Document:

EX-10.3

EXECUTION VERSION

BACK–UP GUARANTY AGREEMENT

THIS BACK–UP GUARANTY AGREEMENT (as amended, modified, waived, supplemented, extended,
restated or replaced from time to time, this “Guaranty”), is made as of the 13th day of November,
2006, by MUNICIPAL MORTGAGE & EQUITY, LLC, a Delaware limited liability company (together with its
successors and permitted assigns and any other Person that becomes a limited guarantor under this
Guaranty, the “Parent Guarantor”), for the benefit of WACHOVIA CAPITAL MARKETS, LLC, a Delaware
limited liability company, as the deal agent (together with its successors and assigns, the “Deal
Agent”), VARIABLE FUNDING CAPITAL COMPANY LLC, a Delaware limited liability company, as the
purchaser (together with its successors and assigns, the “Purchaser”), and the other Secured
Parties under the Repurchase Agreement (defined below) (together with their successors and assigns,
the “Secured Parties”). Capitalized terms used but not defined herein shall have the meanings
given to such terms in the Repurchase Agreement (defined below).

RECITALS:

WHEREAS, under and subject to the terms of the Master Repurchase Agreement (including the
annexes, schedules and exhibits thereto), dated as of November 13, 2006 (as amended, modified,
restated, replaced, waived, substituted, supplemented or extended from time to time, the
“Repurchase Agreement”), among MMA Realty Capital Repurchase Subsidiary, LLC, as the seller
(together with its successors and permitted assigns and any other Person that becomes a seller
under the Repurchase Agreement, the “Seller”), the Purchaser, as the purchaser, the Deal Agent, as
the deal agent, MMA Realty Capital, LLC, a Maryland limited liability company, as the limited
guarantor, and the Parent Guarantor, as the parent, the Seller may sell and the Purchaser may
purchase certain Eligible Assets with a simultaneous agreement by such Seller to repurchase those
assets;

WHEREAS, the Seller and the Limited Guarantor are indirect Subsidiaries of the Parent
Guarantor;

WHEREAS, the Parent Guarantor will benefit directly or indirectly from the transactions
contemplated under the Repurchase Agreement and other Repurchase Documents; and

WHEREAS, the Deal Agent, the Purchaser and the other Secured Parties are unwilling to enter
into the Repurchase Documents or the transactions contemplated thereby without the benefit of this
Guaranty.

NOW, THEREFORE, based upon the foregoing Recitals and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Parent Guarantor, intending to be
legally bound, hereby agrees as follows:

1. Guaranty of Payment and Performance.

Subject to the terms of this Section 1, the Parent Guarantor hereby absolutely, primarily,
unconditionally and irrevocably guarantees, as primary obligor and as guarantor of payment and
performance and not merely as surety or guarantor of collection, to the Deal Agent, the Purchaser
and the other Secured Parties the payment when due (whether on demand or by maturity, acceleration
or otherwise) of the Guarantee Liabilities (however created, arising or evidenced, whether direct
or indirect, primary or secondary, absolute or contingent, joint or several and whether now or
hereafter existing or due or to become due) in the event any such Guarantee Liabilities are, for
any reason whatsoever, not paid when due (whether on demand or by maturity, acceleration or
otherwise) under the Limited Guaranty. The term “Guarantee Liabilities” shall have the meaning
given to such term in the Limited Guaranty. Notwithstanding any provision to the contrary
contained herein or in any of the other Repurchase Documents, the obligations of the Parent
Guarantor (if more than one) hereunder shall be limited to an aggregate amount equal to the largest
amount that would not render its obligations hereunder subject to avoidance under Section 548 of
the Bankruptcy Code or any comparable provisions of any Applicable Law of any state.

2. Release of Collateral, Parties Liable, etc.

The Parent Guarantor agrees that (a) any or all of the Purchased Items, the Pledged Collateral
and other collateral, security and Property now or hereafter held for the Guaranty or the Guarantee
Liabilities may be exchanged, released, terminated, modified, sold, assigned, participated,
pledged, compromised, surrendered or otherwise transferred or disposed of from time to time;
(b) except as expressly set forth in the Repurchase Documents, the Deal Agent, the Purchaser and
the other Secured Parties shall have no obligation to protect, perfect, secure or insure any
Purchased Item, the Pledged Collateral or any collateral, security, Property, Liens, interests or
encumbrances now or hereafter held for the Guaranty or the Guarantee Liabilities or the Properties
subject thereto; (c) the time, place, manner or terms of payment of the Guarantee Liabilities may
be changed or extended, in whole or in part, to a time certain or otherwise, and may be renewed or
accelerated, in whole or in part; (d) the Seller, the Pledgor, the Limited Guarantor, the Parent,
the other Repurchase Parties and other Persons may be granted indulgences generally; (e) any of the
provisions of the Repurchase Agreement and the other Repurchase Documents and the Guarantee
Liabilities may be modified, amended, waived, supplemented, replaced or restated from time to time;
(f) any party liable for the payment of the Guarantee Liabilities, including, without limitation,
other guarantors, may be granted indulgences or released; and (g) any deposit balance for the
credit of the Seller or any other party liable for the payment of the Guarantee Liabilities,
including, without limitation, other guarantors, or liable upon any security therefor, may be
released, in whole or in part, at, before and/or after the stated, extended or accelerated maturity
of the Guarantee Liabilities, all of the foregoing in clauses (a) through (g) without notice to or
further assent by the Parent Guarantor, who shall remain bound thereon, notwithstanding any such
exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence,
release or other act.

3. Waiver of Rights.

The Parent Guarantor expressly waives: (a) notice of acceptance of this Guaranty by the Deal
Agent, the Purchaser and the other Secured Parties and of all extensions of credit, loans or
advances to or purchases from the Seller by the Deal Agent, the Purchaser and the other Secured
Parties; (b) presentment and demand for payment of any of the Guarantee Liabilities; (c) protest
and notice of dishonor or of default to the Parent Guarantor or to any other party with respect to
the Guarantee Liabilities or with respect to any collateral, security or Property therefor;
(d) notice of the Deal Agent, the Purchaser and the other Secured Parties obtaining, amending,
substituting for, releasing, waiving, modifying, extending, replacing or restating all or any
portion of the Guarantee Liabilities, the Repurchase Agreement, any other Repurchase Document,
other guarantees or any Lien now or hereafter securing the Guarantee Liabilities or the Guaranty,
or the Deal Agent, the Purchaser or the other Secured Parties subordinating, compromising,
discharging, terminating or releasing such Liens; (e) notice of the execution and delivery by the
Seller, the Deal Agent, the Purchaser, the other Secured Parties or any other Person of any other
loan, purchase, credit or security agreement or document or of the Seller’s or such other Person’s
execution and delivery of any promissory notes or other documents arising under or in connection
with the Repurchase Documents or in connection with any purchase of the Seller’s or such other
Person’s Property or assets; (f) notice of the occurrence of any breach by the Seller, the Pledgor,
the Limited Guarantor, the Parent, any other Repurchase Party or any other Person or of any Event
of Default; (g) notice of the Deal Agent’s, the Purchaser’s or the other Secured Parties’ transfer,
disposition, assignment, sale, pledge or participation of the Guarantee Liabilities, the Purchased
Items, the Pledged Collateral, the Repurchase Documents, the Mortgage Loan Documents, or any
collateral, security or Property securing the Guaranty or the Guarantee Liabilities or any portion
of the foregoing; (h) notice of the sale or foreclosure (or posting or advertising for sale or
foreclosure) of all or any portion of any Purchased Item, the Pledged Collateral or any collateral,
security or Property securing the Guaranty or the Guarantee Liabilities; (i) notice of the protest,
proof of non–payment or default by the Seller or any other Person; (j) any other action at any time
taken or omitted by the Deal Agent, the Purchaser or the other Secured Parties, and, generally, all
demands and notices of every kind in connection with this Guaranty, the Repurchase Documents, the
Guarantee Liabilities, the Purchased Items, the Pledged Collateral, any collateral, security or
Property securing the Guaranty or the Guarantee Liabilities, the Mortgage Loan Documents, any
documents or agreements evidencing, securing or relating to any of the Guaranty or the Guarantee
Liabilities and the obligations hereby guaranteed; (k) all other notices to which the Parent
Guarantor might otherwise be entitled; (l) demand for payment under this Guaranty; and (m) any
right to assert against the Deal Agent, the Purchaser or the other Secured Parties, as a defense,
counterclaim, set–off or cross–claim, any defense (legal or equitable), set–off, counterclaim or
claim of any kind or nature whatsoever that the Parent Guarantor may now or hereafter have against
the Deal Agent, the Purchaser or the other Secured Parties (other than payment in full of the
Guarantee Liabilities), the Seller or any other Person, but such waiver shall not prevent the
Parent Guarantor from asserting against the Deal Agent, the Purchaser and the other Secured Parties
in a separate action, any claim, action, cause of action or demand that the Parent Guarantor might
have, whether or not arising out of this Guaranty. It shall not be necessary for the Deal Agent,
the Purchaser and the other Secured Parties (and the Parent Guarantor hereby waives any rights
which the Parent Guarantor may have to require the Deal Agent, the Purchaser and the other Secured
Parties), in order to enforce the obligations of the Parent Guarantor hereunder, to (i) institute
suit, enforce its rights or exhaust its remedies against the Seller, the Pledgor, the Limited
Guarantor, the Parent, any other Repurchase Party, others liable on the Guarantee Liabilities, the
Borrowers or any other Person, (ii) enforce the Deal Agent’s, the Purchaser’s or the other Secured
Parties’ rights or exhaust its remedies under or with respect to the Mortgage Loan Documents and
the collateral and Property secured thereby, the Purchased Items, the Pledged Collateral or any
collateral, security or Property which shall ever have been given to secure the Guaranty or the
Guarantee Liabilities, (iii) enforce the Deal Agent’s, the Purchaser’s or the other Secured
Parties’ rights against any other guarantors of the Guarantee Liabilities, (iv) join the Seller,
others liable on the Guarantee Liabilities or any other Person in any action seeking to enforce
this Guaranty, (v) mitigate damages or take any other action to reduce, collect or enforce the
Guarantee Liabilities, or (vii) resort to any other means of obtaining payment of the Guarantee
Liabilities.

4. Validity of Guaranty.

The validity of this Guaranty, the obligations of the Parent Guarantor hereunder and the Deal
Agent’s, the Purchaser’s and the other Secured Parties’ rights and remedies for the enforcement of
the foregoing shall in no way be terminated, abated, reduced, released, modified, changed,
discharged, diminished, affected, limited or impaired in any manner whatsoever by the happening
from time to time of any event or condition of any kind whatsoever, including, without limitation,
any of the following (and the Parent Guarantor hereby waives any common law, equitable, statutory,
constitutional, regulatory or other rights (including rights to notice) which the Parent Guarantor
might have as a result of or in connection with any of the following): (a) the assertion or
non–assertion by the Deal Agent, the Purchaser or the other Secured Parties of any of the rights or
remedies available to the Deal Agent, the Purchaser or the other Secured Parties pursuant to the
provisions of the Repurchase Documents, the Mortgage Loan Documents or pursuant to any Applicable
Law; (b) the waiver by the Deal Agent, the Purchaser or the other Secured Parties of, or the
failure of the Deal Agent, the Purchaser or the other Secured Parties to enforce, or the lack of
diligence by the Deal Agent, the Purchaser or the other Secured Parties in connection with, the
enforcement of any of its rights or remedies under the Repurchase Documents, the Mortgage Loan
Documents, the Purchased Items, the Pledged Collateral or any collateral, security or Property
securing the Guaranty or the Guarantee Liabilities; (c) the granting by the Deal Agent, the
Purchaser or the other Secured Parties of (or failure by the Deal Agent, the Purchaser or the other
Secured Parties to grant) any indulgence, forbearance, adjustment, compromise, consent, approval,
waiver or extension of time; (d) the exercise by the Deal Agent, the Purchaser or the other Secured
Parties of or failure to exercise any so–called self–help remedies; (e) any act, omission or
condition that might in any manner or to any extent vary, alter, increase, extend or continue the
risk to the Parent Guarantor or might otherwise operate as a discharge or release of the Parent
Guarantor under Applicable Law; (f) any full or partial release or discharge of or accord and
satisfaction with respect to liability for the Guarantee Liabilities, or any part thereof, of the
Seller, the Parent Guarantor, the Pledgor, the Limited Guarantor, the Parent, any other Repurchase
Party, any co–guarantors or any other Person now or hereafter liable, whether directly or
indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the
payment of the Guarantee Liabilities, or any part thereof; (g) the impairment, modification,
change, release, discharge or limitation of the liability of the Seller, the Parent Guarantor, the
Pledgor, the Limited Guarantor, the Parent, any other Repurchase Party, any Borrower or any Person
liable for or obligated on the Guarantee Liabilities, or any of their estates in bankruptcy,
resulting from or pursuant to the bankruptcy or insolvency of any of the foregoing or the
application of the Insolvency Laws or of or any decision of any court of the United States or any
state thereof; (h) any present or future Applicable Law or order of any Governmental Authority (de
jure or de facto) purporting to reduce, amend or otherwise affect the Guarantee Liabilities or to
vary any terms of payment, satisfaction or discharge thereof; (i) the waiver, compromise,
settlement, release, extension, amendment, change, modification, substitution, replacement,
reduction, increase, alteration, rearrangement, renewal or termination of the terms of the
Guarantee Liabilities, the Repurchase Documents, the Purchased Items, the Pledged Collateral, any
collateral, security or Property securing the Guaranty or the Guarantee Liabilities, the Mortgage
Loan Documents, any or all of the obligations, covenants or agreements of the Seller, the Pledgor,
the Limited Guarantor, the Parent, the other Repurchase Parties, the Borrowers or any other Person
under the Repurchase Documents or Mortgage Loan Documents (except by satisfaction in full of all
Guarantee Liabilities) or of the Parent Guarantor under this Guaranty and/or any failure of the
Deal Agent, the Purchaser or the other Secured Parties to notify the Parent Guarantor of any of the
foregoing; (j) the extension of the time for satisfaction, discharge or payment of the Guarantee
Liabilities or any part thereof owing or payable by the Seller or any other Person under the
Repurchase Documents or of the time for performance of any other obligations, covenants or
agreements under or arising out of this Guaranty or the extension or renewal of any thereof;
(k) any existing or future offset, claim or defense (other than payment in full of the Guarantee
Liabilities) of the Seller or any other Person against the Deal Agent, the Purchaser or the other
Secured Parties or against payment of the Guarantee Liabilities, whether such offset, claim or
defense arises in connection with the Guarantee Liabilities (or the transactions creating same) or
otherwise; (l) the taking or acceptance or the existence of any other guaranty of or collateral,
security or Property securing the Guarantee Liabilities in favor of the Deal Agent, the Purchaser,
the other Secured Parties, any other Affected Party or any other Person specified in the Repurchase
Documents or the enforcement or attempted enforcement of such other guaranty, collateral, security
or Property; (m) any sale, lease, sublease or transfer of or Lien on all or a portion of the assets
or Property of the Seller, the Pledgor, the Limited Guarantor, the Parent Guarantor, the Parent or
any other Repurchase Party, or any changes in the shareholders, partners or members of the Seller,
the Pledgor, the Limited Guarantor, the Parent Guarantor, the Parent or any other Repurchase Party,
or any reorganization, consolidation or merger of the Seller, the Pledgor, the Limited Guarantor,
the Parent Guarantor, the Parent or any other Repurchase Party; (n) the invalidity, illegality or
unenforceability of all or any part of the Guarantee Liabilities, the Repurchase Documents, the
Purchased Items, the Pledged Collateral, any collateral, security or Property securing the Guaranty
or the Guarantee Liabilities, the Mortgage Loan Documents or any document or agreement executed in
connection with the foregoing, for any reason whatsoever, including, without limitation, the fact
that (1) the Guarantee Liabilities, or any part thereof, exceeds the amount permitted by Applicable
Law or violates usury laws, (2) the act of creating the Guarantee Liabilities, the Mortgage Assets,
the Purchased Items, the Pledged Collateral, any collateral, security or Property securing the
Guaranty or the Guarantee Liabilities or any part of the foregoing is ultra vires, (3) the officers
or representatives executing the Mortgage Loan Documents or Repurchase Documents or otherwise
creating the Guarantee Liabilities, the Mortgage Assets, the Purchased Items, the Pledged
Collateral or any collateral, security or Property securing the Guaranty or the Guarantee
Liabilities acted in excess of their authority, (4) the Seller, the Pledgor, the Limited Guarantor,
the Parent, any other Repurchase Party, any Borrower or any other Person has valid defenses, claims
or offsets (whether at law, in equity or by agreement) which render the Guarantee Liabilities
wholly or partially uncollectible, (5) the creation, performance or repayment of the Guarantee
Liabilities, the Mortgage Assets, the Purchased Items, the Pledged Collateral or any collateral,
security or Property securing the Guaranty or the Guarantee Liabilities (or the execution, delivery
and performance of any Repurchase Document, Mortgage Loan Document or document or instrument
representing part of the Guarantee Liabilities, the Mortgage Assets, the Purchase Items, the
Pledged Collateral, any collateral, security or Property securing the Guaranty or the Guarantee
Liabilities or executed in connection with the Guarantee Liabilities, the Mortgage Assets, the
Purchased Items, the Pledged Collateral or any collateral, security or Property securing the
Guaranty or the Guarantee Liabilities, or given to secure the repayment of the Guarantee
Liabilities, the Mortgage Assets or the other Purchased Items) is illegal, uncollectible or
unenforceable, or (6) any Mortgage Loan Document, any Repurchase Document or any other document,
agreement or instrument has been forged or otherwise is irregular or not genuine or authentic;
(o) any release, termination, sale, pledge, participation, transfer, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including, without limitation, negligent,
willful, unreasonable or unjustifiable impairment) of the Purchased Items, the Pledged Collateral
or any collateral, security or Property at any time existing in connection with, or assuring or
securing payment of, all or any part of the Guaranty or the Guarantee Liabilities; (q) the failure
of the Deal Agent, the Purchaser, the other Secured Parties or any other Person to exercise
diligence or reasonable care in the preservation, protection, enforcement, sale or other handling
or treatment of all or any part of the Purchased Items, the Pledged Collateral or any other
collateral, security or Property securing the Guaranty or the Guarantee Liabilities, including, but
not limited to, any neglect, delay, omission, failure or refusal of the Deal Agent, the Purchaser
or the other Secured Parties (1) to take or prosecute any action for the collection of any of the
Guarantee Liabilities, the Pledged Collateral, any Purchased Item or any collateral, security or
Property securing the Guaranty or the Guarantee Liabilities, (2) to foreclose, or initiate any
action to foreclose, or, once commenced, prosecute to completion any action to foreclose, upon any
Purchased Item, the Pledged Collateral or any security, collateral or Property securing the
Guaranty or Guarantee Liabilities, or (3) to take or prosecute any action in connection with any
instrument or agreement evide

