Document:

Exhibit 10.1

 

 

CONFIDENTIAL

 

April 17, 2006

 

Mr. Jeffery W. Sprick

500 West Eldorado Street

Decatur, IL  62522

 

Dear Jeff:

 

Confirming our recent discussions, we are pleased that
you will be continuing as Senior Vice President and Chief Financial Officer for
Mueller Water Products, Inc. (the “Company”). The following outlines the
terms of your employment. This document supersedes all previous agreements you
had with Walter Industries, Inc., the Company or any affiliate, subsidiary
or predecessor-in-interest of Walter Industries, Inc. or the Company.

 

1.                                       Position.
You will serve as Senior Vice President and Chief Financial Officer reporting
to the President and Chief Executive Officer of Mueller Water Products, Inc.
You will be responsible for all financial matters affecting the company
including financial reporting, balance sheet management, capital structure, and
strategic issues affecting the Company’s financial position.

 

2.                                       Compensation.
Your compensation package will be as follows:

 

(a)                                  Effective
as of November 1, 2005, your base salary will be $240,000 per year. Your
salary and performance will be reviewed once per year.

 

(b)                                 Effective
November 1, 2006, you will participate in the Mueller Water Products
Corporate Executive Incentive Plan with an annual bonus target of 50%, or
$120,000 at your current annual base salary. Your actual annual incentive
payment will have a downside of zero and an upside of 200% of target. The
calculation of your actual bonus amount will consist of four parts:  15% - for the operating income, on a
consolidated basis, of the Company, 35% - for the operating income of the
Mueller segment, the Anvil segment and Company corporate, 30% for the RONA

 

 

(Return On Net Assets) of the Mueller
segment, the Anvil segment and Company corporate, and 20% - for the Individual
Goals. A bonus will not be paid or payable in the event you are not employed by
the Company on the day of the payout.

 

(c)                                  You
will be eligible for the Mueller Water Products, Inc. long term incentive
program as it applies to other executives.

 

(d)                                 You
will receive the following additional benefits:

 

•                  Reimbursement
for all reasonable and customary business-related travel and entertainment
expenses in accordance with the terms of the policy generally applicable to the
executives in the location in which you are primarily based, as it may change
from time to time.

 

•                  Participation
in the group life and health insurance benefit programs, generally applicable
to executives employed in the location in which you are primarily based, in
accordance with their terms, as they may change from time to time.

 

3.                                       Severance.
In the event of your involuntary termination, other than for “cause”, you will
be eligible for the following severance benefits:

 

•                  Twelve
months of salary continuance, including base and target bonus, at the
applicable rate in effect at the time of termination.

 

•                  Twelve
months of continuing fringe benefits to the extent plans permit continued
participation. In any event, health and life insurance will continue for the
period of your contractual severance and the COBRA election period will not
commence until the expiration of that period.

 

4.                                       Developments.
You agree that all inventions, improvements, trade secrets, reports, manuals,
computer programs, systems, tapes and other ideas and materials developed or
invented by you during the period of your employment with the Company, either
solely or in collaboration with others, which relate to the actual or
anticipated business or research of the Company or its subsidiaries, which
result from or are suggested by any work you may do for the Company, or
which result from use of the premises of the Company or of its affiliates or
the property of the Company, its affiliates or its customers (collectively, the
“Developments”) shall be the sole and exclusive property of the Company. You
hereby assign to the Company your entire right and interest in any Developments
and will hereafter execute any documents in connection therewith that the

 

2

 

Company may reasonably request. This section does
not apply to any inventions that you made prior to your employment by the
Company, or to any inventions that you develop entirely on your own time
without using any of the equipment, supplies, facilities, or confidential
information of the Company or of the Company’s affiliates or confidential
information of the Company’s customers and which do not relate to the business,
anticipated research or developments of, or the work you have performed for,
the Company or the Company’s affiliates.

 

5.                                       Non-Compete.
It is understood and agreed that the Company is in the water transmission
products business. The nature of, and methods employed in, the Company’s
business are such that the Employee will have substantial relationships with
specific businesses and personnel, prospective and existing, vendors,
contractors, customers, and employees of the Company that result in the
creation of customer goodwill. Therefore, following the termination of
employment under this Agreement for any reason and continuing for a period of
twelve (12) months from the date of such termination, so long as the Company or
any affiliate, successor or assign thereof carries on the name or like business
within the Restricted Area (defined as the states in which the Company and its
subsidiaries operate in as of the date of your separation), you shall not,
directly or indirectly, for yourself or on behalf of, or in conjunction with,
any other person, persons, company, partnership, corporation, business entity
or otherwise:

 

a.               Call upon, solicit,
write, direct, divert, influence, or accept business (either directly or
indirectly) with respect to any account or customer or prospective customer of the
Company or any corporation controlling, controlled by, under common control
with, or otherwise related to the Company, including but not limited to any
affiliates of the Company; or

 

b.              Hire away any
independent contractors or personnel of the Company or its affiliates and/or
entice any such persons to leave the employ of the Company or its affiliated
entities without the prior written consent of the Company.

 

6.                                       Non-Disparagement.
Following the termination of employment under this Agreement for any reason and
continuing for so long as the Company or any affiliate, successor or assigns
thereof carries on the name or like business within the Restricted Area, you
shall not, directly or indirectly, for yourself or on behalf of, or in
conjunction with, any other person, persons, company, partnership, corporation,
business entity or otherwise:

 

3

 

a.               Make any statements
or announcements or permit anyone to make any public statements or
announcements concerning the termination of your employment with the Company,
or

 

b.              Make any statements
that are inflammatory, detrimental, slanderous, or negative in any way to the
interests of the Company or its affiliated entities.

 

7.                                       No
Conflict. As an inducement to the Company to make this offer to you, you
represent and warrant that you are not a party to any agreement or obligation
for personal services and that there exists no impediment or restraint,
contractual or otherwise on your power, right or ability to accept this offer
and to perform the duties and obligations specified herein.

 

8.                                       Confidential
Information. You acknowledge and agree that you will respect and safeguard the
property, trade secrets and confidential information of the Company and its
affiliates. You acknowledge that the Company’s electronic communication systems
(such as email and voicemail) are maintained to assist in the conduct of the
Company’s business and that such systems and data exchanged or stored thereon
are Company property. In the event that you leave the employ of the Company,
you will not disclose any trade secrets or confidential information you
acquired while an employee of the Company to any other person or entity,
including without limitation, a subsequent employer, or use such information in
any manner.

 

9.                                       Cause.
Definition of “Cause” shall mean your (i) conviction or guilty plea of a
felony involving fraud or dishonesty, (ii) theft or embezzlement of
property from the Company, (iii) willful and continued refusal to perform the
duties of your position (other than any such failure resulting from your
incapacity due to physical or mental illness) or (iv) fraudulent
preparation of financial information of the Company.

 

10.                                 Entire
Agreement. It is agreed and understood that this offer letter, if and when
accepted, shall constitute our entire agreement with respect to the subject
matter herein and shall supersede all prior agreements, discussions,
understandings and proposals (written or oral) relating to your employment with
the Company or any of its affiliates, including Walter Industries, Inc.;
provided, that this does not supersede, but is to be read in conjunction with
the Executive Change in Control Severance Agreement dated the date hereof
between you and Walter Industries, Inc. for so long as that agreement is
effective.

 

4

 

We are delighted that you will be continuing with Mueller Water
Products, Inc. If the terms of the proposal are acceptable, please sign
one of the enclosed copies and return it to me in the envelope provided.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Gregory
  E. Hyland

  	
   

  
	
   

  	
  Gregory E. Hyland

  
	
   

  	
  Chairman, President and Chief Executive
  Officer

  
	
   

  	
   

  
	
  GH:tp

  	
   

  
	
  attachment

  	
   

  
	
   

  	
   

  
	
  Agreed and Accepted

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ Jeffery
  W. Sprick

  	
   

  	
   

  
	
  Jeffery W. Sprick

  	
   

  
	
   

  	
   

  
	
  April 17,
  2006

  	
   

  	
   

  
	
  Date

  	
   

  

 

5MODIFICATION AGREEMENT

         This MODIFICATION  AGREEMENT (this "Agreement") is dated as of March 1,
2006 and is entered  into by and among AXM PHARMA,  INC.,  a Nevada  corporation
(the "Company"), and the noteholders listed below (collectively,  the "Holders")
who are signatories hereto, with reference to the following:

         WHEREAS,  the Company issued separate  secured  convertible  promissory
notes ( the  "Notes")  to the Holders  pursuant  to a Note and Warrant  Purchase
Agreement  dated as of April 19, 2005 (the "Purchase  Agreement"),  by and among
the Company and the Holders and also  entered  into  certain  other  Transaction
Documents ( as defined in the Purchase Agreement), dated as of such date;

         WHEREAS,  the  parties  now wish to modify the Notes and certain of the
Transaction Documents, and;

         WHEREAS,  unless the context otherwise requires,  all capitalized terms
in this Agreement shall have the meanings set forth herein.

         NOW, THEREFORE,  in consideration of the covenants and other provisions
set forth below, the parties agree as follows:

                                            ARTICLE I

                                            The Closing

                  Section  1.1 Note and Warrant  Issuances  Subject to the terms
hereof, on or before 10 a.m. on April 28, 2006 at the offices of Mark Katz, P.C.
(the  "Company's  Outside  Counsel") at 50 California  Street,  Suite 1500,  San
Francisco, California 94111 (the "Closing "), the Company shall:

                           (a) issue and  deliver to the  Holders,  Amended  and
         Restated  Secured  Convertible  Secured Notes, in the form of EXHIBIT 1
         hereto (the "Amended Notes"),  in an aggregate  principal amount not to
         exceed Three  Million  Seven Hundred and Ninety Four Thousand and Forty
         Five Dollars ($3,794,045), with individual Amended Notes to the Holders
         being  issued  for  the  respective  principal  amounts  set  forth  in
         Schedules A (1) or A (2)  opposite  their  names,  in  accordance  with
         Sections 1.3(b) and (c) below:

                           (b) issue and  deliver to the  Holders,  Amended  and
         Restated  Series B Warrants,  for an aggregate  of 2,055,000  shares of
         Common Stock,  which  warrants  shall replace the existing  outstanding
         Series B Warrants for a like number of shares and shall be  exercisable
         at $.50 per share,  with the  individual  Warrants being issued for the
         number of shares set forth in Schedule B opposite the respective  names
         of the Holders;

                           (c) issue and  deliver to the  Holders,  Amended  and
         Restated Series A Warrants for an aggregate of 455,000 shares of Common
         Stock,  which warrants shall replace the existing  outstanding Series A

<PAGE>

         Warrants for a like number of shares and shall be  exercisable  at $.50
         per share, with the individual  Warrants being issued for the number of
         shares set forth in  Schedule B opposite  the  respective  names of the
         Holders,  ( the Amended and Restated  Series A Warrants and the Amended
         and  Restated  Series  B  Warrants  being   collectively   referred  to
         hereinafter as the "Amended Warrants"; and the Amended Warrants and the
         Amended Notes being sometimes  collectively  referred to hereinafter as
         the "Amended Documents").

          Section 1.2 Cashless  Exercise for Warrants The Amended Warrants to be
issued pursuant to Section 1.1 shall provide that cashless exercises may only be
made after April 19,,  2006 and only if there is no  registration  statement  in
effect with respect to the Amended Warrants at such time.

         Section 1.3       Notes, Warrants and Certificates from Holders.

         (a) Subject to the terms hereof, at or before the Closing,  the Holders
shall deliver to the Company's  Outside Counsel the Notes and the Series A and B
Warrants being amended and restated pursuant to Section 1.1 above (collectively,
the "Primary Closing Documents").

         (b) Each Holder delivering its Primary Closing Documents,  at or before
the Closing shall receive Notes in the principal  amount set forth  opposite its
name on Schedule A (1).

          (c) Each Holder  delivering both its Primary Closing Documents and its
September  Certificates,  as defined in Section 1.3 (d) below,  shall  receive a
Note in the principal amount set forth opposite its name on Schedule A(2).

         (d) As used  herein,  "September  Certificates"  shall  mean the  share
certificates  issued by the Company to a Holder in September 2005 as payment for
the principal and interest payment due to the Holder on September 19, 2005.

         Section 1.4 Other Warrants.  Except as specifically provided herein, no
modifications or anti-dilution  adjustments shall be made to any of the Holders'
other outstanding  Warrants as a result of the issuance of the Amended Notes and
the Amended Warrants.

         Section  1.5  Stockholder  Approval.  The  Holders  are aware  that the
Company  has  not  yet  obtained  the  stockholder  approval  (the  "Stockholder
Approval") of the  transactions  contemplated by this Agreement,  as required by
the  applicable  rules and  regulations  of the American  Stock Exchange (or any
successor  entity)  in order to issue  shares of  Common  Stock in excess of the
Issuable   Maximum,   as  defined  in  Section  3.4(c)  of  the  Amended  Notes.
Accordingly,   the  Company  shall  issue  to  each  Holder  requesting  partial
conversion  of its Amended  Note,  a number of shares of Common Stock which will
not exceed such Holder's pro  rata-portion of the Issuable  Maximum,  calculated
based  on  the  principal  amount  of  the  Notes  originally  purchased  by the
respective  Holders as of April 19,  2005.  In addition,  the Company  agrees to
obtain, by no later than September 1, 2006, any Stockholder  Approval  necessary
to permit the Company's issuance, pursuant to the Notes, of the remaining Common
Stock in excess of the Issuable Maximum.

         Section  1.6  Public  Disclosure.   Following  the  execution  of  this
Agreement,  the Company shall file with the Securities and Exchange  Commission,
on a timely basis, a Current Report on Form 8-K disclosing the material terms of

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<PAGE>

the  transactions  contemplated  hereby and shall  attach this  Agreement  as an
exhibit.  The Company  shall also provide to each Holder,  prior to the issuance
thereof,  a copy of the proposed press release with respect to the  transactions
contemplated by this Agreement.

          Section 1.7 Waiver.  The Holders hereby waive the Company's  inability
to repay the  principal  and interest due to Shanghai  Pudong  Development  Bank
("Pudong")  on its loan from such bank,  as set forth in  Schedule C hereto,  in
February  2006 and its inability to repay the amount of  approximately  $400,000
plus interest due to private investors , as disclosed in the Company's Form 10-Q
for the quarter ended September 30, 2005; provided that this waiver shall expire
automatically without any notice to the Company and no longer have any effect if
Pudong or the private  investors,  give a written  default notice to the Company
with  respect to its loan.  The Company  represents  and  warrants  that neither
lender has given written notice to the Company that it considers its loan to the
Company to be in default.

         Section 1.8.  Incorporation of Terms. The covenants made in Article III
of the  Purchase  Agreement  by the Company to the Holders  with  respect to the
Notes and Warrants issued under the Purchase Agreement (and the shares of Common
Stock  underlying  such Notes and  Warrants),  shall be fully  applicable to the
Amended Notes and Amended  Warrants  (and the shares of Common Stock  underlying
the Amended Notes and Warrants),  provided that Sections 3.11,  3.16,  3.19, and
3.20 of the  Purchase  Agreement  shall  not be  applicable.  In  addition,  the
Company's  Irrevocable  Transfer Agent  Instruction to be furnished  pursuant to
Section 3.17 shall be subject to the Company's  confirming to its transfer agent
the correctness of the Conversion  Price  calculations  furnished by the Holders
with respect to the Common Stock  issuable upon  conversion of the Amended Notes
and,  Section  3.22(c)  notwithstanding,  the Company may engage in a Subsequent
Financing,  including  a  Variable  Rate  Transaction,  as long  as the  Company
complies with the First Refusal Rights  procedures set forth in Section 3.22(b).
The Holders also  acknowledge,  in  connection  with Section 3.2,  that AMEX has
initiated a delisting  process and, in connection  with Section  3.10,  that the
Company's  filing  obligation  with  respect to the Form 10-K for the year ended
December 31, 2005 shall be to use its reasonable  best efforts to file such form
prior to the expiration of the current Rule 12b-25 extension period.

         Section  1.9  Definition  of Notes.  As used in any of the  Transaction
Documents,  unless  the  context  otherwise  requires,  the term  "Notes"  shall
hereafter mean the Amended Notes.

                                   ARTICLE I1

                      Modification of Transaction Documents

                  Section 2.1 Registration Rights Agreement. At the Closing, the
parties shall execute and deliver the Registration  Rights Agreement in the form
of EXHIBIT 2 hereto (the "Registration Rights Agreement").

                  Section 2.2 Pledge and Security Agreement; Mortgage

                  (a) The parties hereby amend the Pledge and Security Agreement
         (the  "Pledge  Agreement")  as of the  date  hereof  in  the  following
         respects:

                                             (1) The Holders  hereby  consent to
                  the Company's  relocating  its principal  place of business to

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<PAGE>

                  17870 Castleton Street. Suite 255, City of Industry, CA 91748.
                  If  requested  by any of the Holders at least one business day
                  prior to the Closing, at the Closing the Company shall deliver
                  to the  Holders  a  fully  executed  amended  UCC-1  financing
                  statement  with respect to the  Collateral  (as defined in the
                  Pledge Agreement), reflecting such change of address;

                                    (2)  Schedules  3.3  and  3.4 to the  Pledge
                  Agreement,  respectively,  are hereby modified to read in full
                  as set forth in Schedules C and D attached hereto; and

                                    (3) The following language  shall be  deemed
                  added at the end of Section 3.3 of the Pledge Agreement:

                           "In   addition,   the   Secured   Parties   agree  to
                  subordinate  the  Security  Interest to  additional  financing
                  consisting  of a  minimum  of  $3,000,000  and  a  maximum  of
                  $8,500,000 of new debt;  provided  that such  financing (i) is
                  provided  by a  commercial  bank,  investment  bank or similar
                  financial  institution  whose  primary  business  is  not  the
                  purchase and sale of securities  (including but not limited to
                  PIPE or hedge  funds),  (ii) does not  include  any  equity or
                  equity  linked  component  and (iii) is  subject  to a written
                  subordination  agreement  which does not  require  the Secured
                  Parties to forego any of their  rights to convert  their Notes
                  and collect  interest or any penalties due under the Notes and
                  does not restrict the Secured Parties'  entitlement to enforce
                  such rights, including by specific performance or restrict the
                  Secured  Parties'  ability  to  otherwise  retain any of their
                  conversion benefits."

                  (b)  The  parties  hereby  amend  Section  2 of  the  Mortgage
         Agreement  (the  "Mortgage")  as of  the  date  hereof  by  adding  the
         following language:

                  "In addition,  the Mortgagee  agrees to subordinate its rights
hereunder to additional  financing  consisting of a minimum of $3,000,000  and a
maximum of $8,500,000 of new debt;  provided that such financing (i) is provided
by a commercial bank,  investment bank or similar  financial  institution  whose
primary  business is not the purchase and sale of securities  (including but not
limited  to PIPE or hedge  funds),  (ii) does not  include  any equity or equity
linked component and (iii) is subject to a written subordination agreement which
does not require the  secured  parties to forego any of their  rights to convert
their Notes and collect  interest or any  penalties due under the Notes and does
not restrict the secured parties' entitlement to enforce such rights,  including
by specific  performance or restrict the secured  parties'  ability to otherwise
retain any of their conversion benefits."

                                   ARTICLE III

                          Representation and Warranties

         Section 3.1 Representations and Warranties of the Company.  The Company
hereby gives the following  representations,  warranties and acknowledgements to
the Holders, as of the date hereof and the Closing Date:

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<PAGE>

         (a) Organization  and Good Standing.  The Company is a corporation duly
incorporated,  validly existing and in good standing under the laws of the State
of Nevada and has the requisite  corporate  power to own,  lease and operate its
properties and assets and to conduct its business as it is now being conducted.

         (b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and perform this Agreement, including to issue
the  Amended  Documents.  The  execution,   delivery  and  performance  of  this
Agreement,  including the Amended  Documents,  and the consummation by it of the
transactions  contemplated  thereby have been duly and validly authorized by all
necessary corporate action and, except for the Stockholder Approval described in
Section 1.5, no further consent or  authorization  of the Company,  its Board of
Directors or  stockholders  is  required.  When  executed  and  delivered by the
Company,  this Agreement and the Amended  Documents shall  constitute  valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms,  except as such  enforceability  may be limited by  applicable
bankruptcy,    reorganization,    moratorium,   liquidation,    conservatorship,
receivership or similar laws relating to, or affecting generally the enforcement
of, creditor's  rights and remedies or by other equitable  principles of general
application.

