Document:

ex41.htm

     

     

    

      
 

      
        

      

      
        SUBSCRIPTION
AGREEMENT

      

      
        

        FOR
Z TRIM HOLDINGS, INC.

      

      
        

         

        Z Trim
Holdings, Inc.

        1011
Campus Drive

      

      Mundelein,
IL 60060

       

      
        Ladies
and Gentlemen:

         

        

      

      
        1.           Subscription.

         

      

      
        (a)            The
undersigned (the “Purchaser”), intending to be legally bound,
hereby irrevocably agrees to purchase a unit or units (each, a “Unit” and
collectively, the “Units”) at a purchase price of $10,000 per Unit, from Z
Trim Holdings, Inc., an Illinois corporation
(the “Company”).  Each Unit consists of an 8%, 24 month-senior
secured convertible note (the “Note” or “Notes”) in the principal amount of
$10,000 convertible at the conversion price of $1.00 per share into 10,000
shares of common stock, $.00005 par value (the “Common Stock”) of Z Trim
Holdings, Inc., an Illinois corporation (the “Company” or “Z Trim”), with
interest on the Notes payable upon maturity in the form of Common Stock, and a
five year warrant exercisable for 15,000 shares of the Common Stock at an
exercise price of $1.50 per share (the
“Warrants”).  This subscription is submitted to you in accordance
with and subject to the terms and conditions described in this Subscription
Agreement, and the Confidential Private Placement Memorandum of the Company
dated as of March 25, 2009, as supplemented and restated as of August 31,
2009 and as hereinafter amended
or supplemented from time to time, including all documents incorporated by
reference therein and all attachments, schedules and exhibits thereto (the
“Memorandum”), relating to the offering  by the Company of a maximum
of 550 Units ($5,500,000) (the “Maximum Amount”) (the “Offering”).

        
 

      

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

         

      

      
        2.            Payment.  The
Purchaser encloses herewith a check payable to, or will immediately make a
wire transfer payment to, Z Trim Holdings, Inc., pursuant to the wire
instructions provided by the Company, in the full amount of the purchase price
of the Units being subscribed for (the “Subscription
Amount”).  Together with the check for, or wire transfer of, the
full Subscription Amount, the Purchaser is delivering a completed and
executed Signature Page to this Subscription Agreement.

        

      

      
        3.           Deposit of
Funds.  All payments made as provided in Section 2 hereof shall
be deposited by the Company as soon as practicable in its corporate bank
account.  If the Company rejects a Purchaser’s subscription, either in
whole or in part (which decision is in the sole discretion of the Company), the
rejected Subscription Amount or the rejected portion thereof will be returned
promptly to the Purchaser without interest accrued thereon or deduction
therefrom. The Minimum Subscription Amount for a Purchaser in the Offering is
one Unit; provided, however, that the Company may, in its sole discretion,
permit fractional Units to be purchased.

        
 

      

      
        4.            Acceptance of
Subscription.  The Purchaser understands and agrees that
the Company in its sole discretion reserves the right to accept or reject
this or any other subscription for the Units, in whole or in part,
notwithstanding prior receipt by the Purchaser of notice of acceptance of
this or any other subscription.  The Company shall have no obligation
hereunder until the Company shall execute and deliver to the Purchaser an
executed copy of this Subscription Agreement.  If Purchaser’s
subscription is rejected in whole, or the Offering is terminated, all funds
received from the Purchaser will be returned without interest, penalty,
expense or deduction, and this Subscription Agreement shall thereafter be
of no further force or effect.  If Purchaser’s subscription is
rejected in part, the funds for the rejected portion of such subscription will
be returned without interest, penalty, expense or deduction, and this
Subscription Agreement will continue in full force and effect to the extent
such subscription was accepted.

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

      
        (e)            The
Purchaser has carefully read the Memorandum including the section entitled Risk
Factors.  The  Purchaser and its Advisors, if any, have had
a reasonable opportunity to ask questions of and receive answers from a
person or persons acting on behalf of the Company concerning the offering
of the Units and the business, financial condition, results of operations
and prospects of the Company, and all such questions have been answered by
the Company to the full satisfaction of the Purchaser and its Advisors, if
any, and the Purchaser and its Advisors have had access, through the EDGAR
system, to true and complete copies of the Company’s most recent Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 (the “10-K”) as
amended, and all other reports filed by the Company pursuant to
the Securities Exchange Act of 1934, as amended(the “Exchange Act”), since
the filing of the 10-K and prior to the date hereof and have reviewed such
filings;

         

        

      

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

         

        

      

