Document:

Unassociated Document

    THIS
      AMENDED AND RESTATED 8% SENIOR SECURED CONVERTIBLE NOTE AMENDS AND RESTATES
      THE
      8% SENIOR SECURED CONVERTIBLE NOTE ORIGINALLY ISSUED PURSUANT TO THE SECURITIES
      PURCHASE AGREEMENT, DATED AS OF MARCH 5, 2008, BY AND BETWEEN BLUE HOLDINGS,
      INC., A NEVADA CORPORATION, AND THE PURCHASER NAMED THEREIN. 

    

    NEITHER
      THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
      BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
      COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
      MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
      OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS
      SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE
      PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED
      BY
      SUCH SECURITIES.

    

    Original
      Issue Date: March 5, 2008

    Original
      Conversion Price (subject to adjustment herein): $0.40

    

    $2,500,000

    

    BLUE
      HOLDINGS, INC.

    AMENDED
      AND RESTATED 8% SENIOR SECURED CONVERTIBLE NOTE

    

    THIS
      NOTE
      is one of a series of duly authorized and validly issued 8% Senior Secured
      Convertible Notes of Blue Holdings, Inc., a Nevada corporation (the
“Company”),
      having its principal place of business at 4901 Zambrano Street, Commerce,
      California 90040, designated as its 8% Senior Secured Convertible Notes (this
      Note, the “Note”
and,
      collectively with the other Notes of such series, the “Notes”).

    

    FOR
      VALUE
      RECEIVED, the Company promises to pay to GEMINI MASTER FUND, LTD. or its
      registered assigns (the “Holder”),
      or
      shall have paid pursuant to the terms hereunder, the principal sum of $2,500,000
      on September 1, 2010 (the “Maturity
      Date”)
      or
      such earlier date as this Note is required or permitted to be repaid as provided
      hereunder, or such later date as may be permitted by the Holder as set forth
      in
      Section 2 hereof, and to pay interest to the Holder on the aggregate unconverted
      and then outstanding principal amount of this Note in accordance with the
      provisions hereof.

    

    The
      Company’s and its Subsidiaries’ obligations under this Note and the other
      Transaction Documents are secured by the Collateral (as defined in the Security
      Agreement, including without limitation all Intellectual Property Rights)
      pursuant to the terms of the Security Documents and the obligations under this
      Note are guaranteed by the Company’s Subsidiaries pursuant to the Subsidiary
      Guarantee.

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

     

    This
      Note
      is subject to the following additional provisions:

    Section
      1. Definitions.
      For the
      purposes hereof, in addition to the terms defined elsewhere in this Note (a)
      capitalized terms not otherwise defined herein shall have the meanings set
      forth
      in the Purchase Agreement and (b) the following terms shall have the following
      meanings:

    

    “Alternate
      Consideration”
shall
      have the meaning set forth in Section 5(e).

    

    “Amendment”
means
      that certain Amendment Agreement, dated as of July 30, 2008, amending this
      Note
      (among other things).

    

    “Bankruptcy
      Event”
means
      any of the following events: (a) the Company or any Significant Subsidiary
      (as
      such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a
      case
      or other proceeding under any bankruptcy, reorganization, arrangement,
      adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
      or
      similar law of any jurisdiction relating to the Company or any Significant
      Subsidiary thereof; (b) there is commenced against the Company or any
      Significant Subsidiary thereof any such case or proceeding that is not dismissed
      within 60 days after commencement; (c) the Company or any Significant Subsidiary
      thereof is adjudicated insolvent or bankrupt or any order of relief or other
      order approving any such case or proceeding is entered; (d) the Company or
      any
      Significant Subsidiary thereof suffers any appointment of any custodian or
      the
      like for it or any substantial part of its property that is not discharged
      or
      stayed within 60 calendar days after such appointment; (e) the Company or any
      Significant Subsidiary thereof makes a general assignment for the benefit of
      creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting
      of its creditors with a view to arranging a composition, adjustment or
      restructuring of its debts; or (g) the Company or any Significant Subsidiary
      thereof, by any act or failure to act, expressly indicates its consent to,
      approval of or acquiescence in any of the foregoing or takes any corporate
      or
      other action for the purpose of effecting any of the foregoing.

    

    “Base
      Conversion Price”
shall
      have the meaning set forth in Section 5(b).

    

    “Business
      Day”
means
      any day except any Saturday, any Sunday, any day which shall be a federal legal
      holiday in the United States or any day on which banking institutions in the
      State of New York are authorized or required by law or other governmental action
      to close.

    

    “Buy-In”
shall
      have the meaning set forth in Section 4(d)(v).

    

    “Change
      of Control Transaction”
means
      the occurrence after the date hereof of any of (i) an acquisition after the
      date
      hereof by an individual or legal entity or “group” (as described in Rule
      13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
      through legal or beneficial ownership of capital stock of the Company, by
      contract or otherwise) of in excess of 33% of the voting securities of the
      Company (other than by means of conversion or exercise of the Notes and the
      Securities issued together with the Notes) (for clarification, retention of
      the
      current ownership by Paul Guez shall not be deemed a Change of Control
      Transaction), or (ii) the Company merges into or consolidates with any other
      Person, or any Person merges into or consolidates with the Company and, after
      giving effect to such transaction, the stockholders of the Company immediately
      prior to such transaction own less than 66% of the aggregate voting power of
      the
      Company or the successor entity of such transaction, or (iii) the Company sells
      or transfers all or substantially all of its assets to another Person and the
      stockholders of the Company immediately prior to such transaction own less
      than
      66% of the aggregate voting power of the acquiring entity immediately after
      the
      transaction, or (iv) a replacement at one time or within a three year period
      of
      more than one-half of the members of the Company’s board of directors which is
      not approved by a majority of those individuals who are members of the board
      of
      directors on the date hereof (or by those individuals who are serving as members
      of the board of directors on any date whose nomination to the board of directors
      was approved by a majority of the members of the board of directors who are
      members on the date hereof), or (v) the execution by the Company of an agreement
      to which the Company is a party or by which it is bound, providing for any
      of
      the events set forth in clauses (i) through (iv) above.

     

    
      
         

      

      
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    “Conversion
      Date”
shall
      have the meaning set forth in Section 4(a).

    

    “Conversion
      Price”
shall
      have the meaning set forth in Section 4(b).

    

    “Conversion
      Shares”
means,
      collectively, the shares of Common Stock issued or issuable upon conversion
      or
      redemption of this Note in accordance with the terms hereof, including without
      limitation shares of Common Stock issued or issuable as interest hereunder
      or as
      damages under the Transaction Documents.

    

    “Note
      Register”
shall
      have the meaning set forth in Section 2(c).

    

    “Dilutive
      Issuance”
shall
      have the meaning set forth in Section 5(b).

    

    “Dilutive
      Issuance Notice”
shall
      have the meaning set forth in Section 5(b).

    

    “Equity
      Conditions”
means,
      during the period in question, (i)
      the
      Company shall have duly honored all conversions and redemptions scheduled to
      occur or occurring by virtue of one or more Notices of Conversion of the Holder,
      if any, (ii) the Company shall have paid all liquidated damages and other
      amounts owing to the Holder in respect of this Note, (iii)
      all
      of the shares of Common Stock issued or issuable pursuant to the Transaction
      Documents may be sold by the Holder pursuant to either (a) Section (b)(1)(i)
      of
      Rule 144 and the Company has been subject to the reporting requirements of
      Section 13 or 15(d) of the Exchange Act for the then preceding 90 days and
      has
      filed all reports required to be filed thereunder during the then preceding
      12
      months (or such shorter period that the Company was required to file such
      reports) or (b) an effective Registration Statement (and the Company believes,
      in good faith, that such effectiveness will continue uninterrupted for the
      foreseeable future), (iv) the Common Stock is trading on a Trading Market and
      all of the shares issuable pursuant to the Transaction Documents are listed
      or
      quoted for trading on such Trading Market (and the Company believes, in good
      faith, that trading of the Common Stock on a Trading Market will continue
      uninterrupted for the foreseeable future), (v) there is a sufficient number
      of
      authorized but unissued and otherwise unreserved shares of Common Stock for
      the
      issuance of all of the shares issuable pursuant to the Transaction Documents,
      (vi) there is no existing Event of Default or no existing event which, with
      the
      passage of time or the giving of notice, would constitute an Event of Default,
      (vii) the issuance of the shares in question (or, in the case of an Optional
      or
      Monthly Redemption, the shares issuable upon conversion in full of the Optional
      or Monthly Redemption Amount) to
      the
      Holder would not violate the limitations set forth in Section 4(c) below,
(viii)
      there has been no public announcement of a pending or proposed Fundamental
      Transaction or Change of Control Transaction that has not been consummated,
      (ix)
      the Holder is not in possession of any information provided by the Company
      that
      constitutes, or may constitute, material non-public information, and (x) the
      closing bid price per share of Common Stock on the Trading Market for each
      of
      the ten (10) Trading Days immediately preceding the applicable date in question
      shall be greater than $0.30.

     

    
      
         

      

      
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    “Event
      of Default”
shall
      have the meaning set forth in Section 8.

    

    “Factor
      Indebtedness”
means
      indebtedness to the Company’s factor which has provided or is providing
      factoring financing secured by, or pursuant to the sale of, accounts receivable
      and inventory of the Company or its subsidiaries.

    

      “Forced
      Conversion”
shall
      have the meaning set forth in Section 6(d).

    

    “Forced
      Conversion Date”
shall
      have the meaning set forth in Section 6(d).

    

    “Forced
      Conversion Notice”
shall
      have the meaning set forth in Section 6(d).

    

    “Forced
      Conversion Notice Date”
shall
      have the meaning set forth in Section 6(d).

    

    “Fundamental
      Transaction”
shall
      have the meaning set forth in Section 5(e).

    

    “Guez
      Note”
means
      that certain 8% Senior Convertible Note issued or to be issued by the Company
      to
      Paul Guez in the principal amount of $1,618,093.15.

    

    “Late
      Fees”
shall
      have the meaning set forth in Section 2(d).

    

    “Mandatory
      Default Amount”
means
      the sum of (i) the greater of (A) 125% of the outstanding principal amount
      of
      this Note, plus 100% of accrued and unpaid interest hereon, or (B) the
      outstanding principal amount of this Note, plus all accrued and unpaid interest
      hereon, divided by the lesser of the Conversion Price and the Market Redemption
      Price on the date the Mandatory Default Amount is either (a) demanded (if demand
      or notice is required to create an Event of Default) or otherwise due or (b)
      paid in full, whichever has a lower price, multiplied by the VWAP on the date
      the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
      paid
      in full, whichever has a higher VWAP, and (ii) all other amounts, costs,
      expenses and liquidated damages due in respect of this Note.

    

    “Market
      Pricing Period”
means
      the 10 consecutive Trading Day period used in determining the Market Redemption
      Price.

     

    
      
         

      

      
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    “Market
      Redemption Price”
means
      85% of the average of the closing bid prices for the 10 consecutive Trading
      Days
      immediately preceding the date as of which the Market Redemption Price is being
      determined (subject to appropriate and equitable adjustment for any stock
      dividend, stock split, stock combination or other similar event affecting the
      Common Stock during such 10 Trading Day period).

    

    “Monthly
      Redemption”
means
      the redemption of this Note pursuant to Section 6(b) hereof.

     

    “Monthly
      Redemption Amount”
means,
      as to a Monthly Redemption, 1/24th
      of the
      original principal amount of this Note (as modified by the Amendment), plus
      all
      accrued but unpaid interest, liquidated damages and any other amounts then
      owing
      to the Holder in respect of this Note.

    

    “Monthly
      Redemption Date”
means
      the first day of each calendar month, commencing on the first day of the first
      full calendar month occurring after the date which is six (6) months following
      the Original Issue Date on which this Note was issued, and terminating upon
      the
      full redemption of 100% of the principal amount of this Note. 

    

    “Monthly
      Redemption Notice”
shall
      have the meaning set forth in Section 6(b) hereof. 

     

    “New
      York Courts”
shall
      have the meaning set forth in Section 9(d).

    

    “Notice
      of Conversion”
shall
      have the meaning set forth in Section 4(a).

    

    “Optional
      Redemption”
shall
      have the meaning set forth in Section 6(a).

    

    “Optional
      Redemption Amount”
means
      the sum of (i) 120% of the then outstanding principal amount of this Note,
      (ii)
      all accrued but unpaid interest thereon, and (iii) all liquidated damages and
      other amounts due in respect of this Note.

    

    “Optional
      Redemption Date”
shall
      have the meaning set forth in Section 6(a).

    

    “Optional
      Redemption Notice”
shall
      have the meaning set forth in Section 6(a).

    

    “Optional
      Redemption Notice Date”
shall
      have the meaning set forth in Section 6(a).

    

    “Original
      Issue Date”
means
      the date of the first issuance of this Note, regardless of any transfers of
      this
      Note and regardless of the number of instruments which may be issued to evidence
      this Note.

    

    “Permitted
      Indebtedness”
means
      (a) the indebtedness evidenced by the Notes, (b) the Indebtedness existing
      on
      the initial Closing Date and set forth on Schedule
      3.1(aa)
      attached
      to the Purchase Agreement, (c) lease obligations and purchase money indebtedness
      of up to $100,000, in the aggregate, incurred in connection with the acquisition
      of capital assets and lease obligations with respect to newly acquired or leased
      assets, (d) Factor Indebtedness, and (e) indebtedness that (i) is expressly
      subordinate to the Notes pursuant to a written subordination agreement with
      the
      Purchasers that is acceptable to each Purchaser in its sole and absolute
      discretion and (ii) matures at a date later than the Maturity Date.

     

    
      
         

      

      
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    “Permitted
      Lien”
means
      the individual and collective reference to the following: (a) Liens for taxes,
      assessments and other governmental charges or levies not yet due or Liens for
      taxes, assessments and other governmental charges or levies being contested
      in
      good faith and by appropriate proceedings for which adequate reserves (in the
      good faith judgment of the management of the Company) have been established
      in
      accordance with GAAP; (b) Liens imposed by law which were incurred in the
      ordinary course of the Company’s business, such as carriers’, warehousemen’s and
      mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
      the ordinary course of the Company’s business, and which (x) do not individually
      or in the aggregate materially detract from the value of such property or assets
      or materially impair the use thereof in the operation of the business of the
      Company and its consolidated Subsidiaries or (y) are being contested in good
      faith by appropriate proceedings, which proceedings have the effect of
      preventing for the foreseeable future the forfeiture or sale of the property
      or
      asset subject to such Lien; (c) Liens incurred in connection with Permitted
      Indebtedness under clauses (a), (b), (c) and (d) thereunder, provided that
      such
      Liens are not secured by assets of the Company or its Subsidiaries other than
      the assets so acquired, leased or factored against.

     

    “Purchase
      Agreement”
means
      the Securities Purchase Agreement, dated as of March 5, 2008, among the Company
      and the original Holders, as amended, modified or supplemented from time to
      time
      in accordance with its terms.

