, at any time, of its intention not to comply with the
requests for conversion of any Notes in accordance with the terms hereof;
or

     

    (d) default
shall be made in the performance or observance of (i) any covenant,
condition or agreement contained in this Note or any of the other Transaction
Documents (other than a breach by the Company of its obligations to deliver
Common Shares to the Holder upon conversion which breach is addressed in clause
(c) above) which failure is not cured within the earlier to occur of (A) five
(5) Trading Days after the Holder delivers written notice to the Company of the
occurrence thereof or (B) ten (10) Trading Days after the Company shall
become or should have become aware of such failure;

     

    (e) a
default or event of default (subject to any grace or cure period provided for in
the applicable agreement, document or instrument) shall occur under (i) any of
the Transaction Documents other than the Notes, or (ii) any other material
agreement, lease, document or instrument to which the Company or any subsidiary
is bound, which default, solely in the case of a default under (ii) above, is
not cured, within 10 Trading Days;

     

    (f) any
representation or warranty made by the Company herein or in the Security
Documents, the Registration Rights Agreement, or any other Transaction Document
or other report, financial statement or certificate made or delivered to the
Holder or other holder of Notes shall prove to have been false or incorrect or
breached in a material respect on the date as of which made; or

     

    (g) the
Company or any subsidiary shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property or assets,
(ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the United States Bankruptcy Code (as
now or hereafter in effect) or under the comparable laws of any jurisdiction
(foreign or domestic), (iv) file a petition seeking to take advantage of
any bankruptcy, insolvency, moratorium, reorganization or other similar law
affecting the enforcement of creditors’ rights generally, (v) acquiesce in
writing to any petition filed against it 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), (vi) issue a notice of
bankruptcy or winding down of its operations or issue a press release regarding
same, (vii) fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due, (viii) call a meeting of
its creditors with a view to arranging a composition, adjustment or
restructuring of its debts, (ix) by any act or failure to act expressly indicate
its consent to, approval of or acquiescence in any of the foregoing, or (x) take
any corporate or other action for the purpose of effecting any of the
foregoing;

     

     

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

     

    (h)           a
proceeding or case shall be commenced in respect of the Company or any
subsidiary, 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
its liquidation or dissolution 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 any subsidiary 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 or any subsidiary and shall continue
undismissed, or unstayed and in effect for a period of thirty (30)
days;

     

    (i)           the
Company or any subsidiary shall default in any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement of the Company in an amount
exceeding $50,000, whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

     

    (j)           the
Common Shares shall not be eligible for quotation on or quoted for trading on a
trading market and shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;

     

    (k)           the
Company shall redeem or repurchase more than a de minimis number of its
outstanding Common Shares or other equity securities of the Company (other than
redemptions of Conversion Shares and repurchases of Common Shares or other
equity securities of departing officers and directors of the Company; provided
that such repurchases shall not exceed $50,000, in the aggregate, for all
officers and directors during the term of this Note;

     

    (l)           the
effectiveness of the applicable Registration Statement required to be maintained
effective pursuant to the terms of the Registration Rights Agreement lapses for
any reason (including, without limitation, the issuance of a stop order) or is
unavailable to the Holder for sale of such Holder’s Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or unavailability continues
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 (other than days during an
Allowed Delay (as defined in the Registration Rights Agreement);

     

    (m)           any
change in the composition, form of business association or ownership of the
Company, without Holder’s prior consent;

     

    (n)           if
the Company ceases conducting its operations as currently in effect as of the
date hereof;

     

    (o)           the
Company shall fail for any reason to pay in full the amount of cash due pursuant
to a Buy-In within five Trading Days after notice therefore is delivered
hereunder or shall fail to pay all amounts owed on account of an Event of
Default within five days of the due date.