      
        (g)             Neither
the Purchaser nor any of its equity owners is aware of, or is in anyway relying
on and did not become aware of the offering of the Units through or as a result
of, any form of general solicitation or general advertising including, without
limitation, any article, notice, advertisement or other communication published
in any newspaper, magazine or similar media or broadcast over television, radio,
or over the Internet, in connection with the offering and sale of the Units and
is not subscribing for Units and did not become aware of the offering of the
Units through or as a result of any seminar or meeting to which the Purchaser
was invited by, or any solicitation of a subscription by, a person not
previously known to the Purchaser in connection with investments in securities
generally;

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

      (1)           The
purchase of the Units represents high risk capital and the Purchaser  is
able to afford an investment in a speculative venture having the risks and
objectives of the Company. The Purchaser must bear the substantial economic
risks of the investment in the Units indefinitely because none of the Units, the
Notes, the Warrants, or the Common Stock issuable upon conversion of the Notes,
in payment of the interest accrued thereon, or upon exercise of the Warrants may
be sold, hypothecated or otherwise disposed of unless subsequently registered
under the Securities Act and applicable state securities laws or an exemption
from such registration is available.  Legends shall be placed on the
securities included in the Units to the effect that they have not been
registered under the Securities Act or applicable state securities laws and
appropriate notations thereof will be made in the Company’s stock books. Stop
transfer instructions will be placed with the transfer agent of the securities
constituting the Units.  It is not anticipated that there will be any
market for resale of the Units, the Notes or  the Warrants and such
securities will not be freely transferable at any time in the foreseeable
future.  Unless made the subject of an effective registration Statement
filed under the Securities Act of 1933 (the “1933 Act”), the Common Stock
issuable upon conversion of the Notes, the payment of the interest thereon or
upon exercise of the Warrants will not be transferable until at least 6 months
after conversion or payment in full upon exercise and then only upon compliance
with the conditions of Rule 144 promulgated under the 1933 Act.

       

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

      
        (x)             The
Purchaser’s substantive relationship with the Company predates the Company’s
contact with the Purchaser regarding an investment in the Units;

         

        

      

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

         

        

      

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

         

        

      

      
        (aa)            (For ERISA plans only) The
fiduciary of the ER1SA plan (the “Plan”) represents that such fiduciary has been
informed of and understands the Company’s investment objectives, policies and
strategies, and that the decision to invest “plan assets” (as such term is
defined in ERISA) in the Company is consistent with the provisions of ERISA that
require diversification of plan assets and impose other fiduciary
responsibilities. The Purchaser or Plan fiduciary (a) is responsible for the
decision to invest in the Company; (b) is independent of the Company and any of
its affiliates; (c) is qualified to make such investment decision; and (d) in
making such decision, the Purchaser or Plan fiduciary has not relied on any
advice or recommendation of the Company or any of its affiliates.

         

        

      

      (bb)           The
Purchaser represents that it has complied  with
applicable anti-terrorism/anti-money laundering measures, and  The
Purchaser is not in violation of the Executive Order 13224 (the “Order”) or the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act  or other
anti-terrorist/anti-money laundering measures. Neither the Purchaser nor any of
its equity owners is a Specially Designated National as defined in the
Order.

       

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

         

        

      

      
        (a) The
Company is duly organized, validly existing and in good standing under the laws
of the State of Illinois. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which failure to do so would
have a material adverse effect on the assets, business, properties, operations,
financial condition or prospects of the Company and has all requisite power to
own its respective properties and to carry on its
respective  businesses as now being conducted and as proposed to be
conducted.  The Company has all requisite power to execute, deliver
and perform its obligations under the Transaction documents (as defined in the
Note);

         

        

      

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

         

        

      

      
        (c) The
security interests now or hereafter created pursuant to the Security Agreement
constitute and will constitute, together with the security interests created for
the 2008 Notes and the 2009 Notes previously issued, legal, valid perfected
first priority Liens and security interests in all of the collateral purported
to be covered thereby, subject to no superior Liens;

         

        

      

      
        (d)
Neither the execution and delivery by the Company of this Subscription Agreement
or any of the other Transaction Documents to which it is a party, nor the
offering, issuance or sale of the Units, nor the Company Notes (as defined in
the Note) and any documents executed in connection therewith, nor the
fulfillment of or compliance with the terms and provisions hereof or thereof,
will conflict with, or result in a breach or violation of the terms, conditions
or provisions of, or constitute a default under, or result in the creation of
any Lien (other than Liens created pursuant to the Security Agreements) on any
properties or assets of the Company pursuant to the organizational documents of
the Company, or any material contract, agreement, mortgage, indenture, lease or
instrument to which it is a party or by which it is bound or to which its assets
are subject, or any requirement of law to which it or its assets are subject,
which conflict, breach, violate, default or could reasonably be expected to have
a material adverse effect;

         

        