    

    “Registration
      Statement”
means
      an effective registration statement under the Securities Act that registers
      the
      resale of all Conversion Shares of the Holder, names the Holder as a “selling
      stockholder” therein, and contains a current prospectus not subject to any
      blackout, suspension or stop order.

    

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, and the rules and regulations
      promulgated thereunder.

    

    “Share
      Delivery Date”
shall
      have the meaning set forth in Section 4(d).

    

    “Shareholder
      Approval”
shall
      have the meaning set forth in the Amendment.

    

    “Subsidiary”
shall
      have the meaning set forth in the Purchase Agreement.

    

    “Threshold
      Period”
shall
      have the meaning set forth in Section 6(d). 

    

    “Trading
      Day”
means
      a
      day on which the principal Trading Market is open for business.

    

    “Trading
      Market”
means
      the following markets or exchanges on which the Common Stock is listed or quoted
      for trading on the date in question: the American Stock Exchange, the Nasdaq
      Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market,
      the
      New York Stock Exchange or the OTC Bulletin Board.

     

    
      
         

      

      
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    “Transaction
      Documents”
shall
      have the meaning set forth in the Purchase Agreement.

    

    “VWAP”
means,
      for any date, the price determined by the first of the following clauses that
      applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
      the daily volume weighted average price of the Common Stock for such date (or
      the nearest preceding date) on the Trading Market on which the Common Stock
      is
      then listed or quoted for trading as reported by Bloomberg L.P. (based on a
      Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
      time)); (b)  if the OTC Bulletin Board is not a Trading Market, the volume
      weighted average price of the Common Stock for such date (or the nearest
      preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
      quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
      are then reported in the “Pink Sheets” published by 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
      (d) 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 Company.

    

    Section
      2. Interest;
      No Prepayment.

     

    a)  Interest
      Rate.
      Interest shall accrue daily on the outstanding principal amount of this Note
      at
      a rate per annum equal to 8%.

    

    b)  Payment
      of Interest.
      On each
      Monthly Redemption Date and on the Maturity Date, the Company shall pay to
      the
      Holder any accrued but unpaid interest hereunder on the aggregate unconverted
      and then outstanding principal amount of this Note, and on each Conversion
      Date
      and Optional Redemption Date the Company shall pay to the Holder any accrued
      but
      unpaid interest hereunder on that portion of the principal amount then being
      converted or redeemed, as the case may be. The amount of interest payable on
      each Monthly Redemption Date, Conversion Date, Maturity Date and Optional
      Redemption Date (“Interest
      Amount”)
      shall
      be added to and included in the principal amount being so converted or redeemed
      on such date. 

     

    c)  Interest
      Calculations.
      Interest shall be calculated on the basis of a 360-day year, consisting of
      twelve 30 calendar day periods, and shall accrue daily commencing on the
      Original Issue Date until payment in full of the outstanding principal, together
      with all accrued and unpaid interest, liquidated damages and other amounts
      which
      may become due hereunder, has been made. Interest hereunder will be paid to
      the
      Person in whose name this Note is registered on the records of the Company
      regarding registration and transfers of this Note (the “Note
      Register”).
      Except as otherwise provided herein, if at any time the Company pays interest
      partially in cash and partially in shares of Common Stock to the holders of
      the
      Notes, then such payment of cash shall be distributed ratably among the holders
      of the then-outstanding Notes based on their (or their predecessor’s) initial
      purchases of Notes pursuant to the Purchase Agreement.

     

    
      
         

      

      
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    d)  Late
      Fees.
      All
      overdue accrued and unpaid interest to be paid hereunder shall entail a late
      fee
      at an interest rate equal to the lesser of 20% per annum or the maximum rate
      permitted by applicable law (“Late
      Fees”)
      which
      shall accrue daily from the date such interest is due hereunder through and
      including the date of actual payment in full.

    

    e)  No
      Prepayment.
      Except
      as otherwise set forth in this Note, the Company may not prepay any portion
      of
      the principal amount of this Note without the prior written consent of the
      Holder. 

    

    Section
      3. Registration
      of Transfers and Exchanges.
      

     

    a)  Different
      Denominations.
      This
      Note is exchangeable for an equal aggregate principal amount of Notes of
      different authorized denominations, as requested by the Holder surrendering
      the
      same. No service charge will be payable for such exchange.

     

    b)  Investment
      Representations.
      This
      Note has been issued subject to certain investment representations of the
      original Holder set forth in the Purchase Agreement and may be transferred
      or
      exchanged only in compliance with the Purchase Agreement and applicable federal
      and state securities laws and regulations. 

    

    c)  Reliance
      on Note Register.
      Prior
      to due presentment for transfer to the Company of this Note, the Company and
      any
      agent of the Company may treat the Person in whose name this Note is duly
      registered on the Note Register as the owner hereof for the purpose of receiving
      payment as herein provided and for all other purposes, whether or not this
      Note
      is overdue, and neither the Company nor any such agent shall be affected by
      notice to the contrary.

    

    Section
      4. Conversion.

     

    a)  Voluntary
      Conversion.
      At any
      time after the Original Issue Date until this Note is no longer outstanding,
      this Note shall be convertible, in whole or in part, into shares of Common
      Stock
      at the option of the Holder, at any time and from time to time (subject to
      the
      conversion limitations set forth in Section 4(c) hereof). The Holder shall
      effect conversions by delivering to the Company a Notice of Conversion, the
      form
      of which is attached hereto as Annex
      A
      (a
“Notice
      of Conversion”),
      specifying therein the principal amount of this Note to be converted and the
      future date (which may be the same date as the date such notice is deemed
      effective pursuant to Section 9(a)) on which such conversion shall be effected
      (such date, the “Conversion
      Date”).
      If no
      Conversion Date is specified in a Notice of Conversion, the Conversion Date
      shall be the date that such Notice of Conversion is deemed delivered hereunder.
      To effect conversions hereunder, the Holder shall not be required to physically
      surrender this Note to the Company unless the entire principal amount of this
      Note, plus all accrued and unpaid interest thereon, has been so converted.
      Conversions hereunder shall have the effect of lowering the outstanding
      principal amount of this Note in an amount equal to the applicable conversion.
      The Holder and the Company shall maintain records showing the principal
      amount(s) converted and the date of such conversion(s). In the event of any
      dispute or discrepancy, the records of the Holder shall be controlling and
      determinative in the absence of manifest error. The Holder, and any assignee
      by
      acceptance of this Note, acknowledge and agree that, by reason of the provisions
      of this paragraph, following conversion of a portion of this Note, the unpaid
      and unconverted principal amount of this Note may be less than the amount stated
      on the face hereof.

     

    
      
         

      

      
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    b)  Conversion
      Price.
      The
      conversion price shall be equal to $0.40, subject
      to adjustment herein (the “Conversion
      Price”).

    

    c)  Conversion
      Limitations.
      

    

    i.  Issuance
      Limitations.
      Notwithstanding anything herein to the contrary, if the Company has not obtained
      Shareholder Approval, then the Company may not issue, upon conversion of this
      Note or the issuance of shares of Common Stock for the payment of principal,
      interest or liquidated damages, a number of shares of Common Stock which, when
      aggregated with any shares of Common Stock issued on or after the Original
      Issue
      Date and prior to such Conversion Date (A) in connection with the conversion
      of
      any Notes issued pursuant to the Purchase Agreement or as payment of principal,
      interest or liquidated damages, (B) in connection with the exercise of any
      Warrants issued pursuant to the Purchase Agreement and (C) in connection with
      any warrants issued to any registered broker-dealer as a fee in connection
      with
      the issuance of the Securities pursuant to the Purchase Agreement, would exceed
      19.99% of the number of shares of Common Stock outstanding on the Trading Day
      immediately preceding the date of the Purchase Agreement (subject to adjustment
      for forward and reverse stock splits, recapitalizations and the like) (such
      number of shares, the “Issuable
      Maximum”).
      Each
      Holder shall be entitled to a portion of the Issuable Maximum equal to the
      quotient obtained by dividing (x) the original principal amount of the Holder’s
      Note by (y) the aggregate original principal amount of all Notes issued to
      all
      Holders under the Purchase Agreement. In addition, each Holder may allocate
      its
      pro-rata portion of the Issuable Maximum among Notes and Warrants held by it
      in
      its sole discretion. Such portion shall be adjusted upward ratably in the event
      a Holder no longer holds any Notes or Warrants and the amount of shares issued
      to the Holder pursuant to the Holder’s Notes and Warrants was less than the
      Holder’s pro-rata share of the Issuable Maximum. In determining the issuance
      limitation contained in this paragraph in connection with any conversions or
      redemptions pursuant to Section 6 below, the number of Warrant Shares issuable
      upon exercise of all the Warrants (and shares of Common Stock underlying any
      warrants issued to any registered broker-dealer as a fee in connection with
      the
      issuance of the Securities pursuant to the Purchase Agreement) shall be applied
      first against the Issuable Maximum (and shall be deemed to have been issued
      for
      such purposes).

    

    ii.  Holder’s
      Restriction on Conversion.
      The
      Company shall not effect any conversion of this Note, and a Holder shall not
      have the right to convert any portion of this Note, to the extent that after
      giving effect to the conversion set forth on the applicable Notice of
      Conversion, the Holder (together with the Holder’s Affiliates, and any other
      person or entity acting as a group together with the Holder or any of the
      Holder’s Affiliates) would beneficially own in excess of the Beneficial
      Ownership Limitation (as defined below).  For purposes of the foregoing
      sentence, the number of shares of Common Stock beneficially owned by the Holder
      and its Affiliates shall include the number of shares of Common Stock issuable
      upon conversion of this Note with respect to which such determination is being
      made, but shall exclude the number of shares of Common Stock which are issuable
      upon (A) conversion of the remaining, unconverted principal amount of this
      Note
      beneficially owned by the Holder or any of its Affiliates and (B) exercise
      or
      conversion of the unexercised or unconverted portion of any other securities
      of
      the Company subject to a limitation on conversion or exercise analogous to
      the
      limitation contained herein (including, without limitation, any other Notes
      or
      the Warrants) beneficially owned by the Holder or any of its Affiliates. 
Except as set forth in the preceding sentence, for purposes of this Section
      4(c), beneficial ownership shall be calculated in accordance with Section 13(d)
      of the Exchange Act and the rules and regulations promulgated thereunder. To
      the
      extent that the limitation contained in this paragraph applies, the
      determination of whether this Note is convertible (in relation to other
      securities owned by the Holder together with any Affiliates) and of which
      principal amount of this Note is convertible shall be in the sole discretion
      of
      the Holder, and the submission of a Notice of Conversion shall be deemed to
      be
      the Holder’s determination of whether this Note may be converted (in relation to
      other securities owned by the Holder together with any Affiliates) and which
      principal amount of this Note is convertible, in each case subject to the
      Beneficial Ownership Limitation. To ensure compliance with this restriction,
      the
      Holder will be deemed to represent to the Company each time it delivers a Notice
      of Conversion that such Notice of Conversion has not violated the restrictions
      set forth in this paragraph and the Company shall have no obligation to verify
      or confirm the accuracy of such determination. In
      addition, a determination as to any group status as contemplated above shall
      be
      determined in accordance with Section 13(d) of the Exchange Act and
      the
      rules and regulations promulgated thereunder. For
      purposes of this paragraph, in determining the number of outstanding shares
      of
      Common Stock, the Holder may rely on the number of outstanding shares of Common
      Stock as stated in the most recent of the following: (A) the Company’s most
      recent periodic or annual report, as the case may be; (B) a more recent public
      announcement by the Company; or (C) a more recent notice by the Company or
      the
      Company’s transfer agent setting forth the number of shares of Common Stock
      outstanding.  Upon the written or oral request of a Holder, the Company
      shall within three Trading Days confirm orally and in writing to the Holder
      the
      number of shares of Common Stock then outstanding. In any case, the number
      of
      outstanding shares of Common Stock shall be determined after giving effect
      to
      the conversion or exercise of securities of the Company, including this Note,
      by
      the Holder or its Affiliates since the date as of which such number of
      outstanding shares of Common Stock was reported. The “Beneficial
      Ownership Limitation”
shall
      be 4.9% of the number of shares of the Common Stock outstanding immediately
      after giving effect to the issuance of shares of Common Stock issuable upon
      conversion of this Note held by the Holder. By written notice to the Company,
      the Holder may at any time and from time to time increase or decrease the
      Beneficial Ownership Limitation to any other percentage specified in such notice
      (or specify that the Beneficial Ownership Limitation shall no longer be
      applicable), provided, however, that (A) any such increase (or inapplicability)
      shall not be effective until the sixty-first (61st) day after such notice is
      delivered to the Company, and (B) any such increase or decrease shall apply
      only
      to the Holder and not to any other holder of Notes. The provisions of this
      paragraph shall be construed and implemented in a manner otherwise than in
      strict conformity with the terms of this paragraph to correct this paragraph
      (or
      any portion hereof) which may be defective or inconsistent with the intended
      Beneficial Ownership Limitation herein contained or to make changes or
      supplements necessary or desirable to properly give effect to such
      limitation.
      The
      limitations contained in this paragraph shall apply to a successor holder of
      this
      Note.

     

    
      
         

      

      
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    d)  Mechanics
      of Conversion.

     

    i.  Conversion
      Shares Issuable Upon Conversion of Principal Amount.
      The
      number of Conversion Shares issuable upon a conversion hereunder shall be
      determined by the quotient obtained by dividing (x) the outstanding principal
      amount of this Note to be converted plus any accrued but unpaid interest
      thereon, by (y) the Conversion Price.

     

    ii.  Delivery
      of Certificate Upon Conversion.
      Not
      later than three Trading Days after each Conversion Date (the “Share
      Delivery Date”),
      the
      Company shall deliver, or cause to be delivered, to the Holder a certificate
      or
      certificates representing the Conversion Shares which, on or after the Legend
      Removal Date, shall be free of restrictive legends and trading restrictions
      (other than those which may then be required by the Purchase Agreement)
      representing the number of Conversion Shares being acquired upon the conversion
      of this Note. After September 30, 2008 (provided the Holder is not an affiliate
      of the Company and the Holder may sell such Conversion Shares pursuant to
      Section (b)(1) of Rule 144), the Company shall use commercially reasonable
      efforts to deliver any certificate(s) or shares required to be delivered by
      the
      Company under this Section 4 electronically through the Depository Trust Company
      or another established clearing corporation performing similar functions.

     

    iii.  Failure
      to Deliver Certificates.
      If in
      the case of any Notice of Conversion such certificate(s) or shares are not
      delivered to or as directed by the applicable Holder by the third Trading Day
      after the Conversion Date, the Holder shall be entitled to elect by written
      notice to the Company at any time on or before its receipt of such certificate
      or certificates, to rescind such Conversion, in which event the Company shall
      promptly return to the Holder any original Note delivered to the Company and
      the
      Holder shall promptly return to the Company the Common Stock certificates
      representing the principal amount of this Note unsuccessfully tendered for
      conversion to the Company. 