         (c) Independent  Nature of Holders.  The Company  acknowledges that the
obligations  of each Holder under this  Agreement are several and not joint with
the  obligations of any other Holder,  and no Holder shall be responsible in any
way for the performance of the obligations of any other Holder. The Company also
acknowledges  that the decision of each Holder to enter into this  Agreement has
been  made by  such  Holder  independently  of any  other  Holder.  The  Company
acknowledges that nothing  contained  herein,  and no action taken by any Holder
pursuant hereto, shall be deemed to constitute the Holders as a partnership,  an
association,  a  joint  venture  or any  other  kind  of  entity,  or  create  a
presumption that the Holders are in any way acting in concert or as a group with
respect hereto.

          Section 3.2 Representations and Warranties of the Holders. Each of the
Holders  hereby  represents  and warrants to the Company with respect  solely to
itself and not with  respect to any other Holder as of the date hereof and as of
the Closing Date, as follows:

                  (a) Organization and Standing of the Holders. If the Holder is
         an entity,  such Holder is a corporation,  limited liability company or
         partnership  duly  incorporated or organized,  validly  existing and in
         good standing under the laws of the  jurisdiction of its  incorporation
         or organization.

                  (b)  Authorization  and Power.  Each Holder has the  requisite
         power  and  authority  to enter  into the  Agreement  and  perform  its
         obligations thereunder. The execution,  delivery and performance of the
         Agreement by each Holder and the consummation by it of the transactions
         contemplated   hereby  have  been  duly  authorized  by  all  necessary
         corporate   or   partnership   action,   and  no  further   consent  or
         authorization  of such Holder or its Board of Directors,  stockholders,
         or  partners,  as the case  may be,  is  required.  When  executed  and
         delivered  by the Holders,  this  Agreement  and the Amended  Documents
         shall  constitute   valid  and  binding   obligations  of  each  Holder
         enforceable  against such Holder in accordance with their terms, except

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<PAGE>

         as  such  enforceability  may  be  limited  by  applicable  bankruptcy,
         insolvency, reorganization,  moratorium, liquidation,  conservatorship,
         receivership  or similar laws  relating to, or affecting  generally the
         enforcement  of,  creditor's  rights and remedies or by other equitable
         principles of general application.

                   (c)  Accredited  Investor.  Each  Holder  is  an  "accredited
         investor"  (as  defined  in Rule  501 of  Regulation  D),  and has such
         experience  in business  and  financial  matters  that it is capable of
         evaluating  the  merits  and  risks  of the  transactions  contemplated
         hereby.

                                   ARTICLE IV

                                  MISCELLANEOUS

         Section 4.1 Venue and  Governing  Law. The parties agree that venue for
any dispute  arising under this Agreement  will lie  exclusively in the state or
federal courts located in New York County, New York, and the parties irrevocably
waive any right to raise forum non  conveniens  or any other  argument  that New
York is not the proper  venue.  The  parties  irrevocably  consent  to  personal
jurisdiction  in the state  and  federal  courts  of the state of New York.  The
Company and each Holder consent to process being served in any such suit, action
or  proceeding  by mailing a copy thereof to such party at the address in effect
for  notices  to it under this  Agreement  and agrees  that such  service  shall
constitute good and sufficient service of process and notice thereof. Nothing in
this Section 4.1 shall  affect or limit any right to serve  process in any other
manner  permitted  by law.  The Company and the  Holders  hereby  agree that the
prevailing party in any suit, action or proceeding arising out of or relating to
this  Modification  Agreement shall be entitled to reimbursement  for reasonable
legal fees from the non-prevailing party. The parties hereby waive all rights to
a trial by jury. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York, without giving effect to any of
the conflicts of law  principles  which would result in the  application  of the
substantive law of another jurisdiction. This Agreement shall not be interpreted
or construed with any presumption against the party causing this Agreement to be
drafted.

         Section 4.2 Entire Agreement;  Amendment. This Agreement (including the
schedules  and  exhibits  hereto)  and the  Transaction  Documents,  as amended,
contain the entire  understanding  and  agreement of the parties with respect to
the   matters   covered   hereby  and   supersede   all  prior   understandings,
representations  and  agreements  with respect to such matters.  No provision of
this Agreement or the Transaction  Documents may be waived or amended other than
by a written instrument signed by the Company and the Holders holding at least a
majority of the  principal  amount of the Amended  Notes then  outstanding.  Any
amendment  or waiver  effected  in  accordance  with this  Section  4.2 shall be
binding upon the parties.

         Section 4.3  Notices.  Any  notice,  demand,  request,  waiver or other
communication  required or permitted to be given  hereunder  shall be in writing
and shall be  effective  (a) upon hand  delivery by  facsimile at the address or
number  designated  below (if delivered on a business day during normal business
hours where such notice is to be received),  or the first business day following

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<PAGE>

such delivery (if delivered  other than on a business day during normal business
hours where such notice is to be  received)  or (b) on the second  business  day
following  the date of  mailing  by  express  courier  service,  fully  prepaid,
addressed to such address,  or upon actual  receipt of such  mailing,  whichever
shall first occur. The addresses for such communications shall be:

If to the Company:              AXM Pharma, Inc.
..                               17870 Castleton Street. Suite 255,
                                City of  Industry, CA 91748.
                                Attention:  Harry Zhang, Acting Chief Financial
                                Officer
                                Tel. No.:  (626) 964-2848
                                Fax No.:  (626) 964-3484

With a copy to:                 Mark Katz, P.C.
                                951 Old County Road, #125
                                Belmont, CA 94002
                                Tel. No.:  (650) 522-8760
                                Fax No.:  (650) 522-8770

or to such other address or addresses or facsimile number or numbers as any such
party may most recently have  designated in writing to the other parties  hereto
by such  notice.  Notices to the Holders  shall be sent to their  addresses  set
forth on the signature  page hereto,  with notices also to be sent to counsel as
follows:

In the case of Sibex Capital Fund, Inc, to:

                                Darrin M. Ocasio, Esq.
                                Sichenzia Ross Friedman Ference LLP
                                1065 Avenue of the America, 21st Floor
                                New York, New York 10018
                                Tel. No.: (212) 930-9700
                                Fax No.: (212) 930-9725

In the case of Truk Opportunity Fund, LLC and Truk International Fund, LP, to:

                                Robert Charron, Esq.
                                Feldman Weinstein LLP
                                420 Lexington Avenue
                                New York, New York 10170-0002
                                Tel. No.: (212) 931-8704
                                Fax No.: (212) 401 4741

                                       7
<PAGE>

         Section 4.4  Successors and Assigns.  This  Agreement  shall be binding
upon and inure to the benefit of the parties and their  successors and permitted
assigns and shall inure to the  benefit of each  Holder and its  successors  and
permitted assigns.

          Section 4.5 Counterparts. This Agreement may be executed in any number
of  counterparts,  each of  which  when so  executed  shall be  deemed  to be an
original  and, all of which taken  together  shall  constitute  one and the same
Agreement.  If any  signature  is  delivered  by  facsimile  transmission,  such
signature shall create a valid binding  obligation of the party executing (or on
whose  behalf such  signature  is  executed)  the same,  with the same force and
effect as if such facsimile signature were the original thereof.

         Section 4.6  Cumulative  Remedies.  The  remedies  provided  herein are
cumulative and not exclusive of any remedies provided by law.

         Section  4.7  Severability.   If  any  term,  provision,   covenant  or
restriction  of  this  Agreement  is  held  to  be  invalid,  illegal,  void  or
unenforceable in any respect, the remainder of the terms, provisions,  covenants
and  restrictions  set forth  herein  shall  remain in full force and effect and
shall in no way be affected, impaired or invalidated.

         Section 4.8 Headings.  The headings herein are for convenience only, do
not  constitute  a part of this  Agreement  and  shall not be deemed to limit or
affect any of the provisions hereof.

         Section 4.9 Mutual Releases. Subject to the terms hereof, including the
issuance  of the  Amended  Documents  to replace  the Notes and the Series A and
Series B Warrants  issued as of April 19, 2005, the Company on the one hand, and
the Holders  executing this Agreement on the other hand,  mutually  release each
other from any and all claims, disputes, damages and expenses (collectively, the
"Claims"),  arising  prior to the date hereof with  respect to the Notes and the
Series A and Series B Warrants  issued as of April 19,  2005 based in any way on
financial  information  disseminated by the Company or its management  which was
accurately  disclosed in the Amended Form 10-Q filed for the quarter  ended June
30, 2005.  In addition,  within three (3) business  days after the Closing,  the
Holders shall file  dismissals with prejudice of any actions pending against the
Company as of the Closing.

         Section  4.10 Equal  Treatment of Holders;  Effectiveness.  In order to
confirm that the Company has not  discriminated  among the Holders,  the Company
represents  and warrants that the terms of this  Agreement  have been offered to
each Holder and that no agreement or  consideration  has been offered or paid to
any Holder other than as specifically  set forth in this Agreement.  Each of the
Holders  executing  this Agreement  expressly  confirms that its entry into this
Agreement is not  contingent  upon the execution of this  Agreement by any other
Holder. Similarly, by executing this Agreement the Company agrees to be bound by
the terms hereof to each Holder  executing and delivering  this Agreement to the
Company, even if all Holders do not do so.

                                       8
<PAGE>

         IN WITNESS  WHEREOF,  the parties hereto have caused this  Modification
Agreement to be duly executed by their respective  authorized officers as of the
date first above written.

                                            AXM PHARMA, INC.

                                            By: ________________________________
               Name:

                                                 Title:

                                       9
<PAGE>

                  HOLDERS:

                  Cranshire Capital LP

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                  Sibex Capital Fund, Inc.

                   By: _______________________________________
                        Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                  Enable Growth Partners, LLP

                  Enable Opportunity Partners, LLP

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                                       10
<PAGE>

                   Nite Capital LP

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                   Alpha Capital AG

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                                       11
<PAGE>

                   SRG Capital, LLC

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                   Truk Opportunity Fund LLC

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                   Truk International Fund LP

                   By: _______________________________________
                       Name:

                       Title:

                     Address: ______________________________

                              ______________________________

                                       12
<PAGE>

Noteholder                                     New Principal Amount
----------                                     --------------------

Cranshire Capital LP                                 $  254,184

Sibex Capital Fund, Inc.                             $1,016,738

Enable Growth Partners, LLP                          $  406,695

Enable Opportunity Partners, LLP                     $   76,256

Nite Capital LP                                      $  406,695

Alpha Capital AG                                     $  305,021

SRG Capital, LLC                                     $  254,184

Truk Opportunity Fund LLC                            $  716,800

Truk International Fund LP                           $   45,754
                                                     ----------

         Total                                       $3,482,327

                                       13
<PAGE>

                                            SCHEDULE A (1)

Noteholder                                  New Principal Amount

Cranshire Capital LP                            $  276,938

Sibex Capital Fund, Inc.                        $1,107,750

Enable Growth Partners, LLP                     $  443,100

Enable Opportunity Partners, LLP                $   83,081

Nite Capital LP                                 $  443,100

Alpha Capital AG                                $  332,325

SRG Capital, LLC                                $  276,938

Truk Opportunity Fund LLC                       $  780,964

Truk International Fund LP                      $   49,849
                                                ----------

         Total                                  $3,794,045

                                       14
<PAGE>

                                 SCHEDULE A (2)

                  A&B WARRANTS TO BE ISSUED AS OF MARCH 1, 2006
                  ---------------------------------------------

         Noteholder                                    A Warrants     B Warrants

Cranshire Capital LP                                     33,212          150,000

Sibex Capital Fund, Inc.                                132,847          600,000

Enable Growth Partners, LLP                              53,139          240,000

Enable Opportunity Partners, LLP                          9,664           45,000

Nite Capital LP                                          53,139          240,000

Alpha Capital AG                                         39,854          180,000

SRG Capital, LLC                                         33,212          150,000

Truk Opportunity Fund, LLC                               93,657          423,000

Truk International Fund, LP                               5,976           27,000
                                                      ---------        ---------

                           Total                        455,000        2,055,000

                                       15
<PAGE>

                                   SCHEDULE B
                                   ----------

                                  SCHEDULE 3.3
                                 EXISTING LIENS

Shenyang Branch of Shanghai Pudong Development Bank-loan for up to approximately
25,000,000 RMB (approximately US$3,000,000) to AXM Shenyang, which is secured by
a lien on the real property of AXM Shenyang.

                                   SCHEDULE C
                                   ----------

                                       16
<PAGE>

                                  SCHEDULE 3.4
                             ABSENCE OF OTHER LIENS

Shenyang   Branch  of  Shanghai  Pudong   Development   Bank-  loan  for  up  to
approximately 25,000,000 RMB (approximately US$3,000,000) to AXM Shenyang, which
is secured by a lien on the real property of AXM Shenyang.

                                   SCHEDULE D
                                   ----------

                                       17
<PAGE>

EXHIBIT 1

THIS NOTE HAS NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE  "ACT"),  OR  APPLICABLE  STATE  SECURITIES  LAWS,  AND  MAY  NOT BE  SOLD,
TRANSFERRED,  OR OTHERWISE  DISPOSED OF IN THE ABSENCE OF SUCH  REGISTRATION  OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM,  SUBSTANCE  AND SCOPE
REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, OR
OTHERWISE  DISPOSED OF, UNDER AN EXEMPTION FROM  REGISTRATION  UNDER THE ACT AND
SUCH STATE SECURITIES LAWS.

                                AXM PHARMA, INC.

            Amended and Restated Secured Convertible Promissory Note
                                due March 1, 2009

No. _______
Dated: As of March 1, 2006 (the "Amendment Date")
                                 --------------

         For  value  received,  AXM  PHARMA,  INC.,  a Nevada  corporation  (the
"Maker"),  hereby  promises  to  pay  to the  order  of  _______________________
(together  with its  successors,  representatives,  and permitted  assigns,  the
"Holder"),  in accordance  with the terms  hereinafter  provided,  the principal
amount of  ________________________  ($______________),  together  with interest
thereon.  Concurrently with the issuance of this Note, the Maker is amending and
restating its separate secured convertible  promissory notes (the "Other Notes")
issued to separate  purchasers  (the "Other  Holders")  pursuant to the Purchase
Agreement (as defined in Section 1.1 hereof).

         All  payments  under or  pursuant  to this Note shall be made in United
States  Dollars in immediately  available  funds to the Holder at the address of
the Holder set forth  below or at such other  place as the Holder may  designate
from time to time in  writing to the Maker or by wire  transfer  of funds to the
Holder's  account,  instructions for which are attached hereto as Exhibit A. The
outstanding  principal balance of this Note shall be due and payable on March 1,
2009 (the "Maturity Date") or at such earlier time as provided herein.

<PAGE>

ARTICLE I

         Section  1.1  Purchase  Agreement.  This Note amends and  restates  the
original  Note dated as of April 19, 2005  executed and  delivered to the Holder
pursuant to the Note and Warrant  Purchase  Agreement dated as of April 19, 2005
(the  "Purchase  Agreement")  by and among the Maker and the  purchasers  listed
therein.  Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase  Agreement,  provided that any
references herein to any of the Transaction Documents shall , unless the context
otherwise requires, be deemed to be references to such Transaction Documents, as
amended as of March 1, 2006.

         Section 1.2  Interest;  Installments.  Beginning  as of the date hereof
(the "Amendment  Date"),  the outstanding  principal  balance of this Note shall
bear  interest,  in arrears,  at a rate per annum  equal to nine  percent (9 %).
Interest shall be payable in  installments,  with the first  installment due and
payable  on the  earlier  of (a)  January 1, 2007 or (b) ten (10) days after the
Effectiveness  Date of a Registration  Statement on Form SB-2, as defined in the
Registration Rights Agreement.  Subsequent installments shall be due and payable
on the first day of each successive  calendar quarter  following the due date of
the initial interest  installment amount.  (Each interest installment amount, an
"Interest Installment Amount"; and each payment date for an Interest Installment
Amount,  an "Interest Payment Date.") Interest shall be computed on the basis of
a 360-day year of twelve (12) 30-day  months and shall accrue  commencing  as of
the Amendment Date. Furthermore,  upon the occurrence of an Event of Default (as
defined in Section 2.1 hereof),  to the extent  permitted by law, the Maker will
pay  interest to the Holder,  payable on demand,  on the  outstanding  principal
balance  of the Note from the date of the Event of  Default  until such Event of
Default is cured,  at the rate of the lesser of  fifteen  percent  (15%) and the
maximum applicable legal rate per annum.

         Section 1.3 Form of Interest Payments

                  (a) Each Interest Installment Amount may, at the option of the
         Maker,  be paid in cash or in registered  shares of common  stock,  par
         value $0.001 per share (the "Common  Stock") If the Maker elects to pay
         an Interest  Installment  Amount in cash, such amount shall be wired in
         immediately  available  funds on the Interest  Payment Date;  provided,
         however,  that if the Holder has  delivered a Conversion  Notice to the
         Maker or delivers a  Conversion  Notice at least  fifteen (15) prior to
         the  Interest  Payment  Date  which  requests  that the  next  Interest

                                       2
<PAGE>

         Installment  Amount be paid in registered  shares of Common Stock,  the
         Maker shall pay such Interest  Installment Amount in registered shares.
         The Maker shall provide irrevocable written notice to the Holder of the
         form of payment of the Interest  Installment Amount on the tenth (10th)
         business day prior to each  Interest  Payment  Date (the  "Announcement
         Date").

                  (b) If the Maker elects to pay the Interest Installment Amount
         in registered  shares of Common Stock, the number of registered  shares
         of Common  Stock to be issued to the Holder shall be an amount equal to
         the Interest Installment Amount divided by the lesser of (a) $2.10 (the
         "Fixed  Conversion  Price")or (b) eighty two and a half percent (82.5%)
         of the  average of the VWAP (as defined in Section  1.3(c)  hereof) for
         the twenty (20) Trading Days immediately preceding the Interest Payment
         Date.  Notwithstanding  the  foregoing to the  contrary,  the Maker may
         elect to pay the Interest  Installment  Amount in registered  shares of
         Common Stock on any Interest  Payment Date only if (A) the registration
         statement  providing  for the  resale of the  shares  of  Common  Stock
         issuable  upon  conversion  of this  Note  is  effective  and has  been
         effective, without lapse or suspension of any kind, for a period of ten
         (10)  consecutive  calendar  days,  or the shares of Common  Stock into
         which this Note can be converted  may be offered for sale to the public
         pursuant to Rule 144(k)  under the  Securities  Act, (B) trading in the
         Common  Stock  shall  not have been  suspended  by the  Securities  and
         Exchange  Commission or the American  Stock Exchange (or other exchange
         or market on which the Common  Stock is  trading),  (C) the Maker is in
         material  compliance with the terms and conditions of this Note and the
         other Transaction  Documents,  and (D) the issuance of shares of Common
         Stock on the Interest  Payment Date does not violate the  provisions of
         Section 3.4 hereof.

                                       3
<PAGE>

                  (c) For purposes  hereof,  "VWAP" means, for any date, (i) the
         daily volume  weighted  average price of the Common Stock for such date
         on the American Stock Exchange as reported by Bloomberg  Financial L.P.
         (based  on a  Trading  Day from  9:30  a.m.  Eastern  Time to 4:02 p.m.
         Eastern Time); (ii) if the Common Stock is not then listed or quoted on
         the American Stock Exchange and if prices for the Common Stock are then
         quoted on the OTC Bulletin Board,  the volume weighted average price of
         the Common Stock for such date on the OTC Bulletin Board;  (iii) if the
         Common Stock is not then listed or quoted on the OTC Bulletin Board and
         if prices for the Common Stock are then  reported in the "Pink  Sheets"
         published by the Pink Sheets, LLC (or a similar  organization or agency
         succeeding to its functions of reporting  prices),  the most recent bid
         price per share of the Common Stock so  reported;  or (iv) in all other
         cases,  the fair market value of a share of Common Stock as  determined
         by an  independent  appraiser  selected in good faith by the Holder and
         reasonably acceptable to the Maker.

         Section 1.4 Security Agreement and Mortgage Agreement.  The obligations
of the Maker hereunder are secured by a continuing  security interest in certain
assets  and real  property  of the Maker  pursuant  to the  terms of a  security
agreement dated as of April 19, 2005 and a mortgage  agreement dated as of April
19,  2005 All  payments  due under  this  Note  shall  rank  senior to all other
indebtedness  of the Maker except that all payments due under this Note shall be
subordinated  and made  junior,  in all  respects  to the payment in full of all
principal,  all  interest  accrued  thereon  and all  other  amounts  due on any
indebtedness   outstanding  under  the  mortgage   agreement  and  related  loan
agreements  between  AXM  Pharma  (Shenyang)  Inc.,  the  Maker's  wholly  owned
subsidiary, and Shanghai Pudong Development Bank.

         Section 1.5 Payment on  Non-Business  Days.  Whenever any payment to be
made shall be due on a Saturday,  Sunday or a public  holiday  under the laws of
the State of New York, such payment may be due on the next  succeeding  business

                                       4
<PAGE>

day and such next  succeeding  day shall be included in the  calculation  of the
amount of accrued interest payable on such date.

