Document:

Exhibit 10.6

    
      
        

      

      Exhibit
        10.6

       

      

      

      CERTIFICATE
        OF DESIGNATIONS

      

      of
        the

      

      SERIES
        D CONVERTIBLE PREFERRED STOCK

      

      of

      

      APPLIED
        DIGITAL SOLUTIONS, INC.

      

      

      Scott
        Silverman hereby certifies that: 

      

      A.
         He
        is the
        Chairman, CEO and Acting President of Applied Digital Solutions, Inc. (the
        “Company”),
        a
        Missouri corporation; and 

      

      B.
         Pursuant
        to the authority vested in the Board of Directors of the Company pursuant
        to
        Article Three of the Company’s Fourth Restated Articles of Incorporation, as
        amended, the Board of Directors of the Company has duly adopted the following
        resolutions: 

      

      RESOLVED,
        that the Board of Directors hereby authorizes a series of the Company’s
        previously authorized Preferred Stock, par value $10.00 per share (the
“Preferred
        Stock”),
        and
        hereby states the designation and number of shares, and fixes the relative
        rights, preferences, privileges and restrictions thereof as
        follows:

      

      
        	
                1.

              	
                DESIGNATION.

              

      

      

      The
        designation of this series, which consists of eighteen thousand (18,000)
        shares
        of Preferred Stock, is the “Series D Convertible Preferred Stock” (the
“Series
        D Preferred Stock”).
        The
        face amount of each share of Series D Preferred Stock (each, a “Preferred
        Share”
        and
        collectively, the “Preferred
        Shares”)
        shall
        be One Thousand Dollars ($1,000) (the “Stated
        Value”).
        The
        term of the Series D Preferred Stock shall be perpetual, subject to redemption
        as provided herein.

       

      2.    CERTAIN
        DEFINITIONS.
        

      

      “Bankruptcy
        Law”
        means
        Title 11, United States Code, and the Federal Rules of Bankruptcy
        Procedure, and any similar Federal or state law, rule or regulation providing
        for the relief of debtors.

      

      “Board
        of Directors”
        or
“Board”
        means
        the Company’s Board of Directors, as constituted from time to time.

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      “Business
        Day”
        means
        any day other than a Saturday, a Sunday or a day on which the New York Stock
        Exchange or commercial banks located in New York City are authorized or
        permitted by law to close.

      

      “Cap
        Amount”
        means
        19.99% of the number of shares of Common Stock outstanding on the Initial
        Issue
        Date (subject to adjustment upon a stock split, stock dividend or similar
        event).

      

      “Certificate”
        means
        this Certificate of Designations.

      

      “Change
        of Control”
        means
        the existence or occurrence of any of the following: (a) the sale, conveyance
        or
        disposition of all or substantially all of the assets of the Company; (b)
        the
        effectuation of a transaction or series of transactions in which more than
        fifty
        percent (50%) of the voting power of the Company is disposed of; (c) the
        consolidation, merger or other business combination of the Company with or
        into
        any other entity, immediately following which the prior stockholders of the
        Company fail to own, directly or indirectly, at least fifty percent (50%)
        of the
        surviving entity; (d) a transaction or series of transactions in which any
        Person or group acquires more than fifty percent (50%) of the voting equity
        of
        the Company; and (e) the Continuing Directors do not at any time constitute
        at least a majority of the Board of Directors of the Company. 

      

      “Common
        Stock”
        means
        the Company’s common stock, par value $.01 per share.

      

      “Continuing
        Director”
        means
        at any date a member of the Company’s Board of Directors (i) who was a member of
        such board on the Issue Date or (ii) who was nominated or elected by at least
        a
        majority of the directors who were Continuing Directors at the time of such
        nomination or election or whose election to the Company’s Board of Directors was
        recommended or endorsed by at least a majority of the directors who were
        Continuing Directors at the time of such nomination or election or such lesser
        number comprising a majority of a nominating committee if authority for such
        nominations or elections has been delegated to a nominating committee whose
        authority and composition have been approved by at least a majority of the
        directors who were continuing directors at the time such committee was
        formed.