     

    
      
         

      

      
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    iv.  Obligation
      Absolute; Partial Liquidated Damages.
      The
      Company’s obligations to issue and deliver the Conversion Shares upon conversion
      of this Note in accordance with the terms hereof are absolute and unconditional,
      irrespective of any action or inaction by the Holder to enforce the same, any
      waiver or consent with respect to any provision hereof, the recovery of any
      judgment against any Person or any action to enforce the same, or any setoff,
      counterclaim, recoupment, limitation or termination, or any breach or alleged
      breach by the Holder or any other Person of any obligation to the Company or
      any
      violation or alleged violation of law by the Holder or any other Person, and
      irrespective of any other circumstance which might otherwise limit such
      obligation of the Company to the Holder in connection with the issuance of
      such
      Conversion Shares; provided,
      however,
      that
      such delivery shall not operate as a waiver by the Company of any such action
      the Company may have against the Holder. In the event the Holder of this Note
      shall elect to convert any or all of the outstanding principal amount hereof,
      the Company may not refuse conversion based on any claim that the Holder or
      anyone associated or affiliated with the Holder has been engaged in any
      violation of law, agreement or for any other reason, unless an injunction from
      a
      court, on notice to the Holder, restraining and or enjoining conversion of
      all
      or part of this Note shall have been sought and obtained, and the Company posts
      a surety bond for the benefit of the Holder in the amount of 100% of the
      outstanding principal amount of this Note, which is subject to the injunction,
      which bond shall remain in effect until the completion of arbitration/litigation
      of the underlying dispute and the proceeds of which shall be payable to the
      Holder to the extent it obtains judgment. In the absence of such injunction,
      the
      Company shall issue Conversion Shares or, if applicable, cash, upon a properly
      noticed conversion. If the Company fails for any reason to deliver to the Holder
      such certificate(s) or shares pursuant to Section 4(d)(ii) by the second Trading
      Day after the Share Delivery Date, the Company shall pay to the Holder, in
      cash,
      as liquidated damages and not as a penalty, for each $1,000 of principal amount
      being converted, $10 per Trading Day (increasing to $17.50 per Trading Day
      on
      the fifth Trading Day after such liquidated damages begin to accrue) for each
      Trading Day after such second Trading Day after the Share Delivery Date until
      such certificates are delivered. Nothing herein shall limit a Holder’s right to
      pursue actual damages or declare an Event of Default pursuant to Section 8
      hereof for the Company’s failure to deliver Conversion Shares within the period
      specified herein and the Holder shall have the right to pursue all remedies
      available to it hereunder, at law or in equity including, without limitation,
      a
      decree of specific performance and/or injunctive relief. The exercise of any
      such rights shall not prohibit the Holder from seeking to enforce damages
      pursuant to any other Section hereof or under applicable law.

     

    v.  Compensation
      for Buy-In on Failure to Timely Deliver Certificates Upon
      Conversion.
      In
      addition to any other rights available to the Holder, if the Company fails
      for
      any reason to deliver to the Holder such certificate(s) or shares by the Share
      Delivery Date pursuant to Section 4(d)(ii), and if after such Share Delivery
      Date the Holder is required by its brokerage firm to purchase (in an open market
      transaction or otherwise), or the Holder’s brokerage firm otherwise purchases,
      shares of Common Stock to deliver in satisfaction of a sale by the Holder of
      the
      Conversion Shares which the Holder was entitled to receive upon the conversion
      relating to such Share Delivery Date (a “Buy-In”),
      then
      the Company shall (A) pay in cash to the Holder (in addition to any other
      remedies available to or elected by the Holder) the amount by which (x) the
      Holder’s total purchase price (including any brokerage commissions) for the
      Common Stock so purchased exceeds (y) the product of (1) the aggregate number
      of
      shares of Common Stock that the Holder was entitled to receive from the
      conversion at issue multiplied by (2) the actual sale price at which the sell
      order giving rise to such purchase obligation was executed (including any
      brokerage commissions) and (B) at the option of the Holder, either reissue
      (if
      surrendered) this Note in a principal amount equal to the principal amount
      of
      the attempted conversion or deliver to the Holder the number of shares of Common
      Stock that would have been issued if the Company had timely complied with its
      delivery requirements under Section 4(d)(ii). 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 this Note with respect to
      which the actual sale price of the Conversion Shares (including any brokerage
      commissions) giving rise to such purchase obligation was a total of $10,000
      under clause (A) of the immediately preceding sentence, the Company shall be
      required to pay the Holder $1,000. The Holder shall provide the Company written
      notice indicating the amounts payable to the Holder in respect of the Buy-In
      and, upon request of the Company, evidence of the amount of such loss. 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 Company’s
      failure to timely deliver certificates representing shares of Common Stock
      upon
      conversion of this Note as required pursuant to the terms hereof.

     

    
      
         

      

      
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    vi.  Reservation
      of Shares Issuable Upon Conversion.
      The
      Company covenants that it will at all times reserve and keep available out
      of
      its authorized and unissued shares of Common Stock for the sole purpose of
      issuance upon conversion of this Note and payment of interest on this Note,
      each
      as herein provided, free from preemptive rights or any other actual contingent
      purchase rights of Persons other than the Holder (and the other holders of
      the
      Notes), not less than such aggregate number of shares of the Common Stock as
      shall (subject to the terms and conditions set forth in the Purchase Agreement)
      be issuable (taking into account the adjustments of Section 5) upon the
      conversion of the outstanding principal amount of this Note and payment of
      interest hereunder. The Company covenants that all shares of Common Stock that
      shall be so issuable shall, upon issue, be duly authorized, validly issued,
      fully paid and nonassessable and, if the Registration Statement is then
      effective under the Securities Act, shall be registered for public sale in
      accordance with such Registration Statement.

    

    vii.  Fractional
      Shares.
      No
      fractional shares or scrip representing fractional shares shall be issued upon
      the conversion of this Note. As to any fraction of a share which the Holder
      would otherwise be entitled to purchase upon such conversion, the Company shall
      at its election, either pay a cash adjustment in respect of such final fraction
      in an amount equal to such fraction multiplied by the Conversion Price or round
      up to the next whole share.

     

    
      
         

      

      
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    viii.  Transfer
      Taxes.
      The
      issuance of certificates for shares of the Common Stock on conversion of this
      Note shall be made without charge to the Holder hereof for any documentary
      stamp
      or similar taxes that may be payable in respect of the issue or delivery of
      such
      certificates, provided that the Company shall not be required to pay any tax
      that may be payable in respect of any transfer involved in the issuance and
      delivery of any such certificate upon conversion in a name other than that
      of
      the Holder of this Note and the Company shall not be required to issue or
      deliver such certificates unless or until the person or persons requesting
      the
      issuance thereof shall have paid to the Company the amount of such tax or shall
      have established to the satisfaction of the Company that such tax has been
      paid.

    

    Section
      5. Certain
      Adjustments.

     

    a)  Stock
      Dividends and Stock Splits.
      If the
      Company, at any time while this Note is outstanding: (A) pays a stock dividend
      or otherwise makes a distribution or distributions payable in shares of Common
      Stock on shares of Common Stock or any Common Stock Equivalents (which, for
      avoidance of doubt, shall not include any shares of Common Stock issued by
      the
      Company upon conversion of, or payment of interest on, the Notes); (B)
      subdivides outstanding shares of Common Stock into a larger number of shares;
      (C) combines (including by way of a reverse stock split) outstanding shares
      of
      Common Stock into a smaller number of shares; or (D) issues, in the event of
      a
      reclassification of shares of the Common Stock, any shares of capital stock
      of
      the Company, then the Conversion Price shall be multiplied by a fraction of
      which the numerator shall be the number of shares of Common Stock (excluding
      any
      treasury shares of the Company) outstanding immediately before such event and
      of
      which the denominator shall be the number of shares of Common Stock outstanding
      immediately after such event. Any adjustment made pursuant to this Section
      shall
      become effective immediately after the record date for the determination of
      stockholders entitled to receive such dividend or distribution and shall become
      effective immediately after the effective date in the case of a subdivision,
      combination or re-classification.

     

    b)  Subsequent
      Equity Sales.
      If, at
      any time while this Note is outstanding, the Company or any Subsidiary, as
      applicable, sells or grants any option to purchase or sells or grants any right
      to reprice, or otherwise disposes of or issues (or announces any sale, grant
      or
      any option to purchase or other disposition), any Common Stock or Common Stock
      Equivalents entitling any Person to acquire shares of Common Stock at an
      effective price per share that is lower than the then Conversion Price (such
      lower price, the “Base
      Conversion Price”
and
      such issuances, collectively, a “Dilutive
      Issuance”)
      (if
      the holder of the Common Stock or Common Stock Equivalents so issued shall
      at
      any time, whether by operation of purchase price adjustments, reset provisions,
      floating conversion, exercise or exchange prices or otherwise, or due to
      warrants, options or rights per share which are issued in connection with such
      issuance, be entitled to receive shares of Common Stock at an effective price
      per share that is lower than the Conversion Price, such issuance shall be deemed
      to have occurred for less than the Conversion Price on such date of the Dilutive
      Issuance), then the Conversion Price shall be reduced to equal the Base
      Conversion Price. Such adjustment shall be made whenever such Common Stock
      or
      Common Stock Equivalents are issued. Notwithstanding
      the foregoing, no adjustment will be made under this Section 5(b) in respect
      of
      an Exempt Issuance or in the event that such adjustment will result in the
      issuance of more than 42,000,000 shares of Common Stock (as appropriately and
      equitably adjusted for stock splits, stock dividends and similar events) when
      aggregated with any shares of Common Stock issued on or after the initial
      Closing Date and prior to the Maturity Date (A) in connection with the
      conversion of any Notes or as payment of principal, interest or liquidated
      damages, (B) in connection with the exercise of any Warrants issued pursuant
      to
      the Purchase Agreement, and (C) in connection with any warrants issued to any
      registered broker-dealer as a fee in connection with the issuance of the
      Securities pursuant to the Purchase Agreement.
      If the
      Company enters into a Variable Rate Transaction or MFN Transaction, despite
      the
      prohibition set forth in the Purchase Agreement, the Company shall be deemed
      to
      have issued Common Stock or Common Stock Equivalents at the lowest possible
      conversion price at which such securities may be converted or exercised. The
      Company shall notify the Holder in writing, no later than 1 Business Day
      following the issuance of any Common Stock or Common Stock Equivalents subject
      to this Section 5(b), indicating therein the applicable issuance price, or
      applicable reset price, exchange price, conversion price and other pricing
      terms
      (such notice, the “Dilutive
      Issuance Notice”).
      For
      purposes of clarification, whether or not the Company provides a Dilutive
      Issuance Notice pursuant to this Section 5(b), upon the occurrence of any
      Dilutive Issuance, the Holder is entitled to receive a number of Conversion
      Shares based upon the Base Conversion Price on or after the date of such
      Dilutive Issuance, regardless of whether the Holder accurately refers to the
      Base Conversion Price in the Notice of Conversion.

     

    
      
         

      

      
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    c)  Subsequent
      Rights Offerings.
      If the
      Company, at any time while the Note is outstanding, shall issue rights, options
      or warrants to all holders of Common Stock (and not to the Holders in their
      capacity as holders of Notes) entitling them to subscribe for or purchase shares
      of Common Stock at a price per share that is lower than the VWAP on the record
      date referenced below, then the Conversion Price shall be multiplied by a
      fraction of which the denominator shall be the number of shares of the Common
      Stock outstanding on the date of issuance of such rights or warrants plus the
      number of additional shares of Common Stock offered for subscription or
      purchase, and of which the numerator shall be the number of shares of the Common
      Stock outstanding on the date of issuance of such rights or warrants plus the
      number of shares which the aggregate offering price of the total number of
      shares issued (assuming delivery to the Company in full of all consideration
      payable upon exercise of such rights, options or warrants) would purchase at
      such VWAP. Such adjustment shall be made whenever such rights or warrants are
      issued, and shall become effective immediately after the record date for the
      determination of stockholders entitled to receive such rights, options or
      warrants. 

     

    
      
         

      

      
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    d)  Pro
      Rata Distributions.
      If the
      Company, at any time while this Note is outstanding, distributes to all holders
      of Common Stock (and not to the Holders in their capacity as holders of Notes)
      evidences of its indebtedness or assets (including cash and cash dividends)
      or
      rights or warrants to subscribe for or purchase any security (other than the
      Common Stock, which shall be subject to Section 5(b)), then in each such case
      the Conversion Price shall be adjusted by multiplying such Conversion Price
      in
      effect immediately prior to the record date fixed for determination of
      stockholders entitled to receive such distribution by a fraction of which the
      denominator shall be the VWAP determined as of the record date mentioned above,
      and of which the numerator shall be such VWAP on such record date less the
      then
      fair market value at such record date of the portion of such assets or evidence
      of indebtedness so distributed applicable to 1 outstanding share of the Common
      Stock as determined by the Board of Directors of the Company in good faith.
      In
      either case the adjustments shall be described in a statement delivered to
      the
      Holder describing the portion of assets or evidences of indebtedness so
      distributed or such subscription rights applicable to 1 share of Common Stock.
      Such adjustment shall be made whenever any such distribution is made and shall
      become effective immediately after the record date mentioned above.

     

    e)  Fundamental
      Transaction.
      If, at
      any time while this Note is outstanding, (A) the Company effects any merger
      or
      consolidation of the Company with or into another Person, (B) the Company
      effects any sale of all or substantially all of its assets in one transaction
      or
      a series of related transactions, (C) any tender offer or exchange offer
      (whether by the Company or another Person) is completed pursuant to which
      holders of Common Stock are permitted to tender or exchange their shares for
      other securities, cash or property, or (D) the Company effects any
      reclassification of the Common Stock or any compulsory share exchange pursuant
      to which the Common Stock is effectively converted into or exchanged for other
      securities, cash or property (in any such case, a “Fundamental
      Transaction”),
      then,
      upon any subsequent conversion of this Note, the Holder shall have the right
      to
      receive, for each Conversion Share that would have been issuable upon such
      conversion immediately prior to the occurrence of such Fundamental Transaction,
      the same kind and amount of securities, cash or property as it would have been
      entitled to receive upon the occurrence of such Fundamental Transaction if
      it
      had been, immediately prior to such Fundamental Transaction, the holder of
      1
      share of Common Stock (the “Alternate
      Consideration”).
      For
      purposes of any such conversion, the determination of the Conversion Price
      shall
      be appropriately adjusted to apply to such Alternate Consideration based on
      the
      amount of Alternate Consideration issuable in respect of 1 share of Common
      Stock
      in such Fundamental Transaction, and the Company shall apportion the Conversion
      Price among the Alternate Consideration in a reasonable manner reflecting the
      relative value of any different components of the Alternate Consideration.
      If
      holders of Common Stock are given any choice as to the securities, cash or
      property to be received in a Fundamental Transaction, then the Holder shall
      be
      given the same choice as to the Alternate Consideration it receives upon any
      conversion of this Note following such Fundamental Transaction. To the extent
      necessary to effectuate the foregoing provisions, any successor to the Company
      or surviving entity in such Fundamental Transaction shall issue to the Holder
      a
      new Note consistent with the foregoing provisions and evidencing the Holder’s
      right to convert such Note into Alternate Consideration. The terms of any
      agreement pursuant to which a Fundamental Transaction is effected shall include
      terms requiring any such successor or surviving entity to comply with the
      provisions of this Section 5(e) and insuring that this Note (or any such
      replacement security)
      will be similarly adjusted upon any subsequent transaction analogous to a
      Fundamental Transaction.

