Document:

EX-4.1 Securities Purchase Agreement

Exhibit 4.1

EXECUTION COPY

SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of May 22, 2008, by and among
Liberator Medical Holdings, Inc., a Nevada corporation, with headquarters located at 2979 South
East Gran Park Way, Stuart, Florida 34997 (the “Company”), as issuer, Liberator Medical Supply,
Inc., a Florida corporation and a wholly-owned subsidiary of the Company, as guarantor (the
“Guarantor” and, together with the Company, the “Issuer Parties”), and the investors listed on the
Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

     WHEREAS:

     A. The Company and each Buyer is executing and delivering this Agreement in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

     B. The Company has authorized a new series of unsecured senior convertible notes of the
Company, in the form attached hereto as Exhibit A (the “Notes”), which Notes shall be
convertible into the Company’s common stock, par value $0.001 per share (the “Common Stock”) (as
converted, the “Conversion Shares”), in accordance with the terms of the Notes.

     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) that aggregate principal amount of the Notes set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers attached hereto (which aggregate
amount for all Buyers shall be $3,500,000) and (ii) warrants, in substantially the form attached
hereto as Exhibit B (the “Warrants”), to acquire up to that number of additional shares of
Common Stock set forth opposite such Buyer’s name in column (4) of the Schedule of Buyers (as
exercised, collectively, the “Warrant Shares”) (which aggregate amount of Warrant Shares underlying
the Warrants issued to all Buyers shall be 4,375,000).

     D. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the form attached hereto
as Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company will
agree to provide certain registration rights with respect to the Registrable Securities (as defined
in the Registration Rights Agreement) under the 1933 Act and the rules and regulations of the SEC
promulgated thereunder, and applicable state securities laws.

     E. The Notes, the Conversion Shares, the Warrants and the Warrant Shares collectively are
referred to herein as the “Securities”.

     F. The obligations of the Company under the Notes shall be unconditionally guaranteed
(substantially in the form attached hereto as Exhibit F, the “Guaranty”) by the Guarantor.

 

 

     G. The obligations under the $1,664,000 in aggregate principal amount of promissory notes
(collectively, the “Subordinated Notes”) issued by the Guarantor to Mark Libratore and assumed by
the Company, will be subordinated to the obligations of the Company and the Guarantor to the
holders of the Notes pursuant to a Subordination Agreement to be executed and delivered by Mark
Libratore, for the benefit of the holders of the Notes, and acknowledged and agreed to by the
Company and the Guarantor, substantially in the formed attached hereto as Exhibit G (the
“Subordination Agreement”).

     NOW, THEREFORE, the Company, the Guarantor and each Buyer hereby agree as follows:

     1. PURCHASE AND SALE OF NOTES AND WARRANTS.

          (a) Purchase of Notes and Warrants.

               (i) Notes and Warrants. Subject to the satisfaction (or waiver) of the conditions set
forth in Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer
severally, but not jointly, shall purchase from the Company on the Closing Date (as defined below),
(x) a principal amount of Notes as is set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers and (y) Warrants to acquire up to that number of Warrant Shares as is set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers, (the “Closing”).

               (ii) Closing. The date and time of the Closing (the “Closing Date”) shall be 10:00
a.m., New York City time, on the date hereof (or such later date as is mutually agreed to by the
Company and each Buyer) after notification of satisfaction (or waiver) of the conditions to the
Closing set forth in Sections 6 and 7 below at the offices of Lowenstein Sandler PC, 1251 Avenue of
the Americas, 18th Floor, New York, New York 10020.

               (iii) Purchase Price. The aggregate purchase price for the Notes and the Warrants to
be purchased by each such Buyer at the Closing (the “Purchase Price”) shall be the amount set forth
opposite each Buyer’s name in column (3) of the Schedule of Buyers. Each Buyer shall pay $1,000
for each $1,000 of principal amount of Notes and related Warrants to be purchased by such Buyer at
the Closing.

          (b) Form of Payment. On the Closing Date, (i) each Buyer shall pay its Purchase Price
to the Company for the Notes and the Warrants to be issued and sold to such Buyer at the Closing,
by wire transfer of immediately available funds in accordance with the Company’s written wire
instructions and (ii) the Company shall deliver to each Buyer the Notes (allocated in the principal
amounts as such Buyer shall request) which such Buyer is then purchasing hereunder along with the
Warrants (allocated in the amounts as such Buyer shall request) which such Buyer is purchasing, in
each case duly executed on behalf of the Company and registered in the name of such Buyer or its
designee.

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     2. BUYER’S REPRESENTATIONS AND WARRANTIES. Each Buyer, severally and not jointly,
represents and warrants with respect to only itself that:

          (a) No Sale or Distribution. Such Buyer is acquiring the Notes, and the Warrants, and
upon conversion of the Notes and exercise of the Warrants (other than pursuant to a Cashless
Exercise (as defined in the Warrants)) will acquire the Conversion Shares issuable upon conversion
of the Notes and the Warrant Shares issuable upon exercise of the Warrants, for its own account and
not with a view towards, or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, such Buyer does not agree to hold any of the Securities for any
minimum or other specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under the 1933 Act and
pursuant to the applicable terms of the Transaction Documents (as defined in Section 3(b)). Such
Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such Buyer
does not presently have any agreement or understanding, directly or indirectly, with any Person (as
defined in Section 3(s) below) to distribute any of the Securities.

          (b) Accredited Investor Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.

          (c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine
the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.

          (d) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities that have been requested by such Buyer. Such Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk and is able to afford a complete loss
of such investment. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its acquisition of the
Securities.

          (e) No Governmental Review. Such Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities or the fairness or suitability of the investment in
the Securities nor have such authorities passed upon or endorsed the merits of the offering of the
Securities.

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          (f) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to
the Company an opinion of counsel, in a form reasonably acceptable to the Company, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned or transferred
pursuant to an exemption from such registration, or (C) such Buyer provides the Company with
reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144
or Rule 144A promulgated under the 1933 Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any
resale of the Securities under circumstances in which the seller (or the Person through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any state securities laws or to comply with the terms
and conditions of any exemption thereunder. The Securities may be pledged in connection with a
bona fide margin account or other loan or financing arrangement secured by the Securities and such
pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer effecting a pledge of Securities shall be required to provide the Company
with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or
any other Transaction Document (as defined in Section 3(b)), including, without limitation, this
Section 2(f).

          (g) Legends. Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of the Conversion Shares
and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky” laws of any state
and a restrictive legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such stock certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE]
[EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT 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

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SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by
state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in
connection with a sale, assignment or other transfer, such holder provides the Company with an
opinion of a law firm reasonably acceptable to the Company, in a form reasonably acceptable to the
Company, to the effect that such sale, assignment or transfer of the Securities may be made without
registration under the applicable requirements of the 1933 Act, or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or transferred pursuant
to Rule 144 or Rule 144A.

          (h) Validity; Enforcement. This Agreement and the Registration Rights Agreement have
been duly and validly authorized, executed and delivered on behalf of such Buyer and shall
constitute the legal, valid and binding obligations of such Buyer enforceable against such Buyer in
accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

          (i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such Buyer of the
transactions contemplated hereby and thereby will not (i) result in a violation of the
organizational documents of such Buyer or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities laws) applicable to
such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

          (j) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.

          (k) Certain Trading Activities. Other than with respect to the transactions
contemplated herein, since the time that such Buyer was first contacted by the Company, the Agent
(as defined below) or any other Person regarding this investment in the Company neither the Buyer
nor any “affiliate” of such Buyer (as defined in Rule 144 of the 1933 Act) which (x) had knowledge
of the transactions contemplated hereby, (y) has or shares discretion relating to such Buyer’s
investments or trading or information concerning such Buyer’s investments and (z) is subject to
such Buyer’s review or input concerning such affiliate’s investments or trading (collectively,
“Trading Affiliates”) has directly or indirectly, nor has any Person acting on behalf of or
pursuant to any understanding with such Buyer or Trading Affiliate, effected or agreed to effect
any transactions in the securities of the Company. Such Buyer hereby covenants

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and agrees not to, and shall cause its Trading Affiliates not to, engage, directly or
indirectly, in any transactions in the securities of the Company or involving the Company’s
securities during the period from the date hereof until such time as (i) the transactions
contemplated by this Agreement are first publicly announced as described in Section 4(h) hereof or
(ii) this Agreement is terminated in full pursuant to Section 8 hereof. Notwithstanding the
foregoing, for avoidance of doubt, nothing contained herein shall constitute a representation or
warranty, or preclude any actions, with respect to the identification of the availability of, or
securing of, available shares to borrow in order to effect short sales or similar transactions in
the future.

          (l) Legal Investment. Such Buyer acknowledges that the Company has not provided any
advice as to whether the Securities are a suitable investment or whether the Securities constitute
a legal investment for such Buyer.

          (m) Compliance with SEC Telephone Interpretation. Such Buyer acknowledges the SEC’s
position set forth in Item 65, Section 5 under Section A, of the Manual of Publicly Available
Telephone Interpretations, dated July 1997, compiled by the Office of Chief Counsel, Division of
Corporation Finance, and such Buyer will adhere to such position.

          (n) General Solicitation. Such Buyer is not purchasing the Securities as a result of
any advertisement, article, notice or other communication regarding the Securities published in any
newspaper, magazine or similar media or broadcast over television or radio or presented at any
seminar.

          (o) Organization. Such Buyer is an entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization with the requisite corporate
or partnership power and authority to enter into and to consummate the transactions contemplated by
the applicable Transaction Documents (as defined below) and otherwise to carry out its obligations
thereunder.

