Document:

THIS CONVERTIBLE  PROMISSORY  NOTE, AND THE UNDERLYING  SECURITIES INTO WHICH IT
MAY BE CONVERTED,  HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED,  AND MAY NOT BE SOLD,  TRANSFERRED  ASSIGNED OR HYPOTHECATED UNLESS (i)
THERE IS AN  EFFECTIVE  REGISTRATION  STATEMENT  UNDER  SUCH ACT  COVERING  SUCH
SECURITIES  OR (ii) THE MAKER  RECEIVES  AN OPINION  OF  COUNSEL  FOR THE HOLDER
REASONABLY   SATISFACTORY  TO  THE  MAKER  STATING  THAT  SUCH  SALE,  TRANSFER,
ASSIGNMENT  OR  HYPOTHECATION  IS EXEMPT FROM THE  REGISTRATION  AND  PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.

                           CONVERTIBLE PROMISSORY NOTE

$117,000.00                                                    February 28, 2005

      FOR VALUE RECEIVED, the undersigned, Cyber Defense Systems, Inc. (the
"Maker"), promises to pay to the order of Joseph Theismann (the "Holder"), at
the address set forth herein, or at such other place as the Holder may from time
to time designate by written notice to the Maker, the principal sum of
$117,000.00 paying the existing note herein attached as Exhibit A, together with
interest at the rate of 18% per annum, in accordance with the terms set forth
below.

      The Maker and the Holder further agree as follows:

      1. Payment.

      It is the intention of the Parties that this Note may be paid, and the
debt it evidences satisfied by, the payment of cash, or by the delivery of
shares of the Maker's Class A Common Stock, Par Value $0.001 per share (the
"Class A Common" or the "Payment Shares").

      Accordingly, the Parties agree as follows:

      (a) Beginning on April 30, 2005, and on the last day of each month for the
next succeeding 6 moths, the Maker shall reduce the principal balance of this
Note by an amount equal to 1/6 of the principal; provided, however, that the
last payment of principal, which shall be due on September 30, 2005, shall
include accrued and unpaid interest at the rate of 18% per annum.

      (b) The Maker may reduce the principal balance of this Note by the payment

            (i) in cash, in which case

<PAGE>

                  (A) that payment in cash which reduces the principal balance
            of this Note to Zero, shall include accrued and unpaid interest at
            the rate of 18% per annum; or, at the option of the Maker, and at
            any time during the term of this Note

            (ii) by the issuance and delivery by the Maker to the Holder of the
      Payment Shares, as that number of those shares may be adjusted for splits,
      reclassifications, etc., so as to enable the Maker to deliver the Payment
      Shares on a fully-diluted basis, in which case, and at that time,

                  (A) the Maker shall inform the Holder of the Maker's intent to
            reduce principal by the issuance of Payment Shares, so that the
            Holder may serve a Notice of Conversion upon the Maker as provided
            in this Note;

                  (B) the entire unpaid principal balance shall be due and
            payable;

                  (C) no accrued interest shall be due and owing;

                  (D) when Payment Shares evidencing the then entire unpaid
            principal balance of this Note are delivered to the Holder, the debt
            evidenced by this Note shall be satisfied; and

                  (E) the Holder shall not thereafter be entitled to demand and
            receive cash in payment of the principal and accrued interest
            evidenced by this Note

      2. Representations, Warranties and Undertakings of the Maker.

      In connection with this Note, the Maker represents to the Holder as
follows:

      (a) The Maker

            (i) is a corporation duly organized and validly existing under the
      laws of the State of Florida and is in good standing under such laws with
      its principal executive office located in the State of Florida; and

            (ii) the Maker has full power and legal capacity to enter into this
      Note.

      (b) The Payment Shares, when issued, shall be duly and validly issued,
authorized, fully paid, and non-assessable.

      (c) This Note constitutes valid and legally binding obligations of the
Maker, enforceable in accordance with its terms, except

            (i) as limited by applicable bankruptcy, insolvency, reorganization,
      moratorium, fraudulent conveyance, and any other laws of general
      application affecting enforcement of creditors' rights generally, and

                                       2
<PAGE>

            (ii) as limited by laws relating to the availability of specific
      performance, injunctive relief, or other equitable remedies.

      (d) The execution, delivery and performance of this Note will not result
in any material violation of, be in conflict with, or constitute a default
under, with or without the passage of time or the giving of notice

            (i) any provision of any judgment, decree or order to which the
      Maker is a party or by which it is bound; or

            (ii) any material contract, obligation or commitment to which the
      Maker is a party.

      (e) From shares of its authorized, but un-issued Class A Common, the Maker
shall reserve a sufficient number of shares thereof, adjusted for splits,
reclassifications, etc. to enable the Maker to deliver the Payment Shares on a
fully-diluted basis.

      (f) There is no action, suit or proceeding pending, or to the knowledge of
the Maker, threatened against the Maker, before any court or arbitrator or any
government body, agency or official, which would have a material adverse affect
on Maker's operations or financial condition.

      (g) There is no fact known to the Maker that has not been publicly
disclosed by the Maker or disclosed in writing to the Holder which could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or in the earnings, business affairs, properties or
assets of the Maker, or could reasonably be expected to materially and adversely
affect the ability of the Maker to perform its obligations pursuant to this
Note.

      (h) The information furnished by the Maker to Holder for purposes of or in
connection with this Agreement or any transaction contemplated hereby, does not
contain any untrue statement of material fact or omit to state a material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they are made, not misleading.

      (i) The Maker is a publicly-held corporation whose shares of Class A
Common Stock are publicly traded and quoted on the OTC Electronic Bulletin Board
(the "OTC-BB"), under the symbol "CYDF", and the Maker is required to, and does
file, periodic reports with the United States Securities and Exchange
Commission.

      (j) William C. Robinson, the CEO of the Maker, is also the CEO and
Chairman of the Board of Directors of Proxity. Proxity specializes in the
deployment and integration of security protection technology and government
contract fulfillment. Trading in the Common Stock of Proxity is reported in the
inter-dealer quotation system maintained by the National Quotation Bureau, Inc.
and the Pink Sheets under the symbol "PRXT." Mr. Robinson is also the General
Partner of Cherokee Raiders, L.P., a family limited partnership ("Cherokee").

      Both Proxity and Cherokee are Affiliates of the Maker.

                                       3
<PAGE>

      (k) As at February 1, 2005, the Capitalization of the Maker consisted of

            (i) 200,000,000 shares of Class A Common Stock, Par Value $0.001 per
      share, each share having one vote on matters brought before the
      stockholders of which 25,921,562 shares are issued and outstanding and
      owned by the following persons or groups:

                 Name                                        Number
                  of                                       of Shares of
              Shareholder                                  Class A Owned

               Cherokee                                      6,750,000
               Proxity                                      18,750,000
               Others (Including
               Members of the Public)                          421,562

               TOTAL                                        25,921,562

            (ii) 200,000,000 shares of Class B Common Stock, Par Value $0.001
      per share, each share having 1,000 votes on matters brought before the
      stockholders, of which 150,000 shares are issued and outstanding and owned
      by the following persons:

                 Name                                         Number
                  of                                        of Shares of
              Shareholder                                   Class B Owned

               Cherokee                                        150,000

            (iii) 2 shares of Class C Common Stock, Par Value $0.001 per share,
      each share having one vote on matters brought before the stockholders, of
      which 2 shares are issued and outstanding and owned by the following
      persons:

                     Name                                       Number
                     of                                      of Shares of
                 Shareholder                                 Class C Owned

                  Cherokee                                        1
                  Proxity                                         1

            (iv) 100,000,000 shares of Class A Preferred Stock, Par Value $0.001
      per share, of which no shares are issued and outstanding.

                                       4
<PAGE>

      (l) As at February 1, 2005, Cherokee and Proxity, who are Affiliates of
the Maker, owned a total of 25,500,000 shares of the Class A Common Stock, Par
Value $0.001 per share, of the Maker, or 98.37 % of the Issued and Outstanding
Class A Common Stock of the Maker. In addition, Cherokee owns 150,000 shares of
the Class B Common Stock, Par Value $0.001 per share, of the Maker, each of
which Class B shares is entitled to 1,000 votes on matters brought before the
Shareholders. Thus, the Maker is controlled by its Affiliates, Cherokee and
Proxity.

      (m) As at February 1, 2004, Cherokee owned or had control of
88,60,000shares of the Common Stock, Par Value $0.001 per share, of Proxity, or
31.47 % of the Issued and Outstanding Common Stock of Proxity, there being
300,000,000 shares Authorized, of which 281,545,000 shares are Issued and
Outstanding.

      (n) Mr. Robinson, who is the CEO of Proxity, and of the Maker, and of
Cyber Aero, together with his wife and children own 6,047,027 shares, or 2.15 %
of the Issued and Outstanding Common Stock of Proxity.

      (o) As a result of a merger of a former subsidiary of the Maker called On
Alert Systems, Inc. into the Maker, the Maker has assumed prior obligations
which On Alert had to either Cherokee or Proxity, so that, as at February
1,2005, the Maker was indebted to Cherokee and Proxity in excess of
approximately $1,507,271.24.

      3. Representations and Warranties of the Holder.

      In connection with this Note, the Holder represents to the Maker as
follows:

      (a) The Holder will transfer the $117,000.00 contemplated by this Note, to
the Maker within seven business days of the execution of this note.

      (b) The Holder has full power and legal capacity to enter into this Note.

      (c) This Note constitutes valid and legally binding obligations of the
Holder, enforceable in accordance with its terms, except

            (i) as limited by applicable bankruptcy, insolvency, reorganization,
      moratorium, fraudulent conveyance, and any other laws of general
      application affecting enforcement of creditors' rights generally, and

            (ii) as limited by laws relating to the availability of specific
      performance, injunctive relief, or other equitable remedies.

      (d) The execution, delivery and performance of this Note will not result
in any material violation of, be in conflict with, or constitute a default
under, with or without the passage of time or the giving of notice

            (i) any provision of any judgment, decree or order to which the
      Holder is a party or by which it is bound; or

                                       5
<PAGE>

            (ii) any material contract, obligation or commitment to which the
      Holder is a party.

      (e) The Holder is not, and on the Maturity Date, will not be, an affiliate
of the Maker.

      (f) The Holder is an "accredited investor" as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and the Holder is accepting this Note and the Payment Shares
for his own account.

      (f) The Holder understands that (i) this Note and the Payment Shares are,
and when issued, respectively, will not be registered under the Securities Act;
(ii) that they are being offered and sold to the Holder in reliance on specific
exemptions from the registration requirements of Federal and State securities
laws; and (iii) that the Maker is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
the Holder set forth herein in order to determine the applicability of such
exemptions and the suitability of the Holder and any purchaser from the Holder
to acquire this Note and the Payment Shares.

      (g) The Holder has had an opportunity to receive and review all material
information and financial data and to discuss with the officers of the Maker,
all questions relating to the securities, financial condition, operations and
prospects of Maker have been answered to the Holder's satisfaction, and, in that
connection, the Holder has had the opportunity to review those filings made by
the Maker with the United States Securities and Exchange Commission.

      (h) The Holder acknowledges that the acceptance of this Note and the
Payment Shares involve a high degree of risk. The Holder has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of accepting this Note and the Payment Shares, and the
Holder can afford a complete loss of his investment. The Holder understands that
this Note and the Payment Shares are not being registered under the 1933 Act, or
under any state securities laws, and therefore, the Holder must bear the
economic risk of this investment for an indefinite period of time.

      4. Receipt of the Payment Shares.

      (a) To receive the Payment Shares in payment and in satisfaction of the
then principal unpaid balance of this Note, the Holder shall

            (i) complete and sign a notice of conversion (the "Notice of
      Conversion") in the form attached hereto as Exhibit B and deliver it,
      together with original of this Note, to the Maker at the Maker's address
      set forth below; and

            (ii) sign such other documents or instruments as may be necessary or
      appropriate to complete the conversion.

                                       6
<PAGE>

      (b) Within five (5) business days of receipt by the Maker of the Notice of
Conversion, the Maker shall deliver (a) stock certificate(s) representing the
Payment Shares, the number of which shares shall adjusted for splits,
reclassifications, etc. to enable the Maker to deliver the Payment Shares on a
fully-diluted basis.

      (c) Until registered pursuant to the Securities Act, or until otherwise
eligible to be sold pursuant to an exemption therefrom, the Payment Shares shall
be "Restricted", as the term "Restricted is defined pursuant to Rule 144
promulgated under the Securities Act, and the Payment Shares shall bear a
Restrictive Legend.

      (d) The conversion price shall be equal to a figure which is 50% of the
preceding 30 day average closing bid price not to exceed $1.17 a share for the
Maker's Class A Common as reported on the OTC Electronic Bulletin Board (the
"OTC-BB"), or any exchange on which shares of the Maker's Common Stock are
traded, for any trading day on which the Notice of Exchange is received by the
Maker (the "Conversion Price"). To determine the number of Payment Shares
issuable upon conversion, the Maker shall divide the dollar amount of the debt
evidenced by this Note by the Conversion Price. Upon conversion, Maker shall
deliver a check to Holder for payment of any fractional share that remains
outstanding.

