Document:

Exhibit
10.3

    

    NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR
OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.

     

    COMMON
STOCK PURCHASE
WARRANT

     

    To
Purchase 625,000 Shares of Common Stock of

     

    SteelCloud,
Inc.

     

    THIS
COMMON STOCK PURCHASE WARRANT (the "Warrant") CERTIFIES
that, for value received, Caledonia Capital Corporation, a Delaware corporation,
(the "Holder"),
is entitled, upon the terms and subject to the limitations on exercise and the
conditions hereinafter set forth, at any time on or after July 1, 2009 (the
"Initial Exercise
Date") and on or prior to the fourth anniversary of the Initial Exercise
Date (the "Tennination
Date") but not thereafter, to subscribe for and purchase from SteelCloud,
Inc., a corporation incorporated in the Commonwealth of Virginia (the "Company"), up to
625,000 shares (the "Warrant Shares") of
Common Stock, par value $0.001 per share, of the Company (the "Common Stock"). The
purchase price of each share of Common Stock (the "Exercise Price")
issuable upon the exercise of this Warrant shall be $0.15, subject to adjustment
hereunder. The Exercise Price and the number of Warrant Shares for which the
Warrant is exercisable shall be subject to adjustment as provided
herein.

     

    1.    Title to Warrant.
Prior to the Termination Date and subject to compliance with applicable laws and
Section 7 of this Warrant, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office
or agency of the Company by the Holder in person or by duly authorized attorney,
upon surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed. The transferee shall sign an investment letter in form and
substance reasonably satisfactory to the Company.

     

    
      	
               

            	
              

            

    

     

    
      
         

      

      
        
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    2.    Authorization of
Shares. The Company covenants that all Warrant Shares which may be issued
upon the exercise of the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant, be duly authorized,
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges in respect of the issue thereof (other than taxes in respect of any
transfer occurring contemporaneously with such issue).

     

    3. Exercise of
Warrant.

     

    (a)   Subject
to Section 3(b), exercise of the purchase rights represented by this Warrant may
be made at any time or times on or after the Initial Exercise Date and on or
before the Termination Date by delivery to the Company of a duly executed
facsimile copy of the Notice of Exercise/Exchange Form annexed hereto (or such
other office or agency of the Company as it may designate by notice in writing
to the registered Holder at the address of such Holder appearing on the books of
the Company); provided, however, within 5
business days of the date said Notice of Exercise is delivered to the Company,
the Holder shall have surrendered this Warrant to the Company and the Company
shall have received payment of the aggregate Exercise Price of the shares
thereby purchased by wire transfer or cashier's check drawn on a United States
bank. Certificates for shares purchased hereunder shall be delivered to the
Holder within the earlier of (i) 5 business days after the date on which the
Notice of Exercise shall have been delivered by facsimile copy or (ii) 3
business dates from the delivery to the Company of the Notice of Exercise Form
by facsimile copy, surrender of this Warrant and payment of the aggregate
Exercise Price as set forth above ("Warrant Share
Delivery Date"); provided, however, in the event
the Warrant is not surrendered or the aggregate Exercise Price is not received
by the Company within 5 business days after the date on which the Notice of
Exercise shall be delivered by facsimile copy, the Warrant Share Delivery Date
shall be extended to the extent such 5 business day period is exceeded. This
Warrant shall be deemed to have been exercised on the later of the date the
Notice of Exercise is delivered to the Company by facsimile copy and the date
the Exercise Price is received by the Company. The Warrant Shares shall be
deemed to have been issued, and Holder or any other person so designated to be
named therein shall be deemed to have become a holder of record of such shares
for all purposes, as of the date the Warrant has been exercised by payment to
the Company of the Exercise Price and all taxes required to be paid by the
Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have
been paid. If the Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this Section 3(a) by
the third Trading Day following the Warrant Share Delivery Date, then the Holder
will have the right to rescind such exercise.

     

    (b)   If
this Warrant shall have been exercised in part, the Company shall, at the time
of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

     

    
      
         

      

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

     

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

     

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

     

    7.    Transfer, Division and
Combination.

     

    (a)  Subject
to compliance with any applicable securities laws and the conditions set forth
in Sections 1 and 7(e) hereof, this Warrant and all rights hereunder are
transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by the Holder or
its agent or attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination or denominations
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this
Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be
exercised by a new holder for the purchase of Warrant Shares without having a
new Warrant issued.

     

    (b)  This
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the Holder or its agent or attorney. Subject to compliance with
Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.

     

    (c)   The
Company shall prepare, issue and deliver at its own expense (other than transfer
taxes) the new Warrant or Warrants under this Section 7.

     

    
      
         

      

      
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    (d)
  The Company agrees to maintain, at its aforesaid office, books for
the registration and the registration of transfer of the Warrants.

     

    (e) 
 If, at the time of the surrender of this Warrant in connection with any
transfer of this Warrant, the transfer of this Warrant shall not be registered
pursuant to an effective registration statement under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such transfer (i) that the Holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of counsel
(which opinion shall be in form, substance and scope customary for opinions of
counsel in comparable transactions and reasonably acceptable to the Company) to
the effect that such transfer may be made without registration under the
Securities Act and under applicable state securities or blue sky laws, (ii) that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee be
an "accredited investor" as defined in Rule 501(a) promulgated under the
Securities Act.

     

    8.   No Rights as Shareholder
until Exercise. This Warrant does not entitle the Holder to any voting
rights or other rights as a shareholder of the Company prior to the exercise
hereof. Upon the surrender of this Warrant and the payment of the aggregate
Exercise Price (or by means of a cashless exercise), the Warrant Shares so
purchased shall be and be deemed to be issued to such Holder as the record owner
of such shares as of the close of business on the later of the date of such
surrender or payment.

     

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

     

    10.   Saturdays, Sundays,
Holidays, etc. If the last or appointed day for the taking of any action
or the expiration of any right required or granted herein shall be a Saturday,
Sunday or a legal holiday, then such action may be taken or such right may be
exercised on the next succeeding day that is not a Saturday, Sunday or legal
holiday.

     

    11.   Adjustments of Exercise
Price and Number of Warrant Shares; Stock Splits, etc. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following. In case the Company shall (i) pay a dividend
in shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (iv)
issue any shares of its capital stock in a reclassification of the Common Stock,
then the number of Warrant Shares purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the Holder shall be entitled
to receive the kind and number of Warrant Shares or
other securities of the Company which it would have owned or have been entitled
to receive had such Warrant been exercised in advance thereof. Upon each such
adjustment of the kind and number of Warrant Shares or other securities of the
Company which are purchasable hereunder, the Holder shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such
event.

     

    
      
        
        

      

      
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    12. 
Reorganization,
Reclassification, Merger, Consolidation or Disposition of Assets. In case the
Company shall reorganize its capital, reclassify its capital stock, consolidate
or merge with or into another corporation (where the Company is not the
surviving corporation or where there is a change in or distribution with respect
to the Common Stock of the Company), or sell, transfer or otherwise dispose of
any of its property, assets or business to another corporation (including by way
of a spinoff) and, pursuant to the terms of such reorganization,
reclassification, merger, consolidation or disposition of assets, shares of
common stock of the successor or acquiring corporation, or any cash, shares of
stock or other securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) in addition to or in lieu of
common stock of the successor or acquiring corporation ("Other Property"), are to be received
by or distributed to the holders of Common Stock of the Company, then the Holder
shall have the right thereafter to receive, at the option of the Holder upon
exercise of this Warrant, the number of shares of Common Stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets to which the
holder of the securities deliverable upon the exercise of this Warrant would
have been entitled in such reorganization, reclassification, merger,
consolidation or disposition of assets if this Warrant had been exercised
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of Warrant Shares
for which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 12. For purposes of
this Section 12, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 12 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of
assets.

     

    
      
         

      

      
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    13.   Voluntar
Adjustment b the Corn an . The Company may at any time during the term of this
Warrant reduce the then current Exercise Price to any amount and for any period
of time deemed appropriate by the Board of Directors of the
Company.

     

    14.    Notice of Adjustment.
Whenever the number of Warrant Shares or number or kind of securities or other
property purchasable upon the exercise of this Warrant or the Exercise Price is
adjusted, as herein provided, the Company shall give notice thereof to the
Holder, which notice shall state the number of Warrant Shares (and other
securities or property) purchasable upon the exercise of this Warrant and the
Exercise Price of such Warrant Shares (and other securities or property) after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was
made.