5. Primary Liability of the Parent Guarantor.

Without limiting the foregoing provisions, the Parent Guarantor agrees that this Guaranty may
be enforced by the Deal Agent, the Purchaser and the other Secured Parties without the necessity at
any time of resorting to or exhausting any other security or collateral and without the necessity
at any time of having recourse to any of the Repurchase Documents, the Purchased Items, the Pledged
Collateral or any collateral, security or Property now or hereafter securing the Guaranty or the
Guarantee Liabilities or otherwise, and the Parent Guarantor hereby waives the right to require the
Deal Agent, the Purchaser and the other Secured Parties to proceed against the Seller, the Pledgor,
the Limited Guarantor, the Parent, any other Repurchase Party, any Borrower or any other Person
(including a co–guarantor) or to require the Deal Agent, the Purchaser and the other Secured
Parties to pursue any other remedy or enforce any other right. The Parent Guarantor further agrees
that the Parent Guarantor shall have no right of subrogation, reimbursement or indemnity whatsoever
against any Person, or any right of recourse to the Purchased Items, the Pledged Collateral or any
collateral, security or Property securing the Guaranty or the Guarantee Liabilities, so long as any
such Guarantee Liabilities remain outstanding. The Parent Guarantor further agrees that nothing
contained herein shall prevent the Deal Agent, the Purchaser and the other Secured Parties from
suing on the Repurchase Agreement or any of the other Repurchase Documents or foreclosing its
security interest in or Lien on any Purchased Item, the Pledged Collateral or any collateral,
security or Property now or hereafter securing the Guaranty or the Guarantee Liabilities or from
exercising any other rights available to it under the Repurchase Agreement or any of the other
Repurchase Documents or any other instrument of security if none of the Seller, the Pledgor, the
Limited Guarantor, the Parent Guarantor, the Parent or any other Repurchase Party timely perform
the obligations of the Seller, the Pledgor, the Limited Guarantor, the Parent, all other Repurchase
Parties or other Persons thereunder, and the exercise of any of the aforesaid rights and the
completion of any foreclosure proceedings shall not constitute a discharge of the Parent
Guarantor’s obligations hereunder; it being the purpose and intent of the Parent Guarantor that the
Parent Guarantor’s obligations hereunder shall be absolute, independent and unconditional under any
and all circumstances. The Parent Guarantor recognizes, acknowledges and agrees that the Parent
Guarantor may be required to pay the Guarantee Liabilities in full (subject to the limit set forth
in Section 1) without assistance or support of any other party, and the Parent Guarantor has not
been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or
agreement that other parties will be liable to pay or perform the Guarantee Liabilities, or that
the Deal Agent, the Purchaser and the other Secured Parties will look to other parties to pay or
perform the Guarantee Liabilities. The Parent Guarantor recognizes, acknowledges and agrees that
it is not entering into this Guaranty in reliance on, or in contemplation of the benefits of, the
validity, enforceability, collectibility or value of the Purchased Items, the Pledged Collateral or
any of the collateral, security or Property securing the Guaranty or the Guarantee Liabilities.

6. Attorneys’ Fees and Costs of Collection.

If at any time or times hereafter any of the Deal Agent, the Purchaser or the other Secured
Parties employs counsel to pursue collection, to preserve or enforce its rights under this
Guaranty, or to intervene, to sue for enforcement of the terms of this Guaranty or to file a
petition, complaint, answer, motion or other pleading in any suit or proceeding relating to this
Guaranty, then, in such event, all of the reasonable attorneys’ fees, costs and expenses relating
thereto and all other amounts (if any) owed by the Parent Guarantor under this Guaranty (other than
the Guarantee Liabilities) shall be an additional liability of the Parent Guarantor to the Deal
Agent, the Purchaser and the other Secured Parties (over and above any limitation set forth in
Section 1, if any), payable on demand. The obligations contained in this Section 6 shall survive
the termination of this Guaranty.

7. Security Interests and Setoff.

The Parent Guarantor agrees that in the event the Parent Guarantor fails to pay its
obligations hereunder when due and payable under this Guaranty, the Deal Agent, the Purchaser and
the other Secured Parties shall be entitled to (a) any and all remedies available to it under
Applicable Law including, without limitation, all rights of setoff (subject to Section 33 of this
Guaranty) and (b) the benefit of all Liens heretofore, now and at any time or times hereafter
granted by such Parent Guarantor to the Deal Agent, the Purchaser and the other Secured Parties, if
any, to secure such Parent Guarantor’s obligations hereunder.

8. Term of Guaranty.

This Guaranty shall continue in full force and effect until the Guarantee Liabilities are
fully and indefeasibly paid, performed and discharged and the Repurchase Documents are terminated.
This Guaranty covers the Guarantee Liabilities whether presently outstanding or arising subsequent
to the date hereof, including all amounts advanced by the Deal Agent, the Purchaser and the other
Secured Parties in stages or installments. Notwithstanding the foregoing, this Guaranty shall
continue to be effective, or be reinstated, as the case may be, and any payment of the Guarantee
Liabilities hereunder shall be reinstated, if at any time payment, or any part thereof, of any of
the Guarantee Liabilities is rescinded or must otherwise be restored or returned by the Deal Agent,
the Purchaser or the other Secured Parties as a preference, fraudulent conveyance or otherwise upon
or in connection with an Insolvency Event or Insolvency Proceeding with respect to the Seller or
any other Person obligated on or for the Guarantee Liabilities, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the
Seller or such other Person or any substantial part of such Seller’s or such other Person’s
Property or assets, or otherwise, all as though such payments had not been made; provided, that in
the event payment of all or any part of the Guarantee Liabilities is rescinded or must be restored
or returned, all reasonable costs and expenses (including, without limitation, any reasonable legal
fees and disbursements) incurred by the Deal Agent, the Purchaser and the other Secured Parties in
defending and enforcing such reinstatement shall be deemed to be included as a part of the
Guarantee Liabilities.

9. Representations, Warranties and Covenants.

(a) The Parent Guarantor represents and warrants to, and covenants with, the Deal Agent, the
Purchaser and the other Secured Parties, as of the date of this Guaranty, and shall be deemed to
restate as of each Purchase Date, that:

(i) It is duly organized, validly existing and in good standing as a corporation,
limited partnership or limited liability company under the laws of the jurisdiction of its
organization or formation, and is duly qualified to do business and is in good standing in
all jurisdictions in which the character of its Property or assets, the nature of its
business or the performance of its obligations under any agreement to which it is a party or
is bound makes such qualification necessary, except where the failure to so qualify will
not, and could not reasonably be expected to have, a Material Adverse Effect.

(ii) It’s execution and delivery of, performance under and compliance with this
Guaranty will not violate it’s Authority Documents or constitute a default (or an event
that, with notice or lapse of time, or both, would constitute a default) under, or result in
a material breach of, any material Contractual Obligation, Indebtedness, Contingent
Liability or Guarantee Obligation to which it is a party or by which it is bound.

(iii) It has the full power and authority to enter into and consummate all transactions
contemplated by this Guaranty, has duly authorized the execution, delivery and performance
of this Guaranty, and has duly executed and delivered this Guaranty.

(iv) This Guaranty constitutes a valid, legal and binding obligation of such Parent
Guarantor, enforceable against it in accordance with the terms hereof, subject to
(A) Insolvency Laws affecting the enforcement of creditors’ rights generally, and
(B) general principles of equity, regardless of whether such enforcement is considered in a
proceeding in equity or at law.

(v) It is not in violation of, and its execution and delivery of, performance under and
compliance with this Guaranty shall not constitute a violation of, its Authority Documents.

(vi) It is not in violation of, and its execution and delivery of, performance under
and compliance with this Guaranty shall not constitute a violation of, any Applicable Law,
any order or decree of any court or arbiter, or any order, regulation or demand of any
Governmental Authority, in each case except where the failure such violation will not, and
could not reasonably be expected to, have a Material Adverse Effect.

(vii) No consent, approval, authorization or order of any Governmental Authority is
required for the consummation by it of the transactions contemplated herein, except for
those consents, approvals, authorizations or orders that previously have been obtained.

(viii) No litigation is pending or, to the best of the Parent Guarantor’s knowledge,
threatened against it that, if determined adversely to it, would prohibit the Parent
Guarantor from entering into or performing this Guaranty or that, in the Parent Guarantor’s
good faith and reasonable judgment, is likely to materially and adversely affect either the
ability of it to perform its obligations under this Guaranty or the financial condition of
it.

(ix) Neither the Parent Guarantor, the Seller, the Pledgor, the Limited Guarantor, the
Parent nor any principal or owner of the Seller’s sole member has ever been convicted of a
crime nor is the subject of any currently pending or threatened criminal proceeding.

(x) The Parent Guarantor is not the subject of any Insolvency Proceeding.

(xi) The Parent Guarantor is an Affiliate of the Seller, is the owner of a direct or
indirect interest in the Seller, and has received or will receive direct or indirect benefit
from and adequate consideration for the making of this Guaranty with respect to the
Guarantee Liabilities.

(xii) The recitals to this Guaranty are true and correct.

(xiii) The Parent Guarantor has received valuable consideration, fair value, fair
consideration or reasonable equivalent value for the Guarantee Liabilities, and (2) the
Guarantee Liabilities (A) will not render the Parent Guarantor not Solvent, (B) will not
leave the Parent Guarantor with an unreasonably small amount of capital to conduct its
business, and (C) will not cause the Parent Guarantor to have incurred debts (or to have
intended to have incurred debts) beyond its ability to pay such debts as they mature.

(b) The Parent Guarantor further represents and warrants to the Deal Agent, the Purchaser and
the other Secured Parties that it is familiar with and has independent knowledge of, and has
reviewed the books and records regarding, the Seller’s financial condition and affairs and the
value of the Purchased Items and represents and agrees that it will keep so informed while this
Guaranty is in force; provided, however, the Parent Guarantor acknowledges and agrees that it is
not relying on such financial condition or collateral as an inducement to enter into this Guaranty.
The Parent Guarantor agrees that the Deal Agent, the Purchaser and the other Secured Parties shall
have no obligation to investigate the financial condition or affairs of the Seller for the benefit
of the Parent Guarantor or to advise the Parent Guarantor of any matter relating to or arising
under the Repurchase Agreement or any of the other Repurchase Documents or any fact respecting, or
any change in, the financial condition or affairs of the Seller that might come to the knowledge of
the Deal Agent, the Purchaser or the other Secured Parties at any time, whether or not the Deal
Agent, the Purchaser or the other Secured Parties knows or believes or has reason to know or
believe that any such fact or change is unknown to the Parent Guarantor or might (or does)
materially increase the risk of the Parent Guarantor as guarantor or might (or would) affect the
willingness of the Parent Guarantor to continue as guarantor with respect to the Guarantee
Liabilities.

(c) The Parent Guarantor further represents and warrants to the Deal Agent, the Purchaser and
the other Secured Parties that the financial statements (if any) and other financial information
(if any) of the Parent Guarantor delivered to the Deal Agent, the Purchaser or the other Secured
Parties prior to the Closing Date are true and correct and fairly represent in all material
respects the financial condition of the Parent Guarantor on the date of the delivery of such
information and that there has been no Material Adverse Effect since such date.

(d) The Parent Guarantor hereby agrees that (i) it shall deliver to the Deal Agent all
financial statements, certifications and other information and documents required under the
Repurchase Agreement and any other Repurchase Document and such other financial information as the
Deal Agent, the Purchaser and the other Secured Parties may from time to time reasonably require
and that such financial statements and other information shall be true and correct and fairly
represent in all material respects the financial condition of such Parent Guarantor and its
Subsidiaries on the date of delivery; (ii) it will not sell, assign, transfer or otherwise convey,
in a single transaction or in a series of transactions, any material asset or portion of a material
asset which would (A) result in a Material Adverse Effect or (B) violate the Repurchase Documents;
(iii) it shall cause the Seller to comply with each and every agreement, obligation, duty and
covenant under the Repurchase Documents and, to the extent the Seller does not fulfill its
agreements, obligations, duties and covenants under the Repurchase Documents, the Parent Guarantor
shall fulfill the same; (iv) it shall perform each and every agreement, obligation, duty and
covenant that it has agreed to perform under any Repurchase Document and (v) it shall take all
actions reasonably required by the Deal Agent, the Purchaser and the other Secured Parties to
maintain the Deal Agent’s first priority perfect security interest in the Purchased Items, the
Pledged Collateral and any collateral, security or Property securing the Guaranty and/or the
Guarantee Liabilities.

