Document:

Exhibit
10.82

NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY
REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iv) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE
AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS
THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iv) OF
THIS NOTE.

Earth
Biofuels, Inc.

Senior
Convertible Note

	
  Issuance Date: 
  August 11, 2006

  	
  Original Principal Amount: U.S. $600,000.00

  

FOR
VALUE RECEIVED, Earth Biofuels, Inc., a Delaware corporation
(the “Company”), hereby promises
to pay to the order of WHALEHAVEN CAPITAL FUND
LTD. or registered assigns (“Holder”)
the amount set out above as the Original Principal Amount (as reduced pursuant
to the terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the
Maturity Date (as defined below), on any Installment Date with respect to the
Installment Amount due on such Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the
terms hereof) and to pay interest (“Interest”)
on any outstanding Principal at the applicable Interest Rate from the date set
out above as the Issuance Date (the “Issuance
Date”) until the same becomes due
and payable, whether upon an Interest Date (as defined below), any Installment
Date or the Maturity Date or acceleration, conversion, redemption or otherwise
(in each case in accordance with the terms hereof).  This Senior Convertible Note (including all
Senior Convertible Notes issued in exchange, transfer or replacement hereof,
this “Note”) is one of an issue of
Senior Convertible Notes issued pursuant to the Securities Purchase Agreement
on the Closing Date (collectively, the “Notes”
and such other Senior Convertible Notes, the “Other
Notes”).  Certain capitalized terms used herein are
defined in Section 29.

(1)           PAYMENTS OF
PRINCIPAL.  On each Installment Date,
the Company shall pay to the Holder an amount equal to the Installment Amount
due on such Installment Date

 

in accordance with
Section 8.  On the Maturity Date, the
Company shall pay to the Holder an amount in cash representing all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges on
such Principal and Interest.  The “Maturity  Date”
shall be August 11, 2011, as may be extended at the option of the Holder (i) in
the event that, and for so long as, an Event of Default (as defined in Section
4(a)) shall have occurred and be continuing on the Maturity Date (as may be
extended pursuant to this Section 1) or any event shall have occurred and be
continuing on the Maturity Date (as may be extended pursuant to this Section 1)
that with the passage of time and the failure to cure would result in an Event
of Default and (ii) through the date that is ten (10) Business Days after the
consummation of a Change of Control in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(b))
is delivered prior to the Maturity Date. 
Other than as specifically permitted by this Note, the Company may not
prepay any portion of the outstanding Principal, accrued and unpaid interest or
accrued and unpaid Late Charges on Principal and Interest, if any.

(2)           INTEREST; INTEREST
RATE.  Interest on this Note shall
commence accruing on the Issuance Date and shall be computed on the basis of a
360-day year comprised of twelve (12) thirty (30) day months and shall be
payable in arrears for each Calendar Quarter on the first day of the succeeding
Calendar Quarter during the period beginning on the Issuance Date and ending
on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being November 1, 2006.  Interest shall be payable on each Interest
Date, to the record holder of this Note on the applicable Interest Date, and to the extent that any Principal amount
of this Note is converted prior to such Interest Date, accrued and unpaid
Interest with respect to such converted Principal amount and accrued and unpaid
Late Charges with respect to such Principal and Interest shall be paid on the
Conversion Date (as defined below) to the record holder of this Note on the
applicable Conversion Date, in cash. 
From and after the occurrence and during the continuance of an Event of
Default, the Interest Rate shall be increased to fifteen percent (15.0%).  In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest
as calculated and unpaid at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days after
the occurrence of such Event of Default through and including the date of cure
of such Event of Default.

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

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

 2
 

 

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

(i)            “Conversion Amount”
means the portion of the Principal to be converted, redeemed or otherwise with
respect to which this determination is being made.

(ii)           “Conversion Price”
means, as of any Conversion Date (as defined below) or other date of
determination, $2.90, subject to adjustment as provided herein.

(c)           Mechanics of Conversion.

(i)            Optional Conversion.  To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a
copy of an executed notice of conversion in the form attached hereto as Exhibit
I (the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iv),
surrender this Note to a nationally recognized overnight delivery service for
delivery to the Company (or an indemnification undertaking with respect to this
Note in the case of its loss, theft or destruction).  On or before the first (1st) Business Day following the date of
receipt of a Conversion Notice, the Company shall transmit by facsimile a
confirmation of receipt of such Conversion Notice to the Holder and the
Company’s transfer agent (the “Transfer Agent”).  On or before the second Business Day
following the date of receipt of a Conversion Notice (the “Share
Delivery Date”),
the Company shall (1) (X) if legends are not required to be placed on
certificates of Common Stock pursuant to the Securities Purchase Agreement and
provided that the Transfer Agent is participating in the Depository Trust
Company’s (“DTC”) Fast Automated Securities
Transfer Program, credit such aggregate number of shares of Common Stock to
which the Holder shall be entitled to the Holder’s or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission system or (Y)
if the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to the address as specified in the
Conversion Notice, a certificate, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the Holder shall be
entitled which certificates shall not bear any restrictive legends unless
required pursuant to Section 2(g) of the Securities Purchase Agreement; (2) pay
to the Holder in cash an amount equal to the accrued and unpaid Interest on the
Conversion Amount up to and including the Conversion Date; and (3) for any
conversions prior to the third (3rd)
anniversary of the Issuance Date, pay any applicable Make-Whole Amount in
accordance with Section 3(c)(ii).  If
this Note is physically surrendered for conversion as required by Section
3(c)(iv) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 19(d)) representing the
outstanding Principal not converted.  The
Person or Persons entitled to receive the shares of Common Stock issuable upon
a conversion of this Note shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on the Conversion Date.  In the event of a partial conversion of this
Note pursuant hereto, the principal amount

 3
 

 

converted shall be deducted from the Installment Amounts relating to
the Installment Dates as set forth in the Conversion Notice.

(ii)           Make-Whole Amount.  If prior to the third (3rd) anniversary of the Issuance Date, the
Holder converts all or any portion of this Note pursuant to Section 3(c) or the
Company requires conversion of all or any portion of this Note pursuant to
Section 9, then upon delivery of the applicable shares of Common Stock upon
such conversion, the Holder shall receive the Make-Whole Amount; provided,
however, that in the event that the Average Market Price on a Conversion Date
or Mandatory Conversion Date, as applicable, occurring after the Effective Date
(as defined in the Registration Rights Agreement) exceeds 175% of the
Conversion Price on the Conversion Date or Mandatory Conversion Date, as
applicable, then the Holder shall not be entitled to receive the Make-Whole
Amount; provided, further, that in the event that the Closing Sale Price of the Common Stock for each
Trading Day of any forty (40) consecutive Trading Day period after the
Effective Date exceeds 200% of the Conversion Price on the Issuance Date (as
adjusted for any stock split, combination, reclassification or similar
transaction), then the Holder shall no longer have the right to receive a Make-Whole
Amount.  The Company shall pay the
Make-Whole Amount in shares of Common Stock or, at the Company’s option, in
cash.  Following receipt of any
Conversion Notice during the period when a Holder is entitled to receive a
Make-Whole Amount hereunder, the Company shall, in its confirmation of receipt
of such Conversion Notice as required by Section 3(c)(i) (the “Conversion Notice Confirmation”), (A) specify whether the
Make-Whole Amount shall not be paid in shares of Common Stock but rather in
cash and (B) if the Make-Whole Amount is to be paid in shares of Common Stock,
certify that there has been no Equity Conditions Failure.  Any Make-Whole Amount to be paid in shares of
Common Stock shall be paid in a number of fully paid and nonassessable shares
of Common Stock equal to the quotient of (1) the Make-Whole Amount and (2) the
Make-Whole Conversion Price.  If the
Make-Whole Amount shall be paid in Common Stock on the Share Delivery Date, the
Company shall (x) if legends are not required to be placed on certificates of
Common Stock pursuant to the Securities Purchase Agreement and provided the
Transfer Agent is participating in the DTC Fast Automated Securities Transfer
Program, credit such aggregate number of Common Shares to which the Holder
shall be entitled to the Holder or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system, or (y) if the Transfer
Agent is not participating in the DTC Fast Automated Securities Transfer
Program, issue and deliver to the address as specified in the Conversion Notice
or in the register maintained by the Company for such purpose pursuant to the
Securities Purchase Agreement, a certificate, registered in the name of the
Holder or its designee, for the number of Common Shares to which the Holder
shall be entitled which certificates shall not bear any restrictive legends
unless required pursuant to Section 2(g) of the Securities Purchase
Agreement.  If the Make-Whole Amount
shall be paid in cash, then the Company shall make such payment on the Share
Delivery Date by wire transfer of immediately available funds to an account
designated in writing by the Holder. 
Notwithstanding the foregoing the Company shall not be entitled to pay
the Make-Whole Amount in shares of Common Stock and shall be required to pay such
Make-Whole Amount in cash on the applicable Share Delivery Date, if the Equity
Conditions are not then satisfied or if the Weighted Average Price of the
Common Stock on any Trading Day during the Make-Whole Conversion Measuring
Period is less than $1.00.

(iii)          Company’s Failure to Timely Convert.  If within three (3) Trading Days after the
Company’s receipt of the facsimile copy of a Conversion Notice the

 4
 

 

Company shall fail to issue and deliver a certificate to the Holder or
credit the Holder’s balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon such holder’s conversion of any
Conversion Amount (a “Conversion Failure”),
and if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then
the Company shall, within three (3) Business Days after the Holder’s request
and in the Holder’s discretion, either (i) pay cash to the Holder in an amount
equal to the Holder’s total purchase price (including brokerage commissions and
other out of pocket expenses, if any) for the shares of Common Stock so purchased
(the “Buy-In Price”), at which point the
Company’s obligation to deliver such certificate (and to issue such Common
Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the
Holder a certificate or certificates representing such Common Stock and pay
cash to the Holder in an amount equal to the excess (if any) of the Buy-In
Price over the product of (A) such number of shares of Common Stock, times (B)
the Closing Bid Price on the Conversion Date.

(iv)          Book-Entry. Notwithstanding anything
to the contrary set forth herein, upon conversion of any portion of this Note
in accordance with the terms hereof, the Holder shall not be required to
physically surrender this Note to the Company unless (A) the full Conversion
Amount represented by this Note is being converted or (B) the Holder has
provided the Company with prior written notice (which notice may be included in
a Conversion Notice) requesting reissuance of this Note upon physical surrender
of this Note.  The Holder and the Company
shall maintain records showing the Principal, Interest and Late Charges
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of this Note upon conversion.

(v)           Pro Rata Conversion; Disputes.  In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company, subject to Section 3(d), shall
convert from each holder of Notes electing to have Notes converted on such date
a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. 
In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 24.

(d)           Limitations on Conversions.

(i)            Beneficial Ownership.  The Company shall not effect any conversion
of this Note or otherwise issue shares of Common Stock pursuant to Section
3(c)(ii) hereof or Sections 8 or 9 hereof, and the Holder of this Note shall
not have the right to convert any portion of this Note pursuant to Section
3(a), to the extent that after giving effect to such conversion, the Holder
(together with the Holder’s affiliates) would beneficially own in excess of
4.99% (the “Maximum Percentage”) of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion.  For purposes of the
foregoing sentence, the

 5
 

 

number of shares of Common Stock beneficially owned by the Holder and
its affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Note with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Note beneficially owned by the Holder or any of its affiliates
and (B) exercise or conversion of the unexercised or nonconverted portion of
any other securities of the Company (including, without limitation, any Other
Notes or warrants) subject to a limitation on conversion or exercise analogous
to the limitation contained herein beneficially owned by the Holder or any of
its affiliates.  Except as set forth in
the preceding sentence, for purposes of this Section 3(d)(i), beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “1934 Act”).  For
purposes of this Section 3(d)(i), in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (x) the Company’s most recent Form 10-KSB, Form
10-QSB or Form 8-K, as the case may be (y) a more recent public announcement by
the Company or (z) any other notice by the Company or the Transfer Agent
setting forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written
request of the Holder, the Company shall within one (1) Business Day confirm in
writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Note, by the Holder or
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.

(ii)           Principal Market Regulation.  The Company shall not be obligated to issue
any shares of Common Stock upon conversion of this Note, and the Holder of this
Note shall not have the right to receive upon conversion of this Note any
shares of Common Stock, if the issuance of such shares of Common Stock would
exceed the aggregate number of shares of Common Stock which the Company may
issue upon conversion or exercise, as applicable, of the Notes and Warrants
without breaching the Company’s obligations under the rules or regulations of
the applicable Eligible Market (the number of shares which may be issued
without violating such rules and regulations, the “Exchange Cap”), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of its
stockholders as required by the applicable rules of such Eligible Market for
issuances of Common Stock in excess of such amount or (B) obtains a written
opinion from outside counsel to the Company that such approval is not required,
which opinion shall be reasonably satisfactory to the Required Holders.  Unless and until such approval or written
opinion is obtained, no purchaser of the Notes pursuant to the Securities
Purchase Agreement (the “Purchasers”) shall be issued in the aggregate, upon conversion or exercise
or otherwise, as applicable, of Notes or Warrants, shares of Common Stock in an
amount greater than the product of the Exchange Cap multiplied by a fraction,
the numerator of which is the principal amount of Notes issued to such
Purchasers pursuant to the Securities Purchase Agreement on the Closing Date
and the denominator of which is the aggregate principal amount of all Notes
issued to the Purchasers pursuant to the Securities Purchase Agreement on the
Closing Date (with respect to each Purchaser, the “Exchange Cap Allocation”). 
In the event that any Purchaser shall sell or otherwise transfer any of
such Purchaser’s Notes, the transferee shall be allocated a pro rata portion of
such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior
sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such

 6
 

 

transferee.  In the event that
any holder of Notes shall convert all of such holder’s Notes into a number of
shares of Common Stock which, in the aggregate, is less than such holder’s
Exchange Cap Allocation, then the difference between such holder’s Exchange Cap
Allocation and the number of shares of Common Stock actually issued to such
holder shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of Notes on a pro rata basis in proportion to the aggregate
principal amount of the Notes then held by each such holder.

(4)           RIGHTS UPON EVENT OF
DEFAULT.

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

(i)            the failure of the applicable Registration
Statement required to be filed pursuant to the Registration Rights Agreement to
be declared effective by the SEC on or prior to the date that is sixty (60)
days after the applicable Effectiveness Deadline (as defined in the
Registration Rights Agreement), or, while the applicable Registration Statement
is required to be maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the applicable Registration
Statement lapses for any reason (including, without limitation, the issuance of
a stop order) or is unavailable to any holder of the Notes for sale of all 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 ten (10) consecutive
days (other than days during an Allowable Grace Period (as defined in the
Registration Rights Agreement)or for more than an aggregate of thirty (30) days
in any 365-day period (other than days during an Allowable Grace Period);

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

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

(iv)          at any time following the tenth (10th) consecutive Business Day
following the Authorized Share Failure Deadline that the Holder’s Authorized
Share Allocation is less than the number of shares of Common Stock that the
Holder would be entitled to receive upon a conversion of the full Conversion
Amount of this Note (without regard to any limitations on conversion set forth
in Section 3(d) or otherwise);

(v)           the Company’s failure to pay to the Holder
any amount of Principal, Interest, Late Charges or other amounts when and as
due under this Note (including, without limitation, the Company’s failure to
pay any redemption payments or amounts hereunder) or any other Transaction
Document (as defined in the Securities Purchase

 7
 

 

Agreement) or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated hereby
and thereby to which the Holder is a party, except, in the case of a failure to
pay Interest and Late Charges when and as due, in which case only if such
failure continues for a period of at least ten (10) Business Days;

(vi)          the
occurrence of any default under, redemption of or acceleration prior to
maturity of any Indebtedness of the Company or any of its Subsidiaries (as
defined in Section 3(a) of the Securities Purchase Agreement) which,
individually or in the aggregate, exceeds $500,000, other than with respect to
any Other Notes;

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

(viii)        a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that (A) is for relief against the
Company or any of its Subsidiaries in an involuntary case, (B) appoints a
Custodian of the Company or any of its Subsidiaries or (C) orders the
liquidation of the Company or any of its Subsidiaries;

(ix)           a final judgment or judgments for the
payment of money aggregating in excess of $1,500,000 are rendered against the Company or any of its
Subsidiaries and which judgments are not, within sixty (60) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $1,500,000 amount
set forth above so long as the Company provides the Holder a written statement
from such insurer or indemnity provider (which written statement shall be
reasonably satisfactory to the Holder) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such
judgment;

(x)            the Company breaches any
representation, warranty, covenant or other term or condition of any
Transaction Document, which breach has or is likely to have a cost or adverse
impact on the Company or the Holders (including by reduction in the value of
the shares of Common Stock deliverable in connection with the Transaction
Documents) in excess of $250,000, except, in the case of a breach of a covenant
or other term or condition of any Transaction Document which is curable, only
if such breach continues for a period of at least ten (10) consecutive Business
Days;

(xi)           any breach or failure in any respect to
comply with either of Sections 8 or 15 of this Note; or

 8
 

 

(xii)          any Event of Default (as defined in the Other
Notes) occurs with respect to any Other Notes.