     

    
      
         

      

      
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    f)  Calculations.
      All
      calculations under this Section 5 shall be made to the nearest cent or the
      nearest 1/100th of a share, as the case may be. For purposes of this Section
      5,
      the number of shares of Common Stock deemed to be issued and outstanding as
      of a
      given date shall be the sum of the number of shares of Common Stock (excluding
      any treasury shares of the Company) issued and outstanding.

    

    g)  Notice
      to the Holder.

    

    i.  Adjustment
      to Conversion Price.
      Whenever the Conversion Price is adjusted pursuant to any provision of this
      Section 5, the Company shall promptly deliver to each Holder a notice setting
      forth the Conversion Price after such adjustment and setting forth a brief
      statement of the facts requiring such adjustment. 

     

    ii.  Notice
      to Allow Conversion by Holder.
      If (A)
      the Company shall declare a dividend (or any other distribution in whatever
      form) on the Common Stock, (B) the Company shall declare a special nonrecurring
      cash dividend on or a redemption of the Common Stock, (C) the Company shall
      authorize the granting to all holders of the Common Stock of rights or warrants
      to subscribe for or purchase any shares of capital stock of any class or of
      any
      rights, (D) the approval of any stockholders of the Company shall be required
      in
      connection with any reclassification of the Common Stock, any consolidation
      or
      merger to which the Company is a party, any sale or transfer of all or
      substantially all of the assets of the Company, of any compulsory share exchange
      whereby the Common Stock is converted into other securities, cash or property
      or
      (E) the
      Company shall authorize the voluntary or involuntary dissolution, liquidation
      or
      winding up of the affairs of the Company, then, in each case, the Company shall
      cause to be filed at each office or agency maintained for the purpose of
      conversion of this Note, and shall cause to be delivered
      to the Holder at its last address as it shall appear upon the Note Register,
      at
      least 20 calendar days prior to the applicable record or effective date
      hereinafter specified, a notice stating (x)
      the
      date on which a record is to be taken for the purpose of such dividend,
      distribution, redemption, rights or warrants, or if a record is not to be taken,
      the date as of which the holders of the Common Stock of record to be entitled
      to
      such dividend, distributions, redemption, rights or warrants are to be
      determined or (y) the date on which such reclassification, consolidation,
      merger, sale, transfer or share exchange is expected to become effective or
      close, and the date as of which it is expected that holders of the Common Stock
      of record shall be entitled to exchange their shares of the Common Stock for
      securities, cash or other property deliverable upon such reclassification,
      consolidation, merger, sale, transfer or share exchange, provided that the
      failure to deliver such notice or any defect therein or in the delivery thereof
      shall not affect the validity of the corporate action required to be specified
      in such notice. The Holder is entitled to convert this Note during the 20-day
      period commencing on the date of such notice through the effective date of
      the
      event triggering such notice. 

     

    
      
         

      

      
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    Section
      6. Redemption
      and Forced Conversion.

    

    a)  Optional
      Redemption at Election of Company.
      Subject
      to the provisions of this Section 6, at any time after six months following
      the
      Original Issue Date, the Company may deliver a notice to the Holder (an
“Optional
      Redemption Notice”
and
      the
      date such notice is deemed delivered hereunder, the “Optional
      Redemption Notice Date”)
      of its
      irrevocable election to redeem the entire outstanding principal amount of this
      Note for cash in an amount equal to the Optional Redemption Amount on the
      20th
      Trading
      Day following the Optional Redemption Notice Date (such date, the “Optional
      Redemption Date”
and
      such redemption, the “Optional
      Redemption”).
      The
      Optional Redemption Amount is payable in full on the Optional Redemption Date.
      The Company may only effect an Optional Redemption if each of the Equity
      Conditions shall have been met (unless waived in writing by the Holder) on
      each
      Trading Day during the period commencing on the Optional Redemption Notice
      Date
      through the Optional Redemption Date and
      through and including the date payment of the Optional Redemption Amount is
      actually made in full.
      If any
      of the Equity Conditions shall cease to be satisfied at any time during the
      20
      Trading Day period, then the Holder may elect to nullify the Optional Redemption
      Notice by notice to the Company, in which case the Optional Redemption Notice
      shall be null and void, ab initio.
      The
      Company covenants and agrees that it will honor all Notices of Conversion
      tendered from the time of delivery of the Optional Redemption Notice through
      the
      date all amounts owing thereon are due and paid in full, and to the extent
      elected by the Holder, any such conversions effected during such period shall
      be
      applied against principal amount otherwise payable on the Optional Redemption
      Date.
      If the
      Company elects to redeem this Note it must redeem all outstanding
      Notes.

    

    b)  Monthly
      Redemption.
      On each
      Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
      (the “Monthly
      Redemption”).
      The
      Monthly Redemption Amount payable on each Monthly Redemption Date shall be
      paid
      in cash; provided,
      however,
      as to
      any Monthly Redemption and upon 15 Trading Days’ prior written irrevocable
      notice (the “Monthly
      Redemption Notice”),
      in
      lieu of a cash redemption payment the Company may elect to pay all or part
      of a
      Monthly Redemption Amount in Conversion Shares based on a conversion price
      equal
      to the lesser of (i) the then Conversion Price and (ii) the Market Redemption
      Price; provided,
      further,
      that
      the Company may not pay the Monthly Redemption Amount in Conversion Shares
      unless from the date the Holder receives the duly delivered Monthly Redemption
      Notice through and until the date such Monthly Redemption is paid in full,
      the
      Equity Conditions have been satisfied, unless waived in writing by the Holder.
      The Holder may convert, pursuant to Section 4(a), any principal amount of this
      Note at any time prior to the date that the Monthly Redemption Amount, plus
      accrued but unpaid interest, liquidated damages and any other amounts then
      owing
      to the Holder are due and paid in full. At the Holder’s election, any
      conversions of the principal amount of this Note pursuant to Section 4(a) may
      be
      applied against either the next upcoming Monthly Redemption Amount(s) due or
      the
      last principal amounts of this Note scheduled to be redeemed hereunder, in
      reverse time order from the Maturity Date. In the event that the Holder elects
      to have conversions of the principal amount of this Note pursuant to Section
      4(a) applied against the next upcoming Monthly Redemption Amount(s) due, then
      on
      such Monthly Redemption Date the Monthly Redemption Amount shall consist of
      any
      remaining portion of the principal amount due on such Monthly Redemption date
      plus all accrued and unpaid interest on the entire outstanding principal amount
      of this Note as of such date. The Company covenants and agrees that it will
      honor all Notices of Conversion tendered up until such amounts are paid in
      full.
      The Company’s determination to pay a Monthly Redemption in cash, shares of
      Common Stock or a combination thereof shall be applied ratably to all of the
      holders of the then outstanding Notes based on their (or their predecessor’s)
      initial purchases of Notes pursuant to the Purchase Agreement. If a Registration
      Statement is effective covering the resale of the Conversion Shares by the
      Holder, at any time the Company delivers a notice to the Holder of its election
      to pay the Monthly Redemption Amount in shares of Common Stock, the Company
      shall file a prospectus supplement pursuant to Rule 424 disclosing such
      election. Notwithstanding anything herein to the contrary, until such time
      as
      the Company has obtained Shareholder Approval and it is deemed effective, in
      no
      event shall the Company issue any Conversion Shares upon a Monthly Redemption
      hereunder.

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    c)  Redemption
      Procedure.
      The
      payment of cash pursuant to an Optional Redemption shall be payable on the
      Optional Redemption Date. If any portion of the payment pursuant to an Optional
      Redemption shall not be paid by the Company by the applicable due date, interest
      shall accrue thereon at an interest rate equal to the lesser of 20% per annum
      or
      the maximum rate permitted by applicable law until such amount is paid in full.
      Notwithstanding anything herein contained to the contrary, if any portion of
      the
      Optional Redemption Amount remains unpaid after such date, the Holder may elect,
      by written notice to the Company given at any time thereafter,
      to invalidate such Optional Redemption, ab initio,
      and,
      with respect to the Company’s failure to honor the Optional Redemption, the
      Company shall have no further right to exercise such Optional Redemption. The
      payment of cash or Common Stock pursuant to a Monthly Redemption shall be
      payable on the Monthly Redemption Date. If any portion of the payment pursuant
      to a Monthly Redemption shall not be paid by the Company by the applicable
      due
      date, interest shall accrue thereon at an interest rate equal to the lesser
      of
      20% per annum or the maximum rate permitted by applicable law until such amount
      is paid in full.

     

    d)  Forced
      Conversion.
      Notwithstanding anything herein to the contrary, if after one year following
      the
      initial Closing Date, the VWAP for any 20 out of 30 consecutive Trading Days
      (such 30 Trading Day period being the “Threshold
      Period”)
      exceeds $0.80 (subject to appropriate and equitable adjustment for reverse
      and
      forward stock splits, stock dividends, stock combinations and other similar
      transactions of the Common Stock that occur after such Closing Date), then
      the
      Company may, within 1 Trading Day after the end of any such Threshold Period,
      deliver a written notice to the Holder (a “Forced
      Conversion Notice”
and
      the
      date such notice is delivered to the Holder, the “Forced
      Conversion Notice Date”)
      to
      cause the Holder to convert all or part of the then outstanding principal amount
      of this Note plus, if so specified in the Forced Conversion Notice, accrued
      but
      unpaid interest, liquidated damages and other amounts owing to the Holder under
      this Note, at the Conversion Price on or prior to the tenth Trading Day
      following the Holder’s receipt of such Forced Conversion Notice (such date, the
“Forced
      Conversion Date”).
      The
      Company may not deliver a Forced Conversion Notice, and any Forced Conversion
      Notice delivered by the Company shall not be effective, unless all of the Equity
      Conditions are met (unless waived in writing by the Holder) on each Trading
      Day
      occurring during the applicable Threshold Period through and including the
      later
      of the Forced Conversion Date and the Trading Day after the date such Conversion
      Shares pursuant to such conversion are delivered to the Holder. Any Forced
      Conversion shall be applied ratably to all Holders based on their initial
      purchases of Notes pursuant to the Purchase Agreement, provided that any
      voluntary conversions by a Holder shall be applied against the Holder’s pro rata
      allocation, thereby decreasing the aggregate amount forcibly converted hereunder
      if only a portion of this Note is forcibly converted. For purposes of
      clarification, a Forced Conversion shall be subject to all of the provisions
      of
      Section 4, including, without limitation, the provision requiring payment of
      liquidated damages and limitations on conversions. 

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

     

    Section
      7. Negative
      Covenants.
      As long
      as any portion of this Note remains outstanding, unless the holders of at least
      a majority in principal amount of the then outstanding Notes shall have
      otherwise given prior written consent, the Company shall not, and shall not
      permit any of its subsidiaries (whether or not a Subsidiary on any Closing
      Date)
      to, directly or indirectly:

    

    a)  other
      than Permitted Indebtedness or as set forth on Schedule 7(a) enter into, create,
      incur, assume, guarantee or suffer to exist any indebtedness for borrowed money
      of any kind, including but not limited to, a guarantee, on or with respect
      to
      any of its property or assets now owned or hereafter acquired or any interest
      therein or any income or profits therefrom;

     

    b)  other
      than Permitted Liens, enter into, create, incur, assume or suffer to exist
      any
      Liens of any kind, on or with respect to any of its property or assets now
      owned
      or hereafter acquired or any interest therein or any income or profits
      therefrom;

    

    c)  amend
      its
      charter documents, including, without limitation, its articles of incorporation
      and bylaws, in any manner that materially and adversely affects any rights
      of
      the Holder;

    

    d)  repay,
      repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis
      number
      of shares of its Common Stock or Common Stock Equivalents other than (a) as
      to
      the Conversion Shares or Warrant Shares as permitted or required under the
      Transaction Documents, (b) as to repurchases of Common Stock or Common Stock
      Equivalents of departing employees of the Company, provided that such
      repurchases shall not exceed an aggregate of $150,000 for all employees during
      the term of this Note, and (c) as set forth on Schedule
      7(d);
      

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

    e)  repay,
      repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness
      (except for the Notes in accordance with the terms of the Notes), other than
      regularly scheduled principal and interest payments as such terms are in effect
      as of the initial Closing Date or as set forth on Schedule 7(e);

    

    f)  pay
      cash
      dividends or distributions on any equity securities of the Company;

    

    g)  enter
      into any transaction with any Affiliate of the Company which would be required
      to be disclosed in any public filing with the Commission, unless such
      transaction is made on an arm’s-length basis and expressly approved by a
      majority of the disinterested directors of the Company (even if less than a
      quorum otherwise required for board approval);

    

    h)  amend
      the
      Guez Note, or enter into any agreement which has the effect of effectively
      modifying the Guez Note, without the Holder’s prior written consent;
      or

    

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

     

    Section
      8. Events
      of Default.
      