     

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

     

    Section
2.2                                           Remedies Upon An Event of
Default. If an Event of Default shall have occurred and shall be
continuing, the Holder of this Note may at any time at its option:

     

    (a) demand
that the principal amount of this Note then outstanding shall be converted into
shares of Common Stock at the Conversion Price (as defined in Section 3.2(a)
below) then in effect; or declare immediately due and payable the full Principal
Amount of this Note, together with the Interest Amount and other amounts owing
in respect thereof, in cash, which aggregate amount payable upon an Event of
Default shall be equal to the Mandatory Repayment amount, defined below; provided, however, that upon
the occurrence of an Event of Default described in paragraphs (g) and (h) of
Section 2.1, the outstanding principal balance and accrued interest hereunder
shall be automatically due and payable.  Commencing five (5) days
after the occurrence of any Event of Default that results in the eventual
acceleration of this Note, the Interest Rate shall accrue at a rate of 18% per
annum, or such lower maximum amount of interest permitted to be charged under
applicable law.  All Notes for which the full Mandatory Repayment
amount hereunder shall have been paid in accordance herewith shall promptly be
surrendered to or as directed by the Company.  The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law.   Such
declaration may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a Note holder until such time,
if any, as the full payment under this Section shall have been received by
it.  No such rescission or annulment shall affect any subsequent Event
of Default or impair any right consequent thereon.

     

    (b)           exercise
or otherwise enforce any one or more of the Holder’s rights, powers, privileges,
remedies and interests under this Note, the Security Agreement, or applicable
law.

     

    In
connection with the Holder’s exercise of any of its remedies hereunder, the
Company shall use its reasonable best efforts to cooperate with the Holder to
the end that the Holder’s rights hereunder will be effectuated.

     

    ARTICLE
III

     

    CONVERSION;
ANTIDILUTION

     

    Section
3.1                                Conversion.  At
any time on or after the Issuance Date, at the request of the Holder (the “Conversion
Election”), this Note shall be convertible, in whole or in part, into
such number of fully paid and non-assessable Common Shares as is determined by
dividing (x) the outstanding Principal Amount and the Interest Amount then
accrued hereon by (y) the Conversion Price (as defined in Section 3.2(a)
hereof) then in effect (the “Conversion Rate”);
provided, however, that
the Conversion Price, defined below, shall be subject to adjustment as described
in Section 3.4 of this Note.  The Holder shall effect a Conversion
Election by delivering to the Company the form of Notice of Conversion attached
hereto as Exhibit
B (a “Notice of
Conversion”), specifying therein the principal amount of Notes to be
converted and the date on which such conversion is to be effected (a “Conversion
Date”).  If no Conversion Date is specified, in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is provided hereunder.  To effect Conversion Elections hereunder, the
Holder shall not be required to physically surrender Notes to the company unless
the entire Principal Amount of this Note plus the Interest Amount thereon shall
have been so converted.  Conversions hereunder shall have the effect
of lowering the outstanding Principal Amount in an amount equal to the
applicable conversion.  The Holder and the Company shall maintain
records showing the Principal Amount converted and the date of such
conversions.  The Company shall deliver any objection to any Notice of
Conversion within three (3) Trading Days of receipt of such Notice of
Conversion.  In the event of any dispute or discrepancy, the records
of the Holder shall be controlling and determinative in the absence of manifest
error.  The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Note, the unpaid and unconverted
Principal Amount of this Note may be less than the amount stated on the face
hereof.  However, at the Company’s request, the Holder shall surrender
the Note to the Company within five (5) Trading Days following such request so
that a new Note reflecting the correct Principal Amount may be issued to
Holder.

     

     

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    

    Section
3.2Conversion
Price.

     

     

    (a) The
term “Conversion
Price” shall
mean $0.26, subject to adjustment under Section 3.4
hereof.  References herein to the Conversion Price mean the Conversion
Price as from time to time adjusted pursuant to the provisions of Section 3.4
and in effect on the applicable date.

     

    (b) The
term “Conversion
Shares” shall
mean such Common Shares issuable upon conversion of this Note.

     

    Section
3.3                                  Mechanics of
Conversion.  Not later than five (5) Trading Days after each
Conversion Date (the last day of each such period, a “Delivery Date”), the
Company or its designated transfer agent, as applicable, shall issue and deliver
to the Depository Trust Company (“DTC”) account on the
Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified in the
Conversion Election, registered in the name of the Holder or its designee, for
the number of Common Shares to which the Holder shall be
entitled.  Notwithstanding the foregoing, in the alternative, not
later than the Delivery Date, the Company shall deliver to the applicable Holder
by express courier a certificate or certificates representing the number of
Conversion Shares being acquired upon the conversion of this
Note.  If, in the case of any Conversion Election such DWAC transfer
or certificate or certificates are not delivered to or as directed by the
applicable Holder by the Delivery Date, the Holder shall be entitled by written
notice to the Company at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion, in which event the
Company shall immediately return this Note tendered for conversion, whereupon
the Company and the Holder shall each be restored to their respective positions
immediately prior to the delivery of such Conversion Election.