(b)           Redemption Right.  Upon the occurrence of an Event of Default
with respect to this Note or any Other Note, the Company shall within one (1)
Business Day deliver written notice thereof via facsimile and overnight courier
(an “Event of Default Notice”) to the Holder.  At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. 
Each portion of this Note subject to redemption by the Company pursuant
to this Section 4(b) shall be redeemed by the Company at a price equal to the
greater of (i) the product of (A) the
sum of the Conversion Amount to be redeemed together with accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest and (B) the Redemption Premium and
(ii) the product of (A) the Conversion Rate with respect to such sum of the
Conversion Amount together with accrued and unpaid Interest with respect to
such Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest in
effect at such time as the Holder delivers an Event of Default Redemption
Notice and (B) the product of (1) the Equity Value Redemption Premium and (2)
the greater of (x) the Closing Sale Price of the Common Stock on the date
immediately preceding such Event of Default, (y) the Closing Sale Price of the
Common Stock on the date immediately after such Event of Default and (z) the
Closing Sale Price of the Common Stock on the date the Holder delivers the
Event of Default Redemption Notice (the “Event of Default Redemption Price”). 
Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 13.  To
the extent redemptions required by this Section 4(b) are deemed or determined
by a court of competent jurisdiction to be prepayments of the Note by the
Company, such redemptions shall be deemed to be voluntary prepayments. In the
event of a partial redemption of this Note pursuant hereto, the principal
amount redeemed shall be deducted from the Installment Amounts relating to the
applicable Installment Dates as set forth in the Event of Default Redemption
Notice.  The parties hereto agree that in
the event of the Company’s redemption of any portion of the Note under this
Section 4(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder.  Accordingly, any
Redemption Premium due under this Section 4(b) is intended by the parties to
be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of
its investment opportunity and not as a penalty.

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

(a)           Assumption.  The
Company shall not enter into or be party to a Fundamental Transaction unless
(i)  the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with
the provisions of this Section 5(a) pursuant to written agreements in
form and substance reasonably satisfactory to the Required Holders and approved
by the Required Holders prior to such Fundamental Transaction, including
agreements to deliver to each holder of Notes in

 9
 

 

exchange for such Notes a security of the Successor Entity evidenced
by a written instrument substantially similar in form and substance to the
Notes, including, without limitation, having a principal amount and interest
rate equal to the principal amounts and the interest rates of the Notes then
outstanding held by such holder, having similar conversion rights and having
similar ranking to the Notes, and reasonably satisfactory to the Required
Holders and (ii)  the
Successor Entity (including its Parent Entity) is a publicly traded
corporation whose common stock is quoted on or listed for trading on an
Eligible Market (a “Public Successor Entity”).  Upon
the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note referring to the “Company”
shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company
under this Note with the same effect as if such Successor Entity had been named
as the Company herein.  Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon conversion of this
Note at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Company’s Common Stock (or
other securities, cash, assets or other property) issuable upon the conversion of the Notes prior to such Fundamental
Transaction, such shares of the publicly
traded common stock (or their equivalent) of the Successor Entity (including
its Parent Entity), as adjusted in accordance with the provisions of this
Note.  The provisions of this
Section shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations on the
conversion of this Note.

(b)           Redemption Right.  No sooner than twenty (20) Trading Days nor
later than ten (10) Trading Days prior to the consummation of a Change of
Control, but not prior to the public announcement of such Change of Control,
the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). 
At any time during the period beginning after the Holder’s receipt of a
Change of Control Notice and ending on the later of (A) one (1) Business Day
prior to consummation of such Change of Control or (B) twenty (20) Trading Days
after the date of receipt of such Change of Control Notice, the Holder may
require the Company to redeem all or any portion of this Note by delivering
written notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of
Control Redemption Notice shall indicate the Conversion Amount the Holder is
electing to redeem.  The portion of this
Note subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (i) the sum of (x) the
product of the Change of Control Redemption Premium and the Conversion Amount
being redeemed and (y) the amount of any accrued but unpaid Interest on such
Conversion Amount being redeemed and accrued and unpaid Late Charges, if any,
with respect to such Conversion Amount and Interest through the date of such
redemption payment and (ii) the product of (x) the Equity Value Redemption
Premium and (y) the sum of (1) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient determined by dividing (I) the
aggregate cash consideration and the aggregate cash value of any non-cash
consideration per Common Share to be paid to the holders of the Common Shares
upon consummation of the Change of Control (any such non-cash consideration to
be valued at the higher of the Closing Sale Price of such securities as of the
Trading Day immediately prior to the consummation of such Change of Control,
the Closing Sale Price on the Trading Day immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price on
the Trading Day immediately prior to the public announcement of such proposed
Change of Control) by (II)

 10
 

 

the Conversion Price plus (2) the amount of any accrued but unpaid
Interest on such Conversion Amount being redeemed and accrued and unpaid Late
Charges, if any, with respect to such Conversion Amount and Interest through
the date of such redemption payment, (the “Change of Control Redemption Price”).  Redemptions required by this Section 5 shall
be made in accordance with the provisions of Section 13 and shall have priority
to payments to stockholders in connection with a Change of Control.  To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments. 
Notwithstanding anything to the contrary in this Section 5, but subject
to Section 3(d), until the Change of Control Redemption Price (together with
any interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(c) (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.  In the event of a partial
redemption of this Note pursuant hereto, the principal amount redeemed shall be
deducted from the Installment Amounts relating to the applicable Installment
Dates as set forth in the Change of Control Redemption Notice.  The parties hereto agree that in the event of
the Company’s redemption of any portion of the Note under this Section 5(b), the
Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.  Accordingly, any Change of Control Redemption
Premium due under this Section 5(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty.

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

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

(b)           Other Corporate Events.  In addition to and not in substitution for
any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant to which holders of shares of Common Stock are entitled to
receive securities or other assets with respect to or in exchange for shares of
Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon a conversion of this
Note, at the Holder’s option, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares
of Common Stock otherwise receivable upon such conversion, such securities or
other

 11
 

 

assets received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as the Holder
would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of
Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate.  The provisions of this
Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or
redemption of this Note.

(7)           RIGHTS UPON ISSUANCE
OF OTHER SECURITIES.

(a)           Adjustment of Conversion Price upon
Issuance of Common Stock.  If and
whenever on or after the Subscription Date, the Company issues or sells, or in
accordance with this Section 7(a) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company, but excluding shares of Common
Stock deemed to have been issued or sold by the Company in connection with any
Excluded Security) for a consideration per share less than a price equal to the
Conversion Price in effect immediately prior to such issue or sale (such price
the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance the Conversion
Price then in effect shall be reduced to an amount equal to the product of
(A) the Conversion Price in effect immediately prior to such Dilutive
Issuance and (B) the quotient determined by dividing (1) the sum of
(I) the product derived by multiplying the Conversion Price in effect
immediately prior to such Dilutive Issuance and the number of shares of Common
Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus
(II) the consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying (I) the Conversion
Price in effect immediately prior to such Dilutive Issuance by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such
Dilutive Issuance.  For purposes of
determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

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

 12
 

 

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

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

(iv)          Calculation
of Consideration Received.  In case
any Option is issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for the difference of (x) the
aggregate fair market value of such Options and other securities issued or sold
in such integrated transaction, less (y) the fair market value of the
securities other than such Option, issued or sold in such transaction and the
other securities issued or sold in such integrated transaction will be deemed
to have been issued or sold for the balance of the consideration received by
the Company.  If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the gross amount raised by the Company; provided, however, that such gross
amount is not greater than 110% of the net amount received by the Company therefor.  If any Common Stock,

 13
 

 

Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the Company will be
the fair value of such consideration, except where such consideration consists
of securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of
receipt.  If any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be.  The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Required Holders.  If
such parties are unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the “Valuation
Event”), the fair
value of such consideration will be determined within five (5) Business Days
after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Required Holders.  The determination of such appraiser shall be
deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne by the Company.

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

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

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

 14
 

 

(8)           COMPANY INSTALLMENT
CONVERSION OR REDEMPTION.

(a)           General.  On each applicable Installment Date, the
Company shall pay to the Holder of this Note the Installment Amount due on such
date by converting such Installment Amount, provided that there is not then an
Equity Conditions Failure, in accordance with this Section 8 (a “Company Conversion”); provided, however, that the Company
may, at its option following notice to the Holder, pay the Installment Amount
by redeeming such Installment Amount (a “Company Redemption”)
or by any combination of a Company Conversion and a Company Redemption so long
as all of the outstanding applicable Installment Amount shall be converted
and/or redeemed by the Company on the applicable Installment Date, subject to
the provisions of this Section 8; provided further, however, that the Company
shall not be entitled to pay any portion of the Installment Amount in shares of
Common Stock pursuant to a Company Conversion and shall be required to pay such
Installment Amount in cash pursuant to a Company Redemption if the Weighted
Average Price of the Common Stock on any Trading Day during the Company
Conversion Measuring Period is less than $1.00. 
Notwithstanding the foregoing,
the Company may not effect a Company Conversion of any Installment Amount under
this Section in excess of the Holder Pro Rata Amount of the applicable
Installment Volume Limitation.  On
or prior to the date which is the eighth (8th) Trading Day prior to each Installment Date (each, an “Installment Notice Due Date”), the Company shall deliver
written notice (each, a “Company Installment Notice”
and the date all of the holders receive such notice is referred to as to the “Company Installment Notice Date”), to each
holder of Notes which Company Installment Notice shall (i) either (A) confirm
that the applicable Installment Amount of such holder’s Note shall be converted
in whole pursuant to a Company Conversion (such amount to be converted, the “Company Conversion Amount”) or (B) (1) state that the
Company elects to redeem, or is required to redeem in accordance with the
provisions of the Notes, in whole or in part, the applicable Installment Amount
pursuant to a Company Redemption and (2) specify the portion (including
Interest and Late Charges, if any, on such amount and Interest) which the
Company elects or is required to redeem pursuant to a Company Redemption (such
amount to be redeemed, the “Company Redemption Amount”)
and the portion (including Interest and Late Charges, if any, on such amount
and Interest), if any, that the Company elects to convert pursuant to a Company
Conversion (such amount a “Company Conversion Amount”)
which amounts when added together, must equal the applicable Installment Amount
and (ii) if the Installment Amount is to be paid, in whole or in part, pursuant
to a Company Conversion, certify that there
is not then an Equity Conditions Failure as of the date of the Company
Installment Notice.  Each Company
Installment Notice shall be irrevocable. 
If the Company does not timely deliver a Company Installment Notice in
accordance with this Section 8, then the Company shall be deemed to have
delivered an irrevocable Company Installment Notice confirming a Company
Conversion and shall be deemed to have certified that there is not then an
Equity Conditions Failure in connection with any such conversion. Except as
expressly provided in this Section 8(a), the Company shall convert and/or redeem
the applicable Installment Amount of this Note pursuant to this Section 8 and
the corresponding Installment Amounts of the Other Notes pursuant to the
corresponding provisions of the Other Notes in the same ratio of the
Installment Amount being converted and/or redeemed hereunder.  The Company Conversion Amount (whether set
forth in the Company Installment Notice or by operation of this Section 8)
shall be converted in accordance with Section 8(b) and the Company Redemption
Amount shall be redeemed in accordance with Section 8(c).

 15
 

 

(b)           Mechanics of Company Conversion.  Subject to Section 3(d), if the Company
delivers a Company Installment Notice and elects, or is deemed to have elected,
in whole or in part, a Company Conversion in accordance with Section 8(a), then
the applicable Company Conversion Amount, if any, which remains outstanding as
of the applicable Installment Date shall be converted as of the applicable
Installment Date by converting on such Installment Date such Company Conversion
Amount at the Company Conversion Price; provided that the Equity Conditions are
then satisfied (or waived in writing by the Holder) on such Installment Date
and that the Holder Pro Rata Amount of the Installment Volume Limitation is not
exceeded.  If the Equity Conditions are
not satisfied (or waived in writing by the Holder) on such Installment Date or
the Holder Pro Rata Amount of the Installment Volume Limitation is exceeded,
then at the option of the Holder designated in writing to the Company, the
Holder may require the Company to do any one or more of the following: (i) the
Company shall redeem all or any part designated by the Holder of the
unconverted Company Conversion Amount (such designated amount is referred to as
the “First Redemption Amount”) and the Company
shall pay to the Holder within three (3) days of such Installment Date, by wire
transfer of immediately available funds, an amount in cash equal to 120% of
such First Redemption Amount, and/or (ii) the Company Conversion shall be null
and void with respect to all or any part designated by the Holder of the
unconverted Company Conversion Amount and the Holder shall be entitled to all
the rights of a holder of this Note with respect to such amount of the Company
Conversion Amount; provided, however, that the Conversion Price for such
unconverted Company Conversion Amount shall thereafter be adjusted to equal the
lesser of (A) the Company Conversion Price as in effect on the date on which
the Holder voided the Company Conversion and (B) the Company Conversion Price
as in effect on the date on which the Holder delivers a Conversion Notice
relating thereto.  If the Company fails
to redeem any First Redemption Amount by the third (3rd) day following the applicable
Installment Date by payment of such amount on the applicable Installment Date,
then the Holder shall have the rights set forth in Section 13(a) as if the
Company failed to pay the applicable Company Redemption Price and all other
rights under this Note (including, without limitation, such failure constituting
an Event of Default described in Section 4(a)(xi)).  Notwithstanding anything to the contrary in
this Section 8(b), but subject to 3(d), until the Company delivers Common Stock
representing the Company Conversion Amount to the Holder, the Company
Conversion Amount may be converted by the Holder into Common Stock pursuant to
Section 3.  In the event that the Holder
elects to convert the Company Conversion Amount prior to the applicable
Installment Date as set forth in the immediately preceding sentence, the
Company Conversion Amount so converted shall be deducted from the Installment
Amounts relating to the applicable Installment Dates as set forth in the
applicable Conversion Notice.

(c)           Mechanics of Company Redemption.  If the Company elects a Company Redemption in
accordance with Section 8(a), then the Company Redemption Amount, if any, which
is to be paid to the Holder on the applicable Installment Date shall be
redeemed by the Company on such Installment Date, and the Company shall pay to
the Holder on such Installment Date, by wire transfer of immediately available
funds, in an amount in cash (the “Company Installment
Redemption Price”) equal to 100% of the Company Redemption
Amount.  If the Company fails to redeem
the Company Redemption Amount on the applicable Installment Date by payment of
the Company Installment Redemption Price on such date, then at the option of
the Holder designated in writing to the Company (any such designation, “Conversion Notice” for purposes of this Note), the Holder
may require the Company to convert

 16
 

 

all or any part of the Company Redemption Amount at the Company
Conversion Price.  Conversions required
by this Section 8(c) shall be made in accordance with the provisions of Section
3(c).  Notwithstanding anything to the
contrary in this Section 8(c), but subject to Section 3(d), until the Company
Installment Redemption Price (together with any interest thereon) is paid in
full, the Company Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.  In the event the Holder
elects to convert all or any portion of the Company Redemption Amount prior to
the applicable Installment Date as set forth in the immediately preceding
sentence, the Company Redemption Amount so converted shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as set forth
in the applicable Conversion Notice.

(d)           Deferred Installment Amount.  Notwithstanding any provision of this Section
8 to the contrary, the Holder may, at its option and in its sole discretion,
deliver a written notice to the Company at least two (2) days prior to any
Installment Notice Due Date electing to have the payment of all or any portion
of an Installment Amount payable on the next Installment Date deferred to the
Maturity Date.  Any amount deferred to
the Maturity Date pursuant to this Section 8(d) shall continue to accrue
Interest through the Maturity Date and shall be paid on such date in cash.

(e)           Cancellation of Installment Amount.  Notwithstanding any provision of this Section
8 to the contrary, in the event that the Weighted Average Price of the Common
Stock equals or exceeds 145% of the applicable Conversion Price for each of the
five (5) consecutive Trading Days immediately preceding the Installment Notice
Due Date, then the Installment Amount payable on such Installment Date shall be
deferred to the Maturity Date.  Any
amount deferred to the Maturity Date pursuant to this Section 8(e) shall continue
to accrue Interest through the Maturity Date and shall be paid on such date in
cash.

(9)     COMPANY’S RIGHT OF
MANDATORY CONVERSION.

(a)           Mandatory Conversion.  Subject to Section 3(d), if at any time
from and after the Effective Date (as defined in the Registration Rights
Agreement) (the “Mandatory Conversion Eligibility Date”), (i) the
Closing Sale Price of the Common Stock for any twenty (20) Trading Days
(which need not be consecutive) out of any thirty (30) consecutive Trading Day
period
following the applicable Mandatory Conversion Eligibility Date (the “Mandatory
Conversion Measuring Period”) equals or exceeds either (A) 150% (the “First
Conversion Threshold”) or (B) 175% (the “Second Conversion Threshold”) of the
Conversion Price on the Closing Date (subject to appropriate adjustments for
stock splits, stock dividends, stock combinations and other similar
transactions after the Subscription Date) and (ii) there is not then an Equity
Conditions Failure, the Company shall have the right to require the Holder to
convert (1) if the First Conversion Threshold has been met, up to the
First Conversion Threshold Conversion Amount or (2) if the Second Conversion
Threshold has been met, all, but not less than all, of the Conversion Amount
then remaining under this Note, in each case as
designated in the Mandatory Conversion Notice (as defined below) into fully
paid, validly issued and nonassessable shares of Common Stock in accordance
with Section 3(c) hereof at the Conversion Rate as of the Mandatory
Conversion Date (as defined below) (a “Mandatory
Conversion”).  The Company may
exercise its right to require conversion under this Section 9(a) by delivering
within not more than three (3) Trading Days following the end of such Mandatory
Conversion

 17
 

 

Measuring Period a written notice thereof by facsimile and overnight
courier to all, but not less than all, of the holders of Notes and the Transfer
Agent (the “Mandatory Conversion Notice”
and the date all of the holders received such notice by facsimile is referred to
as the “Mandatory Conversion Notice Date”).  The Mandatory Conversion Notice shall be
irrevocable.  The Mandatory Conversion
Notice shall state (w) the Trading Day selected for the Mandatory Conversion in
accordance with Section 9(a), which Trading Day shall be no later than five (5)
Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (v) the aggregate Conversion
Amount, including any applicable First Conversion Threshold Conversion Amount,
of the Notes subject to mandatory conversion from the Holder and all of the
holders of the Notes pursuant to this Section 9 (and analogous provisions under
the Other Notes), (w) the number of shares of Common Stock to be issued to such
Holder on the Mandatory Conversion Date, (x) if the Mandatory Conversion is
consummated prior to the third (3rd)
anniversary of the Issuance Date, that the Series B Warrants (as defined in the
Securities Purchase Agreement) issued to the Holder shall become exercisable on
the Mandatory Conversion Date, (y) the Make-Whole Amount, if any, required to
be paid on the Mandatory Conversion and whether such Make-Whole Amount shall
not be paid in shares of Common Stock but rather in cash and (z) certify that
there is not then an Equity Conditions Failure; provided, however, that the Company may not effect a Mandatory
Conversion under this Section in excess of the Holder Pro Rata Amount of the
applicable Mandatory Conversion Volume Limitation.  Notwithstanding the foregoing, the Company
may effect only one (1) Mandatory Conversion with respect to the First
Conversion Threshold during any forty (40) consecutive Trading Days.  Any shares of Common Stock delivered in
connection with a Mandatory Conversion hereunder shall be accompanied by (I)
any applicable Make-Whole Amount and (II) any accrued and unpaid Interest with
respect to such Conversion Amount subject to such Mandatory Conversion and
accrued and unpaid Late Charges with respect to such Conversion Amount and
Interest.