      (e) No interest shall be paid on, or with respect to, a principal balance
which is reduced by Conversion.

      (f) By way of example to avoid future misunderstandings, if the Maker were
to be indebted to the Holder in what was then an unpaid principal amount of, for
example $200,000.00, and the Holder served a Notice of Conversion on a day in
which the highest closing bid price of the Maker's Class A Common Stock as
reported on the OTC Electronic Bulletin Board was $4.00 per share, the Holder
would be entitled to receive 100,000 shares of Class A Common Stock having a
market value of $400,000.00, as follows:

            (i) The preceding 30 day average of the closing bid average closing
      bid price of the Maker's Class A Common Stock as reported on the OTC
      Electronic Bulletin Board on that day was $4.00;

            (ii) 50% of $2.34 is $1.17;

            (iii) $117,000.00 divided by $1.17 is 100,000 shares;

            (iv) market price of $1.17 times 100,000 shares is $117,000.00; and

            (v) upon receipt of the Payment Shares, the Note would be satisfied

      5. Registration.

      (a) If, within 120 days from the receipt of the Payment Shares, the
Restrictive Legend affixed to the Certificate(s) evidencing such shares has not
been removed, then the Maker shall be required, upon the demand of the Holder,
and at the Maker's expense, to affect the registration of all of the Payment
Shares under the Securities Act. The Maker shall file such a Registration
Statement within 30 days of Holder's demand, and the Maker shall use its good
faith diligent efforts to cause such Registration Statement to become effective
as soon as practicable thereafter.

                                       7
<PAGE>

      (b) The Maker and the Holder shall cooperate in good faith in connection
with the furnishings of information required for such registration and the
taking of such other actions as may be legally or commercially necessary in
order to effect such registration. Such good faith diligent efforts shall
include, but not be limited to, promptly responding to all comments received
from the staff of the SEC, providing the Holder's counsel with a contemporaneous
copy of all written communications from and to the staff of the SEC with respect
to such Registration Statement and promptly preparing and filing amendments to
such Registration Statement which are responsive to the comments received from
the staff of the SEC.

      (c) Once declared effective by the SEC, the Maker shall cause such
Registration Statement to remain effective until the earlier of (i) the sale by
the Holder of all Payment Shares registered or (ii) 120 days after the Effective
Date of such Registration Statement.

      (d) In the event the Maker undertakes to file a Registration Statement
with respect to the Payment Shares (or a Registration Statement which includes
the Payment Shares along with other securities of the Maker), upon the
effectiveness of such Registration Statement, the Holder shall have the option
to sell the Payment Shares pursuant to such Registration Statement.

      6. Default.

      If one or more of the following described event (the "Events of Default")
shall occur and continue for 30 days, unless a different time frame is noted
below:

      (a) the failure of the Maker to make any payment, whether in cash or with
Payment Shares, when due; or

      (b) the failure of the Maker to reserve a sufficient number of shares of
its authorized, but un-issued Class A Common, adjusted for splits,
reclassifications, etc. to enable the Maker to deliver the Payment Shares on a
fully-diluted basis; or

      (c) any of the representations or warranties made by the Maker herein, or
in any certificate or financial or other written statements heretofore or
hereafter furnished by or on behalf of the Maker in connection with the
execution and delivery of this Note shall be false or misleading in any material
respect at the time made; or

      (d) the Maker shall (i) become insolvent; (ii) admit in writing its
inability to pay its debts generally as they mature; (iii) make an assignment
for the benefit of creditors or commence proceedings for its dissolution; (iv)
apply for or consent to the appointment of a trustee, liquidator or receiver for
its or for a substantial part of its property or business; (v) file a petition
for bankruptcy relief, consent to the filing of such petition or have filed
against it an involuntary petition for bankruptcy relief, all under federal or
state laws as applicable; or

      (e) the failure of the Maker to timely file and timely process a
Registration Statement with respect to the Payment Shares, as contemplated by
Section 5, hereof, then, or at any time thereafter, unless cured, and in each
and every such case, unless such Event of Default shall have been waived in
writing by the Holder (which waiver shall not be deemed to be a waiver of any
subsequent default) at the option of the Holder and in the Holder's sole
discretion, the Holder may consider this Note immediately due and payable,
without presentment, demand, protest or (further) notice of any kind (other than
notice of acceleration), all of which are hereby expressly waived, anything
herein or in any note or other instruments contained to the contrary
notwithstanding, and the Holder may immediately, and without expiration of any
period of grace, enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law.

                                       8
<PAGE>

      7. Waivers.

      (a) The Maker waives demand, presentment, protest, notice of protest,
notice of dishonor, and all other notices or demands of any kind or nature with
respect to this Note other than the initial demand for payment.

      (b) The Maker agrees that a waiver of rights under this Note shall not be
deemed to be made by Holder unless such waiver shall be in writing, duly signed
by Holder, and each such waiver, if any, shall apply only with respect to the
specific instance involved and shall in no way impair the rights of Holder or
the obligations of Maker in any other respect at any other time.

      (c) The Maker agrees that in the event Holder accepts partial payment of
this Note, such acceptance shall not be deemed to constitute a waiver of any
right to demand the entire unpaid balance of this Note at any time in accordance
with the terms of this Note.

      8. Collection Costs.

      If the indebtedness represented hereby is not paid in full when due, the
Maker will, upon demand, pay to the Holder the amount of any and all reasonable
costs and expenses, including, without limitation, the reasonable fees and
disbursements of its counsel (whether or not suit is instituted) and of any
experts and agents, which the Holder may incur in connection with the following:
(i) the enforcement of this Note, and (ii) the enforcement of payment of all
obligations of Maker by any action or participation in, or in connection with
the U. S. Bankruptcy Code, or any successor statute hereto.

      9. Assignment of Note.

      (a) The Maker may not assign its obligations under this Note without the
prior written consent of the Holder, which consent may be withheld in the
Holder's sole discretion.

      (b) The Holder may not negotiate this Note without the prior written
consent of the Maker, which consent may be withheld in the Maker's sole
discretion.

                                       9
<PAGE>

      (c) Any attempted assignment or negotiation hereof except as provided for
herein shall be null and void and of no force and effect against the person
attempting to assign or negotiate this Note.

      10. Applicable Law; Resolution of Disputes; Venue; Jurisdiction; Waiver of
Jury Trial.

      (a) This Note and all questions relating to its validity, interpretation,
performance and enforcement (including, without limitation, provisions
concerning limitations of actions), shall be governed by and construed in
accordance with the laws of the State of Florida, notwithstanding any
conflict-of-laws doctrines of such state or other jurisdiction to the contrary,
and without the aid of any canon, custom or rule of law requiring construction
against the draftsman.

      (b) The Parties hereby waive trial by jury.

            IN THAT CONNECTION, THE PARTIES WAIVE THE RIGHT TO A TRIAL BY JURY
            IN ANY DISPUTE IN CONNECTION WITH OR RELATING TO THIS NOTE, ANY
            RELATED AGREEMENT OR ANY MATTERS DESCRIBED OR CONTEMPLATED HEREIN OR
            THEREIN, AND AGREES TO TAKE ANY AND ALL ACTION NECESSARY OR
            APPROPRIATE TO EFFECT SUCH WAIVER.

      (c) The Parties hereto irrevocably agree and consent that all disputes
concerning this Note or any claim or issue of any nature whatsoever arising from
or relating to this Note or to the corporate steps taken to enter into it
(including, without limitation, claims for alleged fraud, breach of fiduciary
duty, breach of contract, tort, etc.) which cannot be resolved within reasonable
time through discussions between the Parties, shall be resolved solely and
exclusively by means of arbitration to be conducted in St. Petersburg, Florida,
which arbitration will proceed in accordance with the rules of the Arbitration
then in force in St. Petersburg, Florida, for resolution of commercial disputes.

      (d) The Parties agree that Arbitrators themselves shall have the right to
determine and to arbitrate the threshold issue of arbitrability itself, that the
decision of the Arbitrators shall be final, conclusive, and binding upon the
Parties, and that a judgment upon the award may be obtained and entered in any
federal or state court of competent jurisdiction.

      (e) In addition, the Parties waive, to the maximum extent permitted by
law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such forum.

                                       10
<PAGE>

      11. Notice.

      (a) Any notice, request, instruction or other document required by the
terms of this Agreement to be given to any other Party hereto shall be in
writing and shall be given either

            (i) by telephonic facsimile, in which case notice shall be
      presumptively deemed to have been given at the date and time displayed on
      the sender's transmission confirmation receipt showing the successful
      receipt thereof by the recipient; or

            (ii) by hand delivery or Federal Express or other method in which
      the date of delivery is recorded by the delivery service, in which case
      notice shall be presumptively deemed to have been given at the time that
      records of the delivery service indicate the writing was delivered to the
      addressee; or

            (iii) by prepaid telegram, in which case notice shall be
      presumptively deemed to have been given at the time that the records of
      the telegraphic agency indicate that the telegram was telephoned or
      delivered to the recipient or addressee, as the case may be; or

            (iv) by U.S. mail to be sent by "Priority Overnight" registered or
      certified mail, postage prepaid, with return receipt requested, in which
      case notice shall be presumptively deemed to have been given forty-eight
      (48) hours after the letter was deposited with the United States Postal
      Service.

      (b) Notice shall be sent:

            (i) If to the Maker, to:

                  Cyber Defense Systems, Inc.
                  10901 Roosevelt Boulevard
                  Suite 100-D
                  St. Petersburg, Florida 33716

                  Voice Telephone:                   (727)  577-0878
                  Cellular Telephone                 (504)  722-7402
                  Facsimile Telephone:               (727)  577-0878

            (ii) If to the Holder, to:

                  Joseph Theismann

                  Voice Telephone:                   (703)  671  - 6823
                  Facsimile Telephone:               (703)  779  - 8149

                                       11
<PAGE>

            (iii) or to such other address as a Party may have specified in
      writing to the other Parties using the procedures specified above in this
      Section.

      12. Miscellaneous.

      (a) This Note may be altered or modified only by prior written agreement
signed by the party against whom enforcement of any waiver, change,
modification, or discharge is sought.

      (b) The covenants, terms, and conditions contained in this Note apply to
and bind the heirs, successors, executors, administrators and assigns of the
Parties.

      (c) This Note constitutes a final written expression of all the terms of
the agreement between the Parties regarding the subject matter thereof, is a
complete and exclusive statement of those terms, and supersede all prior and
contemporaneous agreements, understandings, and representations between the
Parties.

      (d) If any provision or any word, term, clause or other part of any
provision of this Note shall be invalid for any reason, the same shall be
ineffective, but the remainder of this Note shall not be affected and shall
remain in full force and effect.

      IN WITNESS WHEREOF, the Maker and the Holder have executed this Note
intending it to be effective as of the date first set forth above.

              THE SIGNATURES ON THIS NOTE ARE ON THE FOLLOWING PAGE

                                       12
<PAGE>

                               MAKER:

                               Cyber Defense Systems, Inc.

                               By:
                                  ----------------------------------------------
                               William C. Robinson, as CEO, and not Individually

                               HOLDER:

                               Joseph Theismann

                               By:
                                  ----------------------------------------------

                 EXHIBIT A TO THIS NOTE FOLLOWS ON THE NEXT PAGE

                                       13
<PAGE>

                                    EXHIBIT A

                                       14
<PAGE>

                    EXHIBIT B TO CONVERTIBLE PROMISSORY NOTE

                              NOTICE OF CONVERSION

To:      William C. Robinson, CEO                    Dated:  March 9, 2005
         Cyber Defense Systems, Inc.
         10901 Roosevelt Boulevard
         Suite 100-D

      The  undersigned   hereby  requests  to  receive  payment  under,  and  in
satisfaction of the debt evidenced by, that certain Convertible  Promissory Note
in the Principal Amount of $117,000.00  between Cyber Defense Systems,  Inc., as
the Maker thereof,  and the Undersigned.  as the Holder thereof,  in the form of
100,000  shares of the Maker's Class A Common Stock,  Par Value $0.001 per share
(the "Payment Shares").

      The original Convertible Promissory Note is attached to this Letter.

      Please issue a certificate or certificates representing the Payment Shares
registered in the name of the Undersigned. as follows:

            Number of Certificates:            1

            Number of Shares in
            Each Certificate:                  100,000

      The certificate(s) should be delivered to me at

            5661 Columbia Pike
            Falls Church, VA 22041

      Thank you,

                                       Joseph Theismann

                                       By:
                                          --------------------------------------

                                       15Unassociated Document

EXHIBIT
4.1

 

CERTIFICATE
OF DESIGNATIONS, PREFERENCES

AND
RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK

OF

MILLENNIUM
CELL INC.