      

      “Conversion
        Price”
        means,
        (A) with respect to an Initial Preferred Share, the lowest of (i) $4.40 and
        (ii)
        one hundred and five percent (105%) of the Market Price for the Common Stock
        on
        the Initial Issue Date and (B) with respect to a Subsequent Preferred Share,
        as
        determined in accordance with the terms of the Notes, in each case subject
        to
        adjustment as provided herein.

      

      “Default
        Interest Rate”
        means
        the lower of fifteen percent (15%)
        and
        the highest rate permitted by applicable law.

      

      “Effective
        Date”
        means
        the date on which the Registration Statement is declared effective by the
        Securities and Exchange Commission.

      

      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

        

      

      “Exchange
        Act”
        means
        the Securities Exchange Act of 1934, as amended (or any successor act), and
        the
        rules and regulations thereunder (or respective successors
        thereto).

      

      “Five
        Day VWAP”
        means,
        as of a particular date, the average of daily VWAP for each of the five (5)
        consecutive Trading Days occurring immediately prior to (but not including)
        such
        date. 

      

      “Fundamental
        Change”
        means
        any of the following events or circumstances: (i) any material representation
        or
        warranty of the Company set forth in the Securities Purchase Agreement, this
        Certificate or the other Transaction Documents fails to be true and correct
        in
        all material respects as of the Issue Date as if made on such date; (ii)
        the
        Company fails at any time to comply with or perform in all material respects
        all
        of the material agreements, obligations and conditions set forth in the
        Securities Purchase Agreement, this Certificate or the other Transaction
        Documents that are required to be complied with or performed by the Company
        (after giving effect to any grace periods specified therein); (iii) a Change
        of
        Control occurs; or (iv) a Liquidation Event occurs or is publicly announced
        by
        or with respect to the Company.

      

      “Holder”
        means
        any holder of Preferred Shares.

      

      “Initial
        Issue Date”
        means
        the first date on which the Company issues any shares of Series D Preferred
        Stock.

      

      “Initial
        Preferred Shares”
        means
        the shares of Series D Preferred Stock issued on the Initial Issue
        Date.

      

      “Issue
        Date”
        means,
        with respect to a Preferred Share, the date on which the Company issues such
        Preferred Share.

      

      “Junior
        Securities”
        means
        the Common Stock and all other capital stock of the Company that does not
        constitute Pari Passu Securities or Senior Securities.

      

      “Liquidation
        Event”
        means:

      

      (a) that
        the
        Company or any Subsidiary (i) commences a voluntary case or proceeding under
        any
        Bankruptcy Law; (ii) consents to the entry of any order for relief against
        it in
        an involuntary case or proceeding or the commencement of any case against
        it
        under any Bankruptcy Law; (iii) consents to the appointment of a custodian
        of it
        or for any substantial part of its property; (iv) makes a general assignment
        for
        the benefit of its creditors; (v) files a petition in bankruptcy or answer
        or
        consent seeking reorganization or relief; or (vi) consents to the filing
        of such
        petition or the appointment of or taking possession by a custodian;
        or

      

      (b) that
        a
        court of competent jurisdiction has entered an order or decree under any
        Bankruptcy Law that: (i) is for relief against the Company or any Subsidiary,
        or
        adjudicates the

       

      
        
          
          

        

        
          -3-

          
            

          

        

        
          
          

        

      

      Company
        or any Subsidiary to be insolvent or bankrupt; (ii) appoints a custodian
        or
        receiver for the Company or any Subsidiary, or for any substantial part of
        its
        property; or (iii) orders the winding up or liquidation of the Company or
        any
        Subsidiary, and such order or decree remains unstayed and in effect for at
        least
        thirty (30) days.