     

    Section
3.4                                  Adjustment of Conversion
Price.

     

    (a)           The
Conversion Price shall be subject to adjustment from time to time as
follows:

     

    (i) Adjustments for Stock Splits
and Combinations. If the Company shall at any time or from time to time
after the Issuance Date, effect a stock split of the outstanding Common Shares,
the applicable Conversion Price in effect immediately prior to the stock split
shall be proportionately decreased.  If the Company shall at any time
or from time to time after the Issuance Date, combine the outstanding shares of
Common Stock, the applicable Conversion Price in effect immediately prior to the
combination shall be proportionately increased.  Any adjustments under
this Section 3.4(a)(i) shall be effective at the close of business on the date
the stock split or combination occurs.

     

    (ii) Adjustments for Certain
Dividends and Distributions. If the Company shall at any time or from
time to time after the Issuance Date make or issue or set a record date for the
determination of holders of Common Shares entitled to receive a dividend or
other distribution payable in Common Shares, then, and in each event, the
applicable Conversion Price in effect immediately prior to such event shall be
decreased as of the time of such issuance or, in the event such record date
shall have been fixed, as of the close of business on such record date, by
multiplying the applicable Conversion Price then in effect by a
fraction:

     

    (A) the
numerator of which shall be the total number of Common Shares issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date; and

     

    (B) the
denominator of which shall be the total number of Common Shares issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of Common Shares issuable in
payment of such dividend or distribution.

     

    (iii) Adjustments for
Reclassification, Exchange or Substitution. If the Common Shares issuable
upon conversion of this Note at any time or from time to time after the Issuance
Date shall be changed to the same or different number of shares of any class or
classes of stock, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of shares or stock
dividends provided for in clauses (i) and (ii) of Section 3.4(a), or a
reorganization, merger, consolidation, or sale of assets provided for in Section
3.4(a)(iv)), then, and in each event, an appropriate revision to the Conversion
Price shall be made and provisions shall be made (by adjustments of the
Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock and
other securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of Common Shares into which such Note
might have been converted immediately prior to such reclassification, exchange,
substitution or other change, all subject to further adjustment as provided
herein.

     

     

     

    
      
        
        

      

      
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    (iv) Adjustments for
Reorganization, Merger, Consolidation or Sales of Assets. If at any time
or from time to time after the Issuance Date there shall be a capital
reorganization of the Company (other than by way of a stock split or combination
of shares or stock dividends or distributions provided for in clauses (i) and
(ii) of Section 3.4(a), or a reclassification, exchange or substitution provided
for in Section 3.4(a)(iii)), or a merger or consolidation of the Company with or
into another corporation where the holders of outstanding voting securities of
the Company prior to such merger or consolidation do not own over fifty percent
(50%) of the outstanding voting securities of the merged or consolidated entity,
immediately after such merger or consolidation, or any Asset Sale (an “Organic Change”),
then as a part of such Organic Change, (A) if the surviving entity in any
such Organic Change is a public company that is registered pursuant to the
Securities Exchange Act of 1934, as amended, and its common stock is listed or
quoted on a national exchange or the OTC Bulletin Board, an appropriate revision
to the Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price) so that the Holder shall have the right
thereafter to convert such Note into the kind and amount of shares of stock and
other securities or property of the Company or any successor corporation as it
would have received as a result of such Organic Change if it had converted this
Note into Common Shares immediately prior to such Organic Change, and
(B) if the surviving entity in any such Organic Change is not a public
company that is registered pursuant to the Securities Exchange Act of 1934, as
amended, or its common stock is not listed or quoted on a national securities
exchange or the OTC Bulletin Board, the Holder shall have the right to demand
repayment of the then outstanding aggregate Principal Amount at 115% of the
Principal Amount thereof (“Mandatory
Repayment”).  The Company shall give the Holder at least twenty
(20) day’s prior written notice of any Organic Change, during which time the
Holder shall have the right to convert any portion of the Note into Common
Shares.  In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.4(a)(iv) with respect to the
rights of the Holder after the Organic Change to the end that the provisions of
this Section 3.4(a)(iv) (including any adjustment in the applicable Conversion
Price then in effect and the number of shares of stock or other securities
deliverable upon conversion of this Note) shall be applied after that event in
as nearly an equivalent manner as may be practicable.