 

Millennium Cell Inc. (the "Company"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "DGCL"), does hereby certify that,
pursuant to authority conferred upon the Board of Directors of the Company by
the Certificate of Incorporation, as amended, of the Company, and pursuant to
Sections 151 and 141 of the DGCL, the Board of Directors of the Company
(a) is authorized to issue preferred stock, par value $.001 per share, of
the Company ("Preferred Stock") in one or more series and to
designate the powers, preferences, relative rights, qualifications, limitations
and restrictions relating to the shares of each such series, and (b) has
adopted resolutions (i) designating Ten Thousand (10,000) shares of the
Company's previously authorized Preferred Stock as "Series C Convertible
Preferred Stock," par value $.001 per share (the "Preferred
Shares"), and (ii) providing for the designations, powers,
preferences and relative, optional or other rights, and the qualifications,
limitations or restrictions thereof, as follows:

 

RESOLVED, that the Company is authorized to issue up to 10,000
shares of Series C Convertible Preferred Stock, par value $.001 per share, which
shall have the following designations, powers, preferences, relative rights,
qualifications, limitations and restrictions (with certain defined terms set
forth in Section 2(a) below):

 

(1)  Dividends. The holders of the Preferred
Shares (each a "Holder" and collectively, the
"Holders") shall be entitled to receive dividends
("Dividends") payable on the Stated Value of such Preferred
Share at the Dividend Rate which shall be cumulative, and shall accrue daily
from the Initial Issuance Date with respect to the Preferred Shares issued on
the Initial Issuance Date, and be due and payable beginning on July 1, 2005 (the
"First Dividend Date") and on the first
day of each Calendar Quarter after the First Dividend Date (each, including the
First Dividend Date, a "Dividend Date"). If a Dividend Date is
not a Business Day, then the Dividend shall be due and payable on the Business
Day immediately following such Dividend Date. Provided that the Equity
Conditions are satisfied (or waived by the applicable Holder) during the period
commencing ten (10) Business Days prior to the Dividend Date through such
Dividend Date, Dividends shall be payable in shares of Common Stock
("Dividend Shares") or, at the option of the Company, in cash,
provided that the Dividends which accrued during any period shall be payable in
cash only if the Company provides written notice (the "Dividend
Notice") to each Holder of Preferred Shares at least ten (10) Business
Days prior to the applicable Dividend Date (the "Dividend Notice
Date"). The Company shall be required to provide a Dividend Notice
electing to pay Dividends in cash to the extent that the Equity Conditions are
not satisfied as of the Dividend Notice Date. Dividends paid in Dividend Shares
shall be paid in a number of fully paid and nonassessable shares (rounded up to
the nearest whole share) of Common Stock equal to the quotient of (i) the
Additional Amount divided by (ii) the Stock Dividend Rate. If any Dividend
Shares are to be issued on a Dividend Date, then the Company shall within two
(2) Business Days of the applicable Dividend Date, (X) provided the Transfer
Agent is participating in The Depository Trust Company ("DTC")
Fast Automated Securities Transfer Program, upon the request of the Holder,
credit such aggregate number of shares of Common Stock to which the Holder shall
be entitled to the Holder's or its designee's balance account with DTC through
its Deposit Withdrawal Agent Commission system, or (Y)  if the Transfer
Agent is not participating in the DTC Fast Automated Securities Transfer
Program, issue and deliver to such Holder, a certificate, registered in the name
of the Holder or its designee, for the number of shares of Common Stock to which
the Holder shall be entitled. 

 

 

(2)  Conversion
of Preferred Shares. Preferred Shares shall be convertible into shares of
Common Stock, on the terms and conditions set forth in this Section 2.

 

(a)  Certain
Defined Terms. For purposes of this Certificate of Designations, the
following terms shall have the following meanings:

 

(i)  "Additional Amount" means, as to
each Holder, the sum of the (x) product of (I) the result of the following
formula: (Dividend Rate)(N/365) and (II) the Stated Value of such Holder's
Preferred Shares outstanding on the applicable Dividend Date and (y) the product
for each Preferred Share converted, redeemed or amortized since the immediately
preceding Dividend Date of (I) the result of the following formula: (Dividend
Rate) (C/365) and (II) the Stated Value of such Preferred Shares.

 

(ii)  "Allocation Percentage" means a
fraction, the numerator of which is the number of Preferred Shares then held by
the applicable Holder and the denominator of which is the aggregate amount of
all the Preferred Shares then held by all Holders.

 

(iii)  "AMEX"
means the American Stock Exchange.

 

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

 

(v)  "Bloomberg"
means Bloomberg Financial Markets.

 

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

 

(vii)  "C" means the number of days
from, but excluding, the last Dividend Date with respect to which dividends have
been paid by the Company on the applicable Preferred Share through and including
any applicable conversion, redemption or amortization date.

 

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

 

2

 

(ix)  "Change of Control" means (i) the
merger, reorganization or consolidation of the Company or such Subsidiaries (as
defined in the Securities Purchase Agreement) of the Company the assets of which
constitute all or substantially all the assets of the business of the Company
and its Subsidiaries taken as a whole into or with another Person (as
defined below), in which the Company’s stockholders holding the right to vote
generally in the election of directors, general partners, managing members or
individuals holding similar positions (the "Company’s Voting
Power") immediately preceding such merger, reorganization or
consolidation (solely by virtue of their shares or other securities of the
Company or such Subsidiaries) shall own less than fifty percent (50%) of the
securities of the surviving Person entitled to vote generally in the election of
directors, general partners, managing members or individuals holding similar
positions; (ii) the sale, transfer or lease (but not including a transfer or
lease by pledge or mortgage to a bona fide lender) of all or
substantially all the assets of the Company, whether pursuant to a single
transaction or a series of related transactions or plan (which assets shall
include for these purposes the assets of the Subsidiaries); or (iii) the sale or
transfer, whether in a single transaction or a series of related transactions,
of securities of the Company such that the Company’s stockholders holding the
Company’s Voting Power immediately prior to such sale or transfer or series of
transfers cease to hold a majority of the Company’s Voting Power after such sale
or transfer or series of transfers. A Change of Control shall not be deemed to
include any of the transactions contemplated by the Stock Purchase Agreement
between the Company and The Dow Chemical Company ("Dow") dated
as of February 27, 2005, as amended prior to the Initial Issuance Date, and not
amended in any respect material to the Holders after the Initial Issuance Date
(the "Dow Purchase Agreement").

 

(x)  "Closing Bid Price" and
"Closing Sale Price" means, for any security as of any date,
the last closing bid price and last closing trade price, respectively, for such
security on the Principal Market, as reported by Bloomberg, or, if the Principal
Market begins to operate on an extended hours basis and does not designate the
closing bid price or the closing trade price, as the case may be, then the last
bid price or last trade price, respectively, of such security prior to 4:00:00
p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is
not the principal securities exchange or trading market for such security, the
last closing bid price or last trade price, respectively, of such security on
the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last closing bid price or last trade price, respectively, of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the bid
prices, or the ask prices, respectively, of any market makers for such security
as reported in the "pink sheets" by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price
cannot be calculated for a security on a particular date on any of the foregoing
bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of
such security on such date shall be the fair market value as mutually determined
by the Company and the Required Holders. If the Company and the Holder are
unable to agree upon the fair market value of such security, then such dispute
shall be resolved pursuant to Section 2(d)(iii). All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

 

3

 

(xi)  "Common Stock" means (i) the
Company's shares of Common Stock, par value $0.001 per share, and (ii) any
share capital into which such Common Stock shall have been changed or any share
capital resulting from a reclassification of such Common Stock.

 

(xii)  "Common Stock Deemed
Outstanding" means, at any given time, the number of shares of Common
Stock actually outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding pursuant to Sections 2(f)(i)(A) and 2(f)(i)(B)
hereof regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock owned or held
by or for the account of the Company or issuable upon conversion of the
Preferred Shares.

 

(xiii)  "Company Conversion Price"
means, as of any date of determination, that price which shall be computed as
95% of the arithmetic average of the Weighted Average Price of the Company
Common Stock on each of the ten (10) consecutive Trading Days immediately
preceding the applicable Installment Date. All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction that proportionately decreases or increases the Common
Stock during such period.

 

(xiv)  "Company Delivery Date" means
any of a Company Election Conversion Date, a Company Election Interim Conversion
Date or an Installment Date.

 

4

 

(xv)  "Company Interim Conversion
Amount" means the Conversion Amount relating to 10% of the number of
Preferred Shares issued to each Holder on the Initial Issuance Date.

 

(xvi)  "Conversion
Amount" means the Stated Value of the applicable Preferred
Shares.

 

(xvii)  "Conversion Price" means the
lower of (x) the Standard Conversion Price and (y) the Interim Conversion Price,
if applicable, or on any Installment Date, the Company Conversion Price, subject
to adjustment as provided herein.

 

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

 

(xix)  "Default Conversion Price" means
as of any date of determination, the product of (x) 95% and (y) the lower of (I)
the Conversion Price and (II) the lowest Closing Bid Price during the three (3)
Trading Days ending on and including such date of determination.

 

(xx)  "Dividend Rate" means (i) seven
percent (7.0%) per annum and (ii) for the period from and after the occurrence
of a Triggering Event or Redemption Event through such time that such Triggering
Event or Redemption Event is cured, twelve (12.0%) per annum.

 

(xxi)  "Eligible
Market" means the NYSE, AMEX or the Nasdaq National Market.

 

(xxii)  "Equity Conditions" means: (i)
on each day during the period beginning twenty (20) Trading Days prior to the
applicable date of determination and ending on and including the applicable date
of determination (the "Equity Conditions Measuring Period"),
either (x) the Registration Statement (as defined in the Registration Rights
Agreement, the "Registration Statement") filed pursuant to the
Registration Rights Agreement shall be effective and available for the resale of
all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement and there shall not have been any Grace Periods or
(y) all shares of Common Stock issuable upon conversion of the Preferred Shares
and exercise of the Warrants shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; (ii) on each day during the Equity Conditions Measuring Period,
the Common Stock is designated for quotation on a Principal Market and shall not
have been suspended from trading on such exchange or market (other than
suspensions of not more than two days and occurring prior to the applicable date
of determination due to business announcements by the Company) nor shall
delisting or suspension by such exchange or market been threatened or pending
either (A) in writing by such exchange or market or (B) by falling below the
minimum listing maintenance requirements of such exchange or market; (iii) on
each day during the Equity Conditions Measuring Period, the Company shall have
delivered Conversion Shares upon conversion of the Preferred Shares and Warrant
Shares upon exercise of the Warrants to the Holders on a timely basis as set
forth in Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants,
respectively; (iv) any applicable shares of Common Stock to be issued in
connection with the event requiring determination may be issued in full without
violating Section 5 hereof or the rules or regulations of the applicable
Principal Market and from and after the Stockholder Meeting Deadline (as defined
in the Securities Purchase Agreement), the Company shall have obtained the
Stockholder Approval (as defined in the Securities Purchase Agreement), if
required pursuant to the terms of the Securities Purchase Agreement;
(v) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended
Change of Control which has not been abandoned, terminated or consummated or (B)
a Triggering Event or Redemption Event or an event that with the passage of time
or giving of notice would constitute a Triggering Event or Redemption Event;
(vi) the Company shall have no knowledge of any fact not caused by the failure
of the Holders to provide any required information that would cause (x) the
Registration Statements required pursuant to the Registration Rights Agreement
not to be effective and available for the resale of at least all of the
Registrable Securities in accordance with the terms of the Registration Rights
Agreement or (y) any shares of Common Stock issuable upon conversion of the
Preferred Shares and shares of Common Stock issuable upon exercise of the
Warrants not to be eligible for sale without restriction pursuant to Rule 144(k)
and any applicable state securities laws; and (vii) the Company otherwise shall
have been in material compliance with and shall not have materially breached any
provision, covenant, representation or warranty of any Transaction Document (as
defined in the Securities Purchase Agreement).

 

5

 

(xxiii)  "Excluded Securities" means
shares of Common Stock issued or deemed to be issued in accordance with Section
2(f) hereof by the Company: (A) in connection with an Approved Stock Plan; (B)
upon the issuance or upon conversion of the Series A Preferred Stock or Series B
Preferred Stock or upon the issuance or exercise of warrants to purchase Common
Stock which shall be issued by the Company contemporaneously with any issuances
of Series B Preferred Stock; provided that such issuance of shares upon
issuance, conversion or exercise, as applicable, is made pursuant to the terms
of the Certificate of Designations for such Series A Preferred Stock, the
Certificate of Designations for such Series B Preferred Stock and the warrants
in the form attached to the Dow Purchase Agreement and such preferred stock or
warrants are not amended in any respect material to the Holders after the
Initial Issuance Date; (C) upon issuance of the Preferred Shares or upon
conversion of the Preferred Shares or issued as Dividend Shares or upon exercise
of the Warrants; (D) issued upon exercise of Options or Convertible Securities
which are outstanding on the date immediately preceding the Subscription Date,
provided that such issuance of shares of Common Stock upon exercise of such
Options or Convertible Securities is made pursuant to the terms of such Options
or Convertible Securities in effect on the date immediately preceding the
Subscription Date and such Options or Convertible Securities are not amended
after the date immediately preceding the Subscription Date; (E) issued for
consideration other than cash pursuant to a merger, consolidation, acquisition
or similar business combination the primary purpose of which is not to raise
equity capital; (F) issued in connection with any stock split, stock dividend,
recapitalization or similar transaction by the Company for which adjustment is
made pursuant to Section 2(f)(ii); (G) issued as consideration, whether in whole
or in part, to any person or entity for providing services or supplying goods to
the Company; (H) issued to any entity which is or will be, itself or through its
Subsidiaries or affiliates, an operating company in a business related to or
complementary with the business of the Company and in which the Company receives
material benefits in addition to the investment of funds; (I) issued pursuant to
any equipment leasing arrangement; (J) issued to pay all or a portion of any
investment banking, finders or similar fee or commission, which entitles the
holders thereof to acquire shares of Common Stock at a price not less than the
market price of the Common Stock on the date of such issuance and which is not
subject to any adjustments other than on account of stock splits and reverse
stock splits; and (K) as may be mutually agreed in writing prior to their
issuance by the Company and the Required Holders.