     3. REPRESENTATIONS AND WARRANTIES OF THE ISSUER PARTIES. Each of the Issuer Parties,
jointly and severally, represents and warrants to each of the Buyers that, as of the date hereof
and as of the Closing Date, except as set forth in any disclosure schedules hereto or as otherwise
described in the SEC Documents (as defined in Section 3(k) below) prior to the date hereof:

          (a) Organization and Qualification. The Company and its “Subsidiaries” (which for
purposes of this Agreement means “Significant Subsidiary” as such term is defined in Rule 1-02 of
Regulation S-X of the 1933 Act), including, without limitation, the Guarantor, are entities duly
organized and validly existing and, to the extent legally applicable, in good standing under the
laws of the jurisdiction in which they are formed, and have the requisite power and authorization
to own their properties and to carry on their business as now being conducted. Each of the Company
and its Subsidiaries is duly qualified as a foreign entity to do business and to the extent legally
applicable, is in good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary, except to the extent
that the failure to be so qualified or be in good standing would not reasonably be expected to have
a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material
adverse effect on the business, properties, assets,

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operations, results of operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby and the
other Transaction Documents or by the agreements and instruments to be entered into in connection
herewith or therewith, or on the authority or ability of the Company to perform its obligations
under the Transaction Documents (as defined below). The Company has no Subsidiaries other than the
Guarantor except as set forth on Schedule 3(a). Notwithstanding the foregoing, the entities
in which the Company, directly or indirectly, owns any of the capital stock or holds an equity or
similar interest which are not Subsidiaries, taken as whole, do not have income, revenues or assets
which are material to the Company and its Subsidiaries, individually, or taken as a whole. Except
as set forth on Schedule 3(a), the Company does not, directly or indirectly, own any joint
venture or similar entity or capital stock or hold an equity or similar interests.

          (b) Authorization; Enforcement; Validity. Each of the Issuer Parties has the
requisite corporate power and authority to enter into and perform its obligations under this
Agreement, and to the extent it is a party thereto, the Notes, the Registration Rights Agreement,
the Guaranty, the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the
Warrants and each of the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction Documents”) to which
such Issuer Party is a party, and with respect to the Company, to issue the Securities in
accordance with the terms hereof and thereof. The execution and delivery of the Transaction
Documents by the Issuer Party party thereto and the consummation by such Issuer Party of the
transactions contemplated hereby and thereby, including, without limitation, the issuance of the
Notes and the Warrants, the execution and delivery of the Guaranty, the reservation for issuance
and the issuance of the Conversion Shares issuable upon conversion of the Notes, and the
reservation for issuance and issuance of Warrant Shares issuable upon exercise of the Warrants,
have been duly authorized by the applicable Issuer Party’s board of directors, no further filing,
consent, or authorization is required by any Issuer Party, its board of directors or its
stockholders. This Agreement and the other Transaction Documents of even date herewith have been
duly executed and delivered by each Issuer Party party thereto, and constitute the legal, valid and
binding obligations of such Issuer Party, enforceable against such Issuer Party in accordance with
their respective terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and
remedies and the rules and regulations of Medicare and Medicaid.

          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized by the Company and upon issuance in accordance with the terms of this Agreement shall be
free from all taxes, liens and charges with respect to the issue thereof. As of the Closing, a
number of shares of Common Stock shall have been duly authorized and reserved for issuance which
equals or exceeds 110% of the aggregate of the maximum number of shares of Common Stock issuable
(i) upon conversion of the Notes and (ii) upon exercise of the Warrants. Upon conversion or
exercise in accordance with the Notes or the Warrants, as the case may be, the Conversion Shares
and the Warrant Shares, respectively, will be validly issued, fully paid and nonassessable and free
from all preemptive or similar rights, taxes, liens and charges with respect to the issue thereof,
with the holders being entitled to all rights accorded to a holder of Common Stock. Assuming the
accuracy of each of the representations and warranties set

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forth in Section 2 of this Agreement, the offer and issuance by the Company of the Securities
is exempt from registration under the 1933 Act.

          (d) No Conflicts. The execution, delivery and performance of this Agreement and the
other Transaction Documents by the Issuer Party party thereto and the consummation by such Issuer
Party of the transactions contemplated hereby and thereby (including, without limitation, with
respect to the Company, the issuance of the Notes and Warrants and reservation for issuance and
issuance of the Conversion Shares and the Warrant Shares) will not (i) result in a violation of any
certificate of incorporation, certificate of formation, any certificate of designations or other
constituent documents of the Company or any of its Subsidiaries, any capital stock of the Company
or any of its Subsidiaries or bylaws of the Company or any of its Subsidiaries or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or both would become
a default) in any respect under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any
of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including foreign, federal and state securities laws and regulations and the
rules and regulations of the Pink OTC Markets Inc. (the “Principal Market”)) applicable to the
Company or any of its Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected, except in the case of clauses (ii) and (iii) above, to the
extent that such violation conflict, default or right would not reasonably be expected to have a
Material Adverse Effect.

          (e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other Person in order for
any Issuer Party to execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents to which such Issuer Party is a party, in each case in accordance with the
terms hereof or thereof, except for any consent that may be required in connection with any
restriction on transfer under any laws, rules or regulations relating to Medicare. The Company and
its Subsidiaries are unaware of any facts or circumstances that might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant to the preceding
sentence. The Company is not in violation of the listing requirements of the Principal Market and
has no knowledge of any facts that would reasonably lead to delisting or suspension of the Common
Stock in the foreseeable future.

          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. Each Issuer Party
acknowledges and agrees that each Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to the Transaction Documents and the transactions contemplated hereby and
thereby and that no Buyer is (i) an officer or director of any Issuer Party, (ii) to the knowledge
of any Issuer Party, an “affiliate” of the Company or any of its Subsidiaries (as defined in Rule
144 of the 1933 Act) or (iii) to the knowledge of any Issuer Party, a “beneficial owner” of more
than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the “1934 Act”)).

          (g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of
its Subsidiaries or affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of Regulation D) in

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connection with the offer or sale of the Securities. The Company shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than
for persons engaged by any Buyer or its investment advisor) relating to or arising out of the
transactions contemplated hereby. The Company acknowledges that it has engaged Ladenburg Thalmann
& Co. Inc. as placement agent (collectively, the “Agent”) in connection with the sale of the
Securities. Other than the Agent, neither the Company nor any of its Subsidiaries has engaged any
placement agent or other agent in connection with the sale of the Securities.

          (h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under circumstances that would
require registration of the issuance of any of the Securities under the 1933 Act, whether through
integration with prior offerings or otherwise, or cause this offering of the Securities to require
approval of stockholders of the Company for purposes of any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of any exchange or
automated quotation system on which any of the securities of the Company are listed or designated.
None of the Company, its Subsidiaries, their affiliates and any Person acting on their behalf will
take any action or steps referred to in the preceding sentence that would require registration of
the issuance of any of the Securities under the 1933 Act or cause the offering of the Securities to
be integrated with other offerings for purposes of any such applicable stockholder approval
provisions.

          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares issuable upon
exercise of the Warrants will increase in certain circumstances. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Notes in accordance with this
Agreement and the Notes and its obligation to issue the Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

          (j) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Certificate of Incorporation (as
defined in Section 3(r)) or the laws of the state of its incorporation which is or could become
applicable to any Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company’s issuance of the Securities and any Buyer’s ownership of the
Securities. The Company and its board of directors have taken all necessary action, if any, in
order to render inapplicable any stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of the Company.

          (k) SEC Documents; Financial Statements. Except as disclosed in the Company’s Current
Report on Form 8-K filed with the SEC on February 26, 2008, during the twelve (12) months prior to
the date hereof, the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting

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requirements of the 1934 Act (all of the foregoing filed during the twelve (12) months prior
to the date hereof and all exhibits included therein and financial statements, notes and schedules
thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC
Documents”), and during the twelve months prior thereto, the Company, to its knowledge, has filed
all reports, schedules, forms, statements, and other documents required to be filed by it with the
SEC pursuant to the reporting requirements of the 1934 Act. The Company has delivered to the
Buyers or their respective representatives true, correct and complete copies of the SEC Documents
not available on the EDGAR system. As of their respective filing dates, the SEC Documents complied
in all material respects with the requirements of the 1934 Act and the rules and regulations of the
SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the
time they were filed with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not misleading. As of their
respective filing dates, the financial statements of the Company included in the SEC Documents
complied as to form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may
exclude footnotes or may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments). No other information provided by or on behalf of the
Company to the Buyers which is not included in the SEC Documents, including, without limitation,
information referred to in Section 2(d) of this Agreement or in any disclosure schedules, contains
any untrue statement of a material fact or omits to state any material fact necessary in order to
make the statements therein, in the light of the circumstance under which they are or were made not
misleading.

          (l) Absence of Certain Changes. Since December 31, 2007, there has been no material
adverse change and no material adverse development in the business, properties, operations,
condition (financial or otherwise), results of operations or prospects of the Company or its
Subsidiaries. Since December 31, 2007, the Company has not (i) declared or paid any dividends,
(ii) sold any assets, individually or in the aggregate, in excess of $100,000 outside of the
ordinary course of business or (iii) had capital expenditures, individually or in the aggregate, in
excess of $500,000.

          (m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is contemplated to occur with
respect to the Company, its Subsidiaries or their respective business, properties, prospects,
operations or financial condition, that is required to be, or should have been, disclosed by the
Company under applicable securities laws in the SEC Documents.

          (n) Conduct of Business; Regulatory Permits. Neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under its Certificate of Incorporation,
any certificate of designations of any outstanding series of preferred stock of the Company or the
Bylaws or their organizational charter or bylaws, respectively. Neither the

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Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither
the Company nor any of its Subsidiaries will conduct its business in violation of any of the
foregoing, except for possible violations which could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Since February 14, 2008, (i) the Common
Stock has been designated for quotation on the Principal Market, (ii) trading in the Common Stock
has not been suspended by the SEC or the Principal Market and (iii) the Company has received no
communication, written or oral, from the SEC or the Principal Market regarding the suspension or
delisting of the Common Stock from the Principal Market. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to possess such
certificates, authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate, authorization or
permit.