(b)           Pro Rata Conversion Requirement.  If the Company elects to cause a conversion
of any Conversion Amount of this Note pursuant to Section 9(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes.  If the Company elects a
Mandatory Conversion of this Note pursuant to Section 9(a) (or similar
provisions under the Other Notes) with respect to less than all of the
Conversion Amounts of the Notes then outstanding, then the Company shall
require conversion of a Conversion Amount from each of the holders of the Notes
equal to the product of (I) the aggregate Conversion Amount of Notes which the
Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate Original Principal Amount of the Notes purchased by such holder of
outstanding Notes and the denominator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by all holders holding
outstanding Notes (such fraction with respect to each holder is referred to as
its “Conversion  Allocation
Percentage,” and such amount with respect to each holder is referred
to as its “Pro Rata Conversion Amount”);
provided, however, that in the event that any holder’s Pro Rata Conversion
Amount exceeds the outstanding Principal amount of such holder’s Note, then
such excess Pro Rata Conversion Amount shall be allocated amongst the remaining
holders of Notes in accordance with the foregoing formula.  In the event that the initial holder of any Notes
shall sell or otherwise transfer any of such holder’s Notes, the transferee
shall be allocated a pro rata portion of such holder’s Conversion Allocation
Percentage and the Pro Rata Conversion Amount.

 18

 

(10)         HOLDER’S RIGHT OF
OPTIONAL REDEMPTION.  On the third (3rd) anniversary of the Issuance
Date (the “Optional
Redemption Date”), the Holder shall have the right, in its sole
discretion, to require that the Company redeem (each a “Holder Optional Redemption”) up to all of
the Principal amount of the Note (excluding any Principal amount the payment of
which has been deferred pursuant to Section 8(d)) plus accrued and unpaid
Interest with respect to such Principal and accrued and unpaid Late Charges
with respect to such Principal and Interest then outstanding (the “Optional Redemption Amount”) by delivering written notice
thereof (a “Holder Optional Redemption Notice”
and, collectively with the Event of Default Redemption Notice and the Change of
Control Redemption Notice, the “Redemption
Notices” and each a “Redemption
Notice”) to the Company no later than three (3) Business Days prior
to the Optional Redemption Date.  The
Holder Optional Redemption Notice shall indicate the amount of the applicable
Optional Redemption Amount the Holder is electing to have redeemed on such
Optional Redemption Date (the “Holder
Optional Redemption Amount”). 
The portion of this Note subject to redemption pursuant to this Section
10 shall be redeemed by the Company in cash on the applicable Optional
Redemption Date at a price equal to the Holder Optional Redemption Amount being
redeemed (the “Holder Optional Redemption
Price” and, collectively with the Event of Default Redemption Price,
the Change of Control Redemption Price and the Company Installment Redemption
Price, the “Redemption Prices”
and, each a “Redemption  Price”).

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

(12)         RESERVATION OF
AUTHORIZED SHARES.

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

 19
 

 

Common Stock reserved and allocated to any Person which ceases to hold
any Notes shall be allocated to the remaining holders of Notes, pro rata based
on the principal amount of the Notes then held by such holders.

(b)           Insufficient Authorized Shares.  If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall
immediately take all action necessary to increase the Company’s authorized
shares of Common Stock to an amount sufficient to allow the Company to reserve
the Required Reserve Amount for the Notes then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than ninety (90) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in (the “Authorized Share Failure Deadline”), the
number of authorized shares of Common Stock. 
In connection with such meeting, the Company shall provide each stockholder
with a proxy statement and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock
and to cause its board of directors to recommend to the stockholders that they
approve such proposal.

(13)         HOLDER’S REDEMPTIONS.

(a)           Mechanics.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within five (5) Business Days
after the Company’s receipt of the Holder’s Event of Default Redemption Notice.  If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(b), the Company shall
deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is received
prior to the consummation of such Change of Control and within five (5)
Business Days after the Company’s receipt of such notice otherwise.  The
Company shall deliver the applicable Company Installment Redemption Price to
the Holder on the applicable Installment Date and the applicable Holder
Optional Redemption Price on the applicable Optional Redemption Date.  In the event of a redemption of less
than all of the Conversion Amount of this Note, the Company shall promptly
cause to be issued and delivered to the Holder a new Note (in accordance with
Section 19(d)) representing the outstanding Principal which has not been
redeemed.  In the event that the Company
does not pay the applicable Redemption Price to the Holder within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Note representing the Conversion Amount that was submitted for
redemption and for which the applicable Redemption Price (together with any
Late Charges thereon) has not been paid. 
Upon the Company’s receipt of such notice, (x) the applicable Redemption
Notice shall be null and void with respect to such Conversion Amount, (y) the
Company shall immediately return this Note, or issue a new Note (in accordance
with Section 19(d)) to the Holder representing the sum of such Conversion
Amount to be redeemed together with accrued and unpaid Interest with respect to
such Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest and (z) the

 20
 

 

Conversion Price of this Note or such new Notes shall be adjusted to
the lesser of (A) the Conversion Price as in effect on the date on which the
applicable Redemption Notice is voided and (B) the lowest Closing Bid Price of
the Common Stock during the period beginning on and including the date on which
the applicable Redemption Notice is delivered to the Company and ending on and
including the date on which the applicable Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not affect
the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount
subject to such notice.

(b)           Redemption by Other Holders.  Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences
described in Section 4(b), Section 5(b) or Section 10 (each, an “Other
Redemption Notice”),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice.  If the Company receives a Redemption Notice
and one or more Other Redemption Notices, during the seven (7) Business Day
period beginning on and including the date which is three (3) Business Days
prior to the Company’s receipt of the Holder’s Redemption Notice and ending on
and including the date which is three (3) Business Days after the Company’s
receipt of the Holder’s Redemption Notice and the Company is unable to redeem
all principal, interest and other amounts designated in such Redemption Notice
and such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.

(14)         VOTING RIGHTS.  The Holder shall have no voting rights as the
holder of this Note, except as required by law, including, but not limited to,
the General Corporation Law of the State of Delaware, and as expressly provided
in this Note.

(15)         COVENANTS.

(a)           Rank.      All payments due under this Note (a) shall rank pari passu with all Other Notes and (b) shall be senior to
all other Indebtedness of the Company and its Subsidiaries other than Permitted
Indebtedness of the type described in clause (iii) of the definition thereof.

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

(c)           Existence
of Liens.  So long as this Note is outstanding, the Company shall not, and
the Company shall not permit any of its Subsidiaries to, directly or indirectly,
allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other

 21
 

 

encumbrance
upon or in any property or assets (including accounts and contract rights)
owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.

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

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

(f)            Financial Covenants.

(i)            EBITDA Test.  From and after December 31, 2007 and so long as this Note is outstanding,
the Company shall maintain EBITDA which equals to or exceeds the applicable
EBITDA Threshold (the “EBITDA Test”).

(ii)           Net Cash Balance
Test.  If the EBITDA Test is not met
for any Fiscal Quarter, the Company shall maintain a Net Cash Balance in excess
of the applicable Reserved Amount (the “Net Cash Balance Test”)
until such time as the Company satisfies such EBITDA Test for any Fiscal
Quarter thereafter; provided, however, that if at any time the Company reports
an LTM Consolidated EBITDA equal to or in excess of $60.0 million or EBITDA
equal to or in excess of $25.0 million for any Fiscal Quarter, the Company
shall not be required to satisfy the EBITDA Test or the Net Cash Balance Test at
any time thereafter.  If the Company
fails (a “Failure Date”) to
satisfy the Net Cash Balance Test at any time when such test is required, the
Company promptly shall provide to the Holder a certification, executed on
behalf of the Company by the Chief Financial Officer of the Company, as to the
amount of the Net Cash Balance as of the Failure Date, and publicly disclose
(on a Current Report on Form 8-K or otherwise) such material non-public
information (the date of such certification and public announcement, the “Disclosure Date”).  On the Disclosure Date, the Company shall
also obtain the Letter of Credit (as defined in the Securities Purchase
Agreement) pursuant to and in accordance with Section 4(q) of the Securities
Purchase Agreement from a financial institution satisfactory to the Required
Holders in the applicable Letter of Credit Amount for the benefit, pro rata by
principal amount outstanding, of the holders of Notes in the event of any
default by the Company under any of the Transaction Documents.

(iii)          Operating Results
Announcement.  The Company shall
announce its operating results (the “Operating
Results”) from which compliance with the

 22
 

 

EBITDA Test and Net Cash Balance Test can be
determined for each Fiscal Quarter no later than the forty-fifth (45th) day after the end of each
Fiscal Quarter or, with respect to the last Fiscal Quarter, the ninetieth (90th) day after such quarter (the
“Announcement Date”) and, in the
event the Company shall have satisfied the EBITDA Test and/or the Net Cash
Balance Test at all times during such Fiscal Quarter, as applicable, such
announcement shall include a statement to the effect that the Company satisfied
the EBITDA Test and/or the Net Cash Balance Test, as applicable, at all times
throughout such Fiscal Quarter; provided, however, that in the event the
Company is delayed in announcing its Operating Results for any Fiscal Quarter,
by the Announcement Date the Company shall, in lieu of the foregoing, (A) make
a statement to the effect that it has complied with all of its covenants under
the Notes, including, without limitation, the EBITDA Test and/or the Net Cash
Balance Test, as applicable, and (B) provide to the Holders a certification, in
accordance with terms of  the next sentence,
certifying the same.  On the Announcement
Date, the Company shall also provide to the Holders a certification, executed
on behalf of the Company by the Chief Financial Officer of the Company,
certifying that the Company satisfied the EBITDA Test and/or the Net Cash
Balance Test, as applicable, at all times throughout such Fiscal Quarter.

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

(17)         VOTE TO ISSUE, OR
CHANGE THE TERMS OF, NOTES.  The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the Required Holders shall be required for any
change or amendment to this Note or the Other Notes.

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

(19)         REISSUANCE OF THIS
NOTE.

(a)           Transfer.  If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will, subject
to the satisfaction of the transfer provisions of the Securities Purchase
Agreement, forthwith issue and deliver upon the order of the Holder a new Note
(in accordance with Section 19(d)), registered in the name of the registered
transferee or assignee, representing the outstanding Principal being
transferred by the Holder and, if less then the entire outstanding Principal is
being transferred, a new Note (in accordance with Section 19(d)) to the Holder
representing the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(iv) following conversion or redemption of any

 23
 

 

portion of this Note, the outstanding Principal represented by this
Note may be less than the Principal stated on the face of this Note.

(b)           Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 19(d)) representing the outstanding Principal.

(c)           Note Exchangeable for Different
Denominations.  This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Note or Notes (in accordance with Section 19(d) and
in principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the
time of such surrender.

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

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

(21)         PAYMENT
OF COLLECTION, ENFORCEMENT AND OTHER COSTS. 
If (a) this Note is placed in the hands of an attorney for collection or
enforcement or is

 24
 

 

collected or enforced through any legal proceeding or
the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Note, then the
Company shall pay the costs incurred by the Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’
fees and disbursements.

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

(23)         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.

(24)         DISPUTE
RESOLUTION.  In the case of a dispute
as to the determination of the Closing Bid Price, the Closing Sale Price or the
Weighted Average Price or the arithmetic calculation of the Conversion Rate or
any Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within two (2) Business Days of receipt,
or deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to
agree upon such determination or calculation within two (2) Business Days of
such disputed determination or arithmetic calculation being submitted to the
Holder, then the Company shall, within two (2) Business Days submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or the Weighted Average Price to an independent, reputable
investment bank selected by the Company and approved by the Holder or (b) the
disputed arithmetic calculation of the Conversion Rate or any Redemption Price
to the Company’s independent, outside accountant.  The Company, at the Company’s expense, shall
cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations. 
Such investment bank’s or accountant’s determination or calculation, as
the case may be, shall be binding upon all parties absent demonstrable error.

(25)         NOTICES; PAYMENTS.

(a)           Notices.  Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 10(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore.  Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable
detail, and certifying, the calculation of such adjustment and (ii) at least
twenty (20) days prior to the date on which the Company closes its

 25
 

 

books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

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

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

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

(28)         GOVERNING
LAW.  This Note shall be construed
and enforced in accor­dance with, and all questions concerning the
construction, validity, interpretation and performance of this Note shall be
governed by, the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding
is improper.  Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law.  In the event that any
provision of this Note is invalid or unenforceable under any applicable

 26
 

 

statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law.  Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of this Note.  Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor
of the Holder.  THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY
TRANSACTION CONTEMPLATED HEREBY.

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

(a)           “Approved Stock Plan” means any employee benefit plan which has been approved by the
Board of Directors of the Company, pursuant to which the Company’s securities
may be issued to any employee, consultant, officer or director for services
provided to the Company.

(b)           “Average
Market Price” means, for any given date, the arithmetic average of
the Weighted Average Price of the Common Stock during the ten (10) consecutive
Trading Day period ending on the third (3rd ) Trading Day
immediately prior to such given date, as appropriately adjusted for any stock
split, stock dividend, stock combination or other similar transaction that
proportionately decreases or increases the Common Stock during such period.

(c)           “Bloomberg”
means Bloomberg Financial Markets.

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

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

(f)            “Change of Control”
means any Fundamental Transaction other than (i) any reorganization,
recapitalization or reclassification of the Common Stock or business
combination in which the Company is the publicly traded surviving entity
in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification or business combination
continue after such reorganization, recapitalization or reclassification or business
combination to hold publicly traded securities and, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity

 27
 

 

or entities (except where Apollo Resources International or its
affiliates becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 70% or greater of the aggregate
Voting Stock of the Company), or (ii) pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of incorporation of the
Company.

(g)           “Change of Control
Consideration” means, for any Change of Control, an amount, if any,
equal to the sum of the aggregate cash consideration and the aggregate cash
value of any marketable securities per share of Common Stock to be paid to the
holders of the Common Stock upon consummation of such Change of Control, with
any such non-cash consideration to be valued at the higher of the Closing Sale
Price of such securities as of the Trading Day immediately prior to the
consummation of the Change of Control, the Closing Sale Price on the Trading
Day immediately following the public announcement of such proposed Change of Control
and the Closing Sale Price of on the Trading Day immediately prior to the
public announcement of such proposed Change of Control.

(h)           “Change of Control
Redemption Premium” means (i) for Change of Control Notice delivered
or required to be delivered in connection with a Change of Control prior to the
third (3rd)
anniversary of the Issuance Date, 125% and (ii) for any Change of Control
Notice delivered or required to be delivered in connection with a Change of
Control following the third (3rd)
anniversary of the Issuance Date, 115%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration equals
or exceeds $8.00 per share, then the Change of Control Redemption Premium shall
equal 100%.

(i)            “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid
price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins
to operate on an extended hours basis and does not designate the closing bid
price or the closing trade price, as the case may be, then the last bid price
or last trade price, respectively, of such security prior to 4:00:00 p.m., New
York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing bid price or last trade price, respectively, of such security on the
principal securities exchange or trading market where such security is listed
or traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.).  If the
Closing Bid Price or the Closing Sale Price cannot be calculated for a security
on a particular date on any of the foregoing bases, the Closing Bid Price or
the Closing Sale Price, as the case may be, of such security on such date shall
be the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute
shall be resolved pursuant to Section 24. 
All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.

 28
 

 

(j)            “Closing Date”
shall have the meaning set forth in the Securities Purchase Agreement, which
date is the date the Company initially issued Notes pursuant to the terms of
the Securities Purchase Agreement.

(k)           “Common Stock Deemed
Outstanding” means, at any given time, the number of shares of
Common Stock outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any Common Stock owned or held by or
for the account of the Company or issuable upon conversion or exercise, as
applicable, of the Notes and the Warrants.

(l)            “Company
Conversion Price” means, the
lower of (i) the applicable
Conversion Price and (ii) that price which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the five (5) consecutive Trading
Days immediately preceding the applicable Installment Date (each such period, a
“Company Conversion
Measuring Period”).  All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination
or other similar transaction during such Company
Conversion Measuring Period.

(m)          “Consolidated Net Income”
means, for any applicable period, the net income (loss) of the Company and its
Subsidiaries for such period, determined on a consolidated basis and in
accordance with GAAP, but excluding from the determination of Consolidated Net
Income (without duplication) (a) any extraordinary or non recurring gains or
losses or gains or losses from Dispositions, (b) restructuring charges, (c) any
tax refunds, net operating losses or other net tax benefits, (d) effects of
discontinued operations and (e) interest income (including interest
paid-in-kind).

(n)           “Consolidated Net Interest
Expense” means, for any applicable period, gross interest expense of
the Company and its Subsidiaries for such period determined on a consolidated
basis and in accordance with GAAP, less (i) the sum of (A) interest income for
such period and (B) gains for such period on Hedging Agreements (to the extent
not included in interest income above and to the extent not deducted in the
calculation of gross interest expense), plus (ii) the sum of (A) losses for
such period on Hedging Agreements (to the extent not included in gross interest
expense) and (B) the upfront costs or fees for such period associated with
Hedging Agreements (to the extent not included in gross interest expense), in
each case, determined on a consolidated basis and in accordance with GAAP.