     

    (v) Certain
Issuances.  In the event that the Company sells or issues
Common Shares after the Issuance Date at a price less than the Conversion Price
in effect immediately prior to such sale or issuance, then the Conversion Price
shall be reduced immediately thereafter so that it shall equal the price at
which such Conversion Shares are sold or issued, as applicable.

     

    (vi) Options, Rights, Warrants
and Convertible and Exchangeable Securities.  In case the
Company shall at any time after the Issuance Date issue options, rights or
warrants to subscribe for Common Shares, or issue any securities convertible
into or exchangeable for Common Shares, for a consideration per share less than
the Conversion Price in effect immediately prior to the issuance of such
options, rights, warrants or such convertible or exchangeable securities, or
without consideration, the Conversion Price in effect immediately prior to the
issuance of such options, rights, warrants or such convertible or exchangeable
securities, as the case may be, shall be reduced to the price established for
such options, rights, warrants or convertible or exchangeable securities that
entitle the holders thereof to receive a Common Share.

     

     

    
      
        
        

      

      
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    (b) Obligation Absolute; Partial
Liquidated Damages.  The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.4 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against
impairment.  If the Company fails for any reason to deliver to the
Holder any certificate or certificates required pursuant to Section 3.3 by the
fifth Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of
Principal Amount being converted, $5 per Trading Day (increasing to $10 per
Trading Day after five Trading Days after such damages begin to accrue) for each
Trading Day after such fifth Trading Day until such certificates are
delivered.  The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Note in accordance with the terms
hereof are absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person
of any obligation to the Company or any violation or alleged violation of law by
the Holder or any other Person, and irrespective of any other circumstance which
might otherwise limit such obligation of the Company to the Holder in connection
with the issuance of Conversion Shares.  In the event a Holder shall
elect to convert any or all of the outstanding Principal Amount hereof, the
Company may not refuse conversion based on any claim that such Holder or anyone
associated or affiliated with such Holder has been engaged in any violation of
law, violation of an agreement to which such Holder is a party or for any reason
whatsoever, unless, an injunction from a court, or notice, restraining and
adjoining conversion of all or part of said Notes shall have issued and the
Company posts a surety bond for the benefit of such Holder in an amount equal to
one hundred fifty percent (150%) of the amount of the Principal Amount of the
Notes that the Holder has elected to convert, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and the proceeds
of which shall be payable to such Holder (as liquidated damages) in the event it
obtains judgment.  In the absence of an injunction precluding the
same, the Company shall issue Conversion Shares or, if applicable, cash or other
property as required hereunder.  Nothing herein shall limit a Holder’s
right to pursue actual damages or declare an Event of Default pursuant to
Section 2 herein for the Company’s failure to deliver Conversion Shares within
the period specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief.  Likewise,
nothing herein shall prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

     

    (c) Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion.  In
addition to any other rights available to the Holder, if the Company fails for
any reason to deliver to the Holder any certificate or certificates required
pursuant to Section 3.3 by the fifth Trading Day after the Conversion Date, and
if after such fifth Trading Day the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise) Common Shares to deliver
in satisfaction of a sale by such Holder of the Conversion Shares which the
Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (i) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Shares so purchased exceeds (y) the product of (1) the aggregate number of
Common shares that such Holder anticipated receiving from the conversion at
issue multiplied by (2) the actual sale price of the Common Shares at the time
of the sale (including brokerage commissions, if any) giving rise to such
purchase obligation and (ii) at the option of the Holder, either reissue Notes
in principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of Common Shares that would have been issued
had the Company timely complied with its delivery requirements under Section
3.3.