 

6

 

(xxiv)  "First
Interim Conversion Election Date" means the date that is the one (1)
month anniversary of the Effective Date (as defined in the Registration Rights
Agreement).

 

(xxv)  "Initial
Issuance Date" means April 25, 2005.

 

(xxvi)  "Installment
Amount" means the Conversion Amount relating to up to 500 Preferred
Shares.

 

(xxvii)  "Interim
Conversion Election Date" means either (x) the First Interim Conversion
Election Date or (y) the Second Interim Conversion Election Date, as
applicable.

 

(xxviii)  "Interim Conversion Price"
means the lower of (x) the arithmetic average of the Weighted Average Price of
the Common Stock for each of the ten (10) consecutive Trading Days ending on the
Trading Day immediately preceding the date of the applicable Conversion Notice

 

7

 

or Company Interim Conversion Election Notice, as applicable (all
such determinations to be appropriately adjusted for any stock split, stock
dividend, stock combination or other similar transaction that proportionately
decreases or increases the Common Stock during such period), and (y) any lower
amount set forth in any applicable Company Interim Conversion Election Notice;
provided, however, that unless consented to by the Company and the Required
Holders, the Interim Conversion Price shall not be less than $1.00 (as adjusted
for any stock dividend, stock split, stock combination or other similar event)
prior to the six month anniversary of the Initial Issuance Date (the
"Interim Conversion Price Limitation"). The Interim Conversion
Price shall be set forth in a Conversion Notice or Company Interim Conversion
Election Notice; provided that, without the prior written consent of the
Company, each Holder shall not elect to use the Interim Conversion Price in a
Conversion Notice (the restrictions set forth below in clauses (I), (II)(A),
II(B) and (II)(C) of this definition shall be hereinafter referred to
collectively as the "Total Interim Limitations") (I) during a
Suspension Period or (II) to convert more than (A) during any twenty (20)
consecutive Trading Day period, fifteen percent (15%) of the number of Preferred
Shares issued to such Holder on the Initial Issuance Date, (B) during the first
nine (9) months following the Initial Issuance Date or during any Calendar
Quarter, thirty percent (30%) of the number of Preferred Shares issued to such
Holder on the Initial Issuance Date (the "30% Interim Conversion
Restriction") and (C) during any six (6) month period, thirty-five
percent (35%) of the number of Preferred Shares issued to such Holder on the
Initial Issuance Date at an Interim Conversion Price less than $1.25 (as
adjusted for any stock dividend, stock split, stock combination or other similar
event) (the Interim Conversion Price Limitation and the restriction in clause
(II)(C) hereof, collectively, the "Interim Conversion
Restrictions"); provided that after the occurrence of a
Triggering Event and until such Triggering Event is cured, each Holder shall
have the right to convert all or a portion of such Holder's Preferred Shares in
accordance with Section 2(b) without being subject to the Interim Conversion
Restrictions; and provided further that each Holder shall be entitled to convert
its pro rata portion (based on the number of Preferred Shares purchased by such
Holder on the Initial Issuance Date) of 2,000 Preferred Shares without being
subject to the Interim Conversion Price Limitation or the Total Interim
Limitations.

 

(xxix)  "Liquidation"
means the liquidation, dissolution or winding up of the Company or such
Subsidiaries the assets of which constitute all or substantially all the assets
of the business of the Company and its Subsidiaries taken as a whole, in a
single transaction or series of transactions.

 

(xxx)  "Liquidation
Event" means (x) a Liquidation or (y) a Change of Control.

 

8

 

(xxxi)  "Maturity
Date" means, with respect to a Preferred Share, April 25, 2008, unless
extended pursuant to Section 2(d)(vii)(B).

 

(xxxii)  "N"
means the number of days from, but excluding, the last Dividend Date with
respect to which dividends have been paid by the Company on the applicable
Preferred Share, or the Initial Issuance Date if no Dividend Date has occurred,
through and including the next Dividend Date for such Preferred Share for which
such determination is being made.

 

(xxxiii)  "NYSE"
means The New York Stock Exchange, Inc.

 

(xxxiv)  "Options"
means any rights, warrants or options to subscribe for or purchase Common Stock
or Convertible Securities.

 

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

 

(xxxvi)  "Person"
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a government
or any department or agency thereof.

 

(xxxvii)  "Principal
Market" means The Nasdaq SmallCap Market, or if the Common Stock is not
traded on the Principal Market, an Eligible Market.

 

(xxxviii)  "Registration Rights
Agreement" means that certain registration rights agreement by and
among the Company and the initial Holders of the Preferred Shares relating to
the filing of a registration statement covering the resale of the shares of
Common Stock issuable upon conversion of the Preferred Shares and exercise of
the Warrants, as such agreement may be amended from time to time as provided in
such agreement.

 

(xxxix)  "Required
Holders" means the Holders of Preferred Shares representing at least a
majority of the aggregate Preferred Shares then outstanding.

 

(xl)  "SEC"
means the Securities and Exchange Commission.

 

(xli)  "Second Interim Conversion Election
Date" means the date that is the later of (x) the one (1) year
anniversary of the Effective Date and (y) such time as the applicable Holder or
its transferees holds less than 75% of the number of Preferred Shares issued to
such Holder on the Initial Issuance Date.

 

9

 

(xlii)  "Securities Purchase Agreement"
means that certain securities purchase agreement by and among the Company and
the initial Holders, dated as of the Subscription Date, as such agreement
further may be amended from time to time as provided in such agreement.

 

(xliii)  "Series A Preferred Stock"
shall mean, collectively, (v) the Series A-0 Convertible Preferred Stock of
the Company, par value $0.001 per share, (w) the Series A-1 Convertible
Preferred Stock of the Company, par value $0.001 per share, (x) the Series A-2
Convertible Preferred Stock of the Company, par value $0.001 per share, (y) the
Series A-3 Convertible Preferred Stock of the Company, par value $0.001 per
share, and (z) the Series A-4 Convertible Preferred Stock of the Company, par
value $0.001 per share.

 

(xliv)  "Series B Preferred Stock"
shall mean, collectively, (w) the Series B-1 Convertible Preferred Stock of the
Company, par value $0.001 per share, (x) the Series B-2 Convertible Preferred
Stock of the Company, par value $0.001 per share, (y) the Series B-3 Convertible
Preferred Stock of the Company, par value $0.001 per share, and (z) the Series
B-4 Convertible Preferred Stock of the Company, par value $0.001 per
share. 

 

(xlv)  "Standard Conversion Price"
means, with respect to the Preferred Shares, $2.00, subject to adjustment as
provided herein.

 

(xlvi)  "Stated Value" means
$1,000.

 

(xlvii)  "Stock Dividend Rate" means,
with respect to any Dividend Date, that price which shall be computed as 95% of
the arithmetic average of the Weighted Average Price of the Common Stock on each
of the five (5) consecutive trading days immediately preceding (but not
including) such Dividend Date. All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar
transaction during such period.

 

(xlviii)  "Subscription Date" means
April 20, 2005.

 

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

 

10

 

(l)  "Suspension Period" means the
period commencing fifteen (15) Trading Days after delivery of a notice (the
"Interim Conversion Suspension Notice") from the Company to all
Holders, setting forth that such Holders shall be unable to elect in any
Conversion Notice to use the Interim Conversion Price until the Company notifies
all such Holders in writing that they may once again elect the Interim
Conversion Price in a Conversion Notice; provided, that no Suspension
Period shall (x) exceed twenty-five (25) consecutive Trading Days, (y) commence
within seventy-five (75) Trading Days after delivery of an Interim Conversion
Suspension Notice for a previous Suspension Period or (z) commence within ten
(10) Trading Days following the end of any period during which any Holder is
subject to the 30% Interim Conversion Restriction; provided, further, that the
Company may not deliver more than two (2) Interim Conversion Suspension Notices
hereunder.

 

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

 

(lii)  "Triggering Event" means any of
following events:

 

(A)  the failure of the applicable Registration
Statement to be declared effective by the SEC on or prior to the date that is
two hundred seventy (270) days after the Closing Date (as defined in the
Securities Purchase Agreement);

 

(B)  while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the Holder for sale of all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive Trading Days (excluding days
during an Allowable Grace Period (as defined in the Registration Rights
Agreement)) and such Holder's Registrable Securities covered by such
Registration Statement cannot be sold without restriction pursuant to Rule
144(k) promulgated under the Securities Act of 1933, as amended;

 

11

 

(C)  the suspension from trading or failure of the
Common Stock to be listed on a Principal Market for a period of ten (10)
consecutive Trading Days or for more than an aggregate of fifteen (15) Trading
Days in any 365-day period; or

 

(D)  the Company breaches in any material respect any
representation, warranty, covenant or other term or condition of any Transaction
Document, except, in the case of a breach of a covenant which is curable, only
if such breach remains uncured for a period of at least five (5) Business
Days.

 

(liii)  "Warrants" means the warrants
to purchase shares of Common Stock issued by the Company pursuant to the
Securities Purchase Agreement.

 

(liv)  "Weighted Average Price" means,
for any security as of any date, the dollar volume-weighted average price for
such security on the Principal Market during the period beginning at 9:30:01
a.m., New York City Time, and ending at 4:00:00 p.m., New York City Time, as
reported by Bloomberg through its "Volume at Price" function or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York City Time,
and ending at 4:00:00 p.m., New York City Time, as reported by Bloomberg, or, if
no dollar volume-weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as
reported in the "pink sheets" by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for
such security on such date on any of the foregoing bases, the Weighted Average
Price of such security on such date shall be the fair market value as mutually
determined by the Company and the Required Holders. If the Company and the
Required Holders are unable to agree upon the fair market value of the Common
Stock, then such dispute shall be resolved pursuant to Section 2(d)(iii) below
with the term "Weighted Average Price" being substituted for the term "Closing
Sale Price." All such determinations shall be appropriately adjusted for any
stock dividend, stock split or other similar transaction during such
period.

 

(b)  Holder's Conversion Right. Subject to the
provisions of Section 5 and Section 12, at any time or times on or after the
Initial Issuance Date, any Holder shall be entitled to convert any whole number
of Preferred Shares into fully paid and nonassessable shares of Common Stock in
accordance with Section 2(b) at the Conversion Rate (as defined below).

 

12

 

(c)  Conversion. The number of shares of Common
Stock issuable upon conversion of each Preferred Share pursuant to Section 2(b)
shall be determined according to the following formula (the "Conversion
Rate"):

 

Conversion Amount

Conversion Price

 

(d)  Mechanics of Conversion. The conversion of
Preferred Shares shall be conducted in the following manner:

 

(i)  Holder's Delivery Requirements. To convert
Preferred Shares into shares of Common Stock on any date (the
"Conversion Date"), the Holder shall (A) transmit by facsimile
(or otherwise deliver), for receipt on or prior to 6:59 p.m., New York City
Time, on such date, a copy of a properly completed notice of conversion executed
by the registered Holder of the Preferred Shares subject to such conversion in
the form attached hereto as Exhibit I (the "Conversion
Notice") to the Company and the Company's designated transfer agent
(the "Transfer Agent") and (B) if required by Section
2(d)(viii), surrender to a common carrier for delivery to the Company as soon as
practicable following such date the original certificates representing the
Preferred Shares being converted (or compliance with the procedures set forth in
Section 14) (the "Preferred Stock Certificates").

 

(ii)  Company's Response. Upon receipt by the
Company of copy of a Conversion Notice, the Company shall (I) as soon as
practicable, but in any event within one (1) Business Day, send, via facsimile,
a confirmation of receipt of such Conversion Notice to such Holder and the
Transfer Agent, which confirmation shall constitute an instruction to the
Transfer Agent to process such Conversion Notice in accordance with the terms
herein and (II) as soon as practicable, but in any event on or before the third
(3rd) Business Day following the date of receipt by the Company of
such Conversion Notice, (the "Share Delivery Date"), (A)
provided the Transfer Agent is participating in the DTC Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder's or its designee's
balance account with DTC through its Deposit Withdrawal Agent Commission system,
or (B) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and deliver to the address as specified in
the Conversion Notice, a certificate, registered in the name of the Holder or
its designee, for the number of shares of Common Stock to which the Holder shall
be entitled. If the number of Preferred Shares represented by the Preferred
Stock Certificate(s) submitted for conversion, as may be required pursuant to
Section 2(d)(viii), is greater than the number of Preferred Shares being
converted, then the Company shall, as soon as practicable and in no event later
than three (3) Business Days after receipt of the Preferred Stock Certificate(s)
(the "Preferred Stock Delivery Date") and at its own expense,
issue and deliver to the Holder a new Preferred Stock Certificate representing
the number of Preferred Shares not converted. The Person or Persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.