      

      “Liquidation
        Preference”
        with
        respect to a Preferred Share shall mean an amount equal to the Stated Value
        of
        such Preferred Share, plus any amounts owed by the Company to the holder
        thereof
        with respect to such Preferred Share. 

      

      “Mandatory
        Conversion Condition”
        means,
        as of a particular date, each of the following: 

      

      (i)
         the
        Reserved Amount (as defined in the Securities Purchase Agreement) is not
        less
        than (x) the number of Conversion Shares issuable upon the conversion in
        full of
        the Preferred Shares then outstanding (at the Conversion Price in effect
        on such
        date and without regard to any limitation on such conversion) plus (y) the
        number of Warrant Shares issuable upon the exercise in full of the Warrants
        (without regard to any limitation on such exercise); 

      

      (ii) the
        Common Stock is authorized for quotation on the Nasdaq SmallCap Market or
        Nasdaq
        National Market or listed on the New York Stock Exchange;

      

      (iii) the
        Registration Statement is effective and available for the resale of the
        Registrable Securities by each Holder or such securities are eligible for
        resale
        to the public pursuant to Rule 144(k) under the Securities Act of 1933, as
        amended (the “Securities
        Act”);
        

      

      (iv) a
        Fundamental Change (as defined herein) has not occurred and is not continuing,
        and no event has occurred that with the giving of notice or passage of time,
        or
        both, would constitute a Fundamental Change; and

      

      (v) the
        Market Price is greater than $200% of the Conversion Price on the Issue Date
        (subject to adjustment for stock splits, stock dividends and similar events).
        

      

      “Market
        Price”
        means,
        as of a particular date with respect to a particular security, the
        lesser of (i) the average of the daily VWAP for such security on each Trading
        Day occurring during the ten (10) Trading Day period ending on (and including)
        the Trading Day immediately preceding
        such
        date
        and (ii)
        the
daily
        VWAP for such security
        on the
        Trading Day immediately preceding such date.
        

      

      “Note”
        and
“Notes”
        have
        the respective meanings specified in the Securities Purchase
        Agreement.

      

      “Pari
        Passu Securities”
        means
        any securities ranking by their terms pari
        passu
        with the
        Series D Preferred Stock in respect of redemption or distribution upon
        liquidation.

      

      
        
          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

      “Principal
        Market”
        means
        the principal securities exchange or market on which the Common Stock is
        listed
        or traded.

      

      “Pro
        Rata Share”
        means,
        with respect to a Holder, the ratio determined by dividing (i) the number
        of
        Preferred Shares purchased by a Holder on the Closing Date by (ii) the aggregate
        number of Preferred Shares purchased by all of the Holders on the Closing
        Date.

      

      “Registrable
        Securities”
        means
        the Conversion Shares and the Warrant Shares, any other shares of Common
        Stock
        issuable pursuant to the terms of the Warrants, and any shares of capital
        stock
        issued or issuable from time to time (with any adjustments) in replacement
        of,
        in exchange for or otherwise in respect of the Conversion Shares or the Warrant
        Shares; provided,
        however,
        that
“Registrable
        Securities”
        shall
        not include any such shares that have been sold to the public pursuant to
        the
        Registration Statement or Rule 144.

      

      “Registration
        Rights Agreement”
        means
        the agreement pursuant to which the Company has agreed to register
        the resale of shares of Common Stock issuable upon conversion of the Series
        D
        Preferred Stock.

       

      “Registration
        Statement”
        has the
        meaning set forth in the Registration Rights Agreement.

      

      “Securities
        Purchase Agreement”
        means
        the agreement pursuant to which the Company has agreed to issue the Preferred
        Shares.

      

      “Senior
        Securities”
        means
        (i) any debt issued or assumed by the Company and (ii) any securities of
        the
        Company which, in either such case, by their terms have a preference over
        the
        Series D Preferred Stock in respect of redemption or distribution upon
        liquidation.