         Section 1.6 Transfer.  This Note may be transferred or sold, subject to
the  provisions  of  Section  4.8 of this  Note,  or  pledged,  hypothecated  or
otherwise granted as security by the Holder.

         Section 1.7 Replacement. Upon receipt of a duly executed, notarized and
unsecured  written  statement from the Holder with respect to the loss, theft or
destruction of this Note (or any replacement  hereof),  and without requiring an
indemnity bond or other security,  or, in the case of a mutilation of this Note,
upon surrender and  cancellation of such Note, the Maker shall issue a new Note,
of like tenor and amount, in lieu of such lost,  stolen,  destroyed or mutilated
Note.

                                   ARTICLE II

                           EVENTS OF DEFAULT; REMEDIES

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

                           (a)  the  Maker  shall  fail  to  make  the  Interest
                  Installment  Amount  on an  Interest  Payment  Date  and  such
                  default is not fully cured  within one (1)  business day after
                  the occurrence thereof; or

                           (b) the failure of the  Registration  Statement to be
                  declared  effective by the Securities and Exchange  Commission
                  on or prior to November 1, 2006; or

                           (c) the suspension from listing,  without  subsequent
                  listing on any one of, or the  failure of the Common  Stock to
                  be  listed  on at least one of the  American  Stock  Exchange,
                  Nasdaq National Market,  Nasdaq SmallCap Market,  The New York
                  Stock  Exchange,  Inc. or OTC  Bulletin  Board for a period of
                  five (5) consecutive Trading Days,; or

                           (d) the Maker's  notice to the Holder,  including  by
                  way of public  announcement,  at any time, of its inability to

                                       5
<PAGE>

                  comply  (including for any of the reasons described in Section
                  3.8(a)  hereof) or its  intention  not to comply  with  proper
                  requests  for  conversion  of this Note into  shares of Common
                  Stock; or

                           (e) the Maker  shall fail to (i) timely  deliver  the
                  shares  of Common  Stock  upon  conversion  of the Note or any
                  interest  accrued  and  unpaid  (ii)  cause  the  Registration
                  Statement  to become  effective by the  Effectiveness  Date or
                  (iii) make the payment of any fees and/or  liquidated  damages
                  under this Note,  the Purchase  Agreement or the  Registration
                  Rights  Agreement,  which failure in the case of items (i) and
                  (iii) of this Section 2.1(e) is not remedied  within three (3)
                  business days after the incurrence thereof; or

                           (f) while the  Registration  Statement is required to
                  be  maintained   effective   pursuant  to  the  terms  of  the
                  Registration  Rights  Agreement,   the  effectiveness  of  the
                  Registration  Statement  lapses  for  any  reason  (including,
                  without  limitation,  the  issuance  of a  stop  order)  or is
                  unavailable  to  the  Holder  for  sale  of  the   Registrable
                  Securities (as defined in the Registration  Rights  Agreement)
                  in  accordance  with  the  terms  of the  Registration  Rights
                  Agreement,  and such lapse or  unavailability  continues for a
                  period of ten (10) consecutive Trading Days, provided that the
                  Maker has not exercised its rights pursuant to Section 3(n) of
                  the Registration  Rights Agreement and the cause of such lapse
                  or  unavailability  is not due to factors primarily within the
                  control of Holder; or

                           (g)  default  shall  be  made in the  performance  or
                  observance  of  (i)  any  material   covenant,   condition  or
                  agreement  contained  in this Note (other than as set forth in
                  clause (f) of this  Section 2.1) and such default is not fully
                  cured  within  five (5)  business  days  after the  occurrence
                  thereof or (ii) any material covenant,  condition or agreement
                  contained in the  Purchase  Agreement,  the Other  Notes,  the

                                       6
<PAGE>

                  Registration   Rights  Agreement  or  any  other   Transaction
                  Document which is not covered by any other  provisions of this
                  Section 2.1 and such  default is not fully  cured  within five
                  (5) business days after the occurrence thereof; or

                           (h) any material  representation  or warranty made by
                  the Maker herein,  in the  Modification  Agreement dated as of
                  March 1, 2006 between Maker and Holders or in the Registration
                  Rights  Agreement  between such parties,  dated as of March 1,
                  2006 shall  prove to be false or  incorrect  or  breached in a
                  material respect on the date as of which made; or

                           (i) the Maker shall (A) default in any payment of any
                  amount  or  amounts  of   principal  of  or  interest  on  any
                  Indebtedness  (other than the  Indebtedness  hereunder and the
                  Indebtedness  to the  Pudong  Development  Bank and to private
                  investors , as  described  in the Maker's 10-Q for the quarter
                  ended  September 30, 2005) the aggregate  principal  amount of
                  which  Indebtedness is in excess of $100,000 or (B) default in
                  the  observance  or  performance  of any  other  agreement  or
                  condition  relating to any  Indebtedness  or  contained in any
                  instrument  or  agreement  evidencing,  securing  or  relating
                  thereto,  or any other event shall occur or  condition  exist,
                  the effect of which  default or other event or condition is to
                  cause,  or to permit the holder or holders or  beneficiary  or
                  beneficiaries of such Indebtedness to cause with the giving of
                  notice if required,  such  Indebtedness to become due prior to
                  its  stated  maturity,  provided  that,  in  the  case  of the
                  Indebtedness to Pudong Bank and the private lenders referenced
                  above in this Section 2(i),  either  lender's giving a written
                  default  notice to the Company  shall be deemed to be an Event
                  of Default under this Section; or

                           (j) the Maker  shall (i) apply for or  consent to the
                  appointment  of, or the taking of  possession  by, a receiver,
                  custodian,  trustee  or  liquidator  of  itself or of all or a
                  substantial  part  of its  property  or  assets,  (ii)  make a

                                       7
<PAGE>

                  general  assignment  for the benefit of its  creditors,  (iii)
                  commence a voluntary  case under the United States  Bankruptcy
                  Code (as now or hereafter  in effect) or under the  comparable
                  laws of any  jurisdiction  (foreign or domestic),  (iv) file a
                  petition   seeking  to  take  advantage  of  any   bankruptcy,
                  insolvency,  moratorium,  reorganization  or other similar law
                  affecting the enforcement of creditors' rights generally,  (v)
                  acquiesce  in writing to any petition  filed  against it in an
                  involuntary  case under United States  Bankruptcy Code (as now
                  or  hereafter in effect) or under the  comparable  laws of any
                  jurisdiction  (foreign  or  domestic),  (vi) issue a notice of
                  bankruptcy or winding down of its  operations or issue a press
                  release  regarding  same,  or (vii) take any action  under the
                  laws of any  jurisdiction  (foreign or domestic)  analogous to
                  any of the foregoing; or

                           (k) a  proceeding  or  case  shall  be  commenced  in
                  respect of the Maker,  without its application or consent,  in
                  any  court  of   competent   jurisdiction,   seeking  (i)  the
                  liquidation, reorganization,  moratorium, dissolution, winding
                  up, or  composition  or  readjustment  of its debts,  (ii) the
                  appointment of a trustee, receiver,  custodian,  liquidator or
                  the like of it or of all or any substantial part of its assets
                  in connection with the liquidation or dissolution of the Maker
                  or  (iii)  similar  relief  in  respect  of it  under  any law
                  providing  for the relief of debtors,  and such  proceeding or
                  case  described  in clause (i),  (ii) or (iii) shall  continue
                  undismissed,  or unstayed and in effect, for a period of sixty
                  (60) days or any  order  for  relief  shall be  entered  in an
                  involuntary  case under United States  Bankruptcy Code (as now
                  or  hereafter in effect) or under the  comparable  laws of any
                  jurisdiction (foreign or domestic) against the Maker or action
                  under  the  laws of any  jurisdiction  (foreign  or  domestic)
                  analogous to any of the foregoing  shall be taken with respect
                  to the Maker and shall continue  undismissed,  or unstayed and
                  in effect for a period of sixty (60) days; or

                                       8
<PAGE>

                           (l) the failure of the Maker to instruct its transfer
                  agent to remove  any  legends  from  shares  of  Common  Stock
                  eligible to be sold under Rule 144 of the  Securities  Act and
                  issue such unlegended  certificates to the Holder within three
                  (3)  business  days  of the  Holder's  request  so long as the
                  Holder has provided  reasonable  assurances  to the Maker that
                  such  shares of Common  Stock can be resold  pursuant  to Rule
                  144; or

                           (m) the  failure of the Maker to pay any  amounts due
                  to the  Holder  herein  or in the  Purchase  Agreement  or the
                  Registration  Rights  Agreement within three (3) business days
                  of receipt of notice to the Maker; or

                           (n) the  occurrence  of an Event of Default under the
                  Other Notes.

         Section 2.2 Remedies  Upon An Event of Default.  If an Event of Default
shall have occurred and shall be continuing,  the Holder of this Note may at any
time at its  option,  (a) declare the entire  unpaid  principal  balance of this
Note, together with all interest accrued hereon, due and payable, and thereupon,
the same  shall be  accelerated  and so due and  payable,  without  presentment,
demand,  protest,  or notice, all of which are hereby expressly  unconditionally
and irrevocably waived by the Maker; provided, however, that upon the occurrence
of an Event of Default described in (i) Sections 2.1 (j) or (k), the outstanding
principal balance and accrued interest  hereunder shall be automatically due and
payable  and (ii)  Sections  2.1  (b)-(i),  demand the  prepayment  of this Note
pursuant  to Section 3.7 hereof,  (b) demand that the  principal  amount of this
Note then  outstanding  and all accrued  and unpaid  interest  thereon  shall be
converted into shares of Common Stock at the Conversion Price or (c) exercise or
otherwise  enforce any one or more of the Holder's rights,  powers,  privileges,
remedies and interests under this Note, the Purchase Agreement, the Registration
Rights Agreement or applicable law. No course of delay on the part of the Holder
shall  operate  as a waiver  thereof  or  otherwise  prejudice  the right of the
Holder.  No remedy  conferred  hereby  shall be  exclusive  of any other  remedy
referred to herein or now or hereafter  available at law, in equity,  by statute
or otherwise.

                                       9
<PAGE>

                                  ARTICLE III

                             CONVERSION; PREPAYMENT

         Section 3.1 Conversion Option.

         (a) At any  time on or after  the  Amendment  Date,  this  Note  shall,
subject to Section 3.2 (a) and the other provisions  hereof,  be convertible (in
whole or in part), at the option of the Holder (the "Conversion  Option"),  into
such  number  of fully  paid and  non-assessable  shares of  Common  Stock  (the
"Conversion  Rate")  as is  determined  by  dividing  (x)  that  portion  of the
outstanding  principal  balance plus any accrued but unpaid  interest under this
Note as of such date that the Holder  elects to  convert  by (y) the  Conversion
Price (as defined in Section 3.2 (a) hereof) then in effect on the date on which
the  Holder  faxes a  notice  of  conversion  (the  "Conversion  Notice"),  duly
executed, to the Maker (facsimile number (626) 964-3484 , Attn.: Chief Financial
Officer) (the "Conversion Date"),  provided,  however, that the Fixed Conversion
Price as defined in section  3.2 (a) below,  shall be subject to  adjustment  as
described in Section 3.6  below.").,  The Holder shall  deliver this Note to the
Maker at the address designated in the Purchase Agreement at such time that this
Note is fully converted.  With respect to partial  conversions of this Note, the
Maker shall keep written records of the amount of this Note converted as of each
Conversion Date.

         (b) On the Mandatory  Conversion Date (as defined below), the Maker may
cause the principal  amount of this Note plus all accrued and unpaid interest to
convert  into a number of fully paid and  nonassessable  shares of Common  Stock
equal to the quotient of (i) the principal  amount of this Note plus all accrued
and unpaid interest outstanding on the Mandatory Conversion Date divided by (ii)
the  Conversion  Price in effect on the Mandatory  Conversion  Date by providing
five (5) days prior written  notice of such Mandatory  Conversion  Date. As used
herein, a "Mandatory Conversion Date" shall be the date in which the Closing Bid
Price (as defined below) exceeds $5.00 (as may be adjusted for any stock splits,
combinations  or  recapitalizations  of the Common Stock) for a period of twenty
(20) consecutive  Trading Days;  provided,  that (A) the registration  statement
providing for the resale of the shares of Common Stock issuable upon  conversion
of this Note is effective and has been effective, without lapse or suspension of
any kind, for a period ten (10) consecutive calendar days immediately  preceding
the Mandatory  Conversion  Date,  (B) trading in the Common Stock shall not have
been suspended by the  Securities and Exchange  Commission or the American Stock

                                       10
<PAGE>

Exchange (or other exchange or market on which the Common Stock is trading), (C)
the Maker is in material  compliance  with the terms and conditions of this Note
and the other  Transaction  Documents,  and (D) the issuance of shares of Common
Stock on the Mandatory  Conversion  Date pursuant to such  mandatory  conversion
does not violate the provisions of Section 3.4 hereof.

         Section 3.2 Conversion Price.

                           (a) The term "Conversion Price" shall mean the lesser
                 of (i) $2.10 (the "Fixed Conversion  Price") or (ii) eighty two
                 and a half  percent  (82.5%)  of the  average  of the  VWAP (as
                 defined in Section  1.3(c)  hereof) for the twenty (20) Trading
                 Days  immediately  preceding a Conversion  Date,  provided that
                 during such twenty (20) day period,  such Holder  severally and
                 not jointly with the other  Holders,  covenants that neither it
                 nor any  Affiliate  acting  on its  behalf or  pursuant  to any
                 understanding with it, shall engage in any Short Sales,  except
                 on those days (each a "Permitted  Day") on which the  aggregate
                 short  position with respect to the Common Stock of such Holder
                 prior to giving  effect to any  Short  Sales by such  Holder on
                 such  Permitted  Day does not exceed  such  Holder's  Permitted
                 Share  Position  (as  defined  below)  on such  Permitted  Day;
                 provided,  however,  that a Holder  will  only be  entitled  to
                 engage  in  transactions  that  constitute  Short  Sales  on  a
                 Permitted Day to the extent that  following  such  transaction,
                 the aggregate  short  position with respect to the Common Stock
                 of such Holder does not exceed such  Holder's  Permitted  Share
                 Position.  For  purposes  of this  Section  3.2 (a), a Holder's
                 "Permitted Share Position"  means,  with respect to any date of
                 determination,  the number of shares of Common  Stock  owned by
                 such Holder (including  Conversion  Shares,  Warrant Shares and
                 shares  purchased in the open market or otherwise) plus the sum
                 of (i) the maximum  number of  Conversion  Shares then issuable
                 under the terms of this Note  (including  as to portions of the
                 Note not yet converted and without  regard to any exercise caps
                 or other exercise restrictions applicable to the Note, assuming
                 the lowest  possible  Conversion  Price based on the Conversion
                 Price that would be applicable on the date in question) to such
                 Holder and (ii) the  maximum  number of  Warrants  Shares  then
                 issuable  (including  as to  portions of the  Warrants  not yet
                 exercised  and  without  regard to any  exercise  caps or other
                 exercise  restrictions  applicable  to the  Warrants)  to  such
                 Holder.

                                       11
<PAGE>

                            (b)  Notwithstanding  any  of the  foregoing  to the
                 contrary, if during any period (a "Black-out Period"), a Holder
                 is unable to trade any Common  Stock  issued or  issuable  upon
                 conversion of this Note  immediately due to the postponement of
                 filing  or  delay  or   suspension   of   effectiveness   of  a
                 registration  statement  or  because  the Maker  has  otherwise
                 informed such Holder that an existing prospectus cannot be used
                 at that  time in the  sale or  transfer  of such  Common  Stock
                 (provided  that such  postponement,  delay,  suspension or fact
                 that the prospectus cannot be used is not due to factors solely
                 within  the  control  of the  Holder of this Note or due to the
                 Maker   exercising   its  rights  under  Section  3(n)  of  the
                 Registration  Rights  Agreement),  such  Holder  shall have the
                 option but not the obligation on any Conversion Date within ten
                 (10) Trading Days  following  the  expiration  of the Black-out
                 Period  of  using  the  Conversion  Price  applicable  on  such
                 Conversion Date or any Conversion Price selected by such Holder
                 that would have been  applicable had such  Conversion Date been
                 at any earlier time during the  Black-out  Period or within the
                 ten  (10)  Trading  Days  thereafter.  In no  event  shall  the
                 Black-out  Period have any effect on the Maturity  Date of this
                 Note.

         Section 3.3 Mechanics of Conversion

                           (a) Not later than three (3)  Trading  Days after any
                 Conversion Date the Maker or its designated  transfer agent, as
                 applicable,  shall  issue and deliver to the  Depository  Trust
                 Company  ("DTC") account on the Holder's behalf via the Deposit
                 Withdrawal Agent Commission System ("DWAC") as specified in the
                 Conversion Notice,  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.  In the  alternative,  not later than
                 three (3) Trading  Days after any  Conversion  Date,  the Maker
                 shall  deliver to the  applicable  Holder by express  courier a
                 certificate or certificates  which shall be free of restrictive
                 legends and trading  restrictions (other than those required by
                 Section 5.1 of the Purchase Agreement)  representing the number
                 of shares of Common Stock being acquired upon the conversion of
                 this Note (the "Delivery Date").  Notwithstanding the foregoing
                 to the contrary,  the Maker or its transfer agent shall only be
                 obligated  to issue and  deliver  the  shares to the DTC on the
                 Holder's behalf via DWAC (or  certificates  free of restrictive
                 legends) if such  conversion is in  connection  with a sale and
                 the Holder has complied with the applicable prospectus delivery

                                       12
<PAGE>

                 requirements.  If in the  case of any  Conversion  Notice  such
                 certificate or certificates are not delivered to or as directed
                 by the applicable Holder by the Delivery Date, the Holder shall
                 be  entitled  by written  notice to the Maker at any time on or
                 before  its  receipt  of  such   certificate  or   certificates
                 thereafter,  to rescind  such  conversion,  in which  event the
                 Maker  shall   immediately   return  this  Note   tendered  for
                 conversion,  whereupon  the Maker and the Holder  shall each be
                 restored to their respective positions immediately prior to the
                 delivery of such notice of revocation,  except that any amounts
                 described in Sections  3.3(b) and (c) shall be payable  through
                 the date notice of rescission is given to the Maker.

                           (b)  The  Maker  understands  that  a  delay  in  the
                  delivery of the shares of Common Stock upon conversion of this
                  Note beyond the Delivery Date could result in economic loss to
                  the  Holder.  If the Maker fails to deliver to the Holder such
                  shares via DWAC or a certificate or  certificates  pursuant to
                  this Section  hereunder by the Delivery  Date, the Maker shall
                  pay to such  Holder,  in cash,  an amount per  Trading Day for
                  each Trading Day until such shares are  delivered  via DWAC or
                  certificates  are  delivered,  together  with interest on such
                  amount at a rate of 10% per annum,  accruing until such amount
                  and any accrued interest thereon is paid in full, equal to the
                  greater of (A) (i) 1% of the aggregate principal amount of the
                  Notes requested to be converted for the first five (5) Trading
                  Days  after  the  Delivery  Date and (ii) 2% of the  aggregate
                  principal  amount of the Notes  requested to be converted  for
                  each  Trading  Day  thereafter  and (B)  $2,000 per day (which
                  amount  shall  be  paid  as  liquidated  damages  and not as a
                  penalty).  Nothing  herein  shall  limit a  Holder's  right to
                  pursue  actual  damages  for the  Maker's  failure  to deliver
                  certificates   representing   shares  of  Common   Stock  upon
                  conversion  within the period specified herein and such Holder
                  shall have the right to pursue all remedies available to it at
                  law or in equity (including,  without limitation,  a decree of
                  specific     performance     and/or    injunctive     relief).
                  Notwithstanding anything to the contrary contained herein, the
                  Holder shall be entitled to withdraw a Conversion  Notice, and
                  upon such  withdrawal the Maker shall only be obligated to pay
                  the liquidated damages accrued in accordance with this Section
                  3.3(b) through the date the Conversion Notice is withdrawn.