 

13

 

(iii)  Dispute Resolution. In the case of a
dispute as to the determination of the Closing Sale Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct the Transfer
Agent to issue to the Holder the number of shares of Common Stock that is not
disputed and shall transmit an explanation of the disputed determinations or
arithmetic calculations to the Holder via facsimile as soon as possible, but in
no event later than two (2) Business Day after receipt of such Holder's
Conversion Notice or other date of determination. If such Holder and the Company
are unable to agree upon the determination of the Closing Sale Price or
arithmetic calculation of the Conversion Rate within two (2) Business Days of
such disputed determination or arithmetic calculation being transmitted to the
Holder, then the Company shall within one (1) Business Day of such two (2)
Business Day period submit via facsimile (A) the disputed determination of the
Closing Sale Price to an independent, reputable investment bank selected by the
Company and approved by the Required Holders or (B) the disputed arithmetic
calculation of the Conversion Rate to the Company's independent, outside
accountant. The Company shall cause the investment bank or the accountant, as
the case may be, to perform the determinations or calculations and notify the
Company and the Holders of the results no later than two (2) Business Days from
the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case may
be, shall be binding upon all parties absent error. The reasonable expenses of
such investment bank or accountant in making such determination shall be paid by
the Company in the event the Holder's calculation was correct, or by the Holder
in the event the Company's calculation was correct, or equally by the Company
and the Holder in the event that neither the Company's or the Holder's
calculation was correct.

 

(iv)  Record Holder. The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
Preferred Shares shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on the Conversion Date.

 

(v)  Company's Failure to Timely Convert.

 

(A)  Cash Damages. If (i) within three (3)
Business Days after the Company's receipt of the facsimile copy of a Conversion
Notice or (ii) on any Company Delivery Date, the Company shall fail to issue and
deliver a certificate to a Holder or credit such Holder's balance account with
DTC for the number of shares of Common Stock to which such Holder is entitled
upon such Holder's conversion or the Company's conversion, as applicable, of
Preferred Shares, and if on or after such Business Day the Holder purchases (in
an open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the shares of Common Stock issuable upon
such conversion that the Holder anticipated receiving from the Company (a
"Buy-In"), then the Company shall, within three (3) Business
Days after the Holder's request and in the Holder's discretion, either (i) pay
cash to the Holder in an amount equal to the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased (the "Buy-In Price"), at which point the Company's
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of Common Stock, times (B) the Closing Sale
Price on the Conversion Date or Company Delivery Date, as applicable.

 

14

 

(B)  Void Conversion Notice; Adjustment of Standard
Conversion Price. If for any reason a Holder has not received all of the
shares of Common Stock to which such Holder is entitled prior to the fifth
(5th) Business Day after the Share Delivery Date or Company Delivery
Date, as applicable, with respect to a conversion of Preferred Shares, then the
Holder, upon written notice to the Company, with a copy to the Transfer Agent,
may void its Conversion Notice or any applicable Company Conversion Notice, with
respect to, and retain or have returned, as the case may be, any Preferred
Shares that have not been converted pursuant to such Holder's Conversion Notice
or Company Conversion Notice; provided that the voiding of a Holder's Conversion
Notice or Company Conversion Notice, as applicable, shall not effect the
Company's obligations to make any payments which have accrued prior to the date
of such notice pursuant to Section 2(d)(v)(A) or otherwise. Thereafter, the
Standard Conversion Price of any Preferred Shares returned or retained by the
Holder for failure to timely convert shall be adjusted to the lesser of (I) the
Conversion Price relating to the voided Conversion Notice or voided Company
Conversion Notice, as applicable, and (II) the lowest Weighted Average Price of
the Common Stock during the period beginning on the Conversion Date or Company
Delivery Date, as applicable, and ending on the date such Holder voided the
Conversion Notice or Company Conversion Notice, as applicable, subject to
further adjustment as provided in this Certificate of Designations.

 

 

15

(vi)  Pro Rata Conversion. Subject to Section 12,
in the event the Company receives a Conversion Notice from more than one Holder
for the same Conversion Date and the Company can convert some, but not all, of
such Preferred Shares, the Company shall convert from each Holder electing to
have Preferred Shares converted at such time a pro rata amount of such Holder's
Preferred Shares submitted for conversion based on the number of Preferred
Shares submitted for conversion on such date by such Holder relative to the
number of Preferred Shares submitted for conversion on such date.

 

(vii)  Mandatory Redemption at Maturity.

 

(A)  If any Preferred Share remains outstanding on the
Maturity Date, the Company shall redeem such Preferred Share for an amount in
cash per Preferred Share (the "Maturity Date Redemption Price")
equal to the Conversion Amount plus the applicable Additional Amount by wire
transfer of immediately available funds to an account designated in writing by
such Holder.

 

(B)  If the Company fails to redeem all of the Preferred
Shares outstanding on the Maturity Date by payment of the Maturity Date
Redemption Price for each such Preferred Share, then in addition to any remedy
such Holder may have under any Transaction Document, (I) the applicable Maturity
Date Redemption Price payable in respect of such unredeemed Preferred Shares
shall bear interest at the rate of 1.5% per month, prorated for partial months,
until paid in full, and (II) any Holder shall have the option to require the
Company to convert any or all of such Holder's Preferred Shares and for which
the Maturity Date Redemption Price (together with any interest thereon) has not
been paid into (on a per Preferred Share basis) shares of Common Stock equal to
the number which results from dividing the Maturity Date Redemption Price
(together with any interest thereon) by the Default Conversion Price. If the
Company has failed to pay the Maturity Date Redemption Price in a timely manner
as described above, then the Maturity Date shall be automatically extended for
any Preferred Shares until the date the Holders receive such shares of Common
Stock or Maturity Date Redemption Price and shall be further extended for any
Preferred Shares for as long as (A) the conversion of such Preferred Shares
would violate the provisions of Section 5 or (B) a Triggering Event or
Redemption Event or an event that with the passage of time or giving of notice
would constitute a Triggering Event or Redemption Event shall have occurred and
be continuing.

 

16

 

(viii)  Book-Entry. Notwithstanding anything to
the contrary set forth herein, upon conversion of Preferred Shares in accordance
with the terms hereof, the Holder thereof shall not be required to physically
surrender the certificate representing the Preferred Shares to the Company
unless (A) the full or remaining number of Preferred Shares represented by the
certificate are being converted or (B) a Holder has provided the Company with
prior written notice (which notice may be included in a Conversion Notice)
requesting reissuance of Preferred Shares upon physical surrender of any
Preferred Shares. The Holder and the Company shall maintain records showing the
number of Preferred Shares so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of the certificate representing
the Preferred Shares upon each such conversion. In the event of any dispute or
discrepancy, such records of the Company establishing the number of Preferred
Shares to which the record holder is entitled shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if Preferred Shares represented by a certificate are converted as aforesaid, the
Holder may not transfer the certificate representing the Preferred Shares unless
the Holder first physically surrenders the certificate representing the
Preferred Shares to the Company, whereupon the Company will forthwith issue and
deliver upon the order of the Holder a new certificate of like tenor, registered
as the Holder may request, representing in the aggregate the remaining number of
Preferred Shares represented by such certificate. The Holder and any assignee,
by acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares, the
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated on the face thereof. Each certificate for
Preferred Shares shall bear the following legend: 

 

ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED
SHARES REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(viii) THEREOF.
THE NUMBER OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN
THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION
2(d)(viii) OF THE CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE.

 

17

 

(ix)  Conversion at the Company's Election. On
any date after the Initial Issuance Date (the "Conversion Election
Date"), so long as (i) the Equity Conditions shall have been satisfied
or waived in writing by the applicable Holder from and including the date of the
Company Conversion Election Notice (as defined below) through and including the
Company Election Conversion Date (as defined below) and (ii) on each of the
twenty (20) consecutive Trading Days immediately preceding the date of the
Company Conversion Election Notice, the Weighted Average Price of the Common
Stock exceeds 200% of the Standard Conversion Price on the Initial Issuance Date
(subject to adjustment for stock splits, stock dividends, recapitalizations,
combinations, reverse stock splits or other similar events during such period),
the Company shall have the right, in its sole discretion, to require that some
or all of the outstanding Preferred Shares be converted (the "Company
Conversion Election") at the applicable Conversion Rate;
provided, however, that the Company may not deliver a Company
Conversion Election Notice within thirty (30) Trading Days of having already
delivered such a notice. The Company shall exercise its right to Company
Conversion Election by providing each Holder written notice ("Company
Conversion Election Notice") by facsimile or overnight courier on the
Conversion Election Date. The date on which each of such Holders actually
receives the Company Conversion Election Notice is referred to herein as the
"Company Conversion Election Notice Date." If the Company
elects to require conversion of some, but not all, of such Preferred Shares then
outstanding, the Company shall require conversion of an amount from each Holder
equal to the product of (I) the total number of Preferred Shares which the
Company has elected to convert multiplied by (II) such Holder's Allocation
Percentage (such amount with respect to each Holder of such Preferred Shares
being referred to herein as its "Pro Rata Conversion Amount").
In the event that any initial Holder of the Preferred Shares shall sell or
otherwise transfer any of such Holder's Preferred Shares, the transferee shall
be allocated a pro rata portion of such Holder's Allocation Percentage. The
Company Conversion Election Notice shall indicate (x) the aggregate number of
such Preferred Shares the Company has selected for conversion, (y) the date
selected by the Company for conversion (the "Company Election Conversion
Date"), which date shall be not less than twenty (20) Trading Days or
more than sixty (60) Trading Days after the Company Conversion Election Notice
Date, and (z) each Holder's Pro Rata Conversion Amount. Subject to the
satisfaction of all the conditions of this Section 2(d)(ix), on the Company
Election Conversion Date each Holder of Preferred Shares selected for conversion
will be deemed to have submitted a Conversion Notice in accordance with Section
2(d)(i) for a number of Preferred Shares equal to such Holder's Pro Rata
Conversion Amount. Notwithstanding the above, any Holder may convert such shares
(including Preferred Shares selected for conversion hereunder which shall reduce
such Holder's Pro Rata Conversion Amount) into Common Stock pursuant to Section
2(b) on or prior to the date immediately preceding the Company Election
Conversion Date. If the Company fails to convert any Conversion Amount on the
applicable Company Election Conversion Date, then each Holder shall be entitled
to the remedies set forth in Section 2(d)(v).

 

18

 

(x)  Interim Conversion at the Company's
Election. 

 

(A)  On or after an Interim Conversion Election Date,
the Company shall have the right, in its sole discretion, to require that up to
each Holder's Company Interim Conversion Amount be converted (the
"Company Interim Conversion Election") at the applicable
Conversion Rate (a "Company Interim Conversion");
provided that the Conditions to Interim Conversion at the Company's
Election (as set forth below) are satisfied or waived in writing by the Required
Holders. The Company shall exercise its right to Company Interim Conversion
Election by providing each Holder written notice (collectively, the
"Company Interim Conversion Election Notice") by facsimile
between 4:00 p.m. and 6:00 p.m., New York Time, on or after an Interim
Conversion Election Date (followed by notice by overnight courier). The second
(2nd) Trading Day following the date on which each of such Holders
actually receive the Company Interim Conversion Election Notice is referred to
herein as the "Company Election Interim Conversion Date." If
the Company elects to require conversion of some, but not all, of such Company
Interim Conversion Amount, the Company shall require conversion of an amount
from each Holder equal to the product of (I) the total number of Preferred
Shares which the Company has elected to convert multiplied by (II) such Holder's
Allocation Percentage (such amount with respect to each Holder being referred to
herein as its "Pro Rata Interim Conversion Amount"). In the
event that any initial Holder shall sell or otherwise transfer any of such
Holder's Preferred Shares, the transferee shall be allocated a pro rata portion
of such Holder's Allocation Percentage. The Company Interim Conversion Election
Notice shall indicate (x) the aggregate number of such Preferred Shares the
Company has selected for conversion, and (y) each Holder's Pro Rata Interim
Conversion Amount. Subject to the satisfaction of all the conditions of this
Section 2(d)(x), on the Company Election Interim Conversion Date each Holder of
Preferred Shares selected for conversion will be deemed to have submitted a
Conversion Notice in accordance with Section 2(d)(i) for a number of Preferred
Shares equal to such Holder's Pro Rata Interim Conversion Amount. If the Company
fails to convert any Company Interim Conversion Amount on the applicable Company
Election Interim Conversion Date, then each Holder shall be entitled to the
remedies set forth in Section 2(d)(v).

