Document:

Exhibit 4.6

POWER MEDICAL INTERVENTIONS, INC.

THIRD AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT

This Amended and Restated Investors’ Rights Agreement (this “Agreement”) is entered into as of June
26, 2006, by and among (i) Power Medical Interventions, Inc., a Delaware
corporation (the “Company”); (ii) the
purchasers of the Series D Convertible Preferred Stock, par value $0.001 per
share, of the Company (the “Series D Preferred”)
listed as “Series D Holders” on the Schedule of Preferred Holders
attached hereto, together with certain other persons or entities that become
parties to this Agreement after the date hereof in accordance with Section 26
(each a “Series D Holder”); (iii) the
holders of the Series C Convertible Preferred Stock, par value $0.001 per
share, of the Company (the “Series C Preferred”)
listed as “Series C Holders” on the Schedule of Preferred Holders
attached hereto (each a “Series C Holder”);
(iv) the holders of the Series B Convertible Preferred Stock, par value $0.001
per share, of the Company (the “Series B Preferred”)
listed as “Series B Holders” on the Schedule of Preferred Holders
attached hereto (each a “Series B Holder”);
(v) the holders of the Series A Convertible Preferred Stock, par value $0.001
per share, of the Company (the “Series A Preferred”)
listed as “Series A Holders” on the Schedule of Preferred Holders
attached hereto (each a “Series A Holder”);
and (vi) the holders of the Common Stock, par value $0.001 per share of the
Company (the “Common Stock”) and the
holders of Common Stock purchase warrants, listed on the Schedule of
Significant Common Holders attached hereto (each a “Significant
Common Holder”).

WHEREAS, the Company, the Series C Holders, the Series B Holders, the
Series A Holders and the Significant Common Holders are parties to a Second
Amended and Restated Investors’ Rights Agreement dated as of October 5, 2005
and amended as of October 31, 2005 (as amended, the “2005
Investors’ Rights Agreement”);

WHEREAS, the Company and the Series D Holders are entering into that
certain Series D Convertible Preferred Stock Purchase Agreement of even date
herewith (the “Purchase Agreement”) pursuant
to which the Series D Holders shall purchase Series D Preferred from the
Company;

WHEREAS, it is a condition precedent to the closing of the Purchase
Agreement that the parties hereto enter into this Agreement, which amends and
restates the 2005 Investors’ Rights Agreement;

NOW, THEREFORE, in
consideration of the premises and the mutual agreements hereinafter set forth,
the parties hereby agree as follows:

1.             Certain
Definitions

As used in this Agreement,
the following terms have the following respective meanings:

“Commission”  means the Securities and Exchange
Commission or any successor agency.

 

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“Holder”
means each Preferred Holder, each Significant Common Holder and any transferee
of Registrable Securities from a Preferred Holder or Significant Common Holder
who, pursuant to Section 14, is entitled to registration rights hereunder.

“New Securities”
has the meaning set forth in Section 20(a) of this Agreement.

“Preferred Holder”
means a Series A Holder, a Series B Holder, a Series C Holder or a Series D
Holder.

“Preferred Stock” means the
Series A Preferred, the Series B Preferred, the Series C Preferred and the
Series D Preferred.

“Registrable Securities” means (i)
shares of Common Stock (A) issued or issuable upon the conversion of the
Preferred Stock held by a Preferred Holder or (B) otherwise held by a Preferred
Holder, (ii) shares of Common Stock held by a Significant Common Holder, and
(iii) shares of Common Stock or other securities issued or issuable in respect
of the shares described in clauses (i) and (ii) upon any stock split, stock
dividend, recapitalization, or similar event; provided,
however, that any shares of Common Stock
that are Registrable Securities shall cease to be Registrable Securities (A)
upon any sale of such shares pursuant to a registration statement or Rule 144
under the Securities Act, (B) upon any sale of such shares in a private
transaction in which the transferor’s rights under this Agreement are not
assigned to the transferee in accordance with this Agreement, or (C) upon
termination of registration rights hereunder in accordance with Section 9.

The terms “register,”
“registered” and “registration” refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

“Registration Expenses”
means all expenses incurred by the Company in complying with Sections 4, 5, 7
and 8, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration and the expenses of one
counsel for the Holders; provided, however, that Registration Expenses shall not include any
Selling Expenses.

“registration statement”
means a registration statement filed by the Company with the Commission in
compliance with the Securities Act for a public offering and sale of Common
Stock.

“Restricted Securities”
means the securities of the Company required to bear the legend set forth in Section
3 (or any similar legend).

“Securities Act”
means the Securities Act of 1933, as amended.

“Selling Expenses”
means all underwriting discounts, selling commissions and stock transfer taxes
applicable to the securities registered by the Holders.

 

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“Series B Director”
shall have the meaning ascribed to such term in the Voting Agreement.

“Series C Director”
shall have the meaning ascribed to such term in the Voting Agreement.

“Series D Director”
shall have the meaning ascribed to such term in the Voting Agreement.

“Voting Agreement”
means that certain Third Amended and Restated Voting Agreement of even date
herewith by and among the Company and the other parties named therein.

2.             Notice
of Proposed Transfers.  Each Holder
of Preferred Stock shall comply with the provisions of Section 6 of the
Third Amended and Restated Stockholders’ Agreement of even date herewith by and
among the Company, Preferred Holders, Significant Common Holders and the other
parties named therein.  Each Significant
Common Holder and Holder of each certificate representing Restricted Securities
by acceptance thereof agrees to comply in all respects with the provisions of
this Section 2.  Prior to any proposed
transfer of any Restricted Securities, unless there is in effect a registration
statement covering the proposed transfer, the Holder thereof shall give written
notice to the Company of such Holder’s intention to effect such transfer.  Each such notice shall describe the manner
and circumstances of the proposed transfer in sufficient detail, and shall, if
the Company reasonably requests, be accompanied (except in transactions in
compliance with Rule 144) by either (a) a written opinion of legal counsel
who shall be reasonably satisfactory to the Company, addressed to the Company
and reasonably satisfactory in form and substance to the Company’s counsel, to
the effect that the proposed transfer of the Restricted Securities may be
effected without registration under the Securities Act, or (b) a “No
Action” letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the
staff of the Commission that action be taken with respect thereto, whereupon
the Holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the Holder to the Company; provided, however, that no such opinion or “No Action” letter need be
obtained with respect to a transfer by a Holder of Restricted Securities to (i)
a partner, director, member, manager, active or retired, of such Holder, (ii)
the estate of such Holder upon such Holder’s death, (iii) an “affiliate” of
such Holder, as that term is defined in Rule 405 promulgated by the
Commission under the Securities Act, (iv) if such Holder is a corporation, to
its wholly-owned subsidiary or parent corporation that owns all of the capital
stock of the Holder, (v) if such Holder is a limited liability company, to its
members or former members or (vi) if such Holder is a natural person, to such
Holder’s spouse, children, grandchildren or spouse of such children or
grandchildren or to trusts for the benefit of such Holder or such persons, if,
in each case, the transferee agrees to be subject to the terms hereof.  Each certificate evidencing the Restricted
Securities transferred as above provided shall bear the restrictive legend in
substantially the form set forth in Section 3, except that such
certificate shall not bear such restrictive legend if the transferee provides
an opinion of counsel as provided in Section 3 or in the opinion of
counsel for the Company such legend is not required in order to facilitate
compliance with any provisions of the Securities Act.

 

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3.             Restrictive Legend.  Each certificate representing (a) Preferred
Stock, (b) Common Stock, (c) shares of Common Stock issued upon conversion of
the Preferred Stock, (d) Registrable Securities or (e) any other securities of
the Company issued in respect of the Common Stock, Preferred Stock or the
Common Stock issued upon conversion of the Preferred Stock including upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall (unless otherwise permitted by the provisions of Section 2)
be stamped or otherwise imprinted with a legend in substantially the following
form (in addition to any legend required under applicable securities laws):

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.  THESE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT.  COPIES OF THE AGREEMENT
RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE
BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION
AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.

Each Holder consents to the Company’s making
a notation on its records and giving instructions to any transfer agent of the
Preferred Stock or the Common Stock in order to implement the restrictions on
transfer established in this Section 3. 
The Company shall be obligated to reissue promptly unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel at such Holder’s expense (which counsel may be
counsel to the Company) reasonably acceptable to the Company to the effect that
the securities proposed to be disposed of may lawfully be so disposed of
without registration, qualification or legend.

4.             Requested
Registration.

(a)           Request for Registration.  If at any time after the earlier of (i) the
date three years after the effective date of this Agreement or (ii) the date
six months following the closing date of the first registration statement filed
by the Company covering an underwritten offering of any of its securities to
the general public, the Company shall receive from any Preferred Holder or
group of Preferred Holders holding at least a majority in interest of the
Preferred Stock (the “Initiating
Holders”) a written request that the Company effect a
registration with respect to at least a majority of the Registrable Securities
(or any lesser percent if the anticipated aggregate proceeds are not less than
$5,000,000, prior to underwriter commissions and discounts, the Company will:

(i)            promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and

(ii)           as soon as practicable, use its best efforts to
effect such registration (including, without limitation, filing post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or
regulations) as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the

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Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request received by the
Company within 20 business days after receipt of such written notice from the
Company, subject to the terms and conditions of this Section 4.

Notwithstanding the foregoing, the Company
shall not be obligated to take any action to effect any such registration
pursuant to this Section 4:

(A)          In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in effecting
such registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;

(B)           After the Company has effected two such registrations
pursuant to this Section 4 and such registrations have been declared or
ordered effective and the securities offered pursuant to such registrations
have been sold;

(C)           Within six months after the effective date of a prior
registration under this Section 4;

(D)          During the period starting with the date 60 days prior to
the Company’s estimated date of filing of, and ending on the date 180 days
immediately following the effective date of, any Company-initiated registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee
benefit plan), provided that the Company is actively employing in good faith
all best efforts to cause such registration statement to become effective.

Subject to the foregoing clauses (A), (B),
(C) and (D), the Company shall file a registration statement covering the
Registrable Securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Initiating Holders.  If, however, the Company shall furnish to the
Initiating Holders a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors of the Company (the “Board”), it would
be seriously detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore in the best interests of
the Company and its stockholders to defer the filing of such registration
statement, the Company shall have the right to defer such filing for a period
of not more than 90 days after receipt of the request of the Initiating Holders,
provided, however, that the Company may not utilize this right more than once
in any 12 month period.

(b)           Underwriting.  If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to Section 4(a) and the Company shall include such information
in the written notice referred to in Section 4(a).  The right of any Holder to registration
pursuant to Section 4 shall be conditioned upon such Holder’s
participation in such underwriting and the inclusion of such Holder’s
Registrable Securities to be registered in the underwriting to the extent
requested (unless otherwise mutually agreed by a majority in interest 

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of the Holders) and to the
extent provided herein.  A Holder may
elect to include in such underwriting all or a part of the Registrable
Securities such Holder holds.

The Company shall (together
with all Holders proposing to distribute Registrable Securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter for such underwriting. 
The managing underwriter shall be selected by the Company, subject to
the reasonable consent of a majority in interest of the Initiating
Holders.  Notwithstanding any other
provision of this Section 4, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of
the number of shares to be underwritten, then, the Company shall so advise all
Holders and the number of shares that may be included in the registration and
underwriting shall be allocated among all persons or entities requesting
inclusion in the registration as follows: (i) all securities proposed to be
offered by the Company for its own account or for the account of holders of
securities of the Company other than Registrable Securities shall be excluded
before any Registrable Securities are excluded; (ii) all Registrable Securities
proposed to be offered by the Significant Common Holders shall be excluded
before any Registrable Securities proposed to be offered by the Preferred
Holders; and (iii) if, after the exclusion of non-Registrable Securities and
Registrable Securities held by Significant Common Holders, additional
limitations are required, then the number of Registrable Securities included in
the registration shall be allocated among all Preferred Holders requesting
inclusion thereof in the registration in proportion, as nearly as practicable,
to the respective amounts of Registrable Securities proposed to be registered
by such Preferred Holders at the time of filing the registration statement, or
in such other proportions as shall mutually be agreed by such selling Preferred
Holders.

If any Holder of Registrable Securities
disapproves of the terms of the underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company, the managing underwriter and the
other Holders.  The Registrable Securities
and/or other securities of the Company so withdrawn shall also be withdrawn
from registration; provided, however, that if by the withdrawal of such
Registrable Securities a greater number of Registrable Securities held by other
Holders may be included in such registration (up to the maximum of any
limitation imposed by the underwriters), then the Company shall offer to all
Holders who have included Registrable Securities in the registration the right
to include additional Registrable Securities in the same proportion used in
determining the underwriter limitation in this Section 4(b).

(c)           Withdrawal.  If any registration does not become effective
due to the withdrawal at the behest of the Holder(s) and the withdrawal of the
registration is not at the request of the Company or the result of a material
and adverse change in the Company’s business, financial condition, results of
operations or prospects since the date of the written request of the Initiating
Holders pursuant to this Section 4, then either (A) the Holders
requesting registration shall reimburse the Company for expenses incurred in
complying with the request or (B) the aborted registration shall be treated as
effected for purposes of Section 4(a)(ii)(B).

5.             Company
Registration.

(a)           Notice of Registration.  If the Company in its discretion shall
determine to register any of its securities, either for its own account or the
account of a security holder or

 

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holders exercising their
respective demand registration rights, other than (i) a registration pursuant
to Section 4 or 8, (ii) a registration relating solely to employee
benefit plans, (iii) a registration relating solely to a Rule 145
transaction, or (iv) a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities that are
also being registered, the Company will:

(i)            promptly give to each Holder written notice thereof
at least ten (10) days prior to the filing of the registration statement for
such registration; and

(ii)           include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, mailed by any Holder(s) within twenty (20) business days after
receipt of such written notice from the Company.  Notwithstanding any other provision of this Section
5, if the managing underwriter advises the Company in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders and the number of
shares that may be included in the registration and underwriting shall be
allocated among all persons or entities requesting inclusion in the
registration as follows: (A) all securities proposed to be offered for the
account of holders of securities of the Company other than Registrable
Securities shall be excluded before any Registrable Securities are excluded;
(B) all Registrable Securities proposed to be offered by the Significant Common
Holders shall be excluded before any Registrable Securities proposed to be
offered by the Preferred Holders; (C) if, after the exclusion of
non-Registrable Securities and Registrable Securities held by Significant
Common Holders, additional limitations are required, then the number of
Registrable Securities included in the registration shall be allocated among
all Preferred Holders requesting inclusion thereof in the registration in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities proposed to be registered by such Preferred Holders at the time of
filing the registration statement, or in such other proportions as shall
mutually be agreed by such selling Preferred Holders; and (D) if, after the
exclusion of non-Registrable Securities and Registrable Securities, additional
limitations are required, then all securities proposed to be offered by the
Company for its own account shall be excluded. 
The written request of a Holder may specify that all or a part of the
Registrable Securities of such Holder shall be included in such
registration.  If any Holder disapproves
of the terms of any such underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company and the underwriter, delivered at
least 10 business days prior to the effective date of the registration
statement.  Any Registrable Securities
excluded or withdrawn from such underwriting shall be excluded and withdrawn
from the registration.  For any Holder
which is a partnership or corporation, the partners, retired partners and
stockholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing person shall be deemed to be a single “Holder,” and any pro rata reduction with respect to such “Holder” shall be
based upon the aggregate amount of Registrable Securities or other securities
of the Company carrying registration rights owned by all entities and individuals
included in such “Holder,” as defined in this sentence.  If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by

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the Company with respect to offerings of its
securities for its own account, all upon the terms and conditions set forth
herein.

(b)           Subject to the provisos in Section
5(a)(ii), in all registered public offerings, whether underwritten or not,
the amount of Registrable Securities of the Holders which are included in such
registration, in accordance with the limitations set forth in Section 5(a)(ii),
shall be allocated to the Holders in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities proposed to be registered by
each of such Holders (assuming conversion of all outstanding Preferred Stock)
as of the date of the notice given pursuant to this Section 5.

(c)           The Company may, in its sole
discretion, abandon or delay any registration initiated by the Company pursuant
to this Section 5.  The Registration
Expenses of such abandoned or delayed registration shall be borne by the
Company.

6.             Expenses
of Registration.  All Registration
Expenses incurred in connection with any registration, qualification or
compliance pursuant to Sections 4, 5, 7 and 8 shall be borne by the
Company.  All Selling Expenses relating
to securities registered by the Holders shall be borne by the Holders of such
securities pro rata on the basis of the number of such securities so
registered; provided, however,
that the Company shall bear the expenses of one special counsel to the Holders
selected by a majority in interest of the securities registered by the Holders.

7.             Registration
Procedures.  In the case of each
registration, qualification or compliance effected by the Company pursuant to
this Agreement, the Company will keep each Holder, or counsel to the Holders if
the Holders are represented by counsel, advised in writing as to the initiation
of each registration, qualification and compliance and as to the completion
thereof.  At its expense the Company
will:

(a)           Prepare and file with the
Commission a registration statement with respect to such securities and use its
best efforts to cause such registration statement to become and remain
effective until the first to occur to of (i) the 180th day following
the first day of its effectiveness or (ii) the date of completion of the
distribution described in the registration statement; provided, however,
that (A) such 180 day period shall be extended for a period of time equal to
the period Holders refrain from selling any securities included in such
registration at the request of the Company; and (B) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 180 day period shall be
extended, if necessary, to keep the registration statement effective until all
such Registrable Securities are sold;

(b)           Furnish to the Holders
participating in such registration and to the underwriters of the securities
being registered such number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
Holders or underwriters may reasonably request in order to facilitate the
public offering of such securities;

(c)           Prepare and file promptly
with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection with such registration
statement as may be necessary to comply with the provisions of the Securities
Act

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with respect to the
disposition of all securities covered by such registration statement or to
applicable anti-fraud provisions;

(d)           Use its best efforts to
register and qualify the securities covered by such registration statement
under such other applicable securities or blue sky laws, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act;

(e)           Cause all such Registrable
Securities registered pursuant hereunder to be listed on each securities exchange
on which similar securities issued by the Company are then listed;

(f)            Provide a transfer agent and
registrar for all Registrable Securities registered pursuant to such
registration statement and a CUSIP number for all such Registrable Securities,
in each case not later than the effective date of such registration;

(g)           Enter into a usual and
customary underwriting agreement in form reasonably necessary to effect the
offer and sale of Registrable Securities;

(h)           Notify each Holder of
Registrable Securities covered by such registration statement at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of circumstances then existing.  Upon
receipt of any such notification, each such Holder shall immediately cease
making offers of Registrable Shares and return all outstanding prospectuses to
the Company.  The Company will use
reasonable efforts to amend or supplement such prospectus in order to cause
such prospectus not to include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing; and

(i)            If underwriters are used,
use its reasonable efforts to furnish, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, and (ii) a letter, dated as of such
date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering addressed to the
underwriters.