          (o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries nor
any director, officer, agent, employee or other Person acting on behalf of the Company or any of
its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its
Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

          (p) Sarbanes-Oxley Act. The Company is in material compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof,
and any and all applicable rules and regulations promulgated by the SEC thereunder that are
effective as of the date hereof.

          (q) Transactions With Affiliates. None of the officers, directors or employees of the
Company or any of its Subsidiaries is presently a party to any transaction with the Company or any
of its Subsidiaries (other than for ordinary course services as employees, officers or directors),
including any contract, agreement or other arrangement providing for the furnishing of services to
or by, providing for rental of real or personal property to or from, or otherwise requiring
payments to or from any such officer, director or employee or, to the knowledge of the Company or
any of its Subsidiaries, any corporation, partnership, trust or other entity in which any such
officer, director, or employee has a substantial interest or is an officer, director, trustee or
partner.

          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of 200,000,000 shares of Common Stock, of which as of the date hereof, 32,050,366
shares are issued and outstanding, 1,000,000 shares are reserved for issuance pursuant to the
Company’s stock option and purchase plans and 10,295,018 shares are reserved for issuance pursuant
to securities (other than the aforementioned options, the Notes and the

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Warrants) exercisable or exchangeable for, or convertible into, shares of Common Stock. All
outstanding shares of the Company’s capital stock have been, or upon issuance will be, validly
issued and are, or upon issuance will be, fully paid and nonassessable. With respect to any debt
or equity instruments of the Company and its Subsidiaries, (i) none of the Company’s capital stock
is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered
or permitted by the Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the Company or any of
its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or
any of its Subsidiaries is or may become bound to issue additional capital stock of the Company or
any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments
of any character whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iii) there are
no outstanding debt securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness of the Company or any of its Subsidiaries or by
which the Company or any of its Subsidiaries is or may become bound; (iv) there are no financing
statements securing obligations in any material amounts, either singly or in the aggregate, filed
in connection with the Company or any of its Subsidiaries; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the 1933 Act (except pursuant to the Registration Rights
Agreement); (vi) there are no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or
may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no
securities or instruments containing anti-dilution or similar provisions that will be triggered by
the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or
“phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect. The Issuer Parties have furnished to the
Buyers true, correct and complete copies of the Company’s certificate of incorporation, as amended
and as in effect on the date hereof (the “Certificate of Incorporation”), the Company’s bylaws, as
amended and as in effect on the date hereof (the “Bylaws”), the Guarantor’s certificate of
incorporation, as amended and as in effect on the date hereof (the “Guarantor Charter”), and the
Guarantor’s bylaws, as amended and as in effect on the date hereof (the “Guarantor Bylaws”), and
the terms of all securities convertible into, or exercisable or exchangeable for, shares of Common
Stock and the material rights of the holders thereof in respect thereto.

          (s) Indebtedness and Other Contracts. Neither the Company nor any of its Subsidiaries
(i) has any outstanding Indebtedness (as defined below), (ii) is a party to any contract, agreement
or instrument, the violation of which, or default under which, by the other party(ies) to such
contract, agreement or instrument could reasonably be expected to result in a Material Adverse
Effect, (iii) is in violation of any term of or in default under any contract, agreement or
instrument relating to any Indebtedness, except where such violations and defaults would not
result, individually or in the aggregate, in a Material Adverse Effect, or (iv) is a party

-12-

 

to any contract, agreement or instrument relating to any Indebtedness, the performance of
which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Schedule 3(s) provides a detailed description of the material terms of any such
outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services, including (without limitation)
“capital leases” in accordance with generally accepted accounting principles (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to any property or assets acquired with the
proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in connection with generally
accepted accounting principles, consistently applied for the periods covered thereby, is classified
as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by
(or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in
any property or assets (including accounts and contract rights) owned by any Person, even though
the Person which owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (A) through (G) above; (y) “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; and (z)
"Person” means an individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any department or agency
thereof.

          (t) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries, the Common Stock or any of the
Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers or directors.

          (u) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse
Effect.

-13-

 

          (v) Employee Relations.

               (i) Neither the Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union. The Company and its Subsidiaries believe that their
relations with their employees are good. No executive officer of the Company or any of its
Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the Company or any such
Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise
terminate such officer’s employment with the Company or any such Subsidiary. No executive officer
of the Company or any of its Subsidiaries, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing matters.

               (ii) The Company and its Subsidiaries, to their knowledge, are in compliance with all federal,
state, local and foreign laws and regulations respecting labor, employment and employment practices
and benefits, terms and conditions of employment and wages and hours, except where failure to be in
compliance would not, either individually or in the aggregate, reasonably be expected to result in
a Material Adverse Effect.

          (w) Title. The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each case free and clear
of all liens, encumbrances and defects (in each case, other than Permitted Liens (as defined in the
Notes)) or such as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and any of its Subsidiaries.
Any real property and facilities held under lease by the Company and any of its Subsidiaries are
held by them under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.

          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, service marks and all applications and
registrations therefor, trade names, patents, patent rights, copyrights, original works of
authorship, inventions, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as conducted on the date of this
Agreement. None of the Company’s registered, or applied for, Intellectual Property Rights have
expired or terminated or have been abandoned, or are expected to expire or terminate or expected to
be abandoned, within three years from the date of this Agreement. To the knowledge of the Company,
no product or service of the Company or its Subsidiaries infringes the Intellectual Property Rights
of others. There is no claim, action or proceeding being made or brought, or to the knowledge of
the Company or its Subsidiaries, being threatened, against the Company or its Subsidiaries
regarding (i) its Intellectual Property Rights, or (ii) that the products

-14-

 

or services of the Company or its Subsidiaries infringe the Intellectual Property Rights of
others. Neither the Company nor any of its Subsidiaries is aware of any facts or circumstances
which might give rise to any of the foregoing infringements or claims, actions or proceedings. The
Company and its Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their Intellectual Property Rights.

          (y) Environmental Laws. The Company and its Subsidiaries, to their knowledge, (i) are
in compliance with any and all Environmental Laws (as hereinafter defined), (ii) have received all
permits, licenses or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms and conditions of
any such permit, license or approval where, in each of the foregoing clauses (i), (ii) and (iii),
the failure to so comply could be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect. The term “Environmental Laws” means all federal, state, local or foreign
laws relating to pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively,
“Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as
well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments,
licenses, notices or notice letters, orders, permits, plans or regulations issued, entered,
promulgated or approved thereunder.

          (z) Subsidiary Rights. The Company or one of its Subsidiaries has the unrestricted
right to vote, and (subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the Company or such
Subsidiary.

          (aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

          (bb) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the recorded accountability
for assets and liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. Except as

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described in Item 8A of the Company’s Annual Report on Form 10-KSB filed with the SEC on
January 18, 2008 and in Part I, Item 3 of the Company’s Quarterly Report on Form 10-QSB filed with
the SEC on February 14, 2008 (collectively, the “Controls Disclosures”), the Company maintains
disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that
are effective in ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the SEC, including, without limitation,
controls and procedures designed in to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the 1934 Act is accumulated and communicated
to the Company’s management, including its principal executive officer or officers and its
principal financial officer or officers, as appropriate, to allow timely decisions regarding
required disclosure. Except as described in the Controls Disclosures, during the twelve months
prior to the date hereof neither the Company nor any of its Subsidiaries have received any notice
or correspondence from any accountant relating to any material weakness in any part of the system
of internal accounting controls of the Company or any of its Subsidiaries.

          (cc) Ranking of Notes and Guaranty. No Indebtedness of the Company or the Guarantor
is senior to the Notes or the Guaranty in right of payment, whether with respect of payment of
redemptions, interest, damages or upon liquidation or dissolution or otherwise.

          (dd) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
required to be disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.

          (ee) Investment Company Status. Neither Issuer Party is, and upon consummation of
the sale of the Securities neither Issuer Party will be, an “investment company,” a company
controlled by an “investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company” as such terms are defined in the Investment Company Act
of 1940, as amended.

          (ff) Transfer Taxes. On the Closing Date, all stock transfer, documentary stamp taxes
or other taxes (other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder will be, or will
have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or
will have been complied with.

          (gg) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) other than the Agent, sold, bid for, purchased, or
paid any compensation for soliciting purchases of, any of the Securities, or (iii) other than the
Agent, paid or agreed to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.

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          (hh) Disclosure. All disclosure provided to the Buyers regarding the Company or any
of its Subsidiaries, their business and the transactions contemplated hereby, including the
Schedules to this Agreement, furnished by or on behalf of any Issuer Party is true and correct and
does not contain any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the circumstances under
which they were made, not misleading. Each press release issued by the Company or any of its
Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at the time
of release contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.

     4. COVENANTS.

          (a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the
conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

          (b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company shall, on or before the Closing Date, take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify
the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall provide evidence of any such action so taken to the Buyers on or
prior to the Closing Date. The Company shall make all filings and reports relating to the offer
and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of
the United States following the Closing Date.

          (c) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold all the Conversion Shares and Warrant Shares and
none of the Notes or Warrants is outstanding, (the “Reporting Period”), the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act
or the rules and regulations thereunder would permit such termination.

          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, and not for the redemption or repurchase of any of its
or its Subsidiaries’ equity securities.

          (e) Financial Information. The Company agrees to send the following to each Investor
(as defined in the Registration Rights Agreement) during the Reporting Period (i) unless the
following are filed with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual
Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any
consolidated balance sheets, income statements, stockholders’ equity statements and/or cash flow
statements for any period other than annual, any Current Reports on Form 8-K and any registration
statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same
day as the release thereof, facsimile or e-mailed copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and

-17-

 

other information made available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the stockholders. As used herein,
“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in
The City of New York are authorized or required by law to remain closed.