 

 

19

 

(B)  "Conditions to Interim Conversion at the
Company's Election" means the following conditions:

 

(i)  the Equity Conditions shall have been satisfied or
waived in writing by the applicable Holder from and including the date of the
Company Interim Conversion Election Notice through and including the Company
Election Interim Conversion Date,

 

(ii)  with respect to the period commencing on the First
Interim Conversion Election Date through the Second Interim Conversion Election
Date, (x) the Closing Sale Price immediately preceding delivery of the
applicable Company Interim Conversion Election Notice shall be at least 120% of
the Conversion Price and (y) the number of shares of Common Stock traded on the
Trading Day immediately preceding delivery of the applicable Company Interim
Conversion Election Notice is at least of eight (8) times the aggregate number
of shares set forth in the applicable Company Interim Conversion Election
Notice,

 

(iii)  from and after the period commencing on the
Second Interim Conversion Election Date, (x) the Closing Sale Price immediately
preceding delivery of the applicable Company Interim Conversion Election Notice
shall be at least (A) if the applicable Conversion Price is $1.25 or less (as
adjusted for any stock dividend, stock split, stock combination or other similar
event), 114% of the applicable Conversion Price and (B) if the applicable
Conversion Price is greater than $1.25 (as adjusted for any stock dividend,
stock split, stock combination or other similar event), 108% of the applicable
Conversion Price and (y) the number of shares of Common Stock traded on the
Trading Day immediately preceding delivery of the applicable Company Interim
Conversion Election Notice is at least five (5) times the aggregate number of
shares set forth in the applicable Company Interim Conversion Election Notice,

 

(iv)  the Company does not deliver any Company Interim
Conversion Election Notice during any consecutive twenty (20) Trading Days that
require any Holder to convert more than such Holder's Company Interim Conversion
Amount (as defined below),

 

(v)  the Company does not deliver any Company Interim
Conversion Election Notice during any Calendar Quarter that require any Holder
to convert more than thirty percent (30%) of the number of Preferred Shares
issued to such Holder on the Initial Issuance Date, 

 

(vi)  the Company does not deliver any Company Interim
Conversion Election Notice during any six (6) month period that require any
Holder to convert more than thirty-five percent (35%) of the number of Preferred
Shares issued to such Holder on the Initial Issuance Date at an average
Conversion Price that is less than $1.25 (as adjusted for any stock dividend,
stock split, stock combination or other similar event), 

 

20

 

(vii)  the Company does not deliver any Company Interim
Conversion Election Notice within three (3) Trading Days of receipt from the
applicable Holder of a Conversion Notice electing an Interim Conversion Price
and 

 

(viii)  the Company does not deliver any Company Interim
Conversion Election Notice within twenty (20) Trading Days of delivery of a
Company Installment Notice.

 

(xi)  Company Installment Conversion or
Redemption.

 

(A)  On and after the date that is the eighteenth
(18th) month anniversary of the Initial Issuance Date, so long as the
Equity Conditions shall have been satisfied or waived in writing by the
applicable Holder from and including the date of the applicable Company
Installment Notice (as defined below) through and including the applicable
Installment Date (as defined below), the Company may elect to pay to each Holder
up to such Holder's Allocation Percentage of the Installment Amount, but subject
to and in accordance with the terms of this Section, by (I) requiring the
conversion of the applicable Holder's Allocation Percentage of the Installment
Amount (the "Company Conversion Amount") in accordance with
this Section (a "Company Conversion") or (II) redeeming the
applicable Holder's Allocation Percentage of the Installment Amount (the
"Company Redemption Amount") in accordance with this Section (a
"Company Redemption"). The Company shall deliver written notice
(each, a "Company Installment Notice"), to the Holder which
Company Installment Notice shall state (x) the date on which the Installment
Amount will be paid (the "Installment Date"), which date shall
be fifteen (15) Trading Days from the date of the Company Installment Notice and
at least twenty-five (25) Trading Days from the date of any prior Installment
Date, (y) the Installment Amount to be paid on such Installment Date, and (z)
whether such Installment Amount shall be paid by way of a Company Conversion or
a Company Redemption. The date on which each of such Holders actually receives
the Company Installment Notice is referred to herein as the "Company
Installment Notice Date." Each Company Installment Notice shall be
irrevocable (unless waived by the applicable Holder). The Company shall redeem
and convert the applicable Installment Amount pro rata from the Holders of the
Preferred Shares then outstanding. The Company Redemption Amount shall be
redeemed in accordance with Section 2(d)(xi)(B) and the Company Conversion
Amount shall be converted in accordance with Section 2(d)(xi)(C).

 

21

 

(B)  If the Company elects a Company Redemption in
accordance with Section 2(d)(xi)(A), then the applicable Company Redemption
Amount which is to be paid to the Holders on the applicable Installment Date
shall be redeemed by the Company on such Installment Date, and the Company shall
pay to the Holders on such Installment Date, by wire transfer of immediately
available funds, an amount in cash (the "Company Installment Redemption
Price") equal to 100% of the Company Redemption Amount. If the Company
fails to redeem a Company Redemption Amount on the applicable Installment Date
by payment of the Company Installment Redemption Price on such date, then at the
option of each Holder designated in writing to the Company (any such
designation, a "Conversion Notice" for purposes hereof), such
Holder may require the Company to convert all or any part of the Company
Redemption Amount at the Company Conversion Price. Conversions required by this
Section 2(d)(xi)(B) shall be made in accordance with the provisions of Section
2(d)(ii). Notwithstanding anything to the contrary in this Section, but subject
to Sections 5 and 12, until the Company Installment Redemption Price is paid in
full, the Company Redemption Amount may be converted, in whole or in part, by a
Holder into Common Stock pursuant to Section 2(b). In the event any Holder
elects to convert all or any portion of the Company Redemption Amount prior to
the applicable Installment Date as set forth in the immediately preceding
sentence, the Company Redemption Amount so converted shall be deducted from the
Installment Amount to be paid on such Installment Date. 

 

(C)   Subject to Section 5, if the Company delivers a
Company Installment Notice and elects a Company Conversion in accordance with
Section 2(d)(xi)(A), then the applicable Company Conversion Amount shall be
converted as of the applicable Installment Date by converting on such
Installment Date such Company Conversion Amount at the Company Conversion Price.
Notwithstanding anything to the contrary in this Section, but subject to
Sections 5 and 12, until the Company delivers Common Stock representing the
Company Conversion Amount to a Holder, the Company Conversion Amount may be
converted by such Holder into Common Stock pursuant to Section 2(b). In the
event any Holder elects to convert or exchange the Company Conversion Amount
prior to the applicable Installment Date as set forth in the immediately
preceding sentence, the Company Conversion Amount so converted or exchanged
shall be deducted from the Installment Amount to be paid on such Installment
Date. If the Company fails to convert any Installment Amount on the applicable
Installment Date, then each Holder shall be entitled to the remedies set forth
in Section 2(d)(v).

 

22

 

(e)  Taxes. The Company shall pay any and all
documentary, stamp, transfer (but only in respect of the registered holder
thereof) and other similar taxes that may be payable with respect to the
issuance and delivery of Common Stock upon the conversion of Preferred
Shares.

 

(f)  Adjustments to Conversion Price. The
Conversion Price will be subject to adjustment from time to time as provided in
this Section 2(f).

 

(i)  Adjustment of Standard Conversion Price upon
Issuance of Common Stock. If and whenever on or after the Subscription Date,
the Company issues or sells, or in accordance with this Section 2(f) is deemed
to have issued or sold, any shares of Common Stock (including the issuance or
sale of shares of Common Stock owned or held by or for the account of the
Company but excluding Excluded Securities) for a consideration per share (the
"New Securities Issuance Price") less than a price (the
"Applicable Price") equal to the Standard Conversion Price in
effect immediately prior to such time (a "Dilutive Issuance"),
then immediately after such issue or sale, the Standard Conversion Price then in
effect shall be reduced to an amount equal to the product of (x) the Standard
Conversion Price in effect immediately prior to such Dilutive Issuance and (y)
the quotient of (1) the sum of (I) the product of the Applicable Price and the
number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance and (II) the consideration, if any, received by the Company
upon such Dilutive Issuance, divided by (2) the product of (I) the Applicable
Price multiplied by (II) the number of shares of Common Stock Deemed Outstanding
immediately after such Dilutive Issuance. For purposes of determining the
adjusted Standard Conversion Price under this Section 2(f)(i), the following
shall be applicable:

 

(A)  Issuance of Options. If the Company in any
manner grants or sells any Options and the lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion, exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such share of
Common Stock shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the granting or sale of such Option for such price
per share. For purposes of this Section 2(f)(i)(A), the "lowest price per share
for which one share of Common Stock is issuable upon the exercise of any such
Option or upon conversion, exchange or exercise of any Convertible Securities
issuable upon exercise of such Option" shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon granting or sale of the Option,
upon exercise of the Option and upon conversion, exchange or exercise of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Standard Conversion Price shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such Common Stock upon
conversion, exchange or exercise of such Convertible Securities.

 

23

 

(B)  Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities and the lowest
price per share for which one share of Common Stock is issuable upon such
conversion, exchange or exercise thereof is less than the Applicable Price, then
such share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance of sale of such
Convertible Securities for such price per share. For the purposes of this
Section 2(f)(i)(B), the "lowest price per share for which one share of Common
Stock is issuable upon such conversion, exchange or exercise" shall be equal to
the sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to any one share of Common Stock upon the issuance
or sale of the Convertible Security and upon the conversion, exchange or
exercise of such Convertible Security. No further adjustment of the Standard
Conversion Price shall be made upon the actual issuance of such Common Stock
upon conversion, exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Standard Conversion Price had been or are to
be made pursuant to other provisions of this Section 2(f)(i), no further
adjustment of the Standard Conversion Price shall be made by reason of such
issue or sale.

 

(C)  Change in Option Price or Rate of
Conversion. If the purchase or exercise price provided for in any Options,
the additional consideration, if any, payable upon the issue, conversion,
exchange or exercise of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or exchangeable or exercisable for
Common Stock changes at any time, the Standard Conversion Price in effect at the
time of such change shall be adjusted to the Standard Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold. For purposes of this Section 2(f)(i)(C), if the terms of any
Option or Convertible Security that was outstanding as of the date of issuance
of the Preferred Shares are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change. No adjustment shall be
made if such adjustment would result in an increase of the Standard Conversion
Price then in effect.

 

24

 

(D)  Calculation of Consideration Received. In
case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of
$0.01. If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the gross amount received by the Company therefor.
If any Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of marketable securities, in which case the
amount of consideration received by the Company will be the arithmetic average
of the Closing Sale Prices of such securities during the ten (10) consecutive
Trading Days ending on the date of receipt of such securities. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the Required Holders. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event requiring
valuation (the "Valuation Event"), the fair value of such
consideration will be determined within five (5) Business Days after the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
selected by the Company and the Required Holders. The determination of such
appraiser shall be deemed binding upon all parties absent manifest error. The
reasonable expenses of such appraiser in making such determination shall be paid
by the Company in the event the Holders' calculation was correct, or by the
Holders in the event the Company's calculation was correct, or equally by the
Company and the Holder in the event that neither the Company's or the Holders'
calculation was correct. 

 

25

 

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

 

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

 

(iii)  Other Events. If any event occurs of the
type contemplated by the provisions of this Section 2(f) but not expressly
provided for by such provisions (including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company's Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the Holders;
provided that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 2(f).

 

(iv)  Notices.

 

(A)  Promptly upon any adjustment of the Conversion
Price pursuant to this Section 2(f), the Company will give written notice
thereof to each Holder, setting forth in reasonable detail, and certifying, the
calculation of such adjustment. In the case of a dispute as to the determination
of such adjustment, then such dispute shall be resolved in accordance with the
procedures set forth in Section 2(d)(iii).

 

(B)  The Company will give written notice to each Holder
at least ten (10) Business Days prior to the date on which the Company closes
its books or takes a record (I) with respect to any dividend or distribution
upon the Common Stock, (II) with respect to any pro rata subscription offer to
holders of Common Stock or (III) for determining rights to vote with respect to
any Change of Control or Liquidation Event, provided that such information shall
be made known to the public prior to or in conjunction with such notice being
provided to such Holder.

 

26

 

(C)  The Company will also give written notice to each
Holder at least ten (10) Business Days prior to the date on which any Change of
Control or Liquidation Event will take place, provided that such information
shall be made known to the public prior to or in conjunction with such notice
being provided to such Holder.

 

(3)  Redemption at Option of Holders.

 

(a)  Redemption Event. A "Redemption
Event" shall be deemed to occur: at any time (A) following the tenth
(10th) consecutive Business Day that a Holder's Authorized Share
Allocation is less than the number of shares of Common Stock that such Holder
would be entitled to receive upon a conversion of the full Conversion Amount of
the Preferred Shares or (B) the number of shares of Common Stock registered
pursuant to the Registration Statement for any Holder is less than the number
that such Holder would be entitled to receive upon a conversion of the full
Conversion Amount of the Preferred Shares (in each case, without regard to any
limitations on conversion set forth in Section 5 or otherwise) or (C) the
Company fails or is unable to issue or deliver any shares of Common Stock within
ten (10) Business Days of any conversion or attempted conversion by a Holder of
the Preferred Shares in accordance with the notice provisions hereof.