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

 29
 

 

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

(q)           “EBITDA” means, with respect to any Person and its Subsidiaries for any
applicable Fiscal Quarters, the Consolidated Net Income of such Person and its
Subsidiaries as set forth in the financial statements of the Company contained
in the Form 10-QSB or Form 10-KSB of the Company for the applicable Fiscal
Quarter, plus without duplication, the sum of
the following amounts of the Company and its Subsidiaries for such period to
the extent deducted in determining Consolidated Net Income of such Persons for
such period:  (i) Consolidated Net
Interest Expense, (ii) income tax expense, (iii) depreciation expense and (iv)
amortization expense.

(r)    “EBITDA Threshold” means:

(i)            (A) $30.0 million of
LTM Consolidated EBITDA reported for the Fiscal Quarter ending December 31,
2007 or (B) $27.5 million of LTM Consolidated EBITDA reported for the Fiscal
Quarter ending December 31, 2007 with at least $10.0 million in EBITDA reported
for the Fiscal Quarter ending December 31, 2007;

(ii)           $35.0 million of LTM
Consolidated EBITDA reported for the Fiscal Quarter ending March 31, 2008 or
$11.5 million in EBITDA reported for the Fiscal Quarter ending March 31, 2008;

(iii)          $45.0 million of LTM
Consolidated EBITDA reported for the Fiscal Quarter ending June 30, 2008 or
$17.5 million in EBITDA reported for the Fiscal Quarter ending June 30, 2008;

(iv)          $50.0 million of LTM
Consolidated EBITDA reported for the Fiscal Quarter ending September 30, 2008
or $17.5 million in EBITDA reported for the Fiscal Quarter ending September 30,
2008; and

(v)           $60.0 million of LTM
Consolidated EBITDA reported for the Fiscal Quarter ending December 31, 2008 or
$25.0 million in EBITDA reported for the Fiscal Quarter ending December 31, 2008.

(s)           “Eligible Market”
means the Principal Market, The New York Stock Exchange, Inc., the American
Stock Exchange, the Nasdaq National Market or the Nasdaq Capital Market.

(t)            “Equity Conditions” means that each of the following
conditions is satisfied:  (i) on each day
during the period beginning three (3) months prior to the applicable date of
determination and ending on and including the applicable date of determination
(the “Equity Conditions Measuring Period”),
either (x) the Registration Statement filed pursuant to the Registration Rights
Agreement shall be effective and available for the resale of all remaining
Registrable Securities in accordance with the terms of the Registration Rights
Agreement and there shall not have been for the one (1) month period ending on
and including the date immediately preceding the applicable date of
determination any Grace Periods (as defined in the

 30
 

 

Registration Rights Agreement) or (y) all shares of Common Stock
issuable upon conversion of the Notes and exercise of the Warrants shall be
eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws; (ii) on each day during
the Equity Conditions Measuring Period, the Common Stock is designated for quotation
on the Principal Market or any other Eligible Market and shall not have been
suspended from trading on such exchange or market (other than suspensions of
not more than two (2) days and occurring prior to the applicable date of
determination due to business announcements by the Company) nor shall delisting
or suspension by such exchange or market been threatened or pending either (A)
in writing by such exchange or market or (B) by falling below the then
effective minimum listing maintenance requirements of such exchange or market;
(iii) during the Equity Conditions Measuring Period, the Company shall have
delivered Conversion Shares upon conversion of the Notes and Warrant Shares
upon exercise of the Warrants to the holders on a timely basis as set forth in
Section 3(c)(ii) hereof (and analogous provisions under the Other Notes) and
Section 2(a) of the Warrants; (iv) any applicable shares of Common Stock to be
issued in connection with the event requiring determination may be issued in
full without violating Section 3(d) hereof and the rules or regulations of any
applicable Eligible Market; (v) for the two (2) Calendar Quarters immediately
preceding the applicable date of determination, the Company shall not have
failed to timely make any payments within five (5) Business Days of when such
payment is due pursuant to any Transaction Document; (vi) during the Equity
Conditions Measuring Period, there shall not have occurred either (A) the
public announcement of a pending, proposed or intended Fundamental Transaction
which has not been abandoned, terminated or consummated, or (B) an Event of
Default or (C) an event that with the passage of time or giving of notice would
constitute an Event of Default; (vii) the Company shall have no knowledge of
any fact that would cause (x) the Registration Statements required pursuant to
the Registration Rights Agreement not to be effective and available for the
resale of all remaining Registrable Securities in accordance with the terms of
the Registration Rights Agreement or (y) any shares of Common Stock issuable
upon conversion of the Notes and shares of Common Stock issuable upon exercise
of the Warrants not to be eligible for sale without restriction pursuant to
Rule 144(k) and any applicable state securities laws; and (viii) during the six
(6) month period ending on and including the date immediately preceding the
applicable date of determination, the Company otherwise shall have been in
material compliance with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document.

(u)           “Equity Conditions Failure”
means that (i) on any day during the period commencing ten (10) Trading Days
prior to the applicable Conversion Date through the applicable Share Delivery
Date, (ii) on any day during the period commencing ten (10) Trading Days prior
to the applicable Company Installment Notice Date through the applicable
Installment Date or (ii) on any day during the period commencing ten (10)
Trading Days prior to the applicable Mandatory Conversion Notice Date through
the applicable Mandatory Conversion Date, the Equity Conditions have not been
satisfied (or waived in writing by the Holder).

(v)           “Equity Value Redemption
Premium” means (i) for any Change of Control Notice or Event of
Default Notice, as applicable, delivered or required to be delivered in
connection with a Change of Control or Event of Default, as applicable, prior
to the third (3rd)
anniversary of the Issuance Date, 115% and (ii) for any Change of Control
Notice or Event of Default Notice, as applicable, delivered or required to be
delivered in connection with a Change

 31
 

 

of Control or Event of Default, as applicable, following the third (3rd) anniversary of the Issuance
Date, 110%; provided, however, that, in connection with any Change of Control
in which the Change of Control Consideration equals or exceeds $8.00 per share,
then the Equity Value Redemption Premium shall equal 100%.

(w)          “Excluded Securities” means any Common Stock issued or issuable: (i) in connection
with any Approved Stock Plan; (ii) upon conversion, adjustment or redemption of
the Notes or the exercise of the Warrants; (iii) pursuant to a bona fide firm
commitment underwritten public offering with a nationally recognized
underwriter which generates gross proceeds to the Company in excess of
$50,000,000 (other than an “at-the-market offering” as defined in Rule
415(a)(4) under the 1933 Act and “equity lines”); (iv) in connection with any
acquisition by the Company, whether through an acquisition of stock or a merger
of any business, assets or technologies the primary purpose of which is not to
raise equity capital; (v) in connection with any other strategic transaction or
alliance the primary purpose of which is not to raise equity capital including without
limitation, the issuance of no more than 10,000,000 shares of Common Stock to
agricultural conglomerates and (vii) upon conversion or exercise of any Options
or Convertible Securities which are outstanding on the day immediately
preceding the Subscription Date, provided that the conversion or exercise price
of such Options or Convertible Securities is not amended, modified or changed
on or after the Subscription Date.

(x)            “First
Conversion Threshold Conversion Amount” means an amount equal to (x)
50% of the Conversion Amount of this Note on the Issuance Date minus (y)
the aggregate Conversion Amount of this Note converted or redeemed pursuant to
the terms of this Note.

(y)           “Fiscal Quarter” means each of the fiscal
quarters adopted by the Company for financial reporting purposes that
correspond to the Company’s fiscal year that ends on December 31, or such other
fiscal quarter adopted by the
Company for financial reporting purposes in accordance with GAAP.

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

 32
 

 

under the Exchange Act), directly or indirectly, of 50% of the
aggregate Voting Stock of the Company, or (vii) Apollo Resources International
ceases to be the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of at least 50% of the aggregate Voting
Stock of the Company, or (viii) Apollo Resources International or its
affiliates becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 70% or greater of the aggregate
Voting Stock of the Company.

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

(bb)         “Holder Pro Rata Amount”
means a fraction (i) the numerator of which is the Principal amount of this
Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the
Securities Purchase Agreement on the Closing Date.

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

(dd)         “Installment Amount”
means with respect to any Installment Date, the lesser of (A) the product of
(i) $33,333.33, multiplied
by (ii) Holder Pro Rata Amount and (B) the Principal amount under this Note as
of such Installment Date, as any such Installment Amount may be reduced
pursuant to the terms of this Note, whether upon conversion, redemption or
otherwise, together with, in each case the sum of any accrued and unpaid
Interest with respect to such Principal amount and accrued and unpaid Late
Charges, if any, with respect to such Principal amount and Interest.  In the event the Holder shall sell or
otherwise transfer any portion of this Note, the transferee shall be allocated
a pro rata portion of the each unpaid Installment Amount hereunder.

 33
 

 

(ee)         “Installment Date”
means each of the following dates: (i) March 31, 2007, (ii) June 30, 2007,
(iii) September 31, 2007, (iv) December 31, 2007, (v) March 31, 2008, (vi) June
30, 2008, (vii) September 31, 2008, (viii) December 31, 2008, (ix) March 31,
2009, (x) June 30, 2009, (xi) September 31, 2009, (xii) December 31, 2009,
(xiii) March 31, 2010, (xiv) June 30, 2010, (xv) September 31, 2010, (xvi)
December 31, 2010, (xvii) March 31, 2011 and (xviii) the earlier of the
Maturity Date and June 30, 2011.

(ff)           “Installment Volume
Limitation” means 15% of
the aggregate dollar trading volume (as reported on Bloomberg) of the Common
Stock on the Principal Market over the forty (40) consecutive Trading Day
period ending on the Trading Day immediately preceding the applicable
Installment Notice Date.

(gg)         “Interest  Rate” means,
initially eight percent (8.0%) per annum, subject to adjustment at the
beginning of each Calendar Quarter beginning with the Calendar Quarter ended
March 31, 2007 in the event that the Interest Rate Conditions are satisfied as
of the applicable Calendar Quarter, then in which case the Interest Rate shall
equal six percent (6.0%) per annum thereafter.

(hh)         “Interest Rate Conditions” means that (i)
the Equity Conditions are presently satisfied (or waived in writing by the
Holder) and (ii) the Company has reported LTM Consolidated EBITDA in excess of
$40,000,000.

(ii)           “Letter of Credit Amount” means, as of any date of
determination, an amount equal to 30% of the aggregate Principal Amount
outstanding under the Notes.

(jj)           “LTM Consolidated EBITDA” means, with respect to any Person,
the aggregate Consolidated Net Income of such Person and its Subsidiaries for
the current Fiscal Quarter and the immediately preceding three (3) Fiscal
Quarters but only if and as set forth in the financial statements of the
Company contained in the Form 10-QSB or Form 10-KSB of the Company; plus
without duplication, the sum of the following amounts of such Person and
its Subsidiaries for such period and to the extent deducted in determining
Consolidated Net Income of such Person for such period:  (i) Consolidated Net Interest Expense, (ii)
income tax expense, (iii) depreciation expense, and (iv) amortization
expense.

(kk)         “Make-Whole Amount” means, as to any Conversion Amount being
converted pursuant to Section 3(c) or pursuant to Section 9, an amount equal to
the difference between (i) an amount of Interest that, but for the applicable
conversion, would have been paid to the Holder on such Conversion Amount from
the Issuance Date through the third (3rd)
anniversary of the Issuance Date and (ii) the amount of Interest already paid
to the Holder from the Issuance Date through the Conversion Date or Mandatory
Conversion Date, as applicable with respect to that Conversion Amount.

(ll)           “Make-Whole Conversion Price” means that price which shall be
the lower of (i) the applicable Conversion Price and (ii) the price computed as
90% of the arithmetic average of the Weighted Average Price of the Common
Shares during the five (5) consecutive Trading Day period ending on the Trading
Day immediately preceding the

 34
 

 

Conversion Date or Mandatory Conversion Notice Date, as applicable
(each, a “Make-Whole Conversion
Measuring Period”).  All such
determinations to be appropriately adjusted for any stock split, stock
dividend, stock combination or other similar transaction during such Make-Whole
Conversion Period.

(mm)       “Mandatory Conversion Volume Limitation” means 25% of the aggregate dollar trading volume
(as reported on Bloomberg) of the Common Stock on the Principal Market over the
thirty (30) consecutive Trading Day period prior to the applicable Mandatory
Conversion Notice Date.

(nn)         “Net Cash Balance” means, at any date, (i) an amount equal to
the aggregate amount of cash, cash equivalents (including cash collateralizing
the Letter of Credit and not including other restricted cash) and marketable
securities, consisting of corporate bonds, commercial paper and medium-term
notes, as shown or reflected in the notes to the Company’s consolidated balance
sheet as at such date minus (ii)
the unpaid principal balance of any Indebtedness for borrowed money (excluding
Indebtedness under the Notes and accounts payable).

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

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

(qq)         “Permitted
Indebtedness” means (i) from the Issuance Date through December 31,
2007, total Indebtedness of the Company not to exceed $77.5 million in the
aggregate outstanding at any one time; (ii) on and after January 1, 2008, total
aggregate Indebtedness of the Company that does not as of the date on which any
such Indebtedness is incurred, or as of the end of any Fiscal Quarter, exceed
3.0x LTM Consolidated EBITDA; provided, however, that such Indebtedness
permitted pursuant to clauses (i) and (ii) hereof, shall be made expressly
subordinate in right of payment to the Indebtedness evidenced by this Note, as
reflected in a written agreement acceptable to the Required Holders and
approved by the Required Holders in writing, and which Indebtedness does not
provide at any time for (A) the payment, prepayment, repayment, repurchase or
defeasance, directly or indirectly, of any principal or premium, if any,
thereon until ninety-one (91) days after the Maturity Date or later and (B)
total interest and fees at a rate in excess of the initial Interest Rate per
annum; (iii) Indebtedness of the Company outstanding as of the date hereof, and
Indebtedness of any Subsidiary that is non-recourse to the Company or any other
Subsidiary; (iv) Indebtedness incurred in connection with the build up of a
Shell terminal which Indebtedness shall not exceed twenty percent (20.0%) of
the total cost of such build up project and which Indebtedness may only be
secured by such Shell terminal being financed; (v) Indebtedness represented by
that certain municipal bond financing for the Company’s facility in Bell Chase,
Louisiana which Indebtedness shall be non-recourse to the Company, (vi) the
Indebtedness evidenced by this Note and the Other Notes.

 35
 

 

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

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

(tt)           “Principal
Market” means the OTC Bulletin Board.

(uu)         “Redemption Premium”
means (i) in the case of the Events of Default described in Section 4(a)(i) -
(vi) and (ix) - (xii), 120% or (ii) in the case of the Events of Default
described in Section 4(a)(vii) - (viii), 100%.

(vv)         “Registration Rights Agreement” means that certain registration
rights agreement dated as of the Subscription Date by and among the Company and
the initial holders of the Notes relating to, among other things, the
registration of the resale of the Common Stock issuable upon conversion of the
Notes and exercise of the Warrants.

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

(xx)          “Reserved Amount”
means, as of any date of determination, an amount equal to 35% of the aggregate
Principal amount outstanding under all of the Notes.

 36
 

 

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

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

(aaa)       “Subscription Date”
means August 11, 2006.

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

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

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

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

(fff)         “Weighted Average Price” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly announces is the official open
of trading), and ending at 4:00:00 p.m., New York Time (or such other time as
the Principal Market publicly announces is the official close of trading) as reported
by Bloomberg through its “Volume at Price” functions, or, if the foregoing does
not apply, the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of

 37
 

 

the highest closing bid price and the lowest closing ask price of any
of the market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Required
Holders.  If the Company and the Required
Holders are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

(30)         DISCLOSURE. Upon
receipt or delivery by the Company of any notice in accordance with the terms
of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information
relating to the Company or its Subsidiaries, the Company shall within two (2)
Business Days after any such receipt or delivery publicly disclose such
material, nonpublic information on a Current Report on Form 8-K or
otherwise.  In the event that the Company
believes that a notice contains material, nonpublic information relating to the
Company or its Subsidiaries, the Company so shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to
such notice do not constitute material, nonpublic information relating to the
Company or its Subsidiaries.  In the
event of a breach of the foregoing covenant by the Company, any of its
Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Holder shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material, nonpublic information without the prior approval by the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents.  No
Holder shall have any liability to the Company, its Subsidiaries, or any of its
or their respective officers, directors, employees, stockholders or agents for
any such disclosure.

[Signature Page Follows]

 

 38

 

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

	
  

  	
  Earth Biofuels, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dennis G. McLaughlin

  	
   

  
	
   

  	
  Name: Dennis G.
  McLaughlin, III

  	
   

  
	
   

  	
  Title: Chief
  Executive Officer

  	
   

  

 

EXHIBIT I

EARTH BIOFUELS, INC.

CONVERSION NOTICE

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

	
  Date of Conversion:

  	
   

  
	
   

  	
   

  
	
  Aggregate
  Conversion Amount to be converted:

  	
   

  
	
   

  	
   

  
	
  Please confirm the following information:

  	
   

  
	
   

  	
   

  
	
  Conversion
  Price:

  	
   

  
	
   

  	
   

  
	
  Number of shares
  of Common Stock to be issued:

  	
   

  
	
   

  	
   

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

  
	
   

  	
   

  
	
  Issue to:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Facsimile
  Number:

  	
   

  
	
   

  	
   

  
	
  Authorization:

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  
	
   

  	
   

  
	
  Account Number:

  	
   

  
	
    (if
  electronic book entry transfer)

  	
   

  
	
   

  	
   

  
	
  Transaction Code
  Number:

  	
   

  
	
    (if
  electronic book entry transfer)

  	
   

  
	
  Installment Amounts to be reduced and amount

  of reduction:

  	
   

  
														

 

ACKNOWLEDGMENT

The Company hereby
acknowledges this Conversion Notice and hereby directs Nevada Agency and Trust
Company to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated August   ,
2006 from the Company and acknowledged and agreed to by Nevada Agency and Trust
Company.