(e) The representations, warranties and covenants of the Parent Guarantor set forth in this
Section 9 shall survive the execution and delivery of this Guaranty and shall inure to the benefit
of the Persons for whose benefit they were made for so long as this Guaranty is in effect. Upon
discovery by any party hereto of a breach of any such representations, warranties and covenants,
the party discovering such breach shall give prompt written notice thereof to the other.

10. Additional Liability of Parent Guarantor.

If the Parent Guarantor is or becomes liable for any Indebtedness owing by the Seller to the
Deal Agent, the Purchaser or the other Secured Parties by endorsement or otherwise than under this
Guaranty, such liability shall not be in any manner impaired or reduced hereby but shall have all
and the same force and effect it would have had if this Guaranty had not existed and such Parent
Guarantor’s liability hereunder shall not be in any manner impaired or reduced thereby.

11. Cumulative Rights.

All rights of the Deal Agent, the Purchaser and the other Secured Parties hereunder or
otherwise arising under the Repurchase Documents or any documents executed in connection with or as
security for the Guarantee Liabilities or under Applicable Law are separate and cumulative and may
be pursued separately, successively or concurrently, or not pursued, without affecting, limiting or
impairing any other right of the Deal Agent, the Purchaser or the other Secured Parties and without
limiting, affecting or impairing the liability of the Parent Guarantor.

12. Usury.

Notwithstanding any other provision contained herein to the contrary, no provision of this
Guaranty shall require or permit the collection from the Parent Guarantor of interest in excess of
the maximum rate or amount that the Parent Guarantor may be required or permitted to pay pursuant
to any Applicable Law. In the event any such interest is collected, it shall be applied in
reduction of the Parent Guarantor’s obligations hereunder, and the remainder of such excess
collected shall be returned to the Parent Guarantor once such obligations have been fully
satisfied.

13. Assignments.

(a) Assignments by Purchaser. This Guaranty is intended for and shall inure to the benefit of
the Deal Agent, the Purchaser, the other Secured Parties and each and every Person who shall from
time to time be or become the owner or holder of any of the Guarantee Liabilities, and each and
every reference herein to the Deal Agent, the Purchaser and the other Secured Parties shall include
and refer to each and every successor, assignee, pledgee and participant of the Deal Agent, the
Purchaser and the other Secured Parties and the successors, assignees and participants of the
foregoing at any time holding or owning any part of or interest in any part of the Guarantee
Liabilities. This Guaranty shall be transferable and negotiable by the Deal Agent, the Purchaser
and the other Secured Parties with the same force and effect, and to the same extent, that the
Guarantee Liabilities are transferable and negotiable, it being understood and stipulated that,
upon assignment or any such transfer by the Deal Agent, the Purchaser or the other Secured Parties
of any of the Guarantee Liabilities, the legal holder or owner of said Guarantee Liabilities (or a
part thereof or interest therein thus transferred or assigned) shall (except as otherwise
stipulated by the Deal Agent, the Purchaser or the other Secured Parties in its assignment) have
and may exercise all of the rights granted to the Deal Agent, the Purchaser and the other Secured
Parties under this Guaranty to the extent of that part of or interest in the Guarantee Liabilities
thus assigned or so transferred to said Person. The Parent Guarantor expressly waives notice of
any such transfer or assignment of the Guarantee Liabilities, or any part thereof, or of the rights
of the Deal Agent, the Purchaser and the other Secured Parties hereunder. The Parent Guarantor
acknowledges and agrees that any action taken hereunder shall not release or discharge this
Guaranty or any obligations of the Parent Guarantor hereunder.

(b) Assignments by Parent Guarantor. This Guaranty may not be assigned, and the Parent
Guarantor’s agreements, duties, obligations and covenants hereunder may not be delegated, in whole
or in part by the Parent Guarantor. All agreements, duties, obligations and covenants of the
Parent Guarantor hereunder shall bind and shall be enforceable against the Parent Guarantor’s
successors and assigns.

14. Application of Payments.

The Deal Agent, the Purchaser and the other Secured Parties may apply any payments received by
it from any source against such portion of the Guarantee Liabilities and in such priority and
fashion as it may deem appropriate in its sole and absolute discretion.

15. Counterclaims; Setoff.

The Parent Guarantor waives all rights to interpose any claims, deduction or counterclaims of
any kind, nature or description in any action or proceeding instituted by the Deal Agent, the
Purchaser or the other Secured Parties with respect to this Guaranty, the Guarantee Liabilities,
the Purchased Items, the Pledged Collateral, the collateral, security or Property securing the
Guaranty or the Guarantee Liabilities or any matter arising from or relating to any of the
foregoing, except compulsory counterclaims. The Parent Guarantor hereby waives any right of setoff
it may have or to which it may be entitled under this Guaranty, the Repurchase Documents or
Applicable Law from time to time against the Deal Agent, the Purchaser and the other Secured
Parties or any of their assets or Property. Notwithstanding anything to the contrary contained in
this Guaranty, until the Guarantee Liabilities have been indefeasibly paid in full the Parent
Guarantor hereby unconditionally and irrevocably waives, releases and abrogates any and all rights
it may now or hereafter have under any agreement, at law or in equity (including, without
limitation, any law subrogating the Parent Guarantor to the rights of the Deal Agent, the Purchaser
and/or the other Secured Parties), to assert any claim against or seek contribution,
indemnification or any other form of reimbursement from the Seller, the Pledgor, the Limited
Guarantor, the Parent, any other Repurchase Party or any other party liable for payment of any or
all of the Guarantee Liabilities for any payment made by the Parent Guarantor under or in
connection with this Guaranty or otherwise.

16. Bankruptcy Code Waiver.

In the event that the Seller becomes a debtor in any proceeding under the Bankruptcy Code, the
Parent Guarantor shall not be deemed to be a “creditor” (as defined in Section 101 of the
Bankruptcy Code) of such Seller, by reason of the existence of this Guaranty, and in connection
herewith, the Parent Guarantor hereby waives any such right as a “creditor” under the Bankruptcy
Code. This waiver is given to induce the Deal Agent, the Purchaser and the other Secured Parties
to enter into the transactions contemplated by the Repurchase Documents. After the Guarantee
Liabilities are paid in full and there shall be no obligations or liabilities under this Guaranty
outstanding, this waiver shall be deemed to be terminated.

17. Certain Actions.

No encumbrance, assignment, leasing, subletting, sale or other transfer by the Seller, the
Pledgor, the Limited Guarantor or the Parent of any of the Seller’s, the Pledgor’s, the Limited
Guarantor’s or the Parent’ assets or Property shall operate to extinguish or diminish the liability
of the Parent Guarantor under this Guaranty.

18. Subordination.

(a) As used in this Guaranty, the term “Limited Guarantor Claims” shall mean all debts,
liabilities and other Indebtedness of the Seller, the Pledgor, the Limited Guarantor, the Parent,
any other Repurchase Party or any other Person obligated to the Deal Agent, the Purchaser, the
other Secured Parties or any other Person specified under any Repurchase Document to the Parent
Guarantor, whether such debts, liabilities and other Indebtedness now exist or are hereafter
incurred or arise, or whether the obligations of such Seller, Pledgor, the Limited Guarantor, the
Parent, any other Repurchase Party or such other Person thereon be direct, contingent, primary,
secondary, several, joint and several, or otherwise, and irrespective of whether such debts,
liabilities or other Indebtedness be evidenced by note, contract, open account or otherwise, and
irrespective of the Person or Persons in whose favor such debts, liabilities or other Indebtedness
may, at their inception, have been, or may hereafter be created, or the manner in which they have
been or may hereafter be acquired by the Parent Guarantor. The Limited Guarantor Claims shall
include, without limitation, all rights and claims of the Parent Guarantor against the Seller, the
Pledgor, the Limited Guarantor, the Parent, other Repurchase Parties or other Persons (arising as a
result of subrogation or otherwise) as a result of the Parent Guarantor’s payment of all or a
portion of the Guarantee Liabilities. All Limited Guarantor Claims are and shall be subordinate to
the Guarantee Liabilities.

(b) In the event of any Insolvency Proceedings involving the Parent Guarantor as debtor, the
Deal Agent, the Purchaser and the other Secured Parties shall have the right to prove its claim in
any such proceeding so as to establish its rights hereunder and receive directly from the receiver,
trustee or other court custodian dividends and any payments which would otherwise be payable upon
Limited Guarantor Claims to the extent of any sums owed by the Parent Guarantor hereunder. The
Parent Guarantor hereby assigns such dividends and payments to the Deal Agent, the Purchaser and
the other Secured Parties. Should the Deal Agent, the Purchaser or the other Secured Parties
receive, for application upon the Guarantee Liabilities, any such dividend or payment which is
otherwise payable to the Parent Guarantor, and which, as between the Seller or any other Person
described in clause (a) above on the one hand and the Parent Guarantor on the other, shall
constitute a credit upon the Limited Guarantor Claims, then upon payment to the Deal Agent, the
Purchaser and the other Secured Parties in full of the Guarantee Liabilities, the Parent Guarantor
shall become subrogated to the rights of the Deal Agent, the Purchaser and the other Secured
Parties to the extent that such payments to the Deal Agent, the Purchaser and the other Secured
Parties on the Limited Guarantor Claims have contributed toward the liquidation of the Guarantee
Liabilities, and such subrogation shall be with respect to that proportion of the Guarantee
Liabilities which would have been unpaid if the Deal Agent, the Purchaser and the other Secured
Parties had not received dividends or payments upon the Limited Guarantor Claims.

(c) In the event that, notwithstanding anything to the contrary in this Guaranty, the Parent
Guarantor should receive any funds, payment, claim or distribution which is prohibited by this
Guaranty, the Parent Guarantor agrees to hold in trust for the Deal Agent, the Purchaser and the
other Secured Parties an amount equal to the amount of all funds, payments, claims or distributions
so received, and agrees that it shall have absolutely no dominion over the amount of such funds,
payments, claims or distributions so received except to pay them promptly to the Deal Agent, the
Purchaser and the other Secured Parties, and the Parent Guarantor covenants promptly to pay the
same to the Deal Agent, the Purchaser and the other Secured Parties.

(d) The Parent Guarantor agrees that any claims, charges or Liens against the Seller, the
Pledgor, the Limited Guarantor, the Parent, other Repurchase Parties or any other Persons described
under clause (a) above and/or such Seller’s, the Pledgor’s, the Limited Guarantor’s, the Parent’s,
any other Repurchase Party’s or such other Person’s assets and Property with respect to the Limited
Guarantor Claims shall be and remain inferior and subordinate to any claims, charges or Liens of
the Deal Agent, the Purchaser and the other Secured Parties against the Seller, the Pledgor, the
Limited Guarantor, the Parent, any other Repurchase Party or any such other Person and/or such
Seller’s, such Pledgor’s, the Limited Guarantor’s, such Parent’s, any such other Repurchase Party’s
or such other Person’s assets and Property, regardless of whether such claims, charges or Liens in
favor of the Parent Guarantor or the Deal Agent, the Purchaser and the other Secured Parties
presently exist or are hereafter created or attach. Without the prior written consent of the Deal
Agent, the Purchaser and the other Secured Parties, the Parent Guarantor shall not (i) exercise or
enforce any creditor’s right it may have against the Seller, the Pledgor, the Limited Guarantor,
the Parent, any other Repurchase Party or any other Person described under clause (a) above, or
(ii) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings
(judicial or otherwise, including, without limitation, the commencement of, or joinder in, any
Insolvency Proceeding) to enforce any claims, charges, Liens, mortgage, deeds of trust, security
interests, collateral rights, judgments or other encumbrances against the Seller, the Pledgor, the
Limited Guarantor, the Parent, any other Repurchase Party or such other Person or the assets or
Property of the Seller, the Pledgor, the Limited Guarantor, the Parent, any other Repurchase Party
or such other Person held by the Parent Guarantor.

19. Commercial Transaction.

To induce the Deal Agent and the Purchaser to enter into this Guaranty and the transactions
evidenced by and secured by the Repurchase Documents, the Parent Guarantor agrees that said
transactions are commercial and not consumer transactions.

20. Books and Records.

In addition to any additional rights under the Repurchase Agreement and the other Repurchase
Documents, the Deal Agent, the Purchaser and the other Secured Parties shall have the right at the
Parent Guarantor’s cost, and the Parent Guarantor shall permit and shall cooperate with the Deal
Agent, the Purchaser and the other Secured Parties in arranging for, at any reasonable time from
time to time, the Deal Agent, the Purchaser and the other Secured Parties and/or its
representatives, to review and audit all books, records and financial statements (including all
supporting data and other records) of the Parent Guarantor, and the Parent Guarantor shall make all
such books of account and records available for such examination, at the office where the same are
regularly maintained. The Deal Agent, the Purchaser and the other Secured Parties shall have a
right to copy, duplicate and make abstracts from such books and records as the Deal Agent, the
Purchaser and the other Secured Parties may require.

21. Notices, Etc.

All notices and other communications provided for hereunder shall, unless otherwise stated
herein, be in writing (including telex communication and communication by facsimile copy) and
mailed, telexed, transmitted or delivered, as to the Parent Guarantor on the one hand and the Deal
Agent, the Purchaser and the other Secured Parties on the other, at the address set forth below or
at such other address as shall be designated by such Person in a written notice to the other. All
such notices and communications shall be effective, upon receipt, or in the case of (a) notice by
mail, five (5) days after being deposited in the United States mail, first class postage prepaid,
(b) notice by telex, when telexed against receipt of answer back, or (c) notice by facsimile copy,
when verbal communication of receipt is obtained. The failure of the Deal Agent, the Purchaser or
the other Secured Parties to give any notice required hereunder (if any) shall not affect the
liability or obligations of the Parent Guarantor hereunder. Unless otherwise expressly provided in
this Guaranty, reference to any notice, request, approval, consent or determination provided for,
permitted or required under the terms of this Guaranty with respect to the Seller, the Parent
Guarantor, the Deal Agent, the Purchaser and the other Secured Parties means, in order for such
notice, request, approval, consent or determination to be effective hereunder, such notice,
request, approval or consent must be in writing.

If to the Parent Guarantor:

	 	 	 	 	 
	Municipal Mortgage & Equity, LLC
3000 Bayport Drive, Suite 1100
Tampa, Florida 33607
Attention:
	 	Charles M. Pinckney
	Facsimile No.:
	 	 	(813) 425–8000	 
	Confirmation No.:
	 	 	(813) 868–8076	 

with a copy to:

	 	 	 	 	 
	Municipal Mortgage & Equity, LLC

	621 E. Pratt Street, Suite 300

	Baltimore, Maryland 21202
Attention:
	 	Steve Goldberg, General Counsel

	Facsimile No.:
	 	 	(410) 727–5387	 
	Confirmation No.:
	 	 	(443) 263–2871	 

If to the Deal Agent, the Purchaser or the Secured Parties:

	 	 	 	 	 
	Wachovia Capital Markets, LLC

	301 South College Street, NC0166

	Charlotte, North Carolina 28288

	Attention:
	 	Joseph F. Cannon

	Facsimile No.:
	 	 	(704) 715–0066	 
	Confirmation No.:
	 	 	(704) 383–2324	 

with a copy to:

	 	 	 	 	 
	Variable Funding Capital Company LLC

	c/o Wachovia Capital Markets, LLC

	301 South College Street, TW10

	Charlotte, North Carolina 28288

	Attention:
	 	Conduit Administration

	Facsimile No.:
	 	 	(704) 383–9579	 
	Confirmation No.:
	 	 	(704) 374–2520	 

With respect to notices required pursuant to Section 23, a copy of notices sent to VFCC shall be
sent to:

	 	 	 	 	 	 	 	 	 
	 
	 	Lord Securities Corp.
	 	 	 	 