 

(b)  Redemption Option Upon Redemption Event.
After a Redemption Event, in addition to all other rights of the Holders
contained herein, each Holder shall have the right, at such Holder's option, to
require the Company to redeem a number of such Holder's Preferred Shares equal
to (I) with respect to a Redemption Event pursuant to Section 3(a)(A) and (B),
the number of underlying shares of Common Stock that are not authorized or
registered, as applicable, and (II) with respect to a Redemption Event pursuant
to Section 3(a)(C), the number of underlying shares that the Company fails or is
unable to convert in such Conversion, at a price per Preferred Share equal to
the greater of (i) 120% of the Conversion Amount and (ii) the product of (A) the
Conversion Rate in effect at such time as such Holder delivers a Notice of
Redemption at Option of Holder (as defined below) and (B) the Closing Sale Price
of the Common Stock on the Trading Day immediately preceding such Redemption
Event (the "Redemption Price").

 

(c)  Mechanics of Redemption at Option of Buyer.
Within one (1) Business Day after the occurrence of a qualifying Redemption
Event, the Company shall deliver written notice thereof via facsimile
("Notice of Redemption Event") to each Holder. At any time
after the earlier of a Holder's receipt of a Notice of Redemption Event and such
Holder becoming aware of a Redemption Event but prior to thirty (30) days after
the applicable Redemption Event is cured, any Holder of Preferred Shares then
outstanding may require the Company to redeem up to all of such Holder's
Preferred Shares by delivering written notice thereof via facsimile and
overnight courier ("Notice of Redemption at Option of Holder")
to the Company, which Notice of Redemption at Option of Holder shall indicate
the number of Preferred Shares that such Holder is electing to redeem.

 

27

 

(d)  Payment of Redemption Price. Upon the
Company's receipt of a Notice(s) of Redemption at Option of Buyer from any
Holder, the Company shall immediately notify each Holder by facsimile of the
Company's receipt of such notice(s). The Company shall deliver on the fifth
(5th) Business Day after the Company's receipt of the first Notice of
Redemption at Option of Holder the applicable Redemption Price to all Holders
that deliver a Notice of Redemption at Option of Holder prior to the fifth
(5th) Business Day after the Company's receipt of the first Notice of
Redemption at Option of Holder; provided that, if required by Section
2(d)(viii), a Holder's Preferred Stock Certificates shall have been delivered to
the Transfer Agent. If the Company is unable to redeem all of the Preferred
Shares submitted for redemption, the Company shall (i) redeem a pro rata amount
from each Holder based on the number of Preferred Shares submitted for
redemption by such Holder relative to the total number of Preferred Shares
submitted for redemption by all Holders and (ii) in addition to any remedy such
Holder may have under this Certificate of Designations and the Securities
Purchase Agreement, pay to each Holder interest at the rate of 1.5% per month
(prorated for partial months) in respect of each unredeemed Preferred Share
until paid in full.

 

(e)  Void Redemption. In the event that the
Company does not pay the Redemption Price within the time period set forth in
Section 3(d), at any time thereafter and until the Company pays such unpaid
applicable Redemption Price in full, a Holder shall have the option to, in lieu
of redemption, require the Company to promptly return to such Holder any or all
of the Preferred Shares that were submitted for redemption by such Holder under
this Section 3 and for which the applicable Redemption Price (together with any
interest thereon) has not been paid, by sending written notice thereof to the
Company via facsimile (the "Void Optional Redemption Notice").
Upon the Company's receipt of such Void Optional Redemption Notice, (i) the
Notice of Redemption at Option of Holder shall be null and void with respect to
those Preferred Shares subject to the Void Optional Redemption Notice, (ii) the
Company shall immediately return any Preferred Shares subject to the Void
Optional Redemption Notice, and (iii) the Standard Conversion Price of such
returned Preferred Shares shall be adjusted to the lesser of (A) the Standard
Conversion Price as in effect on the date on which the Void Optional Redemption
Notice is delivered to the Company and (B) the lowest Weighted Average Price of
the Common Stock during the period beginning on the date on which the Notice of
Redemption at Option of Holder is delivered to the Company and ending on the
date on which the Void Optional Redemption Notice is delivered to the
Company.

 

28

 

(f)  Disputes; Miscellaneous. In the event of a
dispute as to the determination of the arithmetic calculation of the Redemption
Price, such dispute shall be resolved pursuant to Section 2(d)(iii) above with
the term "Redemption Price" being substituted for the term "Conversion Rate". A
Holder's delivery of a Void Optional Redemption Notice and exercise of its
rights following such notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice. In the event
of a redemption pursuant to this Section 3 of less than all of the Preferred
Shares represented by a particular Preferred Stock Certificate, the Company
shall promptly cause to be issued and delivered to the Holder of such Preferred
Shares a Preferred Stock Certificate representing the remaining Preferred Shares
which have not been redeemed, if necessary.

 

(4)  Other Rights of Holders.

 

(a)  Assumption. The Company shall not enter into
or be party to a Change of Control unless (i)  the Successor Entity assumes
in writing all of the obligations of the Company under this Certificate of
Designations and the other Transaction Documents in accordance with the
provisions of this Section 4(a) pursuant to written agreements in connection
with the closing of such Change of Control, including agreements to deliver to
each holder of Preferred Shares in exchange for such Preferred Shares a security
of the Successor Entity evidenced by a written instrument substantially similar
in form and substance to the Certificate of Designations, including, without
limitation, having a stated value and dividend rate equal to the stated value
and dividend rate of the Preferred Shares held by such holder and having similar
ranking to the Preferred Shares, and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on a Principal Market. Upon the occurrence of any
Change of Control, the Successor Entity shall succeed to, and be substituted for
(so that from and after the date of such Change of Control, the provisions of
this Certificate of Designations referring to the "Company" shall refer instead
to the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Certificate of
Designations with the same effect as if such Successor Entity had been named as
the Company herein. Upon consummation of the Change of Control, the Successor
Entity shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of the Preferred Shares at any time after the
consummation of the Change of Control, in lieu of the shares of the Company's
Common Stock (or other securities, cash, assets or other property) purchasable
upon the conversion or redemption of the Preferred Shares prior to such Change
of Control, such shares of stock, securities, cash, assets or any other property
whatsoever (including warrants or other purchase or subscription rights) which
the Holder would have been entitled to receive upon the happening of such Change
of Control had the Preferred Shares been converted immediately prior to such
Change of Control, as adjusted in accordance with the provisions of this
Certificate of Designations. The provisions of this Section shall apply
similarly and equally to successive Change of Controls and shall be applied
without regard to any limitations on the conversion or redemption of the
Preferred Shares. 

 

29

 

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

 

(5)  Limitation on Beneficial Ownership. The
Company shall not effect and shall have no obligation to effect any conversion
of Preferred Shares, and no Holder shall have the right to convert any Preferred
Shares, to the extent that after giving effect to such conversion, the
beneficial owner of such shares (together with such Person's affiliates) would
have acquired, through conversion of Preferred Shares or otherwise, beneficial
ownership of a number of shares of Common Stock that exceeds 4.99%
("Maximum Percentage") of the number of shares of Common Stock
outstanding immediately after giving effect to such conversion. Likewise, the
Company shall not give effect to any voting rights of the Preferred Shares, and
any Holder shall not have the right to exercise voting rights with respect to
any Preferred Shares pursuant hereto, to the extent that giving effect to such
voting rights would result in such Holder (together with its affiliates) being
deemed to beneficially own in excess of the Maximum Percentage of the number of
shares of Common Stock outstanding immediately after giving effect to such
exercise, assuming such exercise as being equivalent to conversion. For purposes
of the foregoing sentence, the number of shares of Common Stock beneficially
owned by a Person and its affiliates shall include the number of shares of
Common Stock issuable upon conversion of the Preferred Shares with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by such Person
or any of its affiliates and (B) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained in this Section beneficially owned by such
Person or any of its affiliates. Except as set forth in the preceding sentence,
for purposes of this Section 5, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Section 5, 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 (1) the Company's most recent
Form 8-K, Form 10-Q or Form 10-K as the case may be, (2) a more recent public
announcement by the Company, or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written request of any Holder, the Company shall promptly, but in no
event later than two (2) Business Days following the receipt of such notice,
confirm orally and in writing to any such 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 conversions of Preferred Shares
and exercise of the Warrants by such Holder and its affiliates since the date as
of which such number of outstanding shares of Common Stock was reported. By
written notice to the Company, the Holder may increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such
notice; provided that (i) any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to the Company, and (ii)
any such increase or decrease will apply only to the Holder providing such
written notice and not to any other Holder.

 

30

 

(6)  Reservation of Shares.

 

(a)  The Company shall, so long as any of the Preferred
Shares are outstanding, take all action necessary to reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversions of the Preferred Shares, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 130% of the
number of shares of Common Stock for which the Preferred Shares are at any time
convertible (without regard to any limitations on conversions); provided that at
no time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by reason of the previous sentence
(without regard to any limitations on conversions) (the "Required
Reserve Amount"); provided, further, that any Dividend Shares issued by
the Company shall not be issued from any Common Stock so reserved. The initial
number of shares of Common Stock reserved for conversions of the Preferred
Shares and each increase in the number of shares so reserved shall be allocated
pro rata among the Holders based on the number of Preferred Shares held by each
Holder at the time of issuance of the Preferred Shares or increase in the number
of reserved shares, as the case may be (the "Authorized Share
Allocation"). In the event a Holder shall sell or otherwise transfer
any of such Holder's Preferred Shares, each transferee shall be allocated a pro
rata portion of the number of reserved shares of Common Stock reserved for such
transferor. Any shares of Common Stock reserved and allocated to any Person
which ceases to hold any Preferred Shares shall be allocated to the remaining
Holders of Preferred Shares, pro rata based on the number of Preferred Shares
then held by such Holders.

 

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

 

31

 

(7)  Voting Rights. Subject to Section 5, each
Holder shall be entitled to the whole number of votes equal to the number of
shares of Common Stock into which such holder's Preferred Shares would be
convertible on the record date for the vote or consent of stockholders, and
shall otherwise have voting rights and powers equal to the voting rights and
powers of the Common Stock. Each holder shall be entitled to receive the same
prior notice of any stockholders' meeting as is provided to the holders of
Common Stock in accordance with the bylaws of the Company, as well as prior
notice of all stockholder actions to be taken by legally available means in lieu
of a meeting, and shall vote with holders of the Series A Preferred Stock,
Series B Preferred Stock and Common Stock as if they were a single class of
securities upon any matter submitted to a vote of stockholders, except those
matters required by law or by the terms hereof to be submitted to a class vote
of the Holders of Preferred Shares, in which case the Holders of Preferred
Shares only shall vote as a separate class.

 

(8)  Liquidation, Dissolution, Winding-Up. In the
event of a Liquidation Event, the Holders shall be entitled to receive in cash
out of the assets of the Company, whether from capital or from earnings
available for distribution to its stockholders (the "Liquidation
Funds"), after all amounts which are payable to the holders of Series A
Preferred Stock and Series B Preferred Stock shall have been paid and before any
amounts which are payable to the holders of any of the capital stock of the
Company of any class junior in rank to the Preferred Shares in respect of the
preferences as to distributions and payments upon a Liquidation Event shall be
paid, an amount per Preferred Share equal to (a) if such Liquidation Event
is a Liquidation, the Stated Value plus 120% of the Additional Amount thereon,
and (b) if such Liquidation Event is a Change of Control, 120% of the sum
of the Stated Value plus the Additional Amount thereon; provided that, if
the Liquidation Funds are insufficient to pay the full amount due to the Holders
and holders of shares of other classes or series of preferred stock of the
Company that are of equal rank with the Preferred Shares as to payments of
Liquidation Funds (the "Pari Passu Shares"), then each Holder
and each holder of Pari Passu Shares shall receive a percentage of the
Liquidation Funds equal to the full amount of Liquidation Funds payable to such
Holder as a liquidation preference, in accordance with their respective
Certificate of Designations, Preferences and Rights, as a percentage of the full
amount of Liquidation Funds payable to all holders of Preferred Shares and Pari
Passu Shares. To the extent necessary, the Company shall cause such actions to
be taken by any of its Subsidiaries so as to enable, to the maximum extent
permitted by law, the proceeds of a Liquidation Event to be distributed to the
Holders in accordance with this Section. All the preferential amounts to be paid
to the Holders under this Section shall be paid or set apart for payment before
the payment or setting apart for payment of any amount for, or the distribution
of any Liquidation Funds of the Company to the holders of shares of other
classes or series of preferred stock of the Company junior in rank to the
Preferred Shares in connection with a Liquidation Event as to which this Section
applies. The purchase or redemption by the Company of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be regarded as a
Liquidation Event.