8.             Registration
on Form S-3.  In addition to the
rights set forth above, if the Holder(s) holding at least 10% of the
Registrable Securities then outstanding request in writing that the Company
file a registration statement on Form S-3 (or any successors thereto) with
aggregate proceeds of at least $1,000,000 prior to underwriter commissions and
discounts (a 

 

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“Follow-On Registration”)
for a public offering of shares of Registrable Securities and the Company is
entitled to use Form S-3 to register securities for such an offering, the
Company shall use its best efforts to effect such registration (including,
without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws, and
appropriate compliance with the Securities Act).  The Company will promptly give written notice
of the request for the proposed registration to all other Holders and include
all Registrable Securities of any Holder or Holders joining in such request as
are specified in a written request received by the Company within 30 days after
receipt of such written notice from the Company.  The written request of a Holder may specify
that all or part of such Holder’s Registrable Securities will be included in
such registration.  If the Follow-On
Registration is for an underwritten offering, the provisions of Section 4(b)
shall apply to such registration. 
Notwithstanding the foregoing, the Company shall not be obligated to
effect any such registration, qualification or compliance, pursuant to this Section
8:

(a)           if the Company shall furnish
to the Holders initiating the registration on Form S-3 a certificate signed by
the President of the Company stating that, in the good faith judgment of the
Board, it would be seriously detrimental to the Company and its stockholders
for such Form S-3 registration statement to be filed and it is therefore in the
best interests of the Company and its stockholders to defer such filing; in
which event the Company shall have the right to defer such filing for a period
of not more than 90 days after receipt of the request of the Holders initiating
the registration on Form S-3 under this Section 8, provided, however,
that the Company may not utilize this right more than once in any 12-month
period; or

(b)           if in any particular
jurisdiction in which the Company would be required to qualify to do business
or to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to such service in such jurisdiction and except as may be required by the
Securities Act; or

(c)           within 12 months after the
effective date of any prior registration effected pursuant to this Section 8.

9.             Termination
of Registration Rights.  The registration
rights granted pursuant to this Agreement shall terminate on the date that is
five years from the closing date of the Company’s initial public offering or,
as to any Holder such earlier time at which all Registrable Securities held by
such Holder can be sold in a single three month period pursuant to
Rule 144 promulgated under the Securities Act.

10.           Lock-up
Agreement.  In consideration for the
Company agreeing to its obligations under this Agreement, each Holder of
Registrable Securities and each transferee pursuant to Section 14
agrees, in connection with the first registration of the Company’s securities
in an underwritten public offering, to the extent requested by the managing
underwriter, that it shall not, without the prior consent of the Company or the
underwriters managing any underwritten offering of the Company’s securities,
sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration), as the case may be, for a period of time specified by the
managing underwriter up to 180 days from the effective date of such
registration; provided, however,
that all officers,

 

10

directors and one percent or greater
stockholders of the Company must enter into similar lock-up agreements as
well.  Each Holder agrees that the
Company may instruct its transfer agent to place stop transfer notations in its
records to enforce the provisions of this Section 10.

11.           Indemnification.

(a)           The Company will indemnify
each Holder, each of its officers, members, directors and partners, legal
counsel, accountants and each person controlling such Holder within the meaning
of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, or incorporated herein by
reference, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act, the Exchange
Act, any state securities law, or any rule or regulation promulgated thereunder
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse each such Holder, each of its officers, members, directors and
partners and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action; provided, however,
that the indemnity agreement contained in this Section 11(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability or action
(or expense related thereto) to the extent that it arises out of or is based upon
any untrue statement or omission or alleged untrue statement or omission, that
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any Holder or
underwriter and stated to be specifically for use therein.

(b)           Each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors and officers, legal counsel,
accountants, each underwriter, if any, of the Company’s securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers, members and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities
Act, against all expenses, claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto or incorporated therein by reference or any omission (or

11

alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such
Holders, such directors, officers, legal counsel, accountants, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein; provided, however, that the obligations of such
Holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of such Holder and provided that the
obligations of each such Holder hereunder shall be limited to an amount equal
to the proceeds, net of Selling Expenses, to such Holder from Registrable
Securities sold in such offering.

(c)           Each party entitled to
indemnification under this Section 11 (the “Indemnified Party”)
shall give notice to the party required to provide indemnification (the “Indemnifying Party”)
promptly after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom; provided, that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at the Indemnified Party’s expense; and,
provided, further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, except to the
extent, but only to the extent, that the Indemnifying Party’s ability to defend
against such claim or litigation is impaired as a result of such failure to
give notice.  No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.

(d)           If the indemnification
provided for in this Section 11 is held by a court of competent
jurisdiction to be unavailable to an Indemnified Party with respect to any
losses, claims, damages or liabilities referred to herein, the Indemnifying
Party, in lieu of indemnifying such indemnified party thereunder, shall to the
extent permitted by applicable law contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the indemnified party on the other in
connection with the violation(s) or Holder violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations.  The relative fault of
the Indemnifying Party and of the Indemnified Party shall be determined by a
court of law by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties’ relative intent, knowledge, access to information and
opportunity to correct

 

12

 

or prevent such statement or
omission.  In no event shall any
contribution by a Holder hereunder exceed the net proceeds from the offering
received by such Holder.

(e)           The obligations of the
Company and Holders under this Section 11 shall survive completion of
any offering of Registrable Securities in a registration statement and the
termination of this Agreement.  No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.

12.           Information
by Holder.  The Holder(s) of
Registrable Securities included in any registration shall promptly furnish to
the Company such information regarding such Holder or Holders and the
distribution proposed by such Holder or Holders as the Company may request in
writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Agreement.

13.           Rule
144 Reporting.  With a view to making
available the benefits of certain rules and regulations of the Commission which
may at any time permit the sale of the Restricted Securities to the public
without registration, the Company agrees to:

(a)           Make and keep public
information available, as those terms are understood and defined in Rule 144
under the Securities Act, at all times after the effective date of the first
registration of securities of the Company;

(b)           File with the Commission in
a timely manner all reports and other documents required of the Company under
the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), at
any time after it has become subject to such reporting requirements; and

(c)           So long as any of the
Holders owns Restricted Securities, furnish to Holders of Registrable
Securities forthwith upon written request, a written statement by the Company
as to its compliance with the reporting requirements of Rule 144 (at any time
after the effective date of the first registration statement filed by the
Company), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company as a Holder of Restricted Securities may reasonably request in
availing itself of any rule or regulation of the Commission allowing such
Holder to sell any such securities without registration.

14.           Transfer
of Registration Rights.  The right to
cause the Company to register securities granted hereunder may be assigned (but
only with all related obligations) by a Holder to a transferee or assignee who
acquires the lesser of (a) all of such Holder’s Registrable Securities or (b)
3,500,000 shares of Registrable Securities (as adjusted for stock splits, stock
dividends and the like) from the Holder and/or its affiliates and other
investment funds having the same principal management personnel; provided, that the Company is given written notice of

 

13

 

such assignment at the time of or within a
reasonable time after said transfer or assignment, and the transferee agrees in
writing to be bound by the provisions of this Agreement regarding the right to
register securities.  Notwithstanding the
foregoing, the rights to cause the Company to register securities may be freely
assigned (i) to any partner, active or retired, of a Holder, where such Holder
is a partnership, (ii) to any affiliate (as that term is defined in Rule 405
promulgated by the Commission under the Securities Act) of a Holder, (iii) to
any officer, director, or member thereof, where such Holder is a corporation or
limited liability company, (iv) to any investment fund having the same
principal management personnel as a Holder or (v) to the spouse, children, grandchildren
or spouse of such children or grandchildren of any Holder or to trusts for the
benefit of any Holder or such persons where the Holder is a natural person; provided, that written notice thereof is promptly given to
the Company and that the transferee agrees in writing to be bound by the
provisions of this Agreement.

15.           Subsequent
Grant of Registration Rights.  The
Company shall not grant rights to have securities other than the Registrable
Securities registered under the Securities Act that are more favorable to the
registration rights granted to the Preferred Holders herein without the written
consent of the Preferred Holders holding a majority of the Preferred Stock then
held by all Preferred Holders.

16.           Delay
in Registration.  No Holder shall have
any right to take any action to restrain, enjoin, or otherwise delay any
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.

17.           Basic
Financial Information.  The Company
will furnish the following reports to (a) the Significant Common Holders, and
(b) each Preferred Holder that, together with its affiliates and other
investment funds having the same principal management personnel, holds at least
3,000,000 shares of Preferred Stock (or Common Stock issuable upon conversion
of the Preferred Stock) (together with the Significant Common Holders, the “Significant Holders”), as adjusted
for stock splits, stock dividends and other like recapitalization events:

(a)           As soon as practicable after
the end of each fiscal year of the Company, and in any event within 120 days
thereafter, a consolidated balance sheet of the Company and its subsidiaries,
if any, as at the end of such fiscal year, and consolidated statements of
income and cash flows of the Company and its subsidiaries, if any, for such
year, prepared in accordance with generally accepted accounting principles
consistently applied, all in reasonable detail and audited by an independent
public accountant of recognized national standing selected by the Board.

(b)           As soon as practicable after
the end of each fiscal quarter but in any event within 30 days after the end of
such fiscal quarter, (i) an executive summary of the activities of the Company
in a form consistent with past practice, including, without limitation, a
section regarding any variances from the Budget (as defined below) and a
section regarding the number of units of each product sold during such quarter,
and (ii) a consolidated balance sheet of the Company and its subsidiaries, if
any, as at the end of such fiscal quarter, and consolidated statements of
income and cash flows of the Company and its subsidiaries, if any, for such
fiscal quarter, prepared in accordance with generally accepted accounting
principles consistently

 

14

 

applied, all in reasonable
detail and certified by the principal financial or accounting officer of the
Company.

(c)           As soon as practicable after
the end of each month and in any event within 30 days thereafter, (i) an
unaudited consolidated balance sheet of the Company and its subsidiaries, if
any, as of the end of such month, and unaudited consolidated statements of
income and cash flows of the Company and its subsidiaries for such month, prepared
in accordance with generally accepted accounting principles consistently
applied, subject to changes resulting from year-end audit adjustments and the
absence of notes, and (ii) a Budget variance report, all in reasonable detail
and certified by the principal financial or accounting officer of the Company.

(d)           Not less than 30 days before
the end of each fiscal year, an annual financial plan of the Company (the “Budget”), which
financial plan shall have been approved by the Board and may be amended from
time to time by the Board.

(e)           The rights to basic
financial information set forth in this Section 17 may be transferred to
any person that acquires from a Significant Holder at least 3,500,000 shares of
Preferred Stock (as adjusted for stock splits, stock dividends and other like
recapitalization events affecting the Preferred Stock) unless the transferred
shares of Preferred Stock are transferred to a person who is an actual
competitor of the Company in the reasonable judgment of the Board.

18.           Visitation
Rights.  In addition to any rights of
inspection afforded stockholders by statute or otherwise, the Company shall
permit each Significant Holder, at such Significant Holder’s expense, to visit
and inspect the Company’s properties, to examine its books of account and
records and to discuss the Company’s affairs, finances and accounts with its
officers, all at such times as are mutually and reasonably agreed upon by the
Significant Holder and the Chief Executive Officer of the Company.  The rights to visitation set forth in this Section
18 may be transferred to any person that acquires from a Significant Holder
at least 3,500,000 shares of Preferred Stock (as adjusted for stock splits,
stock dividends and other like recapitalization events affecting the Preferred
Stock) unless the transferred shares of Preferred Stock are transferred to a
person who is an actual competitor of the Company in the reasonable judgment of
the Board.

19.           Termination
of Information and Visitation Rights. 
The covenants of the Company set forth in Sections 17 and 18
shall terminate in all respects on the earliest to occur of: (a) the closing of
an initial firm commitment underwritten public offering pursuant to an
effective registration statement, (b) when the Company first becomes subject to
the periodic reporting requirements of Sections 12(g) or 15(d) of the Exchange
Act, (c) the closing of any sale of all or substantially all of the assets of
the Company or any merger, recapitalization, or reorganization that results in
the stockholders of the Company not holding, directly or indirectly, at least
50% of the voting power of the surviving, continuing or purchasing entity, or
(d) at such time as the Preferred Holders and their permitted transferees
collectively hold fewer than 4,000,000 shares of Series D Preferred in the
aggregate (or a number of Conversion Shares into which 4,000,000

 

15

 

shares of Series D Preferred were converted,
in either case appropriately adjusted to take account of any stock split, stock
dividend, combination of shares, or the like after the date hereof).

20.           Rights
of First Offer.  The Company hereby
grants to each Preferred Holder (individually, an “Offeree”
and collectively, the “Offerees”),
a right of first offer to purchase a pro rata share
of New Securities (as defined in Section 20(a)) which the Company may,
from time to time, propose to sell and issue. 
Each Offeree’s pro rata share,
for purposes of this right of first offer, is the ratio of the number of shares
of Common Stock owned by such Offeree immediately prior to the issuance of New
Securities (or initial issuance in the case of a financing round with multiple
closings), assuming conversion of all shares of Preferred Stock held by such
Offeree, to the total number of shares of Common Stock outstanding immediately
prior to the issuance of New Securities, assuming full conversion of all
outstanding shares of Preferred Stock. 
Each Offeree shall have a right of over-allotment such that if any
Offeree fails to exercise its right hereunder to purchase its pro rata share of New Securities, the other Offerees which
did exercise such rights may purchase the non-purchasing Offerees’ portion on a
pro rata basis.  This right of first offer shall be subject to
the following provisions:

(a)           “New Securities” means
equity securities of the Company, whether or not authorized on the date hereof,
and rights, options or warrants to purchase said equity securities, and
securities of the Company of any type whatsoever that are, or may become,
convertible into said equity securities; provided,
however, that “New Securities”
does not include the following:

(i)            shares of Common Stock issued in connection with the
Company’s first sale of Common Stock in a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act, for
which the aggregate proceeds are not less than $40,000,000 (prior to
underwriter commissions and discounts) at a price to the public of at least
$0.83 per share (as appropriately adjusted for any stock split, stock dividend,
combination of shares or the like affecting the Common Stock after the date
hereof) (a “Qualified Public Offering”);

(ii)           up to 22,080,167 shares of Common Stock or options
to purchase Common Stock, issued to employees, officers or directors of, or
consultants or advisors to, the Company or its subsidiaries pursuant to a plan
or arrangement approved by the Board; provided, however,
that such number of shares and options may be increased from time to time by
the Board, including the Series B Director and Series C Director;

(iii)          securities of the Company issued upon exercise of
any options, warrants or rights to purchase any securities of the Company
outstanding as of the date hereof and any securities of the Company issuable
directly or indirectly upon the conversion thereof;

(iv)          securities of the Company issued to financing
institutions or lessors in connection with commercial credit arrangements,
equipment financings or similar strategic transactions approved by the Board;

 

16

 

(v)           securities of the Company issued in connection with bona fide acquisitions of businesses, products or
technologies approved by the Board, including the Series B Director and Series
C Director;

(vi)          securities of the Company issued in connection with
strategic partnerships, joint ventures, licensing arrangements or similar
transactions not involving financial investors, as approved by the Board,
including the Series B Director and Series C Director;

(vii)         shares of Preferred Stock issued pursuant to the
Purchase Agreement and shares of Common Stock issued or issuable pursuant to
warrants to purchase shares of Common Stock issued in connection with the
Purchase Agreement (including warrants issued to placement agents);

(viii)        securities of the Company
issued in connection with the conversion of that certain Convertible
Subordinated Promissory Note, dated March 30, 2006, issued to Gerald and Myra
S. Dorros Revocable Trust including the warrant to purchase shares of Common
Stock contemplated by such note and the shares of Common Stock issuable upon
exercise of such warrant;

(ix)           shares of Common Stock issued upon conversion of the
Preferred Stock or other securities of the Company outstanding as of the date
hereof; and

(x)            shares of Common Stock or Preferred Stock issued in
connection with any stock split, stock dividend or other distribution, or
recapitalization by the Company.

(b)           In the event that the
Company proposes to undertake an issuance of New Securities, it shall give each
Offeree written notice of its intention, describing the type of New Securities,
the price, and the general terms upon which the Company proposes to issue the
same.  Each Offeree shall have 15
business days after receipt of such notice to agree to purchase its pro rata share (as described in this Section
20) of such New Securities at the price and upon the terms specified in the
notice by giving written notice to the Company and stating therein the maximum
quantity of New Securities that such Offeree desires to purchase.  If all of the Offerees desire to purchase all
or more of their pro rata share,
then each Offeree will be limited to its pro
rata share.  If one or more
Offerees desire to purchase less than its pro
rata share, the unsubscribed amount that was initially allocated to
such Offeree(s) shall be apportioned pro
rata among the Offerees, if any, that desire to purchase more than
their pro rata share.  Each Offeree’s obligation to purchase New
Securities under this Section 20 will be contingent upon the completion
of the issuance of the New Securities substantially in the form as provided in
the written notice from the Company.

(c)           The Company shall have 90
calendar days after the 15 business days specified in Section 20(b) to
sell (or enter into an agreement pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within 30 calendar days from the
date of said agreement) the New Securities respecting which the rights of the
Offerees were not exercised (or which were not subject to a right of first
offer) at a price and upon terms no more favorable to the

 

17

 

purchasers thereof than
specified in the Company’s notice.  In
the event the Company has not sold the New Securities within such 90 calendar
day period (or sold and issued New Securities in accordance with the foregoing
within 30 calendar days from the date of such agreement) the Company shall not
thereafter issue or sell any New Securities, without first offering such New
Securities to the Offerees in the manner provided above.

(d)           Expiration.  The Right of First Offer granted under this Section
20 shall expire upon the first sale of shares of Common Stock in a bona fide, firm commitment underwriting
pursuant to a registration statement.

(e)           Assignability.  This Right of First Offer granted under this Section
20 is nonassignable except to any transferee to whom registration rights
may be transferred pursuant to Section 14.  Any such assignment shall also be in
accordance with Section 14.

21.           Affirmative
Covenants.  The Company hereby
covenants and agrees with the Preferred Holders, as follows:

(a)           Compliance with Laws.  The Company shall comply with all laws,
rules, regulations and orders applicable to the Company, where the failure to
so comply would result in a material and adverse change in the condition,
financial or otherwise, customer relations, prospects, employee relations,
assets, net worth or results of operations of the Company.

(b)           Proprietary Information
Agreement.  The Company
shall require (i) each present or future employee of the Company, to enter into
a Confidentiality, Proprietary Information and Inventions Agreement in the form
attached hereto as Exhibit 21(b) (“Proprietary Information Agreement”), and (ii)
each present or future consultant of the Company or any subsidiary to enter
into a consulting agreement that contains nondisclosure and intellectual
property provisions substantially similar to those contained in the form of
Proprietary Information Agreement.  The
Company shall not amend, modify, terminate, waive or otherwise alter, in whole
or in part, any such Proprietary Information Agreement or the nondisclosure and
intellectual property provisions of any such consulting agreement without the
consent of the Board, including the Series C Director.

(c)           Indemnification of Directors.  The Company shall obtain and maintain
customary directors and officers’ liability insurance providing for coverage in
an amount not less than $1,000,000 and will at all times maintain and exercise
the powers granted to it by its Certificate of Incorporation and its Bylaws,
each as amended and in effect from time to time, and by applicable law to
indemnify and hold harmless to the fullest extent permitted by applicable law
present or former directors or officers of the Company against any threatened
or actual claim, action, suit, proceeding or investigation made against them
arising from their service in such capacities (or service in such capacities
for another enterprise at the request of the Company).

(d)           Expenses of Directors.  The Company shall promptly reimburse in full
each director for all of his, her or their reasonable out-of-pocket expenses
incurred in attending each meeting of the Board or any committee thereof.

 

18

 

(e)           Qualified Small Business
Stock.  The Company covenants that so
long as any of the Preferred Stock or Common Stock is held by a Preferred
Holder (or a transferee in whose hands such Preferred Stock or Common Stock is
eligible to qualify as Qualified Small Business Stock as defined in Section
1202(c) of the Internal Revenue Code of 1986, as amended, (the “Code”)), it will use
its best efforts (including complying with any applicable filing or reporting
requirements imposed by the Code on issuers of Qualified Small Business Stock
and not repurchasing any stock of the Company if such repurchase would cause
such shares not to qualify as “Qualified Small Business Stock”) to qualify as “Qualified
Small Business Stock.”