      

      
        (e) The
Company has filed in a timely manner all required registration statements,
reports, proxy statements and other filings required to be filed with or
furnished to the Commission during the twelve (12) months prior to the date of
this Agreement (the “Exchange Act Filings”).  On their respective
dates of filing, the Exchange Act Filings complied as to form in all material
respects with the requirements of the Exchange Act applicable to such Exchange
Act Filings and the Exchange Act Filings did not contain 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, in light of the circumstances in
which they were made, not misleading, and all financial statements contained in
the Exchange Act Filings fairly present in all material respects the financial
position of the Company on the dates of such statements and the results of
operations for the periods covered thereby in accordance with GAAP consistently
applied throughout the periods involved and prior periods, except as otherwise
indicated in the Exchange Act Filings including the notes to such financial
statements;

         

        

      

      
        (f)
Trading in the Company’s Common Stock has not have been suspended by the
Commission or any trading market and at any time prior to the Closing, trading
in securities generally as reported by Bloomberg Financial Markets (“Bloomberg”)
has not have been suspended or limited, and minimum prices have not have been
established on securities whose trades are reported by Bloomberg. Except as set
forth in the Exchange Act Filings, the Company is, and has no reason to believe
that it will not in the foreseeable future continue to be, in compliance with
all such listing and maintenance requirements;

         

        

      

      
        (g) Since
December 31, 2008 and through the date of this Agreement except as otherwise
reflected in the Exchange Act Filings,, (a) the business of the Company and its
Subsidiaries has been carried on and conducted in all material respects, in the
ordinary course of business consistent with past practice and (b) there has
not been any material adverse effect or any fact, circumstance, event, change,
occurrence or effect that, individually or in the aggregate, would be reasonably
expected to have a material adverse effect, and (c) there has not been:
(i) any declaration, setting aside or payment of any dividend or other
distribution in cash, stock, property or otherwise in respect of the Company’s
or any of its Subsidiaries’ capital stock, except for any dividend or
distribution by a Subsidiary to the Company; (ii) any redemption, repurchase or
other acquisition of any shares of capital stock of the Company or any of its
Subsidiaries; (iii) any material change by the Company in its accounting
principles; or (iv) any material tax election made by the Company or any of its
Subsidiaries or any settlement or compromise of any material tax liability by
the Company or any of its Subsidiaries;

         

        

      

      
        (h) The
Company has previously furnished to the Purchaser a true and correct copy of the
Company’s capitalization table as set forth in Schedule  6.1(h). The
capitalization table is true and complete. The  Company has also
previously furnished the Purchaser its Quarterly Report on Form 10Q for the
quarter ended June 30,2009 as filed with the Securities and Exchange Commission
and the unaudited financial statements therein contained present fairly, in all
material respects, the financial position of the Company as of June 30,
2009.

         

        

      

      
        (i) All
consents, approvals or authorizations of or declarations, registrations or
filings with any agency, authority, instrumentality, regulatory body, court,
administrative tribunal or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
(including any central bank or similar monetary or regulatory authority), and
any corporation or other entity owned or controlled, through stock or capital
ownership or otherwise, by any of the foregoing (“Governmental Authority”) or
any other Person, including the holders of the Company Notes, including any
creditor or stockholder of the Company, required in connection with the
execution or delivery by the Company of the Transaction Documents and the Notes
to which the Company is a party, or the performance by the Company of its
obligations hereunder and thereunder, or as a condition to the legality,
validity or enforceability of Transaction Documents and the Notes have been
obtained or effected on or prior to the date hereof;

         

        

      

      
        (j) There
are no actions, suits, or proceedings pending, or, to the Company’s knowledge,
threatened against or affecting the Company, its Subsidiaries, or any properties
or rights of any of them which, if adversely determined, individually or in the
aggregate would have a material adverse effect.  There are no actions,
suits or proceedings pending, or, to the Company’s knowledge, threatened in
writing against the Company which seek to enjoin, or otherwise prevent the
consummation of, the transactions contemplated herein or to recover any damages
or obtain any relief as a result of any of the transactions contemplated herein
in any court or before any arbitrator of any kind or before or by any
governmental authority;

         

        

      

      
        (k) All
material agreements to which the Company or any of its Subsidiary are a party or
to which the property or assets of the Company or any of its Subsidiaries are
subject are included as part of or specifically identified in the Exchange Act
Filings;

         

        

      

      
        (l) The
Company is not in default under or with respect to any provision of any of its
securities, organizational documents, or of any agreement, undertaking,
contract, indenture, mortgage, deed of trust or other instrument, document or
agreement to which it is a party or by which it or any of its property is bound
which, individually or together with all such defaults, could reasonably be
expected to have a material adverse effect;