	
  

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:Exhibit 10.83

NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY
REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iv) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE
AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS
THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iv) OF
THIS NOTE.

Earth
Biofuels, Inc.

SENIOR CONVERTIBLE NOTE

	
  Issuance
  Date:  August 11, 2006

  	
  Original Principal Amount: U.S. $500,000.00

  

 

FOR
VALUE RECEIVED, Earth Biofuels, Inc., a Delaware corporation
(the “Company”), hereby promises
to pay to the order of GUNDYCO ITF  EXCALIBUR LIMITED PARTNERSHIP or registered assigns (“Holder”) the amount set out above as the
Original Principal Amount (as reduced pursuant to the terms hereof pursuant to
redemption, conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), on any Installment
Date with respect to the Installment Amount due on such Installment Date (each,
as defined herein), acceleration, redemption or otherwise (in each case in
accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at
the applicable Interest Rate from the date set out above as the Issuance Date
(the “Issuance  Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below), any Installment Date
or the Maturity Date or acceleration, conversion, redemption or otherwise (in
each case in accordance with the terms hereof). 
This Senior Convertible Note (including all Senior Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Senior
Convertible Notes issued pursuant to the Securities Purchase Agreement on the
Closing Date (collectively, the “Notes”
and such other Senior Convertible Notes, the “Other
Notes”).  Certain capitalized terms used herein are
defined in Section 29.

(1)           PAYMENTS
OF PRINCIPAL.  On each Installment
Date, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date

 

in accordance with Section 8.  On the Maturity Date, the Company shall pay
to the Holder an amount in cash representing all outstanding Principal, accrued
and unpaid Interest and accrued and unpaid Late Charges on such Principal and
Interest.  The “Maturity  Date”
shall be August 11, 2011, as may be extended at the option of the Holder (i) in
the event that, and for so long as, an Event of Default (as defined in Section
4(a)) shall have occurred and be continuing on the Maturity Date (as may be
extended pursuant to this Section 1) or any event shall have occurred and be
continuing on the Maturity Date (as may be extended pursuant to this Section 1)
that with the passage of time and the failure to cure would result in an Event
of Default and (ii) through the date that is ten (10) Business Days after the
consummation of a Change of Control in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(b))
is delivered prior to the Maturity Date. 
Other than as specifically permitted by this Note, the Company may not
prepay any portion of the outstanding Principal, accrued and unpaid interest or
accrued and unpaid Late Charges on Principal and Interest, if any.

(2)           INTEREST;
INTEREST RATE.  Interest on this Note
shall commence accruing on the Issuance Date and shall be computed on the basis
of a 360-day year comprised of twelve (12) thirty (30) day months and shall be
payable in arrears for each Calendar Quarter on the first day of the succeeding
Calendar Quarter during the period beginning on the Issuance Date and ending
on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being November 1, 2006.  Interest shall be payable on each Interest
Date, to the record holder of this Note on the applicable Interest Date, and to the extent that any Principal amount
of this Note is converted prior to such Interest Date, accrued and unpaid
Interest with respect to such converted Principal amount and accrued and unpaid
Late Charges with respect to such Principal and Interest shall be paid on the
Conversion Date (as defined below) to the record holder of this Note on the
applicable Conversion Date, in cash. 
From and after the occurrence and during the continuance of an Event of
Default, the Interest Rate shall be increased to fifteen percent (15.0%).  In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest
as calculated and unpaid at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.

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

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

 2
 

 

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

(i)            “Conversion
Amount” means the portion of the Principal to be converted, redeemed
or otherwise with respect to which this determination is being made.

(ii)           “Conversion
Price” means, as of any Conversion Date (as defined below) or other
date of determination, $2.90, subject to adjustment as provided herein.

(c)           Mechanics of
Conversion.

(i)            Optional Conversion.  To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a
copy of an executed notice of conversion in the form attached hereto as Exhibit
I (the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iv),
surrender this Note to a nationally recognized overnight delivery service for
delivery to the Company (or an indemnification undertaking with respect to this
Note in the case of its loss, theft or destruction).  On or before the first (1st) Business Day following the date of
receipt of a Conversion Notice, the Company shall transmit by facsimile a
confirmation of receipt of such Conversion Notice to the Holder and the Company’s
transfer agent (the “Transfer Agent”).  On or before the second Business Day
following the date of receipt of a Conversion Notice (the “Share
Delivery Date”),
the Company shall (1) (X) if legends are not required to be placed on certificates
of Common Stock pursuant to the Securities Purchase Agreement and provided that
the Transfer Agent is participating in the Depository Trust Company’s (“DTC”) Fast Automated Securities Transfer Program, credit
such aggregate number of shares of Common Stock to which the Holder shall be
entitled to the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock to which the Holder shall be entitled which certificates shall
not bear any restrictive legends unless required pursuant to Section 2(g) of
the Securities Purchase Agreement; (2) pay to the Holder in cash an amount
equal to the accrued and unpaid Interest on the Conversion Amount up to and
including the Conversion Date; and (3) for any conversions prior to the third
(3rd)
anniversary of the Issuance Date, pay any applicable Make-Whole Amount in
accordance with Section 3(c)(ii).  If
this Note is physically surrendered for conversion as required by Section
3(c)(iv) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 19(d)) representing the
outstanding Principal not converted.  The
Person or Persons entitled to receive the shares of Common Stock issuable upon
a conversion of this Note shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on the Conversion Date.  In the event of a partial conversion of this
Note pursuant hereto, the principal amount

 3
 

 

converted
shall be deducted from the Installment Amounts relating to the Installment
Dates as set forth in the Conversion Notice.

(ii)           Make-Whole Amount.  If prior to the third (3rd) anniversary of the Issuance Date, the
Holder converts all or any portion of this Note pursuant to Section 3(c) or the
Company requires conversion of all or any portion of this Note pursuant to
Section 9, then upon delivery of the applicable shares of Common Stock upon
such conversion, the Holder shall receive the Make-Whole Amount; provided,
however, that in the event that the Average Market Price on a Conversion Date
or Mandatory Conversion Date, as applicable, occurring after the Effective Date
(as defined in the Registration Rights Agreement) exceeds 175% of the
Conversion Price on the Conversion Date or Mandatory Conversion Date, as
applicable, then the Holder shall not be entitled to receive the Make-Whole
Amount; provided, further, that in the event that the Closing Sale Price of the Common Stock for each
Trading Day of any forty (40) consecutive Trading Day period after the Effective
Date exceeds 200% of the Conversion Price on the Issuance Date (as
adjusted for any stock split, combination, reclassification or similar
transaction), then the Holder shall no longer have the right to receive a Make-Whole
Amount.  The Company shall pay the
Make-Whole Amount in shares of Common Stock or, at the Company’s option, in
cash.  Following receipt of any
Conversion Notice during the period when a Holder is entitled to receive a
Make-Whole Amount hereunder, the Company shall, in its confirmation of receipt
of such Conversion Notice as required by Section 3(c)(i) (the “Conversion Notice Confirmation”), (A) specify whether the
Make-Whole Amount shall not be paid in shares of Common Stock but rather in
cash and (B) if the Make-Whole Amount is to be paid in shares of Common Stock,
certify that there has been no Equity Conditions Failure.  Any Make-Whole Amount to be paid in shares of
Common Stock shall be paid in a number of fully paid and nonassessable shares
of Common Stock equal to the quotient of (1) the Make-Whole Amount and (2) the
Make-Whole Conversion Price.  If the
Make-Whole Amount shall be paid in Common Stock on the Share Delivery Date, the
Company shall (x) if legends are not required to be placed on certificates of
Common Stock pursuant to the Securities Purchase Agreement and provided the
Transfer Agent is participating in the DTC Fast Automated Securities Transfer
Program, credit such aggregate number of Common Shares to which the Holder
shall be entitled to the Holder or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system, or (y) if the Transfer
Agent is not participating in the DTC Fast Automated Securities Transfer
Program, issue and deliver to the address as specified in the Conversion Notice
or in the register maintained by the Company for such purpose pursuant to the
Securities Purchase Agreement, a certificate, registered in the name of the
Holder or its designee, for the number of Common Shares to which the Holder
shall be entitled which certificates shall not bear any restrictive legends
unless required pursuant to Section 2(g) of the Securities Purchase
Agreement.  If the Make-Whole Amount
shall be paid in cash, then the Company shall make such payment on the Share
Delivery Date by wire transfer of immediately available funds to an account
designated in writing by the Holder. 
Notwithstanding the foregoing the Company shall not be entitled to pay
the Make-Whole Amount in shares of Common Stock and shall be required to pay
such Make-Whole Amount in cash on the applicable Share Delivery Date, if the
Equity Conditions are not then satisfied or if the Weighted Average Price of
the Common Stock on any Trading Day during the Make-Whole Conversion Measuring
Period is less than $1.00.

(iii)          Company’s Failure to
Timely Convert.  If within three (3)
Trading Days after the Company’s receipt of the facsimile copy of a Conversion
Notice the

 4
 

 

Company shall
fail to issue and deliver a certificate to the Holder or credit the Holder’s
balance account with DTC for the number of shares of Common Stock to which the
Holder is entitled upon such holder’s conversion of any Conversion Amount (a “Conversion Failure”), and if on or after such Trading Day
the Holder purchases (in an open market transaction or otherwise) Common Stock
to deliver in satisfaction of a sale by the Holder of Common Stock issuable
upon such conversion that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three (3) Business
Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price
(including brokerage commissions and other out of pocket expenses, if any) for
the shares of Common Stock so purchased (the “Buy-In
Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such Common Stock) shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the Conversion Date.

(iv)          Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon conversion of
any portion of this Note in accordance with the terms hereof, the Holder shall
not be required to physically surrender this Note to the Company unless (A) the
full Conversion Amount represented by this Note is being converted or (B) the
Holder has provided the Company with prior written notice (which notice may be
included in a Conversion Notice) requesting reissuance of this Note upon
physical surrender of this Note.  The
Holder and the Company shall maintain records showing the Principal, Interest
and Late Charges converted and the dates of such conversions or shall use such
other method, reasonably satisfactory to the Holder and the Company, so as not
to require physical surrender of this Note upon conversion.

(v)           Pro Rata Conversion;
Disputes.  In the event that the
Company receives a Conversion Notice from more than one holder of Notes for the
same Conversion Date and the Company can convert some, but not all, of such
portions of the Notes submitted for conversion, the Company, subject to Section
3(d), shall convert from each holder of Notes electing to have Notes converted
on such date a pro rata amount of such holder’s portion of its Notes submitted
for conversion based on the principal amount of Notes submitted for conversion
on such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. 
In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 24.

(d)           Limitations on
Conversions.

(i)            Beneficial
Ownership.  The Company shall not
effect any conversion of this Note or otherwise issue shares of Common Stock
pursuant to Section 3(c)(ii) hereof or Sections 8 or 9 hereof, and the Holder
of this Note shall not have the right to convert any portion of this Note
pursuant to Section 3(a), to the extent that after giving effect to such
conversion, the Holder (together with the Holder’s affiliates) would
beneficially own in excess of 4.99% (the “Maximum Percentage”)
of the number of shares of Common Stock outstanding immediately after giving
effect to such conversion.  For purposes
of the foregoing sentence, the

 5
 

 

number of
shares of Common Stock beneficially owned by the Holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion of
this Note with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this
Note beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any Other Notes or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the
preceding sentence, for purposes of this Section 3(d)(i), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended (the “1934 Act”).  For purposes of this Section 3(d)(i), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Form 10-KSB, Form 10-QSB or Form 8-K, as the case may
be (y) a more recent public announcement by the Company or (z) any other notice
by the Company or the Transfer Agent setting forth the number of shares of
Common Stock outstanding.  For any reason
at any time, upon the written request of the Holder, the Company shall within
one (1) Business Day confirm in writing to the Holder the number of shares of
Common Stock then outstanding.  In any
case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Note, by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported.

(ii)           Principal Market
Regulation.  The Company shall not be
obligated to issue any shares of Common Stock upon conversion of this Note, and
the Holder of this Note shall not have the right to receive upon conversion of
this Note any shares of Common Stock, if the issuance of such shares of Common
Stock would exceed the aggregate number of shares of Common Stock which the
Company may issue upon conversion or exercise, as applicable, of the Notes and
Warrants without breaching the Company’s obligations under the rules or
regulations of the applicable Eligible Market (the number of shares which may
be issued without violating such rules and regulations, the “Exchange
Cap”), except that
such limitation shall not apply in the event that the Company (A) obtains the
approval of its stockholders as required by the applicable rules of such
Eligible Market for issuances of Common Stock in excess of such amount or (B)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
Required Holders.  Unless and until such
approval or written opinion is obtained, no purchaser of the Notes pursuant to
the Securities Purchase Agreement (the “Purchasers”) shall be issued in the aggregate, upon conversion or exercise
or otherwise, as applicable, of Notes or Warrants, shares of Common Stock in an
amount greater than the product of the Exchange Cap multiplied by a fraction,
the numerator of which is the principal amount of Notes issued to such
Purchasers pursuant to the Securities Purchase Agreement on the Closing Date
and the denominator of which is the aggregate principal amount of all Notes
issued to the Purchasers pursuant to the Securities Purchase Agreement on the
Closing Date (with respect to each Purchaser, the “Exchange Cap Allocation”). 
In the event that any Purchaser shall sell or otherwise transfer any of
such Purchaser’s Notes, the transferee shall be allocated a pro rata portion of
such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior
sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such

 6
 

 

transferee.  In the event that any holder of Notes shall
convert all of such holder’s Notes into a number of shares of Common Stock
which, in the aggregate, is less than such holder’s Exchange Cap Allocation,
then the difference between such holder’s Exchange Cap Allocation and the
number of shares of Common Stock actually issued to such holder shall be allocated
to the respective Exchange Cap Allocations of the remaining holders of Notes on
a pro rata basis in proportion to the aggregate principal amount of the Notes
then held by each such holder.

(4)           RIGHTS
UPON EVENT OF DEFAULT.

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

(i)            the failure of the
applicable Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior
to the date that is sixty (60) days after the applicable Effectiveness Deadline
(as defined in the Registration Rights Agreement), or, while the applicable
Registration Statement is required to be maintained effective pursuant to the
terms of the Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to any holder of the Notes for
sale of all 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
ten (10) consecutive days (other than days during an Allowable Grace Period (as
defined in the Registration Rights Agreement)or for more than an aggregate of
thirty (30) days in any 365-day period (other than days during an Allowable
Grace Period);

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

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

(iv)          at any time following
the tenth (10th)
consecutive Business Day following the Authorized Share Failure Deadline that
the Holder’s Authorized Share Allocation is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion of
the full Conversion Amount of this Note (without regard to any limitations on
conversion set forth in Section 3(d) or otherwise);

(v)           the Company’s failure
to pay to the Holder any amount of Principal, Interest, Late Charges or other
amounts when and as due under this Note (including, without limitation, the
Company’s failure to pay any redemption payments or amounts hereunder) or any
other Transaction Document (as defined in the Securities Purchase

 7
 

 

Agreement) or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, except, in the case of a failure to pay Interest and Late
Charges when and as due, in which case only if such failure continues for a
period of at least ten (10) Business Days;

(vi)          the occurrence of any default under,
redemption of or acceleration prior to maturity of any Indebtedness of the
Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) which, individually or in the aggregate, exceeds
$500,000, other than with respect to any Other Notes;

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

(viii)        a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for
relief against the Company or any of its Subsidiaries in an involuntary case,
(B) appoints a Custodian of the Company or any of its Subsidiaries or (C)
orders the liquidation of the Company or any of its Subsidiaries;

(ix)           a final judgment or
judgments for the payment of money aggregating in excess of $1,500,000 are rendered against the
Company or any of its Subsidiaries and which judgments are not, within sixty
(60) days after the entry thereof, bonded, discharged or stayed pending appeal,
or are not discharged within sixty (60) days after the expiration of such stay;
provided, however, that any judgment which is covered by insurance or an
indemnity from a credit worthy party shall not be included in calculating the $1,500,000 amount
set forth above so long as the Company provides the Holder a written statement
from such insurer or indemnity provider (which written statement shall be
reasonably satisfactory to the Holder) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such
judgment;

(x)            the Company 
breaches any representation, warranty, covenant or other term or condition of
any Transaction Document, which breach has or is likely to have a cost or
adverse impact on the Company or the Holders (including by reduction in the
value of the shares of Common Stock deliverable in connection with the
Transaction Documents) in excess of $250,000, except, in the case of a breach
of a covenant or other term or condition of any Transaction Document which is
curable, only if such breach continues for a period of at least ten (10)
consecutive Business Days;

(xi)           any breach or failure
in any respect to comply with either of Sections 8 or 15 of this Note; or

 8
 

 

(xii)          any Event of Default (as
defined in the Other Notes) occurs with respect to any Other Notes.