    

    a)  “Event
      of Default”
means,
      wherever used herein, any of the following events (whatever the reason for
      such
      event and whether such event shall be voluntary or involuntary or effected
      by
      operation of law or pursuant to any judgment, decree or order of any court,
      or
      any order, rule or regulation of any administrative or governmental
      body):

    

    i.  any
      default in the payment of (A) the principal amount of any Note or (B) interest,
      liquidated damages and other amounts owing to a Holder on any Note, as and
      when
      the same shall become due and payable (whether on a Conversion Date or the
      Maturity Date or by acceleration or otherwise) which default is not cured within
      3 Trading Days;

     

    ii.  the
      Company shall fail to observe or perform any other covenant or agreement
      contained in the Notes (other than a breach by the Company of its obligations
      to
      deliver shares of Common Stock to the Holder upon conversion, which breach
      is
      addressed in clause (xiii) below) which failure is not cured, if possible to
      cure, within the earlier to occur
      of
(A)
      5
Trading
      Days after notice of such failure sent by the Holder or by any other
      Holder
      and (B)
      10 Trading Days after the Company has become or should have become aware of
      such
      failure (except as waived in the Amendment);

    

    iii.  a
      default
      or event of default (subject to any grace or cure period provided in the
      applicable agreement, document or instrument) shall occur under (A) any of
      the
      Transaction Documents or (B) any other material agreement, lease, document
      or
      instrument to which the Company or any Subsidiary is obligated (and not covered
      by clause (vi) below) (except as waived in the Amendment);

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

    iv.  any
      representation
      or warranty made in this Note, any other Transaction Document, any written
      statement pursuant hereto or thereto or any other report, financial statement
      or
      certificate made or delivered to the Holder or any other Holder shall
      be
      untrue or incorrect in any material respect as of the date when made or deemed
      made (except as waived in the Amendment);

    

    v.  the
      Company or any Significant Subsidiary shall be subject to a Bankruptcy
      Event;

     

    vi.  the
      Company or any Subsidiary shall default on any of its obligations under any
      mortgage, credit agreement or other facility, indenture agreement, factoring
      agreement or other instrument under which there may be issued, or by which
      there
      may be secured or evidenced, any indebtedness for borrowed money or money due
      under any long term leasing or factoring arrangement that (a) involves an
      obligation greater than $100,000, whether such indebtedness now exists or shall
      hereafter be created, and (b) results in such indebtedness becoming or being
      declared due and payable prior to the date on which it would otherwise become
      due and payable; 

    

    vii.  if
      the
      Common Stock shall not be eligible for listing or quotation for trading on
      a
      Trading Market and shall not be eligible to resume listing or quotation for
      trading thereon within five Trading Days;

    

    viii.  the
      Company shall be a party to any Change of Control Transaction or Fundamental
      Transaction or shall agree to sell or dispose of all or in excess of 33% of
      its
      assets in one transaction or a series of related transactions (whether or not
      such sale would constitute a Change of Control Transaction);

    

    ix.  if
      at any
      time after September 30, 2008 the
      Company is not subject to the reporting requirements of Section 13 or 15(d)
      of
      the Exchange Act or has failed to file all reports required to be filed
      thereunder during the then preceding 12 months (or such shorter period that
      the
      Company was required to file such reports);

    

    x.  if
      any of
      the Security Documents or Subsidiary Guaranties ceases to be in full force
      and
      effect (including failure to create a valid and perfected second priority lien
      on and security interest in all the Collateral (as defined in the Security
      Agreement) and Intellectual Property Rights of the Company and its Subsidiaries)
      at any time for any reason;

    

    xi.  any
      material adverse change in the condition, value or operation of a material
      portion of the Collateral or Intellectual Property Rights; 

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    xii.  if
      Glenn
      Palmer ceases to serve full time as the President and Chief Executive Officer
      of
      the Company and perform the duties consistent with such positions for similarly
      situated companies, provided that if such cessation is due to Glenn Palmer’s
      death, permanent disability, voluntary termination or termination by the Company
      for cause, then (A) an Event of Default shall not be deemed to have occurred
      unless and until the Company shall have failed to retain a full-time replacement
      reasonably acceptable to the Holder within 90 days following such death,
      permanent disability, voluntary termination or termination by the Company for
      cause, and (B) following any such acceptable replacement this clause shall
      apply
      to such replacement in lieu of Glenn Palmer;

    

    xiii.  the
      Company shall fail for any reason to deliver certificates to a Holder prior
      to
      the seventh Trading Day after a Conversion Date or any Forced Conversion Date
      pursuant to Section 4(d) or the Company shall provide at any time notice to
      the
      Holder, including by way of public announcement, of the Company’s intention to
      not honor requests for conversions of any Notes in accordance with the terms
      hereof; or

    

    xiv.  any
      monetary judgment, writ or similar final process shall be entered or filed
      against the Company, any subsidiary or any of their respective property or
      other
      assets for more than $100,000, and such judgment, writ or similar final process
      shall remain unvacated, unbonded or unstayed for a period of 45 calendar days;
      provided, however, that any judgment which is covered by insurance or an
      indemnity from a creditworthy party (such creditworthiness as reasonably
      determined by the Holder) shall not be included in calculating the amount of
      such judgment, writ or final process so long as the Company provides the Holder
      a written statement from such insurer or indemnity provider (which written
      statement shall be reasonably satisfactory to the Holder) to the effect that
      such judgment is covered by insurance or an indemnity and the Company will
      receive the proceeds of such insurance or indemnity within 45 calendar days
      of
      the issuance of such judgment.

    

    b)  Remedies
      Upon Event of Default.
      If any
      Event of Default occurs, the outstanding principal amount of this Note, plus
      accrued but unpaid interest, liquidated damages and other amounts owing in
      respect thereof through the date of acceleration, shall become, at the Holder’s
      election (which the Holder shall not make more than the later of 30 calendar
      days after the date (a) such Event of Default is cured or otherwise resolved
      and
      (b) the Holder is aware of such cure or resolution), immediately due and payable
      in cash at the Mandatory Default Amount. After the occurrence and during the
      continuance of any Event of Default, the interest rate on this Note shall accrue
      at an interest rate equal to the lesser of 20% per annum or the maximum rate
      permitted under applicable law. Upon the payment in full of the Mandatory
      Default Amount, the Holder shall promptly surrender this Note to or as directed
      by the Company. In connection with such acceleration described herein, the
      Holder need not provide, and the Company hereby waives, any presentment, demand,
      protest or other notice of any kind, and the Holder may immediately and without
      expiration of any grace period enforce any and all of its rights and remedies
      hereunder and all other remedies available to it under applicable law. Such
      acceleration may be rescinded and annulled by Holder at any time prior to
      payment hereunder and the Holder shall have all rights as a holder of the Note
      until such time, if any, as the Holder receives full payment pursuant to this
      Section 8(b). No such rescission or annulment shall affect any subsequent Event
      of Default or impair any right consequent thereon.

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

     

    Section
      9. Miscellaneous.

     

    a)  Notices.
      Any and
      all notices or other communications or deliveries to be provided by the Holder
      hereunder, including, without limitation, any Notice of Conversion, shall be
      in
      writing and delivered personally, by facsimile, or sent by a nationally
      recognized overnight courier service, addressed to the Company, at the address
      set forth above, or such other facsimile number or address as the Company may
      specify for such purpose by notice to the Holder delivered in accordance with
      this Section 9. Any and all notices or other communications or deliveries to
      be
      provided by the Company hereunder shall be in writing and delivered personally,
      by facsimile, or sent by a nationally recognized overnight courier service
      addressed to each Holder at the facsimile number or address of the Holder
      appearing on the books of the Company, or if no such facsimile number or address
      appears, at the principal place of business of the Holder. Any notice or other
      communication or deliveries hereunder shall be deemed given and effective on
      the
      earliest of (i) the date of transmission, if such notice or communication is
      delivered via facsimile at the facsimile number specified in this Section 9
      prior to 5:30 p.m. (New York City time), (ii) the date immediately following
      the
      date of transmission, if such notice or communication is delivered via facsimile
      at the facsimile number specified in this Section 9 between 5:30 p.m. (New
      York
      City time) and 11:59 p.m. (New York City time) on any date, (iii) the second
      Business Day following the date of mailing, if sent by U.S. nationally
      recognized overnight courier service, or (iv) upon actual receipt by the party
      to whom such notice is required to be given. The address for such notices and
      communications shall be as set forth on the signature pages attached to the
      Purchase Agreement.

     

    b)  Absolute
      Obligation.
      Except
      as expressly provided herein, no provision of this Note shall alter or impair
      the obligation of the Company, which is absolute and unconditional, to pay
      the
      principal of, liquidated damages and accrued interest, as applicable, on this
      Note at the time, place, and rate, and in the coin or currency, herein
      prescribed. This Note is a direct debt obligation of the Company. This Note
      ranks pari passu
      with all
      other Notes now or hereafter issued under the terms set forth
      herein. 

     

    c)  Lost
      or Mutilated Note.
      If this
      Note shall be mutilated, lost, stolen or destroyed, the Company shall execute
      and deliver, in exchange and substitution for and upon cancellation of a
      mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed
      Note, a new Note for the principal amount of this Note so mutilated, lost,
      stolen or destroyed, but only upon receipt of evidence of such loss, theft
      or
      destruction of such Note, and of the ownership hereof, reasonably satisfactory
      to the Company.

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

     

    d)  Governing
      Law.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of this Note shall be governed by and construed and enforced in accordance
      with
      the internal laws of the State of New York, without regard to the principles
      of
      conflict of laws thereof. Each party agrees that all legal proceedings
      concerning the interpretation, enforcement and defense of the transactions
      contemplated by any of the Transaction Documents (whether brought against a
      party hereto or its respective Affiliates, directors, officers, shareholders,
      employees or agents) shall be commenced in the state and federal courts sitting
      in the City of New York, Borough of Manhattan (the “New
      York Courts”).
      Each
      party hereto hereby irrevocably submits to the exclusive jurisdiction of the
      New
      York Courts for the adjudication of any dispute hereunder or in connection
      herewith or with any transaction contemplated hereby or discussed herein
      (including with respect to the enforcement of any of the Transaction Documents),
      and hereby irrevocably waives, and agrees not to assert in any suit, action
      or
      proceeding, any claim that it is not personally subject to the jurisdiction
      of
      such New York Courts, or such New York Courts are improper or inconvenient
      venue
      for such proceeding. Each party hereby irrevocably waives personal service
      of
      process and consents to process being served in any such suit, action or
      proceeding by mailing a copy thereof via registered or certified mail or
      overnight delivery (with evidence of delivery) to such party at the address
      in
      effect for notices to it under this Note and agrees that such service shall
      constitute good and sufficient service of process and notice thereof. Nothing
      contained herein shall be deemed to limit in any way any right to serve process
      in any other manner permitted by applicable law. Each party hereto hereby
      irrevocably waives, to the fullest extent permitted by applicable law, any
      and
      all right to trial by jury in any legal proceeding arising out of or relating
      to
      this Note or the transactions contemplated hereby. If either party shall
      commence an action or proceeding to enforce any provisions of this Note, then
      the prevailing party in such action or proceeding shall be reimbursed by the
      other party for its attorney’s fees and other costs and expenses reasonably
      incurred in the investigation, preparation and prosecution of such action or
      proceeding.

     

    e)  Waiver.
      Any
      waiver by the Company or the Holder of a breach of any provision of this Note
      shall not operate as or be construed to be a waiver of any other breach of
      such
      provision or of any breach of any other provision of this Note. The failure
      of
      the Company or the Holder to insist upon strict adherence to any term of this
      Note on one or more occasions shall not be considered a waiver or deprive that
      party of the right thereafter to insist upon strict adherence to that term
      or
      any other term of this Note. Any waiver by the Company or the Holder must be
      in
      writing.

     

    f)  Severability.
      If any
      provision of this Note is invalid, illegal or unenforceable, the balance of
      this
      Note shall remain in effect, and if any provision is inapplicable to any Person
      or circumstance, it shall nevertheless remain applicable to all other Persons
      and circumstances. If it shall be found that any interest or other amount deemed
      interest due hereunder violates the applicable law governing usury, the
      applicable rate of interest due hereunder shall automatically be lowered to
      equal the maximum rate of interest permitted under applicable law. The Company
      covenants (to the extent that it may lawfully do so) that it shall not at any
      time insist upon, plead, or in any manner whatsoever claim or take the benefit
      or advantage of, any stay, extension or usury law or other law which would
      prohibit or forgive the Company from paying all or any portion of the principal
      of or interest on this Note as contemplated herein, wherever enacted, now or
      at
      any time hereafter in force, or which may affect the covenants or the
      performance of this indenture, and the Company (to the extent it may lawfully
      do
      so) hereby expressly waives all benefits or advantage of any such law, and
      covenants that it will not, by resort to any such law, hinder, delay or impeded
      the execution of any power herein granted to the Holder, but will suffer and
      permit the execution of every such as though no such law has been
      enacted.

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     

    g)  Next
      Business Day.
      Whenever any payment or other obligation hereunder shall be due on a day other
      than a Business Day, such payment shall be made on the next succeeding Business
      Day.

    

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

    

    i)  Assumption. 
      Any successor to the Company or any surviving entity in a Fundamental
      Transaction shall (i) assume, prior to such Fundamental Transaction, all of
      the
      obligations of the Company under this Note and the other Transaction Documents
      pursuant to written agreements in form and substance satisfactory to the Holder
      (such approval not to be unreasonably withheld or delayed) and (ii) issue to
      the
      Holder a new Note of such successor entity evidenced by a written instrument
      substantially similar in form and substance to this Note, including, without
      limitation, having a principal amount and interest rate equal to the principal
      amount and the interest rate of this Note and having similar ranking to this
      Note, which shall be satisfactory to the Holder (any such approval not to be
      unreasonably withheld or delayed).  The provisions of this Section 9(i)
      shall apply similarly and equally to successive Fundamental Transactions and
      shall be applied without regard to any limitations of this Note.

    

    j)  Usury.
      This
      Note shall be subject to the anti-usury limitations contained in the Purchase
      Agreement.

    

    *********************

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, the Company has caused this Note to be duly executed by a
      duly
      authorized officer as of the date first above indicated.

     

    
      	 	 	 
	 	
              BLUE
                HOLDINGS, INC.

            
	 
 	 
 	 
 
	
            	By:  	 
	 	 	
              
Name:
              Glenn S. Palmer
	 	 	Title: CEO
	 	Facsimile No. for delivery
              of Notices:
              323-726

    

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

     

    ANNEX
      A

    

    NOTICE
      OF CONVERSION

     

    

    The
      undersigned hereby elects to convert principal under the 8% Senior Secured
      Convertible Note due September 1, 2010 of Blue Holdings, Inc., a Nevada
      corporation (the Company”),
      into
      shares of common stock (the “Common
      Stock”),
      of
      the Company according to the conditions hereof, as of the date written below.
      If
      shares of Common Stock are to be issued in the name of a person other than
      the
      undersigned, the undersigned will pay all transfer taxes payable with respect
      thereto and is delivering herewith such certificates and opinions as reasonably
      requested by the Company in accordance therewith. No fee will be charged to
      the
      holder for any conversion, except for such transfer taxes, if any.

    

    By
      the
      delivery of this Notice of Conversion the undersigned represents and warrants
      to
      the Company that its ownership of the Common Stock does not exceed the amounts
      specified under Section 4 of this Note, as determined in accordance with Section
      13(d) of the Exchange Act.

    

    The
      undersigned agrees to comply with the prospectus delivery requirements under
      the
      applicable securities laws in connection with any transfer of the aforesaid
      shares of Common Stock pursuant to any prospectus. 