          (f) Listing. The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national securities exchange
and automated quotation system, if any, upon which the Common Stock is then listed (subject to
official notice of issuance) and shall maintain, in accordance with the Notes and Warrants, such
listing of all Registrable Securities from time to time issuable under the terms of the Transaction
Documents. The Company shall maintain the Common Stock’s authorization for quotation on the
Principal Market. Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the Common Stock on the
Principal Market. The Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).

          (g) Fees. Each party to this Agreement and the other Transaction Documents shall be
responsible for paying its own fees and expenses, except to the extent specifically provided for
otherwise under any Transaction Document. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or broker’s commissions (other than for Persons
engaged by any Buyer) relating to or arising out of the transactions contemplated hereby,
including, without limitation, any fees payable to the Agent. The Company shall pay, and hold each
Buyer harmless against, any liability, loss or expense (including, without limitation, reasonable
attorney’s fees and out-of-pocket expenses) arising in connection with any claim relating to any
such payment.

          (h) Disclosure of Transactions and Other Material Information. Each of the Issuer
Parties agrees that neither it nor any other Person acting on its behalf will provide any of the
Buyers or their agents or counsel with any information that constitutes or could reasonably be
expected to constitute material, nonpublic information. Each of the Issuer Parties understands and
confirms that each of the Buyers will rely on the foregoing covenant in effecting transactions in
securities of the Company. On or before the second (2nd) Business Day following the
date of this Agreement, the Company shall issue a press release and file a Current Report on Form
8-K describing the terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents (including, without
limitation, this Agreement, the form of the Notes, the form of Warrant and the form of the
Registration Rights Agreement) as exhibits to such filing (such filing, including all such
attachments, the “8-K Filing”). From and after the filing of the 8-K Filing with the SEC, no Buyer
shall be in possession of any material, nonpublic information received from the Company or any of
its Subsidiaries or any of their respective officers, directors, employees or agents, that is not
disclosed in the 8-K Filing. Each Issuer Party shall not, and shall cause each of its Subsidiaries
and its and each of their respective officers, directors, employees and agents, not to, provide any
Buyer with any material, nonpublic information regarding the Company or any of its Subsidiaries
from and after the filing of the 8-K Filing with the SEC without the express written consent of
such Buyer, including, without limitation, in connection with offers made to any Buyer pursuant to
Section 4(j) below.

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          (i) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than 110% of the sum of
the number of shares of Common Stock issuable (i) upon conversion of the Notes issued at the
Closing and (ii) upon exercise of the Warrants issued at the Closing (without taking into account
any limitations on the Conversion of the Notes or exercise of the Warrants set forth in the Notes
and Warrants, respectively).

          (j) Additional Issuances of Securities. From the date hereof until the two year
anniversary of the Closing, each Buyer who purchases at least $1,000,000 in aggregate principal
amount of Notes, so long as such Buyer and its affiliates collectively hold at least $1,000,000 in
aggregate principal amount of Notes (each such Buyer, a “Major Investor”), shall have the right in
the event the Company, directly or indirectly, offers, sells, grants any option to purchase, or
otherwise disposes of (or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its or its Subsidiaries’ debt or equity securities, other than in connection
with Excluded Securities (as defined in the Notes) (any such offer, sale, grant, disposition or
announcement being referred to as a “Subsequent Placement”), to purchase their pro rata share of
such securities as follows:

               (i) The Company shall deliver to each Major Investor an irrevocable written notice (the “Offer
Notice”) of any proposed or intended issuance or sale or exchange (the “Offer”) of the securities
being offered (the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other terms upon which
they are to be issued, sold or exchanged, and the number or amount of the Offered Securities to be
issued, sold or exchanged, (y) identify the persons or entities (if known) to which or with which
the Offered Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell
to or exchange with such Buyers their pro rata share of the Offered Securities, allocated among
such Buyers (a) based on such Buyer’s pro rata share of the Offered Securities (the “Basic
Amount”), and (b) with respect to each Buyer that elects to purchase its Basic Amount, any
additional portion of the Offered Securities attributable to the Basic Amounts of other Major
Investors as such Major Investor shall indicate it will purchase or acquire should the other Major
Investors subscribe for less than their Basic Amounts (the “Undersubscription Amount”), which
process shall be repeated until the Buyers shall have an opportunity to subscribe for any remaining
Undersubscription Amount. For the purposes of this Section 4(o)(ii), a Major Investor’s “pro rata
share” shall be equal to the ratio of (a) the number of shares of Common Stock (including all
shares of Common Stock issuable or issued upon the conversion, exercise and exchange of all
Convertible Securities (as hereinafter defined) for the maximum number of shares of Common Stock
underlying such securities) held by such Major Investor immediately prior to the issuance of such
securities to (b) the total number of shares of Common Stock outstanding (including all shares of
Common Stock issuable or issued upon the conversion, exercise and exchange of all Convertible
Securities for the maximum number of shares of Common Stock underlying such securities)
immediately prior to the issuance of such securities. For the purposes of this Section 4(o)(ii),
“Convertible Securities” shall mean securities convertible into or exercisable or exchangeable for
shares of Common Stock, including, without limitation, convertible notes, convertible or
exchangeable preferred stock, options, stock purchase rights and warrants.

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               (ii) To accept an Offer, in whole or in part, such Major Investor must deliver a written
notice to the Company prior to the end of the fifth (5th) Business Day after such
Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such Buyer’s
Basic Amount that such Major Investor elects to purchase and, if such Major Investor shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Major Investor
elects to purchase (in either case, the “Notice of Acceptance”); provided, however,
that such Major Investors may not accept an Offer by electing to purchase less than 5% of the
Offered Securities on an aggregate basis. If the Basic Amounts subscribed for by all Major
Investors are less than the total of all of the Basic Amounts, then each Major Investor who has set
forth an Undersubscription Amount in its Notice of Acceptance shall be entitled to purchase, in
addition to the Basic Amounts subscribed for, the Undersubscription Amount it has subscribed for;
provided, however, that if the Undersubscription Amounts subscribed for exceed the
difference between the total of all the Basic Amounts and the Basic Amounts subscribed for (the
“Available Undersubscription Amount”), each Major Investor who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the Available
Undersubscription Amount as the Basic Amount of such Major Investor bears to the total Basic
Amounts of all Major Investors that have subscribed for Undersubscription Amounts, subject to
rounding by the Company to the extent its deems reasonably necessary. Notwithstanding anything to
the contrary contained herein, if the Company desires to modify or amend the terms and conditions
of the Offer prior to the expiration of the Offer Period, the Company may deliver to the Major
Investors a new Offer Notice and the Offer Period shall expire on the tenth (10th) Business Day
after such Major Investor’s receipt of such new Offer Notice.

               (iii) The Company shall have fifteen (15) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered Securities as to
which a Notice of Acceptance has not been given by the Major Investors (the “Refused Securities”),
but only to the offerees described in the Offer Notice (if so described therein) and only upon
terms and conditions (including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring person or persons or less favorable to the Company than those set
forth in the Offer Notice and (ii) to publicly announce (a) the execution of such Subsequent
Placement Agreement, and (b) either (x) the consummation of the transactions contemplated by such
Subsequent Placement Agreement or (y) the termination of such Subsequent Placement Agreement, which
shall be filed with the SEC on a Current Report on Form 8-K with such Subsequent Placement
Agreement and any documents contemplated therein filed as exhibits thereto.

               (iv) In the event the Company shall propose to sell less than all the Refused Securities (any
such sale to be in the manner and on the terms specified in Section 4(o)(iii) above), then each
Major Investor may, at its sole option and in its sole discretion, reduce the number or amount of
the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less
than the number or amount of the Offered Securities that such Major Investor elected to purchase
pursuant to Section 4(o)(ii) above multiplied by a fraction, (i) the numerator of which shall be
the number or amount of Offered Securities the Company actually proposes to issue, sell or exchange
(including Offered Securities to be issued or sold to Major Investors pursuant to Section 4(o)(iii)
above prior to such reduction) and (ii) the denominator of which shall be the original amount of
the Offered Securities. In the event that any Major Investor so elects to reduce the number or
amount of

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Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have again been offered
to the Major Investors in accordance with Section 4(o)(i) above.

               (v) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused
Securities, the Major Investors shall acquire from the Company, and the Company shall issue to the
Major Investors, the number or amount of Offered Securities specified in the Notices of Acceptance,
as reduced pursuant to Section 4(o)(iv) above if the Major Investors have so elected, upon the
terms and conditions specified in the Offer. Notwithstanding anything to the contrary contained in
this Agreement, if the Company does not consummate the closing of the issuance, sale or exchange of
all or less than all of the Refused Securities within fifteen (15) Business Days of the expiration
of the Offer Period, the Company shall issue to the Major Investors the number or amount of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to Section 4(o)(iv) above if
the Major Investors have so elected, upon the terms and conditions specified in the Offer. The
purchase by the Major Investors of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Major Investors of a purchase agreement
relating to such Offered Securities reasonably satisfactory in form and substance to the Major
Investors and their respective counsel.

               (vi) Any Offered Securities not acquired by the Major Investors or other persons in accordance
with Section 4(o)(iii) above may not be issued, sold or exchanged until they are again offered to
the Major Investors under the procedures specified in this Agreement.

               (vii) The Company and the Major Investors agree that if any Major Investor elects to
participate in the Offer, (x) neither the agreement regarding the Subsequent Placement (the
“Subsequent Placement Agreement”) with respect to such Offer nor any other transaction documents
related thereto (collectively, the “Subsequent Placement Documents”) shall include any term or
provisions whereby any Major Investor shall be required to agree to any restrictions in trading as
to any securities of the Company owned by such Major Investor prior to such Subsequent Placement,
and (y) any registration rights set forth in such Subsequent Placement Documents shall be similar
in all material respects to the registration rights contained in the Registration Rights Agreement.