	 
	 	2 Wall Street, 19th Floor	 	 	 	 
	 
	 	New York, New York  10005
	 	 	 	 
	 
	 	Attention:
	 	Vice President

	 
	 	Facsimile No.:
	 	 	(212) 346–9012	 
	 
	 	Confirmation No.:
	 	 	(212) 346–9008	 
	22.
	 	No Waiver.
	 	 	 	 

No failure on the part of the Deal Agent, the Purchaser or the other Secured Parties to
exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any
further exercise thereof or the exercise of any other right.

23. Amendments and Waivers.

No amendment, waiver or other modification of any provision of this Guaranty shall be
effective without the written agreement of the Parent Guarantor, the Deal Agent and the Purchaser;
provided, that, no such amendment, waiver or modification that is material shall be effective
unless (if and to the extent required by the commercial paper program of the Purchaser as indicated
in writing by the Deal Agent) the Rating Agencies shall have provided Ratings Confirmations. Any
waiver or consent shall be effective only in the specific instance and for the specific purpose for
which given.

24. Severability; Integration.

Each provision of this Guaranty shall be valid, binding and enforceable to the fullest extent
permitted by Applicable Law. In case any provision in or obligation under this Guaranty shall be
invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any
Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the
remaining provisions or obligations, or of such provision or obligation in any other jurisdiction
or as applied to any other Person, fact, circumstance, action or inaction, shall not in any way be
affected or impaired thereby. This Guaranty and any agreements or letters executed in connection
herewith contain the final and complete integration of all prior expressions by the Parent
Guarantor hereto with respect to the subject matter hereof and shall constitute the entire
agreement of the Parent Guarantor hereto with respect to the subject matter hereof, superseding all
prior oral or written understandings.

25. Heading and Exhibits.

The headings herein are for purposes of references only and shall not otherwise affect the
meaning or interpretation of any provision hereof. The schedules, exhibits and annexes (if any)
attached hereto and referred to herein shall constitute a part of this Guaranty and are
incorporated into this Guaranty for all purposes.

26. Governing Law.

THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF).

27. Waivers.

(a) THE PARENT GUARANTOR KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO ASSERT A
COUNTERCLAIM, OTHER THAN A COMPULSORY COUNTERCLAIM, IN ANY ACTION OR PROCEEDING BROUGHT AGAINST IT
BY THE DEAL AGENT, THE PURCHASER, THE OTHER SECURED PARTIES, THE AFFECTED PARTIES OR ANY OF THEIR
AFFILIATES OR AGENTS.

(b) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE PARTIES HERETO ARISING OUT
OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION
WITH THIS GUARANTY, THE REPURCHASE DOCUMENTS, THE TRANSACTIONS CONTEMPLATED HEREBY OR ANY DEALINGS,
COURSE OF DEALINGS, COURSE OF CONDUCT AMONG THEM OR ANY STATEMENTS (WRITTEN OR ORAL) OR OTHER
ACTIONS OF ANY PARTY, AND NONE OF THE PARTIES WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY
OTHER ACTION IN WHICH A JURY TRIAL CAN NOT BE OR HAS NOT BEEN WAIVED. INSTEAD, ANY SUCH DISPUTE
RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.

(c) ANY LEGAL ACTION OR PROCEEDING AGAINST ANY PARTY HERETO WITH RESPECT TO THIS GUARANTY OR
ANY OTHER REPURCHASE DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE
UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY AND ASSETS, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF A PARTY TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST A PARTY IN ANY OTHER JURISDICTION.

(d) EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN
CONNECTION WITH THIS GUARANTY OR ANY OTHER REPURCHASE DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN
CLAUSE (c) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH
COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.

(e) EXCEPT AS PROHIBITED BY LAW, THE PARENT GUARANTOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO
CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY KIND OR NATURE WHATSOEVER OR ANY DAMAGES OTHER THAN, OR IN ADDITION
TO, ACTUAL DAMAGES. THE PARENT GUARANTOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
THE AGENT OR THE DEAL AGENT, THE PURCHASER OR THE OTHER SECURED PARTIES HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT THE DEAL AGENT, THE PURCHASER OR THE OTHER SECURED PARTIES WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THE SCOPE OF THIS WAIVER IS INTENDED TO
BE ALL–ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE
SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.

(f) EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT THE DEAL AGENT, THE PURCHASER, THE OTHER SECURED PARTIES AND THE PARENT
GUARANTOR HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO OR ACCEPTING THE BENEFITS OF THIS
AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS.
EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH
LEGAL COUNSEL.

(g) THE WAIVERS SET FORTH IN THIS SECTION 27 ARE IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY OR ANY OF THE OTHER REPURCHASE DOCUMENTS OR
TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO ANY TRANSACTION ENTERED INTO HEREUNDER OR
THEREUNDER. IN THE EVENT OF LITIGATION, THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL
BY THE COURT.

28. Taxes.

The provisions of Section 2.14 of the Repurchase Agreement shall be equally applicable to the
Parent Guarantor and any payments made under this Guaranty.

29. Recitals.

The recital and introductory paragraphs hereof are a part hereof, form a basis for this
Guaranty and shall be considered prima facie evidence of the facts and documents referred to
therein.

30. Counterparts.

This Guaranty may be executed in any number of counterparts and by different parties hereto in
separate counterparts (including by facsimile), each of which when so executed shall be deemed to
be an original and all of which when taken together shall constitute one and the same agreement.

31. Discretion.

Reference herein or in any Repurchase Document to the Deal Agent’s, the Purchaser’s or the
other Secured Parties’ discretion shall mean, unless otherwise stated herein or therein, the Deal
Agent’s, the Purchaser’s and the other Secured Parties’ sole and absolute discretion, and the
exercise of such discretion shall be final and conclusive. In addition, whenever the Deal Agent,
the Purchaser and the other Secured Parties have a decision or right of determination or request,
exercises any right given to it to agree, disagree, accept, consent, grant waivers, take action or
no action or to approve or disapprove, or any arrangement or term is to be satisfactory or
acceptable to or approved by (or any similar language or terms) the Deal Agent, the Purchaser and
the other Secured Parties, the decision of the Deal Agent, the Purchaser or the other Secured
Parties with respect thereto shall be in the sole and absolute discretion of the Deal Agent, the
Purchaser and the other Secured Parties, and such decision shall be final and conclusive, except as
may be otherwise specifically provided herein.

32. Recourse Against Certain Parties.

(a) No recourse under or with respect to any obligation, covenant or agreement (including,
without limitation, the payment of any fees or any other obligations) of the Deal Agent, the
Purchaser, the other Secured Parties or the Parent Guarantor as contained in this Guaranty, the
Repurchase Documents or any other agreement, instrument or document entered into by the Deal Agent,
the Purchaser, the other Secured Parties, the Parent Guarantor or any such party pursuant hereto or
thereto or in connection herewith or therewith shall be had against any administrator of the Deal
Agent, the Purchaser, the other Secured Parties, the Parent Guarantor or any incorporator,
Affiliate (direct or indirect), owner, member, partner, stockholder, officer, director, employee,
agent or attorney of the Deal Agent, the Purchaser, the other Secured Parties, the Parent Guarantor
or of any such administrator, as such, by the enforcement of any assessment or by any legal or
equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and
understood that the agreements of the Deal Agent, the Purchaser, the other Secured Parties and the
Parent Guarantor contained in this Guaranty, the Repurchase Documents and all of the other
agreements, instruments and documents entered into by it pursuant hereto or thereto or in
connection herewith or therewith are, in each case, solely the corporate obligations of the Deal
Agent, the Purchaser, the other Secured Parties and the Parent Guarantor and that no personal
liability whatsoever shall attach to or be incurred by any administrator of the Deal Agent, the
Purchaser, the other Secured Parties, the Parent Guarantor or any incorporator, owner, member,
partner, stockholder, Affiliate (direct or indirect), officer, director, employee, agent or
attorney of the Deal Agent, the Purchaser, the other Secured Parties, the Parent Guarantor or of
any such administrator, as such, or any other of them, under or by reason of any of the
obligations, covenants or agreements of the Deal Agent, the Purchaser, the other Secured Parties or
the Parent Guarantor contained in this Guaranty, the Repurchase Documents or in any other such
instruments, documents or agreements, or that are implied therefrom, and that any and all personal
liability of every such administrator of the Deal Agent, the Purchaser, any other Secured Party or
the Parent Guarantor and each incorporator, owner, member, partner, stockholder, affiliate,
officer, director, employee, agent or attorney of the Deal Agent, the Purchaser, any other Secured
Party or the Parent Guarantor, or of any such administrator, or any of them, for breaches by the
Deal Agent, the Purchaser, any other Secured Party or the Parent Guarantor of any such obligations,
covenants or agreements, which liability may arise either at common law or at equity, by statute or
constitution, or otherwise, is hereby expressly waived as a condition of and in consideration for
the execution of this Guaranty. The provisions of this Subsection 32(a) shall survive the
termination of this Guaranty.

(b) Notwithstanding anything in the Repurchase Documents to the contrary, the Purchaser shall
not have any obligation to pay any amount required to be paid by it in excess of any amount
available to the Purchaser after paying or making provision for the payment of its Commercial Paper
Notes. All payment obligations of the Purchaser are contingent on the availability of funds in
excess of the amounts necessary to pay its Commercial Paper Notes; and the Parent Guarantor agrees
that it shall not have a claim under Section 101(5) of the Bankruptcy Code if and to the extent
that any such payment obligation owed to it by the Purchaser exceeds the amount available to the
Purchaser to pay such amount after paying or making provision for the payment of its Commercial
Paper Notes.

33. Set–offs.

In addition to any rights and remedies of the Deal Agent, the Purchaser and the other Secured
Parties provided by this Guaranty, the Repurchase Documents and by Applicable Law, the Deal Agent
as agent for the Secured Parties and the Purchaser shall have the right, without prior notice to
the Seller, the Parent Guarantor, the Pledgor, the Limited Guarantor, the Parent or any other
Repurchase Party, any such notice being expressly waived by the Parent Guarantor to the extent
permitted by Applicable Law, and regardless of the existence of any other collateral, upon any
amount becoming due and payable by the Parent Guarantor to the Deal Agent, the Purchaser and the
other Secured Parties hereunder, under the Repurchase Documents or otherwise (whether at the stated
maturity, by acceleration or otherwise) to set–off and appropriate and apply against such amount
any and all monies and other Property and assets of the Parent Guarantor, any and all deposits
(general or special, time or demand, provisional or final), in any currency, and any and all other
credits, indebtedness, claims, securities, collateral, Property, assets or proceeds of any of the
foregoing in, as applicable, any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, and in each case at any time held or owing by the Deal Agent as
agent for the Secured Parties, the Purchaser, any Person under the control of the Deal Agent as
agent for the Secured Parties, the Purchaser and any successor or assign of the foregoing to or for
the credit or the account of the Parent Guarantor, whether for safekeeping, custody, pledge,
transmission, collection or otherwise. The Deal Agent agrees promptly to notify the Parent
Guarantor after any such set–off and application made by the Deal Agent as agent for the Secured
Parties and the Purchaser, provided that the failure to give such notice shall not affect the
validity of such set–off and application. ANY AND ALL RIGHTS TO REQUIRE THE DEAL AGENT, THE
PURCHASER AND THE OTHER SECURED PARTIES TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY
OTHER COLLATERAL WHICH SECURES THE AMOUNTS OWING TO THE DEAL AGENT, THE PURCHASER AND THE OTHER
SECURED PARTIES BY THE SELLER, THE PARENT GUARANTOR, THE PLEDGOR, THE PARENT OR ANY OTHER
REPURCHASE PARTY UNDER THE REPURCHASE DOCUMENTS, PRIOR TO EXERCISING ITS RIGHT OF SET–OFF WITH
RESPECT TO SUCH MONIES, SECURITIES, COLLATERAL, DEPOSITS, CREDITS OR OTHER PROPERTY OR ASSETS OF
THE PARENT GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED BY THE PARENT
GUARANTOR.

34. No Proceedings.

The Parent Guarantor hereby agrees that it will not institute against, or join any other
Person in instituting against, the Purchaser, the Deal Agent or any Secured Parties any Insolvency
Proceeding so long as any commercial paper issued by the Purchaser shall be outstanding and there
shall not have elapsed one (1) year and one (1) day since the last day on which any such commercial
paper shall have been outstanding.

35. Deal Agent.

The Deal Agent, the Purchaser and the other Secured Parties hereby designate and appoint
Wachovia Capital Markets, LLC as the Deal Agent under this Guaranty and the other Repurchase
Documents, and authorizes the Deal Agent to take such actions as agent on its behalf and to
exercise such powers as are delegated to the Deal Agent by the terms of this Guaranty and the
Repurchase Documents together with such powers as are reasonably incidental thereto. In addition,
the Deal Agent shall take all administrative and other actions required of the Deal Agent, the
Purchaser and the other Secured Parties under this Guaranty and the Repurchase Documents, except
the funding of any Transaction, and the Deal Agent shall give and receive notices on the Deal
Agent’s, the Purchaser’s and the other Secured Parties’ behalf, give or refuse consents on the Deal
Agent’s, the Purchaser’s and the other Secured Parties’ behalf and receive payments on the Deal
Agent’s, the Purchaser’s and the other Secured Parties’ behalf of any amounts due under this
Guaranty or the other Repurchase Documents. All payments and notices shall be made to the Deal
Agent on behalf of the Deal Agent, the Purchaser and the other Secured Parties at the office of the
Deal Agent designated by the Deal Agent from time to time.

36. Third Party Beneficiary.

Each Secured Party (to the extent it is not otherwise a party hereto) is an intended third
party beneficiary of this Guaranty entitled to enforce this Guaranty to the same extent as though
it were a party hereto.

[Remainder of Page Intentionally Left Blank.]

1

IN WITNESS WHEREOF, the undersigned have
caused this Guaranty to be duly executed as of the date first written above.

	 	 	 	 	 
	THE PARENT GUARANTOR:	 	MUNICIPAL MORTGAGE & EQUITY, LLC,

	 
	 	 	 	 
	 	 	a Delaware limited liability company

	 
	 	 	 	 
	
 
	 	By:

Name:

Title:
	 	/s/ Charles M. Pinckney

Charles M. Pinckney

Executive Vice President

	 	 	Address for Notices:

	 	 	 	 	 
	Municipal Mortgage & Equity, LLC
3000 Bayport Drive, Suite 1100
Tampa, Florida 33607
Attention:
	 	Charles M. Pinckney

	Facsimile No.:
	 	 	(813) 425–8000	 
	Confirmation No.:
	 	 	(813) 868–8076	 

with a copy to:

	 	 	 	 	 
	Municipal Mortgage & Equity, LLC

	621 E. Pratt Street, Suite 300

	Baltimore, Maryland 21202
Attention:
	 	Steve Goldberg, General Counsel

	Facsimile No.:
	 	 	(410) 727–5387	 
	Confirmation No.:
	 	 	(443) 263–2871	 

2

STATE OF      ,

     County ss:

I hereby certify that on this [     ] day of [     ], 2006, [     ],
before me, the subscriber, a Notary Public of the State of [     ], in and for the
[     ], personally appeared [     ], [     ], of
Municipal Mortgage & Equity, LLC, a Delaware limited liability company, and known to me (or
satisfactorily proven) to be the person whose name is subscribed to the within instrument and on
behalf of said limited liability company, that he, on behalf of said limited liability company,
executed the same for the purposes therein contained.