         

        

      

      
        (m) The
Company possess all material franchises, certificates, licenses, permits,
registrations, and other authorizations from Governmental Authorities, that are
necessary for the ownership, maintenance and operation of their respective
properties and assets, and for the conduct of its businesses as now conducted,
and the Company is not in violation of any thereof in any material
respect;

         

        

      

      
        (n)  The Company is not now
and has not been,  at any time, during the past 10 years, a shell
company, as defined by Rule 405 of the Securities Act of 1933;

         

        

      

      
        (o)
Neither this Agreement nor any other document, certificate or statement
furnished to the Purchaser by or on behalf of the Company in connection
herewith, including but not limited to the Memorandum, contained, as of its
respective date, or now contains, any untrue statement of a material fact or as
of any such date omitted, or now omits, to state a material fact necessary in
order to make the statements contained herein and therein not
misleading.

         

        

      

      7.           Covenants.

       

      (a) The
Company hereby agrees that immediately following acceptance of this Subscription
Agreement and the execution and delivery to the Purchaser of the Note, Warrants
and Security Agreement, the Company shall, (i) upon written consent of holders
of a majority of the then outstanding principal amount of the 2009 Notes (of
which the Purchaser shall then constitute a majority), amend and restate all of
the 2009 Notes (including the Purchaser’s Note) (ii) and the Purchaser’s
Warrant, (iii) offer to amend the warrants held by each of the other holders of
the 2009 Notes (including the Purchaser), on terms substantially similar to the
Purchaser’s amended Warrant, and (iv) enter into a Registration Rights Agreement
with all of the holders of the 2009 Notes, all in the forms attached hereto as
Exhibit
A.  The Company represents and warrants that such documents and
agreements are substantially similar to the documents, instruments and
agreements entered into with the holders of the 2008 Notes and that no other
consents or approvals are required to effectuate the foregoing.

       

      (b) The
Company shall file with the Commission a Current Report on Form 8-K (“Form 8-K”)
disclosing the sale of unregistered securities to the Purchaser, the entry into
this Subscription Agreement and a press release announcing the sale of the Units
to the Purchaser within (2) business days of the date of the
Closing.

       

      (c)             Provided
the Purchaser has invested at least Two Million Five Hundred Thousand Dollars
($2,500,000) in the Company pursuant to this Offering or the Series A Preferred
Stock offering (the “Minimum Investment”), the Company hereby agrees to use its
reasonable best efforts to nominate a representative of the Purchaser to the
Company’s board of directors (the “Board) as soon as possible, but in no event
later than at its next annual meeting of its shareholders.  In
addition, the Company hereby agrees that as  soon as reasonably
possible and  provided (i) the Company has received the Minimum
Investment from the Purchaser, (ii) the Board has had a
reasonable  opportunity to review and vet information, submitted by
the Purchaser regarding an individual it wishes to designate as a non-voting
observer (the “Designated Observer); (iii) the Designated Observer has executed
and delivered to the Board, a confidentiality agreement in form and substance
equivalent to the confidentially obligation of a Board member of a publicly held
company and otherwise reasonably satisfactory to the Board and (iv) the Board
has approved the Designated Observer (which approval shall not be unreasonably
withheld), the Designated Observer shall thereafter be  entitled to
attend all meetings of the Board and to receive notice of all meetings of the
Board, together with copies of the materials circulated to the members of the
Board in connection with such meetings.  The Purchaser agrees to
submit such information regarding the Designated Observer as the Board may
reasonably request.

       

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

         

        

      

      
        9.           Legal Opinion.  The
Company shall have procured and delivered an opinion of counsel in form and
substance reasonably acceptable to the Purchaser.

         

        

      

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

         

        

      

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

         

        

      

      
        12.           Notices.  Any notice
or other communication required or permitted to be given hereunder shall be
in writing and shall be mailed by certified mail, return receipt requested,
or delivered against receipt to the party to whom it is to be given (a) if
to the Company, at the address set forth above or (b) if to the Purchaser,
at the address set forth on the signature page hereof (or, in either case,
to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 12). Any notice or other
communication given by certified mail shall be deemed given at the time of
certification thereof, except for a notice changing a party’s address which
shall be deemed given at the time of receipt thereof.

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

      
               
18          Miscellaneous.

         

        

      

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

         

        

      

      
        (b)           Each
of the Purchaser’s and the Company’s representations and warranties made in
this Subscription Agreement shall survive the execution and delivery hereof and
delivery of the Notes, the Warrants, the Security Agreements, the Registration
Rights Agreement, and the Common Stock issuable upon conversion of the Notes, in
payment of the interest accrued thereon, or issuable upon the exercise of the
Warrants.