(b)           Redemption Right.  Upon the occurrence of an Event of Default
with respect to this Note or any Other Note, the Company shall within one (1)
Business Day deliver written notice thereof via facsimile and overnight courier
(an “Event of Default Notice”) to the Holder.  At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. 
Each portion of this Note subject to redemption by the Company pursuant
to this Section 4(b) shall be redeemed by the Company at a price equal to the
greater of (i) the product of (A) the
sum of the Conversion Amount to be redeemed together with accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest and (B) the Redemption Premium and
(ii) the product of (A) the Conversion Rate with respect to such sum of the
Conversion Amount together with accrued and unpaid Interest with respect to
such Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest in
effect at such time as the Holder delivers an Event of Default Redemption
Notice and (B) the product of (1) the Equity Value Redemption Premium and (2)
the greater of (x) the Closing Sale Price of the Common Stock on the date
immediately preceding such Event of Default, (y) the Closing Sale Price of the
Common Stock on the date immediately after such Event of Default and (z) the
Closing Sale Price of the Common Stock on the date the Holder delivers the
Event of Default Redemption Notice (the “Event of Default Redemption Price”). 
Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 13.  To
the extent redemptions required by this Section 4(b) are deemed or determined
by a court of competent jurisdiction to be prepayments of the Note by the Company,
such redemptions shall be deemed to be voluntary prepayments. In the event of a
partial redemption of this Note pursuant hereto, the principal amount redeemed
shall be deducted from the Installment Amounts relating to the applicable
Installment Dates as set forth in the Event of Default Redemption Notice.  The parties hereto agree that in the event of
the Company’s redemption of any portion of the Note under this Section 4(b),
the Holder’s damages would be uncertain and difficult to estimate because of
the parties’ inability to predict future interest rates and the uncertainty of
the availability of a suitable substitute investment opportunity for the
Holder.  Accordingly, any Redemption
Premium due under this Section 4(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty.

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

(a)           Assumption.  The
Company shall not enter into or be party to a Fundamental Transaction unless
(i)  the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with
the provisions of this Section 5(a) pursuant to written agreements in
form and substance reasonably satisfactory to the Required Holders and approved
by the Required Holders prior to such Fundamental Transaction, including
agreements to deliver to each holder of Notes in

 9
 

 

exchange for
such Notes a security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to the Notes, including, without limitation,
having a principal amount and interest rate equal to the principal amounts and
the interest rates of the Notes then outstanding held by such holder, having
similar conversion rights and having similar ranking to the Notes, and
reasonably satisfactory to the Required Holders and (ii)  the Successor Entity (including its Parent Entity) is
a publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market (a “Public
Successor Entity”).  Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the “Company” shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein.  Upon consummation of the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion of this Note at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Company’s Common Stock (or
other securities, cash, assets or other property) issuable upon the conversion of the Notes prior to such Fundamental
Transaction, such shares of the publicly
traded common stock (or their equivalent) of the Successor Entity (including
its Parent Entity), as adjusted in accordance with the provisions of this
Note.  The provisions of this
Section shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations on the
conversion of this Note.

(b)           Redemption Right.  No sooner than twenty (20) Trading Days nor
later than ten (10) Trading Days prior to the consummation of a Change of
Control, but not prior to the public announcement of such Change of Control,
the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). 
At any time during the period beginning after the Holder’s receipt of a
Change of Control Notice and ending on the later of (A) one (1) Business Day
prior to consummation of such Change of Control or (B) twenty (20) Trading Days
after the date of receipt of such Change of Control Notice, the Holder may
require the Company to redeem all or any portion of this Note by delivering
written notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of
Control Redemption Notice shall indicate the Conversion Amount the Holder is
electing to redeem.  The portion of this
Note subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (i) the sum of (x) the
product of the Change of Control Redemption Premium and the Conversion Amount
being redeemed and (y) the amount of any accrued but unpaid Interest on such
Conversion Amount being redeemed and accrued and unpaid Late Charges, if any,
with respect to such Conversion Amount and Interest through the date of such
redemption payment and (ii) the product of (x) the Equity Value Redemption
Premium and (y) the sum of (1) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient determined by dividing (I) the
aggregate cash consideration and the aggregate cash value of any non-cash
consideration per Common Share to be paid to the holders of the Common Shares
upon consummation of the Change of Control (any such non-cash consideration to
be valued at the higher of the Closing Sale Price of such securities as of the
Trading Day immediately prior to the consummation of such Change of Control,
the Closing Sale Price on the Trading Day immediately following the public
announcement of such proposed Change of Control and the Closing Sale Price on
the Trading Day immediately prior to the public announcement of such proposed
Change of Control) by (II)

 10
 

 

the Conversion
Price plus (2) the amount of any accrued but unpaid Interest on such Conversion
Amount being redeemed and accrued and unpaid Late Charges, if any, with respect
to such Conversion Amount and Interest through the date of such redemption
payment, (the “Change of Control
Redemption Price”). 
Redemptions required by this Section 5 shall be made in accordance with
the provisions of Section 13 and shall have priority to payments to
stockholders in connection with a Change of Control.  To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments.  Notwithstanding
anything to the contrary in this Section 5, but subject to Section 3(d), until
the Change of Control Redemption Price (together with any interest thereon) is
paid in full, the Conversion Amount submitted for redemption under this Section
5(c) (together with any interest thereon) may be converted, in whole or in
part, by the Holder into Common Stock pursuant to Section 3.  In the event of a partial redemption of this
Note pursuant hereto, the principal amount redeemed shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as set forth
in the Change of Control Redemption Notice. 
The parties hereto agree that in the event of the Company’s redemption
of any portion of the Note under this Section 5(b), the Holder’s damages would
be uncertain and difficult to estimate because of the parties’ inability to
predict future interest rates and the uncertainty of the availability of a
suitable substitute investment opportunity for the Holder.  Accordingly, any Change of Control Redemption
Premium due under this Section 5(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty.

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

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

(b)           Other Corporate
Events.  In addition to and not in
substitution for any other rights hereunder, prior to the consummation of any
Fundamental Transaction pursuant to which holders of shares of Common Stock are
entitled to receive securities or other assets with respect to or in exchange
for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon a conversion of this
Note, at the Holder’s option, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or restrictions
on the convertibility of this Note) or (ii) in lieu of the shares of Common
Stock otherwise receivable upon such conversion, such securities or other

 11
 

 

assets
received by the holders of shares of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion
rights for the form of such consideration (as opposed to shares of Common
Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate.  The provisions of this
Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or
redemption of this Note.

(7)           RIGHTS
UPON ISSUANCE OF OTHER SECURITIES.

(a)           Adjustment of
Conversion Price upon Issuance of Common Stock.  If and whenever on or after the Subscription
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
or sold by the Company in connection with any Excluded Security) for a
consideration per share less than a price equal to the Conversion Price in
effect immediately prior to such issue or sale (such price the “Applicable
Price”) (the
foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance the Conversion
Price then in effect shall be reduced to an amount equal to the product of
(A) the Conversion Price in effect immediately prior to such Dilutive
Issuance and (B) the quotient determined by dividing (1) the sum of
(I) the product derived by multiplying the Conversion Price in effect
immediately prior to such Dilutive Issuance and the number of shares of Common
Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus
(II) the consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying (I) the Conversion
Price in effect immediately prior to such Dilutive Issuance by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such
Dilutive Issuance.  For purposes of
determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

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

 12
 

 

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

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

(iv)          Calculation of Consideration Received.  In case any Option is issued in connection
with the issue or sale of other securities of the Company, together comprising
one integrated transaction in which no specific consideration is allocated to
such Options by the parties thereto, the Options will be deemed to have been
issued for the difference of (x) the aggregate fair market value of such
Options and other securities issued or sold in such integrated transaction,
less (y) the fair market value of the securities other than such Option, issued
or sold in such transaction and the other securities issued or sold in such
integrated transaction will be deemed to have been issued or sold for the
balance of the consideration received by the Company.  If any Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the gross amount
raised by the Company; provided, however, that such gross amount is not greater
than 110% of the net amount received by the Company therefor.  If any Common Stock,

 13
 

 

Options or Convertible Securities are issued
or sold for a consideration other than cash, the amount of the consideration
other than cash received by the Company will be the fair value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Company will be the Closing
Sale Price of such securities on the date of receipt.  If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other
than cash or securities will be determined jointly by the Company and the
Required Holders.  If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Business Days after the tenth
(10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Required Holders.  The determination of such appraiser shall be
deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne by the Company.

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

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

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

 14
 

 

(8)           COMPANY
INSTALLMENT CONVERSION OR REDEMPTION.

(a)           General.  On each applicable Installment Date, the
Company shall pay to the Holder of this Note the Installment Amount due on such
date by converting such Installment Amount, provided that there is not then an
Equity Conditions Failure, in accordance with this Section 8 (a “Company Conversion”); provided, however, that the Company
may, at its option following notice to the Holder, pay the Installment Amount
by redeeming such Installment Amount (a “Company Redemption”)
or by any combination of a Company Conversion and a Company Redemption so long
as all of the outstanding applicable Installment Amount shall be converted
and/or redeemed by the Company on the applicable Installment Date, subject to
the provisions of this Section 8; provided further, however, that the Company
shall not be entitled to pay any portion of the Installment Amount in shares of
Common Stock pursuant to a Company Conversion and shall be required to pay such
Installment Amount in cash pursuant to a Company Redemption if the Weighted
Average Price of the Common Stock on any Trading Day during the Company
Conversion Measuring Period is less than $1.00. 
Notwithstanding the foregoing,
the Company may not effect a Company Conversion of any Installment Amount under
this Section in excess of the Holder Pro Rata Amount of the applicable
Installment Volume Limitation.  On
or prior to the date which is the eighth (8th) Trading Day prior to each Installment Date (each, an “Installment Notice Due Date”), the Company shall deliver
written notice (each, a “Company Installment Notice”
and the date all of the holders receive such notice is referred to as to the “Company Installment Notice Date”), to each
holder of Notes which Company Installment Notice shall (i) either (A) confirm
that the applicable Installment Amount of such holder’s Note shall be converted
in whole pursuant to a Company Conversion (such amount to be converted, the “Company Conversion Amount”) or (B) (1) state that the
Company elects to redeem, or is required to redeem in accordance with the
provisions of the Notes, in whole or in part, the applicable Installment Amount
pursuant to a Company Redemption and (2) specify the portion (including
Interest and Late Charges, if any, on such amount and Interest) which the
Company elects or is required to redeem pursuant to a Company Redemption (such
amount to be redeemed, the “Company Redemption Amount”)
and the portion (including Interest and Late Charges, if any, on such amount
and Interest), if any, that the Company elects to convert pursuant to a Company
Conversion (such amount a “Company Conversion Amount”)
which amounts when added together, must equal the applicable Installment Amount
and (ii) if the Installment Amount is to be paid, in whole or in part, pursuant
to a Company Conversion, certify that there
is not then an Equity Conditions Failure as of the date of the Company
Installment Notice.  Each Company
Installment Notice shall be irrevocable. 
If the Company does not timely deliver a Company Installment Notice in
accordance with this Section 8, then the Company shall be deemed to have
delivered an irrevocable Company Installment Notice confirming a Company
Conversion and shall be deemed to have certified that there is not then an
Equity Conditions Failure in connection with any such conversion. Except as
expressly provided in this Section 8(a), the Company shall convert and/or
redeem the applicable Installment Amount of this Note pursuant to this Section
8 and the corresponding Installment Amounts of the Other Notes pursuant to the
corresponding provisions of the Other Notes in the same ratio of the
Installment Amount being converted and/or redeemed hereunder.  The Company Conversion Amount (whether set
forth in the Company Installment Notice or by operation of this Section 8)
shall be converted in accordance with Section 8(b) and the Company Redemption
Amount shall be redeemed in accordance with Section 8(c).

 15
 

 

(b)           Mechanics of Company
Conversion.  Subject to Section 3(d),
if the Company delivers a Company Installment Notice and elects, or is deemed
to have elected, in whole or in part, a Company Conversion in accordance with
Section 8(a), then the applicable Company Conversion Amount, if any, which
remains outstanding as of the applicable Installment Date shall be converted as
of the applicable Installment Date by converting on such Installment Date such
Company Conversion Amount at the Company Conversion Price; provided that the
Equity Conditions are then satisfied (or waived in writing by the Holder) on
such Installment Date and that the Holder Pro Rata Amount of the Installment
Volume Limitation is not exceeded.  If
the Equity Conditions are not satisfied (or waived in writing by the Holder) on
such Installment Date or the Holder Pro Rata Amount of the Installment Volume
Limitation is exceeded, then at the option of the Holder designated in writing
to the Company, the Holder may require the Company to do any one or more of the
following: (i) the Company shall redeem all or any part designated by the
Holder of the unconverted Company Conversion Amount (such designated amount is
referred to as the “First Redemption Amount”)
and the Company shall pay to the Holder within three (3) days of such
Installment Date, by wire transfer of immediately available funds, an amount in
cash equal to 120% of such First Redemption Amount, and/or (ii) the Company
Conversion shall be null and void with respect to all or any part designated by
the Holder of the unconverted Company Conversion Amount and the Holder shall be
entitled to all the rights of a holder of this Note with respect to such amount
of the Company Conversion Amount; provided, however, that the Conversion Price
for such unconverted Company Conversion Amount shall thereafter be adjusted to
equal the lesser of (A) the Company Conversion Price as in effect on the date
on which the Holder voided the Company Conversion and (B) the Company
Conversion Price as in effect on the date on which the Holder delivers a
Conversion Notice relating thereto.  If
the Company fails to redeem any First Redemption Amount by the third (3rd) day following the applicable
Installment Date by payment of such amount on the applicable Installment Date,
then the Holder shall have the rights set forth in Section 13(a) as if the
Company failed to pay the applicable Company Redemption Price and all other
rights under this Note (including, without limitation, such failure constituting
an Event of Default described in Section 4(a)(xi)).  Notwithstanding anything to the contrary in
this Section 8(b), but subject to 3(d), until the Company delivers Common Stock
representing the Company Conversion Amount to the Holder, the Company Conversion
Amount may be converted by the Holder into Common Stock pursuant to Section
3.  In the event that the Holder elects
to convert the Company Conversion Amount prior to the applicable Installment
Date as set forth in the immediately preceding sentence, the Company Conversion
Amount so converted shall be deducted from the Installment Amounts relating to
the applicable Installment Dates as set forth in the applicable Conversion
Notice.

(c)           Mechanics of Company
Redemption.  If the Company elects a
Company Redemption in accordance with Section 8(a), then the Company Redemption
Amount, if any, which is to be paid to the Holder on the applicable Installment
Date shall be redeemed by the Company on such Installment Date, and the Company
shall pay to the Holder on such Installment Date, by wire transfer of
immediately available funds, in an amount in cash (the “Company
Installment Redemption Price”) equal to 100% of the Company
Redemption Amount.  If the Company fails
to redeem the Company Redemption Amount on the applicable Installment Date by
payment of the Company Installment Redemption Price on such date, then at the
option of the Holder designated in writing to the Company (any such
designation, “Conversion Notice” for purposes of
this Note), the Holder may require the Company to convert

 16

 

all or any
part of the Company Redemption Amount at the Company Conversion Price.  Conversions required by this Section 8(c)
shall be made in accordance with the provisions of Section 3(c).  Notwithstanding anything to the contrary in
this Section 8(c), but subject to Section 3(d), until the Company Installment
Redemption Price (together with any interest thereon) is paid in full, the
Company Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.  In the event the Holder
elects to convert all or any portion of the Company Redemption Amount prior to
the applicable Installment Date as set forth in the immediately preceding sentence,
the Company Redemption Amount so converted shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as set forth
in the applicable Conversion Notice.

(d)           Deferred Installment
Amount.  Notwithstanding any
provision of this Section 8 to the contrary, the Holder may, at its option and
in its sole discretion, deliver a written notice to the Company at least two
(2) days prior to any Installment Notice Due Date electing to have the payment
of all or any portion of an Installment Amount payable on the next Installment
Date deferred to the Maturity Date.  Any
amount deferred to the Maturity Date pursuant to this Section 8(d) shall
continue to accrue Interest through the Maturity Date and shall be paid on such
date in cash.

(e)           Cancellation of
Installment Amount.  Notwithstanding
any provision of this Section 8 to the contrary, in the event that the Weighted
Average Price of the Common Stock equals or exceeds 145% of the applicable
Conversion Price for each of the five (5) consecutive Trading Days immediately
preceding the Installment Notice Due Date, then the Installment Amount payable
on such Installment Date shall be deferred to the Maturity Date.  Any amount deferred to the Maturity Date
pursuant to this Section 8(e) shall continue to accrue Interest through the Maturity
Date and shall be paid on such date in cash.

(9)   COMPANY’S
RIGHT OF MANDATORY CONVERSION.

(a)           Mandatory Conversion.  Subject to Section 3(d), if at any time
from and after the Effective Date (as defined in the Registration Rights
Agreement) (the “Mandatory Conversion Eligibility Date”), (i) the
Closing Sale Price of the Common Stock for any twenty (20) Trading Days
(which need not be consecutive) out of any thirty (30) consecutive Trading Day
period
following the applicable Mandatory Conversion Eligibility Date (the “Mandatory
Conversion Measuring Period”) equals or exceeds either (A) 150% (the “First
Conversion Threshold”) or (B) 175% (the “Second Conversion Threshold”) of the
Conversion Price on the Closing Date (subject to appropriate adjustments for
stock splits, stock dividends, stock combinations and other similar
transactions after the Subscription Date) and (ii) there is not then an Equity
Conditions Failure, the Company shall have the right to require the Holder to
convert (1) if the First Conversion Threshold has been met, up to the
First Conversion Threshold Conversion Amount or (2) if the Second Conversion
Threshold has been met, all, but not less than all, of the Conversion Amount
then remaining under this Note, in each case as
designated in the Mandatory Conversion Notice (as defined below) into fully
paid, validly issued and nonassessable shares of Common Stock in accordance
with Section 3(c) hereof at the Conversion Rate as of the Mandatory
Conversion Date (as defined below) (a “Mandatory
Conversion”).  The Company may
exercise its right to require conversion under this Section 9(a) by delivering
within not more than three (3) Trading Days following the end of such Mandatory
Conversion

 17
 

 

Measuring
Period a written notice thereof by facsimile and overnight courier to all, but
not less than all, of the holders of Notes and the Transfer Agent (the “Mandatory Conversion Notice” and the date
all of the holders received such notice by facsimile is referred to as the “Mandatory Conversion Notice Date”).  The Mandatory Conversion Notice shall be
irrevocable.  The Mandatory Conversion
Notice shall state (w) the Trading Day selected for the Mandatory Conversion in
accordance with Section 9(a), which Trading Day shall be no later than five (5)
Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (v) the aggregate Conversion
Amount, including any applicable First Conversion Threshold Conversion Amount,
of the Notes subject to mandatory conversion from the Holder and all of the
holders of the Notes pursuant to this Section 9 (and analogous provisions under
the Other Notes), (w) the number of shares of Common Stock to be issued to such
Holder on the Mandatory Conversion Date, (x) if the Mandatory Conversion is consummated
prior to the third (3rd)
anniversary of the Issuance Date, that the Series B Warrants (as defined in the
Securities Purchase Agreement) issued to the Holder shall become exercisable on
the Mandatory Conversion Date, (y) the Make-Whole Amount, if any, required to
be paid on the Mandatory Conversion and whether such Make-Whole Amount shall
not be paid in shares of Common Stock but rather in cash and (z) certify that
there is not then an Equity Conditions Failure; provided, however, that the Company may not effect a Mandatory
Conversion under this Section in excess of the Holder Pro Rata Amount of the
applicable Mandatory Conversion Volume Limitation.  Notwithstanding the foregoing, the Company
may effect only one (1) Mandatory Conversion with respect to the First
Conversion Threshold during any forty (40) consecutive Trading Days.  Any shares of Common Stock delivered in
connection with a Mandatory Conversion hereunder shall be accompanied by (I)
any applicable Make-Whole Amount and (II) any accrued and unpaid Interest with
respect to such Conversion Amount subject to such Mandatory Conversion and
accrued and unpaid Late Charges with respect to such Conversion Amount and
Interest.