      

      “Shareholder
        Approval”
        means
        the affirmative vote of the holders of a majority of the votes cast at a
        meeting
        of shareholders approving the issuance of Common Stock pursuant to the Preferred
        Stock and the Warrants in excess of the Cap Amount.

      

      “Stock
        Payment Condition”
        means,
        as of a particular date, each of the following: 

      

      (i)
         the
        Reserved Amount (as defined in the Securities Purchase Agreement) is not
        less
        than (x) the number of Conversion Shares issuable upon the conversion in
        full of
        the Preferred Shares then outstanding (at the Conversion Price in effect
        on such
        date and without regard to any limitation on such conversion) plus (y) the
        number of Warrant Shares issuable upon the exercise in full of the Warrants
        (without regard to any limitation on such exercise) plus (z) the number of
        shares of Common Stock issuable upon satisfaction of the Stock Payment
        Conditions; 

      

      (ii) the
        Common Stock is authorized for quotation on the Nasdaq SmallCap Market or
        Nasdaq
        National Market or listed on the New York Stock Exchange;

      

      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

      

      (iii) the
        Registration Statement is effective and available for the resale of the
        Registrable Securities by the Holder or such securities are eligible for
        resale
        to the public pursuant to Rule 144(k) under the Securities Act of 1933;
        and

      

      (iv) a
        Fundamental Change (as defined herein) has not occurred and is not continuing,
        and no event has occurred that with the giving of notice or passage of time,
        or
        both, would constitute a Fundamental Change.

      

      “Subsequent
        Preferred Shares”
        means
        the shares of Series D Preferred Stock issued on the Exchange Date.

       

      “Trading
        Day”
        means
        any day on which the Common Stock is purchased and sold on the principal
        securities exchange or market on which the Common Stock is then listed or
        traded.

      

      “Transaction
        Documents”
        has the
        meaning given to such term in the Securities Purchase Agreement.

      

      “VWAP”
        on a
        Trading Day means the volume weighted average price of the Common Stock for
        such
        Trading Day on the Principal Market as reported by Bloomberg Financial Markets
        or, if Bloomberg Financial Markets is not then reporting such prices, by
        a
        comparable reporting service of national reputation selected by the Holders
        and
        reasonably satisfactory to the Company. If VWAP cannot be calculated for
        the
        Common Stock on such Trading Day on any of the foregoing bases, then the
        Company
        shall submit such calculation to an independent investment banking firm of
        national reputation reasonably acceptable to the Investors, and shall cause
        such
        investment banking firm to perform such determination and notify the Company
        and
        the Investors of the results of determination no later than two (2) Business
        Days from the time such calculation was submitted to it by the Company. All
        such
        determinations shall be appropriately adjusted for any stock dividend, stock
        split or other similar transaction during such period.

      

      “Warrants”
        means
        the warrants issued by the Company pursuant to the Securities Purchase
        Agreement.

      

      All
        definitions contained in this Certificate are equally applicable to the singular
        and plural forms of the terms defined. The words “hereof”, “herein” and
“hereunder” and words of similar import referring to this Certificate refer to
        this Certificate as a whole and not to any particular provision of this
        Certificate. 

      

      3.    PRIORITY
        IN LIQUIDATION.

      

      Upon
        the
        occurrence of a Liquidation Event, no distribution shall be made to the holders
        of any shares of Junior Securities unless each Holder shall have received
        the
        Liquidation Preference with respect to each Preferred Share then held by
        such
        Holder. In the event that upon the occurrence of a Liquidation Event, the
        assets
        legally available for distribution to the Holders and the holders of Pari
        Passu
        Securities are insufficient to pay the Liquidation Preference with respect
        to
        all of the

       

      
        
          
          

        

        
          -6-

          
            

          

        

        
          
          

        

      

      outstanding
        Preferred Shares and the preferential amounts payable to such holders, the
        entire assets of the Company shall be distributed ratably among the Preferred
        Shares and the shares of Pari Passu Securities in proportion to the ratio
        that
        the preferential amount payable on each such share (which shall be the
        Liquidation Preference in the case of a Preferred Share) bears to the aggregate
        preferential amount payable on all such shares.