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

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

         

        

      

      
        

         

        

      

      
        [REMAINDER
OF THIS PAGE IS BLANK]

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      
        

      

      ANTI-MONEY
LAUNDERING REQUIREMENTS

      

      

      
        	
                The
      USA PATRIOT Act

                 

              	
                What
      is money laundering?

              	
                How
      big is the problem and why is it important?

              
	
                 

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

                 

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

              	
                 

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

              	
                 

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

              

      

      

      
        	 
      
	
                 

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

              	
                 

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

              

      

      

      

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Z
TRIM HOLDINGS, INC.

      SIGNATURE
PAGE TO

      SUBSCRIPTION
AGREEMENT, SECURITY AGREEMENT, PATENT SECURITY AGREEMENT AND TRADEMARK SECURITY
AGREEMENT

      
        

      

      
        Purchaser
hereby elects to purchase a total of 185.25 Units at a
price of $10,000 per Unit
(NOTE: to be completed by the Purchaser).

        

        

        Date
(NOTE: To be completed by the Purchaser): October 15, 2009

         

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

      

      

      ____________________________                                                                           ______________________________

      Print
Name(s)                                                                                    Social Security
Number(s)

      

      ___________________________                                                                    ______________________________

      Signature(s) of
Purchaser(s)                                                                                       Signature

      

      ____________________________                                                                           ______________________________

      Date                                                                                          
Address

       

       

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

      

      BrightlineVentures I,
LLC                                                                           ______________________________

      By: Brightline GP,
LLC                                                                               Federal
Taxpayer Identification Number

      Managing
Member of the Purchaser

      

      

      By:_________________________                                                                                     ______________________________

            Name:                                                                                        State of
Organization

            Title:

      

      ____________________________                                                                                     ______________________________

      Date                                                                                           
  Address

      

      

      

      Z
TRIM HOLDINGS, INC.

      

      

      

      By:           __________________________

      Authorized Officer

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Z
TRIM HOLDINGS, INC.

      ACCREDITED
INVESTOR CERTIFICATION

      

      For
Individual Investors Only

      (all
Individual Investors must INITIAL where
appropriate):

      

      
        	
                Initial
      _______

              	
                I
      certify that I have a net worth
      (including home, furnishings and automobiles) in excess of $1 million
      either individually or through aggregating my individual holdings and
      those in which I have a joint, community property or other similar shared
      ownership interest with my spouse.

              

      

      
        	
                Initial
      _______

              	
                I
      certify that I have had an
      annual gross income for the past two calendar years of at least $200,000
      (or $300,000 jointly with my spouse) and expect my income (or joint
      income, as appropriate) to reach the same level in the current
      year.

              

      

      
        	
                Initial
      _______

              	
                I
      certify that I am a director or
      executive officer of Z Trim Holdings, Inc. (the “Company”).

              

      

      

      
        	
                 
      

              	
                For
      Non-Individual Investors

              

      

      
        	
                 
      

              	
                (all
      Non-Individual Investors must INITIAL where
      appropriate):

              

      

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a partnership, corporation, limited
      liability company or business trust that is 100% owned by persons who meet
      one of the criteria for Individual Investors,
  above.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a partnership, corporation, limited
      liability company or business trust that has total assets in excess $5
      million and was not formed for the purpose of investing in the
      Company.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is an employee benefit plan whose investment
      decision is made by a plan fiduciary (as defined in ERISA §3(21)) that is
      a bank, savings and loan association, insurance company or registered
      investment adviser.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is an employee benefit plan whose total
      assets exceed $5,000,000 as of the date of the Subscription
      Agreement.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a self-directed employee benefit plan
      whose investment decisions are made solely by persons who meet either of
      the criteria for Individual Investors,
above.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a U.S. bank, U.S. savings and loan
      association or other similar U.S. institution acting in its individual or
      fiduciary capacity.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a broker-dealer registered pursuant to
      §15 of the Securities Exchange Act of
1934.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is an organization described in §501(c)(3)
      of the Internal Revenue Code with total assets exceeding $5,000,000 and
      not formed for the specific purpose of investing in the
      Company.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a trust with total assets in excess of
      $5,000,000, not formed for the specific purpose of investing in the
      Company, and whose purchase is directed by a person with such knowledge
      and experience in financial and business matters that he is capable of
      evaluating the merits and risks of the prospective
    investment.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is a plan established and maintained by a
      state or its political subdivisions, or any agency or instrumentality
      thereof, for the benefit of its employees, and which has total assets in
      excess of $5,000,000.