As Witness: my hand and notarial seal.

My Commission Expires:

          

Notary Public

3Exhibit 10.50

    

     

    

     

    

     

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THE SECURITIES MAY NOT BE SOLD,
      TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
      FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
      AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE
      144
      OR REGULATION S UNDER SAID ACT.

     

    

     

    CALLABLE
      SECURED CONVERTIBLE NOTE

     

    
      	
              New
                York, New York

               

            	
              $77,700

               

            
	
              August
                4, 2006

               

            	 

    

    

     

    FOR
      VALUE RECEIVED,
      M POWER ENTERTAINMENT, INC.,
      a
      Delaware Corporation (hereinafter called the “Borrower”),
      hereby promises to pay to the order of AJW PARTNERS, LLC or registered assigns
      (the “Holder”)
      the
      sum of $77,700, on August 4, 2009 (the “Maturity
      Date”),
      and
      to pay interest on the unpaid principal balance hereof at the rate of six
      percent (6%) (the “Interest
      Rate”)
      per
      annum from August 4, 2006 (the “Issue
      Date”)
      until
      the same becomes due and payable, whether at maturity or upon acceleration
      or by
      prepayment or otherwise. Any amount of principal or interest on this Note which
      is not paid when due shall bear interest at the rate of fifteen percent (15%)
      per annum from the due date thereof until the same is paid (“Default
      Interest”).
      Interest shall commence accruing on the Issue Date, shall be computed on the
      basis of a 365-day year and the actual number of days elapsed and shall be
      payable quarterly provided that no interest shall be due and payable for any
      month in which the Trading Price (as such term is defined below) is greater
      than
      $.017125 for each Trading Day (as such term is defined below) of the month.
      All
      payments due hereunder (to the extent not converted into common stock, $.001
      par
      value per share (the “Common
      Stock”)
      in
      accordance with the terms hereof) shall be made in lawful money of the United
      States of America. All payments shall be made at such address as the Holder
      shall hereafter give to the Borrower by written notice made in accordance with
      the provisions of this Note. Whenever any amount expressed to be due by the
      terms of this Note is due on any day which is not a business day, the same
      shall
      instead be due on the next succeeding day which is a business day and, in the
      case of any interest payment date which is not the date on which this Note
      is
      paid in full, the extension of the due date thereof shall not be taken into
      account for purposes of determining the amount of interest due on such date.
      As
      used in this Note, the term “business day” shall mean any day other than a
      Saturday, Sunday or a day on which commercial banks in the city of New York,
      New
      York are authorized or required by law or executive order to remain closed.
      Each
      capitalized term used herein, and not otherwise defined, shall have the meaning
      ascribed thereto in that certain Securities Purchase Agreement, dated April
      18,
      2006, pursuant to which this Note was originally issued (the “Purchase
      Agreement”).

     

    This
      Note
      is free from all taxes, liens, claims and encumbrances with respect to the
      issue
      thereof and shall not be subject to preemptive rights or other similar rights
      of
      shareholders of the Borrower and will not impose personal liability upon the
      holder thereof. The obligations of the Borrower under this Note shall be secured
      by that certain Security Agreement and Intellectual Property Security Agreement,
      each dated April 18, 2006 by and between the Borrower and the
      Holder.

     

    The
      following terms shall apply to this Note:

     

     

    ARTICLE
      I.  CONVERSION
      RIGHTS

     

    1.1  Conversion
      Right.
      The
      Holder shall have the right from time to time, and at any time on or prior
      to
      the earlier of (i) the Maturity Date and (ii) the date of payment of the Default
      Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III,
      the Optional Prepayment Amount (as defined in Section 5.1 or any payments
      pursuant to Section 1.7, each in respect of the remaining outstanding principal
      amount of this Note to convert all or any part of the outstanding and unpaid
      principal amount of this Note into fully paid and non-assessable shares of
      Common Stock, as such Common Stock exists on the Issue Date, or any shares
      of
      capital stock or other securities of the Borrower into which such Common Stock
      shall hereafter be changed or reclassified at the conversion price (the
“Conversion
      Price”)
      determined as provided herein (a “Conversion”);
      provided,
      however,
      that in
      no event shall the Holder be entitled to convert any portion of this Note in
      excess of that portion of this Note upon conversion of which the sum of (1)
      the
      number of shares of Common Stock beneficially owned by the Holder and its
      affiliates (other than shares of Common Stock which may be deemed beneficially
      owned through the ownership of the unconverted portion of the Notes or the
      unexercised or unconverted portion of any other security of the Borrower
      (including, without limitation, the warrants issued by the Borrower pursuant
      to
      the Purchase Agreement) subject to a limitation on conversion or exercise
      analogous to the limitations contained herein) and (2) the number of shares
      of
      Common Stock issuable upon the conversion of the portion of this Note with
      respect to which the determination of this proviso is being made, would result
      in beneficial ownership by the Holder and its affiliates of more than 4.99%
      of
      the outstanding shares of Common Stock and provided further
      that the
      Holder shall not be entitled to convert any portion of this Note during any
      month immediately succeeding a Determination Date on which the Borrower
      exercises its prepayment option pursuant to Section 5.2 of this Note. For
      purposes of the proviso to the immediately preceding sentence, beneficial
      ownership shall be determined in accordance with Section 13(d) of the Securities
      Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except
      as
      otherwise provided in clause (1) of such proviso. The number of shares of Common
      Stock to be issued upon each conversion of this Note shall be determined by
      dividing the Conversion Amount (as defined below) by the applicable Conversion
      Price then in effect on the date specified in the notice of conversion, in
      the
      form attached hereto as Exhibit A (the “Notice
      of Conversion”),
      delivered to the Borrower by the Holder in accordance with Section 1.4 below;
      provided that the Notice of Conversion is submitted by facsimile (or by other
      means resulting in, or reasonably expected to result in, notice) to the Borrower
      before 6:00 p.m., New York, New York time on such conversion date (the
“Conversion
      Date”).
      The
      term “Conversion
      Amount”
means,
      with respect to any conversion of this Note, the sum of (1) the principal amount
      of this Note to be converted in such conversion plus
      (2)
      accrued and unpaid interest, if any, on such principal amount at the interest
      rates provided in this Note to the Conversion Date, provided, however, that
      the
      Company shall have the right to pay any or all interest in cash plus
      (3)
      Default Interest, if any, on the amounts referred to in the immediately
      preceding clauses (1) and/or (2) plus
      (4) at
      the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and
      1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights
      Agreement, dated as of April 18, 2006, executed in connection with the initial
      issuance of this Note and the other Notes issued on the Issue Date (the
“Registration
      Rights Agreement”).
      The
      term “Determination
      Date” means
      the
      last business day of each month after the Issue Date.

     

    1.2  Conversion
      Price.

     

    (a)  Calculation
      of Conversion Price.
      The
      Conversion Price shall be the Variable Conversion Price (as defined herein)
      (subject, in each case, to equitable adjustments for stock splits, stock
      dividends or rights offerings by the Borrower relating to the Borrower’s
      securities or the securities of any subsidiary of the Borrower, combinations,
      recapitalization, reclassifications, extraordinary distributions and similar
      events). The “Variable
      Conversion Price”
shall
      mean the Applicable Percentage (as defined herein) multiplied by the Market
      Price (as defined herein). “Market
      Price”
means
      the average of the lowest three (3) Trading Prices (as defined below) for the
      Common Stock during the twenty (20) Trading Day period ending one Trading Day
      prior to the date the Conversion Notice is sent by the Holder to the Borrower
      via facsimile (the “Conversion
      Date”).
      “Trading
      Price”
means,
      for any security as of any date, the intraday trading price on the
      Over-the-Counter Bulletin Board (the “OTCBB”)
      as
      reported by a reliable reporting service (“Reporting
      Service”)
      mutually acceptable to Borrower and Holder and hereafter designated by Holders
      of a majority in interest of the Notes and the Borrower or, if the OTCBB is
      not
      the principal trading market for such security, the intraday trading price
      of
      such security on the principal securities exchange or trading market where
      such
      security is listed or traded or, if no intraday trading price of such security
      is available in any of the foregoing manners, the average of the intraday
      trading prices of any market makers for such security that are listed in the
      “pink sheets” by the National Quotation Bureau, Inc. If the Trading Price cannot
      be calculated for such security on such date in the manner provided above,
      the
      Trading Price shall be the fair market value as mutually determined by the
      Borrower and the holders of a majority in interest of the Notes being converted
      for which the calculation of the Trading Price is required in order to determine
      the Conversion Price of such Notes. “Trading
      Day”
shall
      mean any day on which the Common Stock is traded for any period on the OTCBB,
      or
      on the principal securities exchange or other securities market on which the
      Common Stock is then being traded. “Applicable
      Percentage”
shall
      mean 50%; provided, however, that the Applicable Percentage shall be increased
      to (i) 55% in the event that the Registration Statement (as defined in the
      Registration Rights Agreement) is filed on or before the Filing Date (as defined
      in the in the Registration Rights Agreement) and (ii) 60% in the event that
      the
      Registration Statement (as defined in the Registration Rights Agreement) becomes
      effective on or before the Effectiveness Deadline (as defined in the
      Registration Rights Agreement).

     

    (b)  Conversion
      Price During Major Announcements.
      Notwithstanding
      anything contained in Section 1.2(a) to the contrary, in the event the Borrower
      (i) makes a public announcement that it intends to consolidate or merge with
      any
      other corporation (other than a merger in which the Borrower is the surviving
      or
      continuing corporation and its capital stock is unchanged) or sell or transfer
      all or substantially all of the assets of the Borrower or (ii) any person,
      group
      or entity (including the Borrower) publicly announces a tender offer to purchase
      50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the
      date of the announcement referred to in clause (i) or (ii) is hereinafter
      referred to as the “Announcement
      Date”),
      then
      the Conversion Price shall, effective upon the Announcement Date and continuing
      through the Adjusted Conversion Price Termination Date (as defined below),
      be
      equal to the lower of (x) the Conversion Price which would have been applicable
      for a Conversion occurring on the Announcement Date and (y) the Conversion
      Price
      that would otherwise be in effect. From and after the Adjusted Conversion Price
      Termination Date, the Conversion Price shall be determined as set forth in
      this
      Section 1.2(a). For purposes hereof, “Adjusted
      Conversion Price Termination Date”
shall
      mean, with respect to any proposed transaction or tender offer (or takeover
      scheme) for which a public announcement as contemplated by this Section 1.2(b)
      has been made, the date upon which the Borrower (in the case of clause (i)
      above) or the person, group or entity (in the case of clause (ii) above)
      consummates or publicly announces the termination or abandonment of the proposed
      transaction or tender offer (or takeover scheme) which caused this Section
      1.2(b) to become operative.

     

    1.3  Authorized
      Shares.
      The
      Borrower covenants that upon the increase in the number of authorized shares
      of
      the Company’s Common Stock to 500,000,000 shares within forty-five (45) days
      from the date hereof and during the period the conversion right exists
      thereafter,, the Borrower will reserve from its authorized and unissued Common
      Stock a sufficient number of shares, free from preemptive rights, to provide
      for
      the issuance of Common Stock upon the full conversion of this Note and the
      other
      Notes issued pursuant to the Purchase Agreement. The Borrower is required at
      all
      times to have authorized and reserved two times the number of shares that is
      actually issuable upon full conversion of the Notes (based on the Conversion
      Price of the Notes or the Exercise Price of the Warrants in effect from time
      to
      time) (the “Reserved
      Amount”).
      The
      Reserved Amount shall be increased from time to time in accordance with the
      Borrower’s obligations pursuant to Section 4(h) of the Purchase Agreement. The
      Borrower represents that upon issuance, such shares will be duly and validly
      issued, fully paid and non-assessable. In addition, if the Borrower shall issue
      any securities or make any change to its capital structure which would change
      the number of shares of Common Stock into which the Notes shall be convertible
      at the then current Conversion Price, the Borrower shall at the same time make
      proper provision so that thereafter there shall be a sufficient number of shares
      of Common Stock authorized and reserved, free from preemptive rights, for
      conversion of the outstanding Notes. The Borrower (i) acknowledges that it
      has
      irrevocably instructed its transfer agent to issue certificates for the Common
      Stock issuable upon conversion of this Note, and (ii) agrees that its
      issuance of this Note shall constitute full authority to its officers and agents
      who are charged with the duty of executing stock certificates to execute and
      issue the necessary certificates for shares of Common Stock in accordance with
      the terms and conditions of this Note.

     

    If,
      at
      any time a Holder of this Note submits a Notice of Conversion, and the Borrower
      does not have sufficient authorized but unissued shares of Common Stock
      available to effect such conversion in accordance with the provisions of this
      Article I (a “Conversion
      Default”),
      subject to Section 4.8, the Borrower shall issue to the Holder all of the shares
      of Common Stock which are then available to effect such conversion. The portion
      of this Note which the Holder included in its Conversion Notice and which
      exceeds the amount which is then convertible into available shares of Common
      Stock (the “Excess
      Amount”)
      shall,
      notwithstanding anything to the contrary contained herein, not be convertible
      into Common Stock in accordance with the terms hereof until (and at the Holder’s
      option at any time after) the date additional shares of Common Stock are
      authorized by the Borrower to permit such conversion, at which time the
      Conversion Price in respect thereof shall be the lesser of (i) the Conversion
      Price on the Conversion Default Date (as defined below) and (ii) the Conversion
      Price on the Conversion Date thereafter elected by the Holder in respect
      thereof. In addition, the Borrower shall pay to the Holder payments
      (“Conversion
      Default Payments”)
      for a
      Conversion Default in the amount of (x) the sum
      of
      (1) the
      then outstanding principal amount of this Note plus
      (2)
      accrued and unpaid interest on the unpaid principal amount of this Note through
      the Authorization Date (as defined below) plus
      (3)
      Default Interest, if any, on the amounts referred to in clauses (1) and/or
      (2),
multiplied
      by
      (y) .24,
multiplied
      by
      (z)
      (N/365), where N = the number of days from the day the holder submits a Notice
      of Conversion giving rise to a Conversion Default (the “Conversion
      Default Date”)
      to the
      date (the “Authorization
      Date”)
      that
      the Borrower authorizes a sufficient number of shares of Common Stock to effect
      conversion of the full outstanding principal balance of this Note. The Borrower
      shall use its best efforts to authorize a sufficient number of shares of Common
      Stock as soon as practicable following the earlier of (i) such time that the
      Holder notifies the Borrower or that the Borrower otherwise becomes aware that
      there are or likely will be insufficient authorized and unissued shares to
      allow
      full conversion thereof and (ii) a Conversion Default. The Borrower shall send
      notice to the Holder of the authorization of additional shares of Common Stock,
      the Authorization Date and the amount of Holder’s accrued Conversion Default
      Payments. The accrued Conversion Default Payments for each calendar month shall
      be paid in cash or shall be convertible into Common Stock (at such time as
      there
      are sufficient authorized shares of Common Stock) at the applicable Conversion
      Price, at the Borrower’s option, as follows:

     

    (a)  In
      the
      event Holder elects to take such payment in cash, cash payment shall be made
      to
      Holder by the fifth (5th)
      day of
      the month following the month in which it has accrued; and

     

    (b)  In
      the
      event Holder elects to take such payment in Common Stock, the Holder may convert
      such payment amount into Common Stock at the Conversion Price (as in effect
      at
      the time of conversion) at any time after the fifth day of the month following
      the month in which it has accrued in accordance with the terms of this Article
      I
      (so long as there is then a sufficient number of authorized shares of Common
      Stock).