               (viii) Notwithstanding anything to the contrary in this Section 4(o) and unless otherwise
agreed to by the Major Investors, the Company shall either confirm in writing to the Major
Investors that the transaction with respect to the Subsequent Placement has been abandoned or shall
publicly disclose its intention to issue the Offered Securities, in either case in such a manner
such that the Major Investors will not be in possession of material non-public information, by the
fifteen (15th) Business Day following delivery of the Offer Notice. If by the fifteen
(15th) following delivery of the Offer Notice no public disclosure regarding a
transaction with respect to the Offered Securities has been made, and no notice regarding the
abandonment of such transaction has been received by the Major Investors, such transaction shall be
deemed to have been abandoned and the Major Investors shall not be deemed to be in possession of
any material, non-public information with respect to the Company. Should the Company decide to

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pursue such transaction with respect to the Offered Securities, the Company shall provide each
Major Investor with another Offer Notice and each Major Investor will again have the right of
participation set forth in this Section 4(o). The Company shall not be permitted to deliver more
than one such Offer Notice to the Major Investors in any 60 day period.

               (ix) The provisions of this Section 4(o) shall not apply in connection with the issuance of
any Excluded Securities (as defined in the Notes) or with any issuance described on Schedule
4(o).

     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

          (a) Register. The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to each holder of Securities),
a register for the Notes and the Warrants in which the Company shall record the name and address of
the Person in whose name the Notes and the Warrants have been issued (including the name and
address of each transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable upon conversion of the Notes and the number of Warrant Shares issuable
upon exercise of the Warrants held by such Person. The Company shall keep the register open and
available at all times during business hours for inspection of any Buyer or its legal
representatives.

          (b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to
the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of
each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant Shares issued at
the Closing or upon conversion of the Notes or exercise of the Warrants in such amounts as
specified from time to time by each Buyer to the Company upon conversion of the Notes or exercise
of the Warrants in the form of Exhibit D attached hereto (the “Irrevocable Transfer Agent
Instructions”). The Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions to give effect to
Section 2(g) hereof, will be given by the Company to its transfer agent, and that the Securities
shall otherwise be freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the other Transaction Documents. If a Buyer effects a sale,
assignment or transfer of the Securities in accordance with Section 2(f), the Company shall permit
the transfer and shall promptly instruct its transfer agent to issue one or more certificates or
credit shares to the applicable balance accounts at DTC in such name and in such denominations as
specified by such Buyer to effect such sale, transfer or assignment. In the event that such sale,
assignment or transfer involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144, the transfer agent shall
issue such Securities to the Buyer, assignee or transferee, as the case may be, without any
restrictive legend. The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to a Buyer. Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5(b) will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this Section 5(b), that a
Buyer shall be entitled, in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring

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immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

          The obligation of the Company hereunder to issue and sell the Notes and the related Warrants
to each Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for the Company’s sole benefit and
may be waived by the Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:

               (i) Such Buyer shall have executed each of the Transaction Documents to which it is a party
and delivered the same to the Company.

               (ii) Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price
for the Notes and the related Warrants being purchased by such Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions provided by the Company.

               (iii) The representations and warranties of such Buyer shall be true and correct in all
material respects (except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the
date when made and as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date, which shall be true and correct as of such
specified date), and such Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Buyer at or prior to the Closing Date.

     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

          The obligation of each Buyer hereunder to purchase the Notes and the related Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by
such Buyer at any time in its sole discretion by providing the Company with prior written notice
thereof:

               (i) (a) The Company have duly executed and delivered to such Buyer (x) each Note (allocated in
such principal amounts as such Buyer shall request) being purchased by such Buyer at the Closing
pursuant to this Agreement, and (y) the related Warrants (allocated in such amounts as such Buyer
shall request) being purchased by such Buyer at the Closing pursuant to this Agreement, (b) the
Guarantor shall have duly executed and delivered to such Buyer the Guaranty, and (c) each Issuer
Party shall have duly executed and delivered to such Buyer each of the other Transaction Documents
to which such Issuer Party is a party and such other certificates or instruments required to be
delivered by it pursuant to the Transaction Documents.

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               (ii) Such Buyer shall have received the opinion of Siegel, Lipman, Dunay, Shepard & Miskel,
LLP, counsel to the Issuer Parties, dated as of the Closing Date, in substantially the form of
Exhibit E attached hereto.

               (iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit D attached hereto, which instructions shall have been
delivered to and acknowledged in writing by the Company’s transfer agent.

               (iv) The Company shall have delivered to such Buyer a certificate (or a fax or pdf copy of
such certificate) evidencing the formation and good standing of the Company and each of its
Subsidiaries in such entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction, as of a date within 10 days of the Closing Date.

               (v) The Issuer Parties shall have delivered to such Buyer a certified copy of the Certificate
of Incorporation as certified by the Secretary of State of the State of Nevada and a copy of the
Guarantor Charter as certified by the Secretary of State of the State of Florida (or, in each
case, a fax or pdf copy of such certificate).

               (vi) The Issuers shall have delivered to such Buyer a certificate, executed by the Secretary
of each of the Issuer Parties and dated as of the Closing Date, as to (i) the resolutions
consistent with Section 3(b) as adopted by each of the Issuer Parties’ board of directors in a form
reasonably acceptable to such Buyer, (ii) the Certificate of Incorporation, (iii) the Bylaws, (iv)
the Guarantor Charter and (v) the Guarantor Bylaws, each as in effect at the Closing, in form and
substance reasonably acceptable to the Buyers.

               (vii) The representations and warranties of the Issuer Parties shall be true and correct in
all material respects (except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the
date when made and as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date, which shall be true and correct as of such
specified date) and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Issuer Parties at or prior to the Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive Officer, President or Vice
President of each of the Issuer Parties, dated as of the Closing Date, to the foregoing effect, in
form and substance reasonably acceptable to the Buyers.

               (viii) The Common Stock (I) shall be designated for quotation or listed on the Principal
Market and (II) shall not have been suspended, as of the Closing Date, by the SEC or the Principal
Market from trading on the Principal Market nor shall suspension by the SEC or the Principal Market
have been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal
Market or (B) by falling below the minimum listing maintenance requirements of the Principal
Market.

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               (ix) The Issuer Parties shall have delivered to such Buyer the Subordination Agreement
executed and delivered by Mark Libratore, as subordinated lender, and acknowledged and agreed to by
the Issuer Parties.

               (x) The Company shall have obtained all governmental, regulatory or third party consents and
approvals, if any, necessary for the sale of the Securities.

               (xi) The Issuer Parties shall have delivered to such Buyer such other documents relating to
the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably
request.

     8. (INTENTIONALLY OMITTED).

     9. MISCELLANEOUS.

          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement 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. Each
party 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. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by mailing a copy thereof
to such party at the address for such notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. EACH PARTY 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 AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

          (b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an original, not a
facsimile signature.

          (c) Headings. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.

-25-

 

          (d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.

          (e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers,
the Issuer Parties, their affiliates and Persons acting on their behalf with respect to the
matters discussed herein, and this Agreement, the other Transaction Documents and the instruments
referenced herein and therein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein or therein, neither
any Issuer Party nor any Buyer makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be amended other than by an instrument
in writing signed by the Issuer Parties and the holders of at least two-thirds of the aggregate
number of Registrable Securities issued and issuable hereunder and under the Notes, and any
amendment to this Agreement made in conformity with the provisions of this Section 9(e) shall be
binding on all Buyers and holders of Securities as applicable. No provision hereof may be waived
other than by an instrument in writing signed by the party against whom enforcement is sought. No
such amendment shall be effective to the extent that it applies to less than all of the holders of
the applicable Securities then outstanding. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration also is offered to all of the parties to the Transaction
Documents, holders of Notes or holders of the Warrants, as the case may be. The Issuer Parties
have not, directly or indirectly, made any agreements with any Buyers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except as set forth in the
Transaction Documents. Without limiting the foregoing, each of the Issuer Parties confirms that,
except as set forth in this Agreement, no Buyer has made any commitment or promise or has any other
obligation to provide any financing to the Company or any of its Subsidiaries or otherwise.

          (f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:

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               If to the Issuer Parties:

	 	 	 
	 

	 	Liberator Medical Holdings, Inc.

2979 South East Gran Park Way

Stuart, Florida 34997

Telephone:     (772) 287-2414

Facsimile:     (772) 781-3867

Attention:     Mark A. Libratore, President

               with a copy to:

	 	 	 
	 

	 	Jonathan L. Shepard, Esquire

Siegel, Lipman, Dunay, Shepard & Miskel, LLP

5355 Town Center Road, Suite 801

Boca Raton, Florida 33486

Telephone:     (561) 368-7700

Facsimile:     (561) 368-9274

               If to the Transfer Agent:

	 	 	 
	 

	 	Standard Registrar & Transfer, Inc.

12528 South 1840 East

Draper, Utah 84020

Telephone:     (801) 571-8844

Facsimile:     (801) 571-2551

Attention:     Ron Harrington

If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies
to such Buyer’s representatives as set forth on the Schedule of Buyers,

               with a copy (for informational purposes only) to:

	 	 	 
	 

	 	Millennium Partners, L.P.

c/o Millennium Management LLC

666 Fifth Avenue, 8th Floor

New York, New York 10103

Telephone:     (212) 841-4100

Facsimile:     (212) 841-4141

Attention:     Terry Feeney

or to such other address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party five (5) days prior
to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or electronically generated
by the sender’s facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above, respectively.