     

    15. 
 Notice of
Corporate Action. If at any time:

     

    (a)       the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend or other distribution, or any right to
subscribe for or purchase any evidences of its indebtedness, any shares of stock
of any class or any other securities or property, or to receive any other right,
or

     

    (b)       there
shall be any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any consolidation or
merger of the Company with, or any sale, transfer or other disposition of all or
substantially all the property, assets or business of the Company to, another
corporation
or,

     

    (c)      
there shall be a voluntary or involuntary dissolution, liquidation or winding up
of the Company;

     

    then, in
any one or more of such cases, the Company shall give to Holder the same notice
given to the record holders of its Common Stock. Each such written notice shall
be sufficiently given if addressed to Holder at the last address of Holder
appearing on the books of the Company and delivered in accordance with Section
17(d).

     

    16.  Authorized Shares.
The Company covenants that during the period the Warrant is outstanding, it will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of the Warrant Shares upon the exercise of
any purchase rights under this Warrant. The Company further covenants that its
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for the Warrant Shares upon the exercise of the purchase
rights under this Warrant. The Company will take all such reasonable action as
may be necessary to assure that such Warrant Shares may be issued as provided
herein without violation of any applicable law or regulation, or of any
requirements of the trading market upon which the Common Stock may be
listed.

     

    
      
        
        

      

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

     

    Before
taking any action which would result in an adjustment in the number of Warrant
Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof,

     

    17. 
Miscellaneous.

     

    (a)  Jurisdiction. All
questions concerning the construction, validity, enforcement and interpretation
of this Warrant shall be governed by and construed and enforced in accordance
with the internal laws of the Commonwealth of Virginia, without regard to the
principles of conflicts of law thereof.

     

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

     

    (c)  Nonwaiver. No course
of dealing or any delay or failure to exercise any right hereunder on the part
of Holder shall operate as a waiver of such right or otherwise prejudice
Holder's rights, powers or remedies, notwithstanding all rights hereunder
terminate on the Teunination Date.

     

    (d)  Notices. Any notice,
request or other document required or permitted to be given or delivered to the
Holder by the Company shall be delivered in accordance

     

    with the
following:

     

    If to the
Company:

    SteelCloud,
Inc.

    13962
Park Center Road

    Herndon,
VA 20171

    Attention:
Kevin Murphy, Chief Financial Officer

     

    If to the
Holder:

    Caledonia
Capital Corporation

    19441
Golf Vista Plaza

    Suite
360

    Leesburg,
VA 20176

    Attention:
Edward M. Murchie

     

    
      
        
        

      

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

     

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

     

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

     

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

     

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

     

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

     

    18.
 Registration
Rights. Commencing on or about August 31, 2009, the Company shall prepare
and file a registration statement with respect to the issuance and the resale of
the Warrant Shares on an appropriate form for an offering to be made on a
continuous basis pursuant to Rule 415 under the Securities Act (the "Registration
Statement") and shall use its best efforts to cause the Registration
Statement to be declared effective on or as soon as practicable thereafter, and
to keep such Registration Statement continuously effective for a period ending
upon all Warrant Shares having been otherwise transferred in a transaction that
would constitute a sale thereof under the Securities Act, the Company has
delivered a new certificate or other evidence of ownership for Warrant Shares
not bearing the Securities Act restricted stock legend and such Warrant Shares
may be resold without restriction under the Securities Act.

     

    
      
         

      

      
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    IN
WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.

     

    
      
        
          	
                  Dated:
      July 1, 2009

                	 
      	
                  STEELCLOUD,
      INC.

                	 
      
	 	 	 	 
	 
      	
                  By:

                	
                  /s/ Kevin Murphy

                	 
      
	 
      	
                  Name:

                	
                  Kevin
      Murphy

                	 
      
	 
      	
                  Title:

                	
                  Chief
      Financial Officer

                	 
      

        

      

    

     

    
      
         

      

      
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    NOTICE OF
EXERCISEIEXCHANGE

     

    
      	
              To:

            	
              SteelCloud,
      Inc.

            

    

     

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

     

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

       

      o in lawful money of the
United States; or

       

    

    o the cancellation of
such number of Warrant Shares as is necessary, in accordance with the formula
set forth in subsection 3(c), to exercise this Warrant with respect to the
maximum number of Warrant Shares purchasable pursuant to the cashless exercise
procedure set forth in subsection 3(c).

     

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

     

    ________________________________

     

    The
Warrant Shares shall be delivered to the following:

     

    ________________________________

     

    ________________________________

     

    ________________________________

     

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

    

    
      
        
          
            	
                    [PURCHASER]

                  
	 
      	 
      	 
      
	
                    By:

                  	 
      	 
      
	
                    Name:

                  	 
      	 
      
	
                    Title:

                  	 
      	 
      
	 
      	 
      	 
      
	
                    Dated:

                  	 
      	 
      

          

        

      

    

    

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    ASSIGNMENT
FORM

     

    (To
assign the foregoing warrant, execute this form and supply required information.
Do not use this form to exercise the warrant.)

     

    FOR VALUE
RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

     

    ____________________________________________________
whose address is

     

    ____________________________________________________________________

     

     

    ____________________________________________________________________

     

      
            
          
             
                       
      
                     
Dated: ____________

     

    
      Holder's
Signature:   __________________________________

       

    

    
      Holder's
Address:     __________________________________

       

                                        __________________________________

       

    

    Signature
Guaranteed: ________________________________________

    

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

    r.THIS NOTE AND THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF SUCH REGISTRATION OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
AND SUCH STATE SECURITIES LAWS.

    

     

    GENTA
INCORPORATED

     

    Form of
Unsecured Subordinated Convertible Promissory Note

    due July
___, 2011

     

    
      
        	
                No.
      _____

              	 
      	
                $___________

              
	
                Dated:
      _____________, 2009

              	 
      	 
      

      

    

     

    For value
received, GENTA INCORPORATED, a Delaware corporation (the “Maker”), hereby
promises to pay to the order of _______________________ (together with its
successors and representatives, the “Holder”), in
accordance with the terms hereinafter provided, the principal amount of
________________________ ($______________), together with interest thereon.
Pursuant to the Purchase Agreement (as defined in Section 1.1 hereof), the Maker
is issuing separate unsecured subordinated convertible promissory notes in
substantially the same form as this Note (the “Other Notes” and
collectively with this Note, the “Notes”) to separate
purchasers (“Other
Holders” and collectively with the Holder, the “Holders”).

     

    All
payments under or pursuant to this Note shall be made in United States Dollars
in immediately available funds to the Holder at the address of the Holder first
set forth above or at such other place as the Holder may designate from time to
time in writing to the Maker or by wire transfer of funds to the Holder’s
account, instructions for which are attached hereto as Exhibit A. The
outstanding principal balance of this Note shall be due and payable on July
___, 2011 (the “Maturity Date”) or at
such earlier time as provided herein.

     

    ARTICLE
1

     

    1.1           Purchase Agreement.
This Note has been executed and delivered pursuant to the Securities Purchase
Agreement, dated as of July ___, 2009 (the “Purchase Agreement”),
by and among the Maker and the purchasers listed therein.  Capitalized
terms used and not otherwise defined herein shall have the meanings set forth
for such terms in the Purchase Agreement.

     

    1.2           Interest. Beginning
on the issuance date of this Note (the “Issuance Date”), the
outstanding principal balance of this Note shall bear interest, in arrears, at a
rate per annum equal to eight percent (8.00%), payable semi-annually on January
__ and July __ of each year (each, an “Interest Payment
Date”) commencing January __, 2010, or earlier upon conversion,
redemption or prepayment of this Note.  Interest shall be paid in cash
or through the issuance of Other Notes to the Holder in the principal amount
equal to the accrued interest as of the applicable Interest Payment Date or date
of such earlier conversion, redemption or prepayment of this Note, at the
Company’s option.  Interest shall be computed on the basis of a
360-day year of twelve (12) thirty- (30) day months and shall accrue commencing
on the Issuance Date. Furthermore, upon the occurrence of an Event of Default
(as defined in Section 2.1 hereof), the Maker will pay interest to the Holder in
cash, payable on demand, on the outstanding principal balance of and unpaid
interest on the Note from the date of the Event of Default until such Event of
Default is cured at the rate of the lesser of twenty percent (20%) and the
maximum applicable legal rate per annum.