      

      4.    DIVIDENDS.

      

      (a)
         Dividend
        Rate.
        Each
        Holder shall be entitled to receive, to the extent permitted by applicable
        law,
        in preference to the payment of any dividend on any class or series of Junior
        Securities, cumulative dividends (“Dividends”)
        on
        each Preferred Share in an amount equal to, on an annualized basis, the Stated
        Value of such Preferred Share times
        six
        percent (6.0%). Dividends shall accrue, whether or not earned or declared,
        on
        each Preferred Share from the Closing Date through the date on which such
        Preferred Share is redeemed or converted in accordance with the terms hereof;
        provided,
        however,
        that
        (i) any Preferred Share that is redeemed or converted, including without
        limitation pursuant to a Mandatory Conversion (as defined below), prior to
        the
        twenty-four (24) month anniversary of the date on which such Preferred Share
        is
        issued, shall be deemed, as of the date of such redemption or conversion,
        to
        have accrued Dividends in an amount equal to the amount of Dividends that
        would
        have accrued had such Preferred Share remained outstanding through such
        twenty-four month anniversary (“Make-Whole
        Dividends”)
        and
        (ii) the amount of Dividends, including Make-Whole Dividends, accrued and
        deemed
        to be accrued hereunder shall be paid as provided herein on the applicable
        Mandatory Redemption Date or Conversion Date, as the case may be (“Make-Whole
        Payment Date”).
        Accrued Dividends on a Preferred Share shall be payable quarterly in arrears
        on
        each January 1, April 1, July 1, and October 1 of each calendar year, commencing
        on July 1, 2005 (each, together with each Mandatory Redemption Date or
        Conversion Date a “Dividend
        Payment Date”).
        Dividends shall be computed on the basis of a 365-day year for the actual
        number
        of days elapsed. 

      

      (b) Dividend
        Payments.
        The
        Company shall pay Dividends (including any Make-Whole Dividends) in
        cash
        by wire transfer of immediately available funds; provided,
        however,
        that the
        Company may elect, subject to the satisfaction of all of the Stock Payment
        Conditions in accordance with paragraph (c) below, to pay all or a portion
        of
        such Dividends in shares of Common Stock (the “Common
        Stock Dividend Option”).
        Dividends that are due in cash and which are not paid within five (5) Business
        Days of the applicable Dividend Payment Date or Make-Whole Payment Date shall
        bear interest until paid at the Default Interest Rate.

      

      (c) Conditions
        to Dividend Payment in Common Stock.
        The
        Company shall be entitled to exercise the Common Stock Dividend Option with
        respect to a Dividend Payment Date (or any Make-Whole Payment Date) only
        if, on
        such date and on each of the twenty (20) Trading Days immediately preceding
        such
        date, all of the Stock Payment Conditions are satisfied in full. In
        the
        event that any Common Stock Payment Condition is not satisfied as of the
        applicable Dividend
        Payment Date or Make-Whole Payment Date
        and each
        such Trading Day, the Company shall not be permitted to exercise the Common
        Stock Dividend
        Option
        and must pay
        all
        amounts due on

       

      
        
          
          

        

        
          -7-

          
            

          

        

        
          
          

        

      

      such
        Dividend Payment Date or Make-Whole Payment Date in
        cash
        by wire transfer of immediately available funds.