     

    The
      Holder’s election shall be made in writing to the Borrower at any time prior to
      6:00 p.m., New York, New York time, on the third day of the month following
      the
      month in which Conversion Default payments have accrued. If no election is
      made,
      the Holder shall be deemed to have elected to receive cash. Nothing herein
      shall
      limit the Holder’s right to pursue actual damages (to the extent in excess of
      the Conversion Default Payments) for the Borrower’s failure to maintain a
      sufficient number of authorized shares of Common Stock, and each holder shall
      have the right to pursue all remedies available at law or in equity (including
      degree of specific performance and/or injunctive relief).

     

    1.4  Method
      of Conversion.

     

    (a)  Mechanics
      of Conversion.
      Subject
      to Section 1.1, this Note may be converted by the Holder in whole or in part
      at
      any time from time to time after the Issue Date, by (A) submitting to the
      Borrower a Notice of Conversion (by facsimile or other reasonable means of
      communication dispatched on the Conversion Date prior to 6:00 p.m., New York,
      New York time) and (B) subject to Section 1.4(b), surrendering this Note at
      the principal office of the Borrower. 

     

    (b)  Surrender
      of Note Upon Conversion.
      Notwithstanding
      anything to the contrary set forth herein, upon conversion of this Note in
      accordance with the terms hereof, the Holder shall not be required to physically
      surrender this Note to the Borrower unless the entire unpaid principal amount
      of
      this Note is so converted. The Holder and the Borrower shall maintain records
      showing the principal amount so converted and the dates of such conversions
      or
      shall use such other method, reasonably satisfactory to the Holder and the
      Borrower, so as not to require physical surrender of this Note upon each such
      conversion. In the event of any dispute or discrepancy, such records of the
      Borrower shall be controlling and determinative in the absence of manifest
      error. Notwithstanding the foregoing, if any portion of this Note is converted
      as aforesaid, the Holder may not transfer this Note unless the Holder first
      physically surrenders this Note to the Borrower, whereupon the Borrower will
      forthwith issue and deliver upon the order of the Holder a new Note of like
      tenor, registered as the Holder (upon payment by the Holder of any applicable
      transfer taxes) may request, representing in the aggregate the remaining unpaid
      principal amount of this Note. The Holder and any assignee, by acceptance of
      this Note, acknowledge and agree that, by reason of the provisions of this
      paragraph, following conversion of a portion of this Note, the unpaid and
      unconverted principal amount of this Note represented by this Note may be less
      than the amount stated on the face hereof.

     

    (c)  Payment
      of Taxes.
      The
      Borrower shall not be required to pay any tax which may be payable in respect
      of
      any transfer involved in the issue and delivery of shares of Common Stock or
      other securities or property on conversion of this Note in a name other than
      that of the Holder (or in street name), and the Borrower shall not be required
      to issue or deliver any such shares or other securities or property unless
      and
      until the person or persons (other than the Holder or the custodian in whose
      street name such shares are to be held for the Holder’s account) requesting the
      issuance thereof shall have paid to the Borrower the amount of any such tax
      or
      shall have established to the satisfaction of the Borrower that such tax has
      been paid.

     

    (d)  Delivery
      of Common Stock Upon Conversion.
      Upon
      receipt by the Borrower from the Holder of a facsimile transmission (or other
      reasonable means of communication) of a Notice of Conversion meeting the
      requirements for conversion as provided in this Section 1.4, the Borrower shall
      issue and deliver or cause to be issued and delivered to or upon the order
      of
      the Holder certificates for the Common Stock issuable upon such conversion
      within three (3) business days after such receipt (and, solely in the case
      of
      conversion of the entire unpaid principal amount hereof, surrender of this
      Note)
      (such third business day being hereinafter referred to as the “Deadline”)
      in
      accordance with the terms hereof and the Purchase Agreement (including, without
      limitation, in accordance with the requirements of Section 2(g) of the Purchase
      Agreement that certificates for shares of Common Stock issued on or after the
      effective date of the Registration Statement upon conversion of this Note shall
      not bear any restrictive legend).

     

    (e)  Obligation
      of Borrower to Deliver Common Stock.
      Upon
      receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed
      to
      be the holder of record of the Common Stock issuable upon such conversion,
      the
      outstanding principal amount and the amount of accrued and unpaid interest
      on
      this Note shall be reduced to reflect such conversion, and, unless the Borrower
      defaults on its obligations under this Article I, all rights with respect to
      the
      portion of this Note being so converted shall forthwith terminate except the
      right to receive the Common Stock or other securities, cash or other assets,
      as
      herein provided, on such conversion. If the Holder shall have given a Notice
      of
      Conversion as provided herein, the Borrower’s obligation to issue and deliver
      the certificates for Common Stock shall be absolute and unconditional,
      irrespective of the absence of any action by the Holder to enforce the same,
      any
      waiver or consent with respect to any provision thereof, the recovery of any
      judgment against any person or any action to enforce the same, any failure
      or
      delay in the enforcement of any other obligation of the Borrower to the holder
      of record, or any setoff, counterclaim, recoupment, limitation or termination,
      or any breach or alleged breach by the Holder of any obligation to the Borrower,
      and irrespective of any other circumstance which might otherwise limit such
      obligation of the Borrower to the Holder in connection with such conversion.
      The
      Conversion Date specified in the Notice of Conversion shall be the Conversion
      Date so long as the Notice of Conversion is received by the Borrower before
      6:00
      p.m., New York, New York time, on such date.

     

    (f)  Delivery
      of Common Stock by Electronic Transfer.
      In
      lieu
      of delivering physical certificates representing the Common Stock issuable
      upon
      conversion, provided the Borrower’s transfer agent is participating in the
      Depository Trust Company (“DTC”)
      Fast
      Automated Securities Transfer (“FAST”)
      program, upon request of the Holder and its compliance with the provisions
      contained in Section 1.1 and in this Section 1.4, the Borrower shall use its
      best efforts to cause its transfer agent to electronically transmit the Common
      Stock issuable upon conversion to the Holder by crediting the account of
      Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission
      (“DWAC”)
      system.

     

    (g)  Failure
      to Deliver Common Stock Prior to Deadline.
      Without
      in any way limiting the Holder’s right to pursue other remedies, including
      actual damages and/or equitable relief, the parties agree that if delivery
      of
      the Common Stock issuable upon conversion of this Note is more than three (3)
      business days after the Deadline (other than a failure due to the circumstances
      described in Section 1.3 above, which failure shall be governed by such Section)
      the Borrower shall pay to the Holder $1,000 per day in cash, for each day beyond
      the Deadline that the Borrower fails to deliver such Common Stock. Such cash
      amount shall be paid to Holder by the fifth day of the month following the
      month
      in which it has accrued or, at the option of the Holder (by written notice
      to
      the Borrower by the first day of the month following the month in which it
      has
      accrued), shall be added to the principal amount of this Note, in which event
      interest shall accrue thereon in accordance with the terms of this Note and
      such
      additional principal amount shall be convertible into Common Stock in accordance
      with the terms of this Note.

     

    1.5  Concerning
      the Shares.
      The
      shares of Common Stock issuable upon conversion of this Note may not be sold
      or
      transferred unless (i) such shares are sold pursuant to an effective
      registration statement under the Act or (ii) the Borrower or its transfer agent
      shall have been furnished with an opinion of counsel (which opinion shall be
      in
      form, substance and scope customary for opinions of counsel in comparable
      transactions) to the effect that the shares to be sold or transferred may be
      sold or transferred pursuant to an exemption from such registration or
      (iii) such shares are sold or transferred pursuant to Rule 144 under the
      Act (or a successor rule) (“Rule
      144”)
      or
      (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of
      the Borrower who agrees to sell or otherwise transfer the shares only in
      accordance with this Section 1.5 and who is an Accredited Investor (as defined
      in the Purchase Agreement). Except as otherwise provided in the Purchase
      Agreement (and subject to the removal provisions set forth below), until such
      time as the shares of Common Stock issuable upon conversion of this Note have
      been registered under the Act as contemplated by the Registration Rights
      Agreement or otherwise may be sold pursuant to Rule 144 without any restriction
      as to the number of securities as of a particular date that can then be
      immediately sold, each certificate for shares of Common Stock issuable upon
      conversion of this Note that has not been so included in an effective
      registration statement or that has not been sold pursuant to an effective
      registration statement or an exemption that permits removal of the legend,
      shall
      bear a legend substantially in the following form, as appropriate:

     

    “THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED
      OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
      SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND
      SCOPE
      CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION
      IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION
      S
      UNDER SAID ACT.”

     

    The
      legend set forth above shall be removed and the Borrower shall issue to the
      Holder a new certificate therefor free of any transfer legend if (i) the
      Borrower or its transfer agent shall have received an opinion of counsel, in
      form, substance and scope customary for opinions of counsel in comparable
      transactions, to the effect that a public sale or transfer of such Common Stock
      may be made without registration under the Act and the shares are so sold or
      transferred, (ii) such Holder provides the Borrower or its transfer agent with
      reasonable assurances that the Common Stock issuable upon conversion of this
      Note (to the extent such securities are deemed to have been acquired on the
      same
      date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock
      issuable upon conversion of this Note, such security is registered for sale
      by
      the Holder under an effective registration statement filed under the Act or
      otherwise may be sold pursuant to Rule 144 without any restriction as to the
      number of securities as of a particular date that can then be immediately sold.
      Nothing in this Note shall (i) limit the Borrower’s obligation under the
      Registration Rights Agreement or (ii) affect in any way the Holder’s obligations
      to comply with applicable prospectus delivery requirements upon the resale
      of
      the securities referred to herein.

     

    1.6  Effect
      of Certain Events.

     

    (a)  Effect
      of Merger, Consolidation, Etc.
      At the
      option of the Holder, the sale, conveyance or disposition of all or
      substantially all of the assets of the Borrower, the effectuation by the
      Borrower of a transaction or series of related transactions in which more than
      50% of the voting power of the Borrower is disposed of, or the consolidation,
      merger or other business combination of the Borrower with or into any other
      Person (as defined below) or Persons when the Borrower is not the survivor
      shall
      either: (i) be deemed to be an Event of Default (as defined in Article III)
      pursuant to which the Borrower shall be required to pay to the Holder upon
      the
      consummation of and as a condition to such transaction an amount equal to the
      Default Amount (as defined in Article III) or (ii) be treated pursuant to
      Section 1.6(b) hereof. “Person”
shall
      mean any individual, corporation, limited liability company, partnership,
      association, trust or other entity or organization.

     

    (b)  Adjustment
      Due to Merger, Consolidation, Etc.
      If,
      at
      any time when this Note is issued and outstanding and prior to conversion of
      all
      of the Notes, there shall be any merger, consolidation, exchange of shares,
      recapitalization, reorganization, or other similar event, as a result of which
      shares of Common Stock of the Borrower shall be changed into the same or a
      different number of shares of another class or classes of stock or securities
      of
      the Borrower or another entity, or in case of any sale or conveyance of all
      or
      substantially all of the assets of the Borrower other than in connection with
      a
      plan of complete liquidation of the Borrower, then the Holder of this Note
      shall
      thereafter have the right to receive upon conversion of this Note, upon the
      basis and upon the terms and conditions specified herein and in lieu of the
      shares of Common Stock immediately theretofore issuable upon conversion, such
      stock, securities or assets which the Holder would have been entitled to receive
      in such transaction had this Note been converted in full immediately prior
      to
      such transaction (without regard to any limitations on conversion set forth
      herein), and in any such case appropriate provisions shall be made with respect
      to the rights and interests of the Holder of this Note to the end that the
      provisions hereof (including, without limitation, provisions for adjustment
      of
      the Conversion Price and of the number of shares issuable upon conversion of
      the
      Note) shall thereafter be applicable, as nearly as may be practicable in
      relation to any securities or assets thereafter deliverable upon the conversion
      hereof. The Borrower shall not effect any transaction described in this Section
      1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days
      prior written notice (but in any event at least fifteen (15) days prior written
      notice) of the record date of the special meeting of shareholders to approve,
      or
      if there is no such record date, the consummation of, such merger,
      consolidation, exchange of shares, recapitalization, reorganization or other
      similar event or sale of assets (during which time the Holder shall be entitled
      to convert this Note) and (b) the resulting successor or acquiring entity (if
      not the Borrower) assumes by written instrument the obligations of this Section
      1.6(b). The above provisions shall similarly apply to successive consolidations,
      mergers, sales, transfers or share exchanges.

     

    (c)  Adjustment
      Due to Distribution.
      If
      the
      Borrower shall declare or make any distribution of its assets (or rights to
      acquire its assets) to holders of Common Stock as a dividend, stock repurchase,
      by way of return of capital or otherwise (including any dividend or distribution
      to the Borrower’s shareholders in cash or shares (or rights to acquire shares)
      of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”),
      then
      the Holder of this Note shall be entitled, upon any conversion of this Note
      after the date of record for determining shareholders entitled to such
      Distribution, to receive the amount of such assets which would have been payable
      to the Holder with respect to the shares of Common Stock issuable upon such
      conversion had such Holder been the holder of such shares of Common Stock on
      the
      record date for the determination of shareholders entitled to such
      Distribution.

     

    (d)  Adjustment
      Due to Dilutive Issuance.
      If, at
      any time when any Notes are issued and outstanding, the Borrower issues or
      sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued
      or sold, any shares of Common Stock for no consideration or for a consideration
      per share (before deduction of reasonable expenses or commissions or
      underwriting discounts or allowances in connection therewith) less than the
      Fixed Conversion Price in effect on the date of such issuance (or deemed
      issuance) of such shares of Common Stock (a “Dilutive
      Issuance”),
      then
      immediately upon the Dilutive Issuance, the Variable Conversion Price will
      be
      reduced to the amount of the consideration per share received by the Borrower
      in
      such Dilutive Issuance; provided
      that
      only one adjustment will be made for each Dilutive Issuance.

     

    The
      Borrower shall be deemed to have issued or sold shares of Common Stock if the
      Borrower in any manner issues or grants any warrants, rights or options (not
      including employee stock option plans), whether or not immediately exercisable,
      to subscribe for or to purchase Common Stock or other securities convertible
      into or exchangeable for Common Stock (“Convertible
      Securities”)
      (such
      warrants, rights and options to purchase Common Stock or Convertible Securities
      are hereinafter referred to as “Options”)
      and
      the price per share for which Common Stock is issuable upon the exercise of
      such
      Options is less than the Variable Conversion Price then in effect, then the
      Variable Conversion Price shall be equal to such price per share. For purposes
      of the preceding sentence, the “price per share for which Common Stock is
      issuable upon the exercise of such Options” is determined by dividing (i) the
      total amount, if any, received or receivable by the Borrower as consideration
      for the issuance or granting of all such Options, plus the minimum aggregate
      amount of additional consideration, if any, payable to the Borrower upon the
      exercise of all such Options, plus, in the case of Convertible Securities
      issuable upon the exercise of such Options, the minimum aggregate amount of
      additional consideration payable upon the conversion or exchange thereof at
      the
      time such Convertible Securities first become convertible or exchangeable,
      by
      (ii) the maximum total number of shares of Common Stock issuable upon the
      exercise of all such Options (assuming full conversion of Convertible
      Securities, if applicable). No further adjustment to the Conversion Price will
      be made upon the actual issuance of such Common Stock upon the exercise of
      such
      Options or upon the conversion or exchange of Convertible Securities issuable
      upon exercise of such Options.