    
      
         

      

      
        1.

        
          

        

      

      
         

      

    

     

    1.3           Payment of Principal; No
Prepayment. The principal amount hereof and all accrued interest hereon
shall be paid in full in cash on the Maturity Date or, if earlier, upon
acceleration or redemption of this Note in accordance with the terms hereof.
Notwithstanding the foregoing, at any time after the one year anniversary of the
Issuance Date, the Holder shall have the right, at the Holder’s option and upon
ten (10) days prior written notice to the Maker, to require the Maker to redeem
this Note by paying to the Holder in cash, the then-outstanding principal amount
of this Note plus accrued and unpaid interest through the date of such
redemption. Any amount of principal repaid hereunder may not be
reborrowed.  Except as set forth in Section 3.6, the Maker may not
prepay any portion of the principal amount of this Note without the prior
written consent of the Holder, which may be withheld in the Holder’s sole and
absolute discretion.

     

    1.4           Payment on Non-Business
Days. Whenever any payment to be made shall be due on a Saturday, Sunday
or a public holiday under the laws of the State of New York, such payment may be
due on the next succeeding business day and such next succeeding day shall be
included in the calculation of the amount of accrued interest payable on such
date.

     

    1.5           Transfer. This Note
may be transferred or sold, subject to the provisions of Section 5.8 of this
Note, or pledged, hypothecated or otherwise granted as security by the
Holder.

     

    1.6           Replacement. Upon
receipt of a duly executed, notarized and unsecured written statement from the
Holder with respect to the loss, theft or destruction of this Note (or any
replacement hereof) and a standard indemnity, or, in the case of a mutilation of
this Note, upon surrender and cancellation of such Note, the Maker shall issue a
new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Note.

     

    1.7           Use of Proceeds. The
Maker shall use the proceeds of this Note as set forth in the Purchase
Agreement.

     

    1.8           Subordinated Status of
Note. The obligations of the Maker under the Notes shall be subordinate
to the 8% Senior Secured Convertible Promissory Notes issued by the Maker
pursuant to that certain Securities Purchase Agreement dated as of April 2, 2009
(the “April 2009
Notes”) and the 15% Senior Secured Convertible Promissory Notes issued by
the Maker pursuant to that certain Securities Purchase Agreement dated as of
June 5, 2008 (the “June 2008 Notes” and
together with the April 2009 Notes, the “Senior Secured
Notes”) to the extent of the security for the Senior Secured Notes, and
senior in time and right of payment to all other Indebtedness of the Maker;
provided, however, that at such time as the security for the Senior Secured
Notes may be released,  the Notes shall be pari passu in time and
right of payment with the Senior Secured Notes. Upon any Liquidation Event, the
Holder will be entitled to receive, before any distribution or payment is made
upon, or set apart with respect to, any Indebtedness of the Maker other than the
holders of the Senior Secured Notes to the extent of the security for the Senior
Secured Notes, or any class of capital stock of the Maker, an amount equal to
the principal amount plus all accrued and unpaid interest thereon. For purposes
of this Note, “Liquidation Event”
means a liquidation pursuant to a filing of a petition for bankruptcy under
applicable law or any other insolvency or debtor’s relief, an assignment for the
benefit of creditors, or a voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Maker.

     

    
      
         

      

      
        2.

        
          

        

      

      
         

      

    

     

    ARTICLE
2

     

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

     

    (a)           any
default in the payment of (1) the principal amount hereunder or under any Other
Note when due, or (2) interest on, or liquidated damages in respect of, this
Note or any Other Note, as and when the same shall become due and payable
(whether on the Maturity Date or by acceleration or otherwise); or

     

    (b)           the
Maker shall fail to observe or perform any other covenant, condition or
agreement contained in this Note or any Other Note which failure is not cured,
if possible to cure, within three (3) business days after notice of such default
sent by the Holder or by any Other Holder; or

     

    (c)           the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq Global Market, the Nasdaq Capital
Market or The New York Stock Exchange, Inc. for a period of twenty (20)
consecutive Trading Days; or

     

    (d)           the
Maker’s notice to the Holder, including by way of public announcement, at any
time, of its inability to comply (including for any of the reasons described in
Section 3.7(a) hereof) or its intention not to comply with proper requests for
conversion of this Note into shares of Common Stock; or

     

    (e)           the
Maker shall fail to (i) timely deliver the shares of Common Stock as and when
required herein, (ii) make the payment of any fees and/or liquidated damages
under this Note, the Purchase Agreement or the other Transaction Documents,
which failure is not remedied within three (3) business days after the
incurrence thereof; or

     

    (f)           default
shall be made in the performance or observance of any material covenant,
condition or agreement contained in the Purchase Agreement or any other
Transaction Document that is not covered by any other provisions of this Section
2.1 and such default is not fully cured within seven (7) business days after the
Maker receives notice from the Holder of the occurrence thereof; or

     

    (g)           at
any time following the Issuance Date the Maker shall fail to have a sufficient
number of shares of Common Stock authorized, reserved and available for issuance
to satisfy the potential conversion in full (disregarding for this purpose any
and all limitations of any kind on such conversion) of this Note and each Other
Note; or

    
      
         

      

      
        3.

        
          

        

      

      
         

      

    

     

    (h)           any
material representation or warranty made by the Maker or any of its Subsidiaries
herein or in the Purchase Agreement, the Other Notes or any other Transaction
Document shall prove to have been false or incorrect or breached in a material
respect on the date as of which made; or

     

    (i)          
 the Maker shall, or shall announce an intention to, consider, pursue or
consummate a Change of Control (as defined below), or a Change of Control shall
be consummated, or Maker shall negotiate, consider, propose or enter into any
agreement, understanding or arrangement with respect to any Change of
Control.  A “Change of Control”
shall mean:

     

    (i)           the
consolidation, merger or other business combination of the Maker with or into
another Person (other than (A) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Maker or
(B) a consolidation, merger or other business combination in which holders of
the Maker’s voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities); or

     

    (ii)        
 the sale, transfer disposition or exclusive license of more than fifty
percent (50%) of the Maker’s intellectual property or assets (based on the fair
market value as determined in good faith by the Holders) other than inventory in
the ordinary course of business in one or a related series of transactions;
except for any such transaction described in this clause (ii) that has been
approved in writing by the holders of two-thirds of the then outstanding
principal amount of the Notes; or

     

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

     

    (j)          
 the Maker or any of its Subsidiaries shall (A) default in any payment of
any amount or amounts of principal of or interest on any Indebtedness (other
than the Indebtedness hereunder or under the Other Notes) the aggregate
principal amount of which Indebtedness is in excess of $250,000 or (B) default in the
observance or performance of any other agreement or condition relating to any
such Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or to
permit the holder or holders or beneficiary or beneficiaries of such
Indebtedness to cause with the giving of notice if required, such Indebtedness
to become due prior to its stated maturity; or

    
      
         

      

      
        4.

        
          

        

      

      
         

      

    

    (k)           the
Maker or any of its Subsidiaries shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property or
assets, (ii) make a general assignment for the benefit of its creditors, (iii)
commence a voluntary case under the United States Bankruptcy Code (as now or
hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), (iv) file a petition seeking to take advantage of any bankruptcy,
insolvency, moratorium, reorganization or other similar law affecting the
enforcement of creditors’ rights generally, (v) acquiesce in writing to any
petition filed against it in an involuntary case under United States Bankruptcy
Code (as now or hereafter in effect) or under the comparable laws of any
jurisdiction (foreign or domestic), (vi) issue a notice of bankruptcy or winding
down of its operations or issue a press release regarding same, or (vii) take
any action under the laws of any jurisdiction (foreign or domestic) analogous to
any of the foregoing; or

     

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

     

    (m)           the
failure of the Maker to instruct its transfer agent to remove any legends from
shares of Common Stock and issue such unlegended certificates to the Holder
within three (3) business days of the Holder’s request (i) so long as the Holder
has provided reasonable assurances to the Maker that such shares of Common Stock
can be sold pursuant to Rule 144 and (ii) following the effectiveness of a
resale registration statement required under the Purchase Agreement;
or

     

    (n)           the
occurrence of an Event of Default under any of the Other Notes or any of the
Senior Secured Notes; or

     

    (o)           the
Maker deregisters its shares of Common Stock and as a result such shares of
Common Stock are no longer publicly traded; or

     

    (p)           the
Maker consummates a “going private” transaction and as a result the Common Stock
is no longer registered under Sections 12(b) or 12(g) of the Exchange Act;
or

     

    (q)           there
shall be any SEC or judicial stop trade order or trading suspension stop-order
or any restriction in place with the transfer agent for the Common Stock
restricting the trading of such Common Stock; or

     

    (r)           the
occurrence of a Material Adverse Effect in respect of the Maker or any of its
Subsidiaries taken as a whole; or

     

    (s)           the
Maker shall, as payment of interest hereon, issue invalid Other
Notes.