(f)            U.S. Real Property Interest
Statement.  The Company
shall provide prompt written notice to each Preferred Holder following any “determination
date” (as defined in Treasury Regulation Section 1.897-2(c)(1)) on which the
Company becomes a United States real property holding corporation.  In addition, upon a Preferred Holder’s
written request, the Company shall provide such Preferred Holder with a written
statement informing such Preferred Holder whether such Preferred Holder’s
interest in the Company constitutes a U.S. real property interest.  The Company’s determination shall comply with
the requirements of Treasury Regulation Section 1.897-2(h)(l) or any successor
regulation, and the Company shall provide timely notice to the IRS, in
accordance with and to the extent required by Treasury Regulation Section
1.897-2(h)(2) or any successor regulation, that such statement has been
made.  The Company’s written statement to
such Preferred Holder shall be delivered to such Preferred Holder within 10
days of such Preferred Holder’s written request therefor.  The Company’s obligation to furnish a written
statement pursuant to this Section 21(e) shall continue notwithstanding
the fact that a class of the Company’s stock may be regularly traded on an
established securities market.

(g)         Stock
Vesting.  Unless otherwise approved
by the Board, all stock options and other stock equivalents issued after the
date of this Agreement to employees, directors, consultants and other service
providers shall be subject to vesting as follows:  (a) 25% of such stock shall vest at the end
of the first year following the earlier of the date of issuance or such person’s
services commencement date with the Company, and (b) 75% of such stock shall
vest over the following three 3 years.

(h)           Reservation of Common Stock.  The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, for the purpose of effecting the conversion of
the Preferred Stock, such number of its duly authorized shares of Common Stock
as shall be sufficient to effect the conversion of the Preferred Stock from
time to time outstanding.  If at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the Preferred Stock, the Company will
forthwith take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose. 
The Company will obtain any authorization, consent, approval or other
action by or make any filing with any court or governmental or administrative
body that may be required under applicable state securities laws in connection
with the issuance of shares of Common Stock upon conversion of the Preferred
Stock.

 

19

(i)            Internal Accounting Controls.  The Company shall devise and maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with Company
management’s general or specific authorization, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP or any other criteria applicable to such statements, and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with Company management’s general or specific authorization, and
(iv) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.

(j)            Independent Accountants.  The Company will retain independent public
accountants of recognized national standing who shall audit the Company’s
financial statements at the end of each fiscal year.  In the event the services of the independent
public accountants so selected, or any firm of independent public accountants
hereafter employed by the Company, are terminated, the Company will promptly
thereafter engage another firm of independent public accountants of recognized
national standing approved by the Board.

(k)           Corporate Existence.  The Company shall preserve and maintain its
corporate existence, rights, franchises and privileges in the jurisdiction of
its incorporation, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is necessary or desirable in view
of its business and operations or the ownership or lease of its properties.

(l)            Preservation of Property and
Assets.  The Company shall use
commercially reasonable efforts to secure, preserve and maintain all licenses
and other rights to patents, processes, know-how, trade secrets, licenses,
permits, trademarks, trade names, inventions, copyrights or other intellectual
property rights, as owned, acquired or possessed by it and deemed by the
Company to be material to the conduct of its business.  The Company shall also use commercially reasonable
efforts to maintain and preserve all of its other properties and assets
necessary for the proper conduct of its business, in good repair, working order
and condition, ordinary wear and tear excepted and, from time to time, make all
necessary and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company will use commercially reasonable efforts
to at all times comply with each provision of all leases to which it is a party
or under which its occupies property.

(m)          Properties, Business,
Insurance.  The Company
shall obtain and maintain and cause each of its subsidiaries to maintain as to
its respective properties and business, with financially sound and reputable
insurers, insurance against such casualties and contingencies and of such types
and in such amounts as is customary for companies similarly situated.  The Company shall not cause or permit any
assignment or change in beneficiary and shall not borrow against any such
policy.  If requested by a Preferred
Holder, the Company will add one designee of such Preferred Holder as a notice
party for such policy and shall request that the issuer of such policy provide
such designee with 10 days notice before such policy is terminated (for failure
to pay premiums or otherwise) or assigned or before any change is made in the
beneficiary thereof.

 

20

(n)         Use
of Proceeds.  The Company shall use
the proceeds from the sale of the Series D Preferred for working capital needs
and capital expenditures in a manner consistent with the Business Plan (as
defined in the Purchase Agreement), as the same may be amended from time to
time by the Board.

(n)           Payment of Taxes.  The Company shall pay and discharge all
taxes, assessments and governmental charges or levies imposed upon it or upon
its income, profits or business, or upon any properties belonging to it, prior
to the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or charge upon any properties of the Company; provided, however,
that the Company shall not be required to pay any such tax, assessment, charge,
levy or claim which is being contested or extended in good faith and by
appropriate proceedings if the Company shall have set aside on its books
sufficient reserves, if any, with respect thereto.

(o)           Notice of Default.  The Company shall furnish to each Preferred
Holder, immediately upon becoming aware of the existence of any condition or
event which constitutes an event of default under any of the agreements between
the Company and such Preferred Holder, written notice specifying the nature and
period of existence thereof and the action which the Company is taking or
proposes to take with respect thereto.

22.           Negative
Covenants.

(a)           Non-Disclosure of Investment
Interests.  Except as
otherwise required by law or in connection with a public offering of Securities
pursuant to the Securities Act, no information concerning the identity of any
Preferred Holder as an investor or interested party to the Company, including
but not limited to information distributed in any press release, marketing or
advertising materials, loan applications and general business development, will
be disclosed by the Company or its agents without the prior written consent of
such Preferred Holder, which consent shall be at that Preferred Holder’s sole
discretion.

(b)           Restrictive Agreements
Prohibited.  Neither the
Company nor any subsidiary shall become a party to any agreement that by its
terms restricts the Company’s performance of this Agreement, any other
agreement between the Company and the Preferred Holders, the Company’s
Certificate of Incorporation or Bylaws, each as amended and in effect from time
to time.

(c)           Transactions with Affiliates.  Except for transactions contemplated by this
Agreement or the Purchase Agreement or as otherwise approved by the Board,
neither the Company nor any subsidiary shall enter into any transaction with
any director, officer, employee or holder of more than five percent of the
outstanding capital stock of any class or series of capital stock of the
Company or any subsidiary, member of the family of any such person, or any
corporation, partnership, trust or other entity in which any such person, or
member of the family of any such person, is a director, officer, trustee, partner
or holder of more than five percent of the outstanding capital stock thereof.

 

21

(d)           Solvency.  The Company will not incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be received by the Company and of amounts to be payable on
or in respect of debt of the Company). 
The cash flow of the Company after taking into account all anticipated
uses of such cash will at all times be sufficient to pay all amounts on or in
respect of debt of the Company when such amounts are required to be paid.

(e)           Events of Default.  The Company shall not take or omit to take
any action, which act or omission would constitute a material default or a
material event of default pursuant to, or noncompliance with, any other
contract, lease, mortgage, deed of trust or instrument to which the Company is
a party or by which it or any of its property is bound.

23.           Special
Covenants.

(a)           The Company shall not,
without first obtaining the approval of a majority of the Board, including the
Series B Director and Series C Director:

(i)            appoint a new chief executive officer;

(ii)           change the Company’s accounting practices or
auditors;

(iii)          transfer, assign or grant any licenses to, the
Company’s intellectual property other than limited licenses that are incidental
to sales of the Company’s products in the ordinary course of business;

(iv)          transfer to any subsidiary more than $500,000 in
cash in the aggregate or title to any of its material intellectual property;

(v)           permit any subsidiary of the Company to issue or
sell, or obligate itself to issue or sell, except to the Company or any
wholly-owned subsidiary of the Company, any stock of such subsidiary;

(vi)          make any material change to the nature of the
Company’s business as reflected in the Company’s operating plan;

(vii)         amend (including any increase in available shares
for issuance under), waive any provision of or terminate its stock incentive
plans, or create any additional stock incentive plan for employees, consultants
and/or directors;

(viii)        amend, waive or terminate a
Proprietary Information Agreement;

(ix)           amend the Bylaws of the Company;

(x)            pay aggregate cash dividends in any fiscal year in
excess of two percent of the Company’s net income for such fiscal year;

 

22

(xi)           incur, grant or suffer to exist a lien on any of the
Company’s assets (including its rights to intellectual property), except for (A) existing liens,
(B) liens for taxes not yet due and payable, (C) non-consensual
liens arising by operation of law and immaterial, individually and in the
aggregate, or (D) liens on equipment in connection with the financing
thereof;

(xii)          commence bankruptcy or reorganization proceedings;

(xiii)         enter into any partnership,
joint venture or similar arrangement with any third party;

(xiv)        incur indebtedness for borrowed money in excess of
$1,000,000 in the aggregate at any one time outstanding other than indebtedness
for borrowed money outstanding as of the date of this Agreement; or

(xv)         make any loans to any officer, director or employee
of the Company outside of the ordinary course of business, except as approved
by the Board.

(b)           The Company shall not,
without first obtaining the approval of a majority of the Board:

(i)            approve any and all matters relating to executive
hiring and compensation above a base salary of $150,000 per annum or incentive
compensation of $100,000 per annum;

(ii)           approve the Company’s annual Budget and any material
amendment thereto;

(iii)          approve any capital expenditure that is not in the
Budget and is in excess of $500,000;

(iv)          approve any operating expenditure that is not in the
Budget and is in excess of $500,000;

(v)           make any prepayment of principal of, or interest on,
indebtedness for borrowed money; or

(vi)          approve any consulting agreements at or above an
annual compensation of $50,000 per year.

24.           Termination
of Covenants.  The covenants of the
Company set forth in Sections 21 (except Sections 21(c), 21(d), 21(h), and 22(a)),
22 and 23 shall terminate in all respects on the earliest to occur of: (a)
the closing of a Qualified Public Offering, (b) the automatic conversion of all
of the Company’s outstanding shares of Series A Preferred, Series B Preferred
and Series C Preferred pursuant to Section 3(b) of Article IV of the Company’s
Third Amended and Restated Certificate of Incorporation in connection with any
firm commitment underwritten initial public offering of the Company’s Common
Stock, (c) the closing of any sale of all or

 

23

substantially all of the assets of the
Company or any merger, recapitalization, or reorganization that results in the
stockholders of the Company not holding, directly or indirectly, at least 50%
of the voting power of the surviving, continuing or purchasing entity, and (d)
such time as the Preferred Holders and their permitted transferees collectively
hold fewer than 6,000,000 shares of Common Stock issued or issuable upon
conversion of the Series B Preferred, Series C Preferred and Series D Preferred
in the aggregate, appropriately adjusted to take account of any stock split,
stock dividend, combination of shares, or the like after the date hereof.  The covenants set forth in Sections 21(c)
and 21(d) shall terminate simultaneously with the termination of the Voting
Agreement.

25.           Miscellaneous.

(a)           Governing Law.  This Agreement and the legal relations
between the parties arising hereunder shall be governed by and interpreted in
accordance with the laws of the State of Delaware (without regard to the
conflict of law principles thereof).  The
parties hereto agree to submit to the jurisdiction of the federal and state
courts of the State of Delaware with respect to the breach or interpretation of
this Agreement or the enforcement of any and all rights, duties, liabilities,
obligations, powers, and other relations between the parties arising under this
Agreement.

(b)           Entire Agreement.  This Agreement constitutes the full and entire
understanding and agreement among the parties regarding the rights provided
herein and supersedes and replaces all written and oral agreements heretofore
made or existing by and among the parties and their representatives with
respect thereto.

(c)           Notices, Etc.  All notices and other communications required
or permitted hereunder shall be in writing and shall be deemed effectively
given (i) when delivered in person or duly sent by fax showing confirmation of
receipt, (ii) three days after being duly sent by first class mail, postage
prepaid, or (iii) two days after being sent by Federal Express or other
recognized express overnight courier service: (A) if to a Preferred Holder, to
such Preferred Holder’s address set forth on the Schedule of Preferred Holders
attached hereto, or at such other address as shall have been furnished to the
other parties hereto in writing, (B) if to a Common Holder, to such Common
Holder’s address set forth on the Schedule of Common Holders attached
hereto or at such other address as shall have been furnished to the other
parties hereto in writing, and (C) if to the Company, to its principal place of
business, or such other address as the Company shall have furnished to the
other parties hereto in writing with a copy (which shall not constitute notice)
to Foley Hoag LLP, Seaport World
Trade Center West, 155 Seaport Boulevard, Boston, Massachusetts, 02210,
Attn: Jeffrey L. Quillen, Esq.

(d)           Counterparts; Facsimile
Signatures.  This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument.  Signatures transmitted via facsimile shall be
deemed originals for purposes of this Agreement.  This
Agreement also may be executed by delivery of the Omnibus
Signature Page, which is included in the Subscription Documents attached to the
Purchase Agreement as Exhibit A, pursuant to which the undersigned
agrees to become a Series D Holder, as defined in this Agreement, and further
agrees to be bound by the terms and conditions of each

 

24

of the Purchase Agreement
and the Related Agreements (as defined in the Purchase Agreement).  The Omnibus Signature Page also may be executed in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument and be
deemed a part of this agreement ab initio.

(e)           Amendment.  Any provision of this Agreement may be
amended, waived or modified only upon the written consent of (i) the Company,
(ii) the Holders of at least a majority in interest of the shares of Series A
Preferred Stock, Series B Preferred and Series C Preferred then held by the
Holders, voting together as a single class, and (iii) the Significant Common Holders
who hold at least a majority in interest of the shares of Common Stock then
held by the Significant Common Holders; provided,
however, that none of the
Company, the group described in clause (ii) of this sentence and the group
described in clause (iii) of this sentence shall be required for the waiver of
any provision of this Agreement with respect to which the Company or such group
does not otherwise have rights hereunder. 
Any amendment or modification effected in accordance with this Section
(e)25(e) shall be binding upon the Company and each Holder of Common Stock
and/or Preferred Stock.  Notwithstanding
anything to the contrary in this Section (e)25(e), no amendment or
waiver may treat one Preferred Holder or a group of Preferred Holders more
adversely than any other Preferred Holder or group of Preferred Holders without
the consent of such Preferred Holder or the consent of the holders of a
majority in interest of the capital stock of the group of Preferred Holders
adversely affected by such amendment or waiver. For purposes of this Section
(e)25(e), a “group” shall have the meaning provided in Rule 13d-5
promulgated under the Securities Exchange Act of 1934, as amended. The Company
shall give prompt written notice of any amendment or termination hereof or
waiver hereunder to any party hereto that did not consent in writing to such
amendment, termination or waiver.  Any
amendment, waiver or modification not effected in accordance with this Section
(e)25(e) shall be null and void.  It
is further agreed that any waiver, permit, consent, or approval of any kind or
character on any party’s part of any breach, default or noncompliance under the
Agreement or any waiver on such party’s part of any provisions or conditions of
this Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing.

(f)            Successors and Assigns.  Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the parties hereto and their respective successors, assigns, heirs,
executors, and administrators and shall inure to the benefit of and be
enforceable by each person who shall be a holder of Registrable Securities from
time to time; provided, however, that prior to the receipt by the
Company of adequate written notice of the transfer of any Registrable
Securities specifying the full name and address of the transferee, the Company
may deem and treat the person listed as the holder of such shares in its
records as the absolute owner and holder of such shares for all purposes,
including the payment of dividends or any redemption price.

(g)           Severability.  In the event one or more of the provisions of
this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

 

25

(h)           Delays or Omissions.  It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement shall be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring.  All remedies,
either under this Agreement, by law, or otherwise afforded to any party, shall
be cumulative and not alternative.

(i)            Attorneys’ Fees.  In the event that any suit or action is
instituted under or in relation to this Agreement, including without limitation
to enforce any provision in this Agreement, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and
expenses of enforcing any right of such prevailing party under or with respect
to this Agreement, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.

(j)            Titles and Subtitles.  The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.

(k)           Aggregation of Stock.  All shares of Registrable Securities held or
acquired by affiliated entities or persons or entities under common management
or control shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.

26.           Accession. 
Any Additional Purchaser (as defined in the Purchase Agreement) shall
automatically become a party to this Agreement by executing and delivering to
the Company a counterpart signature page in the form of Exhibit A
hereto, and shall thereupon be deemed a “Preferred Holder” for all purposes of
this Agreement.

[Remainder of Page Intentionally Left Blank.]

 

26

IN WITNESS WHEREOF, the parties hereto have
entered into this Third Amended and Restated Investors’ Rights Agreement as of
the date first set forth above.

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  POWER
  MEDICAL INTERVENTIONS, INC.

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Thomas K. Grundman

  
	
   

  	
   

  	
  (signature)

  
	
   

  	
   

  	
   

  
	
   

  	
  Name: 

  	
  Thomas K. Grundman

  
	
   

  	
   

  	
  (printed)

  
	
   

  	
   

  	
   

  
	
   

  	
  Its: 

  	
  Chief Financial Officer

  
	
   

  	
   

  	
  (title)

  

 

 

27Exhibit
4.7

FORM OF

7% CONVERTIBLE SENIOR
SECURED NOTE DUE 2010

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF
THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

THE INITIAL REGISTERED HOLDER OF THIS SECURITY IS ENTITLED TO THE
BENEFITS OF A REGISTRATION RIGHTS AGREEMENT, A SECURITY AGREEMENT AND AN ESCROW
AGREEMENT (COPIES OF WHICH ARE AVAILABLE AT THE PRINCIPAL EXECUTIVE OFFICE OF
THE ISSUER). A TRANSFEREE OF THIS SECURITY MAY BECOME ENTITLED TO THE BENEFITS
OF SUCH AGREEMENTS SUBJECT TO COMPLIANCE WITH THE CONDITIONS TO TRANSFER SET
FORTH THEREIN.

THIS NOTE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF
SECTIONS 1271, 1272 AND 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED.  BEGINNING NO LATER THAN 10 DAYS
AFTER THE CLOSING DATE (AS DEFINED IN THIS NOTE), THE COMPANY’S CHIEF FINANCIAL
OFFICER AT 2021 CABOT BOULEVARD WEST, LANGHORNE, PA 19047 WILL MAKE AVAILABLE,
UPON REQUEST TO ANY HOLDER OF THIS NOTE, THE ISSUE PRICE OF THIS NOTE PER
PRINCIPAL AMOUNT DUE AT MATURITY, THE YIELD TO MATURITY OF THIS NOTE PER ANNUM
AS OF ANY DATE OF DETERMINATION, AND THE TOTAL AMOUNT OF ORIGINAL ISSUE
DISCOUNT ON THIS NOTE AS OF THE ISSUE DATE PER PRINCIPAL AMOUNT OF $1,000 AT
MATURITY.

 

 

POWER MEDICAL INTERVENTIONS, INC.

7%
Convertible Senior Secured Note due 2010

Initial
Face Amount: $____________                                                                             Note
Number: ___

 

March
30, 2007

 

POWER
MEDICAL INTERVENTIONS, INC., a Delaware corporation, and any and all successors
thereto in accordance with this Note (the “Company”),
for value received, hereby promises to pay to ________________, the Principal
Amount (as defined in Section 1) on March 31, 2010 (“Maturity”),
and to pay interest on any outstanding Principal (as defined in Section 1) at
the Interest Rate (as defined in Section 2) on the terms set forth in this
Note.

1.             Securities Purchase
Agreement; Definitions.

The Company issued this Note under a
Securities Purchase Agreement dated as of March 30, 2007, among the Company,
the Holder and the other Buyers named therein (the “Securities
Purchase Agreement”). 
Capitalized terms used herein but not defined shall have the meaning
given to such terms in the Securities Purchase Agreement.  As used in this Note, the following terms
shall have the respective meanings set forth in this Section 1:

(a)           “Affiliate” of any specified Person
means any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person, where “control”
(including, with correlative meanings, the terms “controlling”, “controlled by”
and “under common control with”), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, that, solely for the purposes of this definition of “Affiliate,”
beneficial ownership of 10% or more of the voting stock of a Person shall be
deemed to be control.