                                       13
<PAGE>

                           (c) In addition to any other rights  available to the
                 Holder,  if the  Maker  fails to cause  its  transfer  agent to
                 transmit   to  the  Holder  a   certificate   or   certificates
                 representing   the  shares  of  Common  Stock   issuable   upon
                 conversion of this Note on or before the Delivery  Date, and if
                 after  such  date the  Holder  is  required  by its  broker  to
                 purchase (in an open market transaction or otherwise) shares of
                 Common Stock to deliver in satisfaction of a sale by the Holder
                 of the shares of Common Stock issuable upon  conversion of this
                 Note which the Holder anticipated  receiving upon such exercise
                 (a  "Buy-In"),  then  the  Maker  shall  (1) pay in cash to the
                 Holder  the  amount by which (x) the  Holder's  total  purchase
                 price (including brokerage commissions,  if any) for the shares
                 of Common Stock so purchased exceeds (y) the amount obtained by
                 multiplying  (A) the number of shares of Common Stock  issuable
                 upon  conversion  of this Note that the Maker was  required  to
                 deliver  to the Holder in  connection  with the  conversion  at
                 issue  times (B) the price at which the sell order  giving rise
                 to such purchase obligation was executed, and (2) at the option
                 of the  Holder,  either  reinstate  the portion of the Note and
                 equivalent  number of shares  of  Common  Stock for which  such
                 conversion  was not honored or deliver to the Holder the number
                 of shares of Common  Stock that would have been  issued had the
                 Maker  timely   complied  with  its   conversion  and  delivery
                 obligations  hereunder.  For example,  if the Holder  purchases
                 Common Stock having a total  purchase price of $11,000 to cover
                 a Buy-In with respect to an attempted  conversion  of shares of
                 Common Stock with an  aggregate  sale price giving rise to such
                 purchase  obligation  of  $10,000,  under  clause  (1)  of  the
                 immediately  preceding  sentence the Maker shall be required to
                 pay the Holder  $1,000.  The  Holder  shall  provide  the Maker
                 written notice  indicating the amounts payable to the Holder in
                 respect of the Buy-In,  together with applicable  confirmations
                 and other evidence reasonably  requested by the Maker.  Nothing
                 herein  shall  limit a  Holder's  right  to  pursue  any  other
                 remedies  available  to it  hereunder,  at  law  or  in  equity
                 including, without limitation, a decree of specific performance
                 and/or injunctive relief with respect to the Maker's failure to
                 timely deliver certificates representing shares of Common Stock
                 upon conversion of this Note as required  pursuant to the terms
                 hereof.

                                       14
<PAGE>

         Section 3.4 Ownership Cap and Certain Conversion Restrictions

         (a) Notwithstanding  anything to the contrary set forth in Section 3 of
this Note,  at no time may the Holder  convert  all or a portion of this Note if
the number of shares of Common  Stock to be issued  pursuant to such  conversion
would exceed, when aggregated with all other shares of Common Stock owned by the
Holder at such time,  the number of shares of Common Stock which would result in
the Holder  beneficially  owning (as determined in accordance with Section 13(d)
of the  Exchange  Act and the  rules  thereunder)  more  than 4.9% of all of the
Common Stock outstanding at such time; provided,  however,  that upon the Holder
providing  the Maker with  sixty-one  (61) days notice  (pursuant to Section 4.1
hereof) (the "Waiver  Notice")  that the Holder would like to waive this Section
3.4(a) with regard to any or all shares of Common Stock issuable upon conversion
of this Note,  this Section  3.4(a) will be of no force or effect with regard to
all or a portion of the Note referenced in the Waiver Notice; provided, further,
that this provision  shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Maturity Date.

         (b) Notwithstanding  anything to the contrary set forth in Section 3 of
this Note,  at no time may the Holder  convert  all or a portion of this Note if
the number of shares of Common  Stock to be issued  pursuant to such  conversion
would exceed, when aggregated with all other shares of Common Stock owned by the
Holder  at such  time,  would  result  in the  Holder  beneficially  owning  (as
determined  in  accordance  with Section 13(d) of the Exchange Act and the rules
thereunder)  in  excess of 9.9% of the then  issued  and  outstanding  shares of
Common Stock outstanding at such time; provided,  however,  that upon the Holder
providing  the Maker with a Waiver  Notice  that the Holder  would like to waive
Section  3.4(b) of this Note with  regard to any or all  shares of Common  Stock
issuable upon  conversion of this Note, this Section 3.4(b) shall be of no force
or effect with regard to all or a portion of the Note  referenced  in the Waiver
Notice;  provided,  further, that this provision shall be of no further force or
effect during the sixty-one (61) days immediately preceding the Maturity Date

         (c)  Notwithstanding  anything to the contrary set forth herein in this
Section 3. 4 or  elsewhere  in this Note,,  the Maker shall not be  obligated to
issue  in  excess  of  an  aggregate   of  4,258,557   shares  of  Common  Stock
(the"Issuable Maximum" upon conversion of the Notes and exercise of the Warrants
and any shares of Common  Stock  issuable in  connection  with the  Modification
Agreementdated  as of March 1, 2006  between  the Company and the Holder of this

                                       15
<PAGE>

Note. The Issuable Maximum equals 19.99% of the number of shares of Common Stock
outstanding  immediately  prior to the Amendment Date. If on any Conversion Date
(A) the Common Stock is listed for trading on the American Stock  Exchange,  (B)
the Conversion  Price then in effect is such that the aggregate number of shares
of Common Stock  previously  issued at a discount  upon  conversion  of Notes or
exercise of the Warrants or  otherwise  issued in  connection  with the Purchase
Agreement,  would equal or exceed the Issuable Maximum,  and (C) the Maker shall
not  have  previously  obtained  the  vote  of  stockholders  (the  "Stockholder
Approval"),  if any, as may be required by the applicable  rules and regulations
of the American Stock Exchange (or any successor  entity)  applicable to approve
the  issuance  of  shares of Common  Stock in  excess  of the  Issuable  Maximum
pursuant  to the terms  hereof,  then the  Maker  shall  issue to the  Holder so
requesting such number of shares of Common Stock equal to such Holder's pro rata
portion  of the  Issuable  Maximum as of the  initial  purchase  date and,  with
respect to the  remainder  of shares of Common  Stock which  would  result in an
issuance  of shares of Common  Stock in  excess  of the  Issuable  Maximum  (the
"Excess Shares"),  the Maker shall obtain the Stockholder Approval applicable to
such  issuance  by not later  than  September  1, 2006 The Maker and the  Holder
understand  and agree that shares of Common Stock issued to and then held by the
Holder as a result of  conversion of the Notes or as a result of exercise of the
Warrants  shall  not be  entitled  to cast  votes on any  resolution  to  obtain
Stockholder  Approval.  In the event that any requisite Stockholder Approval has
not been  obtained  by such date,  the  Holder  shall have the right to have the
Maker prepay in cash such portion of the  outstanding  principal  amount of this
Note plus all accrued but unpaid  interest  that would result in the issuance of
shares of Common  Stock  upon  conversion  in  excess of the  Holder's  pro rata
portion of the Issuable  Maximum.  In the event that the Holder  exercises  this
prepayment  right,  the Holder shall provide written notice to the Maker and the
Maker  shall pay in cash the  prepayment  price  within five (5)  business  days
following receipt of such written request by the Holder.

         Section  3.5  Preservation  of  Conversion  Price  Available  Prior  to
Stockholder Approval: Conversion Procedures

         (a) If the Holder  has  acquired,  upon  conversion  of this Note,  its
entire  pro-rata share of the Issuable  Maximum ( as defined in Section  3.4(c),
then for the period of ten (10) days immediately  following the Company's giving
notice to the Holder that requisite Stockholder Approval had been obtained , the
Holder  shall,  at its option,  be entitled to convert all or any portion of the
balance  of this Note into  Common  Stock at either (i) the  current  Conversion

                                       16
<PAGE>

Price determined  pursuant to Section 3.2 or (ii) the Conversion Price in effect
on the date on which  the  Holder  obtained  the  share of  Common  Stock  which
resulted in its acquiring its pro-rata share of the Issuable Maximum.

                  (b) No  Impairment.  In the  event a  Holder  shall  elect  to
convert any Notes as provided herein,  the Maker cannot refuse  conversion based
on any claim that such  Holder or any one  associated  or  affiliated  with such
Holder has been engaged in any  violation  of law,  violation of an agreement to
which such Holder is a party or for any reason whatsoever, unless, an injunction
from a court, or notice,  restraining  and or adjoining  conversion of all or of
said Notes  shall have  issued and the Maker posts a surety bond for the benefit
of such Holder in an amount equal to one hundred  thirty  percent  (130%) of the
amount of the Notes the Holder has elected to convert,  which bond shall  remain
in effect until the completion of  arbitration/litigation of the dispute and the
proceeds  of which  shall be  payable  to such  Holder in the  event it  obtains
judgment.

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

                  (d) Fractional  Shares.  No fractional  shares of Common Stock
shall be issued upon  conversion of this Note. In lieu of any fractional  shares
to which the Holder would otherwise be entitled,  the Maker shall pay cash equal
to the product of such fraction multiplied by the Conversion Price of the Common
Stock on the Conversion Date.

         Section 3.6 Adjustments to Fixed Conversion Price.

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

                  (i)  Adjustments  for Stock  Splits and  Combinations.  If the
         Maker shall at any time or from time to time after the  Issuance  Date,
         effect a stock split of the  outstanding  Common Stock,  the applicable
         Conversion Price in effect  immediately  prior to the stock split shall
         be  proportionately  decreased.  If the Maker shall at any time or from

                                       17
<PAGE>

         time to time after the Issuance Date, combine the outstanding shares of
         Common Stock,  the applicable  Conversion  Price in effect  immediately
         prior  to the  combination  shall  be  proportionately  increased.  Any
         adjustments  under this  Section  3.6(a) (i) shall be  effective at the
         close of business on the date the stock split or combination occurs

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

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

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

                  (iii) Adjustment for Other Dividends and Distributions. If the
         Maker shall at any time or from time to time after the  Issuance  Date,
         make or issue or set a record date for the  determination of holders of
         Common  Stock  entitled  to  receive a dividend  or other  distribution
         payable in other than shares of Common Stock,  then, and in each event,
         an  appropriate  revision to the applicable  Conversion  Price shall be
         made and  provision  shall be made (by  adjustments  of the  Conversion
         Price or otherwise) so that the holders of this Note shall receive upon
         conversions  thereof,  in  addition  to the  number of shares of Common
         Stock receivable  thereon,  the number of securities of the Maker which
         they would have received had this Note been converted into Common Stock
         on the date of such event and had  thereafter,  during the period  from
         the date of such event to and including the Conversion  Date,  retained
         such securities (together with any distributions payable thereon during
         such period),  giving  application to all adjustments called for during
         such period under this Section  3.6(a)(iii)  with respect to the rights
         of the  holders of this Note and the Other  Notes;  provided,  however,
         that if such record date shall have been fixed and such dividend is not
         fully paid or if such  distribution is not fully made on the date fixed
         therefor,  the  Conversion  Price  shall be  adjusted  pursuant to this

                                       18
<PAGE>

         paragraph  as of the  time  of  actual  payment  of such  dividends  or
         distributions.

                  (iv)   Adjustments   for    Reclassification,    Exchange   or
         Substitution. If the Common Stock issuable upon conversion of this Note
         at any time or from  time to time  after  the  Issuance  Date  shall be
         changed  to the same or  different  number  of  shares  of any class or
         classes of stock, whether by reclassification,  exchange,  substitution
         or  otherwise  (other  than by way of a stock split or  combination  of
         shares or stock dividends provided for in Sections 3.6(a)(i),  (ii) and
         (iii), or a reorganization,  merger,  consolidation,  or sale of assets
         provided  for in  Section  3.6(a)(v)),  then,  and in  each  event,  an
         appropriate  revision  to  the  Conversion  Price  shall  be  made  and
         provisions  shall be made (by  adjustments of the  Conversion  Price or
         otherwise)  so that the  Holder  shall  have the  right  thereafter  to
         convert this Note into the kind and amount of shares of stock and other
         securities receivable upon reclassification,  exchange, substitution or
         other  change,  by holders of the number of shares of Common Stock into
         which  such Note might have been  converted  immediately  prior to such
         reclassification,  exchange,  substitution or other change, all subject
         to further adjustment as provided herein.

                  (v) Adjustments for Reorganization,  Merger,  Consolidation or
         Sales of Assets. If at any time or from time to time after the Issuance
         Date there shall be a capital  reorganization  of the Maker (other than
         by way of a stock split or combination of shares or stock  dividends or
         distributions  provided for in Section 3.6(a)(i),  (ii) and (iii), or a
         reclassification,  exchange or  substitution  of shares provided for in
         Section 3.6(a)(iv)),  or a merger or consolidation of the Maker with or
         into  another  corporation  where the  holders  of  outstanding  voting
         securities  prior to such merger or consolidation do not own over fifty
         percent  (50%) of the  outstanding  voting  securities of the merged or
         consolidated entity, immediately after such merger or consolidation, or
         the  sale of all or  substantially  all of the  Maker's  properties  or
         assets to any other  person (an  "Organic  Change"),  then as a part of
         such Organic  Change an appropriate  revision to the  Conversion  Price
         shall  be made and  provision  shall  be made  (by  adjustments  of the
         Conversion  Price or otherwise) so that the Holder shall have the right
         thereafter  to convert  such Note into the kind and amount of shares of
         stock and other  securities  or property of the Maker or any  successor
         corporation   resulting  from  Organic   Change.   In  any  such  case,
         appropriate  adjustment  shall  be  made  in  the  application  of  the
         provisions of this Section  3.6(a)(v) with respect to the rights of the
         Holder after the Organic  Change to the end that the provisions of this
         Section   3.6(a)(v)   (including   any  adjustment  in  the  applicable
         Conversion  Price  then in effect  and the number of shares of stock or
         other securities deliverable upon conversion of this Note and the Other

                                       19
<PAGE>

         Notes)  shall be applied  after  that event in as nearly an  equivalent
         manner as may be practicable.

                  (vi)  Adjustments for Issuance of Additional  Shares of Common
         Stock.

                           (1) In the event the Maker,  shall, at any time, from
                  time to time, issue or sell any shares of additional shares of
                  common  stock  (otherwise  than as provided  in the  foregoing
                  subsections (i) through (v) of this Section 3.6(a) or pursuant
                  to Common Stock  Equivalents  (hereafter  defined)  granted or
                  issued  prior to the  Issuance  Date)  ("Additional  Shares of
                  Common Stock"),  at a price per share less than the Conversion
                  Price  then in  effect  or  without  consideration,  then  the
                  Conversion  Price upon each such issuance shall be adjusted to
                  that  price  (rounded  to  the  nearest  cent)  determined  by
                  multiplying  each of the Conversion  Price then in effect by a
                  fraction:

                                    (A) the numerator of which shall be equal to
                           the sum of (x) the  number of shares of Common  Stock
                           outstanding immediately prior to the issuance of such
                           Additional Shares of Common Stock plus (y) the number
                           of shares of Common  Stock  (rounded  to the  nearest
                           whole share) which the  aggregate  consideration  for
                           the total number of such Additional  Shares of Common
                           Stock so issued  would  purchase at a price per share
                           equal to the Conversion Price then in effect, and

                                    (B) the  denominator of which shall be equal
                           to the number of shares of Common  Stock  outstanding
                           immediately  after the  issuance  of such  Additional
                           Shares of Common Stock.

                           (2) The provisions of paragraph (1) of Section 3.6(a)
                  (vi) shall not apply to any issuance of  Additional  Shares of
                  Common Stock for which an adjustment is provided under Section
                  3.6(a) (vii).  No adjustment of the number of shares of Common
                  Stock for which this Note shall be  convertible  shall be made
                  under  paragraph (1) of Section  3.6(a) (vi) upon the issuance
                  of any  Additional  Shares of Common  Stock  which are  issued
                  pursuant to the exercise of any Common Stock  Equivalents,  if
                  any such adjustment  shall  previously have been made upon the
                  issuance of such Common Stock Equivalents  pursuant to Section
                  3.6(a) (vii).

                           (vii)  Issuance of Common Stock  Equivalents.  If the
                  Maker,  at any time after the Issuance  Date,  shall issue any
                  securities  convertible into or exchangeable  for, directly or
                  indirectly,  Common Stock  ("Convertible  Securities"),  other

                                       20
<PAGE>

                  than the  Notes,  or any  rights or  warrants  or  options  to
                  purchase  any such  Common  Stock or  Convertible  Securities,
                  shall be  issued  or sold  (collectively,  the  "Common  Stock
                  Equivalents")  and the  aggregate  of the  price per share for
                  which  Additional  Shares  of  Common  Stock  may be  issuable
                  thereafter pursuant to such Common Stock Equivalent,  plus the
                  consideration  received  by the  Maker  for  issuance  of such
                  Common  Stock  Equivalent  divided  by the number of shares of
                  Common Stock issuable pursuant to such Common Stock Equivalent
                  (the  "Aggregate  Per Common Share  Price") shall be less than
                  the applicable  Conversion Price then in effect,  or if, after
                  any such issuance of Common Stock  Equivalents,  the price per
                  share for  which  Additional  Shares  of  Common  Stock may be
                  issuable thereafter is amended or adjusted,  and such price as
                  so amended  shall make the Aggregate Per Share Common Price be
                  less  than the  applicable  Conversion  Price in effect at the
                  time of such  amendment  or  adjustment,  then the  applicable
                  Conversion Price upon each such issuance or amendment shall be
                  adjusted as provided in the first sentence of subsection  (vi)
                  of this  Section  3.6(a)  on the  basis  that (1) the  maximum
                  number of Additional  Shares of Common Stock issuable pursuant
                  to all such Common Stock  Equivalents  shall be deemed to have
                  been issued (whether or not such Common Stock  Equivalents are
                  actually then  exercisable,  convertible  or  exchangeable  in
                  whole or in part) as of the  earlier  of (A) the date on which
                  the Maker shall enter into a firm contract for the issuance of
                  such  Common  Stock  Equivalent,  or (B) the  date  of  actual
                  issuance of such Common Stock Equivalent. No adjustment of the
                  applicable   Conversion   Price   shall  be  made  under  this
                  subsection (vii) upon the issuance of any Convertible Security
                  which is issued  pursuant to the  exercise of any  warrants or
                  other  subscription  or  purchase  rights  therefor,   if  any
                  adjustment  shall  previously  have been made to the  exercise
                  price of such  warrants  then in effect  upon the  issuance of
                  such  warrants or other  rights  pursuant  to this  subsection
                  (vii).  No adjustment  shall be made to the  Conversion  Price
                  upon the  issuance of Common Stock  pursuant to the  exercise,
                  conversion or exchange of any  Convertible  Security or Common
                  Stock  Equivalent  where an adjustment to the Conversion Price
                  was  made as a  result  of the  issuance  or  purchase  of any
                  Convertible Security or Common Stock Equivalent.

                           (viii) Consideration for Stock. In case any shares of
                  Common Stock or any Common Stock  Equivalents  shall be issued
                  or sold:

                                    (1)  in   connection   with  any  merger  or
                           consolidation  in which  the  Maker is the  surviving
                           corporation  (other than any  consolidation or merger
                           in which the previously  outstanding shares of Common
                           Stock of the Maker  shall be changed to or  exchanged

                                       21
<PAGE>

                           for  the  stock  or  other   securities   of  another
                           corporation),  the amount of  consideration  therefor
                           shall be, deemed to be the fair value,  as determined
                           reasonably   and  in  good  faith  by  the  Board  of
                           Directors of the Maker, of such portion of the assets
                           and business of the nonsurviving  corporation as such
                           Board may determine to be attributable to such shares
                           of Common Stock,  Convertible  Securities,  rights or
                           warrants or options, as the case may be; or

                                    (2) in the  event  of any  consolidation  or
                           merger  of the  Maker in which  the  Maker is not the
                           surviving  corporation  or in  which  the  previously
                           outstanding shares of Common Stock of the Maker shall
                           be changed into or  exchanged  for the stock or other
                           securities of another corporation, or in the event of
                           any sale of all or substantially all of the assets of
                           the  Maker  for  stock  or  other  securities  of any
                           corporation, the Maker shall be deemed to have issued
                           a number of shares of its  Common  Stock for stock or
                           securities or other property of the other corporation
                           computed on the basis of the actual exchange ratio on
                           which  the  transaction  was  predicated,  and  for a
                           consideration  equal to the fair market  value on the
                           date  of  such  transaction  of  all  such  stock  or
                           securities   or   other   property   of   the   other
                           corporation.  If  any  such  calculation  results  in
                           adjustment of the applicable Conversion Price, or the
                           number  of  shares  of  Common  Stock  issuable  upon
                           conversion  of the Notes,  the  determination  of the
                           applicable  Conversion  Price or the number of shares
                           of Common Stock issuable upon conversion of the Notes
                           immediately  prior to such merger,  consolidation  or
                           sale,  shall  be made  after  giving  effect  to such
                           adjustment  of the  number of shares of Common  Stock
                           issuable upon  conversion of the Notes.  In the event
                           Common   Stock  is  issued   with  other   shares  or
                           securities   or  other   assets   of  the  Maker  for
                           consideration  which covers both,  the  consideration
                           computed as provided in this Section  3.6(viii) shall
                           be  allocated  among  such  securities  and assets as
                           determined in good faith by the Board of Directors of
                           the Maker.

                  (b) Record  Date.  In case the Maker  shall take record of the
         holders  of its  Common  Stock for the  purpose  of  entitling  them to
         subscribe for or purchase Common Stock or Convertible Securities,  then
         the date of the issue or sale of the  shares of Common  Stock  shall be
         deemed to be such record date.