    
      
         

      

      
        5.

        
          

        

      

      
         

      

    

     

    2.2           Remedies Upon An Event of
Default.  If an Event of Default shall have occurred and shall
be continuing, the Holder of this Note may at any time at its option declare the
entire unpaid principal balance of this Note, together with all interest accrued
hereon, due and payable, and thereupon, the same shall be accelerated and so due
and payable, without presentment, demand, protest, or notice, all of which are
hereby expressly unconditionally and irrevocably waived by the Maker; provided, however, that upon
the occurrence of an Event of Default described above, the Holder, in its sole
and absolute discretion, may (a) demand the redemption of this Note pursuant to
Section 3.6(a) hereof (to the extent permitted by Section 3.6(a) hereof), (b)
demand that the principal amount of this Note then outstanding and all accrued
and unpaid interest thereon shall be converted into shares of Common Stock at
the Conversion Price per share on the Trading Day immediately preceding the date
the Holder demands conversion pursuant to this clause, or (c) exercise or
otherwise enforce any one or more of the Holder’s rights, powers, privileges,
remedies and interests under this Note, the Purchase Agreement, the other
Transaction Documents or applicable law; provided further, however, that upon
the occurrence of an Event of Default described in clauses (k) or (l), the
entire unpaid principal balance of this Note, together with all interest accrued
hereon, shall automatically become due and payable, and thereupon, the same
shall be accelerated and so due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and
irrevocably waived by the Maker. No course of delay on the part of the Holder
shall operate as a waiver thereof or otherwise prejudice the right of the
Holder. No remedy conferred hereby shall be exclusive of any other remedy
referred to herein or now or hereafter available at law, in equity, by statute
or otherwise.

     

    ARTICLE
3

     

    3.1          Conversion.

     

    (a)         
  Voluntary
Conversion. Subject to Section 3.1(c), this Note shall be convertible (in
whole or in part), at the option of the Holder, into such number of fully paid
and non-assessable shares of Common Stock as is determined by dividing (x) that
portion of the outstanding principal balance and accrued and unpaid interest on
the portion of the outstanding principal balance that the Holder elects to
convert by (y) the Conversion Price (as defined in Section 3.2 hereof) then in
effect on the date on which the Holder faxes a notice of conversion (the “Conversion Notice”),
duly executed, to the Maker (facsimile number (908) 464-1705, Attn.: Raymond P.
Warrell, Jr., M.D.) (the “Voluntary Conversion
Date”). The Holder shall deliver this Note to the Maker at the address
designated in the Purchase Agreement at such time that this Note is fully
converted. With respect to partial conversions of this Note, the Maker shall
keep written records of the amount of this Note converted as of each Conversion
Date.

    
      
         

      

      
        6.

        
          

        

      

      
         

      

    

    (b)           Mandatory Conversion.
On the Mandatory Conversion Date (as defined below), the Maker may cause the
Notes to convert into a number of fully paid and nonassessable shares of Common
Stock equal to the quotient of (i) the outstanding principal and accrued and
unpaid interest on the Notes divided by (ii) the Conversion Price in effect on
the Mandatory Conversion Date by providing five business (5) days prior written
notice of such Mandatory Conversion Date. Any such conversion shall be made
pro-rata amongst all Holders of Notes. As used herein, a “Mandatory Conversion
Date” shall be a date on which the Daily VWAP equals or has exceeded
$0.01 (as appropriately adjusted for stock splits, stock dividends,
reorganizations, recapitalizations, stock combinations and the like) for each of
the ten (10) consecutive prior Trading Days ending on the Trading Day
immediately prior to such date; provided, that the Equity
Conditions shall have been satisfied and the Common Stock shall have been
Tradable on each Trading Day during the period beginning on the first day of
such ten (10) day period and ending on the date of the delivery of such shares
of Common Stock pursuant to the mandatory conversion. The Mandatory Conversion
Date and the Voluntary Conversion Date collectively are referred to in this Note
as the “Conversion
Date.”  The Company shall publicly disclose the conversion of
the Notes pursuant to this paragraph in a Form 8-K within one business day of
the date on which it delivers written notice to the Holders of the
Notes.

     

    (c)           Conversion
Limitations.  Except as required under Section 5 of that
certain Consent and Amendment Agreement dated as of July 6, 2009, by and between
the Company and the Holders listed on Exhibit A thereto, each Holder hereby
agrees that such Holder will not convert any Notes on any day to the extent
that, together with all prior conversions under such Notes following the
Issuance Date, the total amount of such Notes that has been converted since the
Issuance Date exceeds (A) 10% of the principal amount of such Notes on the
Issuance Date multiplied by (B) the number of weeks since the earlier of two
weeks from the effectiveness of a resale registration statement registering the
securities underlying this Note and the date that is six months following the
Issuance Date.  For the avoidance of doubt, as an example if the
Issuance Date were on a Tuesday, such calculation shall be based upon a Tuesday
through Monday week.

     

    3.2          Conversion
Price.  The term “Conversion Price”
shall mean $0.002 (for the avoidance of doubt, the Conversion Price does not
reflect the reverse stock split announced by the Company in June of 2009 and
shall be adjusted for such reverse stock split at the time of the effectiveness
of such reverse stock split).

     

    3.3          Mechanics of
Conversion.

     

    (a)           Not
later than three (3) Trading Days after any Conversion Date (the “Delivery Date”), the
Maker or its designated transfer agent, as applicable, shall issue and deliver
to the Depository Trust Company (“DTC”) account on the
Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified
in the Conversion Notice, registered in the name of the Holder or its designee,
the number of shares of Common Stock to which the Holder is entitled, free from
any restrictive legend.  If in the case of any Conversion Notice such
shares are not delivered to or as directed by the applicable Holder by the
Delivery Date, the Holder shall be entitled by written notice to the Maker at
any time on or before its receipt of such shares, to rescind such conversion, in
which event the Maker shall immediately return this Note tendered for
conversion, whereupon the Maker and the Holder shall each be restored to their
respective positions immediately prior to the delivery of such notice of
revocation, except that any amounts described in Sections 3.3(b) and (c) shall
be payable through the date notice of rescission is given to the
Maker.

    
      
         

      

      
        7.

        
          

        

      

      
         

      

    

    (b)           The
Maker understands that a delay in the delivery of the shares of Common Stock
upon conversion of this Note beyond the Delivery Date could result in economic
loss to the Holder.  If the Maker fails to deliver to the Holder such
shares via DWAC by the Delivery Date, the Maker shall pay to such Holder, in
cash, an amount per Trading Day for each Trading Day until such shares are
delivered via DWAC, together with interest on such amount at a rate of 15% per
annum, accruing until such amount and any accrued interest thereon is paid in
full, equal to the greater of (A) (i) 1% of the aggregate principal amount of
the Notes requested to be converted for each of the first five (5) Trading Days
after the Delivery Date and (ii) 2% of the aggregate principal amount of the
Notes requested to be converted for each Trading Day thereafter and (B) $2,000
per day (which amount shall be paid as liquidated damages and not as a
penalty).  Nothing herein shall limit a Holder’s right to pursue
actual damages for the Maker’s failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein and
such Holder shall have the right to pursue all remedies available to it at law
or in equity (including, without limitation, a decree of specific performance
and/or injunctive relief).  Notwithstanding anything to the contrary
contained herein, the Holder shall be entitled to withdraw a Conversion Notice,
and upon such withdrawal the Maker shall only be obligated to pay the liquidated
damages accrued in accordance with this Section 3.3(b) through the date the
Conversion Notice is withdrawn.