     

     

    
      
        
        

      

      
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    (d) Certificates as to
Adjustments. Upon occurrence of each adjustment or readjustment of the
Conversion Price or number of Common Shares issuable upon conversion of this
Note pursuant to this Section 3.4, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based.  The Company shall, upon written request of the
Holder, at any time, furnish or cause to be furnished to the Holder a like
certificate setting forth such adjustments and readjustments, the applicable
Conversion Price in effect at the time, and the number of Common Shares and the
amount, if any, of other securities or property which at the time would be
received upon the conversion of this Note.  Notwithstanding the
foregoing, the Company shall not be obligated to deliver a certificate unless
such certificate would reflect an increase or decrease of at least one percent
(1%) of such adjusted amount.

     

    (e)           Issue Taxes. The
Company shall pay any and all issue and other taxes, excluding federal, state or
local income taxes, that may be payable in respect of any issue or delivery of
Common Shares on conversion of this Note pursuant thereto; provided, however, that the
Company shall not be obligated to pay any transfer taxes resulting from any
transfer requested by the Holder in connection with any such
conversion.

     

    (f)           Fractional Shares. No
fractional shares of Common Shares shall be issued upon conversion of this
Note.  In lieu of any fractional shares to which the Holder would
otherwise be entitled, the Company shall pay in cash any remainder resulting
from after the number of whole Common Shares is determined as a result of any
conversion.  If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu of the final
fraction of a Common Share, one whole Common Share.

     

    (g)           Reservation of Common
Shares. The Company shall at all times when this Note shall be
outstanding, reserve and keep available out of its authorized but unissued
Common Shares, solely for the purpose of issuance upon conversion of the Notes
and payment of the Interest Amount on the Notes, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of Common Shares as shall from
time to time be sufficient to effect the conversion of this Note, taking into
account the adjustments and restrictions of Section 3.4.  The Company
shall, from time to time in accordance with Illinois law, increase the
authorized number of Common Shares if at any time the unissued number of
authorized Common Shares shall not be sufficient to satisfy the Company’s
obligations under this Section 3.4(g).  The Company covenants that all
Common Shares that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Registration
Statement is then effective under the Securities Act, registered for public sale
in accordance with the Registration Statement.

     

    (h)           Regulatory
Compliance. If any Common Shares to be reserved for the purpose of
conversion of this Note require registration or listing with or approval of any
governmental authority, stock exchange or other regulatory body under any
federal or state law or regulation or otherwise before such shares may be
validly issued or delivered upon conversion, the Company shall, at its sole cost
and expense, in good faith and as expeditiously as possible, endeavor to secure
such registration, listing or approval, as the case may be.

     

    Section
3.5                                  No Rights as
Stockholder. Nothing contained in this Note shall be construed as
conferring upon the Holder, prior to the conversion of this Note, the right to
vote or to receive dividends or to consent or to receive notice as a stockholder
in respect of any meeting of stockholders for the election of directors of the
Company or of any other matter, or any other rights as a stockholder of the
Company.

     

    Section
3.6                                  Calculations.                                           All
calculations under this ARTICLE III shall be made to the nearest cent or the
nearest 1/100th of a
Common Share, as the case may be.  The number of Common Shares
outstanding at any given time shall not include the Common Shares owned by or
held by or for the account of the Company, and the description of any such
Common Shares shall be considered on issue or sale of Common
Shares.  For purposes of this ARTICLE III, the number of Common Shares
deemed to be issued and outstanding as of a given date shall be the sum of the
number of Common Shares (excluding treasury shares, if any) issued and
outstanding.

     

     

     

    
      
        
        

      

      
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    ARTICLE
IV

     

    NEGATIVE
COVENANTS

     

    Section
4.                                Negative
Covenants.  So long as any portion of this Note is outstanding,
the Company will not and will not permit any of its subsidiaries to directly or
indirectly:

     

    (a)           Consistent
with Section 1.2, enter into, create, incur, assume or suffer to exist any
indebtedness or Liens of any kind, on or with respect to any of its property or
assets or Collateral now owned or hereafter acquired or any interest therein or
any income or profits therefrom that is senior to, subordinated to or pari passu
with, in any respect, the Company’s obligations under the Notes other than
obligations under the Additional Offering;

     