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          (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Notes or the Warrants. Neither of the Issuer Parties shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the holders of at least two-thirds of
the aggregate number of Registrable Securities issued and issuable hereunder, including by way of a
Fundamental Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign
some or all of its rights hereunder without the consent of the Issuer Parties, in which event such
assignee shall be deemed to be a Buyer hereunder with respect to such assigned rights

          (h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.

          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Issuer Parties and the Buyers contained in Sections 2 and 3,
and the agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing. Each
Buyer shall be responsible only for its own representations, warranties, agreements and covenants
hereunder.

          (j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.

          (k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Issuer Parties shall defend,
protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of
their stockholders, partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or warranty made by any
Issuer Party in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby or (b) any breach of any covenant, agreement or obligation of any
Issuer Party contained in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Investor Parties shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified Liabilities that is
permissible under applicable law. Except as otherwise set forth herein, the

-28-

 

mechanics and procedures with respect to the rights and obligations under this Section 9(k)
shall be the same as those set forth in Section 6 of the Registration Rights Agreement.

          (l) No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.

          (m) Remedies. Each Buyer and each holder of the Securities shall have all rights and
remedies set forth in the Transaction Documents and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or other security),
to recover damages by reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. Furthermore, each of the Issuer Parties recognizes that in the event
that it fails to perform, observe, or discharge any or all of its obligations under the Transaction
Documents, any remedy at law may prove to be inadequate relief to the Buyers. Each of the Issuer
Parties therefore agrees that the Buyers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual damages and without
posting a bond or other security.

          (n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Buyer exercises a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods therein provided, then
such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to
the Issuer Parties, any relevant notice, demand or election in whole or in part without prejudice
to its future actions and rights.

          (o) Payment Set Aside. To the extent that the Company or the Guarantor makes a
payment or payments to the Buyers hereunder or pursuant to any of the other Transaction Documents
or the Buyers enforce or exercise their rights hereunder or thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or
are required to be refunded, repaid or otherwise restored to the Company, the Guarantor, a trustee,
receiver or any other Person under any law (including, without limitation, any bankruptcy law,
foreign, state or federal law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

          (p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each
Buyer under any Transaction Document are several and not joint with the obligations of any other
Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any
other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as, and each of the Issuer Parties acknowledges that the Buyers do not so
constitute, a partnership, an association, a joint venture or any other kind of entity, or

-29-

 

create a presumption that the Buyers are in any way acting in concert or as a group, and
neither of the Issuer Parties will assert any such claim with respect to such obligations or the
transactions contemplated by the Transaction Documents and each of the Issuer Parties acknowledges
that the Buyers are not acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. Each of the Issuer Parties acknowledges
and each Buyer confirms that it has independently participated in the negotiation of the
transaction contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall
be entitled to independently protect and enforce its rights, including, without limitation, the
rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any proceeding for such
purpose.

[Signature Pages Follow.]

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     IN WITNESS WHEREOF, each Buyer, the Company and the Guarantor have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of the date first
written above.

	 	 	 	 	 
	 	COMPANY:

LIBERATOR MEDICAL HOLDINGS, INC.

 	 
	 	By:  	/s/  Mark A. Libratore
 	 
	 	 	Name:  	Mark A. Libratore 	 
	 	 	Title:  	President 	 
	 
	 	GUARANTOR:

LIBERATOR MEDICAL SUPPLY, INC.

 	 
	 	By:  	/s/  Mark A. Libratore
 	 
	 	 	Name:  	Mark A. Libratore 	 
	 	 	Title:  	President 	 
	 

Signature Page to Securities Purchase Agreement

 

 

     IN WITNESS WHEREOF, each Buyer, the Company and the Guarantor have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of the date first
written above.

	 	 	 	 	 	 	 	 	 
	 	 	BUYER:	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	MILLENNIUM PARTNERS, L.P.	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By:	 	Millennium Management LLC, its Managing Partner	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Robert Williams
 

Name: Robert Williams

Title: CFO
	 	 

Signature Page to Securities Purchase AgreementEX-4.2 Form of Senion Convertible Note

Exhibit 4.2

[FORM OF SENIOR CONVERTIBLE NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A 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)(iii) AND 18(a) HEREOF. THE PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

Liberator Medical Holdings, Inc.

Senior Convertible Note

					
	 	 	 	 	 
	Issuance Date:May 22, 2008
	 	 
	 	Original Principal Amount: U.S. $                    

     FOR VALUE RECEIVED, Liberator Medical Holdings, Inc., a Nevada corporation (the “Company”),
hereby promises to pay to [          ] or its registered assigns (“Holder”) the
amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the
Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance
with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at the rate of
three percent (3%) per annum (the “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) or the Maturity Date, 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 (as defined
below) 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 28.

     (1) PAYMENTS OF PRINCIPAL. On the Maturity Date, the Company shall pay to the Holder
an amount in cash representing all outstanding Principal, accrued and unpaid

 

 

Interest, and accrued and unpaid Late Charges, if any, on such Principal and Interest. The
“Maturity Date” shall be the two year anniversary of the Issuance Date, 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 that shall have occurred and be continuing 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 the Note,
the Company may not prepay any portion of the outstanding Principal, accrued and unpaid Interest or
accrued and unpaid Late Charges, if any, on Principal and Interest.

     (2) INTEREST; INTEREST RATE. Interest on the outstanding Principal amount of this
Note shall commence accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable semi-annually, in arrears, on November 15 and May
15 of each year (each, an “Interest Date”), with the first Interest Date being November 15, 2008.
Interest shall be payable on each Interest Date, to the record holder of this Note on each November
1 and May 1 immediately preceding the applicable Interest Date (each, an “Record Date”), in cash.
Prior to the payment of Interest on an Interest Date, Interest on this Note shall accrue at the
Interest Rate. From and after the occurrence and during the continuance of an Event of Default,
the Interest Rate shall be increased to ten percent (10%) (the “Default Rate”). 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 but
not 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 taxes that may be payable with respect to the issuance and delivery of Common Stock
upon conversion of any Conversion Amount; provided that the Company shall not be required to pay
any tax that may be payable in respect of any issuance of Common Stock to any Person other than the
converting Holder or with respect to any income tax due by the Holder with respect to such Common
Stock.

          (b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of
any Conversion Amount pursuant to Section 3(a) shall be

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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, $0.80, 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 10:00 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to
the Company and (B) if required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or destruction). On or before
the third (3rd) Trading 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
(2nd) Trading Day following the date of receipt of a Conversion Notice (the “Share
Delivery Date”), the Company shall (X) provided that the Transfer Agent is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate
number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system or (Y)
if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program,
issue and deliver to the address as specified in the Conversion Notice, a certificate, registered
in the name of the Holder or its designee, for the number of shares of Common Stock to which the
Holder shall be entitled. If this Note is physically surrendered for conversion as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than the Principal portion
of the Conversion Amount being converted, then the Company shall as soon as practicable and in no
event later than five (5) 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 18(d)) representing the
outstanding Principal not converted. The Person or Persons entitled to receive the shares of
Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the Conversion Date.

               (ii) Company’s Failure to Timely Convert. If within five (5) Trading Days after the
Company’s receipt of the facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holder’s balance account with DTC for the number
of shares of Common Stock to which the Holder is entitled upon such holder’s conversion of any
Conversion Amount (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

-3-

 

Company shall, within five (5) 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 Weighted Average Price on the
Conversion Date.

               (iii) Registration; Book-Entry. The Company shall maintain a register (the
“Register”) for the recordation of the names and addresses of the holders of each Note and the
principal amount of the Notes held by such holders (the “Registered Notes”). The entries in the
Register shall be conclusive and binding for all purposes absent manifest error. The Company and
the holders of the Notes shall treat each Person whose name is recorded in the Register as the
owner of a Note for all purposes, including, without limitation, the right to receive payments of
principal and interest hereunder, notwithstanding notice to the contrary. A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or sale on the
Register. Upon its receipt of a request to assign or sell all or part of any Registered Note by a
Holder, the Company shall record the information contained therein in the Register and issue one or
more new Registered Notes in the same aggregate principal amount as the principal amount of the
surrendered Registered Note to the designated assignee or transferee pursuant to Section 18.
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, if any, converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of
this Note upon conversion.

               (iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company
can convert some, but not all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted
on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based
on the principal amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such date. In the event of
a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section 23.

          (d) Limitations on Conversions. The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any

-4-

 

portion of this Note pursuant to Section 3(a), to the extent that after giving effect to such
conversion, the Holder (together with the Holder’s affiliates) would beneficially own in excess of
9.99% (the “Maximum Percentage”) of the number of shares of Common Stock outstanding immediately
after giving effect to such conversion. For purposes of the foregoing sentence, the number of
shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number
of shares of Common Stock issuable upon conversion of this Note with respect to which the
determination of such sentence is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this
Note beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company (including, without
limitation, any Other Notes or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d),
beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). For purposes of this Section 3(d), 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-K, Form
10-Q 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 or oral request of the Holder, the
Company shall within two (2) Business Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or exercise of securities of
the Company, including this Note, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. By written notice to the Company, the
Holder may increase or decrease the Maximum Percentage to any other percentage specified in such
notice; provided that (i) any such increase will not be effective until the sixty-first
(61st) day after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder and not to any other holder of Notes.

     (4) RIGHTS UPON EVENT OF DEFAULT.