     

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

     

    3.4           Ownership
Cap.  Notwithstanding anything to the contrary set forth in
Section 3 of this Note, at no time may the Company issue to Holder shares of
Common Stock or the Holder convert all or a portion of this Note into shares of
Common Stock if the number of shares of Common Stock to be issued pursuant to
such issuance or conversion would exceed, when aggregated with all other shares
of Common Stock owned by the Holder at such time and all shares of Common Stock
that the Holder is then the beneficial owner of (as determined in accordance
with Section 13(d) of the Exchange Act and the rules thereunder), the number of
shares of Common Stock that would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) more than 9.999% of the then issued and outstanding shares of Common
Stock.

    
      
         

      

      
        8.

        
          

        

      

      
         

      

    

     

    3.5          Adjustment of Conversion
Price.

     

    (a)           Until
the Note has been paid in full or converted in full, the Conversion Price shall
be subject to adjustment from time to time as follows (but shall not be
increased, other than pursuant to Section 3.5(a)(i) hereof):

     

    (i)           Adjustments for Stock Splits
and Combinations.  If the Maker shall at any time or from time
to time after the Closing Date effect a stock split of the outstanding Common
Stock, the applicable Conversion Price in effect immediately prior to the stock
split shall be proportionately decreased.  If the Maker shall at any
time or from time to time after the Closing Date, combine the outstanding shares
of Common Stock, the applicable Conversion Price in effect immediately prior to
the combination shall be proportionately increased.  Any adjustments
under this Section 3.5(a)(i) shall be effective at the close of business on the
date the stock split or combination occurs.

     

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

     

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

     

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

     

    (iii)         Adjustment for Other
Dividends and Distributions.  If the Maker shall at any time or
from time to time after the Closing Date make or issue or set a record date for
the determination of holders of Common Stock entitled to receive a dividend or
other distribution payable in other than shares of Common Stock, then, and in
each event, an appropriate revision to the applicable Conversion Price shall be
made and provision shall be made (by adjustments of the Conversion Price or
otherwise) so that the holders of this Note shall receive upon conversions
thereof, in addition to the number of shares of Common Stock receivable thereon,
the number of securities of the Maker or other issuer (as applicable) or other
property that they would have received had this Note been converted into Common
Stock on the date of such event and had thereafter, during the period from the
date of such event to and including the Conversion Date, retained such
securities (together with any distributions payable thereon during such period)
or assets, giving application to all adjustments called for during such period
under this Section 3.5(a)(iii) with respect to the rights of the holders of this
Note and the Other Notes; provided, however, that if
such record date shall have been fixed and such dividend is not fully paid or if
such distribution is not fully made on the date fixed therefor, the Conversion
Price shall be adjusted pursuant to this paragraph as of the time of actual
payment of such dividends or distributions.

    
      
         

      

      
        9.

        
          

        

      

      
         

      

    

     

    (iv)           Adjustments for
Reclassification, Exchange or Substitution.  If the Common
Stock at any time or from time to time after the Closing Date shall be changed
to the same or different number of shares or other securities of any class or
classes of stock or other property, whether by reclassification, exchange,
substitution or otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 3.5(a)(i), (ii) and (iii), or
a reorganization, merger, consolidation, or sale of assets provided for in
Section 3.5(a)(v)), then, and in each event, an appropriate revision to the
Conversion Price shall be made and provisions shall be made (by adjustments of
the Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock or
other securities or other property receivable upon reclassification, exchange,
substitution or other change, by holders of the number of shares of Common Stock
into which such Note might have been converted immediately prior to such
reclassification, exchange, substitution or other change, all subject to further
adjustment as provided herein.

     

    (v)           Adjustments for
Reorganization, Merger, Consolidation or Sales
of Assets.  If at any time or from time to time after the
Issuance Date there shall be a Change of Control, then as a part of such Change
of Control the Holder shall have the right to demand prepayment pursuant to
Section 3.6(b) hereof.

     

    (vi)          Adjustments for Issuance of
Additional Shares of Common Stock.  In the event the Maker
shall at any time or from time to time after the Closing Date (even if occurring
prior the Issuance Date) issue or sell any additional shares of Common Stock
(otherwise than as provided in the foregoing subsections (i) through (v) of this
Section 3.5(a) or pursuant to Common Stock Equivalents (hereafter defined)
granted or issued prior to the Issuance Date) (“Additional Shares of Common
Stock”), at an effective price per share less than the Conversion Price
then in effect or without consideration, then the Conversion Price upon each
such issuance shall be reduced to a price equal to the consideration per share
paid for such Additional Shares of Common Stock.  For purposes of
clarification, the amount of consideration received for such Additional Shares
of Common Stock shall not include the value of any additional securities or
other rights received in connection with such issuance of Additional Shares of
Common Stock (ie. warrants, rights of first refusal or other similar
rights)

    
      
         

      

      
        10.

        
          

        

      

      
         

      

    

    (vii)         Issuance of Common Stock
Equivalents.  The provisions of this Section 3.5 shall apply if
(a) the Maker, at any time after the Closing Date, shall issue any securities
convertible into or exercisable or exchangeable for, directly or indirectly,
Common Stock (“Convertible
Securities”), other than the Notes and the Other Notes, or (b) any rights
or warrants or options to purchase any such Common Stock or Convertible
Securities (collectively with the Convertible Securities the “Common Stock
Equivalents”) shall be issued or sold.  If the price per share
for which Additional Shares of Common Stock may be issuable pursuant to any such
Common Stock Equivalent shall be less than the applicable Conversion Price then
in effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter
is amended or adjusted, and such price as so amended or adjusted shall be less
than the applicable Conversion Price in effect at the time of such amendment or
adjustment, then the applicable Conversion Price upon each such issuance or
amendment or adjustment shall be adjusted as provided in subsection (vi) of this
Section 3.5(a) as if the maximum number of shares of Common Stock issuable upon
conversion, exercise or exchange of such Common Stock Equivalents had been
issued on the date of such issuance or amendment or adjustment.

     

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

     

    (1)           in
connection with any merger or consolidation in which the Maker is the surviving
corporation (other than any consolidation or merger in which the previously
outstanding shares of Common Stock of the Maker shall be changed to or exchanged
for the stock or other securities of another corporation), the amount of
consideration therefor shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Maker and approved
by holders of at least two-thirds of the aggregate principal amount of then
outstanding Notes, of such portion of the assets and business of the
nonsurviving corporation as such Board may determine to be attributable to such
shares of Common Stock, Convertible Securities, rights or warrants or options,
as the case may be; or

     

    (2)           in
the event of any consolidation or merger of the Maker in which the Maker is not
the surviving corporation or in which the previously outstanding shares of
Common Stock of the Maker shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of
any corporation, the Maker shall be deemed to have issued a number of shares of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation. If any such calculation results in adjustment
of the applicable Conversion Price, or the number of shares of Common Stock
issuable upon conversion of the Notes, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Notes immediately prior to such merger, consolidation or sale,
shall be made after giving effect to such adjustment of the number of shares of
Common Stock issuable upon conversion of the Notes. In the event Common Stock is
issued with other shares or securities or other assets of the Maker for
consideration which covers both, the consideration computed as provided in this
Section 3.5(a)(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Maker, and approved by
holders of at least two-thirds of the aggregate principal amount of then
outstanding Notes.

     

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

    
      
         

      

      
        11.

        
          

        

      

      
         

      

    

     

    (c)           Certain Issues
Excepted. Anything herein to the contrary notwithstanding, the Maker
shall not be required to make any adjustment to the Conversion Price in
connection with any of the transactions described in clauses (1), (2) and (3) of
the definition of Permitted Financings.

     

    (d)           No Impairment. The
Maker shall not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Maker, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3.5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against impairment. In the event a Holder shall
elect to convert any Notes as provided herein, the Maker cannot refuse
conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law, violation
of an agreement to which such Holder is a party or for any reason whatsoever,
unless, an injunction from a court, or notice, restraining and or adjoining
conversion of all or of said Notes shall have issued and the Maker posts a
surety bond for the benefit of such Holder in an amount equal to one hundred
fifty percent (150%) of the amount of the Notes the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder (as liquidated damages) in the event it obtains
judgment.