    

    Conversion
      calculations:   

    Date
      to
      Effect Conversion: _______________________________________

    

    Principal
      Amount of Note to be Converted:
      ___________________________

    

    Interest
      Accrued on Account

    of
      Conversion at Issue: __________________________________________

     

    Number
      of
      shares of Common Stock to be issued:
      ______________________

    ____________________________________________________________

     

    Signature:
      ____________________________________________________

     

    Name:
      _______________________________________________________

     

    Address
      for Delivery of Common Stock Certificates: ____________________

    ____________________________________________________

    ____________________________________________________

    

    Or

    

    DWAC
      Instructions:

    

    Broker
      No: ______________

    Account
      No: _____________

     

    
      
         

      

      
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    Schedule
      7(a)

    

    The
      Company is party to that certain Revolving Promissory Note dated August 7,
      2006
      with Paul Guez pursuant to which Mr. Guez advances and may continue to advance
      funds to the Company from time to time under the terms currently in effect.
      The
      Company repays these funds from time to time in the ordinary course. The Company
      and Mr. Guez are operating under a one-year extension of the term of the
      Revolving Promissory Note under the same terms as reflected in the Revolving
      Promissory Note. There are no amounts outstanding under the Revolving Promissory
      Note as of July 30, 2007.

    

    The
      Company intends to enter into an 8% Senior Convertible Note with Paul Guez
      in
      the principal amount of $1,618,093.15 on terms substantially similar to those
      set forth in this Note except that the note to be issued to Paul Guez shall
      be
      unsecured and shall be subordinate in payment to the Notes.

     

    

    Schedule
      7(d)

    

    The
      Company intends to rescind the conversion on March 5, 2008 of $1,400,000 of
      indebtedness under the Revolving Promissory Note dated August 7, 2006 with
      Paul
      Guez into 1,750,000 shares of the Company’s common stock. Mr. Guez will cancel
      $700,000 of outstanding indebtedness under the Revolving Promissory Note and
      the
      Company will issue to Mr. Guez an 8% Senior Convertible Note in the principal
      amount of $1,618,093.15 (which will include $700,000 of remaining indebtedness
      under the Revolving Promissory Note), such that upon the issuance of the 8%
      Senior Convertible Note, no amounts shall be outstanding under the Revolving
      Promissory Note other that new amounts advanced under the Note after July 30,
      2008.

    

     

    Schedule
      7(e)

    

    The
      Company is party to that certain Revolving Promissory Note dated August 7,
      2006
      with Paul Guez pursuant to which Mr. Guez advances and may continue to advance
      funds to the Company from time to time under the terms currently in effect.
      The
      Company repays these funds from time to time in the ordinary course. The Company
      and Mr. Guez are operating under a one-year extension of the term of the
      Revolving Promissory Note under the same terms as reflected in the Revolving
      Promissory Note. There are no amounts outstanding under the Revolving Promissory
      Note as of July 30, 2007.

    

    The
      Company intends to enter into an 8% Senior Convertible Note with Paul Guez
      in
      the principal amount of $1,618,093.15 on terms substantially similar to those
      set forth in this Note except that the note to be issued to Paul Guez shall
      be
      unsecured and shall be subordinate in payment to the Notes.

     

    
      
         

      

      
        28Unassociated Document

    THIS
      AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT AMENDS AND RESTATES THE
      COMMON STOCK PURCHASE WARRANT ORIGINALLY ISSUED PURSUANT TO THE SECURITIES
      PURCHASE AGREEMENT, DATED AS OF MARCH 5, 2008, BY AND BETWEEN BLUE HOLDINGS,
      INC., A NEVADA CORPORATION, AND THE PURCHASER NAMED THEREIN. 

    

    NEITHER
      THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE
      BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
      COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
      MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
      OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS
      SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE
      PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED
      BY
      SUCH SECURITIES.

    

    

    AMENDED
      AND RESTATED

    COMMON
      STOCK PURCHASE WARRANT

    

    

    BLUE
      HOLDINGS, INC.

     

    
      	Warrant Shares: 2,187,500	 	Issue Date: March 5,
              2008

    

     

     

    THIS
      COMMON STOCK PURCHASE WARRANT (the “Warrant”)
      certifies that, for value received, GEMINI MASTER FUND, LTD. (the “Holder”)
      is
      entitled, upon the terms and subject to the limitations on exercise and the
      conditions hereinafter set forth, at any time on or after the Issue Date (as
      defined above) and on or prior to the close of business on the fifth
      (5th)
      anniversary of the Issue Date (the “Termination
      Date”)
      but
      not thereafter, to subscribe for and purchase from Blue Holdings, Inc., a Nevada
      corporation (the “Company”),
      up to
      2,187,500 shares (the “Warrant
      Shares”)
      of
      Common Stock. The purchase price of one share of Common Stock under this Warrant
      shall be equal to the Exercise Price, as defined in Section 2(b). 

     

    Section
      1. Definitions.
      Capitalized terms used and not otherwise defined herein shall have the meanings
      set forth in that certain Securities Purchase Agreement (the “Purchase
      Agreement”),
      dated
      March 5, 2008, among the Company and the purchasers signatory
      thereto.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    Section
      2. Exercise.

     

    a)  Exercise
      of Warrant.
      Exercise of the purchase rights represented by this Warrant may be made, in
      whole or in part, at any time and from time to time on or after the Issue Date
      and on or before the Termination Date by delivery to the Company of a duly
      executed facsimile copy of the Notice of Exercise Form (“Notice
      of Exercise”)
      annexed hereto (or such other office or agency of the Company as it may
      designate by notice in writing to the registered Holder at the address of the
      Holder appearing on the books of the Company); and, within 3 Trading Days of
      the
      date said Notice of Exercise is delivered to the Company, the Company shall
      have
      received payment of the aggregate Exercise Price of the shares thereby purchased
      by wire transfer or cashier’s check drawn on a United States bank, unless
      payment is being made by cashless exercise as provided in Section 2(c) below.
      Notwithstanding anything herein to the contrary, the Holder shall not be
      required to physically surrender this Warrant to the Company until the Holder
      has purchased all of the Warrant Shares available hereunder and the Warrant
      has
      been exercised in full, in which case the Holder shall surrender this Warrant
      to
      the Company for cancellation within 3 Trading Days of the date the final Notice
      of Exercise is delivered to the Company. Partial exercises of this Warrant
      resulting in purchases of a portion of the total number of Warrant Shares
      available hereunder shall have the effect of lowering the outstanding number
      of
      Warrant Shares purchasable hereunder in an amount equal to the applicable number
      of Warrant Shares purchased. The Holder and the Company shall maintain records
      showing the number of Warrant Shares purchased and the date of such purchases.
      In the event of any dispute or discrepancy, the records of the Company shall
      be
      controlling and determinative in the absence of manifest error. The Holder
      and
      any assignee, by acceptance of this Warrant, acknowledge and agree that, by
      reason of the provisions of this paragraph, following the purchase of a portion
      of the Warrant Shares hereunder, the number of Warrant Shares available for
      purchase hereunder at any given time may be less than the amount stated on
      the
      face hereof.

     

    b)  Exercise
      Price.
      The
      exercise price per share of the Common Stock under this Warrant shall be $0.40,
      subject to adjustment hereunder (the “Exercise
      Price”).

     

    c)  Cashless
      Exercise.
      This
      Warrant may also be exercised by means of a “cashless exercise” in which the
      Holder shall be entitled to receive a certificate for the number of Warrant
      Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A),
      where:

     

    (A)
      = the
      VWAP on the Trading Day immediately preceding the date of such
      election;

    

    (B)
      = the
      Exercise Price of this Warrant, as adjusted; and 

    

    (X)
      = the
      number of Warrant Shares issuable upon exercise of this Warrant in accordance
      with the terms of this Warrant by means of a cash exercise rather than a
      cashless exercise.

    

    Notwithstanding
      anything herein to the contrary, on the Termination Date, this Warrant shall
      be
      automatically exercised via cashless exercise pursuant to this Section
      2(c).

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    d)  Holder’s
      Restrictions.
      The
      Company shall not effect any exercise of this Warrant, and a Holder shall not
      have the right to exercise any portion of this Warrant, pursuant to Section
      2 or
      otherwise, to the extent that after giving effect to such issuance after
      exercise as set forth on the applicable Notice of Exercise, the Holder (together
      with the Holder’s Affiliates, and any other person or entity acting as a group
      together with the Holder or any of the Holder’s Affiliates), would beneficially
      own in excess of the Beneficial Ownership Limitation (as defined below). 
For purposes of the foregoing sentence, the number of shares of Common Stock
      beneficially owned by the Holder and its Affiliates shall include the number
      of
      shares of Common Stock issuable upon exercise of this Warrant with respect
      to
      which such determination is being made, but shall exclude the number of shares
      of Common Stock which would be issuable upon (A) exercise of the remaining,
      nonexercised portion of this Warrant beneficially owned by the Holder or any
      of
      its Affiliates and (B) exercise or conversion of the unexercised or nonconverted
      portion of any other securities of the Company (including, without limitation,
      any other Common Stock Equivalents) subject to a limitation on conversion or
      exercise analogous to the limitation contained herein beneficially owned by
      the
      Holder or any of its Affiliates.  Except as set forth in the preceding
      sentence, for purposes of this Section 2(d), beneficial ownership shall be
      calculated in accordance with Section 13(d) of the Exchange Act and the rules
      and regulations promulgated thereunder, it being acknowledged by the Holder
      that
      the Company is not representing to the Holder that such calculation is in
      compliance with Section 13(d) of the Exchange Act and the Holder is solely
      responsible for any schedules required to be filed in accordance therewith.
      To
      the extent that the limitation contained in this Section 2(d) applies, the
      determination of whether this Warrant is exercisable (in relation to other
      securities owned by the Holder together with any Affiliates) and of which
      portion of this Warrant is exercisable shall be in the sole discretion of the
      Holder, and the submission of a Notice of Exercise shall be deemed to be the
      Holder’s determination of whether this Warrant is exercisable (in relation to
      other securities owned by the Holder together with any Affiliates) and of which
      portion of this Warrant is exercisable, in each case subject to the Beneficial
      Ownership Limitation, and the Company shall have no obligation to verify or
      confirm the accuracy of such determination. In addition, a determination as
      to
      any group status as contemplated above shall be determined in accordance with
      Section 13(d) of the Exchange Act and the rules and regulations promulgated
      thereunder. For purposes of this Section 2(d), in determining the number of
      outstanding shares of Common Stock, a Holder may rely on the number of
      outstanding shares of Common Stock as reflected in (x) the Company’s most recent
      periodic or annual report, as the case may be, (y) a more recent public
      announcement by the Company or (z) any other notice by the Company or the
      Company’s Transfer Agent setting forth the number of shares of Common Stock
      outstanding.  Upon the written or oral request of a Holder, the Company
      shall within three Trading Days confirm orally and in writing to the Holder
      the
      number of shares of Common Stock then outstanding.  In any case, the number
      of outstanding shares of Common Stock shall be determined after giving effect
      to
      the conversion or exercise of securities of the Company, including this Warrant,
      by the Holder or its Affiliates since the date as of which such number of
      outstanding shares of Common Stock was reported. The “Beneficial
      Ownership Limitation”
shall
      be 4.9% of the number of shares of the Common Stock outstanding immediately
      after giving effect to the issuance of shares of Common Stock issuable upon
      exercise of this Warrant. By written notice to the Company, the Holder may
      at
      any time and from time to time increase or decrease the Beneficial Ownership
      Limitation to any other percentage specified in such notice (or specify that
      the
      Beneficial Ownership Limitation shall no longer be applicable), provided,
      however, that (A) any such increase (or inapplicability) shall not be effective
      until the sixty-first (61st) day after such notice is delivered to the Company,
      and (B) any such increase or decrease shall apply only to the Holder and not
      to
      any other holder of Warrants. The provisions of this paragraph shall be
      construed and implemented in a manner otherwise than in strict conformity with
      the terms of this Section 2(d) to correct this paragraph (or any portion hereof)
      which may be defective or inconsistent with the intended Beneficial Ownership
      Limitation herein contained or to make changes or supplements necessary or
      desirable to properly give effect to such limitation. The limitations contained
      in this paragraph shall apply to a successor holder of this
      Warrant.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    e)  Mechanics
      of Exercise.
      

     

    i.  Delivery
      of Certificates Upon Exercise.
      Certificates for shares purchased hereunder shall be transmitted by the transfer
      agent of the Company to the Holder by crediting the account of the Holder’s
      prime broker with the Depository Trust Company (“DTC”)
      through its Deposit Withdrawal Agent Commission (“DWAC”)
      system
      if the Company is a participant in such system and either (x) there is an
      effective Registration Statement permitting the resale of the Warrant Shares
      by
      the Holder, or (y) such shares may be sold pursuant to Rule 144, and otherwise
      by physical delivery to the address specified by the Holder in the Notice of
      Exercise, within 3 Trading Days from the delivery to the Company of the Notice
      of Exercise, surrender of this Warrant (if required) and payment of the
      aggregate Exercise Price as set forth above (“Warrant
      Share Delivery Date”).
      This
      Warrant shall be deemed to have been exercised on the date the Exercise Price
      is
      received by the Company. The Warrant Shares shall be deemed to have been issued,
      and the Holder or any other person so designated to be named therein shall
      be
      deemed to have become a holder of record of such shares for all purposes, as
      of
      the date the Warrant has been exercised by payment to the Company of the
      Exercise Price (or by cashless exercise) and all taxes required to be paid
      by
      the Holder, if any, pursuant to Section 2(e)(vi) prior to the issuance of such
      shares, have been paid. If the Company fails for any reason to deliver to the
      Holder the Warrant Shares or certificates evidencing the Warrant Shares subject
      to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall
      pay to the Holder, in cash, as liquidated damages and not as a penalty, for
      each
      $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the
      Common Stock on the date of the applicable Notice of Exercise), $10 per Trading
      Day (increasing to $17.50 per Trading Day on the fifth Trading Day after such
      liquidated damages begin to accrue) for each Trading Day after such Warrant
      Share Delivery Date until such shares or certificates are delivered.

     

    ii.  Delivery
      of New Warrants Upon Exercise.
      If this
      Warrant shall have been exercised in part, the Company shall, at the request
      of
      a Holder and upon surrender of this Warrant, at the time of delivery of the
      certificate or certificates representing Warrant Shares, deliver to the Holder
      a
      new Warrant evidencing the rights of the Holder to purchase the unpurchased
      Warrant Shares called for by this Warrant, which new Warrant shall in all other
      respects be identical with this Warrant.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    iii.  Rescission
      Rights.
      If the
      Company fails to cause its transfer agent to transmit to the Holder a
      certificate or certificates representing the Warrant Shares (or otherwise
      transmit such shares via DWAC to the Holder’s DTC account) pursuant to this
      Section 2(e) by the Warrant Share Delivery Date, then the Holder will have
      the
      right to rescind such exercise.