(b)           “Anti-Terrorism Laws” means any Law
of the United States or any state thereof or political subdivision of the
foregoing relating to terrorism or money laundering, including the Executive
Order and the Patriot Act.

(c)           “Business Day” means any day except
Saturday, Sunday and any day that is a federal legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other governmental action to close.

(d)           “Capital Stock” means (A) in the case
of a corporation, corporate stock, (B) in the case of an association or
business entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, (C) in the case of a
partnership or limited liability company, partnership interests (whether
general or limited) or membership interests, and (D) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person, but

 

2

 

excluding
from all of the foregoing any debt securities convertible into Capital Stock,
whether or not such debt securities include any right of participation with
Capital Stock.

(e)           “Cash Equivalents” means (i) United
States dollars, (ii) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or instrumentality of the
United States government (provided, that
the full faith and credit of the United States is pledged in support of those
securities) having maturities of not more than six months from the date of
acquisition, (iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers’
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500,000,000 and a Thompson Bank Watch Rating of “B” or
better, (iv) repurchase obligation  with
a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having the highest rating obtainable from either Moody’s or
Standard & Poor’s, in each case, maturing within six months after the date
of acquisition, (vi) AAA-rated taxable securities having maturities of not more
than six months including, but not limited to, auction rate securities and
variable rate demand notes (for securities where the interest rate resets via a
“dutch auction” or “put” mechanism, the auction date or put date will be used
to determine the maturity date), (vii) U.S. corporate bonds or notes with
maturities of not more than six months and having a minimum long-term credit
rating of “A2” by Moody’s and “A” by Standard & Poor’s, and (viii) money
market funds at least 95% of the assets of which constitute Cash Equivalents of
the kinds described in clauses (i) through (vii) of this definition.

(f)            “Change of Control” means (i) a
consolidation or merger of the Company or any of its Subsidiaries with or into
any other Person or Persons (except one in which the holders of capital stock
of the Company or such Subsidiary immediately prior to such merger or
consolidation continue to hold a majority of the outstanding equity securities
of the surviving, resulting or consolidated entity), (ii) the direct or
indirect sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related transactions, of
all or substantially all of the properties or assets of the Company and its
Subsidiaries taken as a whole to any “person” (as that term is used in Section
13(d) of the Exchange Act) or group of persons, (iii) the consummation of a
transaction (including, without limitation, any merger or consolidation) the
result of which is that any “person” (as that term is used in Section 14(d) of
the Exchange Act) or group of persons becomes the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the Company’s issued and
outstanding Capital Stock on a fully-diluted basis, (iv) the adoption of a plan
relating to the liquidation or dissolution of the Company, or (v) after an
initial public offering, the termination of trading of the Company’s common
stock, which shall be deemed to have occurred if the Company’s common stock is
neither listed for trading on a U.S. national securities exchange nor approved
for listing on The Nasdaq Global Market or any similar United States system of
automated dissemination of quotations of securities prices or traded in
over-the-counter securities markets or traded in over-the-counter securities
markets.

(g)           “Collateral” means any assets of the
Company or any other Person defined as “Collateral” in any Collateral Document.

 

3

 

(h)           “Collateral Agent” shall have the
meaning set forth in the Security Agreement.

(i)            “Collateral Documents” means the
Security Agreement and the other agreements, documents, or instruments,
including any financing statements, and any amendments or supplements thereto,
creating, perfecting, or evidencing any Liens securing the Notes and any other
Obligation under the Collateral Documents.

(j)            “Common Stock” means the Company’s
common stock, par value $0.001 per share.

(k)           “Consolidated Cash Flow” means, with
respect to any specified Person for any period, the Consolidated Net Income of
such Person for such period plus or minus the following (as the case may be, as
set forth below), without duplication: plus (1) provision for taxes based on
income or profits of such Person and its Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing such
Consolidated Net Income; plus (2) Consolidated Interest Expense of such Person
and its Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, noncash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with capital lease obligations, imputed interest with
respect to attributable debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers’ acceptance financings), to
the extent that any such expense was deducted in computing such Consolidated
Net Income; plus (3) depreciation, amortization (excluding amortization of
prepaid cash expenses that were paid in a prior period) and other noncash
expenses (excluding any such noncash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Subsidiaries for such period to the extent that such depreciation,
amortization and other noncash expenses were deducted in computing such
Consolidated Net Income; plus (4) any extraordinary or non-recurring expenses
of such Person and its Subsidiaries for such period to the extent that such
charges were deducted in computing such Consolidated Net Income; plus (5)
noncash items (excluding any noncash item to the extent that it represents an
accrual of, or a reserve for, cash expenditures in any future period) reducing
such Consolidated Net Income for such period; minus (6) noncash items
increasing such Consolidated Net Income for such period, other than the accrual
of revenue in the ordinary course of business; and minus (7) non-operating
gains (including extraordinary or non-recurring gains), in each case, on a
consolidated basis and determined in accordance with GAAP.

(l)            “Consolidated Interest Expense”
means, with respect to any Person for any period, the sum, without duplication
of: (1) the consolidated interest expense of such Person and its Subsidiaries
for such period, whether paid or accrued; (2) the consolidated interest expense
of such Person and its Subsidiaries that was capitalized during such period;
(3) any interest expense on Indebtedness of another Person that is guaranteed
by such Person or any of its Subsidiaries or secured by a Lien on assets of
such Person or any of its Subsidiaries (whether or not such guarantee or Lien
is called upon); and (4) the product of: (a) all cash dividend payments (and
noncash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person or any of the Subsidiaries, times (b)
a fraction, the numerator of which is one and the denominator of which is one minus
the then current combined federal, state

 

4

 

and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and determined in accordance with GAAP.

(m)          “Consolidated
Net Income” means, with respect to any specified Person for any
period, the aggregate of the net income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the net income (but not
loss) of any Person that is accounted for by the equity method of accounting
will be included only to the extent of the amount of dividends or distributions
paid in cash to the specified Person or Subsidiary of the Person; (2) the net
income of any Subsidiary will be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that net
income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary or its stockholders; (3) the net income of any Person acquired
during the specified period for any period prior to the date of such
acquisition will be excluded; and (4) the cumulative effect of a change in
accounting principles will be excluded.

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

(o)           “Current Market Price:” for the
purpose of any computation under subsections (b) and (c) of Section 9, the “Current
Market Price” per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices for the 10 consecutive Trading Days
commencing 11 Trading Days before (A) the Determination Date (as defined in
Section 9) or the Expiration Date (as defined in Section 9), as the case may
be, with respect to distributions or tender offers under subsection (c) of
Section 9 or (B) the record date with respect to distributions, issuances or
other events requiring such computation under subsections (c) or (d) of Section
9. The closing price (“Closing Price”) for each day,
shall be the last reported sales price or, in case no such reported sale takes
place on such date, the average of the reported closing bid and asked prices in
either case on the Nasdaq Global Market or, if the Common Stock is not listed
or admitted to trading on the Nasdaq Global Market, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on the Nasdaq Global Market or any
national securities exchange, the last reported sales price of the Common Stock
as quoted on Nasdaq or, in case no reported sales takes place, the average of
the closing bid and asked prices as quoted on Nasdaq or any comparable system
or, if the Common Stock is not quoted on Nasdaq or any comparable system, the
closing sales price or, in case no reported sale takes place, the average of
the closing bid and asked prices, as furnished by any two members of the
National Association of Securities Dealers, Inc. selected from time to time by
the Company for that purpose. If no such prices are available, the Current
Market Price per share shall be the fair value of a share of Common Stock as
reasonably determined by the Board of Directors of the Company (the “Board”) (which shall be

 

5

 

evidenced
by an Officers’ Certificate delivered to the Holders), in consultation with a financial advisor the Company determines in
good faith is reasonably proficient in valuing equity interests.

(p)           “Disqualified Stock” means any
Capital Stock that, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable, in each case, at the option of
the holder of the Capital Stock), or upon the happening of any event, matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or redeemable at the option of the holder thereof, in whole or in
part, on or prior to the date that is 91 days after the date on which the Notes
mature.  Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely
because the holders of the Capital Stock have the right to require the Company
to repurchase such Capital Stock upon the occurrence of a change of control or
an asset sale will not constitute Disqualified Stock if the terms of such
Capital Stock provide that the Company may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the terms of Section 4 herein which addresses Restricted
Payments.  The amount of Disqualified
Stock deemed to be outstanding at any time for purposes hereof shall be the
maximum amount that the Company and its Subsidiaries may become obligated to
pay upon the maturity of, or pursuant to any mandatory redemption provisions
of, such Disqualified Stock, exclusive of accrued dividends.

(q)           “Equity Interests” means Capital
Stock and all warrants, options or other rights to acquire Capital Stock (but
excluding any debt security that is convertible into, or exchangeable for,
Capital Stock).

(r)            “Escrow Deposit” means cash equal to
the amount sufficient for the Company to pay the initial four interest payments
on the Notes, with the first such interest payment date being September 30,
2007, which the Company shall have deposited into the escrow account under the
Escrow Agreement on or before the date of this Agreement.

(s)           “Executive Order” means the Executive
Order No. 13224 on Terrorist Financing, effective September 24, 2001, and
relating to Blocking Property and Prohibiting Transactions With Persons Who
Commit, Threaten to Commit, or Support Terrorism.

(t)            “GAAP” means United States generally
accepted accounting principles.

(u)           “Governmental Authority” means the
government of the United States of America or any other nation, or of any
political subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank or other
entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government (including
any supra-national bodies such as the European Union or the European Central
Bank).

(v)           “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, “capital leases” in
accordance with GAAP) (other than trade payables and accrued liabilities
incurred in the ordinary course of business), (C) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or

 

6

 

similar
instruments, including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses, (E) all indebtedness created or
arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to any property or assets
acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are
limited to repossession or sale of such property), (F) all monetary obligations
under any leasing or similar arrangement which, in connection with generally
accepted accounting principles, consistently applied for the periods covered
thereby, is classified as a capital lease, (G) all indebtedness referred to in
clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, (H) all
Disqualified Stock, (I) the Escrow Deposit, and (J) all Contingent Obligations
in respect of indebtedness or obligations of others of the kinds referred to in
clauses (A) through (I) above.

(w)          “Investments”
means , with respect to any Person, all direct or indirect investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
guarantees or other obligations), advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP, other than, for the avoidance of doubt, any investments
in assets of the Company’s business, whether made as capital expenditures or
otherwise. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition in such
Subsidiary. The acquisition by the Company or any Subsidiary of the Company of
a Person that holds an Investment in a third Person shall be deemed to be an
Investment by the Company or such Subsidiary in such third Person.

(x)            “Law” means all common law and all
applicable provisions of constitutions, laws, statutes, ordinances, rules,
treaties, regulations, permits, licenses, approvals, interpretations and orders
of courts or Governmental Authorities and all orders and decrees of all courts
and arbitrators.

(y)           “Lien” means any lien, charge, encumbrance,
security interest, right of first refusal or other restrictions of any kind.

(z)            “Material Adverse Effect” means any
material adverse effect on the business, properties, assets, operations,
results of operations, condition (financial or otherwise) or prospects of the
Company, its Subsidiaries, taken as a whole, or on the transactions
contemplated hereby or in the other Transaction Documents, or on the authority
or ability of the Company to perform its obligations under the Transaction
Documents.

 

7

 

(aa)         “Obligations”
shall have the meaning set forth in the Security Agreement.

(bb)         “OFAC”
means the Office of Foreign Assets Control of the U.S. Department of the
Treasury.

(cc)         “Officer”
means, with respect to any Person, the Chair of the Board, the Vice Chair of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary or any Vice-President of such Person.

(dd)         “Patriot
Act” means the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(Public Law 107-56) (The USA PATRIOT Act), as amended.

(ee)         “Permitted
Investments” means (i) any Investment in the Company or in a
wholly-owned Subsidiary of the Company (subject to compliance with Section
4(s)(ii)); (ii) any Investment in Cash Equivalents; (iii) any Investment by the
Company or any Subsidiary of the Company in a Person, if as a result of such
Investment: (a) such Person becomes a wholly-owned Subsidiary of the Company
(subject to compliance with Section 4(s)(ii)), or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a wholly-owned
Subsidiary of the Company; (iv) any acquisition of assets or Capital Stock
solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company; (v) any Investments received in compromise
or resolution of litigation, arbitration or other disputes; (vi) loans or
advances to employees made in the ordinary course of business of the Company or
any Subsidiary of the Company in an aggregate principal amount not to exceed
(I) $250,000 at any one time outstanding prior to the consummation of a
Qualified IPO and (II) $500,000 at any one time outstanding following the
consummation of a Qualified IPO; and (vii) redemptions or repurchases of Notes
pursuant to Sections 6 or 8 herein.

(ff)           “Permitted Liens” means (i) Any Liens
existing on the date hereof and specifically disclosed in Schedule 3(p)
to the Securities Purchase Agreement; (ii) Liens securing the Permitted
Indebtedness (A) prior to a Conversion Event, solely of the type described in
Section 4(g)(i)(c) or (d), or (B) after a Conversion Event, of the type
described in any of clauses (a)-(d) of Section 4(g)(i), subject to compliance
with Section 4(i); (iii) liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in
good faith by appropriate proceedings and for which the Company maintains
adequate reserves; (iv) Liens to secure payment of workers’ compensation,
employment insurance, old age pensions, social security or other like obligations
incurred in the ordinary course of business; (v) Liens incurred in connection
with the extension, renewal or refinancing of indebtedness secured by Liens of
the type described in clause (i) above, provided
that any extension, renewal or replacement Lien shall be limited to the
property (together with any accessions thereto and proceeds thereof) encumbered
by any such Lien and the amount of such Permitted Lien does not exceed the
amount of the lien extended, renewed or refinanced; (vi) carriers’, warehousemen’s,
mechanic’s, materialmen’s, repairmen’s or other like liens arising in the
ordinary course of business and securing obligations that are not due and
payable or which are being contested in good faith for which adequate reserves
have been established; (vii) pledges and deposits made in

 

8

the
ordinary course of business in compliance with workmen’s compensation,
unemployment insurance and other social security laws or regulations; (viii)
easements, rights-of-way, restrictions and other similar encumbrances on the
use of real property imposed by law or arising in the ordinary course of
business that do not secure any monetary obligations and do not materially
detract from the value of the affected property or interfere with the ordinary
conduct of business of the Company and the Subsidiaries; and (ix) Liens granted
in favor of the Collateral Agent for the ratable benefit of the Holders under
the Security Agreement, provided however
that, upon and after the consummation of a Conversion Event, such Liens under
the Security Agreement shall terminate and be released and thus shall no longer
be “Permitted Liens”.

(gg)         “Permitted
Refinancing Indebtedness” means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to renew, refund, refinance, replace, defease or discharge other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness renewed, refunded, refinanced,
replaced, defeased or discharged (plus all accrued interest on the Indebtedness
and the amount of all fees and expenses, including premiums, incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being renewed, refunded, refinanced, replaced, defeased or
discharged; (iii) if the Indebtedness being renewed, refunded, refinanced,
replaced, defeased or discharged is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders as those contained in
the documentation governing the Indebtedness being renewed, refunded,
refinanced, replaced, defeased or discharged; and (iv) such Indebtedness is
incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being renewed, refunded, refinanced, replaced, defeased or
discharged.

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

(ii)           “Principal” means, for any date, the
sum of (i) the initial face amount of this Note as stated in the preamble to
this Note preceding Section 1, less any portion thereof that has been earlier
repaid or redeemed or converted, in each case pursuant to the terms of this
Note, and (ii) the principal amount of any PIK Notes that are then outstanding.

(jj)           “Principal Amount” means, for any
date, the sum of (i) the Principal then outstanding and (ii) the then
applicable Terminal Value Payment, if any.

(kk)         “Qualified
IPO” means the closing of an underwritten public offering of
Common Stock that results in the Common Stock being listed on a U.S. national
securities exchange and for which aggregate gross proceeds to the Company are
not less than $40 million (prior to underwriting commissions and discounts).

 

9

 

(ll)           “Qualified Sale” means a Change of
Control either (i) following a Qualified IPO or (ii) prior to a Qualified IPO,
if (A) the surviving or acquiring entity is a public company whose shares of
capital stock are listed or traded on a U.S. national securities exchange with
a market capitalization of at least that of the Company at the effective time
of such transaction, (B) the Underlying Shares are convertible or exchangeable,
by the terms of the Change of Control transaction, into the common stock of the
surviving or acquiring company and (C) at least 90% of the merger or other
consideration that the holders of Common Stock are entitled to receive in the
Change of Control transaction will consist of shares of the acquiring or
surviving entity’s common stock whose initial issuance has been registered with
the Commission under the Securities Act and that are traded on a U.S. national
securities exchange

(mm)       “Qualified
Sale Price” means an amount equal to the market value of the
consideration to be received in connection with the Qualified Sale by each
holder of a share of Common Stock, which for purposes of this paragraph shall
be deemed to be equal to the product of (a) the average of the high and low
sale prices of the common stock of the acquiring entity, as reported by the
principal securities exchange on which such common stock is listed, on each of
the 20 trading days preceding the consummation of the Qualified Sale times (b)
the number of shares of such common stock to be received for each share of the
Company’s Common Stock.

(nn)         “Restricted
Investment” means any Investment other than a Permitted
Investment.

(oo)         “record
date,” for purposes of Section 9, shall mean, with respect to
any dividend, distribution or other transaction or event in which the holders
of Common Stock have the right to receive
any cash, securities or other property or in which the Common Stock (or
other applicable security) is exchanged or converted into any combination of cash,
securities or other property, the date fixed for determination of stockholders
entitled to receive such cash, security or other property (whether or not such
date is fixed by the Board or by statute, contract or otherwise).

(pp)         “Sanctioned
Country” means a country subject to a sanctions program
identified on the list maintained by OFAC and available at
http://www.treas.gov/offices/enforcement/ofac/programs/ or as otherwise
published from time to time.

(qq)         “Sanctioned
Person” means (i) a person named on the list of Specially
Designated Nationals or Blocked Persons maintained by OFAC available at
http://www.treas.gov/offices/eotffc/ofac/sdn/index.html, or as otherwise
published from time to time, or (ii) (A) an agency of the government of a
Sanctioned Country, (B) an organization controlled by a Sanctioned Country, or
(C) a person resident in a Sanctioned Country, to the extent subject to a
sanctions program administered by OFAC.

(rr)           “Subordinated Obligation” means any
Indebtedness of the Company (whether outstanding on the date hereof or incurred
thereafter) which is subordinated or junior in right of payment to the Notes
pursuant to a written agreement.

(ss)         “Subsidiary”
means any joint venture or any entity in which the Company, directly or
indirectly, owns capital stock or holds an equity or similar interest.

 

10

 

(tt)           “Trading Day” means (i) a day on
which the Common Stock is traded on a Trading Market, or (ii) if the Common
Stock is not listed on a Trading Market, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC
Bulletin Board, (iii) if the Common Stock is not quoted on any Trading Market,
a day on which the Common Stock is quoted in the over-the-counter
market as reported by the Pink Sheets, LLC (or any similar organization or
agency succeeding to its functions of reporting prices), or (iv) in the event
that the Common Stock is not listed or quoted as set forth in (i), (ii) and
(iii) hereof, a Business Day.

(uu)         “Trading
Market” means whichever of the New York Stock Exchange, the
American Stock Exchange, the Nasdaq Global Market, the Nasdaq Capital Market or
such other United States registered national securities exchange on which the
Common Stock is listed or quoted for trading on the date in question.

(vv)         “Trailing
Twelve Month Reference Period” means for any date, the twelve
calendar month period ending on the calendar month immediately preceding such
date.