                  (c) Certain Issues  Excepted.  Anything herein to the contrary
         notwithstanding, the Maker shall not be required to make any adjustment
         to the Conversion Price in connection with (i) securities issued (other
         than  for  cash)  in  connection   with  a  merger,   acquisition,   or
         consolidation,  (ii)  securities  issued  pursuant  to a bona fide firm
         underwritten   public  offering  of  the  Maker's   securities,   (iii)
         securities issued pursuant to the conversion or exercise of convertible
         or exercisable securities issued or outstanding on or prior to the date
         hereof or issued pursuant to the Purchase Agreement, (iv) the shares of

                                       22
<PAGE>

         Common Stock  issuable  upon the exercise of Warrants,  (v)  securities
         issued  in  connection  with  strategic  license  agreements  or  other
         partnering  arrangements  so  long as  such  issuances  are not for the
         purpose of raising  capital,  (vi)  Common  Stock  issued or options to
         purchase  Common Stock granted or issued  pursuant to the Maker's stock
         option plans and employee stock purchase plans as they now exist, (vii)
         any warrants  issued to the  placement  agent and its designees for the
         transactions  contemplated  by the Purchase  Agreement,  and (viii) the
         payment of any principal and accrued interest in shares of Common Stock
         pursuant to this Note.

                  (d) No  Impairment.  The Maker shall not, by  amendment of its
         Certificate of Incorporation or through any reorganization, transfer of
         assets, consolidation, merger, dissolution, issue or sale of securities
         or any other voluntary action, avoid or seek to avoid the observance or
         performance  of any of the terms to be observed or performed  hereunder
         by the  Maker,  but will at all  times  in good  faith,  assist  in the
         carrying  out of all  the  provisions  of this  Section  3.6 and in the
         taking of all such action as may be necessary or  appropriate  in order
         to protect the Conversion Rights of the Holder against  impairment.  In
         the event a Holder shall elect to convert any Notes as provided herein,
         the Maker cannot refuse  conversion based on any claim that such Holder
         or any one  associated or affiliated  with such Holder has been engaged
         in any violation of law, violation of an agreement to which such Holder
         is a party or for any reason  whatsoever,  unless, an injunction from a
         court, or notice,  restraining and or adjoining conversion of all or of
         said Notes  shall have issued and the Maker posts a surety bond for the
         benefit of such Holder in an amount equal to one hundred thirty percent
         (130%) of the amount of the Notes the Holder  has  elected to  convert,
         which   bond  shall   remain  in  effect   until  the   completion   of
         arbitration/litigation  of the dispute and the  proceeds of which shall
         be payable to such Holder in the event it obtains judgment.

                  (e)  Certificates as to  Adjustments.  Upon occurrence of each
         adjustment or readjustment of the Conversion  Price or number of shares
         of Common Stock issuable upon  conversion of this Note pursuant to this
         Section  3.6,  the Maker at its expense  shall  promptly  compute  such
         adjustment  or  readjustment  in  accordance  with the terms hereof and
         furnish to the Holder a certificate  setting forth such  adjustment and
         readjustment, showing in detail the facts upon which such adjustment or
         readjustment  is based.  The Maker shall,  upon written  request of the
         Holder,  at any time,  furnish or cause to be furnished to the Holder a
         like certificate setting forth such adjustments and readjustments,  the
         applicable  Conversion  Price in effect at the time,  and the number of
         shares of Common Stock and the amount,  if any, of other  securities or
         property  which at the time would be received  upon the  conversion  of
         this  Note.  Notwithstanding  the  foregoing,  the  Maker  shall not be

                                       23
<PAGE>

         obligated  to  deliver a  certificate  unless  such  certificate  would
         reflect an increase  or  decrease of at least one percent  (1%) of such
         adjusted amount.

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

                  (g) Fractional  Shares.  No fractional  shares of Common Stock
         shall be issued upon conversion of this Note. In lieu of any fractional
         shares to which the Holder would otherwise be entitled, the Maker shall
         pay cash  equal  to the  product  of such  fraction  multiplied  by the
         average of the  Closing  Bid Prices of the Common  Stock for the twenty
         (20)  consecutive  Trading Days  immediately  preceding the  Conversion
         Date. The term "Closing Bid Price" shall mean,  means on any particular
         date (i) the  closing  bid price per share of the Common  Stock on such
         date on the  American  Stock  Exchange or another  registered  national
         stock exchange on which the Common Stock is then listed, or if there is
         no such price on such date,  then the  average of the closing bid price
         on such exchange or quotation system on the date nearest preceding such
         date,  or (ii) if the Common  Stock is not listed then on the  American
         Stock Exchange or any registered  national stock exchange,  the closing
         bid price for a share of Common Stock in the  over-the-counter  market,
         as  reported by the OTC  Bulletin  Board or in the  National  Quotation
         Bureau Incorporated or similar organization or agency succeeding to its
         functions of  reporting  prices) at the close of business on such date,
         or (iii) if the Common  Stock is not then  reported by the OTC Bulletin
         Board  or  the  National  Quotation  Bureau  Incorporated  (or  similar
         organization  or  agency  succeeding  to  its  functions  of  reporting
         prices),  then the average of the "Pink Sheet"  quotes for the relevant
         conversion  period,  as determined in good faith by the holder, or (iv)
         if the Common Stock is not then  publicly  traded the fair market value
         of a share of Common Stock as determined  by the Holder and  reasonably
         acceptable to the Maker.

                  (h) Reservation of Common Stock.  The Maker shall at all times
         when this Note shall be outstanding,  reserve and keep available out of
         its  authorized  but unissued  Common  Stock,  such number of shares of
         Common  Stock as shall  from time to time be  sufficient  to effect the
         conversion of this Note and all interest accrued thereon; provided that
         the number of shares of Common  Stock so  reserved  shall at no time be
         less than one hundred  twenty percent (120%) of the number of shares of

                                       24
<PAGE>

         Common Stock for which this Note and all interest  accrued  thereon are
         at any  time  convertible.  The  Maker  shall,  from  time  to  time in
         accordance  with the  Nevada  General  Corporation  Law,  increase  the
         authorized number of shares of Common Stock if at any time the unissued
         number of  authorized  shares  shall not be  sufficient  to satisfy the
         Maker's obligations under this Section 3.6(h).

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

                  (j) Reservation of Common Stock. The Maker confirms that as of
         the date hereof its  authorized  Common  Stock  consists of  50,000,000
         shares,  of which  21,303,  439 shares are issued and  outstanding.  If
         there are not sufficient authorized shares of Common Stock available at
         any time to permit  the Holder to  convert  all or any  portion of this
         Note into  Common  Stock to which it is  otherwise  fully  entitled  to
         obtain by conversion hereunder, then on ninety (90) days written notice
         from Holder,  Maker shall seek the stockholder approval of the increase
         in the Company's authorized capital necessary to enable such conversion
         to occur.

         Section 3.7 Prepayment.

         (a) Prepayment  Upon an Event of Default.  Notwithstanding  anything to
the  contrary  contained  herein,  upon the  occurrence  of an Event of  Default
described in Sections  2.1(b)-(k)  hereof,  the Holder shall have the right,  at
such Holder's option, to require the Maker to prepay in cash all or a portion of
this Note at a price equal to the Triggering  Event Prepayment Price (as defined
in Section  3.7(c) below)  applicable at the time of such request (the "Event of
Default  Prepayment  Price").  Nothing in this  Section  3.7(a)  shall limit the
Holder's rights under Section 2.2 hereof.

         (b) Prepayment Option Upon Major Transaction.  In addition to all other
rights of the Holder  contained  herein,  simultaneous  with the occurrence of a
Major  Transaction (as defined  below),  the Holder shall have the right, at the
Holder's option, to require the Maker to prepay all or a portion of the Holder's
Notes at a price equal to one hundred percent (100%) of the aggregate  principal

                                       25
<PAGE>

amount of this Note plus all accrued and unpaid interest (the "Major Transaction
Prepayment  Price");  provided  that the Holder  shall  have the sole  option to
receive payment of the Major  Transaction  Prepayment Price in cash or shares of
Common Stock. If the Holder elects to receive  payment of the Major  Transaction
Prepayment  Price in shares of Common Stock,  the price per share shall be based
upon the  Conversion  Price  then in  effect  on the day  preceding  the date of
delivery of the Notice of Prepayment at Option of Holder Upon Major  Transaction
(as  hereafter  defined)  and the Holder  shall have  "piggy-back"  registration
rights with respect to such shares.

         (c) Prepayment  Option Upon Triggering  Event. In addition to all other
rights of the Holder  contained  herein,  after a  Triggering  Event (as defined
below),  the Holder shall have the right, at the Holder's option, to require the
Maker to prepay  all or a portion  of this Note in cash at a price  equal to the
sum of (i) the greater of (A) one hundred twenty percent (120%) of the aggregate
principal  amount of this Note plus all accrued and unpaid  interest  and (B) in
the event at such  time the  Holder is  unable  to  obtain  the  benefit  of its
conversion  rights  through the conversion of this Note and resale of the shares
of Common Stock issuable upon conversion  hereof in accordance with the terms of
this Note and the other Transaction Documents, the aggregate principal amount of
this Note plus all accrued but unpaid interest hereon, divided by the Conversion
Price on (x) the date the  Prepayment  Price (as  defined  below) is demanded or
otherwise due or (y) the date the Prepayment Price is paid in full, whichever is
less, multiplied by the VWAP on (x) the date the Prepayment Price is demanded or
otherwise due, and (y) the date the Prepayment Price is paid in full,  whichever
is greater, and (ii) all other amounts,  costs,  expenses and liquidated damages
due in respect of this Note and the other Transaction Documents (the "Triggering
Event  Prepayment   Price,"  and,   collectively  with  the  "Major  Transaction
Prepayment Price," the "Prepayment Price").

         (d) Intentionally Omitted.

         (e) "Major  Transaction." A "Major Transaction" shall be deemed to have
occurred at such time as any of the following events:

                  (i) the consolidation, merger or other business combination of
         the Maker  with or into  another  Person (as  defined  in Section  4.13
         hereof) (other than (A) pursuant to a migratory  merger effected solely
         for the purpose of changing the  jurisdiction of  incorporation  of the
         Maker or (B) a consolidation,  merger or other business  combination in
         which  holders of the Maker's  voting  power  immediately  prior to the
         transaction  continue  after  the  transaction  to  hold,  directly  or

                                       26
<PAGE>

         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).

                  (ii) the sale or transfer of more than fifty  percent (50%) of
         the Maker's  assets  (based on the fair market value as  determined  in
         good faith by the Maker's Board of Directors)  other than  inventory in
         the  ordinary  course  of  business  in  one  or a  related  series  of
         transactions; or

                  (iii) closing of a purchase,  tender or exchange offer made to
         the holders of more than fifty percent (50%) of the outstanding  shares
         of  Common  Stock  in  which  more  than  fifty  percent  (50%)  of the
         outstanding shares of Common Stock were tendered and accepted.

         (f)  "Triggering  Event." A "Triggering  Event" shall be deemed to have
occurred at such time as any of the following events:

                  (i) so long as any Notes are outstanding, the effectiveness of
         the Registration Statement,  after it becomes effective, (i) lapses for
         any reason  (including,  without  limitation,  the  issuance  of a stop
         order) or (ii) is  unavailable  to the Holder for sale of the shares of
         Common Stock, and such lapse or  unavailability  continues for a period
         of twenty (20) consecutive Trading Days, and the shares of Common Stock
         into which the Holder's  Notes can be  converted  cannot be sold in the
         public  securities  market  pursuant to Rule 144(k),  provided that the
         cause of such lapse or  unavailability  is not due to factors primarily
         within the  control of the Holder of the Notes;  and  provided  further
         that a  Triggering  Event shall not have  occurred if and to the extent
         the  Maker  exercised  its  rights  set  forth in  Section  3(n) of the
         Registration Rights Agreement;

                  (ii) the suspension from listing,  without  subsequent listing
         on any one of, or the  failure of the  Common  Stock to be listed on at
         least one of the  American  Stock  Exchange,  Nasdaq  National  Market,
         Nasdaq  SmallCap  Market,  The New York  Stock  Exchange,  Inc.  or OTC
         Bulletin Board, for a period of five (5) consecutive Trading Days;

                  (iii) the Maker's notice to any holder of the Notes, including
         by way of public announcement,  at any time, of its inability to comply
         (including  for any of the  reasons  described  in Section  3.8) or its
         intention  not to comply with proper  requests  for  conversion  of any
         Notes into shares of Common Stock; or

                                       27
<PAGE>

                  (iv) the Maker's  failure to comply with a  Conversion  Notice
         tendered in accordance with the provisions of this Note within ten (10)
         business days after the receipt by the Maker of the Conversion Notice.

         (g) Intentionally Omitted.

         (h) Mechanics of Prepayment at Option of Holder Upon Major Transaction.
No sooner  than  fifteen  (15) days nor  later  than ten (10) days  prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major  Transaction,  the Maker shall  deliver  written  notice  thereof via
facsimile and overnight courier ("Notice of Major Transaction") to the Holder of
this Note.  At any time after receipt of a Notice of Major  Transaction  (or, in
the event a Notice of Major  Transaction is not delivered at least ten (10) days
prior to a Major Transaction,  at any time within ten (10) days prior to a Major
Transaction),  any holder of the Notes then outstanding may require the Maker to
prepay,   effective   immediately  prior  to  the  consummation  of  such  Major
Transaction,  all of the holder's Notes then  outstanding by delivering  written
notice  thereof via facsimile and  overnight  courier  ("Notice of Prepayment at
Option  of  Holder  Upon  Major  Transaction")  to the  Maker,  which  Notice of
Prepayment  at Option of Holder Upon Major  Transaction  shall  indicate (i) the
number of Notes that such holder is  electing to prepay and (ii) the  applicable
Major  Transaction  Prepayment  Price, as calculated  pursuant to Section 3.7(b)
above.

         (i) Mechanics of Prepayment at Option of Holder Upon Triggering  Event.
Within one (1) business day after the  occurrence  of a  Triggering  Event,  the
Maker shall deliver  written notice thereof via facsimile and overnight  courier
("Notice of  Triggering  Event") to each holder of the Notes.  At any time after
the  earlier of a  holder's  receipt  of a Notice of  Triggering  Event and such
holder  becoming  aware of a Triggering  Event,  any holder of this Note and the
Other Notes then outstanding may require the Maker to prepay all of the Notes on
a pro rata  basis  by  delivering  written  notice  thereof  via  facsimile  and
overnight  courier  ("Notice of Prepayment  at Option of Holder Upon  Triggering
Event")  to the  Maker,  which  Notice of  Prepayment  at Option of Holder  Upon
Triggering  Event shall  indicate (i) the amount of the Note that such holder is
electing to have prepaid and (ii) the  applicable  Triggering  Event  Prepayment
Price,  as calculated  pursuant to Section  3.7(c) above. A holder shall only be
permitted to require the Maker to prepay the Note pursuant to Section 3.7 hereof
for the  greater of a period of ten (10) days after  receipt by such holder of a
Notice  of  Triggering  Event  or  for so  long  as  such  Triggering  Event  is
continuing.

         (j) Intentionally Omitted.

                                       28
<PAGE>

                  (k) Payment of Prepayment Price. Upon the Maker's receipt of a
Notice(s) of Prepayment at Option of Holder Upon Triggering Event or a Notice(s)
of Prepayment at Option of Holder Upon Major  Transaction from any holder of the
Notes, the Maker shall immediately  notify each holder of the Notes by facsimile
of the Maker's  receipt of such Notice(s) of Prepayment at Option of Holder Upon
Triggering  Event or  Notice(s)  of  Prepayment  at Option of Holder  Upon Major
Transaction  and each holder which has sent such a notice shall promptly  submit
to the Maker such holder's certificates representing the Notes which such holder
has elected to have prepaid.  The Maker shall deliver the applicable  Triggering
Event Prepayment Price, in the case of a prepayment  pursuant to Section 3.7(i),
to such holder  within  five (5)  business  days after the Maker's  receipt of a
Notice of Prepayment at Option of Holder Upon Triggering  Event and, in the case
of a  prepayment  pursuant  to  Section  3.7(h),  the Maker  shall  deliver  the
applicable  Major   Transaction   Prepayment  Price  immediately  prior  to  the
consummation of the Major  Transaction;  provided that a holder's  original Note
shall have been so delivered to the Maker; provided further that if the Maker is
unable  to prepay  all of the Notes to be  prepaid,  the Maker  shall  prepay an
amount  from each  holder  of the Notes  being  prepaid  equal to such  holder's
pro-rata  amount  (based on the number of Notes held by such holder  relative to
the number of Notes outstanding) of all Notes being prepaid.  If the Maker shall
fail to prepay all of the Notes submitted for prepayment (other than pursuant to
a dispute as to the arithmetic calculation of the Prepayment Price), in addition
to any remedy such holder of the Notes may have under this Note and the Purchase
Agreement,  the applicable Prepayment Price payable in respect of such Notes not
prepaid shall bear interest at the rate of two percent (2%) per month  (prorated
for  partial  months)  until  paid in full.  Until  the Maker  pays such  unpaid
applicable  Prepayment  Price in full to a holder  of the  Notes  submitted  for
prepayment,  such holder  shall have the option (the "Void  Optional  Prepayment
Option") to, in lieu of prepayment, require the Maker to promptly return to such
holder(s) all of the Notes that were  submitted for prepayment by such holder(s)
under this  Section 3.7 and for which the  applicable  Prepayment  Price has not
been paid, by sending  written  notice  thereof to the Maker via facsimile  (the
"Void  Optional  Prepayment  Notice").  Upon the  Maker's  receipt  of such Void
Optional  Prepayment  Notice(s)  and  prior to  payment  of the full  applicable
Prepayment  Price to such holder,  (i) the  Notice(s) of Prepayment at Option of
Holder Upon Triggering  Event or the Notice(s) of Prepayment at Option of Holder
Upon Major Transaction,  as the case may be, shall be null and void with respect
to those Notes submitted for prepayment and for which the applicable  Prepayment
Price has not been  paid,  (ii) the Maker  shall  immediately  return  any Notes
submitted to the Maker by each holder for  prepayment  under this Section 3.7(k)
and for which the  applicable  Prepayment  Price has not been paid and (iii) the

                                       29
<PAGE>

Conversion  Price of such returned  Notes shall be adjusted to the lesser of (A)
the  Conversion  Price  as in  effect  on the date on  which  the Void  Optional
Prepayment  Notice(s) is  delivered to the Maker and (B) the lowest  Closing Bid
Price  during  the  period  beginning  on the date on  which  the  Notice(s)  of
Prepayment  of Option of Holder  Upon  Major  Transaction  or the  Notice(s)  of
Prepayment  at Option of Holder Upon  Triggering  Event,  as the case may be, is
delivered  to the  Maker  and  ending  on the  date on which  the Void  Optional
Prepayment  Notice(s)  is delivered to the Maker;  provided  that no  adjustment
shall be made if such  adjustment  would result in an increase of the Conversion
Price then in effect. A holder's  delivery of a Void Optional  Prepayment Notice
and  exercise of its rights  following  such notice shall not effect the Maker's
obligations  to make any payments  which have accrued  prior to the date of such
notice.  Payments  provided  for in this  Section  3.7 shall  have  priority  to
payments to other stockholders in connection with a Major Transaction.