(b)           Pro Rata Conversion
Requirement.  If the Company elects
to cause a conversion of any Conversion Amount of this Note pursuant to Section
9(a), then it must simultaneously take the same action in the same proportion
with respect to the Other Notes.  If the
Company elects a Mandatory Conversion of this Note pursuant to Section 9(a) (or
similar provisions under the Other Notes) with respect to less than all of the
Conversion Amounts of the Notes then outstanding, then the Company shall
require conversion of a Conversion Amount from each of the holders of the Notes
equal to the product of (I) the aggregate Conversion Amount of Notes which the
Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate Original Principal Amount of the Notes purchased by such holder of
outstanding Notes and the denominator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by all holders holding
outstanding Notes (such fraction with respect to each holder is referred to as its
“Conversion  Allocation
Percentage,” and such amount with respect to each holder is referred
to as its “Pro Rata Conversion Amount”);
provided, however, that in the event that any holder’s Pro Rata Conversion
Amount exceeds the outstanding Principal amount of such holder’s Note, then
such excess Pro Rata Conversion Amount shall be allocated amongst the remaining
holders of Notes in accordance with the foregoing formula.  In the event that the initial holder of any
Notes shall sell or otherwise transfer any of such holder’s Notes, the
transferee shall be allocated a pro rata portion of such holder’s Conversion
Allocation Percentage and the Pro Rata Conversion Amount.

 18
 

 

(10)         HOLDER’S
RIGHT OF OPTIONAL REDEMPTION.  On the
third (3rd)
anniversary of the Issuance Date (the “Optional Redemption Date”), the Holder shall have the right,
in its sole discretion, to require that the Company redeem (each a “Holder Optional Redemption”) up to all of
the Principal amount of the Note (excluding any Principal amount the payment of
which has been deferred pursuant to Section 8(d)) plus accrued and unpaid
Interest with respect to such Principal and accrued and unpaid Late Charges
with respect to such Principal and Interest then outstanding (the “Optional Redemption Amount”) by delivering written notice
thereof (a “Holder Optional Redemption Notice”
and, collectively with the Event of Default Redemption Notice and the Change of
Control Redemption Notice, the “Redemption
Notices” and each a “Redemption
Notice”) to the Company no later than three (3) Business Days prior
to the Optional Redemption Date.  The
Holder Optional Redemption Notice shall indicate the amount of the applicable
Optional Redemption Amount the Holder is electing to have redeemed on such
Optional Redemption Date (the “Holder
Optional Redemption Amount”). 
The portion of this Note subject to redemption pursuant to this Section
10 shall be redeemed by the Company in cash on the applicable Optional
Redemption Date at a price equal to the Holder Optional Redemption Amount being
redeemed (the “Holder Optional Redemption
Price” and, collectively with the Event of Default Redemption Price,
the Change of Control Redemption Price and the Company Installment Redemption
Price, the “Redemption Prices”
and, each a “Redemption  Price”).

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

(12)         RESERVATION
OF AUTHORIZED SHARES.

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

 19
 

 

Common Stock
reserved and allocated to any Person which ceases to hold any Notes shall be
allocated to the remaining holders of Notes, pro rata based on the principal
amount of the Notes then held by such holders.

(b)           Insufficient
Authorized Shares.  If at any time
while any of the Notes remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount
(an “Authorized Share Failure”), then the Company shall
immediately take all action necessary to increase the Company’s authorized
shares of Common Stock to an amount sufficient to allow the Company to reserve
the Required Reserve Amount for the Notes then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than ninety (90) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in (the “Authorized Share Failure Deadline”), the
number of authorized shares of Common Stock. 
In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit
its stockholders’ approval of such increase in authorized shares of Common
Stock and to cause its board of directors to recommend to the stockholders that
they approve such proposal.

(13)         HOLDER’S
REDEMPTIONS.

(a)           Mechanics.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within five (5) Business Days
after the Company’s receipt of the Holder’s Event of Default Redemption
Notice.  If the Holder has submitted a
Change of Control Redemption Notice in accordance with Section 5(b), the Company
shall deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five
(5) Business Days after the Company’s receipt of such notice otherwise.  The
Company shall deliver the applicable Company Installment Redemption Price to
the Holder on the applicable Installment Date and the applicable Holder
Optional Redemption Price on the applicable Optional Redemption Date.  In the event of a redemption of less
than all of the Conversion Amount of this Note, the Company shall promptly
cause to be issued and delivered to the Holder a new Note (in accordance with
Section 19(d)) representing the outstanding Principal which has not been
redeemed.  In the event that the Company
does not pay the applicable Redemption Price to the Holder within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Note representing the Conversion Amount that was submitted for
redemption and for which the applicable Redemption Price (together with any
Late Charges thereon) has not been paid. 
Upon the Company’s receipt of such notice, (x) the applicable Redemption
Notice shall be null and void with respect to such Conversion Amount, (y) the
Company shall immediately return this Note, or issue a new Note (in accordance
with Section 19(d)) to the Holder representing the sum of such Conversion
Amount to be redeemed together with accrued and unpaid Interest with respect to
such Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest and (z) the

 20
 

 

Conversion
Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the applicable Redemption
Notice is voided and (B) the lowest Closing Bid Price of the Common Stock
during the period beginning on and including the date on which the applicable
Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.

(b)           Redemption by Other
Holders.  Upon the Company’s receipt
of notice from any of the holders of the Other Notes for redemption or
repayment as a result of an event or occurrence substantially similar to the
events or occurrences described in Section 4(b), Section 5(b) or Section 10
(each, an “Other Redemption Notice”), the Company shall immediately,
but no later than one (1) Business Day of its receipt thereof, forward to the
Holder by facsimile a copy of such notice. 
If the Company receives a Redemption Notice and one or more Other
Redemption Notices, during the seven (7) Business Day period beginning on and
including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s Redemption Notice and ending on and including the date
which is three (3) Business Days after the Company’s receipt of the Holder’s
Redemption Notice and the Company is unable to redeem all principal, interest
and other amounts designated in such Redemption Notice and such Other
Redemption Notices received during such seven (7) Business Day period, then the
Company shall redeem a pro rata amount from each holder of the Notes (including
the Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received
by the Company during such seven Business Day period.

(14)         VOTING
RIGHTS.  The Holder shall have no
voting rights as the holder of this Note, except as required by law, including,
but not limited to, the General Corporation Law of the State of Delaware, and
as expressly provided in this Note.

(15)         COVENANTS.

(a)           Rank.      All payments due under this
Note (a) shall rank pari passu with
all Other Notes and (b) shall be senior to all other Indebtedness of the
Company and its Subsidiaries other than Permitted Indebtedness of the type
described in clause (iii) of the definition thereof.

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

(c)           Existence of Liens.  So
long as this Note is outstanding, the Company shall not, and the Company
shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien,
pledge, charge, security interest or other

 21
 

 

encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.

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

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

(f)            Financial Covenants.

(i)            EBITDA
Test.  From and after December 31,
2007 and so long as this Note
is outstanding, the Company shall maintain EBITDA which equals to or exceeds
the applicable EBITDA Threshold (the “EBITDA Test”).

(ii)           Net
Cash Balance Test.  If the EBITDA
Test is not met for any Fiscal Quarter, the Company shall maintain a Net Cash
Balance in excess of the applicable Reserved Amount (the “Net Cash
Balance Test”) until such time as the Company satisfies such EBITDA
Test for any Fiscal Quarter thereafter; provided, however, that if at any time
the Company reports an LTM Consolidated EBITDA equal to or in excess of $60.0
million or EBITDA equal to or in excess of $25.0 million for any Fiscal
Quarter, the Company shall not be required to satisfy the EBITDA Test or the
Net Cash Balance Test at any time thereafter. 
If the Company fails (a “Failure Date”)
to satisfy the Net Cash Balance Test at any time when such test is required,
the Company promptly shall provide to the Holder a certification, executed on
behalf of the Company by the Chief Financial Officer of the Company, as to the
amount of the Net Cash Balance as of the Failure Date, and publicly disclose
(on a Current Report on Form 8-K or otherwise) such material non-public
information (the date of such certification and public announcement, the “Disclosure Date”).  On the Disclosure Date, the Company shall
also obtain the Letter of Credit (as defined in the Securities Purchase
Agreement) pursuant to and in accordance with Section 4(q) of the Securities
Purchase Agreement from a financial institution satisfactory to the Required
Holders in the applicable Letter of Credit Amount for the benefit, pro rata by
principal amount outstanding, of the holders of Notes in the event of any
default by the Company under any of the Transaction Documents.

(iii)          Operating
Results Announcement.  The Company
shall announce its operating results (the “Operating
Results”) from which compliance with the

 22
 

 

EBITDA Test
and Net Cash Balance Test can be determined for each Fiscal Quarter no later
than the forty-fifth (45th) day after the end of each Fiscal
Quarter or, with respect to the last Fiscal Quarter, the ninetieth (90th) day after such quarter (the “Announcement Date”) and, in the event the
Company shall have satisfied the EBITDA Test and/or the Net Cash Balance Test
at all times during such Fiscal Quarter, as applicable, such announcement shall
include a statement to the effect that the Company satisfied the EBITDA Test
and/or the Net Cash Balance Test, as applicable, at all times throughout such
Fiscal Quarter; provided, however, that in the event the Company is delayed in
announcing its Operating Results for any Fiscal Quarter, by the Announcement
Date the Company shall, in lieu of the foregoing, (A) make a statement to the
effect that it has complied with all of its covenants under the Notes,
including, without limitation, the EBITDA Test and/or the Net Cash Balance
Test, as applicable, and (B) provide to the Holders a certification, in
accordance with terms of  the next
sentence, certifying the same.  On the
Announcement Date, the Company shall also provide to the Holders a
certification, executed on behalf of the Company by the Chief Financial Officer
of the Company, certifying that the Company satisfied the EBITDA Test and/or
the Net Cash Balance Test, as applicable, at all times throughout such Fiscal
Quarter.

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

(17)         VOTE
TO ISSUE, OR CHANGE THE TERMS OF, NOTES. 
The affirmative vote at a meeting duly called for such purpose or the
written consent without a meeting of the Required Holders shall be required for
any change or amendment to this Note or the Other Notes.

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

(19)         REISSUANCE
OF THIS NOTE.

(a)           Transfer.  If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will, subject
to the satisfaction of the transfer provisions of the Securities Purchase
Agreement, forthwith issue and deliver upon the order of the Holder a new Note
(in accordance with Section 19(d)), registered in the name of the registered
transferee or assignee, representing the outstanding Principal being
transferred by the Holder and, if less then the entire outstanding Principal is
being transferred, a new Note (in accordance with Section 19(d)) to the Holder
representing the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(iv) following conversion or redemption of any

 23
 

 

portion of
this Note, the outstanding Principal represented by this Note may be less than
the Principal stated on the face of this Note.

(b)           Lost, Stolen or
Mutilated Note.  Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Note, the Company shall execute and deliver to the Holder a new Note
(in accordance with Section 19(d)) representing the outstanding Principal.

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

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

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

(21)         PAYMENT
OF COLLECTION, ENFORCEMENT AND OTHER COSTS. 
If (a) this Note is placed in the hands of an attorney for collection or
enforcement or is

 24
 

 

collected or enforced through any legal proceeding or
the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Note, then the
Company shall pay the costs incurred by the Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’
fees and disbursements.

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

(23)         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.

(24)         DISPUTE
RESOLUTION.  In the case of a dispute
as to the determination of the Closing Bid Price, the Closing Sale Price or the
Weighted Average Price or the arithmetic calculation of the Conversion Rate or
any Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within two (2) Business Days of receipt,
or deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to
agree upon such determination or calculation within two (2) Business Days of
such disputed determination or arithmetic calculation being submitted to the
Holder, then the Company shall, within two (2) Business Days submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or the Weighted Average Price to an independent, reputable
investment bank selected by the Company and approved by the Holder or (b) the
disputed arithmetic calculation of the Conversion Rate or any Redemption Price
to the Company’s independent, outside accountant.  The Company, at the Company’s expense, shall
cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations. 
Such investment bank’s or accountant’s determination or calculation, as
the case may be, shall be binding upon all parties absent demonstrable error.

(25)         NOTICES;
PAYMENTS.

(a)           Notices.  Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 10(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore.  Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable
detail, and certifying, the calculation of such adjustment and (ii) at least
twenty (20) days prior to the date on which the Company closes its

 25
 

 

books or takes
a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Fundamental
Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder.

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

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

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

(28)         GOVERNING
LAW.  This Note shall be construed
and enforced in accor­dance with, and all questions concerning the
construction, validity, interpretation and performance of this Note shall be
governed by, the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper.  Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.  In the
event that any provision of this Note is invalid or unenforceable under any
applicable

 26
 

 

statute or rule of law, then such provision shall be
deemed inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of this Note. 
Nothing contained herein shall be deemed or operate to preclude the
Holder from bringing suit or taking other legal action against the Company in
any other jurisdiction to collect on the Company’s obligations to the Holder,
to realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court ruling in favor of the Holder.  THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

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

(a)           “Approved Stock Plan” means any employee benefit plan
which has been approved by the Board of Directors of the Company, pursuant to
which the Company’s securities may be issued to any employee, consultant,
officer or director for services provided to the Company.

(b)           “Average Market Price” means, for any given
date, the arithmetic average of the Weighted Average Price of the Common Stock
during the ten (10) consecutive Trading Day period ending on the third (3rd ) Trading Day immediately prior to such given
date, as appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately decreases or
increases the Common Stock during such period.

(c)           “Bloomberg” means Bloomberg Financial
Markets.

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

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

(f)            “Change of
Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock or
business combination in which the Company is the publicly traded surviving
entity in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification or business combination
continue after such reorganization, recapitalization or reclassification or
business combination to hold publicly traded securities and, directly or
indirectly, the voting power of the surviving entity or entities necessary to
elect a majority of the members of the board of directors (or their equivalent
if other than a corporation) of such entity

 27
 

 

or entities
(except where Apollo Resources International or its affiliates becomes the “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 70% or greater of the aggregate Voting Stock of the Company), or
(ii) pursuant to a migratory merger effected solely for the purpose of changing
the jurisdiction of incorporation of the Company.

(g)           “Change of
Control Consideration” means, for any Change of Control, an amount,
if any, equal to the sum of the aggregate cash consideration and the aggregate
cash value of any marketable securities per share of Common Stock to be paid to
the holders of the Common Stock upon consummation of such Change of Control,
with any such non-cash consideration to be valued at the higher of the Closing
Sale Price of such securities as of the Trading Day immediately prior to the
consummation of the Change of Control, the Closing Sale Price on the Trading
Day immediately following the public announcement of such proposed Change of
Control and the Closing Sale Price of on the Trading Day immediately prior to
the public announcement of such proposed Change of Control.

(h)           “Change of
Control Redemption Premium” means (i) for Change of Control Notice
delivered or required to be delivered in connection with a Change of Control
prior to the third (3rd)
anniversary of the Issuance Date, 125% and (ii) for any Change of Control
Notice delivered or required to be delivered in connection with a Change of
Control following the third (3rd)
anniversary of the Issuance Date, 115%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration equals
or exceeds $8.00 per share, then the Change of Control Redemption Premium shall
equal 100%.

(i)            “Closing
Bid Price” and “Closing
Sale Price” means,
for any security as of any date, the last closing bid price and last closing
trade price, respectively, for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or last trade price,
respectively, of such security prior to 4:00:00 p.m., New York Time, as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing bid
price or last trade price, respectively, of such security on the principal
securities exchange or trading market where such security is listed or traded
as reported by Bloomberg, or if the foregoing do not apply, the last closing
bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.).  If the
Closing Bid Price or the Closing Sale Price cannot be calculated for a security
on a particular date on any of the foregoing bases, the Closing Bid Price or
the Closing Sale Price, as the case may be, of such security on such date shall
be the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

 28
 

 

(j)            “Closing Date”
shall have the meaning set forth in the Securities Purchase Agreement, which
date is the date the Company initially issued Notes pursuant to the terms of
the Securities Purchase Agreement.

(k)           “Common Stock
Deemed Outstanding” means, at any given time, the number of shares
of Common Stock outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any Common Stock owned or held by or
for the account of the Company or issuable upon conversion or exercise, as
applicable, of the Notes and the Warrants.

(l)            “Company
Conversion Price” means, the
lower of (i) the applicable
Conversion Price and (ii) that price which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the five (5) consecutive Trading
Days immediately preceding the applicable Installment Date (each such period, a
“Company Conversion
Measuring Period”).  All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination
or other similar transaction during such Company
Conversion Measuring Period.