     

    Additionally,
      the Borrower shall be deemed to have issued or sold shares of Common Stock
      if
      the Borrower in any manner issues or sells any Convertible Securities, whether
      or not immediately convertible (other than where the same are issuable upon
      the
      exercise of Options), and the price per share for which Common Stock is issuable
      upon such conversion or exchange is less than the Variable Conversion Price
      then
      in effect, then the Variable Conversion Price shall be equal to such price
      per
      share. For the purposes of the preceding sentence, the “price per share for
      which Common Stock is issuable upon such conversion or exchange” is determined
      by dividing (i) the total amount, if any, received or receivable by the Borrower
      as consideration for the issuance or sale of all such Convertible Securities,
      plus the minimum aggregate amount of additional consideration, if any, payable
      to the Borrower upon the conversion or exchange thereof at the time such
      Convertible Securities first become convertible or exchangeable, by (ii) the
      maximum total number of shares of Common Stock issuable upon the conversion
      or
      exchange of all such Convertible Securities. No further adjustment to the
      Variable Conversion Price will be made upon the actual issuance of such Common
      Stock upon conversion or exchange of such Convertible Securities.

     

    (e)  Purchase
      Rights.
      If,
      at
      any time when any Notes are issued and outstanding, the Borrower issues any
      convertible securities or rights to purchase stock, warrants, securities or
      other property (the “Purchase
      Rights”)
      pro
      rata to the record holders of any class of Common Stock, then the Holder of
      this
      Note will be entitled to acquire, upon the terms applicable to such Purchase
      Rights, the aggregate Purchase Rights which such Holder could have acquired
      if
      such Holder had held the number of shares of Common Stock acquirable upon
      complete conversion of this Note (without regard to any limitations on
      conversion contained herein) immediately before the date on which a record
      is
      taken for the grant, issuance or sale of such Purchase Rights or, if no such
      record is taken, the date as of which the record holders of Common Stock are
      to
      be determined for the grant, issue or sale of such Purchase Rights.

     

    (f)  Notice
      of Adjustments.
      Upon
      the
      occurrence of each adjustment or readjustment of the Conversion Price as a
      result of the events described in this Section 1.6, the Borrower, at its
      expense, shall promptly compute such adjustment or readjustment and prepare
      and
      furnish to the Holder of a certificate setting forth such adjustment or
      readjustment and showing in detail the facts upon which such adjustment or
      readjustment is based. The Borrower shall, upon the written request at any
      time
      of the Holder, furnish to such Holder a like certificate setting forth (i)
      such
      adjustment or readjustment, (ii) the Conversion Price at the time in effect
      and
      (iii) 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 conversion
      of
      the Note.

     

    1.7  Trading
      Market Limitations.
      Unless
      permitted by the applicable rules and regulations of the principal securities
      market on which the Common Stock is then listed or traded, in no event shall
      the
      Borrower issue upon conversion of or otherwise pursuant to this Note and the
      other Notes issued pursuant to the Purchase Agreement more than the maximum
      number of shares of Common Stock that the Borrower can issue pursuant to any
      rule of the principal United States securities market on which the Common Stock
      is then traded (the “Maximum
      Share Amount”),
      which
      shall be 19.99% of the total shares outstanding on the Closing Date (as defined
      in the Purchase Agreement), subject to equitable adjustment from time to time
      for stock splits, stock dividends, combinations, capital reorganizations and
      similar events relating to the Common Stock occurring after the date hereof.
      Once the Maximum Share Amount has been issued (the date of which is hereinafter
      referred to as the “Maximum
      Conversion Date”),
      if
      the Borrower fails to eliminate any prohibitions under applicable law or the
      rules or regulations of any stock exchange, interdealer quotation system or
      other self-regulatory organization with jurisdiction over the Borrower or any
      of
      its securities on the Borrower’s ability to issue shares of Common Stock in
      excess of the Maximum Share Amount (a “Trading
      Market Prepayment Event”),
      in
      lieu of any further right to convert this Note, and in full satisfaction of
      the
      Borrower’s obligations under this Note, the Borrower shall pay to the Holder,
      within fifteen (15) business days of the Maximum Conversion Date (the
“Trading
      Market Prepayment Date”),
      an
      amount equal to 130% times
      the
sum
      of (a)
      the then outstanding principal amount of this Note immediately following the
      Maximum Conversion Date, plus
      (b)
      accrued and unpaid interest on the unpaid principal amount of this Note to
      the
      Trading Market Prepayment Date, plus
      (c)
      Default Interest, if any, on the amounts referred to in clause (a) and/or (b)
      above, plus
      (d) any
      optional amounts that may be added thereto at the Maximum Conversion Date by
      the
      Holder in accordance with the terms hereof (the then outstanding principal
      amount of this Note immediately following the Maximum Conversion Date,
plus
      the
      amounts referred to in clauses (b), (c) and (d) above shall collectively be
      referred to as the “Remaining
      Convertible Amount”).
      With
      respect to each Holder of Notes, the Maximum Share Amount shall refer to such
      Holder’s pro rata
      share
      thereof determined in accordance with Section 4.8 below. In the event that
      the
      sum of (x) the aggregate number of shares of Common Stock issued upon conversion
      of this Note and the other Notes issued pursuant to the Purchase Agreement
      plus
      (y) the
      aggregate number of shares of Common Stock that remain issuable upon conversion
      of this Note and the other Notes issued pursuant to the Purchase Agreement,
      represents at least one hundred percent (100%) of the Maximum Share Amount
      (the
“Triggering
      Event”),
      the
      Borrower will use its best efforts to seek and obtain Shareholder Approval
      (or
      obtain such other relief as will allow conversions hereunder in excess of the
      Maximum Share Amount) as soon as practicable following the Triggering Event
      and
      before the Maximum Conversion Date. As used herein, “Shareholder
      Approval”
means
      approval by the shareholders of the Borrower to authorize the issuance of the
      full number of shares of Common Stock which would be issuable upon full
      conversion of the then outstanding Notes but for the Maximum Share
      Amount.

     

    1.8  Status
      as Shareholder.
      Upon
      submission of a Notice of Conversion by a Holder, (i) the shares covered thereby
      (other than the shares, if any, which cannot be issued because their issuance
      would exceed such Holder’s allocated portion of the Reserved Amount or Maximum
      Share Amount) shall be deemed converted into shares of Common Stock and (ii)
      the
      Holder’s rights as a Holder of such converted portion of this Note shall cease
      and terminate, excepting only the right to receive certificates for such shares
      of Common Stock and to any remedies provided herein or otherwise available
      at
      law or in equity to such Holder because of a failure by the Borrower to comply
      with the terms of this Note. Notwithstanding the foregoing, if a Holder has
      not
      received certificates for all shares of Common Stock prior to the tenth (10th)
      business day after the expiration of the Deadline with respect to a conversion
      of any portion of this Note for any reason, then (unless the Holder otherwise
      elects to retain its status as a holder of Common Stock by so notifying the
      Borrower) the Holder shall regain the rights of a Holder of this Note with
      respect to such unconverted portions of this Note and the Borrower shall, as
      soon as practicable, return such unconverted Note to the Holder or, if the
      Note
      has not been surrendered, adjust its records to reflect that such portion of
      this Note has not been converted. In all cases, the Holder shall retain all
      of
      its rights and remedies (including, without limitation, (i) the right to receive
      Conversion Default Payments pursuant to Section 1.3 to the extent required
      thereby for such Conversion Default and any subsequent Conversion Default and
      (ii) the right to have the Conversion Price with respect to subsequent
      conversions determined in accordance with Section 1.3) for the Borrower’s
      failure to convert this Note.

     

     

    ARTICLE
      II.  CERTAIN
      COVENANTS

     

    2.1  Distributions
      on Capital Stock.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not without the Holder’s written consent (a) pay, declare or set apart for such
      payment, any dividend or other distribution (whether in cash, property or other
      securities) on shares of capital stock other than dividends on shares of Common
      Stock solely in the form of additional shares of Common Stock or (b) directly
      or
      indirectly or through any subsidiary make any other payment or distribution
      in
      respect of its capital stock except for distributions pursuant to any
      shareholders’ rights plan which is approved by a majority of the Borrower’s
      disinterested directors.

     

    2.2  Restriction
      on Stock Repurchases.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not without the Holder’s written consent redeem, repurchase or otherwise acquire
      (whether for cash or in exchange for property or other securities or otherwise)
      in any one transaction or series of related transactions any shares of capital
      stock of the Borrower or any warrants, rights or options to purchase or acquire
      any such shares.

     

    2.3  Borrowings.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, create, incur, assume or suffer to
      exist any liability for borrowed money, except (a) borrowings in existence
      or
      committed on the date hereof and of which the Borrower has informed Holder
      in
      writing prior to the date hereof, (b) indebtedness to trade creditors or
      financial institutions incurred in the ordinary course of business or (c)
      borrowings, the proceeds of which shall be used to repay this Note.

     

    2.4  Sale
      of Assets.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, sell, lease or otherwise dispose of
      any significant portion of its assets outside the ordinary course of business.
      Any consent to the disposition of any assets may be conditioned on a specified
      use of the proceeds of disposition.

     

    2.5  Advances
      and Loans.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, lend money, give credit or make
      advances to any person, firm, joint venture or corporation, including, without
      limitation, officers, directors, employees, subsidiaries and affiliates of
      the
      Borrower, except loans, credits or advances (a) in existence or committed on
      the
      date hereof and which the Borrower has informed Holder in writing prior to
      the
      date hereof, (b) made in the ordinary course of business or (c) not in excess
      of
      $50,000.

     

    2.6  Contingent
      Liabilities.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, which shall not be unreasonably
      withheld, assume, guarantee, endorse, contingently agree to purchase or
      otherwise become liable upon the obligation of any person, firm, partnership,
      joint venture or corporation, except by the endorsement of negotiable
      instruments for deposit or collection and except assumptions, guarantees,
      endorsements and contingencies (a) in existence or committed on the date hereof
      and which the Borrower has informed Holder in writing prior to the date hereof,
      and (b) similar transactions in the ordinary course of business. 

     

     

    ARTICLE
      III.  EVENTS
      OF DEFAULT

     

    If
      any of
      the following events of default (each, an “Event
      of Default”)
      shall
      occur:

     

    3.1  Failure
      to Pay Principal or Interest.
      The
      Borrower fails to pay the principal hereof or interest thereon when due on
      this
      Note, whether at maturity, upon a Trading Market Prepayment Event pursuant
      to
      Section 1.7, upon acceleration or otherwise;

     

    3.2  Conversion
      and the Shares.
      The
      Borrower fails to issue shares of Common Stock to the Holder (or announces
      or
      threatens that it will not honor its obligation to do so) upon exercise by
      the
      Holder of the conversion rights of the Holder in accordance with the terms
      of
      this Note (for a period of at least sixty (60) days, if such failure is solely
      as a result of the circumstances governed by Section 1.3 and the Borrower is
      using its best efforts to authorize a sufficient number of shares of Common
      Stock as soon as practicable), fails to transfer or cause its transfer agent
      to
      transfer (electronically or in certificated form) any certificate for shares
      of
      Common Stock issued to the Holder upon conversion of or otherwise pursuant
      to
      this Note as and when required by this Note or the Registration Rights
      Agreement, or fails to remove any restrictive legend (or to withdraw any stop
      transfer instructions in respect thereof) on any certificate for any shares
      of
      Common Stock issued to the Holder upon conversion of or otherwise pursuant
      to
      this Note as and when required by this Note or the Registration Rights Agreement
      (or makes any announcement, statement or threat that it does not intend to
      honor
      the obligations described in this paragraph) and any such failure shall continue
      uncured (or any announcement, statement or threat not to honor its obligations
      shall not be rescinded in writing) for ten (10) days after the Borrower shall
      have been notified thereof in writing by the Holder;

     

    3.3  Failure
      to Timely File Registration or Effect Registration.
      The
      Borrower fails to file the Registration Statement within thirty (30) days
      following the Closing Date (as defined in the Purchase Agreement) or obtain
      effectiveness with the Securities and Exchange Commission of the Registration
      Statement within one hundred twenty (120) days following the Closing Date (as
      defined in the Purchase Agreement) or such Registration Statement lapses in
      effect (or sales cannot otherwise be made thereunder effective, whether by
      reason of the Borrower’s failure to amend or supplement the prospectus included
      therein in accordance with the Registration Rights Agreement or otherwise)
      for
      more than ten (10) consecutive days or twenty (20) days in any twelve month
      period after the Registration Statement becomes effective;

     

    3.4  Breach
      of Covenants.
      The
      Borrower breaches any material covenant or other material term or condition
      contained in Sections 1.3, 1.6 or 1.7 of this Note, or Sections 4(c), 4(e),
      4(h), 4(i), 4(j) or 5 of the Purchase Agreement and such breach continues for
      a
      period of ten (10) days after written notice thereof to the Borrower from the
      Holder;

     

    3.5  Breach
      of Representations and Warranties.
      Any
      representation or warranty of the Borrower made herein or in any agreement,
      statement or certificate given in writing pursuant hereto or in connection
      herewith (including, without limitation, the Purchase Agreement and the
      Registration Rights Agreement), shall be false or misleading in any material
      respect when made and the breach of which has (or with the passage of time
      will
      have) a material adverse effect on the rights of the Holder with respect to
      this
      Note, the Purchase Agreement or the Registration Rights Agreement;

     

    3.6  Receiver
      or Trustee.
      The
      Borrower or any subsidiary of the Borrower shall make an assignment for the
      benefit of creditors, or apply for or consent to the appointment of a receiver
      or trustee for it or for a substantial part of its property or business, or
      such
      a receiver or trustee shall otherwise be appointed;

     

    3.7  Judgments.
      Any
      money judgment, writ or similar process shall be entered or filed against the
      Borrower or any subsidiary of the Borrower or any of its property or other
      assets for more than $50,000, and shall remain unvacated, unbonded or unstayed
      for a period of twenty (20) days unless otherwise consented to by the Holder,
      which consent will not be unreasonably withheld;

     

    3.8  Bankruptcy.
      Bankruptcy, insolvency, reorganization or liquidation proceedings or other
      proceedings for relief under any bankruptcy law or any law for the relief of
      debtors shall be instituted by or against the Borrower or any subsidiary of
      the
      Borrower, unless such proceeding shall be stayed within thirty (30)
      days;

     

    3.9  Delisting
      of Common Stock.
      The
      Borrower shall fail to maintain the listing of the Common Stock on at least
      one
      of the OTCBB or an equivalent replacement exchange, the Nasdaq National Market,
      the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock
      Exchange; or

     

    3.10  Default
      Under Other Notes.
      An Event
      of Default has occurred and is continuing under any of the other Notes issued
      pursuant to the Purchase Agreement,

     

    then,
      upon the occurrence and during the continuation of any Event of Default
      specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
      of the Holders of a majority of the aggregate principal amount of the
      outstanding Notes issued pursuant to the Purchase Agreement exercisable through
      the delivery of written notice to the Borrower by such Holders (the
“Default
      Notice”),
      and
      upon the occurrence of an Event of Default specified in Section 3.6 or 3.8
      (unless, under Section 3.8, such proceeding shall be stayed within 30 days),
      the
      Notes shall become immediately due and payable and the Borrower shall pay to
      the
      Holder, in full satisfaction of its obligations hereunder, an amount equal
      to
      the greater of (i) 130% times
      the
sum
      of (w)
      the then outstanding principal amount of this Note plus
      (x)
      accrued and unpaid interest on the unpaid principal amount of this Note to
      the
      date of payment (the “Mandatory
      Prepayment Date”)
      plus
      (y)
      Default Interest, if any, on the amounts referred to in clauses (w) and/or
      (x)
plus
      (z) any
      amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or
      pursuant to Section 2(c) of the Registration Rights Agreement (the then
      outstanding principal amount of this Note to the date of payment plus
      the
      amounts referred to in clauses (x), (y) and (z) shall collectively be known
      as
      the “Default
      Sum”)
      or
      (ii) the “parity value” of the Default Sum to be prepaid, where parity value
      means (a) the highest number of shares of Common Stock issuable upon conversion
      of or otherwise pursuant to such Default Sum in accordance with Article I,
      treating the Trading Day immediately preceding the Mandatory Prepayment Date
      as
      the “Conversion Date” for purposes of determining the lowest applicable
      Conversion Price, unless the Default Event arises as a result of a breach in
      respect of a specific Conversion Date in which case such Conversion Date shall
      be the Conversion Date), multiplied
      by
      (b) the
      highest Closing Price for the Common Stock during the period beginning on the
      date of first occurrence of the Event of Default and ending one day prior to
      the
      Mandatory Prepayment Date (the “Default
      Amount”)
      and
      all other amounts payable hereunder shall immediately become due and payable,
      all without demand, presentment or notice, all of which hereby are expressly
      waived, together with all costs, including, without limitation, legal fees
      and
      expenses, of collection, and the Holder shall be entitled to exercise all other
      rights and remedies available at law or in equity. If the Borrower fails to
      pay
      the Default Amount within five (5) business days of written notice that such
      amount is due and payable, then the Holder shall have the right at any time,
      so
      long as the Borrower remains in default (and so long and to the extent that
      there are sufficient authorized shares), to require the Borrower, upon written
      notice, to immediately issue, in lieu of the Default Amount, the number of
      shares of Common Stock of the Borrower equal to the Default Amount divided
      by
      the Conversion Price then in effect.