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

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

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

-5-

 

               (iii) at any time following the fifteenth (15th) consecutive Business Day 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);

               (iv) the Company’s failure to pay to the Holder any amount of Principal (including, without
limitation, any redemption payments), Interest, Late Charges or other amounts when and as due under
this Note, except, in the case of a failure to pay Interest and Late Charges when and as due, in
which case only if such failure continues for a period of at least five (5) Business Days;

               (v) the Company or the Guarantor shall either (i) fail to pay, when due, or within any
applicable grace period, any payment with respect to any Indebtedness in excess of $500,000,
individually or in the aggregate, due to any third party, other than, with respect to unsecured
Indebtedness only, payments contested by the Company or the Guarantor, as the case may be, in good
faith by proper proceedings and with respect to which adequate reserves have been set aside for the
payment thereof in accordance with GAAP, or otherwise be in breach or violation of any agreement
for monies owed or owing in an amount in excess of $500,000, individually or in the aggregate,
which breach or violation permits the other party thereto to declare a default or otherwise
accelerate amounts due thereunder, or (ii) suffer to exist any other circumstance or event that
would, with or without the passage of time or the giving of notice, result in a default or event of
default under any agreement binding the Company or the Guarantor, as the case may be, which default
or event of default would or is likely to have a material adverse effect on the business,
operations, properties, prospects of financial condition of the Company and its Subsidiaries, taken
as a whole; provided, however, that this clause (v) shall not apply to any lease on a premises
occupied by the Company or any of its Subsidiaries until the payment obligations under any such
lease have been accelerated or collateral securing such obligations have been foreclosed on;

               (vi) 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;

               (vii) 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;

               (viii) a final judgment or judgments for the payment of money aggregating in excess of
$750,000 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

-6-

 

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 $750,000 amount set forth above;

               (ix) the Company or the Guarantor breaches any material covenant or any material
representation or warranty under this Note or the Securities Purchase Agreement, except, in the
case of a breach of a covenant which is curable, only if such breach continues for a period of at
least ten (10) consecutive Business Days;

               (x) the Guaranty shall fail to be in full force or effect; or

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

          (b) Remedies upon an Event of Default. Upon the occurrence of an Event of Default of
the type specified in Section 4(a)(vi) or 4(a)(vii) above (each, a “Bankruptcy Event of Default”),
this Note shall immediately become due and payable without notice, and the Company shall as
promptly as practicable, but in any event within one (1) Business Day after the Company has written
notice or actual knowledge of the occurrence of such Event of Default, deliver written notice
thereof via facsimile or e-mail and overnight courier (an “Event of Default Notice”) to the Holder.
In connection with a Bankruptcy Event of Default, the Company shall pay to the Holder in cash the
sum of (i) all outstanding Principal of this Note, plus (ii) accrued and unpaid interest
thereon, plus (iii) accrued and unpaid Late Charges, if any. Upon the occurrence of any
Event Default other than a Bankruptcy Event of Default, the Company shall within two (2) Business
Days deliver an Event of Default Notice via facsimile or e-mail and overnight courier to the
Holder. At any time after the earlier of the Holder’s receipt of an Event of Default Notice and
the Holder gives written notice to the Company of an Event of Default, the Holder, in its sole
discretion, may by written notice to the Company declare this Note to be immediately due and
payable (the “Acceleration Notice”). Immediately following receipt an Acceleration Notice, the
Company shall pay to the Holder in cash the sum of (i) the product of all outstanding Principal
multiplied by 115% (the “Default Premium”), plus (ii) accrued and unpaid interest
thereon, plus (iii) accrued and unpaid Late Charges, if any. The parties hereto agree that
in the event of the Company’s acceleration of the Principal of this 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 Default 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 (as defined in the Securities Purchase
Agreement) in accordance with the provisions of this Section 5(a) pursuant to written agreements in
form and substance satisfactory to the Required Holders and

-7-

 

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

          (b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10) 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 on
the date of the Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading Days
after the consummation of such Change of Control, the Holder may require the Company to redeem all
or any portion of this Note by delivering written notice thereof (“Change of Control Redemption
Notice”) to the Company, which Change of Control Redemption Notice shall indicate the Conversion
Amount the Holder is electing to redeem. The portion of the Principal of this Note subject to
redemption pursuant to this Section 5 shall be redeemed by the Company in cash at a price equal to
(i) the product of (x) the Conversion Amount being redeemed and (y) the Change of Control Premium,
plus (ii) accrued and unpaid Interest and Late Charges, if any, on the portion of the
Principal to be redeemed, to, but not including, the date of redemption (the “Change of Control
Redemption Price”). Redemptions required by this Section 5(b) shall be made in accordance with the
provisions of Section 12 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 is
paid in full, the Conversion Amount submitted for redemption under this Section 5(b) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3. The parties
hereto agree that in the event of the Company’s redemption of any portion of this Note under this

-8-

 

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 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 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, (i) in addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder would have been entitled with
respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon
the consummation of such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares of Common Stock
otherwise receivable upon such conversion, such securities or other assets received by the holders
of shares of Common Stock in connection with the consummation of such Corporate Event in such
amounts as the Holder would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a
conversion rate for such consideration commensurate with the Conversion Rate. Provision made
pursuant to the preceding sentence shall be in a form and substance reasonably satisfactory to the
Required Holders. The provisions of this Section shall apply similarly and equally to successive
Corporate Events and shall be applied without regard to any limitations on the conversion or
redemption of this Note.

     (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

          (a) Adjustment upon Issuance of shares of Common Stock. If and whenever the Company
issues or sells, or in accordance with this Section 7 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 issued or sold or deemed to have
been issued or sold by the Company in connection with any Excluded Securities for a consideration
per share less than a price (the “Applicable Price”) equal to both the Conversion Price in effect
immediately prior to such issue or sale or deemed issuance or sale and $0.75 (subject to adjustment
corresponding to adjustments made to the Conversion Price under Sections 7(b) and (c) below, the
“Trigger Price”) (the foregoing a “Dilutive Issuance"), then immediately after such Dilutive
Issuance, the Conversion Price in effect immediately prior to such Dilutive Issuance 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 lower of (x) the Trigger Price and (y) the Conversion Price in
effect immediately prior to such Dilutive Issuance (such lower amount, the “Adjustment Price”), by
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 Adjustment Price by (II) the number

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of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. Upon
each such adjustment of the Conversion Price hereunder, the number of shares of Common Stock into
which the Principal of this Note is convertible into (the “Conversion Shares”) shall be adjusted
to the number of shares of Common Stock determined by multiplying the Conversion Price in effect
immediately prior to such adjustment by the number of Conversion Shares issuable upon conversion of
this Note immediately prior to such adjustment and dividing the product thereof by the Conversion
Price resulting from such adjustment. 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 any Options and the
lowest price per share for which one share of Common Stock is issuable upon the exercise of any
such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share. For purposes of this Section
7(a)(i), the “lowest price per share for which one share of Common Stock is issuable upon exercise
of such Options or upon conversion, exercise or exchange of such Convertible Securities issuable
upon exercise of any such 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
the granting or sale of the Option, upon exercise of the Option and upon conversion, exercise or
exchange of any Convertible Security issuable upon exercise of such Option. No further adjustment
of the Conversion Price or number of shares Conversion Shares shall be made upon the actual
issuance of such shares of Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such shares of Common Stock upon conversion, exercise or
exchange of such Convertible Securities.

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

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

               (iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued for a consideration of $0.01. If
any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any shares of Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount of such consideration
received by the Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration received by the
Company will be the Weighted Average Price of such security on the date of receipt. If any shares
of Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such shares of Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration other than cash or
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 final and binding upon all parties absent manifest error
and the fees and expenses of such appraiser shall be borne by the Company.

               (v) Record Date. If the Company takes a record of the holders of shares of Common
Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in
shares of Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase
shares of Common Stock, Options or Convertible Securities, then such

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record date will be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or purchase, as the
case may be.

          (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
Section 7(b) 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.

          (d) De Minimis Adjustments. No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least $0.01 in such price;
provided, however, that any adjustment which by reason of this Section 7(d) is not required to be
made shall be carried forward and taken into account in any subsequent adjustments under this
Section 7. All calculations under this Section 7 shall be made by the Company in good faith and
shall be made to the nearest cent or to the nearest one hundredth of a share, as applicable. No
adjustment need be made for a change in the par value or no par value of the Company’s Common
Stock.

     (8) (INTENTIONALLY OMITTED).

     (9) UNSECURED OBLIGATION; NO SINKING FUND. This Note and the Other Notes are
unsecured obligations of the Company and no sinking fund or reserve has been established to pay the
Principal of this Note or the principal amount of the Other Notes.

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

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     (11) RESERVATION OF AUTHORIZED SHARES.

          (a) Reservation. The Company shall initially reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 110% 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, 110% of the number of shares of Common Stock as shall from
time to time be necessary to effect the conversion of all of the Notes then outstanding; provided
that at no time shall the number of shares of Common Stock so reserved be less than the number of
shares required to be reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of Common Stock
reserved for conversions of the Notes and each increase in the number of shares so reserved shall
be allocated pro rata among the holders of the Notes based on the principal amount of the Notes
held by each holder at the Closing (as defined in the Securities Purchase Agreement) or increase in
the number of reserved shares, as the case may be (the “Authorized Share Allocation”). In the
event that a holder shall sell or otherwise transfer any of such holder’s Notes, each transferee
shall be allocated a pro rata portion of such holder’s Authorized Share Allocation. Any shares of
Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be allocated
to the remaining holders of Notes, pro rata based on the principal amount of the Notes then held by
such holders.

          (b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share
Failure”), then the Company shall immediately take all action necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the
Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than sixty (60) 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 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.

     (12) HOLDER’S REDEMPTIONS. 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. 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 18(d)) representing the outstanding
Principal which has not been

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redeemed. In the event that the Company does not pay the Change of Control Redemption Price
to the Holder within the time period required, at any time thereafter and until the Company pays
such unpaid Change of Control 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 Change
of Control Redemption Price (together with any Late Charges thereon) has not been paid. Upon the
Company’s receipt of such notice, (x) the Change of Control 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 18(d)) to the Holder representing such Conversion
Amount and (z) the Conversion Price of this Note or such new Notes shall be adjusted to the lesser
of (A) the Conversion Price as in effect on the date on which the Change of Control 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 Change of Control Redemption Notice is delivered
to the Company and ending on and including the date on which the Change of Control Redemption
Notice is voided. The Holder’s delivery of a notice voiding a Change of Control 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.