    (b)           Consistent
with Section 1.2, repay, repurchase or offer to repay, repurchase, make any
payment in respect of or otherwise acquire any of its Common Shares or other
equity securities;

     

    (c)           authorize
or approve any reverse stock split of the Company Shares;

     

    (d)           amend
its certificate of incorporation, bylaws or charter documents so as to adversely
affect any rights of the Holder; provided that reincorporating the Company in
Delaware and eliminating cumulative voting rights for directors shall not be
deemed a violation of this covenant;

     

    (e)           create
or acquire any subsidiary after the date hereof unless (i) such subsidiary is a
wholly-owned subsidiary of the Company and (ii) such subsidiary becomes party to
the Security Documents (either by executing a counterpart thereof or an
assumption or joinder agreement in respect thereof) and, to the extent required
by the Holder, satisfied each condition of this Agreement as if such subsidiary
were a subsidiary on the Issuance Date;

     

    (f)           make
any capital expenditure in an amount greater than $1,500,000;

     

    (g)           engage
in any transactions with any officer, director, employee or any affiliate of the
Company, including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of $10,000
other than (i) for payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company and (iii) for
other employee benefits, including stock option agreements under any stock
option plan of the Company;

     

    (h)           consummate
any Organic Change without the prior consent of Holder; or

     

    (i)           enter
into any agreement with respect to any of the foregoing.

     

     

    
      
        
        

      

      
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    ARTICLE
V

     

    AFFIRMATIVE
COVENANTS

     

    Section
5.                                Affirmative
Covenants.  The Company shall adhere to and use the proceeds
received of the sale of the Notes solely for the purposes set forth in the Use
of Proceeds schedule attached hereto as Schedule
3.

     

    ARTICLE
VI

     

    MISCELLANEOUS

     

    Section
6.1Notices.

     

    (a)           Any
notice, demand, request, waiver or other communication required or permitted to
be given hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and shall be delivered personally, by facsimile, or sent by
a nationally recognized overnight courier service, addressed to the Company at
the address set forth above, facsimile number (847) 549-6028, Attn: Steven J.
Cohen, or such other address or facsimile number as the Company may specify for
such purposes by notice to the Holders delivered in accordance with this
Section.  Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile number or address of such
Holder appearing on the books and records of the Company, or if no such
facsimile number or address appears, at the principal place of business of the
Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section later than 5:30 p.m. (New York City time) on any date and earlier
than 11:59 p.m. (New York City time) on such date (iii) the second Trading Day
following the date of mailing, if sent by nationally recognized overnight
courier services, or (iv) upon actual receipt by the party to whom such notice
is required to be given.

    

     

    (b)            The
Company will give written notice to the Holder at least twenty (20) days prior
to the date on which the Company takes a record (i) with respect to any
dividend or distribution upon the Common Shares, (ii) with respect to any
pro rata subscription offer to holders of Common Shares or (z) for
determining rights to vote with respect to any Organic Change, dissolution,
liquidation or winding-up but in no event shall such notice be provided to the
Holder prior to such information being made known to the public.  The
Company also will give written notice to the Holder at least twenty (20) days
prior to the date on which any Organic Change, dissolution, liquidation or
winding-up will take place but in no event shall such notice be provided to the
Holder prior to such information being made known to the public.  The
Holder is entitled to convert Notes during the 20-day period commencing the date
of such notice to the effective date of the event triggering such
notice.

     

    Section
6.2                                Governing Law; Consent to
Jurisdiction. The parties acknowledge and agree that any claim,
controversy, dispute or action relating in any way to this agreement or the
subject matter of this agreement shall be governed solely by the laws of the
State of Delaware, without regard to any conflict of laws
doctrines.  The parties irrevocably consent to being served with legal
process issued from the state and federal courts located in Delaware and
irrevocably consent to the exclusive personal jurisdiction of the federal and
state courts situated in the State of Delaware.  The parties
irrevocably waive any objections to the personal jurisdiction of these
courts.  Said courts shall have sole and exclusive jurisdiction over
any and all claims, controversies, disputes and actions which in any way relate
to this Note or the subject matter of this agreement.  The parties
also irrevocably waive any objections that these courts constitute an
oppressive, unfair, or inconvenient forum and agree not to seek to change venue
on these grounds or any other grounds.  Nothing in this Section 6.2
shall affect or limit any right to serve process in any other manner permitted
by law.