     

    iv.  Compensation
      for Buy-In on Failure to Timely Deliver Certificates Upon
      Exercise.
      In
      addition to any other rights available to the Holder, if the Company fails
      to
      cause its transfer agent to transmit to the Holder a certificate or certificates
      representing the Warrant Shares (or otherwise transmit such shares via DWAC
      to
      the Holder’s DTC account) pursuant to an exercise on or before the Warrant Share
      Delivery Date, and if after such date the Holder is required by its broker
      to
      purchase (in an open market transaction or otherwise) or the Holder’s brokerage
      firm otherwise purchases, shares of Common Stock to deliver in satisfaction
      of a
      sale by the Holder of the Warrant Shares which the Holder anticipated receiving
      upon such exercise (a “Buy-In”),
      then
      the Company 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 Warrant Shares that the Company was required
      to
      deliver to the Holder in connection with the exercise 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 Warrant and equivalent number of Warrant Shares for which such exercise
      was
      not honored or deliver to the Holder the number of shares of Common Stock that
      would have been issued had the Company timely complied with its exercise 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 exercise 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 Company shall be required to pay the Holder
      $1,000. The Holder shall provide the Company written notice indicating the
      amounts payable to the Holder in respect of the Buy-In and, upon request of
      the
      Company, evidence of the amount of such loss. 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 Company’s failure to timely deliver the
      Warrant Shares or certificates representing shares of Common Stock upon exercise
      of the Warrant as required pursuant to the terms hereof.

     

    v.  No
      Fractional Shares or Scrip.
      No
      fractional shares or scrip representing fractional shares shall be issued upon
      the exercise of this Warrant. As to any fraction of a share which the Holder
      would otherwise be entitled to purchase upon such exercise, the Company shall
      at
      its election, either pay a cash adjustment in respect of such final fraction
      in
      an amount equal to such fraction multiplied by the Exercise Price or round
      up to
      the next whole share.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    vi.  Charges,
      Taxes and Expenses.
      Issuance of certificates for Warrant Shares shall be made without charge to
      the
      Holder for any issue or transfer tax or other incidental expense in respect
      of
      the issuance of such certificate, all of which taxes and expenses shall be
      paid
      by the Company, and such certificates shall be issued in the name of the Holder
      or in such name or names as may be directed by the Holder; provided,
      however,
      that in
      the event certificates for Warrant Shares are to be issued in a name other
      than
      the name of the Holder, this Warrant when surrendered for exercise shall be
      accompanied by the Assignment Form attached hereto duly executed by the Holder;
      and the Company may require, as a condition thereto, the payment of a sum
      sufficient to reimburse it for any transfer tax incidental thereto.

     

    vii.  Closing
      of Books.
      The
      Company will not close its stockholder books or records in any manner which
      prevents the timely exercise of this Warrant, pursuant to the terms
      hereof.

     

    Section
      3. Certain
      Adjustments.

     

    a)  Stock
      Dividends and Splits.
      If the
      Company, at any time while this Warrant is outstanding: (A) pays a stock
      dividend or otherwise makes a distribution or distributions on shares of its
      Common Stock or any other equity or equity equivalent securities payable in
      shares of Common Stock (which, for avoidance of doubt, shall not include any
      shares of Common Stock issued by the Company upon exercise of this Warrant),
      (B)
      subdivides outstanding shares of Common Stock into a larger number of shares,
      (C) combines (including by way of reverse stock split) outstanding shares of
      Common Stock into a smaller number of shares, or (D) issues by reclassification
      of shares of the Common Stock any shares of capital stock of the Company, then
      in each case the Exercise Price shall be multiplied by a fraction of which
      the
      numerator shall be the number of shares of Common Stock (excluding treasury
      shares, if any) outstanding immediately before such event and of which the
      denominator shall be the number of shares of Common Stock outstanding
      immediately after such event and the number of shares issuable upon exercise
      of
      this Warrant shall be proportionately adjusted such that the aggregate Exercise
      Price of this Warrant shall remain unchanged. Any adjustment made pursuant
      to
      this Section 3(a) shall become effective immediately after the record date
      for
      the determination of stockholders entitled to receive such dividend or
      distribution and shall become effective immediately after the effective date
      in
      the case of a subdivision, combination or re-classification.

     

    b)  Subsequent
      Equity Sales.
      If the
      Company or any Subsidiary thereof, as applicable, at any time while this Warrant
      is outstanding, shall sell or grant any option to purchase, or sell or grant
      any
      right to reprice, or otherwise dispose of or issue (or announce any offer,
      sale,
      grant or any option to purchase or other disposition) any Common Stock or Common
      Stock Equivalents entitling any Person to acquire shares of Common Stock, at
      an
      effective price per share less than the then Exercise Price (such issuances
      collectively, a “Dilutive
      Issuance”)
      (if
      the holder of the Common Stock or Common Stock Equivalents so issued shall
      at
      any time, whether by operation of purchase price adjustments, reset provisions,
      floating conversion, exercise or exchange prices or otherwise, or due to
      warrants, options or rights per share which are issued in connection with such
      issuance, be entitled to receive shares of Common Stock at an effective price
      per share which is less than the Exercise Price, such issuance shall be deemed
      to have occurred for less than the Exercise Price on such date of the Dilutive
      Issuance), then the Exercise Price shall be reduced and only reduced to equal
      an
      amount (“Adjusted Price”) determined by multiplying the Exercise Price then in
      effect by a fraction (a) the numerator of which shall be the sum of (1) the
      number of shares of Common Stock outstanding immediately prior to such issue
      or
      sale, plus (2) the number of shares of Common Stock which the aggregate
      consideration received by the Company for such additional shares would purchase
      at such Exercise Price, and (b) the denominator of which shall be the number
      of
      shares of Common Stock of the Company outstanding immediately after such issue
      or sale, and the number of Warrant Shares issuable hereunder shall be increased
      such that the aggregate Exercise Price payable hereunder, after taking into
      account the decrease in the Exercise Price, shall be equal to the aggregate
      Exercise Price prior to such adjustment. Such adjustment shall be made whenever
      such Common Stock or Common Stock Equivalents are issued. Notwithstanding the
      foregoing, no adjustments shall be made, paid or issued under this Section
      3(b)
      in respect of an Exempt Issuance or
      in the
      event that such adjustment will result in the issuance of more than 42,000,000
      shares of Common Stock (as appropriately and equitably adjusted for stock
      splits, stock dividends and similar events) when
      aggregated with any shares of Common Stock issued on or after the Issue Date
      and
      prior to the Termination Date (A) in connection with the conversion of any
      Notes
      issued pursuant to the Purchase Agreement or as payment of principal, interest
      or liquidated damages, (B) in connection with the exercise of any Warrants
      issued pursuant to the Purchase Agreement, including this Warrant, and (C)
      in
      connection with any warrants issued to any registered broker-dealer as a fee
      in
      connection with the issuance of the Securities pursuant to the Purchase
      Agreement. The Company shall notify the Holder in writing, no later than the
      third (3rd)
      Trading
      Day following the issuance of any Common Stock or Common Stock Equivalents
      subject to this Section 3(b), indicating therein the applicable issuance price,
      or applicable reset price, exchange price, conversion price and other pricing
      terms (such notice the “Dilutive
      Issuance Notice”).
      For
      purposes of clarification, whether or not the Company provides a Dilutive
      Issuance Notice pursuant to this Section 3(b), upon the occurrence of any
      Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
      entitled to receive a number of Warrant Shares based upon the Adjusted Price
      regardless of whether the Holder accurately refers to the Adjusted Price in
      the
      Notice of Exercise.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    c)  Subsequent
      Rights Offerings.
      If the
      Company, at any time while the Warrant is outstanding, shall issue rights,
      options or warrants to all holders of Common Stock (and not to Holders in their
      capacity as holders of Warrants) entitling them to subscribe for or purchase
      shares of Common Stock at a price per share less than the VWAP at the record
      date mentioned below, then the Exercise Price shall be multiplied by a fraction,
      of which the denominator shall be the number of shares of the Common Stock
      outstanding on the date of issuance of such rights or warrants plus the number
      of additional shares of Common Stock offered for subscription or purchase,
      and
      of which the numerator shall be the number of shares of the Common Stock
      outstanding on the date of issuance of such rights or warrants plus the number
      of shares which the aggregate offering price of the total number of shares
      issued (assuming receipt by the Company in full of all consideration payable
      upon exercise of such rights, options or warrants) would purchase at such VWAP.
      Such adjustment shall be made whenever such rights or warrants are issued,
      and
      shall become effective immediately after the record date for the determination
      of stockholders entitled to receive such rights, options or warrants.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    d)  Pro
      Rata Distributions.
      If the
      Company, at any time while this Warrant is outstanding, shall distribute to
      all
      holders of Common Stock (and not to Holders in their capacity as holders of
      Warrants) evidences of its indebtedness or assets (including cash and cash
      dividends) or rights or warrants to subscribe for or purchase any security
      other
      than the Common Stock (which shall be subject to Section 3(b)), then in each
      such case the Exercise Price shall be adjusted by multiplying the Exercise
      Price
      in effect immediately prior to the record date fixed for determination of
      stockholders entitled to receive such distribution by a fraction of which the
      denominator shall be the VWAP determined as of the record date mentioned above,
      and of which the numerator shall be such VWAP on such record date less the
      then
      per share fair market value at such record date of the portion of such assets
      or
      evidence of indebtedness so distributed applicable to one outstanding share
      of
      the Common Stock as determined by the Board of Directors in good faith. In
      either case the adjustments shall be described in a statement provided to the
      Holder of the portion of assets or evidences of indebtedness so distributed
      or
      such subscription rights applicable to one share of Common Stock. Such
      adjustment shall be made whenever any such distribution is made and shall become
      effective immediately after the record date mentioned above.

     

    e)  Fundamental
      Transaction.
      If, at
      any time while this Warrant is outstanding, (A) the Company effects any merger
      or consolidation of the Company with or into another Person, (B) the Company
      effects any sale of all or substantially all of its assets in one or a series
      of
      related transactions, (C) any tender offer or exchange offer (whether by the
      Company or another Person) is completed pursuant to which holders of Common
      Stock are permitted to tender or exchange their shares for other securities,
      cash or property, or (D) the Company effects any reclassification of the Common
      Stock or any compulsory share exchange pursuant to which the Common Stock is
      effectively converted into or exchanged for other securities, cash or property
      (each a “Fundamental
      Transaction”),
      then,
      upon any subsequent exercise of this Warrant, the Holder shall have the right
      to
      receive, for each Warrant Share that would have been issuable upon such exercise
      immediately prior to the occurrence of such Fundamental Transaction, the number
      of shares of Common Stock of the successor or acquiring corporation or of the
      Company, if it is the surviving corporation, and any additional consideration
      (the “Alternate
      Consideration”)
      receivable as a result of such merger, consolidation or disposition of assets
      by
      a holder of the number of shares of Common Stock for which this Warrant is
      exercisable immediately prior to such event. For purposes of any such exercise,
      the determination of the Exercise Price shall be appropriately adjusted to
      apply
      to such Alternate Consideration based on the amount of Alternate Consideration
      issuable in respect of one share of Common Stock in such Fundamental
      Transaction, and the Company shall apportion the Exercise Price among the
      Alternate Consideration in a reasonable manner reflecting the relative value
      of
      any different components of the Alternate Consideration. If holders of Common
      Stock are given any choice as to the securities, cash or property to be received
      in a Fundamental Transaction, then the Holder shall be given the same choice
      as
      to the Alternate Consideration it receives upon any exercise of this Warrant
      following such Fundamental Transaction. To the extent necessary to effectuate
      the foregoing provisions, any successor to the Company or surviving entity
      in
      such Fundamental Transaction shall issue to the Holder a new warrant consistent
      with the foregoing provisions and evidencing the Holder’s right to exercise such
      warrant into Alternate Consideration. The terms of any agreement pursuant to
      which a Fundamental Transaction is effected shall include terms requiring any
      such successor or surviving entity to comply with the provisions of this Section
      3(e) and insuring that this Warrant (or any such replacement security) will
      be
      similarly adjusted upon any subsequent transaction analogous to a Fundamental
      Transaction. Notwithstanding anything to the contrary, in the event of a
      Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3
      transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934,
      as amended, or (3) a Fundamental Transaction involving a person or entity not
      traded on a national securities exchange, the Nasdaq Global Select Market,
      the
      Nasdaq Global Market, the Nasdaq Capital Market or the OTC Bulletin Board,
      the
      Company or any successor entity shall pay at the Holder’s option, exercisable at
      any time concurrently with or within 30 days after the consummation of the
      Fundamental Transaction, an amount of cash equal to the value of this Warrant
      as
      determined in accordance with the Black Scholes Option Pricing Model obtained
      from the “OV” function on Bloomberg L.P. using (i) a price per share of Common
      Stock equal to the VWAP of the Common Stock for the Trading Day immediately
      preceding the date of consummation of the applicable Fundamental Transaction,
      (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for
      a
      period equal to the remaining term of this Warrant as of the date of
      consummation of the applicable Fundamental Transaction and (iii) an expected
      volatility equal to the 100 day volatility obtained from the “HVT” function on
      Bloomberg L.P. determined as of the Trading Day immediately following the public
      announcement of the applicable Fundamental Transaction.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    f)  Calculations.
      All
      calculations under this Section 3 shall be made to the nearest cent or the
      nearest 1/100th of a share, as the case may be. For purposes of this Section
      3,
      the number of shares of Common Stock deemed to be issued and outstanding as
      of a
      given date shall be the sum of the number of shares of Common Stock (excluding
      treasury shares, if any) issued and outstanding.

     

    g)  Voluntary
      Adjustment By Company.
      The
      Company may at any time during the term of this Warrant reduce the then current
      Exercise Price to any amount and for any period of time deemed appropriate
      by
      the Board of Directors of the Company.

     

    h)  Notice
      to Holder.
      

     

    i.  Adjustment
      to Exercise Price.
      Whenever the Exercise Price is adjusted pursuant to any provision of this
      Section 3, the Company shall promptly mail to the Holder a notice setting forth
      the Exercise Price after such adjustment and setting forth a brief statement
      of
      the facts requiring such adjustment. If the Company enters into a Variable
      Rate
      Transaction (as defined in the Purchase Agreement), despite the prohibition
      thereon in the Purchase Agreement, the Company shall be deemed to have issued
      Common Stock or Common Stock Equivalents at the lowest possible conversion
      or
      exercise price at which such securities may be converted or exercised.

     

    ii.  Notice
      to Allow Exercise by Holder.
      If (A)
      the Company shall declare a dividend (or any other distribution in whatever
      form) on the Common Stock; (B) the Company shall declare a special nonrecurring
      cash dividend on or a redemption of the Common Stock; (C) the Company shall
      authorize the granting to all holders of the Common Stock rights or warrants
      to
      subscribe for or purchase any shares of capital stock of any class or of any
      rights; (D) the approval of any stockholders of the Company shall be required
      in
      connection with any reclassification of the Common Stock, any consolidation
      or
      merger to which the Company is a party, any sale or transfer of all or
      substantially all of the assets of the Company, of any compulsory share exchange
      whereby the Common Stock is converted into other securities, cash or property;
      (E) the Company shall authorize the voluntary or involuntary dissolution,
      liquidation or winding up of the affairs of the Company; then, in each case,
      the
      Company shall cause to be mailed to the Holder at its last address as it shall
      appear upon the Warrant Register of the Company, at least 20 calendar days
      prior
      to the applicable record or effective date hereinafter specified, a notice
      stating (x) the date on which a record is to be taken for the purpose of such
      dividend, distribution, redemption, rights or warrants, or if a record is not
      to
      be taken, the date as of which the holders of the Common Stock of record to
      be
      entitled to such dividend, distributions, redemption, rights or warrants are
      to
      be determined or (y) the date on which such reclassification, consolidation,
      merger, sale, transfer or share exchange is expected to become effective or
      close, and the date as of which it is expected that holders of the Common Stock
      of record shall be entitled to exchange their shares of the Common Stock for
      securities, cash or other property deliverable upon such reclassification,
      consolidation, merger, sale, transfer or share exchange; provided that the
      failure to mail such notice or any defect therein or in the mailing thereof
      shall not affect the validity of the corporate action required to be specified
      in such notice. The Holder is entitled to exercise this Warrant during the
      period commencing on the date of such notice to the effective date of the event
      triggering such notice.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    Section
      4. Transfer
      of Warrant.