(ww)       “Transaction
Documents” shall mean the Securities Purchase Agreement, the
Notes, the Registration Rights Agreement, the Escrow Agreement, the Security
Agreement and the Collateral Documents.

(xx)          “Underlying Shares” means shares of
Common Stock issued upon conversion of the Notes.

(yy)         “Weighted
Average Life to Maturity” means, when applied to any
Indebtedness at any date, the number of years obtained by dividing: (a) the sum
of the products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect of the Indebtedness,
by (y) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment, by (b) the then
outstanding principal amount of such Indebtedness.

2.             Interest;
Terminal Value Payment; Ranking; Etc.

(a)           Interest. 
The Company promises to pay interest on the Principal of this Note at an
initial interest rate of 7% per annum, subject to increase pursuant to clauses
(a)(ii) and (a)(iii) below of this Section 2 and to the Registration Rights
Agreement (as defined below) as set forth in the penultimate paragraph of
clause (a)(iv) of this Section 2 (such initial rate as it may be increased, the
“Interest Rate”) from the Closing
Date until repayment at Maturity, redemption or conversion as follows:

(i) In the case of interest accruing on or
before March 31, 2009, in cash from the funds (“Escrow
Funds”) deposited by the Company into the escrow account
established pursuant to the Escrow Agreement, dated as of March 30, 2007 among
the undersigned, the Company and The Bank of New York, as escrow agent (the “Escrow Agreement”) and, if such
Escrow Funds are insufficient, in cash payable by the Company.

 

11

 

(ii) In the case of interest accruing after
March 31, 2009, at the Company’s option, in cash or, so long as no default or
Event of Default has occurred and is continuing, in additional Notes (such
Notes, the “PIK Notes”), provided that
(A) the principal amount of any such PIK Notes must be limited to the amount of
interest whose payment is being satisfied by the issuance of such PIK Notes,
(B) the form and terms of any such PIK Notes must be identical to those of this
Note except with respect to the higher interest contemplated by this paragraph
and (C) for the avoidance of doubt, the principal amount of any such PIK Notes
will have the same Maturity, payable in cash, as this Note.  If issued, any PIK Notes shall be considered
part of Principal for all purposes of this Note.  Should the Company elect to pay interest on
this Note in PIK Notes, (x) the interest rate on such PIK Notes shall be equal
to the then applicable Interest Rate plus 1.5 percentage points, (y) the
Company may issue each holder of Notes a substitute Note in such amount that
reflects the initial Principal plus such interest (and providing for such
higher rate described in clause (x)) and the original Note surrendered in
exchange for the substitute Note shall be cancelled, and (z) the Company shall
provide 15 days prior written notice of its intention to pay interest in PIK
Notes and to issue any substitute Notes. 
Notwithstanding the foregoing (and without limiting any other payment
obligations of the Company and without limiting any other remedies if there is
any default or Event of Default), during the existence of any Event of Default
the Company shall not have the option of paying interest by issuing PIK Notes.

(iii) In the event that a Qualified IPO does
not occur by December 31, 2007, the initial interest rate will increase
thereafter from 7% to 8.5% per annum.

(iv) The Company will pay interest on the
Principal of this Note (whether in cash or by delivery of PIK Notes (to the
extent permitted hereby)) semi-annually in arrears on September 30 and March 31
of each year (each an “Interest Payment Date”),
commencing September 30, 2007 or if any such day is not a Business Day, on the
next succeeding Business Day.  Interest
on the Principal of this Note will accrue from the Closing Date.  To the extent substitute or additional Notes
are issued (for whatever reason, including to reflect an increase in the
Principal due to the issuance of PIK Notes, to exchange a new Note for the
Principal Amount that was not converted following a partial conversion of Notes
or otherwise), interest will accrue on the Principal of such substitute or
additional Notes from the date of issuance of such Notes.  Interest on the Principal of this Note shall
be computed (i) for any full semi-annual period for which a particular Interest
Rate is applicable on the basis of a 360-day year of twelve 30-day months, (ii)
for any period for which a particular Interest Rate is applicable shorter than
a full semi-annual period for which interest is calculated, on the basis of a
30-day month, and (iii) for such periods of less than a month, the actual
number of days elapsed over a 30-day month.

(v) If the Company shall default in the
payment of the Principal of or interest on this Note within five Business Days
of the date due, whether upon Maturity, by acceleration, or otherwise, including
without limitation as a result of a bankruptcy case commenced by or against the
Company in which it is the debtor, the Company shall on demand from time to
time pay interest, to the extent permitted by law, on such defaulted amount up
to (but not including) the date of actual payment (whether before or after
judgment) at the rate per annum (computed on the basis of the actual number of
days elapsed over a year of 360 days) equal to the Interest Rate, plus
2.0 percentage points. It is the intention of the Company and the holder of
this Note

 

12

 

(“Holder”) to comply with
applicable usury laws (now or hereafter enacted); accordingly, notwithstanding
any provision to the contrary in this Note, and any other document executed in
connection herewith, in no event shall this Note or any such other document
require the payment or permit the collection of interest in excess of the
maximum amount permitted by such laws. If for any circumstances whatsoever,
fulfillment of any provision of this Note or of any such other document at the
time performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law for the collection or charging of interest,
then, ipso facto, the obligation to be fulfilled shall be reduced to the limit
of such validity, and if for any such circumstances the Holder shall ever
receive anything of value as interest or deemed interest by applicable law
under this Note or any such other document or otherwise an amount that would
exceed the highest lawful rate, such amount that would be excessive interest
shall be applied to the reduction of the Principal owing under this Note or on
account of any other indebtedness of the Company to such Holder, and not to the
payment of interest, or if such excessive interest exceeds the unpaid balance
of principal of such indebtedness, such excess shall be refunded to the
Company. In determining whether or not the interest paid or payable with
respect to any indebtedness of the Company to the Holder, under any specific
contingency, exceeds the highest lawful rate, the Company and such Holder
shall, to the maximum extent permitted by applicable law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(ii) exclude voluntary prepayments and the effects thereof, (iii) amortize,
prorate, allocate and spread the total amount of interest throughout the full
term of such indebtedness so that the actual rate of such interest does not
exceed the maximum amount permitted by applicable law, and/or (iv) allocate
interest between portions of such indebtedness, to the end that no such portion
shall bear interest at a rate greater than that permitted by applicable law.

In accordance with the terms of the
Registration Rights Agreement dated as of March 30, 2007, among the Company and
the Buyers named therein (the “Registration Rights
Agreement”), from and after, and during the continuation of, a
Registration Default (as defined in the Registration Rights Agreement), the
Interest Rate borne by the Note shall, in addition to any other increases
provided for above, be increased by (i) 0.5% per annum or (ii) if any
Registration Default shall continue for more than 180 consecutive days, 1.0%
per annum after such 180th day (all such amounts being collectively
referred to as “Additional Payment Amounts”);
provided  that (a) in no event shall Additional Payment Amounts in
respect of any Note accrue at a rate exceeding 1.0% per annum, and (b) the
Additional Payment Amounts will cease to accrue upon the day on which the
Registration Default has been cured, all as more fully specified in the
Registration Rights Agreement.

For the avoidance of doubt, any increase in
the Interest Rate pursuant to any single provision of this Section 2 shall be
an independent basis for adjusting the then applicable Interest Rate pursuant
to this Section 2.

(b)           Terminal Value
Payment.  The terminal value of this
Note that (i) will be due upon redemption or conversion, (ii) will be
considered part of the Conversion Amount for purposes of determining the
Conversion Rate or (iii) will be due upon Maturity or acceleration as part of
the Principal Amount, in each case and as the case may be, as set forth in this
Note (the “Terminal Value Payment”) will
equal, at any date of determination, the amount equal to 7% per annum of the
then applicable Principal from the Closing Date to the earlier of (x) the
initial

 

13

declaration
of effectiveness of the Registration Statement (as defined in the Registration
Rights Agreement) and (y) Maturity, provided that if the Registration Statement
is declared effective, the accretion of the Terminal Value Payment will run, or
will be deemed to run, only to the first Conversion Event, with the effect that
any such accretion from that Conversion Event until that effective date will
cease for all purposes of calculating the Terminal Value Payment.  In the event the Company redeems or
repurchases Notes pursuant to Section 6 or Section 8 or a Holder converts Notes
pursuant to Section 7 between the date of the Conversion Event and Maturity, if
the Registration Statement has not yet been declared effective, then the
Terminal Value Payment shall equal the accreted value up until such redemption,
repurchase or conversion date, regardless of whether or not the Registration
Statement is ever declared effective following such redemption, repurchase or
conversion.

(c)           Ranking.  The Company’s obligations under this Note are
secured under the terms of the Security Agreement (as defined in Section 10),
however, upon the consummation of a Conversion Event, this Note shall become
unsecured and will become effectively subordinated to all then existing and
future secured indebtedness of the Company to the extent of the value of the
collateral securing that indebtedness.

(d)           No Repurchases,
Redemptions or Prepayments Other than in Sections 6 and 8.  The Company shall not be permitted to make
any repurchases, redemptions or prepayments of this Note, except pursuant to
Sections 6 and 8 herein, without consent of the Holder of this Note.

3.             Method of Payment.

The Principal and interest on the Notes will
be payable in cash at the office or agency of the Company maintained for such
purpose. Interest (including the Additional Payment Amounts and/or the Terminal
Value Payment, if any) will be payable by wire transfer in immediately
available funds to an account within the United States designated in writing by
the Holder provided to the Registrar; provided, however, that the
Company may elect to pay any and all interest accruing after March 31, 2009
through the issuance of PIK Notes to the extent permitted in Section 2
hereunder and subject to the terms of the Securities Purchase Agreement.

4.             Covenants.

For
so long as any Notes remain outstanding, the Company and its Subsidiaries, as
the case may be, agree to the following covenants:

(a)           Compliance
Certificate.  (i) The Company shall
furnish to the Holders, within 90 days after the end of each fiscal year and 45
days after each fiscal quarter, an Officer’s Certificate, signed by either the
Company’s Chief Executive Officer or Chief Financial Officer, stating that a
review of the activities of the Company and its Subsidiaries during the
preceding fiscal year (or fiscal quarter) has been made under the supervision
of the signing Officer with a view to determining whether the Company has kept,
observed, performed and fulfilled its obligations under the Notes, and further
stating that, to his or her knowledge, the Company has kept, observed,
performed and fulfilled each and every covenant contained in the Notes, except
where such default has been cured, and is not in default in the performance or
observance of any of the terms, provisions and conditions of the Notes (or, if
a default or Event of Default shall

 

14

have
occurred, describing all such defaults or Events of Default of which he or she
may have knowledge and what action the Company is taking or proposes to take
with respect thereto, except where such default has been cured) and that, to
the best of his or her knowledge, no event has occurred and remains in
existence by reason of which payments on the Notes is prohibited or if such
event has occurred, a description of the event and what action the Company or
such obligor is taking or proposes to take with respect thereto.

(ii) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
year-end financial statements delivered pursuant to Section 4(k) shall be
accompanied by a written statement of the Company’s independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial
statements, nothing has come to their attention that would lead them to believe
that the Company has violated any provisions of Section 4 hereof, or, if any
such violation has occurred, specifying the nature and period of existence
thereof, it being understood that such accountants shall not be liable directly
or indirectly to any Person for any failure to obtain knowledge of any such
violation.

(iii) The Company shall, so long as any of the Notes
are outstanding, deliver to the Holders, forthwith upon any Officer becoming
aware of any Event of Default, an Officer’s Certificate specifying such Event
of Default and what action the Company is taking or proposes to take with
respect thereto.

(b)           Taxes.  The Company shall pay, and shall cause each
of its Subsidiaries to pay, prior to delinquency, all material taxes,
assessments, and governmental levies except such as are contested in good faith
by appropriate proceedings and for which adequate reserves have been
maintained.  The Company will timely
prepare and file all tax related returns, reports and declarations that it is
required to file.  All such returns shall
be correct and complete in all material respects.

(c)           Corporate
Existence.  Subject to Section 4(e)
herein, the Company shall do or cause to be done all things necessary to
preserve and keep in full force and effect (i) its corporate existence, and the
corporate, partnership or other existence of each of its Subsidiaries, in
accordance with the respective organizational documents (as the same may be
amended from time to time) of the Company or any such Subsidiary and (ii) the
rights (charter and statutory), licenses and franchises of the Company and its
Subsidiaries; provided, however, that the
Company shall not be required to preserve any such right, license or franchise,
or the corporate, partnership or other existence of any of its Subsidiaries, if
the Board of Directors of the Company or such Subsidiary shall determine that
the preservation thereof is no longer desirable in the conduct of the business
of the Company and its Subsidiaries, taken as a whole, and that the loss
thereof is not adverse in any material respect to the Holders of the Notes and
would not reasonably be expected to result in a Material Adverse Effect.

(d)           Insurance.  The Company shall, and shall cause each of
its Subsidiaries to, maintain, with financially sound and reputable insurance companies,
insurance in such amounts and against such risks as are customarily maintained
by companies engaged in the same or similar businesses.

 

15

(e)           Merger or Sale;
Disposition of Property.  (i) The
Company shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, consolidate or merge with or into another Person (whether or not
the Company or such Subsidiary is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of the Company and its Subsidiaries taken as a whole in
one or more related transactions, to any other Person, unless (A) either the
Company or such Subsidiary (which must be a domestic Subsidiary complying with
Section 4(s)) is the surviving corporation or the Person formed by or surviving
any such consolidation or merger (if other than the Company or such Subsidiary)
or to which such sale, assignment, transfer, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia, (B) the
Person formed by or surviving any such consolidation or merger (if other than
the Company or such Subsidiary) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made (1) assumes in
writing all the obligations of the Company and/or such Subsidiary under the
Notes, the Registration Rights Agreement, the Securities Purchase Agreement and
the Collateral Documents and (2) causes to be delivered to each Holder of any
Notes an opinion of nationally recognized independent counsel, or other
independent counsel reasonably satisfactory to the Holder, to the effect that
all agreements or instruments effecting such assumption are enforceable in
accordance with their terms and comply with the terms hereof, provided, however, that should all the Notes
be repurchased pursuant to Section 8 herein in connection with such merger or
sale, then such opinion shall not be required, and (C) immediately after such
transaction, no default or Event of Default exists. In addition, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, lease all or substantially all of the properties or assets, of the
Company and its Subsidiaries taken as a whole, in one or more related
transactions, to any other Person.

The
foregoing paragraph in this Section 4(e) shall not apply to (x) a merger of the
Company with an Affiliate with no material assets, liabilities or operations
solely for the purpose of reincorporating the Company in another jurisdiction
in the United States of America; or (y) any consolidation or merger, or any
sale, assignment, transfer, conveyance, lease or other disposition of assets
between or among the Company and its wholly-owned Subsidiaries; provided, however, that such consolidation or
merger shall comply with subclauses (A) and (B) in the foregoing paragraph.

(ii)
The Company will not, and will not permit any of its Subsidiaries to, sell,
transfer, convey or lease all or any substantial part of its assets, except for
(i) the sale of inventory in the ordinary course of business, (ii) dispositions
of used, worn-out or surplus equipment in the ordinary course of business and
(iii) asset dispositions not covered by (i) or (ii) in this Section 4(e)(ii) to
the extent that the aggregate fair market value of all such assets sold by the
Company and its Subsidiaries does not exceed $250,000 in any fiscal year.

(iii)
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company or any of its Subsidiaries permitted by Section 4(e) hereof, the
successor corporation formed by such consolidation or into or with which the
Company or such Subsidiary is merged or to which such sale, assignment,
transfer, lease, conveyance or other disposition is made shall succeed to, and
be substituted for (so that from and after the date of such consolidation, merger,
sale, lease, conveyance or other disposition, the provisions of this Note
referring to the “Company,” or to a

 

16

“Subsidiary”
shall refer instead to the successor corporation and not to the Company or such
Subsidiary, as the case may be), may exercise every right and power of the
Company or such Subsidiary under this Note with the same effect as if such
successor Person had been named as the Company or a Subsidiary herein and shall
be bound by every obligation and liability of the Company or such Subsidiary
under this Note, the Registration Rights Agreement and the Collateral
Documents; provided, however, that the
predecessor Person shall not be relieved from the obligation to pay the
Principal of and interest on the Notes, except in the case of a sale of all or
substantially all assets that meets the requirements of Section 4(e) hereof and
as to which the Holders have reasonably determined such relief would not have
an adverse effect on their rights and interests.

(f)            Reservation of
Shares.  The Company shall take all
action necessary to at all times have authorized, and reserved for the purpose
of issuance, no less than 56,000,000 shares of Common Stock, or, following a
Qualified IPO or a Qualified Sale, such greater number of shares of Common Stock,
as are issuable initially upon conversion of the Notes.

(g)           Incurrence of
Indebtedness; Subsidiary Capital Stock.

(i) Neither the Company nor
any Subsidiary shall, directly or indirectly, contingently or otherwise,
create, incur, assume, become or be liable in any manner in respect of, or
suffer to exist, any Indebtedness, except (a) Indebtedness in existence on the
date hereof, as shown on Schedule 3(l) to the Securities Purchase
Agreement, including the Notes (and any PIK Notes), and any extensions, renewals,
or replacements thereof, and additional Indebtedness incurred by the Company
for borrowed money, not to exceed: (I) $2,000,000 prior to a Qualified IPO and
(II) $4,000,000 following a Qualified IPO, provided
that, in connection with clause (II) only, the Company has Consolidated
Cash Flow of at least $1,000,000 for the Trailing Twelve Month Reference
Period; (b) Contingent Obligations in existence on the date hereof, as shown on
Schedule 3(l) to the Securities Purchase Agreement; (c) Indebtedness incurred
by the Company to finance the acquisition of fixed or capital assets (whether
pursuant to a loan, capital lease obligation or otherwise) in an aggregate
principal amount not to exceed at any time outstanding (provided that such Indebtedness is incurred simultaneously with such
acquisition) (I) $2,000,000 prior to a Qualified IPO and (II) $4,000,000
following a Qualified IPO, provided that,
in connection with clause (II) only, the Company has Consolidated Cash Flow of
at least $1,000,000 for the Trailing Twelve Month Reference Period; and (d)
Indebtedness incurred in issuing PIK Notes (collectively (a) through (d) shall
be referred to as the “Permitted
Indebtedness”); and

(ii)
the Company shall not permit any of its Subsidiaries to issue any shares of Capital
Stock.

(h)           Restricted
Payments.  The Company shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on
account of its Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company or any
Subsidiary of the Company not permitted by Section 4(e) above) or to the direct
or indirect holders of its Equity Interests in their capacity as such, other
than dividends or distributions payable (a) in Equity Interests (other than
Disqualified Stock) of the Company, (b) to the Company or any Subsidiary

 

17

of
the Company, or (c) in the case of dividends or distributions payable by any
Subsidiary of the Company, pro rata to the holders of such Subsidiary’s Equity
Interests; (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company not permitted by Section 4(e) above) any Equity Interests
of the Company; (iii) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness of
the Company or any of its Subsidiaries that is contractually subordinated to
the Notes (excluding any intercompany Indebtedness between or among the Company
and any of its Subsidiaries), except a payment of interest or principal at the
maturity of such Indebtedness; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as “Restricted Payments”),
except as provided in the following paragraph.

So
long as no default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof, no provision of this Note shall prohibit
(i) the making of any Restricted Payment in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a Subsidiary
of the Company) of, Equity Interests of the Company (other than Disqualified
Stock) or from the substantially concurrent contribution of common equity
capital to the Company; (ii) the redemption, repurchase, defeasance or other
acquisition or retirement for value of Indebtedness of the Company or its
Subsidiaries that is contractually subordinated to the Notes with the net cash
proceeds from a substantially concurrent incurrence of Permitted Refinancing
Indebtedness; (iii) the repurchase of Equity Interests of the Company deemed to
occur upon the exercise of stock options to the extent such Equity Interests
represent a portion of the exercise price of those stock options; and (iv) the
purchase, redemption, other acquisition or retirement for value of Equity
Interests of the Company from employees or directors of or consultants to the
Company upon termination of their status as such pursuant to an agreement
containing vesting and/or repurchase provisions approved by a majority of the
Board, provided that payments pursuant to
this clause (iv) shall not exceed, in the aggregate, (I) $250,000 prior to the
consummation of a Qualified IPO and (II) $500,000 following the consummation of
a Qualified IPO.