(m)          “Consolidated
Net Income” means, for any applicable period, the net income (loss)
of the Company and its Subsidiaries for such period, determined on a
consolidated basis and in accordance with GAAP, but excluding from the
determination of Consolidated Net Income (without duplication) (a) any
extraordinary or non recurring gains or losses or gains or losses from Dispositions,
(b) restructuring charges, (c) any tax refunds, net operating losses or other
net tax benefits, (d) effects of discontinued operations and (e) interest
income (including interest paid-in-kind).

(n)           “Consolidated
Net Interest Expense” means, for any applicable period, gross
interest expense of the Company and its Subsidiaries for such period determined
on a consolidated basis and in accordance with GAAP, less (i) the sum of (A)
interest income for such period and (B) gains for such period on Hedging
Agreements (to the extent not included in interest income above and to the
extent not deducted in the calculation of gross interest expense), plus (ii)
the sum of (A) losses for such period on Hedging Agreements (to the extent not
included in gross interest expense) and (B) the upfront costs or fees for such
period associated with Hedging Agreements (to the extent not included in gross
interest expense), in each case, determined on a consolidated basis and in
accordance with GAAP.

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

 29
 

 

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

(q)   “EBITDA” means, with respect to any Person
and its Subsidiaries for any applicable Fiscal Quarters, the Consolidated Net
Income of such Person and its Subsidiaries as set forth in the financial
statements of the Company contained in the Form 10-QSB or Form 10-KSB of the Company
for the applicable Fiscal Quarter, plus
without duplication, the sum of the following amounts of the Company and its
Subsidiaries for such period to the extent deducted in determining Consolidated
Net Income of such Persons for such period: 
(i) Consolidated Net Interest Expense, (ii) income tax expense, (iii)
depreciation expense and (iv) amortization expense.

(r)    “EBITDA Threshold” means:

(i)            (A)
$30.0 million of LTM Consolidated EBITDA reported for the Fiscal Quarter ending
December 31, 2007 or (B) $27.5 million of LTM Consolidated EBITDA reported for
the Fiscal Quarter ending December 31, 2007 with at least $10.0 million in
EBITDA reported for the Fiscal Quarter ending December 31, 2007;

(ii)           $35.0
million of LTM Consolidated EBITDA reported for the Fiscal Quarter ending March
31, 2008 or $11.5 million in EBITDA reported for the Fiscal Quarter ending
March 31, 2008;

(iii)          $45.0
million of LTM Consolidated EBITDA reported for the Fiscal Quarter ending June
30, 2008 or $17.5 million in EBITDA reported for the Fiscal Quarter ending June
30, 2008;

(iv)          $50.0
million of LTM Consolidated EBITDA reported for the Fiscal Quarter ending
September 30, 2008 or $17.5 million in EBITDA reported for the Fiscal Quarter
ending September 30, 2008; and

(v)           $60.0
million of LTM Consolidated EBITDA reported for the Fiscal Quarter ending
December 31, 2008 or $25.0 million in EBITDA reported for the Fiscal Quarter
ending December 31, 2008.

(s)           “Eligible
Market” means the Principal Market, The New York Stock Exchange,
Inc., the American Stock Exchange, the Nasdaq National Market or the Nasdaq
Capital Market.

(t)            “Equity
Conditions” means
that each of the following conditions is satisfied:  (i) on each day during the period beginning
three (3) months prior to the applicable date of determination and ending on
and including the applicable date of determination (the “Equity
Conditions Measuring Period”), either (x) the Registration Statement
filed pursuant to the Registration Rights Agreement shall be effective and
available for the resale of all remaining Registrable Securities in accordance
with the terms of the Registration Rights Agreement and there shall not have
been for the one (1) month period ending on and including the date immediately
preceding the applicable date of determination any Grace Periods (as defined in
the

 30
 

 

Registration
Rights Agreement) or (y) all shares of Common Stock issuable upon conversion of
the Notes and exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; (ii) on each day during the Equity Conditions
Measuring Period, the Common Stock is designated for quotation on the Principal
Market or any other Eligible Market and shall not have been suspended from
trading on such exchange or market (other than suspensions of not more than two
(2) days and occurring prior to the applicable date of determination due to
business announcements by the Company) nor shall delisting or suspension by
such exchange or market been threatened or pending either (A) in writing by
such exchange or market or (B) by falling below the then effective minimum
listing maintenance requirements of such exchange or market; (iii) during the
Equity Conditions Measuring Period, the Company shall have delivered Conversion
Shares upon conversion of the Notes and Warrant Shares upon exercise of the
Warrants to the holders on a timely basis as set forth in Section 3(c)(ii)
hereof (and analogous provisions under the Other Notes) and Section 2(a) of the
Warrants; (iv) any applicable shares of Common Stock to be issued in connection
with the event requiring determination may be issued in full without violating
Section 3(d) hereof and the rules or regulations of any applicable Eligible Market;
(v) for the two (2) Calendar Quarters immediately preceding the applicable date
of determination, the Company shall not have failed to timely make any payments
within five (5) Business Days of when such payment is due pursuant to any
Transaction Document; (vi) during the Equity Conditions Measuring Period, there
shall not have occurred either (A) the public announcement of a pending,
proposed or intended Fundamental Transaction which has not been abandoned,
terminated or consummated, or (B) an Event of Default or (C) an event that with
the passage of time or giving of notice would constitute an Event of Default;
(vii) the Company shall have no knowledge of any fact that would cause (x) the
Registration Statements required pursuant to the Registration Rights Agreement
not to be effective and available for the resale of all remaining Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) any shares of Common Stock issuable upon conversion of the Notes and shares
of Common Stock issuable upon exercise of the Warrants not to be eligible for
sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; and (viii) during the six (6) month period ending on and
including the date immediately preceding the applicable date of determination,
the Company otherwise shall have been in material compliance with and shall not
have materially breached any provision, covenant, representation or warranty of
any Transaction Document.

(u)           “Equity
Conditions Failure” means that (i) on any day during the period
commencing ten (10) Trading Days prior to the applicable Conversion Date
through the applicable Share Delivery Date, (ii) on any day during the period
commencing ten (10) Trading Days prior to the applicable Company Installment
Notice Date through the applicable Installment Date or (ii) on any day during
the period commencing ten (10) Trading Days prior to the applicable Mandatory
Conversion Notice Date through the applicable Mandatory Conversion Date, the Equity
Conditions have not been satisfied (or waived in writing by the Holder).

(v)           “Equity Value
Redemption Premium” means (i) for any Change of Control Notice or
Event of Default Notice, as applicable, delivered or required to be delivered
in connection with a Change of Control or Event of Default, as applicable,
prior to the third (3rd)
anniversary of the Issuance Date, 115% and (ii) for any Change of Control
Notice or Event of Default Notice, as applicable, delivered or required to be
delivered in connection with a Change

 31
 

 

of Control or
Event of Default, as applicable, following the third (3rd) anniversary of the Issuance
Date, 110%; provided, however, that, in connection with any Change of Control
in which the Change of Control Consideration equals or exceeds $8.00 per share,
then the Equity Value Redemption Premium shall equal 100%.

(w)          “Excluded Securities” means any Common Stock issued or
issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion,
adjustment or redemption of the Notes or the exercise of the Warrants; (iii)
pursuant to a bona fide firm commitment underwritten public offering with a
nationally recognized underwriter which generates gross proceeds to the Company
in excess of $50,000,000 (other than an “at-the-market offering” as defined in
Rule 415(a)(4) under the 1933 Act and “equity lines”); (iv) in connection with
any acquisition by the Company, whether through an acquisition of stock or a
merger of any business, assets or technologies the primary purpose of which is
not to raise equity capital; (v) in connection with any other strategic
transaction or alliance the primary purpose of which is not to raise equity
capital including without limitation, the issuance of no more than 10,000,000
shares of Common Stock to agricultural conglomerates and (vii) upon conversion
or exercise of any Options or Convertible Securities which are outstanding on
the day immediately preceding the Subscription Date, provided that the
conversion or exercise price of such Options or Convertible Securities is not
amended, modified or changed on or after the Subscription Date.

(x)            “First Conversion Threshold Conversion Amount”
means an amount equal to (x) 50% of the Conversion Amount of this Note on the
Issuance Date minus (y) the aggregate Conversion Amount of this Note
converted or redeemed pursuant to the terms of this Note.

(y)           “Fiscal Quarter” means each of the fiscal
quarters adopted by the Company for financial reporting purposes that
correspond to the Company’s fiscal year that ends on December 31, or such other
fiscal quarter adopted by the
Company for financial reporting purposes in accordance with GAAP.

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

 32
 

 

under the
Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock of
the Company, or (vii) Apollo Resources International ceases to be the “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of at least 50% of the aggregate Voting Stock of the Company, or
(viii) Apollo Resources International or its affiliates becomes the “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 70% or greater of the aggregate Voting Stock of the Company.

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

(bb)         “Holder Pro
Rata Amount” means a fraction (i) the numerator of which is the
Principal amount of this Note on the Closing Date and (ii) the denominator of
which is the aggregate principal amount of all Notes issued to the initial
purchasers pursuant to the Securities Purchase Agreement on the Closing Date.

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

(dd)         “Installment
Amount” means with respect to any Installment Date, the lesser of
(A) the product of (i) $27,777.77, multiplied
by (ii) Holder Pro Rata Amount and (B) the Principal amount under this Note as
of such Installment Date, as any such Installment Amount may be reduced
pursuant to the terms of this Note, whether upon conversion, redemption or
otherwise, together with, in each case the sum of any accrued and unpaid
Interest with respect to such Principal amount and accrued and unpaid Late
Charges, if any, with respect to such Principal amount and Interest.  In the event the Holder shall sell or
otherwise transfer any portion of this Note, the transferee shall be allocated
a pro rata portion of the each unpaid Installment Amount hereunder.

 33
 

 

(ee)         “Installment
Date” means each of the following dates: (i) March 31, 2007, (ii)
June 30, 2007, (iii) September 31, 2007, (iv) December 31, 2007, (v) March 31,
2008, (vi) June 30, 2008, (vii) September 31, 2008, (viii) December 31, 2008,
(ix) March 31, 2009, (x) June 30, 2009, (xi) September 31, 2009, (xii) December
31, 2009, (xiii) March 31, 2010, (xiv) June 30, 2010, (xv) September 31, 2010,
(xvi) December 31, 2010, (xvii) March 31, 2011 and (xviii) the earlier of the
Maturity Date and June 30, 2011.

(ff)           “Installment
Volume Limitation” means 15%
of the aggregate dollar trading volume (as reported on Bloomberg) of the Common
Stock on the Principal Market over the forty (40) consecutive Trading Day
period ending on the Trading Day immediately preceding the applicable
Installment Notice Date.

(gg)         “Interest
Rate” means, initially eight percent
(8.0%) per annum, subject to adjustment at the beginning of each Calendar
Quarter beginning with the Calendar Quarter ended March 31, 2007 in the event
that the Interest Rate Conditions are satisfied as of the applicable Calendar
Quarter, then in which case the Interest Rate shall equal six percent (6.0%)
per annum thereafter.

(hh)         “Interest Rate Conditions” means that (i)
the Equity Conditions are presently satisfied (or waived in writing by the
Holder) and (ii) the Company has reported LTM Consolidated EBITDA in excess of
$40,000,000.

(ii)           “Letter of
Credit Amount” means, as of any date of determination, an amount
equal to 30% of the aggregate Principal Amount outstanding under the Notes.

(jj)           “LTM
Consolidated EBITDA” means, with respect to any Person, the
aggregate Consolidated Net Income of such Person and its Subsidiaries for the
current Fiscal Quarter and the immediately preceding three (3) Fiscal Quarters
but only if and as set forth in the financial statements of the Company
contained in the Form 10-QSB or Form 10-KSB of the Company; plus without
duplication, the sum of the following amounts of such Person and its
Subsidiaries for such period and to the extent deducted in determining
Consolidated Net Income of such Person for such period:  (i) Consolidated Net Interest Expense, (ii)
income tax expense, (iii) depreciation expense, and (iv) amortization
expense.

(kk)         “Make-Whole
Amount” means, as to any Conversion Amount being converted pursuant
to Section 3(c) or pursuant to Section 9, an amount equal to the difference
between (i) an amount of Interest that, but for the applicable conversion,
would have been paid to the Holder on such Conversion Amount from the Issuance
Date through the third (3rd)
anniversary of the Issuance Date and (ii) the amount of Interest already paid
to the Holder from the Issuance Date through the Conversion Date or Mandatory
Conversion Date, as applicable with respect to that Conversion Amount.

(ll)           “Make-Whole
Conversion Price” means that price which shall be the lower of (i)
the applicable Conversion Price and (ii) the price computed as 90% of the
arithmetic average of the Weighted Average Price of the Common Shares during
the five (5) consecutive Trading Day period ending on the Trading Day
immediately preceding the

 34
 

 

Conversion
Date or Mandatory Conversion Notice Date, as applicable (each, a “Make-Whole Conversion Measuring Period”).  All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction during such Make-Whole Conversion Period.

(mm)       “Mandatory
Conversion Volume Limitation” means 25% of the aggregate dollar trading volume (as reported on Bloomberg)
of the Common Stock on the Principal Market over the thirty (30) consecutive
Trading Day period prior to the applicable Mandatory Conversion Notice Date.

(nn)         “Net Cash
Balance” means, at any date, (i) an amount equal to the aggregate
amount of cash, cash equivalents (including cash collateralizing the Letter of
Credit and not including other restricted cash) and marketable securities,
consisting of corporate bonds, commercial paper and medium-term notes, as shown
or reflected in the notes to the Company’s consolidated balance sheet as at
such date minus (ii) the unpaid
principal balance of any Indebtedness for borrowed money (excluding
Indebtedness under the Notes and accounts payable).

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

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

(qq)         “Permitted Indebtedness” means (i) from the
Issuance Date through December 31, 2007, total Indebtedness of the Company not
to exceed $77.5 million in the aggregate outstanding at any one time; (ii) on
and after January 1, 2008, total aggregate Indebtedness of the Company that
does not as of the date on which any such Indebtedness is incurred, or as of
the end of any Fiscal Quarter, exceed 3.0x LTM Consolidated EBITDA; provided,
however, that such Indebtedness permitted pursuant to clauses (i) and (ii)
hereof, shall be made expressly subordinate in right of payment to the
Indebtedness evidenced by this Note, as reflected in a written agreement
acceptable to the Required Holders and approved by the Required Holders in
writing, and which Indebtedness does not provide at any time for (A) the
payment, prepayment, repayment, repurchase or defeasance, directly or indirectly,
of any principal or premium, if any, thereon until ninety-one (91) days after
the Maturity Date or later and (B) total interest and fees at a rate in excess
of the initial Interest Rate per annum; (iii) Indebtedness of the Company
outstanding as of the date hereof, and Indebtedness of any Subsidiary that is
non-recourse to the Company or any other Subsidiary; (iv) Indebtedness incurred
in connection with the build up of a Shell terminal which Indebtedness shall
not exceed twenty percent (20.0%) of the total cost of such build up project
and which Indebtedness may only be secured by such Shell terminal being
financed; (v) Indebtedness represented by that certain municipal bond financing
for the Company’s facility in Bell Chase, Louisiana which Indebtedness shall be
non-recourse to the Company, (vi) the Indebtedness evidenced by this Note and
the Other Notes.

 35
 

 

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

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

(tt)           “Principal Market” means the OTC Bulletin
Board.

(uu)         “Redemption
Premium” means (i) in the case of the Events of Default described in
Section 4(a)(i) - (vi) and (ix) - (xii), 120% or (ii) in the case of the Events
of Default described in Section 4(a)(vii) - (viii), 100%.

(vv)         “Registration Rights Agreement” means that certain registration
rights agreement dated as of the Subscription Date by and among the Company and
the initial holders of the Notes relating to, among other things, the
registration of the resale of the Common Stock issuable upon conversion of the
Notes and exercise of the Warrants.

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

(xx)          “Reserved
Amount” means, as of any date of determination, an amount equal to
35% of the aggregate Principal amount outstanding under all of the Notes.

 36
 

 

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

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

(aaa)       “Subscription
Date” means August 11, 2006.

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

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

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

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

(fff)         “Weighted Average Price” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly announces is the official open
of trading), and ending at 4:00:00 p.m., New York Time (or such other time as
the Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its “Volume at Price” functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of

 37
 

 

the highest
closing bid price and the lowest closing ask price of any of the market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.).  If
the Weighted Average Price cannot be calculated for a security on a particular
date on any of the foregoing bases, the Weighted Average Price of such security
on such date shall be the fair market value as mutually determined by the Company
and the Required Holders.  If the Company
and the Required Holders are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

(30)         DISCLOSURE.
Upon receipt or delivery by the Company of any notice in accordance with the
terms of this Note, unless the Company has in good faith determined that the
matters relating to such notice do not constitute material, nonpublic
information relating to the Company or its Subsidiaries, the Company shall
within two (2) Business Days after any such receipt or delivery publicly disclose
such material, nonpublic information on a Current Report on Form 8-K or
otherwise.  In the event that the Company
believes that a notice contains material, nonpublic information relating to the
Company or its Subsidiaries, the Company so shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to
such notice do not constitute material, nonpublic information relating to the
Company or its Subsidiaries.  In the
event of a breach of the foregoing covenant by the Company, any of its
Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Holder shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material, nonpublic information without the prior approval by the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents.  No
Holder shall have any liability to the Company, its Subsidiaries, or any of its
or their respective officers, directors, employees, stockholders or agents for
any such disclosure.

[Signature Page
Follows]

 38

 

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

	
  

  	
  Earth Biofuels, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dennis G. McLaughlin, III

  
	
   

  	
   

  	
  Name: Dennis G. McLaughlin, III

  
	
   

  	
   

  	
  Title: Chief Executive Officer

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00113-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00113-of-00352.parquet"}]]