     (13) 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, Chapter 78 of the Nevada Revised
Statutes, or as otherwise provided herein.

     (14) COVENANTS.

          (a) Rank. This Note is an unsubordinated obligation of the Company and all payments
due under this Note (A) shall rank pari passu with all Other Notes, (B) shall be senior to all of
the Subordinated Notes (as defined in the Securities Purchase Agreement) in accordance with the
terms and conditions of the Subordination Agreement (as defined in the Securities Purchase
Agreement), and (C) shall not be subordinated to any other Indebtedness of the Company.

          (b) Disclosure of Operating Results. Commencing with the Fiscal Quarter ending March
31, 2008, the Company shall use commercially reasonable efforts to publicly disclose and
disseminate its operating results (the “Operating Results”) (x) for each of the first three Fiscal
Quarters of each fiscal year no later than the forty-fifth (45th) day after the end of
such Fiscal Quarter and (y) for the fourth Fiscal Quarter of each fiscal year, no later than the
ninetieth (90th) day after the end of such Fiscal Quarter, and shall file its Operating
Results with SEC for the first three Fiscal Quarters of each fiscal year a part of a Quarterly
Report on Form 10-Q or Form 10-QSB, as applicable, and for the fiscal year as part of an Annual
Report on Form 10-K or Form 10-KSB, as applicable (provided that such deadlines shall be subject to
extension as permitted under the Exchange Act and the rule and regulations of the SEC promulgated
thereunder).

          (c) Future Subsidiaries. If the Company or any of its Subsidiaries shall hereafter
create or acquire any Subsidiary, simultaneously with the creation or acquisition

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of such Subsidiary, the Company shall cause such Subsidiary to duly execute and deliver a
guaranty of this Note and the Other Notes in favor of the Holder and the holders of the Other
Notes, substantially in the form of the Form of Guaranty attached as Exhibit F to the Securities
Purchase Agreement.

     (15) PARTICIPATION. The Holder, as the holder of this Note, shall not be entitled to
receive such dividends paid and distributions made to the holders of Common Stock with respect to
any unconverted portion of the Principal of this Note.

     (16) 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. No consideration shall be
offered or paid to any holder of Notes to amend or consent to a waiver or modification of the Notes
unless the same consideration also is offered to all of the holders of Notes. Notwithstanding the
foregoing, without the prior written consent of the Holder, (i) the Maturity Date of this Note
shall not be extended, (ii) the Interest Rate shall not be decreased, (iii) the right to receive
any payment hereunder that is then due and owing shall not be reduced or waived, (iv) the Principal
shall not be reduced other than in accordance with the terms hereof and (v) the Conversion Price
shall not be increased other than in accordance with Section 7(b) or 7(c) hereof.

     (17) TRANSFER. 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.

     (18) REISSUANCE OF THIS NOTE.

          (a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder
a new Note (in accordance with Section 18(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 18(d)) to the Holder
representing the outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(iii) following conversion or redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal stated on the face of this Note.

          (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of 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 18(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,

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for a new Note or Notes (in accordance with Section 18(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 18(a) or Section 18(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, if any, from the Issuance
Date.

     (19) 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.

     (20) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed
in the hands of an attorney for collection or enforcement or is collected or enforced through any
legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’ rights and involving
a claim under this Note, then the Company shall pay the 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, financial advisory fees and
attorneys’ fees and disbursements.

     (21) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the
Company and all the initial holders of the Notes 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.

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     (22) 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.

     (23) 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 the Change of Control Redemption Price, the Company shall
submit the disputed determinations or arithmetic calculations via facsimile within one (1) Business
Day of receipt, or deemed receipt, of the Conversion Notice or Change of Control 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 one (1) Business Day
of such disputed determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one Business Day submit via facsimile (a) the disputed determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or the Change of Control 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.

     (24) 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 9(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 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 initial holders of the Notes, 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

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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 this Note 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 Default Rate from the date such amount was due until the same is paid in full (“Late Charge”).

     (25) 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.

     (26) 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.

     (27) GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL. 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 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.

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     (28) 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 or hereafter is
approved by the board of directors of the Company, pursuant to which the Company’s securities may
be issued to any employee, officer or director for services provided to the Company.

          (b) “Bloomberg” means Bloomberg Financial Markets.

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

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

          (e) “Change of Control Premium” means 115%.

          (f) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets”. 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 23. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.

-19-

 

          (g) “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.

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

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

          (j) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., the
American Stock Exchange, The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ
Capital Market or the OTC Bulletin Board.

          (k) “Excluded Securities” means any Common Stock issued or issuable: (i) in connection with
any Approved Stock Plan or with respect to any shares of Common Stock reserved as employee shares
(or for officers or directors of the Company and its Subsidiaries) as of the date immediately
preceding the Subscription Date; (ii) upon conversion 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 $20,000,000
(other than an “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act of
1933, as amended, and “equity lines”); (iv) upon conversion of any Options or Convertible
Securities which are outstanding on the day immediately preceding the Subscription Date, provided
that the terms of such Options or Convertible Securities are not amended, modified or changed on or
after the Subscription Date; (v) in connection with any merger, consolidation, acquisition, or
similar business combination approved by the board of directors of the Company; (vi) pursuant to
any equipment loan or leasing arrangement, real property leasing arrangement or debt financing from
a bank or similar financial institution approved by the board of directors of the Company; (vii) to
any Major Investor (as defined in the Securities Purchase Agreement) pursuant to Section 4(j) of
the Securities Purchase Agreement; or (viii) in connection with the payment of interest, penalties,
premiums or other liquidated damages on the Notes or under the Registration Rights Agreement.

          (l) “Fiscal Quarter” means each of the fiscal quarters adopted by the Company for financial
reporting purposes that correspond to the Company’s fiscal year as of the date hereof that ends on
September 30 of each year.

          (m) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person or Persons, if the holders of the Voting Stock (not including
any shares of Voting Stock held by the Person or

-20-

 

Persons making or party to, or associated or affiliated with the Persons making or party to,
such consolidation or merger) immediately prior to such consolidation or merger shall hold or have
the right to direct the voting of less than 50% of the Voting Stock or such voting securities of
such other surviving Person immediately following such transaction, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or assets of the Company
to another Person, or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of 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), (v) reorganize, recapitalize or reclassify
its Common Stock or (vi) any “person” or “group” (as these terms are used for purposes of Sections
13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate ordinary voting
power represented by issued and outstanding Common Stock.

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

          (o) “Guarantor” means Liberator Medical Supply, Inc., a Florida corporation and a wholly-owned
subsidiary of the Company.

          (p) “Guaranty” means the guaranty by the Guarantor of the obligations of the Company under
this Note and the other Notes.

          (q) “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 generally
accepted accounting principles (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 generally accepted accounting principles, 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

-21-

 

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.

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

          (s) “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 (other than Pink OTC Markets Inc.), 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.

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

          (u) “Principal Market” means Pink OTC Markets Inc. or any Eligible Market the Common Stock is
then listed on.

          (v) “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.

          (w) “Required Holders” means the holders of Notes representing at least two-thirds
(2/3rd) of the aggregate principal amount of the Notes then outstanding.

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

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

          (z) “Subscription Date” means May 22, 2008.

          (aa) “Subsidiary” means each of the Guarantor and each other “Significant Subsidiary” (as such
term is defined in Rule 1-02 of Regulation S-X of the Securities Act of 1933, as amended ) of the
Company.

          (bb) “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
(other than Pink OTC Markets Inc.), Successor Entity shall mean such Person’s Parent Entity.

-22-

 

          (cc) “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).

          (dd) “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).

          (ee) “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.

          (ff) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such security as reported in
the “pink sheets”. If the Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.

     (29) 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,

-23-

 

nonpublic information, relating to the Company or its Subsidiaries, the Company shall indicate
to the Holder contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to such notice do not
constitute material, nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

-24-

 

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

	 	 	 	 	 
	 	LIBERATOR MEDICAL HOLDINGS, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Mark A. Libratore 	 
	 	 	Title:  	President 	 

Signature Page to 3% Senior Convertible Note due 2010

 

 

	 	 	 	 	 

EXHIBIT I

LIBERATOR MEDICAL HOLDINGS, INC.

CONVERSION NOTICE

Reference is made to the Senior Convertible Note (the “Note”) issued to the undersigned by
Liberator Medical Holdings, 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. Capitalized terms used herein and not otherwise defined
shall have the respective meanings set forth in the Note.

	 	 	 
	     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:
	 	 
	 

	 	 

The Holder represents and warrants to the Company that the Holder, together
with the Holder’s affiliates, will not beneficially own in excess of 9.99% of
the shares of Common Stock of the Company outstanding immediately after giving
effect to the exercise of the Note for the number of shares of Common Stock of
the Company to be issued pursuant to this Conversion Notice.

	 	 	 
	     Authorization:
	 	 
	 

	 	 

	 	 	 
	          By:
	 	 
	 

	 	 

	 	 	 
	               Title:
	 	 
	 

	 	 

	 	 	 
	Dated:
	 	 
	 

	 	 

	 	 	 
	     Account Number:
	 	 
	 

	 	 

        (if electronic book entry transfer)

	 	 	 
	     Transaction Code Number:
	 	 
	 

	 	 

        (if electronic book entry transfer)

 

 

ACKNOWLEDGMENT

     The Company hereby acknowledges this Conversion Notice and hereby directs Standard Registrar &
Transfer, Inc. to issue the above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated May 22, 2008 from the Company and acknowledged and agreed to by
Standard Registrar & Transfer, Inc.

	 	 	 	 	 
	 	LIBERATOR MEDICAL HOLDINGS, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:

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