The
amount of all Restricted Payments (other than cash) shall be the fair market value
on the date of such Restricted Payment of the asset(s) or securities proposed
to be transferred or issued by the Company or such Subsidiary, as the case may
be, pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment shall be determined by the Board whose resolution with
respect thereto shall be delivered to the Holders, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if such fair market value exceeds
$5,000,000.

Promptly
following the making of a permitted Restricted Payment, the Company shall
provide notice of such payment to the Holders, which notice shall include the
amount of such payment, the provision of this Note which permits such payment,
and, if the Board relied upon an opinion or appraisal in determining the fair
market value of any non-cash Restricted Payment, a copy of such opinion or
appraisal.

(i)            Limitation on
Liens.

 

18

(i)
Prior to the consummation of a Conversion Event, the Company will not, and
shall not permit any of its Subsidiaries (whether nor or hereafter existing)
to, create or permit to exist any Lien on any of its real or personal
properties, assets or rights of whatsoever nature (whether now owned or
hereafter acquired) except for Permitted Liens.

(ii)
Only upon and after the consummation of a Conversion Event, the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
create, incur or suffer to exist any Liens (other than Permitted Liens) upon
any of its property or assets (including Capital Stock of Subsidiaries), either
owned on the date hereof or acquired thereafter, which Lien is securing any
Permitted Indebtedness, unless contemporaneously with the incurrence of such
Liens effective provision is made to secure the Indebtedness due under this
Note, or, in respect of any Liens on any Subsidiary’s property or assets,
equally and ratably with (or senior in priority to in the case of Liens with
respect to Subordinated Obligations) the Permitted Indebtedness secured by such
Lien for so long as such Permitted Indebtedness is so secured.

(j)            Collateral
Transfers to Subsidiaries.

(i)
The Company will not transfer any portion of the Collateral to any of its
foreign Subsidiaries (whether now or hereafter existing) other than transfers
of products for the purpose of sales in the ordinary course of business and
consistent with past practices.

(ii)
The Company will not transfer any portion of the Collateral to any of its domestic
Subsidiaries (whether now or hereafter existing) unless and until such
Subsidiary is a direct or indirect wholly-owned domestic Subsidiary which has
signed a guaranty of the Notes in customary form and a security agreement in
substantially similar form to the Security Agreement, and other Collateral
Documents, each in favor of the Holders, in forms satisfactory to a majority of
the Holders, and the Holders shall have received an opinion of counsel to the
Company and such Subsidiary in customary form and substance.

(k)           Reporting
Requirements.

(i)
Beginning at such time as the Company shall have shares of its capital stock
trading on a U.S. national securities exchange and until the date on which none
of the Notes is outstanding (the “Reporting Period”),
the Company shall timely file all reports required to be filed with the SEC
pursuant to the Exchange Act, and the Company shall not terminate its status as
an issuer required to file reports under the Exchange Act even if the Exchange
Act or the rules and regulations thereunder would no longer require such status
or otherwise would permit such termination, and the Company shall take all
actions necessary to maintain its eligibility to register the Underlying Shares
for resale by the Holders.

(ii) Beginning at such time as the Company shall have
shares of its capital stock trading on a U.S. national securities
exchange, the Company agrees to send
the following to each Holder during the Reporting Period unless the following
are available to the public through the EDGAR system, (A) within one Business
Day after the filing thereof with the SEC, a copy of its Annual Reports and
Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or
any consolidated balance sheets, income statements, stockholders’ equity

 

19

 

statements
and/or cash flow statements for any period other than annual, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the Securities Act and (B) copies of any notices
and other information made available or given to the securityholders of the
Company generally, contemporaneously with the making available or giving
thereof to the securityholders.

(l)            Financial
Statements.  Until the consummation
of a Qualified IPO, the Company will furnish the following reports to the
Holders:

(i)            As soon as practicable after the end
of each fiscal year of the Company, and in any event within 120 days
thereafter, a consolidated balance sheet of the Company and its Subsidiaries, if
any, as at the end of such fiscal year, and consolidated statements of income
and cash flows of the Company and its Subsidiaries, if any, for such year,
prepared in accordance with GAAP consistently applied, all in reasonable detail
and audited by an independent public accountant of recognized national standing
selected by the Board.

(ii)           As soon as practicable after the end
of each fiscal quarter but in any event within 30 days after the end of such
fiscal quarter, a consolidated balance sheet of the Company and its
Subsidiaries, if any, as at the end of such fiscal quarter, and consolidated
statements of income and cash flows of the Company and its Subsidiaries, if
any, for such fiscal quarter, prepared in accordance with GAAP consistently
applied, all in reasonable detail and certified by the principal financial or
accounting officer of the Company.

(iii)          Concurrently with the delivery to any
security holder or lender of or to the Company, any financial information of
the Company and its Subsidiaries (including budgets or monthly financial
statements), other than the type described in subclauses (i) and (ii) above, in
the same form as so delivered to such other securityholder or lender.

(m)          Access Rights.  Prior to the consummation of a Qualified IPO,
the Holder will have reasonable access, during normal business hours, (i) to
the facilities, records and personnel (including outside accountants) of the
Company and its Subsidiaries and (ii) to the executive officers and senior
management of the Company and its Subsidiaries, in each case to the extent that
the same reasonably relates to the Holder’s interest in the Company, subject to
reasonable prior written notice (which during the continuance of an Event of
Default, need not be longer than one Business Day) delivered to the Company and
subject to execution by the Holder, at the Company’s request, of a
confidentiality and nondisclosure agreement in the form reasonably agreed to by
the Company. The Company shall be entitled to designate one or more representatives
of the Company to be present during all such periods of access.

(n)           Transactions with
Affiliates.  Except for transactions
contemplated by the Transaction Documents or transactions approved by
disinterested members of the Board that are on terms and conditions no less
favorable to the Company or the Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Subsidiary with an
unrelated Person, neither the Company nor any Subsidiary shall enter into any
transaction with any director, officer, employee or holder of more than five
percent of the outstanding capital stock of any class or series of capital
stock of the Company or any subsidiary, member of the family of any such
person, or any corporation, partnership, trust or other entity in which any

 

20

such
person, or member of the family of any such person, is a director, officer,
trustee, partner or holder of more than five percent of the outstanding capital
stock thereof.

(o)           Dividend and
Other Payment Restrictions Affecting Subsidiaries.  The Company shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise permit,
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Subsidiary to (a)(i) pay dividends or make
any other distributions on its Capital Stock to the Company or any of its
Subsidiaries or with respect to any other interest or participation in, or
measured by, its profits or (ii) pay any indebtedness owed to the Company or
any of its Subsidiaries, (b) make loans or advances to the Company or any of
its Subsidiaries or (c) sell, lease or transfer any of its properties or assets
to the Company or any of its Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (i) the Notes; (ii) applicable law
rule, regulation or order; (iii) customary non-assignment provisions in
contracts and licenses entered into in the ordinary course of business; (iv)
any agreement for the sale or other disposition of a Subsidiary that restricts
distributions by that Subsidiary pending the sale or other disposition; (v)
Permitted Liens that limit the right of the debtor to dispose of the assets
subject to such Liens; (vii) provisions limiting the disposition or
distribution of assets or property in joint venture agreements, asset sale
agreements, saleleaseback agreements, stock sale agreements and other similar
agreements entered into with the approval of the Board, which limitation is
applicable only to the assets that are the subject of such agreements; and
(viii) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.

(p)           Notice of Known
Events of Default.  The Company shall
furnish to the Holders a notice of the occurrence of an Event of Default, and
what action the Company is taking or proposes to take with respect thereto,
promptly after such Event of Default becomes known to an Officer.

(q)           Pari Passu and
Pro Rata Treatment of Holders.  The
Company acknowledges that this Note is one of an issue of 7% Convertible Senior
Secured Notes Due 2010 issued by the Company pursuant to the Securities
Purchase Agreement on the Closing Date (this Note collectively with such other
notes and any PIK Notes, the “Notes”).  Each Note ranks equally and ratably with the
other Notes without priority over one another. 
No payment shall be made hereunder unless payment is made with respect
to the other Notes in an amount which bears the same ratio to the then unpaid
Principal and accrued and unpaid interest on such other Notes as the payment
made hereon bears to the then unpaid Principal and accrued and unpaid interest
under this Note.  Nothing contained
herein shall be interpreted or construed to limit the obligation of the
Company, which is absolute, to make payment in full of all amounts due under
the Notes.

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

 

21

(s)           Restrictions on
Acquisitions; Creation of Subsidiaries. 
Prior to the consummation of a Qualified IPO, the Company shall not, and
shall not permit any of its Subsidiaries to, (i) make any investment, or
acquire the capital shares, assets or business of, any Person, whether in a
single transaction or a series of related transactions, for a purchase price in
excess of $5,000,000, or (ii) make or permit to exist any Investments in any
other Person except contributions by the Company to the capital of any
wholly-owned Subsidiary, or by any Subsidiary to the capital of any wholly
owned Subsidiary, so long as the recipient of any such capital contribution has
executed and delivered a guaranty and a security agreement, each in favor of
the Holders in a form satisfactory to a majority of the Holders and the Holders
shall have received an opinion of counsel to the Company and such Subsidiary in
customary form and substance; or (iii) create, form or permit to exist any
Subsidiary other than wholly-owned Subsidiaries or non-wholly owned foreign
subsidiaries which have director nominee shareholders or other shareholders to
satisfy foreign law requirements.

(t)            Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Notes for working capital purposes, including to fund further
development of the Company as consistent with the Company’s stated business
plan, for general and reasonable corporate expenses, and to provide the Escrow
Funds.

(u)           Line of Business.  Except as otherwise approved by the Board,
the Company shall not, and shall not permit any of its Subsidiaries to, make
any material change to the nature of the Company’s business as reflected in the
Company’s operating plan.

(v)           Compliance with
Laws.  The Company shall, and shall
cause each of its Subsidiaries to, materially comply with all applicable Laws
and obtain or maintain all material permits, franchises and other governmental
authorizations and approvals necessary for the ownership, acquisition and
disposition of their respective properties and the conduct of their respective
businesses.  Without limiting the
generality of the foregoing, the Company shall not nor permit any of its
Subsidiaries to (a) violate any Anti-Terrorism Law or engage in or conspire to
engage in any transaction that evades or avoids, or has the purpose of evading
or avoiding, or attempts to violate, any of the prohibitions set forth in any
Anti-Terrorism Law or (b) conduct any business or engage in making or receiving
any contribution of funds, goods or services to or for the benefit of any
Sanctioned Person or Sanctioned Country, maintain any of its assets in a
Sanctioned Country or derive any of its operating income from investments in or
transactions with a Sanctioned Person.

(w)          Maintenance of
Properties. The Company shall, and shall cause each of its Subsidiaries
to:  (a) maintain its properties in good
repair, working order and condition, ordinary wear and tear excepted; and (b)
make all appropriate and proper repairs, renewals, replacements, additions and
improvements thereto, ordinary wear and tear excepted; and (c) keep all systems
and equipment that may now or in the future be subject to compliance with any
material standards or rules imposed by any applicable governmental authority in
compliance in all material respects with such standards or rules.  The Company shall, and shall cause each of
its Subsidiaries to, take all steps necessary to prosecute, maintain, preserve,
defend and protect, and, when necessary, renew: 
(i) all franchises, licenses, and permits, necessary to the conduct of
its business, (ii) all patent applications, patents, trademarks, service marks,
trade dress, domain names, trade names, trade secrets, copyrights and other
Intellectual Property Rights (as such term

 

22

 

is
defined in the Securities Purchase Agreement) owned or licensed by any of them,
including but not limited to the payment of all necessary maintenance fees and
the filing of all statutory declarations, and (iii) all agreements to which any
of them are parties that are necessary or useful to conduct the Company’s or
the applicable Subsidiary’s business, except in the case of clauses (i), (ii)
or (iii) to the extent that the Company has determined in its reasonable
judgment that such property is no longer useful in or material to its business
and that it is in its best business interest to terminate the same.

(x)            Maintenance of
Records; Fiscal Year. The Company shall, and shall cause each of its
Subsidiaries to, keep at all times books of record and account in which full,
true and correct entries shall be made of all dealings or transactions in
relation to its business and affairs. 
The Company shall, and shall cause each of its Subsidiaries to, keep its
books of account and financial statements in accordance with GAAP and to report
on the basis of a fiscal year ending December 31.

(y)           Compliance with
Federal Reserve Regulations.  No
proceeds of the proceeds of this Note shall be used, in whole or in part, by
the Company, any of its Subsidiaries or other Person, directly or indirectly,
to purchase or carry, or to reduce or retire or refinance any credit incurred
to purchase or carry, any “margin security” or “margin stock,” or to extend
credit to others for the purpose of purchasing or carrying any “margin security”
or “margin stock.”  Neither the Company
nor any of its Subsidiaries shall, directly or indirectly, otherwise take or
permit to be taken any action which would result in the Notes or the carrying
out of any of the other transactions contemplated by this Note being violative
of Regulation T, U or X of the Board of Governors of the Federal Reserve System
or any other regulation of the Board of Governors of the Federal Reserve
System.  If requested by the Holder, the
Company shall complete and sign Part I of a copy of the Federal Reserve Form U-1
referred to in Regulation U of the Board of Governors of the Federal Reserve
System and deliver such copy to such Holder.

(z)            Further
Assurances.  The Company and its
Subsidiaries shall execute and deliver any and all such further documents and
take any and all such other actions as may be reasonably necessary or
appropriate to carry out the intent and purposes of this Note and to consummate
the transactions contemplated herein.

5.             Registrar.

The Company shall maintain an office or
agency where this Note may be presented for redemption or conversion (the “Registrar”).  Initially, the Company will act as Registrar.
The Company may change the Registrar with notice to all Holders.

6.             Redemption at
the Option of the Company.

Beginning on the date that is 180 days
following the closing of a Qualified IPO, the Company may, at its option,
redeem this Note (and the other Notes issued as of the date hereof) in whole at
any time or in part from time to time, upon 15 days prior written notice to the
Holder (the “Redemption Notice”), at a
redemption price (the “Redemption Price”),
payable in cash, equal to the Principal Amount plus any interest (including
Additional Payment Amounts, if any)

 

23

accrued and unpaid to, but excluding, the date of the redemption (the “Redemption Date”), subject to the
satisfaction of the following conditions precedent:

(a)           the
declaration of effectiveness of a registration statement filed with the
Securities and Exchange Commission (the “Commission”)
for the resale of the Underlying Shares;

(b)           the
average of the high and low sale price of the Common Stock, as reported on the
principal securities exchange on which the Common Stock is listed on each of
any 20 trading days during any period of 30 consecutive trading days ending
within 45 days prior to the Redemption Date (so long as, during the entire 30
trading day period, the aforementioned registration statement has been
effective and there has been no suspension of trading of the Common Stock),
having been equal to or greater than 140% of the initial public offering price
in the Qualified IPO (in each case, with prices adjusted for stock splits,
reverse splits, stock dividends, share combination and other antidilution
events, in each event, in the manner contemplated by Section 9); and

(c)           no
more than $12,500,000 of outstanding Notes may be redeemed pursuant to this
provision in any period of 30 consecutive trading days; and

(d)           any
such redemption shall be effected on a pro rata basis with respect to all then
outstanding Notes (including PIK Notes).

The Redemption Notice shall set forth (i) the
intended Redemption Date; (ii) the Redemption Price computed as of the
Redemption Date; (iii) a statement that on the Redemption Date the Redemption
Price will become due and payable upon each such Note to be redeemed, and that
interest (including Additional Payment Amounts, if any) and the Terminal Value
Payment applicable thereto thereon shall cease to accrue on and after such
date; (iv) the Conversion Price, the date on which the right to convert the
Principal Amount of the Notes to be redeemed will terminate (which may not be
more than 5 days preceding the Redemption Date), and the places where such
Notes may be surrendered for conversion; and (v) the place or places where such
Notes are to be surrendered for payment of the Redemption Price and accrued and
unpaid interest, if any, payable thereon. 
Upon receipt of the Redemption Notice, the Holder will be entitled to
convert the portion of the Note to be redeemed up to the fifth day preceding
the Redemption Date established in the Redemption Notice.

On and after the Redemption Date, interest
will cease to accrue on Notes or portions of Notes called for redemption,
unless the Company defaults in the payment of the Redemption Price.

The Redemption Notice will be delivered by
the Company to the Holders in the manner provided in Section 8(f) the
Securities Purchase Agreement.

Any Notes repurchased or redeemed by the
Company or any Subsidiary as permitted hereunder shall be cancelled with no
further rights under such Notes.

 

24

 

7.             Conversion Rights.

If a Qualified IPO or a Qualified Sale (each,
a “Conversion Event”) occurs, then the
Holder will be entitled, at such Holder’s option,

(i)            at
any time and from time to time thereafter, until the close of business on the
Business Day immediately preceding Maturity, to convert the outstanding
Principal Amount plus accrued and unpaid interest on the Note, or any portion
thereof, which is an integral multiple of $1,000 (such amount, the “Conversion Amount”), into duly
authorized, fully paid and nonassessable shares of Common Stock, or

(ii)           at
any time and from time to time after written notice to the Holder of a
Qualified Sale pursuant to Section 8(a)(i) herein, until the earlier of the
close of business on the Business Day immediately preceding Maturity or 5 days
prior to the consummation of the Qualified Sale, to convert the Conversion
Amount into the right to receive the consideration to be received by a holder
of Common Stock in the Qualified Sale, pursuant to the same terms of the
Qualified Sale transaction as are applicable to the Company’s holders of Common
Stock,

in
the case of each of clauses (i) and (ii) above, at the conversion rate (the “Conversion Rate”)
equal to the quotient obtained by dividing (x) the Conversion Amount by (y) the
Conversion Price.

                The “Conversion
Price” shall be the lesser of the following:

(i)(A)      if
the first Conversion Event to occur shall be a Qualified IPO, an amount equal
to the initial public offering price per share of the Common Stock in such
Qualified IPO, less the percentage discount set forth in the following schedule
multiplied by such initial public offering price per share (as adjusted for
stock splits, reverse splits, stock dividends, share combinations and other
antidilution events, in each event, in the manner contemplated by Section 9),
or (B) if the first Conversion Event to occur shall be a Qualified Sale, an
amount equal to the Qualified Sale Price per share less the percentage discount
set forth in the following schedule multiplied by such Qualified Sale Price per
share (as adjusted for stock splits, reverse splits, stock dividends, share
combinations and other antidilution events, in each event, in the manner
contemplated by Section 9):

(I)                                    6% if the
Conversion Event occurs 180 days or less after the Closing Date;

(II)                                9% if the
Conversion Event occurs more than 180 days but less than or at 360 days after
the Closing Date;

(III)                            12% if the
Conversion Event occurs more than 360 days but less than or at 540 days after
the Closing Date; or

(IV)                            16% if the
Conversion Event occurs more than 540 days after the Closing Date,

it being understood that, in no event, shall
the percentage discount under this clause (i) exceed 16%, or

 

25

 

(ii)           $1.565
per share (which represents the quotient obtained by dividing $375,000,000 by
239,609,044, which represents the number of outstanding shares of Common Stock
on the Closing Date on a fully diluted basis) to be adjusted appropriately for
any recapitalizations, stock combinations, stock dividends, stock splits and
other antidilution events, in each event, in the manner contemplated by Section
9 (such price per share, the “Maximum Conversion Price”).