      

      (d)
         Common
        Stock Dividend Notice.
        In
        order to exercise the Common Stock Dividend Option with respect to a Dividend
        Payment Date, the Company must deliver, on or before the fifteenth
        (15th)
        calendar day immediately prior to such date, written notice to each Holder
        stating that the Company wishes to exercise such option (a “Common
        Stock Dividend Notice”).
        If
        the Company wishes to exercise the Common Stock Dividend Option with respect
        to
        less than all of the Dividends due on a Dividend Payment Date, then the
        Company’s exercise of Common Stock Dividend Option (and the delivery of shares
        of Common Stock pursuant thereto) shall be allocated among the Holders on
        a
pro
        rata
        basis in
        accordance with the number of Preferred Shares held by each Holder. In order
        to
        exercise the Common Stock Dividend Option with respect to a Make-Whole Payment
        Date, the Company must deliver a Common Stock Dividend Notice on or before
        the
        related Conversion Date or Mandatory Redemption Date, as the case may be.
        A
        Common Stock Dividend Notice, once delivered by the Company, shall be
        irrevocable, unless the Company is not permitted to exercise the Common Stock
        Dividend Option in accordance with the terms of Section
        4(c).
        In the
        event that the Company does not deliver a Common Stock Dividend Notice on
        or
        before the date on which it is required to do so by this paragraph (d), the
        Company will be deemed to have elected to pay the related Dividend in cash.
        

      

      (e)
         Delivery
        of Shares.
        On or
        before the third (3rd)
        Business Day following a Dividend Payment Date or Mandatory Redemption Date
        with
        respect to which the Company has validly exercised the Common Stock Dividend
        Option (each a “Common
        Stock Dividend Delivery Date”),
        the
        Company must deliver to each Holder a number of shares of Common Stock equal
        to
        the amount of Dividends payable with respect to such Holder’s Preferred Shares
divided
        by
        ninety-five percent (95%) of the Five Day VWAP in effect on such Dividend
        Payment Date or Mandatory Redemption Date, as the case may be. The Company
        must
        deliver such shares of Common Stock to such Holder in accordance with the
        provisions of paragraph 5(d) below, with the Common Stock Dividend Delivery
        Date
        or Mandatory Redemption Date, as the case may be being deemed the Delivery
        Date
        and, in the event of the Company’s failure to effect such delivery on the
        applicable Delivery Date therefor (determined in accordance with paragraph
        5(d)), such Holder shall have the remedies specified in paragraph 5(e) below.
        

      

      5.    CONVERSION.

      

      (a) Right
        to Convert.
        Each
        Holder shall have the right to convert, at any time and from time to time
        after
        the Issue Date, all or any part of the Preferred Shares held by such Holder
        into
        such number of fully paid and non-assessable shares (“Conversion
        Shares”)
        of the
        Common Stock as is determined in accordance with the terms hereof (a
“Conversion”).

      

      (b) Conversion
        Notice.
        In
        order to convert Preferred Shares, a Holder shall send to the Company by
        facsimile transmission, at any time prior to 6:00 p.m., eastern time, on
        the
        date on which such Holder wishes to effect such Conversion (the “Conversion
        Date”),
        (i) a
        notice of conversion (a “Conversion
        Notice”),
        in
        substantially the form of Exhibit A hereto, to the Company

       

      
        
          
          

        

        
          -8-

          
            

          

        

        
          
          

        

      