     

    (e)           Certificates as to
Adjustments. Upon occurrence of each adjustment or readjustment of the
Conversion Price or number of shares of Common Stock issuable upon conversion of
this Note pursuant to this Section 3.5, the Maker at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based. The Maker shall, upon written request of the Holder, at
any time, furnish or cause to be furnished to the Holder a like certificate
setting forth such adjustments and readjustments, the applicable Conversion
Price in effect at the time, and the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon the conversion of this Note. Notwithstanding the foregoing, the
Maker shall not be obligated to deliver a certificate unless such certificate
would reflect an increase or decrease of at least one percent (1%) of such
adjusted amount.

     

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

     

    (g)           Fractional Shares. No
fractional shares of Common Stock shall be issued upon conversion of this Note.
In lieu of any fractional shares to which the Holder would otherwise be
entitled, the Maker shall pay cash equal to the product of such fraction
multiplied by the Daily VWAP of the Common Stock for the five (5) consecutive
Trading Days immediately preceding the Conversion Date.

    
      
         

      

      
        12.

        
          

        

      

      
         

      

    

     

    (h)          Reservation of Common
Stock.  The Maker shall at all times when this Note shall be
outstanding, reserve and keep available out of its authorized but unissued
Common Stock, such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of this Note and all interest accrued
thereon; provided that
the number of shares of Common Stock so reserved shall at no time be less than
one hundred twenty five percent (125%) of the number of shares of Common Stock
for which this Note and all interest accrued thereon are at any time convertible
(disregarding for this purpose any and all limitations of any kind on such
conversion).  The Maker shall, from time to time in accordance with
the Delaware General Corporation Law, increase the authorized number of shares
of Common Stock or take other effective action if at any time the unissued
number of authorized shares shall not be sufficient to satisfy the Maker’s
obligations under this Section 3.5(h).

     

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

     

    3.6           Prepayment.

     

    (a)           Prepayment Upon an Event of
Default.  Notwithstanding anything to the contrary contained
herein, upon the occurrence of an Event of Default the Holder shall have the
right, at the Holder’s option, to require the Maker to prepay all or a portion
of this Note in cash at a price equal to the sum of (i) the greater of (A) one
hundred percent (100%) of the aggregate principal amount of this Note plus all
accrued and unpaid interest and (B) the aggregate principal amount of this Note
plus all accrued but unpaid interest hereon, divided by the Conversion Price on
(x) the date the Prepayment Price (as defined below) is demanded or otherwise
due or (y) the date the Prepayment Price is paid in full, whichever is less,
multiplied by the Daily VWAP on (x) the date the Prepayment Price is demanded or
otherwise due, and (y) the date the Prepayment Price is paid in full, whichever
is greater; provided that if the Event of Default is under Section 2.1(l) or (k)
of this Note, the Daily VWAP shall be as of the date immediately prior to the
occurrence of such Event of Default, and (ii) all other amounts, costs, expenses
and liquidated damages due in respect of this Note and the other Transaction
Documents (the “Prepayment
Price”).

    
      
         

      

      
        13.

        
          

        

      

      
         

      

    

    (b)           Mechanics of Prepayment at
Option of Holder in Connection with a Change of Control. No sooner than
fifteen (15) days nor later than ten (10) days prior to the consummation of a
Change of Control, but not prior to the public announcement of such Change of
Control, the Maker shall deliver written notice thereof via facsimile and
overnight courier (“Notice of Change of
Control”) to the Holder of this Note and to each Other Holder of the
Other Notes. At any time after receipt of a Notice of Change of Control (or, in
the event a Notice of Change of Control is not delivered at least ten (10) days
prior to a Change of Control, at any time within ten (10) days prior to a Change
of Control), any holder of the Notes then outstanding may require the Maker to
prepay, effective immediately prior to the consummation of such Change of
Control, all of the holder’s Notes then outstanding by delivering written notice
thereof via facsimile and overnight courier (“Notice of Prepayment at
Option of Holder Upon Change of Control”) to the Maker, which Notice of
Prepayment at Option of Holder Upon Change of Control shall indicate (i) the
principal amount of the Notes that such holder is electing to have prepaid and
(ii) the applicable Prepayment Price, as calculated pursuant to Section 3.6(a)
above. In the event the Maker receives a Notice of Prepayment at Option of
Holder Upon Change of Control from more than one Holder of the Notes and the
Maker can prepay some, but not all, of the Notes pursuant to this Section 3.6,
the Maker shall prepay from each Holder of the Notes electing to have its Notes
prepaid at such time an amount equal to such Holder’s pro-rata amount (based on
the principal amount of the Notes held by such Holder relative to the principal
amount of the Notes outstanding) of all the Notes being prepaid at such
time.

     

    (c)           Mechanics of Prepayment at
Option of Holder Upon Other Event of Default. Within one (1) business day
after the occurrence of an Event of Default other than a Change of Control, the
Maker shall deliver written notice thereof via facsimile and overnight courier
(“Notice of Event of
Default”) to each Holder of the Notes. At any time after the earlier of a
Holder’s receipt of a Notice of Event of Default and such Holder becoming aware
of an Event of Default, any Holder of this Note may require the Maker to prepay
all (but not less than all) of the Notes held by such Holder by delivering
written notice thereof via facsimile and overnight courier (“Notice of Prepayment at
Option of Holder Upon Event of Default”) to the Maker, which Notice of
Prepayment at Option of Holder Upon Event of Default shall indicate the
applicable Prepayment Price, as calculated pursuant to Section 3.6(a) above. In
the event the Maker receives a Notice of Prepayment at Option of Holder Upon
Event of Default from more than one Holder of the Notes and the Maker can prepay
some, but not all, of the Notes pursuant to this Section 3.6, the Maker shall
prepay from each Holder of the Notes electing to have its Notes prepaid at such
time an amount equal to such Holder’s pro-rata amount (based on the principal
amount of the Notes held by such Holder relative to the principal amount of the
Notes outstanding) of all the Notes being prepaid at such time.

    
      
         

      

      
        14.

        
          

        

      

      
         

      

    

    (d)           Payment of Prepayment
Price. Upon the Maker’s receipt of a Notice(s) of Prepayment at Option of
Holder Upon Event of Default or a Notice(s) of Prepayment at Option of Holder
Upon Change of Control from any Holder of the Notes, the Maker shall immediately
notify each holder of the Notes by facsimile of the Maker’s receipt of such
Notice(s) of Prepayment at Option of Holder Upon Event of Default or Notice(s)
of Prepayment at Option of Holder Upon Change of Control and each holder which
has sent such a notice shall promptly submit to the Maker such holder’s original
Notes that are to be prepaid. The Maker shall deliver the applicable Prepayment
Price, in the case of a prepayment pursuant to Section 3.6(c), to such holder
within five (5) business days after the Maker’s receipt of a Notice of
Prepayment at Option of Holder Upon Event of Default and, in the case of a
prepayment pursuant to Section 3.6(b), the Maker shall deliver the applicable
Prepayment Price immediately prior to the consummation of the Change of Control;
provided that a holder’s original Note shall have been so delivered to the
Maker; provided further that if the Maker is unable to prepay all of the Notes
to be prepaid, the Maker shall prepay an amount from each holder of the Notes
being prepaid equal to such holder’s pro-rata amount (based on the number of
Notes held by such holder relative to the number of Notes outstanding) of all
Notes being prepaid. If the Maker shall fail to prepay all of the Notes
submitted for prepayment (including as a result of a dispute as to the
calculation of the Prepayment Price), in addition to any remedy such holder of
the Notes may have under this Note and the Purchase Agreement, the applicable
Prepayment Price payable in respect of such Notes not prepaid shall bear
interest at the rate of two percent (2%) per month (prorated for partial months)
until paid in full. Until the Maker pays such unpaid applicable Prepayment Price
in full to a holder of the Notes submitted for prepayment, such holder shall
have the option to, in lieu of prepayment, require the Maker to promptly return
to such holder(s) all of the Notes that were submitted for prepayment by such
holder(s) under this Section 3.6 and for which the applicable Prepayment Price
has not been paid, by sending written notice thereof to the Maker via facsimile
(the “Void Optional
Prepayment Notice”). Maker shall promptly send a copy of such Void
Optional Prepayment Notice to each of the Other Holders. Upon the Maker’s
receipt of such Void Optional Prepayment Notice(s) and prior to payment of the
full applicable Prepayment Price to such holder, (i) the Notice(s) of Prepayment
at Option of Holder Upon Event of Default or the Notice(s) of Prepayment at
Option of Holder Upon Change of Control, as the case may be, shall be null and
void with respect to those Notes submitted for prepayment and for which the
applicable Prepayment Price has not been paid, (ii) the Maker shall immediately
return any Notes submitted to the Maker by each holder for prepayment under this
Section 3.6(d) and for which the applicable Prepayment Price has not been paid
and (iii) the Conversion Price of such returned Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Void
Optional Prepayment Notice(s) is delivered to the Maker and (B) the lowest
Closing Price during the period beginning on the date on which the Notice(s) of
Prepayment of Option of Holder Upon Change of Control or the Notice(s) of
Prepayment at Option of Holder Upon Event of Default, as the case may be, is
delivered to the Maker and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder’s delivery of a Void Optional Prepayment Notice
and exercise of its rights following such notice shall not affect the Maker’s
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3.6 shall have priority to
payments to other creditors and stockholders in connection with a Change of
Control.