In
no event, shall the Conversion Price be greater than the Maximum Conversion
Price.

Following, but not prior to, the consummation
of a Conversion Event, the Conversion Price will be subject to adjustment in
accordance with Section 9.

If no Conversion Event occurs before the
Maturity of the Note, the Note shall not be convertible into shares of Common
Stock.

To exercise the conversion right, the Holder
must surrender the original Note duly endorsed or assigned to the Company or in
blank, at the office of the Company, accompanied by a duly signed conversion
notice to the Company, in the form attached hereto as Exhibit A.  The Holder may specify in the conversion
notice a condition to its conversion request that the conversion of this Note
is conditioned upon the consummation of the Qualified Sale.

No fractional shares of Common Stock will be
issued upon conversion of any Notes. Instead of any fractional share of Common
Stock which would otherwise be issued upon conversion of such Notes, the
Company shall pay to the Holder cash in an amount equal to the balance of the
Principal Amount and interest due under the Note and tendered for conversion
that was not so converted by reason of this sentence.

The Company understands that a delay in the
delivery of the certificates representing the Underlying Shares upon conversion
of the Notes could result in economic loss to the Holder.  As compensation to the Holder for such late
delivery of Underlying Shares upon conversion of this Note the amount of $50
per Business Day after the fifth Business Day after the Holder has properly
converted this Note for each $10,000 of Common Stock (measured by the relevant
Conversion Price as of the date the Holder has properly converted the Note and
prorated for amounts other than $10,000), and continuing until the date on
which the certificate representing such Underlying Shares is delivered to the
Holder (or its designee) or the obligation to deliver such certificate is
terminated as set forth below.  The
Company shall pay any payments incurred under this paragraph in immediately
available funds upon demand.

In addition, if, on or after the third
Business Day after the Holder has properly requested the conversion of this
Note (i) the certificate for such Underlying Shares has not been delivered by
the Company to the Holder and (ii) the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of shares of Common Stock issuable upon such conversion
that the Holder anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within three (3) Business Days after the Holder’s
written request (which request shall include evidence of the purchase and a
breakdown of the purchase price), pay cash to the Holder in an amount equal to
the Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares

 

26

of Common Stock so purchased (the “Buy-In Price”),
at which point the Company’s obligation to deliver such certificate (and to
issue such shares of Common Stock) shall terminate.

If a Holder converts a Note, the Company shall
pay any documentary, stamp, or similar issue or transfer tax due on the issue
of shares of Common Stock upon such conversion. 
However, the Holder shall pay any such tax which is due because the
Holder requests the securities to be issued in a name other than the Holder’s
name.  Nothing herein shall preclude any
tax withholding required by law or regulation.

Upon the effectiveness of a registration
statement covering all of the Underlying Shares or the date upon which such
Underlying Shares may be sold pursuant to Rule 144 under the Securities Act,
the Company shall remove (or shall cause its transfer agent or registrar to
remove) the restrictive legend on any shares of Common Stock issued upon
conversion of Notes promptly after the written request of the Holder of such
Underlying Shares and tender of the original Note to the Company.  On the date when Notes may be sold without
registration under the Securities Act pursuant to Rule 144(k) or otherwise, the
Company shall remove (or shall cause its transfer agent or registrar to remove)
the restrictive legend on this Note at the written request of the Holder.

8.             Qualified Sale
Offer to Purchase; Other Changes of Control.

(a)           (i)
The Company will not, and will not permit its Subsidiaries to (except in
connection with mergers of any Subsidiary with and into the Company), enter
into a Qualified Sale unless the acquiring, surviving or successor entity has
agreed in writing to make an offer to purchase this Note (and all other Notes)
within 30 days after the closing of the Qualified Sale at a price equal to the
Principal Amount plus accrued and unpaid interest (including any Additional
Payment Amounts, if any) to but excluding the date of purchase and the Holder’s
pro rata portion of any undistributed Escrow Funds not yet applied to the
payment of interest on the Notes (collectively, the “Qualified
Sale Redemption Price”). 
The Company shall provide Holders written notice of a Qualified Sale,
including the proposed terms thereof, 20 days prior to the proposed consummation
of such Qualified Sale.

(ii) A Holder of the Note may, in connection
with a Qualified Sale, convert all or a portion of such Note as set forth in
Section 7 herein, up to 5 days prior to the consummation of any such Qualified
Sale, and may also (A) receive the Qualified Sale Redemption Price on any Note
(or portion thereof) not converted on or before the date of purchase, or (B)
retain any portion of the Note not converted until its Maturity. In the event
of a Qualified Sale following a Qualified IPO, a Holder of the Note may convert
all or a portion of the Note at the applicable Conversion Price, in which event
such Holder may be entitled to any merger or similar consideration payable to
holders of Common Stock pursuant to the terms of the Qualified Sale (presuming
such Holder follows the requirements to be eligible to receive that
consideration pursuant to the terms of the Qualified Sale) or to continue to
hold the unconverted Note, which will become an obligation of the acquiring,
surviving or successor entity upon the effectiveness of the Qualified Sale.

 

27

(iii) The Company, or the acquiring or
surviving entity, as the case may be, shall provide a written notice within
five Business Days of the close of the Qualified Sale setting forth the terms and
conditions of the offer to purchase the Notes.

(b)           The
Company will not, and will not permit its Subsidiaries to (except in connection
with mergers of any Subsidiary with and into the Company), enter into, or
permit to occur, a Change of Control transaction prior to a Qualified IPO that
does not satisfy the conditions in clause (ii) of the definition of “Qualified
Sale,” unless the acquiring, surviving or successor entity agrees in writing to
make an offer to purchase the Note (and all other Notes), such purchase to be
effected and consummated simultaneously with the closing of such transaction at
a price equal to the Principal Amount plus (i) accrued and unpaid interest up
to but excluding the date of purchase and (ii) the Holder’s pro rata portion of
any undistributed Escrow Funds not yet applied to the payment of interest on
the Notes, computed as of the business day preceding the date of purchase.  The Company and the acquiring or surviving
entity shall provide Holders a written notice, 15 days prior to the proposed
consummation of such Change of Control transaction, setting forth the terms and
conditions of the offer to purchase the Notes pursuant to this Section.

9.             Conversion Price
Adjustment.

Following
the consummation of a Conversion Event, the Conversion Price shall be adjusted
from time to time by the Company as follows:

(a)           In case the Company shall (i) pay a
dividend on its Common Stock in shares of Common Stock, (ii) make a
distribution on its Common Stock in shares of Common Stock, (iii) subdivide its
outstanding Common Stock into a greater number of shares, or (iv) combine its
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect immediately prior thereto shall be adjusted so that the Holder of any
Note thereafter surrendered for conversion shall be entitled to receive that
number of shares of Common Stock which it would have owned had such Note been
converted immediately prior to the happening of such event. An adjustment made
pursuant to this subsection 9(a) shall become effective immediately after the
record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of subdivision or
combination.

(b)           In case the Company shall distribute
rights, options or warrants to all or substantially all holders of its Common
Stock entitling them (for a period of not more than 60 days after such
issuance) to subscribe for or purchase shares of Common Stock (or securities
convertible into or exercisable or exchangeable for Common Stock) at a price
per share (or having a conversion, exercise or exchange price per share) less
than the Current Market Price per share of Common Stock (as determined on the
record date for the determination of stockholders entitled to receive such
rights, options or warrants (or if no record date is fixed, the Business Day
immediately prior to the date of announcement of such issuance)) (treating the
conversion, exercise or exchange price per share of the securities convertible
into or exercisable or exchangeable for Common Stock as equal to (x) the sum of
(i) the price for a unit of the security convertible into or exercisable or
exchangeable for Common Stock and (ii) any additional consideration initially
payable upon the conversion of such security into or exercise or exchange of
such security for Common Stock divided by (y) the number of shares of Common
Stock initially underlying such security), the Conversion Price in effect
immediately prior thereto shall

 

28

be
adjusted so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to such record date by a fraction
of which:

(i)            the numerator shall be the number of shares of Common
Stock outstanding on the close of business on such record date (or if no record
date is fixed, the date immediately prior to the date of announcement of such
issuance), plus the number of shares which the aggregate offering price of the
total number of shares of Common Stock so offered (or the aggregate conversion,
exercise or exchange price of the securities so offered, which shall be
determined by multiplying the number of shares of Common Stock issuable upon
conversion, exercise or exchange of such securities by the applicable
conversion, exercise or exchange price per share of Common Stock pursuant to
the terms of such securities) would purchase at the Current Market Price per
share of Common Stock on such record date; and

(ii)           the denominator shall be the number of shares of Common
Stock outstanding on the close of business on such record date with respect to
such distribution (or if no record date is fixed, the date immediately prior to
the date of announcement of such issuance), plus the number of additional
shares of Common Stock offered (or into which the securities so offered are
convertible, exchangeable or exercisable).

                Such adjustment shall be made
successively whenever any such rights, options or warrants are issued, and
shall become effective immediately after such record date. If at the end of the
period during which such rights, options or warrants are exercisable not all
rights, option or warrants shall have been exercised, the adjusted Conversion
Price shall be immediately readjusted to what it would have been based upon the
number of additional shares of Common Stock actually issued (or the number of
shares of Common Stock issuable upon conversion of convertible securities
actually issued).

(c)           (i) In case the Company shall distribute to all or
substantially all holders of its Common Stock any shares of capital stock of
the Company (other than Common Stock), evidences of indebtedness or other
non-cash assets (including securities of any person other than the Company but
excluding (A) dividends or distributions paid exclusively in cash or (B)
dividends or distributions referred to in subsection 9(a) hereof, shall
distribute to all or substantially all holders of its Common Stock rights or
warrants to subscribe for or purchase any of its securities (excluding those
rights and warrants referred to in subsection 9(b) hereof and also excluding
the distribution of rights to all holders of Common Stock pursuant to a Rights
Plan (as defined below) adopted before the date of this Note), then in each
such case the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the current Conversion Price by a fraction
of which:

(A)          the numerator shall be Current Market Price per share of
the Common Stock on the record date mentioned below less the fair market value
on such record date (as determined by the Board, whose determination shall be
conclusive evidence of such fair market value and which shall be evidenced by
an Officer’s Certificate delivered to the Holders) of the portion of the
capital stock, evidences of indebtedness or other non-cash assets so
distributed or of such rights, options or warrants applicable to one share of
Common Stock (determined on the basis of the number of shares of Common Stock
outstanding on the record date); and

(B)           the denominator shall be the Current Market Price per
share of the Common Stock on such record date.

 

29

 

                Such adjustment shall be made
successively whenever any such distribution is made and shall become effective immediately after the record date
for the determination of stockholders entitled to receive such
distribution.

(ii) In the event the then
fair market value (as so determined) of the portion of the capital stock,
evidences of indebtedness or other non-cash assets so distributed or of such
rights or warrants applicable to one share of Common Stock is equal to or
greater than the Current Market Price per share of the Common Stock on such
record date, in lieu of the foregoing adjustment, adequate provision shall be
made prior to the time the foregoing adjustment could otherwise be made in a
writing delivered to the Holders so that each Holder of a Note shall have the
right to receive upon conversion the amount of capital stock, evidences of
indebtedness or other non-cash assets so distributed or of such rights or warrants
such Holder would have received had such holder converted each Note on such
record date. In the event that such dividend or distribution is not so paid or
made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared. If the Board determines
the fair market value of any distribution for purposes of this subsection 9(c)
by reference to the actual or when issued trading market for any securities, it
must in doing so consider the prices in such market over the same period used in computing the Current Market Price of the
Common Stock.

                Notwithstanding the foregoing,
if the securities distributed by the Company to all or substantially  all holders of its Common Stock consist of capital
stock of, or similar equity interests in, a Subsidiary or other business
unit, the Conversion Price shall be decreased so that the same shall be equal to the price determined by
multiplying the Conversion Price in effect on the record date with
respect to such distribution by a fraction:

(A)          the numerator of which shall be the average Closing Price
of one share of Common Stock over the Spinoff Valuation Period (as defined
below), such adjustment to become effective immediately prior to the opening of
business on the fifteenth Trading Day after the date on which “ex-dividend
trading” commences; and

(B)           the denominator of which shall be the sum of (x) the
average Closing Price of one share of Common Stock over the ten consecutive
Trading Day period (the “Spinoff Valuation Period”)
commencing on and including the fifth Trading Day after the date on which “ex-dividend
trading” commences on the Common Stock on the Nasdaq Global Market or such
other national or regional exchange or market
on which the Common Stock is then listed or quoted and (y) the average
Closing Price over the Spinoff Valuation Period of the portion of the
securities so distributed applicable to one share of Common Stock.

                In lieu of the foregoing, the Company may at the time
of the public announcement of such distribution elect in a writing provided to
the Holders to reserve the pro rata portion of such Notes so that each Holder of
securities shall have the right to receive upon conversion the amount of such
shares of capital stock or similar equity interests of such Subsidiary or
business unit that such Holder of Notes would have received if such Holder of
Notes had converted such Notes on the record date with respect to such
distribution.

                              (iii)   With respect to any rights (the “Rights”)  that
may be issued or distributed pursuant to any
rights plan of the Company (any Rights that may be issued pursuant to any
rights  plan being referred to as,
a “Rights Plan”),  upon conversion
of the

 

30

 

Notes into Common Stock, to the extent that
such Rights Plan is in effect upon such conversion, the holders of Notes will
receive, in addition to the Common Stock, the Rights described therein (whether
or not the Rights have separated from the Common Stock at the time of conversion),
subject to the limitations set forth in any such Rights Plan. If the Rights
Plan provides that upon separation of rights
under such plan from the Common Stock that the Holders would not be
entitled to receive any such rights in respect of the Common Stock issuable
upon conversion of the Notes, the Conversion
Price will be adjusted as provided herein (with such separation deemed to be
the distribution of such rights), subject to readjustment in the event
of the expiration, termination or redemption of the rights. Any distribution of
rights or warrants pursuant to a Rights Plan complying with the requirements
set forth in the immediately preceding sentence of this paragraph shall not
constitute a distribution of rights or warrants pursuant to this subsection
9(c)

                              (iv)          Rights, options or warrants (other
than rights issued pursuant to a Rights Plan) distributed
by the Company to all or substantially all holders of Common Stock entitling the
holders thereof to subscribe for or purchase shares of the Company’s Capital
Stock (either initially or under certain circumstances), which rights, options
or warrants, until the occurrence of a specified event or events (a “Trigger
Event”):  (A)
are deemed to be transferred with such shares of Common Stock; (B) are not
exercisable; and (C) are also issued in respect of future issuances of Common
Stock (including issuances of Common Stock upon conversion of the Notes), shall
be deemed not to have been distributed for purposes of this Section 9 (and no
adjustment to the Conversion Price under this Section 9 will be required) until
the occurrence of the earliest Trigger Event, whereupon such rights and
warrants shall be deemed to have been distributed and an appropriate adjustment
(if any is required) to the Conversion Price shall be made under this
subsection 9(c). If any such right, option or warrant, including any such
existing rights, options or warrants distributed prior to the date of this
Note, are subject to events, upon the occurrence of which such rights, options
or warrants become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the date of the occurrence of any and each
such event shall be deemed to be the date of distribution and record date with
respect to new rights or warrants with such rights (and a termination or
expiration of the existing rights, options or warrants without exercise by any
of the holders thereof). In addition, in the event of any distribution (or
deemed distribution) of rights, options or warrants, or any Trigger Event or
other event (of the type described in the preceding sentence) with respect
thereto that was counted for purposes of calculating a distribution amount for
which an adjustment to the Conversion Price under this Section 9 was made, (1)
in the case of any such rights, options or warrants which shall all have been
redeemed, purchased by the Company or repurchased without exercise by any
holders thereof, the Conversion Price shall be readjusted upon such final
redemption, purchase by the Company or repurchase to give effect to such
distribution or Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by
a holder or holders of Common Stock with respect to such rights or warrants
(assuming such holder had retained such rights or warrants), made to all or
substantially all holders of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of such rights, options or warrants which shall
have expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not
been issued.

(d)           In case the Company shall, by
dividend or otherwise, at any time distribute (a “Triggering Distribution”)  to all or substantially all
holders of its Common Stock cash, the Conversion Price shall be decreased so
that the same shall equal the price determined by

 

31

multiplying
such Conversion Price in effect immediately prior to the Business Day
immediately preceding the day on which such Triggering Distribution is declared
(a “Determination Date”)  by a fraction of which:

(i)
the numerator shall be the Current Market Price per share of the Common Stock on the Determination Date less the sum
of the Triggering Distribution applicable to one share of Common Stock
(determined on the basis of the number of shares of Common Stock outstanding on
the Determination Date); and

(ii)
the denominator shall be such Current Market Price per share of the Common
Stock on the Determination Date.

                Such decrease to become
effective immediately prior to the opening of business on the day following the
date on which the Triggering Distribution is paid.

(e)           In case the Company or any of its Subsidiaries shall purchase
any shares of the Common Stock by means of tender offer, then immediately prior
to the opening of business on the day after the last date (the “Expiration Date”)  tenders could have been made pursuant to such tender
offer (as it may be amended) (the last time at which such tenders could have
been made on the Expiration Date is hereinafter sometimes called the “Expiration Time”),  the Conversion Price shall be decreased so that the
same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the close of business on the Expiration Date by a
fraction of which:

                (i)            the
numerator shall be the product of the number of shares of Common Stock
outstanding (including Purchased Shares but excluding any shares held in the
treasury of the Company) immediately prior to the Expiration Time multiplied by
the Current Market Price per share of the Common Stock (as determined on the Trading Day next
succeeding the Expiration Date); and

(ii)           the denominator
shall be the sum of (A) the aggregate consideration (determined as aforesaid)
payable to stockholders based on the acceptance (up to any maximum specified in
the terms of the tender offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the “Purchased Shares”)  and (B) the product of the number
of shares of Common Stock outstanding (less any Purchased Shares and excluding
any shares held in the treasury of the Company) immediately prior to the
Expiration Time and the Current Market Price per share of Common Stock on the
Trading Day next succeeding the Expiration Date.

For purposes of this
subsection 9(e), the aggregate consideration in any such tender offer shall
equal the sum of the aggregate amount of cash consideration and the aggregate
fair market value (as determined by the Board, whose determination shall be
conclusive evidence thereof and which shall be evidenced by an Officer’s
Certificate delivered to the Holders) of any other consideration payable in
such tender offer. Such decrease will become effective immediately prior to the
opening of business on the day following the Expiration Date. In the event that
the Company is obligated to purchase shares pursuant to any such tender offer,
but the Company is permanently prevented by applicable law from effecting any
or all such purchases or any or all such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
have been in effect based upon the number of shares actually purchased.  If the application of this subsection 9(e) to
any tender offer would result in an increase in the

 

32

 

Conversion Price, no
adjustment shall be made for such tender offer under this subsection 9(e).  For purposes of this subsection 9(e), the
term “tender offer” shall mean and include both tender offers and exchange
offers, all references to “purchases” of shares in tender offers (and all
similar references) shall mean and include both the purchase of shares in
tender offers and the acquisition of shares pursuant to exchange offers, and
all references to “tendered shares” (and all similar references) shall mean and
include shares tendered in both tender offers and exchange offers.