 

32

 

(9)  Preferred Rank. All shares of Common Stock
shall be of junior rank to all Preferred Shares with respect to the preferences
as to dividends, distributions and payments upon the liquidation, dissolution
and winding up of the Company. The rights of the shares of Common Stock shall be
subject to the preferences and relative rights of the Preferred Shares. Without
the prior express written consent of the Required Holders, the Company shall not
hereafter authorize or issue additional or other capital stock (other than the
Series A Preferred Stock and the Series B Preferred Stock authorized to be
issued on the terms thereof as of the Initial Issuance Date) that is of senior
or pari-passu rank to the Preferred Shares in respect of the preferences as to
distributions and payments upon a Liquidation Event. The Company shall be
permitted to issue preferred stock that is junior in rank to the Preferred
Shares in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company, provided that the
maturity date (or any other date requiring redemption or repayment of such
preferred stock) of any such junior preferred stock is not on or before the
Maturity Date. In the event of the merger or consolidation of the Company with
or into another corporation, the Preferred Shares shall maintain their relative
powers, designations and preferences provided for herein (except that the
Preferred Shares may be pari passu with, but not junior to, any capital
stock of the successor entity other than any capital stock of the successor
entity that replaces, or is given in exchange for, Series A Preferred Stock and
Series B Preferred Stock) and no merger shall result inconsistent
therewith.

 

(10)  Participation. Subject to the rights of the
holders, if any, of the Pari Passu Shares, the Holders shall, as holders of
Preferred Stock, be entitled to such dividends paid and distributions made to
the holders of Common Stock to the same extent as if such Holders had converted
the Preferred Shares into Common Stock (without regard to any limitations on
conversion herein or elsewhere) and had held such shares of Common Stock on the
record date for such dividends and distributions. Payments under the preceding
sentence shall be made concurrently with the dividend or distribution to the
holders of Common Stock. Following the occurrence of a Liquidation Event and the
payment in full to a Holder of its applicable liquidation preference, such
Holder shall cease to have any rights hereunder to participate in any future
dividends or distributions made to the holders of Common Stock. 

 

(11)  Incurrence of Indebtedness. Prior to the
second anniversary of the Initial Issuance Date (the "Second Anniversary
Date"), the Company shall not, and the Company shall not permit any of
its Subsidiaries to, without the consent of the Required Holders, directly or
indirectly, incur or guarantee, assume or suffer to exist any Indebtedness (as
defined in the Securities Purchase Agreement) other than (a) Indebtedness
existing as of the Subscription Date and (b) Indebtedness issuable pursuant to
the terms as set forth on the Subscription Date in that certain Investor Rights
Agreement between the Company and Dow executed pursuant to the Dow Purchase
Agreement (the "Dow Investor Rights Agreement"); provided that
such existing Indebtedness shall not be amended, restated, renewed, refunded,
refinanced or otherwise extended and the principal amount shall not be increased
without the consent of the Required Holders. From and after the Second
Anniversary Date, and so long as the Preferred Shares are outstanding, the
Company shall not, without the consent of the Required Holders, directly or
indirectly, redeem, defease, repurchase, repay or make any payments in respect
of, by the payment of cash, all or any portion of any principal amount of any
Indebtedness incurred after the Second Anniversary Date, other than payments in
respect of Indebtedness issuable pursuant to the terms set forth on the
Subscription Date in the Dow Investor Rights Agreement.

 

33

 

(12)  Limitation on Number of Conversion Shares.
Notwithstanding anything to the contrary contained herein, the Company shall not
be obligated to issue any shares of Common Stock upon conversion of the
Preferred Shares or exercise of the Warrants if the issuance of such shares of
Common Stock would exceed that number of shares of Common Stock which the
Company may issue upon conversion of the Preferred Shares without breaching the
Company's obligations under the rules or regulations of the Principal Market, or
the market or exchange where the Common Stock is then traded (the
"Exchange Cap"), except that such limitation shall not apply in
the event that the Company (a) obtains the approval of its stockholders as
required by the applicable rules of the Principal Market (or any successor rule
or regulation) for issuances of Common Stock in excess of such amount, or (b)
obtains a written opinion from outside counsel to the Company that such approval
is not required, which opinion shall be reasonably satisfactory to the Required
Holders. Until such approval or written opinion is obtained, no purchaser of
Preferred Shares pursuant to the Securities Purchase Agreement (the
"Purchasers") shall be issued, in the aggregate, upon
conversion of Preferred Shares or exercise of the Warrants, shares of Common
Stock in an amount greater than the product of (i) the Exchange Cap amount
multiplied by (ii) a fraction, the numerator of which is the number of Preferred
Shares issued to such Purchaser pursuant to the Securities Purchase Agreement on
the Initial Issuance Date and the denominator of which is the aggregate amount
of all the Preferred Shares issued to the Purchasers pursuant to the Securities
Purchase Agreement on the Initial Issuance Date (the "Exchange Cap
Allocation"). In the event that any Purchaser shall sell or otherwise
transfer any of such Purchaser's Preferred Shares, the transferee shall be
allocated a pro rata portion of such Purchaser's Exchange Cap Allocation. In the
event that any Holder shall convert all of such Holder's Preferred Shares into a
number of shares of Common Stock which, in the aggregate, is less than such
Holder's Exchange Cap Allocation, then the difference between such Holder's
Exchange Cap Allocation and the number of shares of Common Stock actually issued
to such Holder shall be allocated to the respective Exchange Cap Allocations of
the remaining Holders on a pro rata basis in proportion to the number of
Preferred Shares then held by each such Holder.

 

(13)  Vote to Change the Terms of or Issue Preferred
Shares. Until such time as less than 25% of the number of shares issued to
each Holder on the Initial Issuance Date are outstanding, in addition to any
other rights provided by law, except where the vote or written consent of the
holders of a greater number of shares is required by law or by another provision
of the Certificate of Incorporation, without first obtaining the affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting of the Required Holders, voting together as a single class, the Company
shall not: (u) amend or repeal any provision of, or add any provision to, the
Certificate of Incorporation or bylaws, or file any certificate of designations,
preferences, limitations and relative rights of any series of preferred stock,
if such action would adversely alter or change the preferences, rights,
privileges or powers of, or restrictions provided for the benefit of the
Preferred Shares, regardless of whether any such action shall be by means of
amendment to the Certificate of Incorporation or by merger, consolidation or
otherwise; (v) increase or decrease (other than by conversion) the authorized
number of shares of the Preferred Shares; (w) create or authorize (by
reclassification or otherwise) any new class or series of shares that has a
preference over or is on a parity with the Preferred Shares with respect to
dividends or the distribution of assets on the liquidation, dissolution or
winding up of the Company (other than the authorization or creation of the
Series A Preferred Stock or the Series B Preferred Stock on the terms thereof as
of the Initial Issuance Date); (x) purchase, repurchase or redeem any shares of
Common Stock (other than pursuant to equity incentive agreements with employees
giving the Company the right to repurchase shares upon the termination of
services and other than repurchases or redemptions of shares of Common Stock
with respect to the Series A Preferred Stock and Series B Preferred Stock
authorized to be issued on the terms thereof and on the terms of the Dow
Investor Rights Agreement, in each case, as of the Initial Issuance Date); (y)
pay dividends or make any other distribution on the Common Stock; or (z) whether
or not prohibited by the terms of the Preferred Shares, circumvent a right of
the Preferred Shares.

 

34

 

(14)  Lost or Stolen Certificates. Upon receipt
by the Company of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of any Preferred Stock Certificates
representing the Preferred Shares, and, in the case of loss, theft or
destruction, of an indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Company shall execute and deliver new
preferred stock certificate(s) of like tenor and date; provided,
however, the Company shall not be obligated to re-issue preferred stock
certificates if the Holder contemporaneously requests the Company to convert
such Preferred Shares into Common Stock.

 

(15)  Remedies, Characterizations, Other Obligations,
Breaches and Injunctive Relief. The remedies provided in this Certificate of
Designations shall be cumulative and in addition to all other remedies available
under this Certificate of Designations, at law or in equity (including a decree
of specific performance and/or other injunctive relief). No remedy contained
herein shall be deemed a waiver of compliance with the provisions giving rise to
such remedy. Nothing herein shall limit a Holder's right to pursue actual
damages for any failure by the Company to comply with the terms of this
Certificate of Designations. The Company covenants to each Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holders and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holders
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

 

(16)  Construction. This Certificate of
Designations shall be deemed to be jointly drafted by the Company and all Buyers
and shall not be construed against any person as the drafter hereof.

 

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

 

35

 

(18)  Notice. Whenever notice is required or
other communication is to be given under this Certificate of Designations,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement (provided that if the
Preferred Shares are not held by a Buyer (as defined in the Securities Purchase
Agreement) then substituting the words "holder of Securities" for the word
"Buyer").

 

(19)  Transfer of Preferred Shares. A Holder may
assign some or all of the Preferred Shares and the accompanying rights hereunder
held by such Holder without the consent of the Company; provided that
such assignment is in compliance with applicable securities laws.

 

(20)  Preferred Share Register. The Company shall
maintain at its principal executive offices (or such other office or agency of
the Company as it may designate by notice to the Holders), a register for the
Preferred Shares, in which the Company shall record the name and address of the
persons in whose name the Preferred Shares have been issued, as well as the name
and address of each transferee. The Company may treat the person in whose name
any Preferred Share is registered on the register as the owner and holder
thereof for all purposes, notwithstanding any notice to the contrary, but in all
events recognizing any properly made transfers.

 

(21)  Stockholder Matters. Any stockholder
action, approval or consent required, desired or otherwise sought by the Company
pursuant to the rules and regulations of the Principal Market, the DGCL, this
Certificate of Designations or otherwise with respect to the issuance of the
Preferred Shares or the Common Stock issuable upon conversion thereof or the
issuance of any Warrants and the Common Stock issuable upon exercise thereof may
be effected by written consent of the Company's stockholders or at a duly called
meeting of the Company's stockholders, all in accordance with the applicable
rules and regulations of the Principal Market and the DGCL. This provision is
intended to comply with the applicable sections of the DGCL permitting
stockholder action, approval and consent affected by written consent in lieu of
a meeting.

 

(22)  SECURITY. The obligations under this
Certificate of Designations are secured to the extent and in the manner set
forth in the Security Documents (as defined in the Securities Purchase
Agreement).

 

36

 

 

IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed, as of this 22nd day of April, 2005.

 

	 	 	 
	 	MILLENNIUM CELL
  INC.
	 
 	 
 	 
 
		By:  	/s/ John D. Giolli
	 	
      

      
      Name:
      John D. Giolli

	 	Title:  
      Vice
      President - Finance and Chief Financial
Officer

 

 

EXHIBIT I

 

MILLENNIUM CELL INC. CONVERSION NOTICE

 

Reference is made to the Certificate of Designations, Preferences
and Rights of Series C Convertible Preferred Stock of Millennium Cell Inc. (the
"Certificate of Designations"). In accordance with and pursuant
to the Certificate of Designations, the undersigned hereby elects to convert the
number of shares of Series C Convertible Preferred Stock, par value $.001 per
share (the "Preferred Shares"), of Millennium Cell Inc., a
Delaware corporation (the "Company"), indicated below into
shares of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company, as of the date specified below.

 

	
      Date
      of Conversion:
	
       

      
      

      

	 	
	Number
      of Preferred Shares to be converted:
	
       

      
      

      

	 	
	Stock
      certificate no(s). of Preferred Shares to be converted:
	
       

      
      

       

	 	
	Tax
      ID Number (If applicable): 
	
       

      
      

       

	 	
	Please
      confirm the following information:
	
       

      
      

       

	 	
	Conversion
      Price:
	
	 	
	
       Is
      Interim Conversion Price being utilized?
	YES: _____ NO:
_____.

 

	
      Number
      of shares of Common Stock to be issued:
	
       

      
      

       

 

Please
issue the Common Stock into which the Preferred Shares are being converted in
the following name and to the following address:

 

	Issue
      to:
	
       

      
      

       

	 	
	Address:
	
       

      
      

       

	 	 
	Telephone
      Number:
	
       

      
      

       

	 	
	Facsimile
      Number:
	
       

      
      

       

	 	 
	Authorization:
	
       

      
      

       

	 	 
	By:
	
       

      
      

       

	 	 
	Title:
	
       

      
      

      

	 	 
	Dated:
	
       

      
      

       

	 	 

 

	Account
      Number (if electronic book entry transfer):
	
       

      
      

      

	 	 

 

	Transaction
      Code Number (if electronic book entry transfer):
	
       

      
      

      

	 

[NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER
AGENT]

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby
directs American Stock Transfer & Trust Company to issue the above indicated
number of shares of Common Stock in accordance with the Irrevocable Transfer
Agent Instructions dated April __, 2005 from the Company and acknowledged and
agreed to by American Stock Transfer & Trust Company.

 

	 	 	 
	 	MILLENNIUM CELL
  INC.
	 
 	 
 	 
 
		By:  	
	 	
      

      Name:

	 	
      

      
	 	Title:

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