     

    3.7          Inability to Fully
Convert.

     

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

     

    (i)       
    require the Maker to prepay that portion of this Note
for which the Maker is unable to issue Common Stock in accordance with the
Holder’s Conversion Notice (the “Mandatory
Prepayment”) at a price equal to the Prepayment Price as of such
Conversion Date (the “Mandatory Prepayment
Price”);

    
      
         

      

      
        15.

        
          

        

      

      
         

      

    

     

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

     

    (iii)          exercise
its Buy-In rights pursuant to and in accordance with the terms and provisions of
Section 3.3(c) of this Note.

     

    (b)          Mechanics of Fulfilling
Holder’s Election. The Maker shall immediately send via facsimile to the
Holder and to each of the Other Holders, upon receipt of a facsimile copy of a
Conversion Notice from the Holder which cannot be fully satisfied as described
in Section 3.7(a) above, a notice of the Maker’s inability to fully satisfy the
Conversion Notice (the “Inability to Fully Convert
Notice”). Such Inability to Fully Convert Notice shall indicate (i) the
reason why the Maker is unable to fully satisfy such holder’s Conversion Notice,
(ii) the amount of this Note which cannot be converted and (iii) the applicable
Mandatory Prepayment Price. The Holder shall notify the Maker of its election
pursuant to Section 3.7(a) above by delivering written notice via facsimile to
the Maker (“Notice in
Response to Inability to Convert”). Maker shall promptly deliver a copy
of such Notice in Response to Inability to Convert to each of the Other
Holders.

     

    (c)          Payment of Prepayment
Price. If the Holder shall elect to have its Notes prepaid pursuant to
Section 3.7(a)(i) above, the Maker shall pay the Mandatory Prepayment Price to
the Holder within three (3) days of the Maker’s receipt of the Holder’s Notice
in Response to Inability to Convert; provided that prior to the
Maker’s receipt of the Holder’s Notice in Response to Inability to Convert the
Maker has not delivered a notice to the Holder stating, to the satisfaction of
the Holder, that the event or condition resulting in the Mandatory Prepayment
has been cured and all Conversion Shares issuable to the Holder can and will be
delivered to the Holder in accordance with the terms of this Note. If the Maker
shall fail to pay the applicable Mandatory Prepayment Price to the Holder on the
date that is one (1) business day following the Maker’s receipt of the Holder’s
Notice in Response to Inability to Convert (including as a result of a dispute
as to the determination of the calculation of the Prepayment Price), in addition
to any remedy the Holder may have under this Note and the Purchase Agreement,
such unpaid amount shall bear interest at the rate of two percent (2%) per month
(prorated for partial months) until paid in full. Until the full Mandatory
Prepayment Price is paid in full to the Holder, the Holder may (i) void the
Mandatory Prepayment with respect to that portion of the Note for which the full
Mandatory Prepayment Price has not been paid, (ii) receive back such Note, and
(iii) require that the Conversion Price of such returned Note be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Holder
voided the Mandatory Prepayment and (B) the lowest Closing Price during the
period beginning on the Conversion Date and ending on the date the Holder voided
the Mandatory Prepayment.

     

    (d)          Pro-rata Conversion and
Prepayment. In the event the Maker receives a Conversion Notice from more
than one holder of the Notes on the same day and the Maker can convert and
prepay some, but not all, of the Notes pursuant to this Section 3.7, the Maker
shall convert and prepay from each holder of the Notes electing to have its
Notes converted and prepaid at such time an amount equal to such holder’s
pro-rata amount (based on the principal amount of the Notes held by such holder
relative to the principal amount of the Notes and Other Notes outstanding) of
all the Notes being converted and prepaid at such time.

    
      
         

      

      
        16.

        
          

        

      

      
         

      

    

     

    (e)           No Rights as
Stockholder. Nothing contained in this Note shall be construed as
conferring upon the Holder, prior to the conversion of this Note, the right to
vote or to receive dividends or to consent or to receive notice as a stockholder
in respect of any meeting of stockholders for the election of directors of the
Maker or of any other matter, or any other rights as a stockholder of the
Maker.

     

    ARTICLE
4

     

    4.1          Covenants. For so
long as any Note is outstanding, without the prior written consent of the
holders of at least two-thirds of the then outstanding principal amount of the
Notes (together, as one class):

     

    (a)           Compliance with Transaction
Documents. The Maker shall, and shall cause its Subsidiaries to, comply
with its obligations under this Note, the Other Notes and the other Transaction
Documents.

     

    (b)           Payment of Taxes,
Etc. The Maker shall, and shall cause each of its Subsidiaries to,
promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, property or business of the Maker and the
Subsidiaries, except for such failures to pay that, individually or in the
aggregate, have not had and would not reasonably be expected to have a Material
Adverse Effect; provided,
however, that any such tax, assessment, charge or levy need not be paid
if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Maker or such Subsidiaries shall have set
aside on its books adequate reserves with respect thereto, and provided,
further, that the Maker and such Subsidiaries will pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.

     

    (c)           Corporate Existence.
The Maker shall, and shall cause each of its Subsidiaries to, maintain in full
force and effect its corporate existence, rights and franchises and all licenses
and other rights to use property owned or possessed by it and reasonably deemed
to be necessary to the conduct of its business.

     

    (d)           Investment Company
Act. The Maker shall conduct its businesses in a manner so that it will
not become subject to the Investment Company Act of 1940, as
amended.

     

    4.2          Equal Treatment of
Holders.  No consideration shall be offered or paid to any
Holder to amend or waive or modify any provision of the Notes unless the same
consideration is also offered to all of the Holders then holding
Notes.  This provision constitutes a separate right granted to each
Holder by the Maker and shall not in any way be construed as the Holders acting
in concert or as a group with respect to the purchase disposition or voting of
securities or otherwise.

    
      
         

      

      
        17.

        
          

        

      

      
         

      

    

     

    ARTICLE
5

     

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

     

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

     

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

     

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

    
      
         

      

      
        18.

        
          

        

      

      
         

      

    

     

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

     

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

     

    5.7           Amendments.  No
provision of the Notes may be modified or amended on behalf of all of the
Holders other than by a written instrument signed by the Company and the Holders
holding at least two-thirds of the principal amount of the then outstanding
Notes; provided
that if any
Holder is materially adversely affected by such modification or amendment on
behalf of all Holders in a manner that not similar in all material respects to
the affect on the other Holders, such modification or amendment shall not be
effective without the written consent of the adversely affected
Holder.  The Holder acknowledges that any amendment or modification
made in compliance with this Section 5.7 shall be binding on all Holders of the
Notes, including, without limitation, an amendment or modification that has an
adverse effect on any or all Holders.  Notwithstanding the foregoing,
nothing provided in this Section 5.7 shall limit the Holder’s right to waive or
amend any provision of this Note on its own behalf.

     

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

     

    “THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH STATE SECURITIES LAWS.”

     

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

    
      
         

      

      
        19.