(f)            In any case in which this Section 9
shall require that an adjustment be made following a record date or a
Determination Date or Expiration Date, as the case may be, established for purposes of this Section 9, the
Company may elect to defer (but only until five Business Days following
the filing by the Company with the Holders of the certificate described below)
issuing to the Holder of any Note converted after such record date or  Determination Date or Expiration Date the
shares of Common Stock and other capital stock of the Company issuable upon
such conversion over and above the shares of Common Stock and other capital
stock of the Company issuable upon such conversion only on the basis of the
Conversion Price prior to adjustment; and, in lieu of the shares the issuance
of which is so deferred, the Company shall issue or cause its transfer agents
to issue due bills or other appropriate evidence prepared by the Company of the
right to receive such shares. If any distribution in respect of which an
adjustment to the Conversion Price is required to be made as of the record date
or Determination Date or Expiration Date therefor is not thereafter made or
paid by the Company for any reason, the Conversion Price shall be readjusted to
the Conversion Price which would then be in effect if such record date had not
been fixed or such effective date or Determination Date or Expiration Date had
not occurred.

(g)           Whenever the Conversion Price or conversion privilege is
adjusted (or at any time upon request by a Holder), the Company shall promptly
mail to Holders a notice of the adjustment and an Officer’s Certificate briefly
stating the facts requiring the adjustment and the manner of computing it.
Unless and until the Holders shall receive an Officer’s Certificate setting
forth an adjustment of the Conversion Price, the Holders may assume without
inquiry that the Conversion Price has not been adjusted and that the last
Conversion Price of which it has knowledge remains in effect.

(h)             Without limiting the Company’s
covenants in Sections 4 and 8 hereof, if any of the following shall occur,
namely: (i) any reclassification or change of shares of Common Stock issuable
upon conversion of the Notes (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination, or any other change for which an adjustment is
provided above); (ii) any consolidation or merger or combination to which the
Company is a party other than a merger in which the Company is the continuing
corporation and which does not result in any reclassification of, or change
(other than in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination) in,
outstanding shares of Common Stock; or (iii) any sale or conveyance as an
entirety or substantially as an entirety of the property and assets of the
Company, directly or indirectly, to any person, then the Company, or such
successor, purchasing or transferee corporation, as the case may be, shall, as
a condition precedent to such reclassification, change, combination,
consolidation, merger, sale or conveyance, amend this Note to provide that the
Holder of each Note
then outstanding shall have the right to convert such Note into the kind and
amount of shares of stock and other securities and property

 

33

(including
cash) receivable upon such reclassification, change, combination,
consolidation, merger, sale or conveyance by a holder of the number of shares
of Common Stock deliverable upon conversion of such Note immediately prior to such reclassification, change, combination,
consolidation, merger, sale or conveyance. Such amended Note shall
provide for adjustments of the Conversion Price which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Price
provided for in this Section 9. If, in the case of any such consolidation,
merger, combination, sale or conveyance, the stock or other securities and
property (including cash) receivable thereupon by a holder of Common Stock
include shares of stock or other securities and property of a person other than
the successor, purchasing or transferee corporation, as the case may be, in
such consolidation, merger, combination, sale or conveyance, then such amended
Note shall also be executed by such other person and shall contain such
additional provisions to protect the interests of the Holders of the Notes as
the Board shall reasonably consider necessary by reason of the foregoing. The
provisions of this paragraph shall similarly apply to successive
reclassifications, changes, combinations, consolidations, mergers, sales or
conveyances.

10.           Security Interests; Release of Security.

Payments
on this Note are secured under the terms of the Security Agreement dated as of
March 30, 2007 by and among the Company, the Holders and The Bank of New York,
solely in its capacity as Collateral Agent for the ratable benefit of the
Holders from time to time, and the Company (the “Security
Agreement”).

The
Security Agreement provides that upon the earlier to occur of (i) consummation
of a Conversion Event, or (ii) full payment and performance of the Obligations,
the Collateral Documents and all of the covenants, agreements and obligations
of the Company thereunder shall terminate and shall have no further force or
effect and all security interests, Liens, pledges, mortgages and other
encumbrances of any kind whatsoever created pursuant to any of the Collateral
Documents shall be terminated and released.

11.           Denominations;
Transferability; Exchange.

(a)           The Notes are issuable in certificate
form, without coupons, in denominations of $1,000 and integral multiples of
$1,000 in excess thereof.

(b)           This
Note, the PIK Notes and any Common Shares issued upon the conversion of this
Note and the PIK Notes may be offered, sold, assigned or transferred by the
Holder without the consent of the Company; provided, however, that all such
offers, sales, assignments or transfers are effected in compliance with
Sections 2(g) and 2(h) of the Securities Purchase Agreement.

(c)           If the Company shall have given a
Redemption Notice pursuant to Section 6 herein, the Company will not be
required to register the transfer of, or exchange, Notes for a period of 15
Business Days immediately preceding the Redemption Date specified in the
Redemption Notice.

12.           Reissuance of
this Note.

 

34

(a)           Transfer.  If this Note is to be transferred, the Holder
shall surrender this Note to the Registrar, whereupon the Company will
forthwith issue and the Registrar shall deliver upon the order of the Holder a
new Note (in accordance with Section 12(d)), registered as the Holder may
request, representing and evidencing the same outstanding Principal being
transferred by the Holder and, if less than the entire outstanding Principal is
being transferred, a new Note (in accordance with Section 12(d)) to the Holder
representing and evidencing the same outstanding Principal not being
transferred.  The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that following
conversion or redemption of any portion of this Note, the outstanding Principal
evidenced by this Note may be less than the Principal stated on the face of
this Note. The Holder and any assignee, by acceptance of the Note, acknowledge
and agree that they are bound by the terms of the Security Agreement and
further agree, at the request of the Collateral Agent, to execute and deliver
an assumption agreement in favor of the Collateral Agent with respect to the
Security Agreement, in form and substance acceptable to the Collateral Agent.

(b)           Lost,
Stolen or Mutilated Note.  Upon
receipt by the Registrar of evidence reasonably satisfactory to the Registrar
of the loss, theft, destruction or mutilation of this Note, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Holder to
the Registrar in customary form and, in the case of mutilation, upon surrender
and cancellation of this Note, the Company shall execute and the Registrar
shall deliver to the Holder a new Note (in accordance with Section 12(d))
representing and evidencing the same outstanding Principal.

(c)           Note
Exchangeable for Different Denominations. 
This Note is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Registrar, for a new Note or Notes (in accordance
with Section 12(d) and in Principal amounts of at least $100,000) representing
in the aggregate and evidencing the same outstanding Principal of this Note,
and each such new Note will evidence such portion of such outstanding Principal
as is designated by the Holder at the time of such surrender.

(d)           Issuance
of New Notes.  Whenever the Registrar
is required to issue a new Note pursuant to the terms of this Note, such new
Note (i) shall be of like tenor with this Note, (ii) shall evidence the same
and represent, as indicated on the face of such new Note, the Principal
remaining outstanding (or in the case of a new Note being issued pursuant to
Section 12(a) or Section 12(c), the Principal designated by the Holder which, when
added to the Principal represented by the other new Notes issued in connection
with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an
issuance date, as indicated on the face of such new Note, which is the same as
the Issuance Date of this Note, (iv) shall have the same rights and conditions
and evidence the same indebtedness as this Note, and (v) shall evidence accrued
Interest on the Principal and Interest of this Note, from the Issuance Date.

13.           Persons Deemed
Owners.

The registered Holder of this Note shall be
treated as its owner for all purposes.

 

35

14.           Amendment; Supplement; Waiver.

Notwithstanding
the following paragraph of this Section 14, the Company may amend or supplement
the Notes without the consent of any Holder in a manner that does not adversely
affect the legal rights or remedies hereunder of any Holder or impair the
obligations of the Company hereunder (A) to cure any ambiguity, defect or
inconsistency and (B) to make changes that would provide any additional rights
or benefits to the Holders.  After an
amendment or supplement under this paragraph becomes effective, the Company
will provide Holders with written notice describing such amendment or
supplement and, as applicable, substitute Notes to replace Notes whose terms
were so amended or supplemented.

Except
as provided in the following paragraph of this Section 14, the Company may
amend or supplement the Notes with the consent of the Holders of at least a
majority in aggregate outstanding Principal of the Notes issued; and, subject
to Section 14, any existing Event of Default (other than an Event of Default in
the payment of the Principal of or interest on the Notes, except a payment
default resulting from an acceleration that has been rescinded) or compliance
with any provision of the Notes, may be waived with the consent of the Holders
of a majority in aggregate outstanding Principal of the then outstanding Notes.

However,
without the consent of each Holder affected, an amendment or waiver under this
Section 14 may not (with respect to any Notes held by a non-consenting Holder)
(A) reduce the aggregate outstanding Principal of Notes whose holders must
consent to an amendment, supplement or waiver, (B) reduce the Principal of or
the Terminal Value Payment, if any, whether payable upon redemption,
repurchase, at Maturity, acceleration or otherwise, or change the fixed
maturity of any Note or any other date for the required payment of Principal on
any Note, (C) reduce the rate of or change the time for payment of interest,
including default interest, on any Note or otherwise reduce the amounts payable
under any Note or change the scheduled time of payment therof, (D) waive a
default or Event of Default in the payment of Principal of or interest on the
Notes (except a rescission of acceleration of the Notes and a waiver of the
payment default that resulted from such acceleration as provided in Section
15), (E) make any Note payable in money other than that stated in the Notes,
(F) adversely affect the conversion rights of Holders of the Notes set forth in
Sections 7, 8 and 9, (G) reduce the amount of any Additional Payment Amounts,
if any, (H) amend or modify the pro rata or pari passu treatment of Holders set
forth in Sections 4(q), 6(d), 8(a)(i) or 8(b) or amend or modify the amendment
and waiver provisions of this Section 14 or Section 15, (I) modify any of the
provisions in the Transaction Documents to purport to subordinate the payment of
any Notes to the payment of other obligations, (J) amend or modify any of the
provisions of Section 6 in a manner adverse to the Holders of the Notes, (K)
amend or modify any of the provisions of the Security Agreement in a manner
adverse to the Holders of the Notes or (L) permit the assignment by the Company
or any of its Subsidiaries of any of their respective rights or obligations
under this Note, the Securities Purchase Agreement or the Collateral Documents,
except any assignment expressly permitted under this Note as constituted on the
date hereof.  The Company will not offer
consideration to any Holder for any waiver or amendment under this Section 14,
unless the same consideration is offered ratably to the Holders all Notes then
outstanding.

Any
amendment to the Notes made in conformity with the provisions of this Section
14 shall be binding on all Holders of Notes. 
Any Notes purchased by any Affiliates of the Company

 

36

(except Subsidiaries) do not
have any right to consent to any amendment or otherwise pursuant to these
provisions.  For purposes of this
paragraph, “Affiliate” shall mean any officer or director of the Company or any
stockholder with beneficial ownership of 10% or more of the voting stock of the
Company and any Person controlled by any of the foregoing.

No reference herein to the Securities
Purchase Agreement and no provision of this Note or of the Securities Purchase
Agreement shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the Principal of and interest (including the
Additional Payment Amounts and/or the Terminal Value Payment, if any) on this
Note at the times, places and rate, and in the coin or currency, herein
prescribed or to convert this Note as provided herein and in the Securities
Purchase Agreement.

15.           Events of Default; Remedies.

Each of the following constitutes an “Event of Default” when it occurs
(whatever the reason for such Event of Default):

(a)           the Company defaults
in the payment of interest, including Additional Payment Amounts and/or the
Terminal Value Payment, if any, or any other amount not described in Section
15(b) below, on the Notes when due and payable and such default continues for a
period of 15 days;

(b)           the Company defaults
in the payment of Principal of any Note at Maturity, or upon repurchase,
redemption or otherwise (including in connection with an offer to purchase or
repurchase);

(c)           the Company fails to
deliver shares of Common Stock (together with cash in lieu of fractional
shares) when such Common Stock (or cash in lieu of fractional shares) is
required to be delivered following conversion of a Note and continuance of such
default for a period of 5 days;

(d)           the Company defaults
in the performance of or breaches any other material covenants, representations
or agreements herein or in any of the Transaction Documents (other than a
default specified in any of the preceding three subclauses) and such default or
breach continues for a period of 15 consecutive days following knowledge of an
Officer or written notice thereof from any Holder, unless waived in writing by
Holders of 51% or more in aggregate outstanding Principal of the Notes (to the
extent permitted under Section 14);

(e)           there occurs with
respect to any agreement, indenture or instrument under which the Company has
Indebtedness of $1,000,000 or more in the aggregate, not including any amounts
owed under reimbursement or similar obligations to banks, sureties or other
entities which have issued letters of credit, surety bonds, performance bonds
or other guarantees relating to the performance by the Company or its
Subsidiaries of contractual obligations to customers, to the extent any demands
made under any such reimbursement or similar obligation relate to a draw under
the related letter of credit or other instrument which draw is being contested
in good faith through appropriate proceedings, whether such Indebtedness now
exists or shall hereafter be created, (A) a default with respect to any payment
obligation thereunder that then entitles the holder thereof to declare such
Indebtedness to be due and payable prior to its stated maturity, or

 

37

(B) any other default thereunder that entitles, and has caused, the
holder thereof to declare such indebtedness to be due and payable prior to its
stated maturity;

(f)            the security
interest granted by the Company to the Holders under the Security Agreement
shall no longer provide such Holders with a valid, perfected first priority
security interest in the Collateral thereunder (subject to Permitted Liens), or
the Security Agreement shall no longer be in full force or effect according to
its terms, provided however, that, upon and
after the consummation of a Conversion Event, this subclause (f) shall not
constitute an “Event of Default”;

(g)           the entry by a court
having jurisdiction in the premises of (i) a decree or order for relief in
respect of the Company or any material Subsidiary in an involuntary case or
proceeding under any applicable U.S. federal or state bankruptcy, insolvency,
reorganization or other similar law, (ii) a decree or order adjudging the
Company or any material Subsidiary a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any material Subsidiary under
any applicable U.S. federal or state law, or appointing a Custodian of the
Company or any material Subsidiary or of any substantial part of their
respective property, or ordering the winding up or liquidation of its affairs, or
(iii) an order or judgment invalidating the validity or enforceability of one
or more Intellectual Property Rights (as such term is defined in the Securities
Purchase Agreement) which could reasonably be expected to have a Material
Adverse Effect, and in the case of clauses (i), (ii) or (iii) the continuance
of any such decree, order or judgment is unstayed and in effect for a period of
60 consecutive days;

(h)           the commencement by
the Company or any material Subsidiary of a voluntary case or proceeding under
any applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the consent by the Company or any material Subsidiary to the
entry of a decree or order for relief in respect of the Company or any material
Subsidiary in an involuntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against the
Company or any material Subsidiary, or the filing by the Company or any
material Subsidiary of a petition or answer or consent seeking reorganization
or relief under any applicable federal or state law, or the consent by the
Company or any material Subsidiary to the filing of such petition or to the
appointment of or the taking possession by a Custodian of the Company or any
material Subsidiary or of any substantial part of its property, or the making
by the Company or any material Subsidiary of an assignment for the benefit of
creditors, or the admission by the Company or any material Subsidiary in
writing of its inability to pay its debts generally as they become due, or the
taking of corporate action by the Company or any material Subsidiary expressly
in furtherance of any such action;

(i)            if the Company
shall not have filed or recorded with respect to the Collateral (i) the initial
financing statement with the Delaware Secretary of State and (ii) the
confirmations of grant of security interest in trademarks and patents with the
appropriate offices of the United States Patent and Trademark Office, in each
case, within 3 Business Days following the Closing Date; or

(j)            if one or more
judgments or decrees shall be entered against the Company or any Subsidiary and
shall not have been stayed, vacated, satisfied, discharged or bonded pending

 

38

appeal within 30 days after the entry, which judgments or decrees
involve, in the aggregate, at any one time outstanding, a liability of
$1,000,000 or more.

If
an Event of Default (other than an Event of Default specified in subclauses (a)
through (c) above) occurs and is continuing, the Holders of at least 51% in
aggregate outstanding Principal of the Notes, by written notice to the Company,
may declare due and payable 100% of the Principal Amount of all Notes plus any
accrued and unpaid interest (including the Additional Payment Amounts, if any)
to the date of payment. If an Event of Default specified in subclauses (a)
through (c) above occurs and is continuing, then and in every such case the
Holder of any Note may declare the Principal Amount of such Note plus any
accrued and unpaid interest (including the Additional Payment Amounts, if any)
to be due and payable immediately, by notice in writing to the Company, and
upon any such declaration such Principal Amount shall be immediately due and
payable. If an Event of Default specified in subclauses (g) or (h) above
occurs, the Principal Amount of, and accrued interest on, all the Notes shall
automatically, and without any declaration or other action on the part of any
Holder, become immediately due and payable. 
Upon a declaration of acceleration, such Principal Amount and accrued
and unpaid interest to the date of payment shall be immediately due and
payable, and such Holders (or the Collateral Agent, as applicable) shall have
the right to exercise the applicable remedies set forth in the Security
Agreement.

The
Holders of not less than a majority in aggregate Principal of the Notes through
notice to the Company may, on behalf of the Holders of all of the Notes,
rescind and annul an acceleration and its consequences if:

•                    all existing
Events of Default, other than the nonpayment of Principal of or premium, if
any, or interest on the Notes which have become due solely because of the
acceleration, have been remedied, cured or waived, and

•                    the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction;

provided, however,
that in the event such declaration of acceleration has been made based on the
existence of an Event of Default under subclause (d) above and the default with
respect to Indebtedness for money borrowed which gave rise to such Event of
Default has been remedied, cured or waived, then, without any further action by
the Holders, such declaration of acceleration shall be rescinded automatically
and the consequences of such declaration shall be annulled. No such rescission
or annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.

The
Holders, through the written consent of not less than a majority in aggregate
Principal of the Notes, may, on behalf of the Holders of all of the Notes,
waive an existing Event of Default, except an Event of Default:

•                    in the payment
of the Principal of or premium, if any, or interest (including the Additional
Payment Amounts and/or the Terminal Value Payment, if any) on any Note; or

 

39

•                    in respect of a covenant or provision hereof which
cannot be modified or amended without the consent of the Holders of all
Outstanding Notes affected.

Upon any such waiver any
Event of Default arising therefrom shall be deemed to have been cured for every
purpose of this Agreement; provided, however,
that no such waiver shall extend to any subsequent or other Event of Default or
impair any right consequent thereon.

16.           Expenses.

If
(i) this Note is placed in the hands of an attorney for collection or
enforcement or is collected or enforced through any legal proceeding or the
Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note, (ii) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Note (iii) this Note
or any of the other Transaction Documents is subject to any amendment, waiver
or consent, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding or such amendment, waiver or
consent, including, but not limited to, attorneys’ fees and disbursements.

17.           Waiver.

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

18.           Governing Law.

This Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of New
York.  Each party agrees that all
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Note (whether brought against a party hereto
or its respective Affiliates, employees or agents) may be commenced in the
state and federal courts sitting in the City of New York, Borough of Manhattan
(the “New York Courts”).  Each party hereto hereby irrevocably submits
to the non-exclusive jurisdiction of the New York Courts for the adjudication
of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any proceeding, any claim that it is not personally
subject to the jurisdiction of any New York Court, or that such proceeding has
been commenced in an improper or inconvenient forum.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law.  Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any proceeding arising out of or relating to this
Note or the transactions contemplated hereby. 
If either party shall commence a proceeding to enforce any provisions of
this Note, then the prevailing party in such proceeding shall be reimbursed by
the other party for its attorney’s fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such proceeding.

 

40

19.           Rights and Remedies Cumulative.

No
right or remedy conferred in this Note upon or reserved to the Holders of Notes
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or employment
of any other appropriate right or remedy.

 

[Remainder of Page
Intentionally Left Blank; Signature Page Follows]

 

41

IN WITNESS WHEREOF, the Company has caused
this Note to be duly executed by its duly authorized officer as of the date set
forth above.

 

	
   

  	
  POWER MEDICAL INTERVENTIONS,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John Gandolfo

  
	
   

  	
   

  	
  Name: John Gandolfo

  
	
   

  	
   

  	
  Title: Chief Financial
  Officer

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