      stating
        the number of Preferred Shares to be converted and a calculation of the number
        of shares of Common Stock issuable upon such Conversion and (ii) a copy of
        the
        certificate or certificates representing the Preferred Shares being converted.
        The Holder shall thereafter send the original of the Conversion Notice and
        of
        such certificate or certificates to the Company. The Company shall issue
        a new
        certificate for Preferred Shares to the Holder in the event that less than
        all
        of the Preferred Shares represented by a certificate are converted; provided,
        however,
        that
        the failure of the Company to deliver such new certificate shall not affect
        the
        ability of the Holder to submit a further Conversion Notice with respect
        to such
        Preferred Shares and, in such case, the Holder shall be deemed to have submitted
        the original of such new certificate at the time that it submits such further
        Conversion Notice. Except as otherwise provided herein, upon delivery of
        a
        Conversion Notice by a Holder in accordance with the terms hereof, such Holder
        shall, as of the applicable Conversion Date, be deemed for all purposes to
        be
        the record owner of the Common Stock to which such Conversion Notice relates.
        In
        the case of a dispute between the Company and a Holder as to the calculation
        of
        the Conversion Price or the number of Conversion Shares issuable upon a
        Conversion (including without limitation the calculation of any adjustment
        to
        the Conversion Price pursuant to Section 6 below), the Company shall issue
        to
        such Holder the number of Conversion Shares that are not disputed within
        the
        time periods specified in paragraph 5(d) below and shall submit the disputed
        calculations to an independent registered public accounting firm of national
        recognition within two (2) Business Days of receipt of such Holder’s Conversion
        Notice. The Company shall cause such accountant to calculate the Conversion
        Price as provided herein and to notify the Company and such Holder of the
        results in writing no later than five (5) Business Days following the Company’s
        receipt of such Holder’s Conversion Notice (such 5th
        Business
        Day being referred to herein as the “Disputed
        Share Calculation Date”).
        Such
        accountant’s calculation shall be deemed conclusive absent manifest error. The
        fees of any such accountant shall be borne by the party whose calculations
        were
        most at variance with those of such accountant.

      

      (c) Number
        of Conversion Shares.
        The
        number of Conversion Shares to be delivered by the Company pursuant to a
        Conversion shall be determined by dividing (i) the
        aggregate Liquidation Preference of the Preferred
        Shares to be converted by (ii) the Conversion Price in effect on the applicable
        Conversion Date. 

      

      (d) Delivery
        of Conversion Shares.
        Upon
        receipt of a fax copy of a Conversion Notice from a Holder, the Company shall,
        no later than the close of business on the earlier to occur of (i) the third
        (3rd) Business Day following the Conversion Date set forth in such Conversion
        Notice and (ii) the date after the date on which the Company receives the
        original Conversion Notice and Preferred Shares (the “Delivery
        Date”),
        issue
        and deliver or caused to be delivered to such Holder the number of Conversion
        Shares determined pursuant to paragraph 5(c) above, provided,
        however,
        that
        any Conversion Shares that are the subject of a Dispute Procedure shall be
        delivered no later than the close of business on the third (3rd) Business
        Day
        following the determination made pursuant thereto. The
        Company shall effect delivery of Conversion Shares to such Holder by, as
        long as
        the Transfer Agent participates in FAST and no restrictive legend is required
        by
        the terms of this Certificate or the Securities Purchase Agreement to be
        set
        forth on such Conversion Shares, crediting the account of such Holder or
        its
        nominee at DTC (as specified in the applicable Conversion Notice) with the
        number of Conversion Shares required to be delivered, no

       

      
        
          
          

        

        
          -9-

          
            

          

        

        
          
          

        

      

      later
        than the close of business on such Delivery Date. In the event that the Transfer
        Agent is not a participant in FAST or if a Holder so specifies in a Conversion
        Notice or otherwise in writing on or before the Conversion Date, the Company
        shall effect delivery of Conversion Shares by delivering to such Holder or
        its
        nominee physical certificates representing such Conversion Shares, no later
        than
        the close of business on such Delivery Date. If
        any
        Conversion would create a fractional Conversion Share, such fractional
        Conversion Share shall be disregarded and the number of Conversion Shares
        issuable upon such Conversion, in the aggregate, shall be the next closest
        number of Conversion Shares. Conversion Shares delivered to a Holder shall
        not
        contain any restrictive legend as long as the resale of such Conversion Shares
        (x) is covered by an effective Registration Statement and the Holder represents
        in writing to the Company that such resale has been or promptly will be made
        pursuant to such Registration Statement, (y) has been made pursuant to Rule
        144
        under the Securities Act and customary documentation regarding such resale
        has
        been provided to the Company, or (z) may be made pursuant to Rule 144(k)
        under the Securities Act or any successor rule or provision.

       

      (e) Taxes.
        The
        Company shall pay any and all taxes or duties that may be imposed with respect
        to the issuance and delivery of the Conversion Shares upon a
        Conversion.