        
          

        

      

      
         

      

    

     

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

     

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

     

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

     

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

     

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

     

    (c)           In
the case of a dispute as to the determination of the Closing Price or the Daily
VWAP or the arithmetic calculation of the Conversion Price, any adjustment to
the Conversion Price, liquidated damages amount, interest or dividend
calculation, or any redemption price, redemption amount, adjusted Conversion
Price, or similar calculation, or as to whether a subsequent issuance of
securities is prohibited hereunder or would lead to an adjustment to the
Conversion Price, the Maker shall submit the disputed determinations or
arithmetic calculations via facsimile within two (2) business days of receipt,
or deemed receipt, of the Conversion Notice, any redemption notice, default
notice or other event giving rise to such dispute, as the case may be, to the
Holder. If the Holder and the Maker are unable to agree upon such determination
or calculation within two (2) business days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Maker shall,
within two (2) business days submit via facsimile (a) the disputed determination
of the Closing Price or the Daily VWAP to an independent, reputable investment
bank selected by the Maker and approved by the Holder, which approval shall not
be unreasonably withheld, (b) the disputed arithmetic calculation of the
Conversion Price, adjusted Conversion Price or any redemption price, redemption
amount or default amount to the Maker’s independent, outside accountant or (c)
the disputed facts regarding whether a subsequent issuance of securities is
prohibited hereunder or would lead to an adjustment to the Conversion Price (or
any of the other above described facts not expressly designated to the
investment bank or accountant), to an expert attorney from a nationally
recognized outside law firm (having at least one hundred (100) attorneys and
having with no prior relationship with the Maker) selected by the Maker and
approved by the Lead Purchaser as defined in the Purchase Agreement). The Maker,
at the Maker’s expense, shall cause the investment bank, the accountant, the law
firm, or other expert, as the case may be, to perform the determinations or
calculations and notify the Maker and the Holder of the results no later than
five (5) business days from the time it receives the disputed determinations or
calculations. Such investment bank’s, accountant’s or attorney’s determination
or calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

    
      
         

      

      
        20.

        
          

        

      

      
         

      

    

     

    5.13        Definitions.
Capitalized terms used herein and not defined shall have the meanings set forth
in the Purchase Agreement.  For the purposes hereof, the following
terms shall have the following meanings:

     

    (a)           “Affiliate” means any
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with another Person. A Person shall be deemed to be
“controlled by” any other Person if such other Person possesses, directly or
indirectly, power (a) to vote ten percent (10%) or more of the securities
(on a fully diluted basis) having ordinary voting power for the election of
directors or managing general partners; or (b) to direct or cause the direction
of the management and policies of such Person whether by contract or
otherwise.

     

    (b)           “Closing Price” shall
mean, on any particular date (i) the last trading price per share of the Common
Stock on such date on the principal Trading Market on which the Common Stock is
then listed, or if there is no such price on such date, then the last trading
price on such Trading Market on the date nearest preceding such date, or (ii) if
the Common Stock is not listed then on a Trading Market, the last trading price
for a share of Common Stock in the over-the-counter market, as reported in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the close of business on such
date, or (iii) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), then the average of the “Pink Sheet” quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (iv) if the Common Stock is not then publicly traded the fair market value of
a share of Common Stock as determined by the Holder and reasonably acceptable to
the Maker.

     

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

    
      
         

      

      
        21.

        
          

        

      

      
         

      

    

     

    (d)           “Equity Conditions”
shall mean, during the period in question, (i) the Maker shall have duly honored
all conversions and redemptions scheduled to occur or occurring by virtue of one
or more Conversion Notices of the Holder, if any, (ii) all liquidated damages
and other amounts owing to the Holder in respect of this Note shall have been
paid; (iii) the Common Stock is trading on a Trading Market and all of the
shares issuable pursuant to the Transaction Documents are eligible for trading
on a Trading Market (and the Maker believes, in good faith, that trading of the
Common Stock on a Trading Market will continue uninterrupted for the foreseeable
future), (iv) there is a sufficient number of authorized but unissued and
otherwise unreserved shares of Common Stock for the issuance of all of the
shares then issuable pursuant to the Transaction Documents (disregarding any
limitations on issuance or conversion contained in such documents), (v) there is
then existing no Event of Default or event which, with the passage of time or
the giving of notice, would constitute an Event of Default, (vi) the issuance of
the shares in question to the Holder would not violate the limitations set forth
in Section 3.4 hereof, and (vii) no public announcement of a pending or proposed
Change of Control has occurred.

     

    (e)           “Indebtedness” means
(a) all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement or other
obligations in respect of letters of credit, bankers acceptances, current swap
agreements, interest rate hedging agreements, interest rate swaps, or other
financial products, (c) all capital lease obligations that exceed $50,000 in the
aggregate in any fiscal year, (d) all obligations or liabilities secured by a
lien or encumbrance on any asset of the Maker, irrespective of whether such
obligation or liability is assumed, (e) all obligations for the deferred
purchase price of assets, together with trade debt and other accounts payable
that exceed $50,000 in the aggregate in any fiscal year, (f) all synthetic
leases, (g) any obligation guaranteeing or intended to guarantee (whether
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse) any of the foregoing obligations of any other person, (h) trade debt
and (i) endorsements for collection or deposit.

     

    (f)           “Investment” means,
with respect to any Person, all investments in any other Person, whether by way
of extension of credit, loan, advance, purchase of stock or other ownership
interest (other than ownership interests in such Person), bonds, notes,
debentures or other securities, or otherwise, and whether existing on the
Issuance Date or thereafter made, but such term shall not include the cash
surrender value of life insurance policies on the lives of officers or
employees, excluding amounts due from customers for services or products
delivered or sold in the ordinary course of business.

     

    (g)           “Permitted Financing”
shall mean (1) issuances of shares of Common Stock or options to employees,
officers, directors or consultants of the Maker pursuant to any stock or option
plan duly adopted by a majority of the non-employee members of the Board of
Directors of Maker or a majority of the members of a committee of non-employee
directors established for such purpose, duly approved by Maker’s stockholders
and described in the Public Filings; (2) issuances of securities upon the
exercise or exchange of or conversion of any securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding on the Closing Date and described in the Public Filings, provided
that such securities have not been amended since the Closing Date to increase
the number of such securities or to decrease the exercise, exchange or
conversion price of any such securities (including the Notes); (3) the issuance
of any Securities under the Purchase Agreement.

    
      
         

      

      
        22.

        
          

        

      

      
         

      

    

     

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

     

    (i)           “Tradable” with
respect to any shares of Common Stock as of any time means that as of such time
(i) such shares shall be held, or eligible to be held, in an account on behalf
of the Holder at the DTC, (ii) there shall be no SEC or judicial stop trade
order or trading suspension stop-order or any restriction in place with the
transfer agent for the Common Stock with restricting the trading of such Common
Stock and (iii) such shares shall be then eligible under all applicable federal
and state securities laws for immediate resale to the public without volume,
manner of sale, holding period, prospectus delivery, filing, registration,
qualification or other limitations, requirements or restrictions.

     

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

     

    (k)           “Trading Market” means
the OTC Bulletin Board, the New York Stock Exchange, the Nasdaq Capital Markets,
the Nasdaq Global Markets, the Nasdaq Global Select Market or the American Stock
Exchange.

    
      
         

      

      
        23.

        
          

        

      

      
         

      

    

     

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

     

    
      
        
          
            
              	 
      	
                      GENTA
      INCORPORATED

                    
	 
      	 
      	 
      
	
                      Date:

                    	
                      By: 

                    	 
      
	 
      	 
      	
                      Title

                    

            

          

        

      

    

     

    
      
        
        

      

      
        24.

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
A

     

    WIRE
INSTRUCTIONS

     

    Payee:
________________________________________________________

     

    Bank:
________________________________________________________

     

    Address:
______________________________________________________

    
      
      

    

    
       

      ______________________________________________________

       

    

    Bank No.:
_____________________________________________________

     

    Account
No.: ___________________________________________________

     

    Account
Name: _________________________________________________

     

    
      
         

      

      
        25.

        
          

        

      

      
         

      

    

     

    FORM
OF

     

    NOTICE OF
CONVERSION

     

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

     

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

     

    Date of
Conversion
_________________________________________________________

     

    Applicable
Conversion Price __________________________________________________

     

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

     

    Signature___________________________________________________________________

    
      
      

    

     

    [Name]

     

    Address:__________________________________________________________________

     

    
      
      

    

    
      __________________________________________________________________

    

     

    
      
         

      

      
        26.

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