              

      

      
        	
                Initial
      _______

              	
                The
      undersigned certifies that it is an insurance company as defined in §2(13)
      of the Securities Act of 1933, as amended, or a registered investment
      company.ex42.htm

     

    

      THIS
AMENDED AND RESTATED 8% CONVERTIBLE SENIOR SECURED NOTE IS GIVEN IN REPLACEMENT
OF AN 8% CONVERTIBLE SENIOR SECURED NOTE DATED OCTOBER 15, 2009.  THE
PREDECESSOR 8% CONVERTIBLE SENIOR SECURED NOTE, MARKED “EXCHANGED”, WILL BE
RETURNED TO THE COMPANY UPON THE HOLDER’S RECEIPT OF THIS AMENDED AND RESTATED
8% CONVERTIBLE SENIOR SECURED NOTE.

       

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

       

      

       

      Z
TRIM HOLDINGS, INC.

       

      AMENDED
AND RESTATED

       

      8%
CONVERTIBLE SENIOR SECURED NOTE

      DUE
24 Months from Issuance

       

      Date:
October 15,
2009                                                                                                                                                                                          $1,852,500

       

      For value
received, Z TRIM HOLDINGS, INC., an Illinois corporation (the “Company”), hereby
promises to pay to the order of Brightline Ventures I, LLC,
a  Delaware limited liability company  (together with its
successors and permitted assigns, the “Holder”), in
accordance with the terms hereinafter provided, the principal amount of One
Million Eight Hundred Fifty Two Thousand Five Hundred Dollars ($1,852,500) (the
“Principal
Amount”).  The Company is issuing this amended and restated
convertible senior secured note (this “Note” and,
collectively with all other notes issued in connection with the Offering
Memorandum (as defined below), the “2009 Notes”) to the Holder pursuant
to the Subscription Agreement (the “Subscription
Agreement”) executed
and delivered in connection with the Offering Memorandum (the “Private
Offering”).  As used herein, the term “Issuance Date” means
October 15, 2009.  The Company previously issued a series of 8%
convertible senior secured notes in 2008 (the “2008 Notes”). This
Note is one of a series of the 2009 Notes offered by the Company for up to a
maximum principal amount of $5,500,000.  The 2008 Notes and the 2009
Notes are hereinafter collectively referred to as the “Company
Notes”.

       

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

       

      This Note
is secured by a Security Agreement dated October 15, 2009(the “Security
Agreement”) among
the Company and the holders of the 2009 Notes covering certain collateral (the
“Collateral”), all
as more particularly described and provided therein, and is entitled to the
benefits thereof.  As part of this transaction, the Holder is becoming
a party to the Security Agreement and will be entitled to the same benefits
thereof.  The Security Agreement, the Uniform Commercial Code (“UCC”) financing
statements on form UCC-1 naming the Holder as a secured party which is to be
filed in connection with the Security Agreement and any and all other documents
executed and delivered by the Company to the Holder under which the Holder is
granted Liens ( as defined in the Security Agreement) on assets of the Company
are collectively referred to as the “Security
Documents.”

      

          ARTICLE I THE
NOTE

       

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

       

      Section
1.2                                Ranking and
Covenants.

       

      (a)          Except
as set forth on Schedule 1 attached
hereto, no indebtedness of the Company or any subsidiary of the Company is
senior to this Note in right of payment, whether with respect to interest,
damages or upon liquidation or dissolution or otherwise.  Until this
Note is fully paid and discharged in full, the Company shall not, and shall not
permit any subsidiary of the Company to, directly or indirectly, incur any
indebtedness for borrowed money (excluding accounts payable incurred in the
ordinary course of business) unless such indebtedness is expressly subordinated
to this Note pursuant to a written subordination agreement reasonably acceptable
in form, scope and substance to the Holders of not less than a simple majority
of the then outstanding aggregate principal of the 2009
Notes.  Notwithstanding the foregoing, the Company may issue, under
the Company Notes, an aggregate combined maximum of indebtedness, including this
Note, in the amount of $10,000,000.  The Company Notes rank pari passu
with each other and shall be secured equally and ratably by Liens, on or with
respect to any of the Company’s property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom and shall
have the benefit, to the full extent that and with such priority as the
obligations under the Company Notes.

       

      

      (b) Except
for Permitted Liens (as defined in Section 6.14 below), until this Note is fully
paid and discharged in full, the Company shall not, and shall not permit any
subsidiary of the Company to, directly or indirectly, incur any Lien (as defined
in Section 6.14 below) on or with respect to any of the Collateral now owned or
hereafter acquired, or any interest therein or any income or profits therefrom,
without the prior written consent of the Holders of not less than a simple
majority of the then outstanding aggregate principal on the Company
Notes.