     

     

    ARTICLE
      IV.  MISCELLANEOUS

     

    4.1  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 privileges. All rights
      and remedies existing hereunder are cumulative to, and not exclusive of, any
      rights or remedies otherwise available.

     

    4.2  Notices.
      Any
      notice herein required or permitted to be given shall be in writing and may
      be
      personally served or delivered by courier or sent by United States mail and
      shall be deemed to have been given upon receipt if personally served (which
      shall include telephone line facsimile transmission) or sent by courier or
      three
      (3) days after being deposited in the United States mail, certified, with
      postage pre-paid and properly addressed, if sent by mail. For the purposes
      hereof, the address of the Holder shall be as shown on the records of the
      Borrower; and the address of the Borrower shall be 2602 Yorktown Place, Houston,
      Texas 77056; facsimile: (713) 626-5333. Both the Holder and the Borrower may
      change the address for service by service of written notice to the other as
      herein provided.

     

    4.3  Amendments.
      This
      Note and any provision hereof may only be amended by an instrument in writing
      signed by the Borrower and the Holder. The term “Note” and all reference
      thereto, as used throughout this instrument, shall mean this instrument (and
      the
      other Notes issued pursuant to the Purchase Agreement) as originally executed,
      or if later amended or supplemented, then as so amended or
      supplemented.

     

    4.4  Assignability.
      This
      Note shall be binding upon the Borrower and its successors and assigns, and
      shall inure to be the benefit of the Holder and its successors and assigns.
      Each
      transferee of this Note must be an “accredited investor” (as defined in Rule
      501(a) of the 1933 Act). Notwithstanding anything in this Note to the contrary,
      this Note may be pledged as collateral in connection with a bona fide
      margin
      account or other lending arrangement.

     

    4.5  Cost
      of Collection.
      If
      default is made in the payment of this Note, the Borrower shall pay the Holder
      hereof costs of collection, including reasonable attorneys’ fees.

     

    4.6  Governing
      Law.
      THIS
      NOTE SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
      OF
      THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
      WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE
      BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES
      FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING
      UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
      TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE
      THE
      DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.
      BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST
      CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON
      THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER
      PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH
      PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR
      PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
      SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT
      PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL
      FEES
      AND EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN
      CONNECTION WITH SUCH DISPUTE.

     

    4.7  Certain
      Amounts.
      Whenever
      pursuant to this Note the Borrower is required to pay an amount in excess of
      the
      outstanding principal amount (or the portion thereof required to be paid at
      that
      time) plus accrued and unpaid interest plus Default Interest on such interest,
      the Borrower and the Holder agree that the actual damages to the Holder from
      the
      receipt of cash payment on this Note may be difficult to determine and the
      amount to be so paid by the Borrower represents stipulated damages and not
      a
      penalty and is intended to compensate the Holder in part for loss of the
      opportunity to convert this Note and to earn a return from the sale of shares
      of
      Common Stock acquired upon conversion of this Note at a price in excess of
      the
      price paid for such shares pursuant to this Note. The Borrower and the Holder
      hereby agree that such amount of stipulated damages is not plainly
      disproportionate to the possible loss to the Holder from the receipt of a cash
      payment without the opportunity to convert this Note into shares of Common
      Stock.

     

    4.8  Allocations
      of Maximum Share Amount and Reserved Amount.
      The
      Maximum Share Amount and Reserved Amount shall be allocated pro rata among
      the
      Holders of Notes based on the principal amount of such Notes issued to each
      Holder. Each increase to the Maximum Share Amount and Reserved Amount shall
      be
      allocated pro rata among the Holders of Notes based on the principal amount
      of
      such Notes held by each Holder at the time of the increase in the Maximum Share
      Amount or Reserved Amount. In the event a Holder shall sell or otherwise
      transfer any of such Holder’s Notes, each transferee shall be allocated a pro
      rata portion of such transferor’s Maximum Share Amount and Reserved Amount. Any
      portion of the Maximum Share Amount or Reserved Amount which remains allocated
      to any person or entity which does not hold any Notes shall be allocated to
      the
      remaining Holders of Notes, pro rata based on the principal amount of such
      Notes
      then held by such Holders.

     

    4.9  Damages
      Shares.
      The
      shares of Common Stock that may be issuable to the Holder pursuant to Sections
      1.3 and 1.4(g) hereof and pursuant to Section 2(c) of the Registration Rights
      Agreement (“Damages
      Shares”)
      shall
      be treated as Common Stock issuable upon conversion of this Note for all
      purposes hereof and shall be subject to all of the limitations and afforded
      all
      of the rights of the other shares of Common Stock issuable hereunder, including
      without limitation, the right to be included in the Registration Statement
      filed
      pursuant to the Registration Rights Agreement. For purposes of calculating
      interest payable on the outstanding principal amount hereof, except as otherwise
      provided herein, amounts convertible into Damages Shares (“Damages
      Amounts”)
      shall
      not bear interest but must be converted prior to the conversion of any
      outstanding principal amount hereof, until the outstanding Damages Amounts
      is
      zero.

     

    4.10  Denominations.
      At the
      request of the Holder, upon surrender of this Note, the Borrower shall promptly
      issue new Notes in the aggregate outstanding principal amount hereof, in the
      form hereof, in such denominations of at least $50,000 as the Holder shall
      request.

     

    4.11  Purchase
      Agreement.
      By its
      acceptance of this Note, each Holder agrees to be bound by the applicable terms
      of the Purchase Agreement.

     

    4.12  Notice
      of Corporate Events.
      Except
      as otherwise provided below, the Holder of this Note shall have no rights as
      a
      Holder of Common Stock unless and only to the extent that it converts this
      Note
      into Common Stock. The Borrower shall provide the Holder with prior notification
      of any meeting of the Borrower’s shareholders (and copies of proxy materials and
      other information sent to shareholders). In the event of any taking by the
      Borrower of a record of its shareholders for the purpose of determining
      shareholders who are entitled to receive payment of any dividend or other
      distribution, any right to subscribe for, purchase or otherwise acquire
      (including by way of merger, consolidation, reclassification or
      recapitalization) any share of any class or any other securities or property,
      or
      to receive any other right, or for the purpose of determining shareholders
      who
      are entitled to vote in connection with any proposed sale, lease or conveyance
      of all or substantially all of the assets of the Borrower or any proposed
      liquidation, dissolution or winding up of the Borrower, the Borrower shall
      mail
      a notice to the Holder, at least twenty (20) days prior to the record date
      specified therein (or thirty (30) days prior to the consummation of the
      transaction or event, whichever is earlier), of the date on which any such
      record is to be taken for the purpose of such dividend, distribution, right
      or
      other event, and a brief statement regarding the amount and character of such
      dividend, distribution, right or other event to the extent known at such time.
      The Borrower shall make a public announcement of any event requiring
      notification to the Holder hereunder substantially simultaneously with the
      notification to the Holder in accordance with the terms of this Section
      4.12.

     

    4.13  Remedies.
      The
      Borrower acknowledges that a breach by it of its obligations hereunder will
      cause irreparable harm to the Holder, by vitiating the intent and purpose of
      the
      transaction contemplated hereby. Accordingly, the Borrower acknowledges that
      the
      remedy at law for a breach of its obligations under this Note will be inadequate
      and agrees, in the event of a breach or threatened breach by the Borrower of
      the
      provisions of this Note, that the Holder shall be entitled, in addition to
      all
      other available remedies at law or in equity, and in addition to the penalties
      assessable herein, to an injunction or injunctions restraining, preventing
      or
      curing any breach of this Note and to enforce specifically the terms and
      provisions thereof, without the necessity of showing economic loss and without
      any bond or other security being required.

     

     

    ARTICLE
      V.  CALL
      OPTION

     

    5.1  Call
      Option.
      Notwithstanding anything to the contrary contained in this Article V, so long
      as
(i) no
      Event of Default or Trading Market Prepayment Event shall have occurred and
      be
      continuing, (ii) the
      Borrower has a sufficient number of authorized shares of Common Stock reserved
      for issuance upon full conversion of the Notes, then at any time after the
      Issue
      Date, and (iii) the
      Common Stock is trading at or below $..05 per share, the Borrower shall have
      the
      right, exercisable on not less than ten (10) Trading Days prior written notice
      to the Holders of the Notes (which notice may not be sent to the Holders of
      the
      Notes until the Borrower is permitted to prepay the Notes pursuant to this
      Section 5.1), to prepay all of the outstanding Notes in accordance with this
      Section 5.1. Any notice of prepayment hereunder (an “Optional
      Prepayment”)
      shall
      be delivered to the Holders of the Notes at their registered addresses appearing
      on the books and records of the Borrower and shall state (1) that the Borrower
      is exercising its right to prepay all of the Notes issued on the Issue Date
      and
      (2) the date of prepayment (the “Optional
      Prepayment Notice”).
      On
      the date fixed for prepayment (the “Optional
      Prepayment Date”),
      the
      Borrower shall make payment of the Optional Prepayment Amount (as defined below)
      to or upon the order of the Holders as specified by the Holders in writing
      to
      the Borrower at least one (1) business day prior to the Optional Prepayment
      Date. If the Borrower exercises its right to prepay the Notes, the Borrower
      shall make payment to the holders of an amount in cash (the “Optional
      Prepayment Amount”)
      equal
      to either (i) 120% (for prepayments occurring within thirty (30) days of
      the Issue Date), (ii) 130% for prepayments occurring between thirty-one
      (31) and sixty (60) days of the Issue Date, or (iii) 140% (for prepayments
      occurring after the sixtieth (60th)
      day
      following the Issue Date), multiplied by the sum of (w) the then outstanding
      principal amount of this Note plus
      (x) accrued and unpaid interest on the unpaid principal amount of this Note
      to the Optional Prepayment Date plus
      (y)
      Default Interest, if any, on the amounts referred to in clauses (w) and (x)
      plus
      (z) any
      amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or
      pursuant to Section 2(c) of the Registration Rights Agreement (the then
      outstanding principal amount of this Note to the date of payment plus
      the
      amounts referred to in clauses (x), (y) and (z) shall collectively be known
      as
      the “Optional
      Prepayment Sum”).
      Notwithstanding notice of an Optional Prepayment, the Holders shall at all
      times
      prior to the Optional Prepayment Date maintain the right to convert all or
      any
      portion of the Notes in accordance with Article I and any portion of Notes
      so
      converted after receipt of an Optional Prepayment Notice and prior to the
      Optional Prepayment Date set forth in such notice and payment of the aggregate
      Optional Prepayment Amount shall be deducted from the principal amount of Notes
      which are otherwise subject to prepayment pursuant to such notice. If the
      Borrower delivers an Optional Prepayment Notice and fails to pay the Optional
      Prepayment Amount due to the Holders of the Notes within two (2) business days
      following the Optional Prepayment Date, the Borrower shall forever forfeit
      its
      right to redeem the Notes pursuant to this Section 5.1.

     

    5.2  Partial
      Call Option.
      Notwithstanding anything to the contrary contained in this Article V, in the
      event that the Average Daily Price of the Common Stock, as reported by the
      Reporting Service, for each day of the month ending on any Determination Date
      is
      below the Initial Market Price, the Borrower may, at its option, prepay a
      portion of the outstanding principal amount of the Notes equal to 104% of the
      principal amount hereof divided by thirty-six (36) plus one month’s interest.
      The term “Initial
      Market Price”
      shall
      mean the volume weighted average price of the Common Stock for the five (5)
      Trading Days immediately preceding the Closing which is $.05. 

     

    

     

    

     

    

     

    

     

    

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF,
      Borrower has caused this Note to be signed in its name by its duly authorized
      officer this 4th
      day of
      August, 2006.

     

    

    M
      POWER ENTERTAINMENT, INC.

    

    

    /s/
      Gary
      F. Kimmons

    By: ______________________________

    Gary
      F.
      Kimmons

    Chief
      Executive Officer

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      A

     

    NOTICE
      OF CONVERSION

     

    (To
      be
      Executed by the Registered Holder

     

    in
      order
      to Convert the Notes)

     

    The
      undersigned hereby irrevocably elects to convert $__________ principal amount
      of
      the Note (defined below) into shares of common stock, par value $.001 per share
      (“Common
      Stock”),
      of M
      Power Entertainment, Inc., a Delaware corporation (the “Borrower”)
      according to the conditions of the convertible Notes of the Borrower dated
      as of
      August 4, 2006 (the “Notes”),
      as of
      the date written below. If securities are to be issued in the name of a person
      other than the undersigned, the undersigned will pay all transfer taxes payable
      with respect thereto and is delivering herewith such certificates. No fee will
      be charged to the Holder for any conversion, except for transfer taxes, if
      any.
      A copy of each Note is attached hereto (or evidence of loss, theft or
      destruction thereof).

     

    The
      Borrower shall electronically transmit the Common Stock issuable pursuant to
      this Notice of Conversion to the account of the undersigned or its nominee
      with
      DTC through its Deposit Withdrawal Agent Commission system (“DWAC
      Transfer”).

     

    Name
      of
      DTC Prime Broker:

    Account
      Number:

     

    In
      lieu
      of receiving shares of Common Stock issuable pursuant to this Notice of
      Conversion by way of a DWAC Transfer, the undersigned hereby requests that
      the
      Borrower issue a certificate or certificates for the number of shares of Common
      Stock set forth below (which numbers are based on the Holder’s calculation
      attached hereto) in the name(s) specified immediately below or, if additional
      space is necessary, on an attachment hereto:

     

    Name:

    Address:

     

    The
      undersigned represents and warrants that all offers and sales by the undersigned
      of the securities issuable to the undersigned upon conversion of the Notes
      shall
      be made pursuant to registration of the securities under the Securities Act
      of
      1933, as amended (the “Act”),
      or
      pursuant to an exemption from registration under the Act.

     

    Date
      of
      Conversion:___________________________

    Applicable
      Conversion Price:____________________

    Number
      of
      Shares of Common Stock to be Issued Pursuant to

    Conversion
      of the Notes:______________

    Signature:___________________________________

    Name:______________________________________

    Address:____________________________________

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    The
      Borrower shall issue and deliver shares of Common Stock to an overnight courier
      not later than three business days following receipt of the original Note(s)
      to
      be converted, and shall make payments pursuant to the Notes for the number
      of
      business days such issuance and delivery is late.

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