         (l) Maker Prepayment Option. At any time following the date hereof, the
Maker may prepay in cash all or any portion of the outstanding  principal amount
of this Note together with all accrued and unpaid  interest  thereon upon thirty
(30) days prior written notice to the Holder (the "Maker's  Prepayment  Notice")
at a price equal to 110% of the aggregate principal amount of this Note plus any
accrued but unpaid interest (the "Maker's Prepayment Price"); provided, however,
that if a holder has  delivered a  Conversion  Notice to the Maker or delivers a
Conversion  Notice within such thirty (30) day period following  delivery of the
Maker's  Prepayment  Notice,  the principal amount of the Notes plus any accrued
but unpaid  interest  designated to be converted may not be prepaid by the Maker
and shall be converted in accordance with Section 3.3 hereof;  provided  further
that if during the period between delivery of the Maker's  Prepayment Notice and
the Maker's  Prepayment Date (as defined below),  a holder shall become entitled
to deliver a Notice of Prepayment at Option of Holder Upon Major  Transaction or
Notice of Prepayment at Option of Holder upon  Triggering  Event,  then the such
rights of the holders shall take precedence over the previously  delivered Maker
Prepayment  Notice.  The  Maker's  Prepayment  Notice  shall  state  the date of
prepayment which date shall be the  thirty-first  (31st) day after the Maker has
delivered the Maker's  Prepayment Notice (the "Maker's  Prepayment  Date"),  the
Maker's  Prepayment Price and the principal amount of Notes plus any accrued but
unpaid interest to be prepaid by the Maker.  The Maker shall deliver the Maker's
Prepayment Price on the Maker's Prepayment Date, provided, that if the holder(s)
delivers a  Conversion  Notice  before the  Maker's  Prepayment  Date,  then the
portion of the Maker's  Prepayment Price which would be paid to prepay the Notes
covered by such  Conversion  Notice shall be returned to the Maker upon delivery

                                       30
<PAGE>

of the Common Stock issuable in connection  with such  Conversion  Notice to the
holder(s).  On the  Maker's  Prepayment  Date,  the Maker  shall pay the Maker's
Prepayment  Price,  subject  to  any  adjustment  pursuant  to  the  immediately
preceding sentence,  to the holder(s) on a pro rata basis. If the Maker fails to
pay the Maker's Prepayment Price by the thirty-first  (31st) day after the Maker
has delivered the Maker's  Prepayment  Notice,  the prepayment  will be declared
null and void and the Maker  shall lose its right to serve a Maker's  Prepayment
Notice  pursuant  to this  Section  3.7(l) in the  future.  Notwithstanding  the
foregoing to the  contrary,  the Maker may effect a prepayment  pursuant to this
Section 3.7(l) only if (A) the registration  statement  providing for the resale
of the shares of Common Stock issuable upon conversion of this Note is effective
and has been  effective,  without lapse or suspension of any kind,  for a period
sixty  (60)  consecutive   calendar  days  immediately   preceding  the  Maker's
Prepayment  Notice through the Maker's  Prepayment Date, or the shares of Common
Stock  into  which this Note can be  converted  may be  offered  for sale to the
public  pursuant to Rule 144(k)  under the  Securities  Act,  (B) trading in the
Common  Stock  shall not have been  suspended  by the  Securities  and  Exchange
Commission or the American  Stock Exchange (or other exchange or market on which
the Common Stock is trading),  and (C) the Maker is in material  compliance with
the terms and conditions of this Note and the other Transaction Documents.

         Section 3.8 Inability to Fully Convert.

         (a) Holder's Option if Maker Cannot Fully Convert. If, upon the Maker's
receipt of a  Conversion  Notice,  the Maker cannot issue shares of Common Stock
registered  for  resale  under  the  Registration   Statement  for  any  reason,
including, without limitation,  because the Maker (w) does not have a sufficient
number of shares of Common Stock authorized and available, (x) is, subsequent to
October  1,  2006  otherwise  prohibited  by  applicable  law or by the rules or
regulations  of any  stock  exchange,  interdealer  quotation  system  or  other
self-regulatory  organization  with  jurisdiction  over the  Maker or any of its
securities  from  issuing  all of the Common  Stock which is to be issued to the
Holder  pursuant to a Conversion  Notice or (y) fails  subsequent to November 1,
2006,  to have a  sufficient  number of shares of Common  Stock  registered  for
resale  under the  Registration  Statement,  then the Maker  shall issue as many
shares of Common  Stock as it is able to issue in  accordance  with the Holder's
Conversion Notice and, with respect to the unconverted portion of this Note, the
Holder, solely at Holder's option, can elect to:

                  (i) require the Maker to prepay that  portion of this Note for
         which the Maker is unable to issue Common Stock in accordance  with the

                                       31
<PAGE>

         Holder's Conversion Notice (the "Mandatory  Prepayment") at a price per
         share  equal  to the  Triggering  Event  Prepayment  Price  as of  such
         Conversion Date (the "Mandatory Prepayment Price")

                  (ii) if the Maker's  inability to fully convert is pursuant to
         Section 3.8(a) (x) above,  require the Maker to issue restricted shares
         of Common Stock in accordance with such holder's Conversion Notice;

                  (iii) void its Conversion  Notice and retain or have returned,
         as the case may be, this Note that was to be converted  pursuant to the
         Conversion  Notice  (provided that the Holder's  voiding its Conversion
         Notice  shall not effect the Maker's  obligations  to make any payments
         which have accrued prior to the date of such notice).

In the  event a Holder  shall  elect to  convert  any  portion  of its  Notes as
provided herein, the Maker cannot refuse conversion based on any claim that such
Holder or any one associated or affiliated  with such Holder has been engaged in
any violation of law,  violation of an agreement to which such Holder is a party
or for any reason  whatsoever,  unless,  an injunction  from a court, on notice,
restraining and or adjoining  conversion of all or of said Notes shall have been
issued and the Maker  posts a surety  bond for the  benefit of such Holder in an
amount equal to 130% of the principal amount of the Notes the Holder has elected
to  convert,  which  bond  shall  remain  in  effect  until  the  completion  of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.

         (b)  Mechanics  of  Fulfilling  Holder's  Election.   The  Maker  shall
immediately  send via facsimile to the Holder,  upon receipt of a facsimile copy
of a  Conversion  Notice  from the Holder  which  cannot be fully  satisfied  as
described in Section  3.8(a) above,  a notice of the Maker's  inability to fully
satisfy the Conversion  Notice (the "Inability to Fully Convert  Notice").  Such
Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is
unable to fully satisfy such holder's Conversion Notice, (ii) the amount of this
Note which cannot be converted  and (iii) the  applicable  Mandatory  Prepayment
Price.  The Holder shall  notify the Maker of its  election  pursuant to Section
3.8(a) above by delivering written notice via facsimile to the Maker ("Notice in
Response to Inability to Convert").

         (c) Payment of Prepayment  Price. If the Holder shall elect to have its
Notes  prepaid  pursuant  to Section  3.8(a)(i)  above,  the Maker shall pay the
Mandatory  Prepayment Price to the Holder within thirty (30) days of the Maker's

                                       32
<PAGE>

receipt of the Holder's  Notice in Response to  Inability  to Convert,  provided
that  prior to the  Maker's  receipt  of the  Holder's  Notice  in  Response  to
Inability to Convert the Maker has not delivered a notice to the Holder stating,
to the satisfaction of the Holder,  that the event or condition resulting in the
Mandatory  Prepayment has been cured and all Conversion  Shares  issuable to the
Holder can and will be delivered to the Holder in  accordance  with the terms of
this Note. If the Maker shall fail to pay the  applicable  Mandatory  Prepayment
Price to the Holder on a timely basis as described in this Section 3.8(c) (other
than pursuant to a dispute as to the determination of the arithmetic calculation
of the  Prepayment  Price),  in addition to any remedy the Holder may have under
this Note and the Purchase Agreement,  such unpaid amount shall bear interest at
the rate of two percent (2%) per month  (prorated for partial months) until paid
in  full.  Until  the  full  Mandatory  Prepayment  Price is paid in full to the
Holder,  the Holder may (i) void the Mandatory  Prepayment  with respect to that
portion of the Note for which the full Mandatory  Prepayment  Price has not been
paid,  (ii) receive back such Note, and (iii) require that the Conversion  Price
of such returned Note be adjusted to the lesser of (A) the  Conversion  Price as
in effect on the date on which the Holder  voided the Mandatory  Prepayment  and
(B) the lowest  Closing Bid Price during the period  beginning on the Conversion
Date and ending on the date the Holder voided the Mandatory Prepayment.

         (d) Pro-rata Conversion and Prepayment. In the event the Maker receives
a  Conversion  Notice from more than one holder of the Notes on the same day and
the Maker can convert  and prepay  some,  but not all, of the Notes  pursuant to
this  Section  3.8,  the Maker shall  convert and prepay from each holder of the
Notes  electing to have its Notes  converted  and prepaid at such time an amount
equal to such holder's  pro-rata  amount  (based on the principal  amount of the
Notes  held by  such  holder  relative  to the  principal  amount  of the  Notes
outstanding) of all the Notes being converted and prepaid at such time.

         (e) The term "Closing Bid Price" shall mean, on any particular date (i)
the closing bid price per share of the Common Stock on such date on the American
Stock Exchange or another registered national stock exchange on which the Common
Stock  is then  listed,  or if there is no such  price  on such  date,  then the
average of the closing bid price on such  exchange  or  quotation  system on the
date nearest preceding such date, or (ii) if the Common Stock is not listed then
on the American Stock Exchange or any registered  national stock  exchange,  the
closing bid price for a share of Common Stock in the over-the-counter market, as
reported  by  the  OTC  Bulletin  Board  or in  the  National  Quotation  Bureau
Incorporated or similar  organization  or agency  succeeding to its functions of

                                       33
<PAGE>

reporting  prices) at the close of business on such date, or (iii) if the Common
Stock is not then reported by the OTC Bulletin  Board or the National  Quotation
Bureau  Incorporated  (or  similar  organization  or  agency  succeeding  to its
functions of reporting prices),  then the average of the "Pink Sheet" quotes for
the relevant  conversion  period,  as determined in good faith by the holder, or
(iv) if the Common Stock is not then publicly  traded the fair market value of a
share of Common Stock as determined by the Holder and  reasonably  acceptable to
the Maker.

         Section 3.9 No Rights as  Shareholder.  Nothing  contained in this Note
shall be construed as  conferring  upon the Holder,  prior to the  conversion of
this Note, the right to vote or to receive dividends or to consent or to receive
notice as a  shareholder  in respect  of any  meeting  of  shareholders  for the
election of directors of the Maker or of any other  matter,  or any other rights
as a shareholder of the Maker.

                                   ARTICLE IV

                                  MISCELLANEOUS

         Section 4.1  Notices.  Any  notice,  demand,  request,  waiver or other
communication  required or permitted to be given  hereunder  shall be in writing
and shall be  effective  (a) upon hand  delivery by  facsimile at the address or
number  designated  in the Purchase  Agreement  (if  delivered on a business day
during normal business hours where such notice is to be received),  or the first
business day following such delivery (if delivered  other than on a business day
during normal  business hours where such notice is to be received) or (b) on the
second  business day following the date of mailing by express  courier  service,
fully  prepaid,  addressed  to such  address,  or upon  actual  receipt  of such
mailing,  whichever shall first occur. The Maker will give written notice to the
Holder  at least ten (10)  days  prior to the date on which  the  Maker  takes a
record (x) with respect to any dividend or  distribution  upon the Common Stock,
(y) with respect to any pro rata  subscription  offer to holders of Common Stock
or (z) for  determining  rights  to vote with  respect  to any  Organic  Change,
dissolution,  liquidation  or  winding-up  and in no event  shall such notice be
provided  to such  holder  prior to such  information  being  made  known to the
public.  The Maker will also give written notice to the Holder at least ten (10)
days prior to the date on which any Organic Change, dissolution,  liquidation or
winding-up  will take place and in no event shall such notice be provided to the
Holder prior to such information being made known to the public. The Maker shall

                                       34
<PAGE>

promptly notify the Holder of this Note of any notices sent or received,  or any
actions taken with respect to the Other Notes.

         4.2  Governing  Law.  This Note shall be governed by and  construed  in
accordance  with the  internal  laws of the  State of New York,  without  giving
effect to any of the  conflicts  of law  principles  which  would  result in the
application of the substantive law of another jurisdiction.  This Note shall not
be interpreted or construed with any presumption  against the party causing this
Note to be drafted.

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

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

         Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and
expenses of enforcement of this Note, including, without limitation,  reasonable
attorneys' fees and expenses.

         Section 4.6 Binding Effect. The obligations of the Maker and the Holder
set forth herein shall be binding upon the  successors  and assigns of each such
party,  whether or not such  successors  or assigns are  permitted  by the terms
hereof.

                                       35
<PAGE>

         Section 4.7 Amendments. This Note may not be modified or amended in any
manner except in writing executed by the Maker and the Holder.

         Section 4.8 Compliance  with  Securities  Laws. The Holder of this Note
acknowledges  that this  Note is being  acquired  solely  for the  Holder's  own
account and not as a nominee for any other party,  and for investment,  and that
the Holder shall not offer,  sell or otherwise  dispose of this Note.  This Note
and any Note issued in substitution or replacement  therefor shall be stamped or
imprinted with a legend in substantially the following form:

            "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
            1933, AS AMENDED (THE "ACT"),  OR APPLICABLE  STATE SECURITIES
            LAWS,  AND MAY NOT BE SOLD OR  TRANSFERRED  IN THE  ABSENCE OF
            SUCH  REGISTRATION  OR  RECEIPT  BY THE MAKER OF AN OPINION OF
            COUNSEL   IN  THE  FORM,   SUBSTANCE   AND  SCOPE   REASONABLY
            SATISFACTORY  TO  THE  MAKER  THAT  THIS  NOTE  MAY  BE  SOLD,
            TRANSFERRED,  HYPOTHECATED OR OTHERWISE  DISPOSED OF, UNDER AN
            EXEMPTION  FROM  REGISTRATION  UNDER  THE ACT AND  SUCH  STATE
            SECURITIES LAWS."

         Section 4.9 Consent to  Jurisdiction.  Each of the Maker and the Holder
(i) hereby  irrevocably  submits  to the  exclusive  jurisdiction  of the United
States  District  Court  sitting in the  Southern  District  of New York and the
courts of the State of New York  located in New York county for the  purposes of
any suit, action or proceeding  arising out of or relating to this Note and (ii)
hereby waives,  and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally  subject to the  jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient  forum or that
the venue of the suit,  action or proceeding is improper.  Each of the Maker and
the  Holder  consents  to  process  being  served  in any such  suit,  action or
proceeding  by mailing a copy thereof to such party at the address in effect for
notices to it under the Purchase  Agreement  and agrees that such service  shall
constitute good and sufficient service of process and notice thereof. Nothing in
this Section 4.9 shall  affect or limit any right to serve  process in any other
manner  permitted by law. Each of the Maker and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to

                                       36
<PAGE>

this Note shall be entitled to reimbursement  for reasonable legal fees from the
non-prevailing party.

         Section  4.10  Parties in  Interest.  This Note shall be binding  upon,
inure to the benefit of and be  enforceable  by the Maker,  the Holder and their
respective successors and permitted assigns.

         Section 4.11 Failure or Indulgence  Not Waiver.  No failure or delay on
the  part of the  Holder  in the  exercise  of any  power,  right  or  privilege
hereunder  shall  operate as a waiver  thereof,  nor shall any single or partial
exercise  of any  such  power,  right or  privilege  preclude  other or  further
exercise thereof or of any other right, power or privilege.

         Section 4.12 Maker Waivers.  Except as otherwise  specifically provided
herein,  the Maker and all others that may become  liable for all or any part of
the obligations evidenced by this Note, hereby waive presentment, demand, notice
of nonpayment, protest and all other demands' and notices in connection with the
delivery,  acceptance,  performance  and enforcement of this Note, and do hereby
consent to any number of renewals of  extensions  of the time or payment  hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon,  all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.

                  (a) No  delay  or  omission  on the  part  of  the  Holder  in
         exercising  its rights under this Note,  or course of conduct  relating
         hereto,  shall operate as a waiver of such rights or any other right of
         the  Holder,  nor shall any  waiver by the  Holder of any such right or
         rights on any one  occasion  be  deemed a waiver  of the same  right or
         rights on any future occasion.

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

         Section 4.13 Definitions.  For the purposes hereof, the following terms
shall have the following meanings:

                                       37
<PAGE>

         "Person"  means an individual  or a  corporation,  partnership,  trust,
incorporated or  unincorporated  association,  joint venture,  limited liability
company, joint stock company,  government (or an agency or political subdivision
thereof) or other entity of any kind.

         "Trading  Day" means (a) a day on which the  Common  Stock is traded on
the  American  Stock  Exchange,  or (b) if the Common Stock is not listed on the
American Stock Exchange,  a day on which the Common Stock is traded on any other
registered national stock exchange,  or (c) if the Common Stock is not traded on
any other registered national stock exchange, a day on which the Common Stock is
traded on the OTC  Bulletin  Board,  or (d) if the Common Stock is not traded on
the OTC  Bulletin  Board,  a day on which  the  Common  Stock is  quoted  in the
over-the-counter   market  as  reported  by  the   National   Quotation   Bureau
Incorporated (or any similar  organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a),  (b) or (c) hereof,  then  Trading Day
shall mean any day except  Saturday,  Sunday and any day which  shall be a legal
holiday  or a day on which  banking  institutions  in the  State of New York are
authorized or required by law or other government action to close.

                      AXM PHARMA, INC.

                      By:  ______________________________
                              Name:
                              Title:

                                       38
<PAGE>

                                    EXHIBIT A

                               WIRE INSTRUCTIONS.

Payee: _____________________________________________________

Bank:  _____________________________________________________

Address: ___________________________________________________

         ___________________________________________________

Bank No.: __________________________________________________

Account No.:  ______________________________________________

Account Name: ______________________________________________

                                       39
<PAGE>

                                     FORM OF

                              NOTICE OF CONVERSION

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

The undersigned hereby  irrevocably elects to convert $ ________________  of the
principal  amount of the above Note No. ___ into  shares of Common  Stock of AXM
Pharma,  Inc. (the "Maker")  according to the conditions  hereof, as of the date
written below.

Date of Conversion _________________________________________________________

Applicable Conversion Price ________________________________________________

Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion: _________________________

Signature_________________________________________________________________

         [Name]

Address:__________________________________________________________________

        __________________________________________________________________

                                       40
<PAGE>

EXHIBIT 2

                          REGISTRATION RIGHTS AGREEMENT

                  This Registration  Rights Agreement (this "Agreement") is made
and entered  into as of March 1, 2006,  by and among AXM Pharma,  Inc., a Nevada
corporation  (the  "Company"),  and the holders listed on Schedule I hereto (the
"Holders").

                  This   Agreement  is  being   entered  into  pursuant  to  the
Modification  Agreement  dated as of the date  hereof  among the Company and the
Holders (the  "Modification  Agreement") and supersedes the Registration  Rights
Agreement dated April 19, 2005 (the "2005  Agreement") among the parties hereto,
which the parties are terminating, as provided below.

                  The Company and the Holders hereby agree as follows:

          1.      Definitions.

                  Capitalized  terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase  Agreement entered into as of
April 19, 2005 among the parties hereto (the "Purchase Agreement"), as modified,
where applicable,  by the Modification Agreement. As used in this Agreement, the
following terms shall have the following meanings:

                  "Advice" shall have meaning set forth in Section 3(m).

                  "Affiliate"  means,  with  respect  to any  Person,  any other
Person that directly or indirectly  controls or is controlled by or under common
control with such Person.  For the purposes of this definition,  "control," when
used with respect to any Person,  means the possession,  direct or indirect,  of
the power to direct or cause the  direction  of the  management  and policies of
such Person, whether through the ownership of voting securities,  by contract or
otherwise;  and the terms of "affiliated,"  "controlling"  and "controlled" have
meanings correlative to the foregoing.

                  "Board" shall have meaning set forth in Section 3(n).

                  "Business Day" means any day except  Saturday,  Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state  of New  York  generally  are  authorized  or  required  by  law or  other
government actions to close.

                  "Closing  Date" means the  closing  date  contemplated  by the
Modification Agreement.

                  "Commission" means the Securities and Exchange Commission.

                  "Common  Stock" means the Company's  Common  Stock,  par value
$.001 per share.

                  "Effectiveness  Date" means with  respect to the  Registration
Statement  the earlier of November 1, 2006 or the date which is within three (3)
business days of the date on which the  Commission  informs the Company that the
Commission  (i) will not  review  the  Registration  Statement  or (ii) that the
Company may request the  acceleration of the  effectiveness  of the Registration
Statement.

<PAGE>

                  "Effectiveness  Period"  shall have the  meaning  set forth in
Section 2.

                  "Event" shall have the meaning set forth in Section 7(e).

                  "Event Date" shall have the meaning set forth in Section 7(e).

                  "Exchange Act" means the  Securities  Exchange Act of 1934, as
amended.

         . "Holder" or  "Holders"  means the holder or holders,  as the case may
be, from time to time of Registrable Securities.

                  "Indemnified  Party"  shall  have  the  meaning  set  forth in
Section 5(c).

                  "Indemnifying  Party"  shall  have the  meaning  set  forth in
Section 5(c).

                  "Losses" shall have the meaning set forth in Section 5(a).

                  "Person"  means an individual or a  corporation,  partnership,
trust,  incorporated  or  unincorporated  association,  joint  venture,  limited
liability  company,  joint stock company,  government (or an agency or political
subdivision thereof) or other entity of any kind.

                  "Proceeding" means an action,  claim,  suit,  investigation or
proceeding   (including,   without  limitation,   an  investigation  or  partial
proceeding, such as a deposition), whether commenced or threatened.

                  "Prospectus" means the prospectus included in the Registration
Statement  (including,  without  limitation,  a  prospectus  that  includes  any
information  previously  omitted from a prospectus filed as part of an effective
registration  statement  in  reliance  upon  Rule  430A  promulgated  under  the
Securities Act), as amended or supplemented by any prospectus  supplement,  with
respect  to  the  terms  of  the  offering  of any  portion  of the  Registrable
Securities covered by the Registration  Statement,  and all other amendments and
supplements to the  Prospectus,  including  post-effective  amendments,  and all
material incorporated by reference in such Prospectus.