      

       

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

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

       

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

       

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

       

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

      

       

      ARTICLE
II

       

      EVENTS
OF DEFAULT; REMEDIES

       

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

       

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

       

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

       

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

       

      (d) default
shall be made in the performance or observance of (i) any covenant,
condition or agreement contained in this Note or any of the other Transaction
Documents (other than a breach by the Company of its obligations to deliver
Common Shares to the Holder upon conversion which breach is addressed in clause
(c) above) which failure is not cured within the earlier to occur of (A) five
(5) Trading Days after the Holders of not less than 20% of the then outstanding
aggregate principal amount of the 2009 Notes deliver written notice to the
Company of the occurrence thereof or (B) ten (10) Trading Days after the
Company shall become or should have become aware of such failure;

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

      (l)           the
effectiveness of the applicable Registration Statement required to be maintained
effective pursuant to the terms of the Registration Rights Agreement lapses for
any reason (including, without limitation, the issuance of a stop order) or is
unavailable to the Holder for sale of such Holder’s Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or unavailability continues
for a period of five (5) consecutive Trading Days or for more than an aggregate
of ten (10) Trading Days in any 365-day period (other than days during an
Allowed Delay (as defined in the Registration Rights Agreement);

       

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

       

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

       

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

       

      (p)           any
Event of Default as defined in any of the Company Notes.

       

      Section
2.2                                           Remedies Upon An Event of
Default. If an Event of Default shall have occurred and shall be
continuing and unless the Event of Default shall have been waived in writing by
the Holders of not less than a simple majority of the then outstanding aggregate
principal amount of the 2009 Notes, the Holder of this Note may at any time at
its option:

       

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

       

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

       

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

       

      ARTICLE
III

       

      CONVERSION;
ANTI DILUTION

       

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

       

      

      Section
3.2    Conversion
Price.

       

       

      (a)     The term
“Conversion
Price” shall
mean $1.00, subject to adjustment under Section 3.4
hereof.  References herein to the Conversion Price mean the Conversion
Price as from time to time adjusted pursuant to the provisions of Section 3.4
and in effect on the applicable date.

       

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

       

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

       

      Section
3.4                                  Adjustment of Conversion
Price.

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

      (vii) Any reset
of the Conversion Price pursuant to sections 3.4(a)(v) or (vi) shall not reduce
the Conversion Price below $0.10 under any circumstances.

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

      ARTICLE
IV

       

      NEGATIVE
COVENANTS

       

      Section
4.                      Negative
Covenants.  So long as any portion of this Note is outstanding,
and unless waived in writing by the Holders of not less than a simple majority
of the then outstanding principal amount of the 2009 Notes, the Company will not
and will not permit any of its subsidiaries to directly or
indirectly:

       

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

       

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

       

      (c)           intentionally
left blank;

       

      (d)           amend
its certificate of incorporation, bylaws or charter documents so as to adversely
affect any rights of the Holder without the approval of the Holders of not less
than a simple majority of the then outstanding aggregate principal amount of the
2009 Notes; provided that reincorporating the Company in Delaware and
eliminating cumulative voting rights for directors shall not be deemed a
violation of this covenant;

       

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

       

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

       

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

       

      (h)           consummate
any Organic Change without the prior consent of the Holders of not less than a
simple majority of the then outstanding  aggregate principal amount of
the 2009 Notes; or

       

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

       

      ARTICLE
V

       

      AFFIRMATIVE
COVENANTS

       

      Section
5.1     Affirmative
Covenants

      

      (a) The
Company shall adhere to and use the proceeds received of the sale of the Note
solely for operating expenses and working capital as Company management deems
appropriate;

       

      (b) The
Company and each of its subsidiaries shall maintain its existence and authority
to conduct its business as presently contemplated to be conducted;

       

      (c) The
Company shall comply, and cause each of its subsidiaries to comply, with all
applicable laws, rules, regulations and orders applicable to the Company and
each of its subsidiaries;

       

      (d) The
Company shall keep and cause each of its subsidiaries to keep adequate records
and books of account, in which materially complete entries will be made in
accordance with generally accepted accounting principles, consistently
applied,(“GAAP”) reflecting all material financial transactions of the Company
and its subsidiaries, and in which, for each fiscal year, all proper reserves
for depreciation, depletion, obsolescence, amortization, taxes, bad debts and
other purposes in connection with its business shall be made to the extent
required by GAAP;

       

      (e) The
Company shall not enter into any agreement in which the terms of such agreement
would restrict or impair the right or ability of the Company or any subsidiary
to perform under this Note and the Transaction Documents;

       

      (f) The
Company and its subsidiaries shall maintain insurance with responsible companies
in such amounts and against such risks as is customary in the industry in which
the Company operates but in no event less than currently carried by the Company
and its subsidiaries;

       

      (g) The
Company shall pay all applicable taxes as they come due; and

       

      (h) The
Company shall file and shall use its best efforts to timely file all reports
required to be filed with the Commission 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 permit such termination.