     

    Section
6.3                                Absolute
Obligation.  Except as expressly provided herein, no provision
of this Note shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the Principal Amount, the Interest Amount,
and liquidated damages, if any, on this Note at the time, place, and rate, and
in the coin or currency, herein prescribed.  This Note is a direct
debt obligation of the Company.  This Note ranks pari passu with all
other Notes now or hereinafter issued under the terms set forth
herein.

     

     

     

    
      
        
        

      

      
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    Section
6.4                                Security
Interest.  This note is a direct debt obligation of the Company
and, pursuant to the Security Agreement, is secured by a first priority
perfected security interest in all of the assets of the Company for the benefit
of the Holders.

     

    Section
6.5                                Headings. Article and
section headings in this Note are included herein for purposes of convenience of
reference only and shall not constitute a part of this Note for any other
purpose.

     

    Section
6.6                                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, at law or in equity (including, without limitation, a decree of
specific performance and/or other injunctive relief), no remedy contained herein
shall be deemed a waiver of compliance with the provisions giving rise to such
remedy and nothing herein shall limit a Holder’s right to pursue actual 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 hereof 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 and material harm to the Holder
and that the remedy at law for any such breach may be
inadequate.  Therefore the Company agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to
all other available rights and remedies, at law or in equity, to seek and obtain
such equitable relief, including but not limited to an injunction restraining
any such breach or threatened breach, without the necessity of showing economic
loss and without any bond or other security being required.

     

    

     

    Section
6.7                                Enforcement Expenses.
The Company agrees to pay all reasonable costs and expenses of the Holder
incurred as a result of enforcement of this Note, including, without limitation,
reasonable attorneys’ fees and expenses.

     

    Section
6.8                                Binding Effect. The
obligations of the Company and the Holder set forth herein shall be binding upon
the successors and assigns of each such party, whether or not such successors or
assigns are permitted by the terms hereof.

     

    Section
6.9                                Amendments. This Note
may not be modified or amended in any manner except in writing executed by the
Company and the Holder.

     

    Section
6.10                              Compliance with Securities
Laws. The Holder of this Note acknowledges that this Note is being
acquired solely for the Holder’s own account and not as a nominee for any other
party, and for investment and not with a view to the distribution hereof. This
Note and any Note issued in substitution or replacement therefor shall be
stamped or imprinted with a legend in substantially the following
form:

     

    “THIS
NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS (THE “STATE ACTS”), AND MAY NOT BE OFFERED,
SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHICATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.”

     

    

    Section
6.11                              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, nor shall any waiver by the Holder of any such right or rights on any
one occasion be deemed a waiver of the same right or rights on any future
occasion.

     

    
      
        
        

      

      
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    Section
6.12                              Company’s
Waivers.

     

    (a)           Except
as otherwise specifically provided herein, the Company and all others that may
become liable for all or any part of the obligations evidenced by this Note,
hereby waive presentment, demand, notice of nonpayment, protest and all other
demands’ and notices in connection with the delivery, acceptance, performance
and enforcement of this Note, and do hereby consent to any number of renewals of
extensions of the time or payment hereof and agree that any such renewals or
extensions may be made without notice to any such persons and without affecting
their liability herein and do further consent to the release of any person
liable hereon, all without affecting the liability of the other persons, firms
or Company liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY
JURY.

     

    (b)           THE
COMPANY ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

     

    Section
6.13                              Seniority.  This
Note is senior in right of payment to any and all other indebtedness of the
Company.

     

    Section
6.14                              Definitions. For the
purposes hereof, the following term shall have the following
meaning:

     

    “Asset Sale” means (i)
in one or more transactions, the sale, lease, conveyance or other disposition of
any assets or rights other than in the ordinary course of business, and (ii) the
sale of debt or equity interests in any of the Company’s
subsidiaries.

     

    “Lien” means any mortgage,
charge, pledge, lien (statutory or other), security interest, hypothecation,
assignment for security, claim or preference or priority or other encumbrance
upon or with respect to any property of any kind.  A Person shall be
deemed to own subject to a Lien any property which such Person has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.