                  "Registrable  Securities" means (i) the shares of Common Stock
issuable upon  conversion of the principal  amount of the Notes and any interest
accrued  thereon  and all shares  issued to the Holders in  connection  with the
Company's August, 2005 financing,  (ii) the shares of Common Stock issuable upon
exercise of the  Warrants  (as defined  below)  (iii) the shares of Common Stock
issued or issuable as dividend  payments on the  Company's  Series C Convertible
Preferred  Stock;  and (iv) the shares  registered on the Company's  most recent
Form S-3 Registration Statement, which became effective in June, 2005.

                  "Registration Statement" means the registration statements and
any additional  registration statements contemplated by Section 2, including (in
each case) the  Prospectus,  amendments  and  supplements  to such  registration
statement or  Prospectus,  including  pre- and  post-effective  amendments,  all
exhibits   thereto,   and  all  material   incorporated  by  reference  in  such
registration statement.

                                       -2-
<PAGE>

                  "Rule  144"  means  Rule  144  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Rule  158"  means  Rule  158  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Rule  415"  means  Rule  415  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Rule  424"  means  Rule  424  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Warrants"  means the Amended and Restated Series A and Series
B Warrants to purchase shares of Common Stock issued to the Holders  pursuant to
the Purchase  Agreement,  as amended by the  Modification  Agreement;  all other
warrants issued in connection with the Company's April 19, 2005 and August, 2005
financing;  and  any  additional  Warrants  issued  to  any of  the  Holders  in
connection with any private offering which closes within the six month following
the date hereof.

                  The  Company  shall  prepare  and file with the  Commission  a
"resale"  Registration  Statement  covering all  Registrable  Securities  for an
offering to be made on a continuous basis pursuant to Rule 415. The Registration
Statement shall be on Form SB-2. The Company shall (i) not permit any securities
other than the Registrable  Securities and the securities  listed on Schedule II
hereto  to be  included  in the  Registration  Statement]  and (ii) use its best
efforts to cause the Registration  Statement to be declared  effective under the
Securities  Act as  promptly as possible  after the filing  thereof,  but in any
event prior to the Effectiveness  Date, and to keep such Registration  Statement
continuously  effective  under  the  Securities  Act  until  such date as is the
earlier  of (x)  the  date  when  all  Registrable  Securities  covered  by such
Registration  Statement have been sold or (y) the date on which the  Registrable
Securities may be sold without any restriction pursuant to Rule 144(k) under the
Securities  Act as  determined  by counsel to the Company  pursuant to a written
opinion  letter,  addressed to the Company's  transfer agent to such effect (the
"Effectiveness  Period").  If at any  time  and for any  reason,  an  additional
Registration  Statement is required to be filed  because at such time the actual
number of shares of Common  Stock into which the Notes are  convertible  and the
Warrants are exercisable exceeds the number of shares of Registrable  Securities
remaining under the Registration  Statement,  the Company shall have twenty (20)
Business Days to file such additional  Registration  Statement,  and the Company
shall use its best efforts to cause such additional Registration Statement to be
declared effective by the Commission as soon as possible.

                                       -3-
<PAGE>

         3.       Registration Procedures.

                  In  connection  with the  Company's  registration  obligations
hereunder, the Company shall:

                  (a)  Prepare  and file  with the  Commission,  a  Registration
Statement  on Form  SB-1 or S-1 in  accordance  with the  method or  methods  of
distribution  thereof as specified by the Holders (except if otherwise  directed
by  the  Holders)  and  in  accordance   with  applicable  law,  and  cause  the
Registration  Statement  to become  effective  and remain  effective as provided
herein;  provided,  however, that not less than three (3) Business Days prior to
the  filing of the  Registration  Statement  or any  related  Prospectus  or any
amendment or  supplement  thereto,  the Company shall (i) furnish to the Holders
and any counsel  retained by them , copies of all such documents  proposed to be
filed,  which  documents  will be subject to the review of such Holders and such
counsel,  and (ii) cause its officers  and  directors,  counsel and  independent
certified public accountants to respond to such inquiries as shall be necessary,
in the  reasonable  opinion of such counsel,  to conduct a reasonable  review of
such  documents.  The Company shall not file the  Registration  Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the  Registrable  Securities  shall  reasonably  object in writing
within three (3) Business Days of their receipt thereof.

                  (b) (i) Prepare and file with the Commission such  amendments,
including  post-effective  amendments,  to the Registration  Statement as may be
necessary to keep the Registration  Statement  continuously  effective as to the
applicable  Registrable  Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements as necessary in
order to register for resale  under the  Securities  Act all of the  Registrable
Securities;  (ii) cause the related  Prospectus to be amended or supplemented by
any required  Prospectus  supplement,  and as so  supplemented  or amended to be
filed pursuant to Rule 424 (or any similar provisions then in force) promulgated
under the Securities Act; (iii) respond as promptly as possible, but in no event
later than ten (10) business days, to any comments  received from the Commission
with  respect to the  Registration  Statement  or any  amendment  thereto and as
promptly  as  possible  provide  the  Holders  true and  complete  copies of all
correspondence   from  and  to  the  Commission  relating  to  the  Registration
Statement;  and (iv) comply in all material  respects with the provisions of the
Securities  Act and the  Exchange  Act with  respect to the  disposition  of all
Registrable   Securities  covered  by  the  Registration  Statement  during  the
applicable  period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.

                  (c)  Notify  the  Holders of  Registrable  Securities  and any
counsel as promptly as possible (and, in the case of (i)(A) below, not less than
three (3) days  prior to such  filing)  and (if  requested  by any such  Person)
confirm such notice in writing no later than two (2) Business Days following the
day (i)(A) when a Prospectus  or any  Prospectus  supplement  or  post-effective
amendment  to the  Registration  Statement  is  filed;  (B) when the  Commission
notifies  the  Company  whether  there will be a "review"  of such  Registration
Statement and whenever the Commission  comments in writing on such  Registration
Statement   and  (C)  with  respect  to  the   Registration   Statement  or  any
post-effective  amendment,  when  the  same has  become  effective;  (ii) of any
request by the Commission or any other Federal or state  governmental  authority
for amendments or supplements to the Registration Statement or Prospectus or for

                                       -4-
<PAGE>

additional  information;  (iii) of the  issuance by the  Commission  of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the  Registrable  Securities  or the  initiation  or  threatening  of any
Proceedings for that purpose; (iv) if at any time any of the representations and
warranties of the Company contained in any agreement  contemplated hereby ceases
to be true and  correct  in all  material  respects;  (v) of the  receipt by the
Company of any notification  with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation of any Proceeding for such purpose; and (vi)
of the occurrence of any event that makes any statement made in the Registration
Statement  or  Prospectus  or  any  document   incorporated   or  deemed  to  be
incorporated  therein  by  reference  untrue  in any  material  respect  or that
requires  any  revisions  to the  Registration  Statement,  Prospectus  or other
documents so that, in the case of the Registration  Statement or the Prospectus,
as the case may be, it will not contain any untrue  statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements  therein, in the light of the circumstances under which they
were made, not misleading.

                  (d) Use its best  efforts  to avoid the  issuance  of,  or, if
issued,  obtain  the  withdrawal  of, as  promptly  as  possible,  (i) any order
suspending  the  effectiveness  of  the  Registration   Statement  or  (ii)  any
suspension of the qualification (or exemption from  qualification) of any of the
Registrable Securities for sale in any jurisdiction.

                  (e) If  requested  by the Holders of a majority in interest of
the Registrable Securities,  (i) promptly incorporate in a Prospectus supplement
or  post-effective  amendment to the Registration  Statement such information as
the  Company  reasonably  agrees  should be  included  therein and (ii) make all
required filings of such Prospectus supplement or such post-effective  amendment
as soon as  practicable  after the  Company  has  received  notification  of the
matters to be  incorporated  in such  Prospectus  supplement  or  post-effective
amendment.

                  (f) If requested by any Holder, furnish to such Holder and any
Special  Counsel,   without  charge,   at  least  one  conformed  copy  of  each
Registration   Statement  and  each  amendment  thereto,   including   financial
statements  and  schedules,   all  documents   incorporated   or  deemed  to  be
incorporated  therein by reference,  and all exhibits to the extent requested by
such Person (including those previously  furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.

                  (g) Promptly  deliver to each Holder and any Special  Counsel,
without charge, as many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as such Persons may
reasonably  request;  and subject to the provisions of Section 3(n), the Company
hereby  consents to the use of such  Prospectus and each amendment or supplement
thereto by each of the selling  Holders in connection with the offering and sale
of the  Registrable  Securities  covered by such Prospectus and any amendment or
supplement thereto.

                  (h) Prior to any public  offering of  Registrable  Securities,
use its best  efforts  to  register  or qualify or  cooperate  with the  selling
Holders  and  any  Special  Counsel  in  connection  with  the  registration  or
qualification  (or exemption from such  registration or  qualification)  of such
Registrable  Securities for offer and sale under the securities or Blue Sky laws
of such  jurisdictions  within  the  United  States as any  Holder  requests  in

                                      -5-

<PAGE>

writing,   to  keep  each  such  registration  or  qualification  (or  exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or  things  necessary  or  advisable  to  enable  the  disposition  in such
jurisdictions of the Registrable Securities covered by a Registration Statement;
provided,  however,  that the Company shall not be required to qualify generally
to do business in any jurisdiction  where it is not then so qualified or to take
any  action  that would  subject  it to  general  service of process in any such
jurisdiction  where it is not then so  subject  or  subject  the  Company to any
material tax in any such jurisdiction where it is not then so subject.

                  (i)  Cooperate  with the  Holders  to  facilitate  the  timely
preparation and delivery of certificates  representing Registrable Securities to
be sold pursuant to a Registration Statement, which certificates,  to the extent
permitted by the Purchase  Agreement and applicable federal and state securities
laws, shall be free of all restrictive  legends,  and to enable such Registrable
Securities  to be in such  denominations  and  registered  in such  names as any
Holder may request in connection with any sale of Registrable Securities.

                  (j) Upon the occurrence of any event  contemplated  by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment,  including
a post-effective amendment, to the Registration Statement or a supplement to the
related  Prospectus or any document  incorporated  or deemed to be  incorporated
therein  by  reference,  and file  any  other  required  document  so  that,  as
thereafter  delivered,  neither the  Registration  Statement nor such Prospectus
will contain an untrue  statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements  therein,
in the light of the circumstances under which they were made, not misleading.

                  (k) Use its best efforts to cause all  Registrable  Securities
relating  to the  Registration  Statement  to be  listed on the  American  Stock
Exchange or any other securities  exchange,  quotation system or market, if any,
on which similar securities issued by the Company are then listed.

                  (l) Comply in all material  respects with all applicable rules
and  regulations of the Commission and make generally  available to its security
holders  earning  statements  satisfying  the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period  (or 90 days  after the end of any  12-month  period if such  period is a
fiscal  year)  commencing  on the first day of the first  fiscal  quarter of the
Company after the effective date of the Registration Statement,  which statement
shall conform to the requirements of Rule 158.

                  (m) The Company may require each selling  Holder to furnish to
the  Company  information  regarding  such Holder and the  distribution  of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement,  Prospectus,  or any amendment or supplement thereto, and the Company
may exclude from such registration the Registrable Securities of any such Holder
who  unreasonably  fails to furnish such  information  within a reasonable  time
after receiving such request.

                  Each Holder covenants and agrees that (i) it will not sell any
Registrable  Securities under the  Registration  Statement until it has received
copies of the  Prospectus as then amended or  supplemented  as  contemplated  in
Section 3(g) and notice from the Company that such  Registration  Statement  and
any  post-effective  amendments thereto have become effective as contemplated by

                                      -6-
<PAGE>

Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply  with the  prospectus  delivery  requirements  of the  Securities  Act as
applicable to them in connection with sales of Registrable  Securities  pursuant
to the Registration Statement.

                  Each  Holder  agrees by its  acquisition  of such  Registrable
Securities  that, upon receipt of a notice from the Company of the occurrence of
any  event of the kind  described  in  Section  3(c)(ii),  3(c)(iii),  3(c)(iv),
3(c)(v), 3(c)(vi) or 3(n), such Holder will forthwith discontinue disposition of
such Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement  contemplated  by Section 3(j), or until it is advised in writing (the
"Advice")  by the  Company  that  the use of the  applicable  Prospectus  may be
resumed,  and,  in  either  case,  has  received  copies  of any  additional  or
supplemental  filings  that are  incorporated  or deemed to be  incorporated  by
reference in such Prospectus or Registration Statement.

                  (n) If (i) there is material non-public  information regarding
the Company which the  Company's  Board of Directors  (the  "Board")  reasonably
determines  not to be in the  Company's  best interest to disclose and which the
Company is not  otherwise  required to disclose,  or (ii) there is a significant
business  opportunity  (including,  but  not  limited  to,  the  acquisition  or
disposition  of assets  (other than in the  ordinary  course of business) or any
merger,  consolidation,  tender offer or other similar transaction) available to
the Company  which the Board  reasonably  determines  not to be in the Company's
best  interest to disclose,  then the Company may postpone or suspend  filing or
effectiveness  of a  registration  statement  for a  period  not  to  exceed  20
consecutive  days,  provided  that the Company  may not  postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 360 day period;  provided,  however, that no such postponement or suspension
shall be permitted for  consecutive 20 day periods,  arising out of the same set
of facts, circumstances or transactions.

     4. Registration Expenses.

                  (a)The fees and  expenses  incident to the  performance  of or
compliance  with this  Agreement  by the  Company,  except as and to the  extent
specified  in  Section  4,  shall be borne by the  Company,  whether  or not the
Registration  Statement  is filed or becomes  effective  and  whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and  expenses  referred to in the  foregoing  sentence  shall  include,  without
limitation, (i) all registration and filing fees (including, without limitation,
fees and  expenses  (A) with  respect to filings  required  to be made with each
securities  exchange  or market on which  Registrable  Securities  are  required
hereunder to be listed,  (B) with respect to filing fees  required to be paid to
the National  Association of Securities  Dealers,  Inc. and the NASD Regulation,
Inc. and (C) in compliance  with state  securities or Blue Sky laws  (including,
without  limitation,  fees and  disbursements  of  counsel  for the  Holders  in
connection  with  Blue Sky  qualifications  of the  Registrable  Securities  and
determination  of the eligibility of the  Registrable  Securities for investment
under the laws of such jurisdictions as the Holders of a majority of Registrable
Securities  may  designate)),   (ii)  printing  expenses   (including,   without
limitation,  expenses of printing certificates for Registrable Securities and of
printing  prospectuses  if the  printing of  prospectuses  is  requested  by the
holders of a majority of the Registrable Securities included in the Registration
Statement),  (iii)  messenger,  telephone and delivery  expenses,  (iv) fees and
disbursements  of  counsel  for  the  Company,   (v)  Securities  Act  liability
insurance,  if the Company so desires such insurance and (vii) fees and expenses

                                      -7-
<PAGE>

of all other Persons retained by the Company in connection with the consummation
of  the  transactions  contemplated  by  this  Agreement,   including,   without
limitation, the Company's independent public accountants (including the expenses
of any comfort  letters or costs  associated  with the  delivery by  independent
public accountants of a comfort letter or comfort letters).

     5. Indemnification.

                  (a)  Indemnification  by  the  Company.   The  Company  shall,
notwithstanding  any termination of this Agreement,  indemnify and hold harmless
each Holder,  the officers,  directors,  agents,  brokers (including brokers who
offer and sell  Registrable  Securities  as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them,  each Person who controls any such Holder (within
the meaning of Section 15 of the  Securities  Act or Section 20 of the  Exchange
Act) and the officers,  directors, agents and employees of each such controlling
Person,  to the fullest extent permitted by applicable law, from and against any
and  all  losses,  claims,  damages,  liabilities,   costs  (including,  without
limitation,   costs  of   preparation   and   attorneys'   fees)  and   expenses
(collectively,  "Losses"), as incurred,  arising out of or based upon any untrue
or alleged  untrue  statement of a material fact  contained in the  Registration
Statement,  any  Prospectus  or any form of  prospectus  or in any  amendment or
supplement thereto or in any preliminary prospectus,  or arising out of or based
upon any omission or alleged  omission of a material  fact required to be stated
therein  or  necessary  to make  the  statements  therein  (in  the  case of any
Prospectus or form of prospectus  or  supplement  thereto),  in the light of the
circumstances under which they were made, not misleading,  except to the extent,
but only to the extent, that such untrue statements or omissions arise out of or
are based upon information regarding the Holders or such other Indemnified Party
furnished in writing to the Company by a Holder expressly for use therein, which
information  was  reasonably  relied on by the Company for use therein or to the
extent  that such  information  relates  to a Holder or such  Holder's  proposed
method of distribution of Registrable  Securities and was reviewed and expressly
approved in writing by a Holder expressly for use in the Registration Statement,
such  Prospectus  or such form of  Prospectus  or in any amendment or supplement
thereto.  The  Company  shall  notify the Holders  promptly of the  institution,
threat  or  assertion  of any  Proceeding  of  which  the  Company  is  aware in
connection with the transactions contemplated by this Agreement.

                  (b) Indemnification by Holders.  Each Holder shall,  severally
and not  jointly,  indemnify  and hold  harmless  the  Company,  its  directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses,  as
incurred, arising out of or based upon any untrue or alleged untrue statement of
a material fact contained in the Registration Statement, any Prospectus,  or any
form  of  prospectus,  or in  any  amendment  or  supplement  thereto  or in any
preliminary prospectus,  or arising out of or based upon any omission or alleged
omission of a material fact  required to be stated  therein or necessary to make
the  statements  therein (in the case of any Prospectus or form of prospectus or
supplement  thereto),  in the light of the  circumstances  under which they were
made, not misleading,  to the extent,  but only to the extent,  that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder or other  Indemnified Party to the Company expressly for use therein
and that such  information  was  reasonably  relied  upon by the Company for use
therein,  or to the extent that such information  relates to such Holder or such

                                      -8-
<PAGE>

Holder's  proposed  method of  distribution  of  Registrable  Securities and was
reviewed and expressly  approved in writing by such Holder  expressly for use in
the  Registration  Statement,  such Prospectus or such form of Prospectus or any
amendment  or  supplement  thereto.  Notwithstanding  anything  to the  contrary
contained  herein,  the Holders shall be liable under this Section 5(b) for only
that  amount as does not exceed  the lesser of (i) the dollar  amount of the net
proceeds  received by such Holder  upon the sale of the  Registrable  Securities
giving rise to such  indemnification  obligation and (ii) the aggregate purchase
price paid by the Holder for the Notes pursuant to the Purchase Agreement.

                  (c) Conduct of Indemnification  Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity  hereunder
(an  "Indemnified  Party"),  such  Indemnified  Party  promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying  Party) in writing,  and
the  Indemnifying  Party  shall be  entitled  to  assume  the  defense  thereof,
including the employment of counsel  reasonably  satisfactory to the Indemnified
Party and the  payment of all fees and  expenses  incurred  in  connection  with
defense  thereof;  provided,  that the failure of any Indemnified  Party to give
such notice  shall not  relieve the  Indemnifying  Party of its  obligations  or
liabilities pursuant to this Agreement,  except (and only) to the extent that it
shall  be  finally  determined  by a  court  of  competent  jurisdiction  (which
determination  is not  subject to appeal or further  review)  that such  failure
shall have  proximately  and materially  adversely  prejudiced the  Indemnifying
Party.

         An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof,  but the fees and
expenses of such counsel  shall be at the expense of such  Indemnified  Party or
Parties  unless:  (1) the  Indemnifying  Party has agreed in writing to pay such
fees and expenses;  or (2) the Indemnifying  Party shall have failed promptly to
assume  the  defense  of  such  Proceeding  and  to  employ  counsel  reasonably
satisfactory to such Indemnified Party in any such Proceeding;  or (3) the named
parties to any such Proceeding  (including any impleaded  parties)  include both
such Indemnified  Party and the Indemnifying  Party, and such parties shall have
been  advised by counsel  that a conflict  of interest is likely to exist if the
same counsel were to represent such Indemnified Party and the Indemnifying Party
(in which case, if such  Indemnified  Party notifies the  Indemnifying  Party in
writing  that it  elects  to  employ  separate  counsel  at the  expense  of the
Indemnifying  Party, the  Indemnifying  Party shall not have the right to assume
the defense thereof and such counsel shall be at the expense of the Indemnifying
Party).  The  Indemnifying  Party shall not be liable for any  settlement of any
such Proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed. No Indemnifying Party shall, without the prior
written consent of the Indemnified  Party,  effect any settlement of any pending
or threatened  Proceeding in respect of which any  Indemnified  Party is a party
and  indemnity has been sought  hereunder,  unless such  settlement  includes an
unconditional  release of such  Indemnified  Party from all  liability on claims
that are the subject matter of such Proceeding.