       

       

      ARTICLE
VI

       

      MISCELLANEOUS

       

           Section
6.1    Notices.

       

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

      

       

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

       

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

       

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

       

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

       

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

       

      Section
6.6                                  Remedies, Characterizations,
Other Obligations, Breaches and Injunctive Relief. The remedies provided
in this Note shall be cumulative and in addition to all other remedies available
under this Note, at law or in equity (including, without limitation, a decree of
specific performance and/or other injunctive relief), no remedy contained herein
shall be deemed a waiver of compliance with the provisions giving rise to such
remedy and nothing herein shall limit a Holder’s right to pursue actual damages
for any failure by the Company to comply with the terms of this
Note.  Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder hereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof).  The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable and material harm to the Holder
and that the remedy at law for any such breach may be
inadequate.  Therefore the Company agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to
all other available rights and remedies, at law or in equity, to seek and obtain
such equitable relief, including but not limited to an injunction restraining
any such breach or threatened breach, without the necessity of showing economic
loss and without any bond or other security being required.

       

      

       

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

       

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

      Section
6.9                                Amendments. This Note
may not be modified or amended in any manner except in writing executed by the
Company and the Holder provided, however, that this Note may be amended or
modified, and the observance of any term of this Note may be waived, with (and
only with) the written consent of the Holders of a simple majority of the then
outstanding principal amount of the 2009 Notes (the “Majority”)  Any
amendment or waiver effected in accordance with this Section 6.9 by the Majority
shall be binding upon each holder of 2009 Notes  (whether or not such
holder consented to any such amendment or waiver).

       

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

       

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

       

      

      Section
6.11                                Failure or Indulgence Not
Waiver. No failure or delay on the part of the Holder in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege, nor shall any waiver by the Holder of any such right or rights on any
one occasion be deemed a waiver of the same right or rights on any future
occasion.

       

      Section
6.12                                Company’s
Waivers.

       

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

       

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

       

      Section
6.13                                Seniority.  This
Note is senior in right of payment to any and all other indebtedness of the
Company, except the Company Notes with which it ranks pari passu.

       

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

       

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

       

      “Commission” means the
U.S. Securities and Exchange Commission.

       

      “Company Notes” means
the 2008 Notes and the 2009 Notes.

       

      “Holders” means the
Holder and any holder of 2009 Notes.

       

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

       

      “Offering Memorandum”
means that certain Confidential Private Placement Memorandum of the Company,
dated March 25, 2009 as amended and supplemented by the restatement dated as of
August 31, 2009.

       

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

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

      

      “Registration
Statement” shall have the meaning set forth in the Registration Rights
Agreement.

      

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

      

      “Transaction
Documents” means the offering documents entered into in connection with
the Private Offering by the Company, which offering documents include, without
limitation, the Subscription Agreement, the Security Documents, the Registration
Rights Agreement, and the Notes and Warrants issued in connection with the
Private Offering.

       

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

       

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

       

      

       

      

       

      [Signatures
on Next Page]

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

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

       

       

      Z TRIM
HOLDINGS, INC.

       

       

      By:                                                                           

       

       

      Print
Name:

       

       

      Title:

       

       

      

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      EXHIBIT
A

       

      WIRE
INSTRUCTIONS

       

      Payee:                                                                                                                                          

       

      Bank:

       

      Address:                                                                                                                                

       

      Bank
No.:                                                                                                                                          

       

      Account
No.:                                

       

      Account
Name:                                                                                                                                          

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      EXHIBIT
B

       

      

       

      FORM
OF NOTICE OF CONVERSION INTO SHARES OF COMMON STOCK

       

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

       

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

       

      Date of
Conversion:

       

      Applicable
Conversion Price:

       

      Signature:

       

      [Print
Name]:

       

      Address:                                                                                                                                          

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Schedule
1

      Existing
Indebtedness

      Any
indebtedness pursuant to any Liens listed on Schedule 2.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      Schedule
2

       

      Liens

       

      

      
        	
                Vendor

              	
                Description of Lease

              	
                Dates

              
	
                Imagetec,
      L.P.

              	
                Konica
      C6500 Pro Entry (printer/ copier)

              	
                36
      month lease beginning 5/30/07

              

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      Schedule
3

       

      Use
of Proceeds

       

      

      
        	 
      	
                Minimum
      Amount

              	
                Maximum
      Amount

              
	
                Capital
      expenditures - plant and equipment

              	
                --

              	
                $1,500,000

              
	
                Working
      capital

              	
                $4,000,000

              	
                $5,500,000

              
	
                Total

              	
                --

              	
                $5,500,000

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