     

    a)  Transferability.
      Subject
      to compliance with any applicable securities laws and the conditions set forth
      in Section 4(d) hereof and to the provisions of Section 4.1 of the Purchase
      Agreement, this Warrant and all rights hereunder (including, without limitation,
      any registration rights) are transferable, in whole or in part, upon surrender
      of this Warrant at the principal office of the Company or its designated agent,
      together with a written assignment of this Warrant substantially in the form
      attached hereto duly executed by the Holder or its agent or attorney and funds
      sufficient to pay any transfer taxes payable upon the making of such transfer.
      Upon such surrender and, if required, such payment, the Company shall execute
      and deliver a new Warrant or Warrants in the name of the assignee or assignees
      and in the denomination or denominations specified in such instrument of
      assignment, and shall issue to the assignor a new Warrant evidencing the portion
      of this Warrant not so assigned, and this Warrant shall promptly be cancelled.
      A
      Warrant, if properly assigned, may be exercised by a new holder for the purchase
      of Warrant Shares without having a new Warrant issued. 

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    b)  New
      Warrants.
      This
      Warrant may be divided or combined with other Warrants upon presentation hereof
      at the aforesaid office of the Company, together with a written notice
      specifying the names and denominations in which new Warrants are to be issued,
      signed by the Holder or its agent or attorney. Subject to compliance with
      Section 4(a), as to any transfer which may be involved in such division or
      combination, the Company shall execute and deliver a new Warrant or Warrants
      in
      exchange for the Warrant or Warrants to be divided or combined in accordance
      with such notice. All Warrants issued on transfers or exchanges shall be dated
      the original Issue Date and shall be identical with this Warrant except as
      to
      the number of Warrant Shares issuable pursuant thereto. 

     

    c)  Warrant
      Register.
      The
      Company shall register this Warrant, upon records to be maintained by the
      Company for that purpose (the “Warrant
      Register”),
      in
      the name of the record Holder hereof from time to time. The Company may deem
      and
      treat the registered Holder of this Warrant as the absolute owner hereof for
      the
      purpose of any exercise hereof or any distribution to the Holder, and for all
      other purposes, absent actual notice to the contrary.

     

    d)  Transfer
      Restrictions.
      If,
      at the
time
      of
      the surrender of this Warrant in connection with any transfer of this Warrant,
      the transfer of this Warrant shall not be registered pursuant to an effective
      registration
      statement under the Securities Act
      and
under
      applicable state securities or blue sky laws or eligible for resale under Rule
      144, the Company may require, as a condition of allowing such transfer, that
      the
      Holder or transferee of this Warrant, as the case may be, comply
      with the provisions of Section 5.7 of, and provide or otherwise agree to the
      representations, warranties and covenants applicable to the “Purchasers” as set
      forth in, the Purchase Agreement.

     

    Section
      5. Miscellaneous.

     

    a)  No
      Rights as Shareholder Until Exercise.
      This
      Warrant does not entitle the Holder to any voting rights or other rights as
      a
      shareholder of the Company prior to the exercise hereof as set forth in Section
      2(e)(i). 

     

    b)  Loss,
      Theft, Destruction or Mutilation of Warrant.
      The
      Company covenants that upon receipt by the Company of evidence reasonably
      satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
      or any stock certificate relating to the Warrant Shares, and in case of loss,
      theft or destruction, of indemnity or security reasonably satisfactory to it
      (which, in the case of the Warrant, shall not include the posting of any bond),
      and upon surrender and cancellation of such Warrant or stock certificate, if
      mutilated, the Company will make and deliver a new Warrant or stock certificate
      of like tenor and dated as of such cancellation, in lieu of such Warrant or
      stock certificate.

     

    c)  Saturdays,
      Sundays, Holidays, etc.
      If the
      last or appointed day for the taking of any action or the expiration of any
      right required or granted herein shall not be a Business Day, then such action
      may be taken or such right may be exercised on the next succeeding Business
      Day.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    d)  Authorized
      Shares.
      

     

    The
      Company covenants that during the period the Warrant is outstanding, it will
      reserve from its authorized and unissued Common Stock a sufficient number of
      shares to provide for the issuance of the Warrant Shares upon the exercise
      of
      any purchase rights under this Warrant. The Company further covenants that
      its
      issuance of this Warrant shall constitute full authority to its officers who
      are
      charged with the duty of executing stock certificates to execute and issue
      the
      necessary certificates for the Warrant Shares upon the exercise of the purchase
      rights under this Warrant. The Company will take all such reasonable action
      as
      may be necessary to assure that such Warrant Shares may be issued as provided
      herein without violation of any applicable law or regulation, or of any
      requirements of the Trading Market upon which the Common Stock may be listed.
      The Company covenants that all Warrant Shares which may be issued upon the
      exercise of the purchase rights represented by this Warrant will, upon exercise
      of the purchase rights represented by this Warrant, be duly authorized, validly
      issued, fully paid and nonassessable and free from all taxes, liens and charges
      created by the Company in respect of the issue thereof (other than taxes in
      respect of any transfer occurring contemporaneously with such issue).

     

    Except
      and to the extent as waived or consented to by the Holder, the Company shall
      not
      by any action, including, without limitation, amending 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 of
      this
      Warrant, but will at all times in good faith assist in the carrying out of
      all
      such terms and in the taking of all such actions as may be necessary or
      appropriate to protect the rights of the Holder as set forth in this Warrant
      against impairment. Without limiting the generality of the foregoing, the
      Company will (a) not increase the par value of any Warrant Shares above the
      amount payable therefor upon such exercise immediately prior to such increase
      in
      par value, (b) take all such action as may be necessary or appropriate in order
      that the Company may validly and legally issue fully paid and nonassessable
      Warrant Shares upon the exercise of this Warrant, and (c) use commercially
      reasonable efforts to obtain all such authorizations, exemptions or consents
      from any public regulatory body having jurisdiction thereof as may be necessary
      to enable the Company to perform its obligations under this
      Warrant.

     

    Before
      taking any action which would result in an adjustment in the number of Warrant
      Shares for which this Warrant is exercisable or in the Exercise Price, the
      Company shall obtain all such authorizations or exemptions thereof, or consents
      thereto, as may be necessary from any public regulatory body or bodies having
      jurisdiction thereof. Notwithstanding anything herein to the contrary, if the
      Company has not obtained Shareholder Approval, then the Company may not issue,
      upon exercise of this Warrant, a number of shares of Common Stock which, when
      aggregated with any shares of Common Stock issued on or after the Issue Date
      and
      prior to the Termination Date (A) in connection with the conversion of any
      Notes
      issued pursuant to the Purchase Agreement or as payment of principal, interest
      or liquidated damages, (B) in connection with the exercise of any Warrants
      issued pursuant to the Purchase Agreement, including this Warrant, and (C)
      in
      connection with any warrants issued to any registered broker-dealer as a fee
      in
      connection with the issuance of the Securities pursuant to the Purchase
      Agreement, would exceed 19.99% of the number of shares of Common Stock
      outstanding on the Trading Day immediately preceding the date of the Purchase
      Agreement (subject to adjustment for forward and reverse stock splits,
      recapitalizations and the like) (such number of shares, the “Issuable
      Maximum”).
      Each
      Holder shall be entitled to a portion of the Issuable Maximum equal to the
      quotient obtained by dividing (x) the original principal amount of the Holder’s
      Note by (y) the aggregate original principal amount of all Notes issued under
      the Purchase Agreement to all Holders. In addition, each Holder may allocate
      its
      pro-rata portion of the Issuable Maximum among Notes and Warrants held by it
      in
      its sole discretion. Such portion shall be adjusted upward ratably in the event
      a Holder no longer holds any Notes or Warrants and the amount of shares issued
      to the Holder pursuant to the Holder’s Notes and Warrants was less than the
      Holder’s pro-rata share of the Issuable Maximum. .

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    e)  Jurisdiction.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of this Warrant shall be determined in accordance with the provisions of the
      Purchase Agreement.

     

    f)  Restrictions.
      The
      Holder acknowledges that the Warrant Shares acquired upon the exercise of this
      Warrant, if not registered, will have restrictions upon resale imposed by state
      and federal securities laws.

     

    g)  Nonwaiver
      and Expenses.
      No
      course of dealing or any delay or failure to exercise any right hereunder on
      the
      part of the Holder shall operate as a waiver of such right or otherwise
      prejudice the Holder’s rights, powers or remedies, notwithstanding the fact that
      all rights hereunder terminate on the Termination Date. If the Company willfully
      and knowingly fails to comply with any provision of this Warrant, which results
      in any material damages to the Holder, the Company shall pay to the Holder
      such
      amounts as shall be sufficient to cover any costs and expenses including, but
      not limited to, reasonable attorneys’ fees, including those of appellate
      proceedings, incurred by the Holder in collecting any amounts due pursuant
      hereto or in otherwise enforcing any of its rights, powers or remedies
      hereunder.

     

    h)  Notices.
      Any
      notice, request or other document required or permitted to be given or delivered
      to the Holder by the Company shall be delivered in accordance with the notice
      provisions of the Purchase Agreement.

     

    i)  Limitation
      of Liability.
      No
      provision hereof, in the absence of any affirmative action by the Holder to
      exercise this Warrant to purchase Warrant Shares, and no enumeration herein
      of
      the rights or privileges of the Holder, shall give rise to any liability of
      the
      Holder for the purchase price of any Common Stock or as a stockholder of the
      Company, whether such liability is asserted by the Company or by creditors
      of
      the Company.

     

    j)  Remedies.
      The
      Holder, in addition to being entitled to exercise all rights granted by law,
      including recovery of damages, will be entitled to specific performance of
      its
      rights under this Warrant. The Company agrees that monetary damages would not
      be
      adequate compensation for any loss incurred by reason of a breach by it of
      the
      provisions of this Warrant and hereby agrees to waive and not to assert the
      defense in any action for specific performance that a remedy at law would be
      adequate.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    k)  Successors
      and Assigns.
      Subject
      to applicable securities laws, this Warrant and the rights and obligations
      evidenced hereby shall inure to the benefit of and be binding upon the
      successors of the Company and the successors and permitted assigns of Holder.
      The provisions of this Warrant are intended to be for the benefit of all Holders
      from time to time of this Warrant and shall be enforceable by each such
      Holder.

     

    l)  Amendment.
      This
      Warrant may be modified or amended or the provisions hereof waived with the
      written consent of the Company and the Holder.

     

    m)  Severability.
      Wherever possible, each provision of this Warrant shall be interpreted in such
      manner as to be effective and valid under applicable law, but if any provision
      of this Warrant shall be prohibited by or invalid under applicable law, such
      provision shall be ineffective to the extent of such prohibition or invalidity,
      without invalidating the remainder of such provisions or the remaining
      provisions of this Warrant.

     

    n)  Headings.
      The
      headings used in this Warrant are for the convenience of reference only and
      shall not, for any purpose, be deemed a part of this Warrant.

     

     

    ********************

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
      officer thereunto duly authorized as of the date first above
      indicated.

     

    
      	 	 	 
	 	
              BLUE
                HOLDINGS, INC.

            
	 
 	 
 	 
 
	
            	By:  	
            
	 	
              

              Name:
                Glenn S. Palmer

            
	 	
              Title:
                CEO

            

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    NOTICE
      OF EXERCISE

    

    TO: BLUE
      HOLDINGS, INC.

    
      	
              RE:

            	
              Warrant
                originally issued on or about March ___, 2008 to ____________________
                for
                ____________ Warrant Shares.

            

    

    

    (1)  The
      undersigned hereby elects to purchase _______________ Warrant Shares of the
      Company pursuant to the terms of the attached Warrant (only if exercised in
      full), and tenders herewith payment of the exercise price in full, together
      with
      all applicable transfer taxes, if any.

     

    (2)  Payment
      shall take the form of (check applicable box):

     

    o
in
      lawful money of the
      United States; or

     

    o
the
      cancellation of such number of
      Warrant Shares as is necessary, in accordance with the formula set forth in
      subsection 2(c), to exercise this Warrant with respect to the maximum number
      of
      Warrant Shares purchasable pursuant to the cashless exercise procedure set
      forth
      in subsection 2(c).

     

    (3)  Please
      issue a certificate or certificates representing said Warrant Shares in the
      name
      of the undersigned or in such other name as is specified below:

     

    _______________________________

     

    

    The
      Warrant Shares shall be delivered to the following DWAC Account Number or by
      physical delivery of a certificate to:

    

    _______________________________

     

    _______________________________

     

    _______________________________

    

    (4)
      Accredited
      Investor.
      The
      undersigned is an “accredited investor” as defined in Regulation D promulgated
      under the Securities Act of 1933, as amended.

    

    [SIGNATURE
      OF HOLDER]

     

    Name
      of
      Warrant Holder:
      ________________________________________________________________________

    Signature
      of Authorized Signatory of Warrant Holder:
      _________________________________________________

    Name
      of
      Authorized Signatory:
      ___________________________________________________________________

    Title
      of
      Authorized Signatory:
      ____________________________________________________________________

    Date:
      ________________________________________________________________________________________

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ASSIGNMENT
      FORM

    

    (To
      assign the foregoing warrant, execute

    this
      form
      and supply required information. 

    Do
      not
      use this form to exercise the warrant.)

     

    

    FOR
      VALUE
      RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all
      rights evidenced thereby are hereby assigned to

     

    

    _______________________________________________
      whose address is

    

    _______________________________________________________________.

    

    

    

    _______________________________________________________________

    

    Dated:
      ______________, _______

    

    

    Holder’s
      Signature: _____________________________

    

    Holder’s
      Address: _____________________________

     

     
      _____________________________

    

    

    

    Signature
      Guaranteed: ___________________________________________

    

    

    NOTE:
      The
      signature to this Assignment Form must correspond with the name as it appears
      on
      the face of the Warrant, without alteration or enlargement or any change
      whatsoever, and must be guaranteed by a bank or trust company. Officers of
      corporations and those acting in a fiduciary or other representative capacity
      should file proper evidence of authority to assign the foregoing
      Warrant.

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