     

    “Offering Memorandum”
means that certain Confidential Private Placement Memorandum of the Company,
dated __________, 2008.

     

    “Permitted Liens” shall
have the meaning given such term in the Security Agreement. “Person” shall have the meaning
given such term in the Security Agreement.

    “Registration Rights
Agreement” shall mean that Registration Rights Agreement of even date
herewith, between the Company and the Holder.

    

    “Trading Day” means
(a) a day on which the Common Shares are traded on the OTC Bulletin Board,
or (b) if the Common Shares are not traded on the OTC Bulletin Board, a day
on which the Common Shares are quoted in the over-the-counter market as reported
by the Pink Sheets LLC (or any similar organization or agency succeeding its
functions of reporting prices); provided, however, that in
the event that the Common Shares are not listed or quoted as set forth in (a) or
(b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of Delaware are authorized or required by law or other government action
to close.

    

    “Transaction
Documents” means the offering documents entered into in connection with
the Private Offering by the Company of Units to be placed by ________ as
placement agent, which offering documents include, without limitation, the
Subscription Agreement, the Security Documents, the Registration Rights
Agreement, and the Notes and warrants issued in connection with the Private
Offering.

     

     

    
      
        
        

      

      
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    Section
6.15                              Usury. All agreements
between the Company and the Holder are hereby expressly limited to provide that
in no contingency or event whatsoever, whether by reason of acceleration of
maturity of the indebtedness evidenced hereby or otherwise, shall the amount
paid or agreed to be paid to the Holder for the use, forbearance or detention of
the indebtedness evidenced hereby exceed the maximum amount which the Holder is
permitted to receive under applicable law.  If, from any circumstances
whatsoever, fulfillment of any provision hereof, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then, ipso facto, the obligation to be fulfilled shall
automatically be reduced to the limit of such validity, and if from any
circumstance the Holder shall ever receive as interest an amount which would
exceed the highest lawful rate, such amount which would be excessive interest
shall be applied to the reduction of the principal balance of any of the
Company’s obligations to the Holder, and not to the payment of interest
hereunder.  To the extent permitted by applicable law, all sums paid
or agreed to be paid for the use, forbearance or detention of the indebtedness
evidenced by this Note shall be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full, to the end
that the rate or amount of interest on account of such indebtedness does not
exceed any applicable usury ceiling.

     

    As used
herein, the term “applicable law” shall mean all applicable provisions of
constitutions, statutes, laws, rules and regulations in effect as of the date
hereof, provided, however, that in the event there is a change in such
applicable law which results in a higher permissible rate of interest, then this
Note shall be governed by such new law as of its effective date.  This
provision shall control every other provision of all agreements between the
Company and the Holder.

     

    

     

    

     

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

     

    
      	 
      	
              Z
      TRIM HOLDINGS, INC.

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/ 

            	 
      
	 
      	 
      	
              Name 

            	 
      
	 
      	 
      	
              Title 

            	 
      
	 
      	 
      	 
      	 
      

    

     

     

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    

     

    

    EXHIBIT
A

     

    WIRE
INSTRUCTIONS

     

    Payee: ________________________________________________________                                      

     

    Bank:
_________________________________________________________

     

    Address:_______________________________________________________

     

    Bank
No.:______________________________________________________

     

    Account
No.:____________________________________________________

     

    Account
Name:__________________________________________________

    

    

     

    
      
        
        

      

      
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    EXHIBIT
B

     

    

     

    FORM
OF NOTICE OF CONVERSION INTO SHARES OF COMMON STOCK

     

    (To be
Executed by the Registered Holder in order to Convert the Note into Common
Shares)

     

    The
undersigned hereby irrevocably elects to convert $_____ of the principal amount
of the above Note into Common Shares of Z TRIM HOLDINGS, INC. (the “Company”) according
to the conditions hereof, as of the date written below.

     

    Date of
Conversion:_______________________________________________________________

     

    Applicable
Conversion
Price:_________________________________________________________

     

    Signature:_______________________________________________________________________

     

    [Print
Name]:____________________________________________________________________

     

    Address: _______________________________________________________________________                                                                                                                    

     

    

     

     

     

    17

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