         All fees and expenses of the Indemnified  Party  (including  reasonable
fees and expenses to the extent  incurred in connection  with  investigating  or
preparing  to defend  such  Proceeding  in a manner not  inconsistent  with this
Section) shall be paid to the Indemnified  Party,  as incurred,  within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder;  provided, that the Indemnified Party shall reimburse

                                      -9-
<PAGE>

all such fees and  expenses  to the extent it is finally  judicially  determined
that such Indemnified Party is not entitled to indemnification hereunder).

                  (d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is due but unavailable to an Indemnified Party because of a failure
or refusal  of a  governmental  authority  to enforce  such  indemnification  in
accordance  with its terms (by reason of public policy or otherwise),  then each
Indemnifying  Party,  in lieu of  indemnifying  such  Indemnified  Party,  shall
contribute to the amount paid or payable by such  Indemnified  Party as a result
of such Losses,  in such  proportion as is  appropriate  to reflect the relative
fault of the  Indemnifying  Party and  Indemnified  Party in connection with the
actions,  statements  or omissions  that  resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and  Indemnified  Party shall be  determined  by reference to, among other
things,  whether any action in question,  including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been  taken  or made  by,  or  relates  to  information  supplied  by,  such
Indemnifying,  Party or Indemnified  Party,  and the parties'  relative  intent,
knowledge,  access to  information  and  opportunity  to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include,  subject to the  limitations set forth
in Section 5(c), any reasonable  attorneys' or other reasonable fees or expenses
incurred  by such party in  connection  with any  Proceeding  to the extent such
party   would  have  been   indemnified   for  such  fees  or  expenses  if  the
indemnification  provided  for in this  Section was  available  to such party in
accordance with its terms.

        The  parties  hereto  agree that it would not be just and  equitable  if
contribution  pursuant  to  this  Section  5(d)  were  determined  by  pro  rata
allocation or by any other method of allocation  that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent  misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to  contribution  from any Person
who was not guilty of such  fraudulent  misrepresentation.  Notwithstanding  the
provisions of this Section 5(d) to the contrary,  no Holder shall be required to
contribute,  in the  aggregate,  the lesser of (i) the aggregate  purchase price
paid by the Holder for the Notes  pursuant to the Purchase  Agreement,  and (ii)
any amount in excess of the amount by which the net proceeds  actually  received
by such  Holder  from  the sale of the  Registrable  Securities  subject  to the
Proceeding exceeds the amount of any damages that such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, except in the case of fraud by such Holder.

         The indemnity and contribution agreements contained in this Section are
in  addition  to any  liability  that the  Indemnifying  Parties may have to the
Indemnified Parties pursuant to the law.

         6. Rule 144.

         As long as any  Holder  owns  Notes,  Conversion  Shares,  Warrants  or
Warrant Shares,  the Company will use its best efforts to timely file (or obtain
extensions in respect  thereof and file within the applicable  grace period) all
reports  required to be filed by the Company  after the date hereof  pursuant to

                                      -10-
<PAGE>

Section  13(a) or 15(d) of the  Exchange  Act. As long as any Holder owns Notes,
Conversion Shares, Warrants or Warrant Shares, if the Company is not required to
file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will use
its best  efforts  to  prepare  and  furnish to the  Holders  and make  publicly
available in accordance  with Rule 144(c)  promulgated  under the Securities Act
annual and  quarterly  financial  statements,  together  with a  discussion  and
analysis  of such  financial  statements  in form  and  substance  substantially
similar to those that would  otherwise  be  required  to be  included in reports
required  by Section  13(a) or 15(d) of the  Exchange  Act, as well as any other
information  required  thereby,  in the time period that such filings would have
been  required to have been made under the  Exchange  Act.  The Company  further
covenants  that it will take such  further  action as any Holder may  reasonably
request,  all to the extent  required from time to time to enable such Person to
sell  Conversion  Shares  and  Warrant  Shares  without  registration  under the
Securities  Act within the  limitation  of the  exemptions  provided by Rule 144
promulgated  under the  Securities  Act. In  connection  therewith , the Company
hereby confirms that the Holders will be entitled to "tacking" treatment for the
Amended Note and Amended Warrants and that on and after April 19, 2006,  subject
to the Holder's providing customary  non-affiliate or other representations ,the
Company will cause its counsel to instruct the Company's  transfer  agent to (i)
remove legends from shares issued upon  conversion of the Notes or to (ii) issue
unlegended  shares upon the Holder's  requests for conversion,  provided in both
cases that the volume, manner of sale and current public information and related
requirements  of Rule 144 are  satisfied.  In addition,  if the  transfer  agent
requires a written legal opinion to effect the Rule 144 sales,  the Company will
cause its counsel to provide the transfer agent with such an opinion, subject to
compliance with the above-enumerated  criteria.  Upon the request of any Holder,
the  Company  shall  deliver to such  Holder a written  certification  of a duly
authorized officer as to whether it has complied with such requirements.

         7. Miscellaneous.

                  (a) Remedies.  In the event of a breach by the Company or by a
Holder,  of any of their  obligations  under this Agreement,  such Holder or the
Company,  as the case may be, in  addition to being  entitled  to  exercise  all
rights granted by law and under this Agreement,  including  recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary  damages would not provide  adequate
compensation  for any losses  incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific  performance  in respect of such breach,  it shall waive the
defense that a remedy at law would be adequate.

                  (b) No Inconsistent Agreements. Neither the Company nor any of
its  subsidiaries  has,  as of the date hereof  entered  into and  currently  in
effect,  nor shall the Company or any of its subsidiaries,  on or after the date
of this Agreement,  enter into any agreement with respect to its securities that
is  inconsistent  with the rights  granted to the Holders in this  Agreement  or
otherwise conflicts with the provisions hereof.  Except as disclosed in Schedule
2.1(c) of the Purchase Agreement or on Schedule II attached hereto,  neither the
Company nor any of its  subsidiaries  has previously  entered into any agreement
currently in effect granting any registration  rights with respect to any of its
securities to any Person.  Without  limiting the  generality  of the  foregoing,
without the written consent of the Holders of a majority of the then outstanding
Registrable  Securities,  the Company shall not grant to any Person the right to

                                      -11-
<PAGE>

request  the  Company  to  register  any  securities  of the  Company  under the
Securities  Act unless the rights so granted are subject in all  respects to the
prior rights in full of the Holders set forth  herein,  and are not otherwise in
conflict with the provisions of this Agreement.

                  (c) No Piggyback on Registrations. Neither the Company nor any
of its security holders (other than the Holders in such capacity pursuant hereto
or as  disclosed  in Schedule  2.1(c) of the  Purchase  Agreement or Schedule II
attached  hereto) may  include  securities  of the  Company in the  Registration
Statement,  and the  Company  shall  not after the date  hereof  enter  into any
agreement providing such right to any of its  securityholders,  unless the right
so granted is subject in all respects to the prior rights in full of the Holders
set forth herein,  and is not otherwise in conflict with the  provisions of this
Agreement.

                  (d) Piggy-Back Registrations. If at any time when there is not
an  effective  Registration  Statement  covering (i)  Conversion  Shares or (ii)
Warrant  Shares,  the  Company  shall  determine  to  prepare  and file with the
Commission a registration  statement relating to an offering for its own account
or the  account  of  others  under  the  Securities  Act  of  any of its  equity
securities,  other than on Form S-4 or Form S-8 (each as  promulgated  under the
Securities Act) or their then  equivalents  relating to equity  securities to be
issued solely in connection  with any  acquisition  of any entity or business or
equity  securities  issuable in connection  with stock option or other  employee
benefit plans,  the Company shall send to each holder of Registrable  Securities
written  notice of such  determination  and,  if within  thirty  (30) days after
receipt  of  such  notice,  or  within  such  shorter  period  of time as may be
specified  by the Company in such  written  notice as may be  necessary  for the
Company to comply with its obligations  with respect to the timing of the filing
of such  registration  statement,  any such holder  shall so request in writing,
(which request shall specify the Registrable  Securities intended to be disposed
of by the Holders), the Company will cause the registration under the Securities
Act of all  Registrable  Securities  which the Company has been so  requested to
register by the holder, to the extent requisite to permit the disposition of the
Registrable  Securities so to be registered,  provided that if at any time after
giving  written  notice of its intention to register any securities and prior to
the effective date of the  registration  statement filed in connection with such
registration,  the Company shall  determine for any reason not to register or to
delay  registration of such securities,  the Company may, at its election,  give
written notice of such determination to such holder and,  thereupon,  (i) in the
case of a determination not to register,  shall be relieved of its obligation to
register any Registrable  Securities in connection with such  registration  (but
not from its  obligation to pay expenses in  accordance  with Section 4 hereof),
and (ii) in the case of a determination to delay registering, shall be permitted
to delay  registering any Registrable  Securities being  registered  pursuant to
this  Section  7(d) for the same period as the delay in  registering  such other
securities.  The Company shall include in such registration statement all or any
part of such  Registrable  Securities  such holder  requests  to be  registered;
provided,  however,  that the Company  shall not be  required  to  register  any
Registrable  Securities pursuant to this Section 7(d) that are eligible for sale
pursuant to Rule 144(k) of the  Securities  Act. In the case of an  underwritten
public  offering,  if  the  managing  underwriter(s)  or  underwriter(s)  should
reasonably  object  to the  inclusion  of the  Registrable  Securities  in  such
registration statement, then if the Company after consultation with the managing
underwriter  should reasonably  determine that the inclusion of such Registrable
Securities would materially  adversely affect the offering  contemplated in such
registration statement,  and based on such determination recommends inclusion in
such  registration  statement of fewer or none of the Registrable  Securities of
the  Holders,  then (x) the  number of  Registrable  Securities  of the  Holders
included in such  registration  statement  shall be reduced  pro-rata among such

                                      -12-
<PAGE>

Holders  (based  upon the  number  of  Registrable  Securities  requested  to be
included  in the  registration),  if the  Company  after  consultation  with the
underwriter(s)  recommends the inclusion of fewer Registrable Securities, or (y)
none of the  Registrable  Securities  of the  Holders  shall be included in such
registration   statement,   if  the   Company   after   consultation   with  the
underwriter(s)  recommends the inclusion of none of such Registrable Securities;
provided, however, that if Securities are being offered for the account of other
persons or entities as well as the Company, such reduction shall not represent a
greater fraction of the number of Registrable  securities intended to be offered
by the Holders  than the  fraction of similar  reductions  imposed on such other
persons or entities (other than the Company).

                  (e) Failure to File  Registration  Statement and Other Events.
The Company and the Holders  agree that the Holders  will suffer  damages if the
Registration  Statement is not declared  effective by the Commission on or prior
to November 1, 2006 and maintained in the manner  contemplated herein during the
Effectiveness  Period or if certain  other  events  occur.  The  Company and the
Holders  further  agree that it would not be feasible to ascertain the extent of
such damages with  precision.  Accordingly,  if,  except as set forth in Section
3(n), (A) the Registration Statement is not declared effective by the Commission
on or prior to  November  1,  2006 (or in the event an  additional  Registration
Statement  is filed  because  the actual  number of shares of Common  Stock into
which the Notes are  convertible  and the Warrants are  exercisable  exceeds the
number of shares of Common Stock initially  registered is not filed and declared
effective  with the time  periods  set forth in Section  2), or (B) the  Company
fails to file with the Commission a request for  acceleration in accordance with
Rule 461 promulgated  under the Securities Act within three (3) Business Days of
the date that the  Company is  notified  (orally  or in  writing,  whichever  is
earlier) by the Commission that a Registration Statement will not be "reviewed,"
or is not subject to further review, or (C) the Registration  Statement is filed
with and  declared  effective  by the  Commission  but  thereafter  ceases to be
effective as to all  Registrable  Securities at any time prior to the expiration
of the Effectiveness Period, without being succeeded immediately by a subsequent
Registration  Statement  filed with and declared  effective by the Commission in
accordance  with Section 2 hereof or (D) the Company has breached  Section 3(n),
or (E) trading in the Common  Stock shall be suspended or if the Common Stock is
delisted from the American Stock Exchange (or other principal  exchange on which
the Common Stock is traded) for any reason for more than three  Business Days in
the aggregate  (any such failure or breach being  referred to as an "Event," and
for purposes of clause (A) the date on which such Event occurs,  or for purposes
of clause (B) the date on which such three (3)  Business Day period is exceeded,
or for purposes of clause (C) after more than twenty (20) Business  Days, or for
purposes of clause (E) the date on which such three (3)  Business  Day period is
exceeded, being referred to as "Event Date"), the Company shall pay an amount as
liquidated  damages  to each  Holder  equal to 1.0% for each  calendar  month or
portion thereof of the Holder's  initial  investment in the Notes from the Event
Date, less any principal amount of the Notes that has been converted and sold by
such Holder,  until the applicable Event is cured.  Notwithstanding  anything to
the  contrary  in this  paragraph  (e),  if (I) any of the Events  described  in
clauses (A)or (B) shall have occurred,  (II) on or prior to the applicable Event
Date,  the Company shall have exercised its rights under Section 3(n) hereof and
(III) the  postponement  or suspension  permitted  pursuant to such Section 3(n)
shall remain  effective as of such  applicable  Event Date,  then the applicable
Event Date shall be deemed instead to occur on the second Business Day following
the termination of such postponement or suspension.

                                      -13-
<PAGE>

                  (f) Amendments and Waivers.  The provisions of this Agreement,
including  the  provisions  of this  sentence,  may not be amended,  modified or
supplemented,  and waivers or consents to departures from the provisions  hereof
may not be given,  unless the same shall be in writing and signed by the Company
and the Holders of a majority of the Registrable Securities outstanding.

                  (g)  Notices.  Any notice,  demand,  request,  waiver or other
communication  required or permitted to be given  hereunder  shall be in writing
and shall be  effective  (a) upon hand  delivery by  facsimile at the address or
number  designated  below (if delivered on a business day during normal business
hours where such notice is to be received),  or the first business day following
such delivery (if delivered  other than on a business day during normal business
hours where such notice is to be  received)  or (b) on the second  business  day
following  the date of  mailing  by  express  courier  service,  fully  prepaid,
addressed to such address,  or upon actual  receipt of such  mailing,  whichever
shall first occur. The addresses for such  communications  shall be with respect
to each  Holder at its  address  set forth under its name on Schedule I attached
hereto, or with respect to the Company, addressed to:

                                    AXM Pharma, Inc.
                                    17870 Castleton Street. Suite 255,
                                    City of Industry, CA 91748.
                                    Attention:  Harry Zhang, CFO
                                    Tel. No.:  (626) 964-2848
                                    Fax No.:  (626) 964-3484

With a copy to:                     Mark Katz, P.C.
                                    50 California Street, Suite 1500
                                    San Francisco, Ca 94115
                                    Tel. No.:  (650) 522-8760
                                    Fax No.:  (650) 522-8770

or to such other address or addresses or facsimile number or numbers as any such
party may most recently have  designated in writing to the other parties  hereto
by such notice.
                  (h)  Successors and Assigns.  This Agreement  shall be binding
upon and inure to the benefit of the parties and their  successors and permitted
assigns and shall inure to the  benefit of each  Holder and its  successors  and
assigns.  The  Company  may not assign  this  Agreement  or any of its rights or
obligations  hereunder  without the prior written  consent of each Holder.  Each
Holder  may  assign its  rights  hereunder  in the manner and to the  Persons as
permitted under the Purchase Agreement.

                  (i)  Assignment  of  Registration  Rights.  The rights of each
Holder  hereunder,  including the right to have the Company  register for resale
Registrable Securities in accordance with the terms of this Agreement,  shall be
automatically  assignable  by each Holder to any Affiliate of such Holder or any
other  Holder or  Affiliate of any other Holder of all or a portion of the Notes
or the  Registrable  Securities  if: (i) the Holder  agrees in writing  with the
transferee  or assignee to assign such rights,  and a copy of such  agreement is
furnished to the Company within a reasonable  time after such  assignment,  (ii)
the Company is,  within a  reasonable  time after such  transfer or  assignment,
furnished with written notice of (a) the name and address of such  transferee or
assignee,  and (b) the securities with respect to which such registration rights

                                      -14-
<PAGE>

are being  transferred or assigned,  (iii) following such transfer or assignment
the further  disposition  of such  securities by the  transferee or assignees is
restricted  under the Securities Act and applicable  state securities laws, (iv)
at or before the time the Company  receives the written notice  contemplated  by
clause (ii) of this Section,  the transferee or assignee  agrees in writing with
the Company to be bound by all of the provisions of this Agreement, and (v) such
transfer shall have been made in accordance with the applicable  requirements of
the Purchase Agreement.  In addition, each Holder shall have the right to assign
its rights  hereunder to any other Person with the prior written  consent of the
Company,  which consent shall not be  unreasonably  withheld  provided that such
assignment shall be in accordance with applicable securities laws. The rights to
assignment  shall  apply  to the  Holders  (and to  subsequent)  successors  and
assigns.

                  (j) Counterparts. This Agreement may be executed in any number
of  counterparts,  each of  which  when so  executed  shall be  deemed  to be an
original  and, all of which taken  together  shall  constitute  one and the same
Agreement.   In  the  event  that  any   signature  is  delivered  by  facsimile
transmission,  such  signature  shall create a valid  binding  obligation of the
party  executing  (or on whose behalf such  signature is executed) the same with
the same  force and  effect as if such  facsimile  signature  were the  original
thereof.

                  (k)  Governing  Law. This  Agreement  shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving  effect to any of the conflicts of law  principles  which would result in
the application of the substantive law of another  jurisdiction.  This Agreement
shall not be  interpreted or construed  with any  presumption  against the party
causing this Agreement to be drafted.

                  (l)  Cumulative  Remedies.  The remedies  provided  herein are
cumulative and not exclusive of any remedies provided by law.

                  (m)  Severability.   If  any  term,  provision,   covenant  or
restriction  of  this  Agreement  is  held  to  be  invalid,  illegal,  void  or
unenforceable in any respect, the remainder of the terms, provisions,  covenants
and  restrictions  set forth  herein  shall  remain in full force and effect and
shall in no way be affected,  impaired or  invalidated,  and the parties  hereto
shall use their  reasonable  efforts to find and employ an alternative  means to
achieve the same or substantially  the same result as that  contemplated by such
term, provision,  covenant or restriction.  It is hereby stipulated and declared
to be the  intention of the parties that they would have  executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

                  (n) Headings. The headings herein are for convenience only, do
not  constitute  a part of this  Agreement  and  shall not be deemed to limit or
affect any of the provisions hereof.

                  (o) Shares Held by the Company  and its  Affiliates.  Whenever
the  consent or approval of Holders of a  specified  percentage  of  Registrable
Securities is required hereunder,  Registrable Securities held by the Company or
its  Affiliates  (other than any Holder or  transferees or successors or assigns
thereof  if such  Holder is deemed  to be an  Affiliate  solely by reason of its
holdings of such  Registrable  Securities)  shall not be counted in  determining
whether  such  consent or  approval  was given by the  Holders of such  required
percentage.

                                      -15-
<PAGE>

                  (p) Company's 2005 Registration Rights Agreement.  The parties
hereby terminate the 2005 Agreement.

         IN WITNESS  WHEREOF,  the parties hereto have caused this  Registration
Rights Agreement to be duly executed by their respective  authorized  persons as
of the date first indicated above.

                                        AXM PHARMA, INC.

                                        By:_____________________________________
                                           Name:
                                           Title:

                                        HOLDER
                                        By:_____________________________________
                                           Name:
                                           Title:

                                      -16-
<PAGE>

                                   Schedule I
                                     Holders

                                      -17-
<PAGE>

                                   Schedule II
        Securities Permitted to be Included on the Registration Statement

1.   Shares of Common Stock issuable upon the exercise of warrants issued to the
     placement  agent and its  designees  in  connection  with the  transactions
     contemplated by the Purchase  Agreement,  the August, 2005 financing or the
     Modification Agreement entered into between the parties hereto .

2.   [350,000] shares of Common stock held by Madden Consulting, Inc.

3.   350,000 shares of Common Stock granted to Newbridge Securities  Corporation
     (250,000 of which represent shares underlying warrants).

4.   25,000 shares of Common Stock granted to Aurelius Consulting Group, Inc.

5.   105,926 shares of Common Stock  representing  the dividends  distributed to
     the  Company's  Series C  shareholders  on January  19,  2005;  125% of the
     dividends due and payable on June 24, 2005;  and any  subsequent  dividends
     that may be payable  in shares of Common  Stock to the  Company's  Series C
     shareholders.

6.   Shares  issuable to Mark Katz,  P.C.,  for legal  services  rendered to the
     Company,  pursuant  to a  Convertible  Note  in  the  principal  amount  of
     approximately $60,000.

                                      -18-

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