      

      (f) Failure
        to Deliver Conversion Shares.

      

      (i)
         In
        the
        event that,
        for any
        reason,
        a Holder
        has not received certificates (without any restrictive legend in the
        circumstances described in clause (x), (y) or (z) of paragraph 5(d) above)
        representing the number of Conversion Shares specified in the applicable
        Conversion Notice on or before the Delivery Date therefor (a “Conversion
        Default”),
        and
        such failure to deliver certificates continues for ten (10) Business Days
        following the delivery of written notice thereof from such Holder (such tenth
        Business Day being referred to herein as the “Conversion
        Default Date”),
        the
        Company shall pay to such Holder payments (“Conversion
        Default Payments”)
        in the
        amount of (A) “N”multiplied
        by
        (B) the
        aggregate Stated Value of the Preferred Shares which are the subject of such
        Conversion Default multiplied
        by
        (C) one
        percent (1%), where “N” equals the number of days elapsed between the Conversion
        Default Date and the date on which all of the certificates (without any
        restrictive legend in the circumstances described in clause (x), (y) or (z)
        of
        paragraph 5(d) above) representing such Conversion Shares are issued and
        delivered to such Holder. Amounts payable hereunder shall be paid to the
        Holder
        in immediately available funds on or before the fifth (5th) Business Day
        of the
        calendar month immediately following the calendar month in which such amounts
        have accrued.

      

      (ii)
         In
        addition to any other remedies provided herein, each Holder shall have the
        right
        to pursue actual damages for the Company’s failure to issue and deliver
        Conversion Shares on the applicable Delivery Date (including, without
        limitation, damages relating to any purchase of shares of Common Stock by
        such
        Holder to make delivery on a sale lawfully effected in anticipation of receiving
        Conversion Shares upon Conversion, such damages to be in an amount equal
        to (A)
        the aggregate amount paid by such Holder for the shares of Common Stock so
        purchased minus
        (B) the
        aggregate Conversion Price for such Conversion Shares), and such Holder shall
        have the right to pursue all other remedies available to it at law or in
        equity
        (including, without limitation, a decree of specific performance and/or
        injunctive relief).

      

      
        
          
          

        

        
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      6.    CONVERSION
        LIMITATIONS.

      

      (a) In
        no
        event shall a Holder be permitted to convert any Preferred Shares to the
        extent
        that, upon the Conversion of such Preferred Shares, the number of shares
        of
        Common Stock beneficially owned by such Holder (other than shares of Common
        Stock issuable upon conversion of such Preferred Shares or which would otherwise
        be deemed beneficially owned except for being subject to a limitation on
        conversion or exercise analogous to the limitation contained in this
Section
        6(a)),
        when
        added to the number of shares of Common Stock issuable upon the Conversion
        of
        such Preferred Shares, would exceed 4.99% of the number of shares of Common
        Stock then issued and outstanding. As used herein, beneficial ownership shall
        be
        determined in accordance with Section 13(d) of the Exchange Act and the rules
        thereunder. To the extent that the limitation contained in this paragraph
        applies (and without limiting any rights the Company may otherwise have),
        the
        Company may rely on the Holder’s determination of whether Preferred Shares are
        convertible pursuant to the terms hereof, the Company having no obligation
        whatsoever to verify or confirm the accuracy of such determination, and the
        submission of a Conversion Notice by the Holder shall be deemed to be the
        Holder’s representation that the Preferred Shares specified therein are
        convertible pursuant to the terms hereof. Nothing contained herein shall
        be
        deemed to restrict the right of a Holder to convert Preferred Shares at such
        time as the Conversion thereof will not violate the provisions of this
        paragraph. The limitation contained in this paragraph shall cease to apply
        to a
        Holder (x) upon sixty (60) days’ prior written notice from such Holder to the
        Company or (y) immediately upon written notice from such Holder to the Company
        at any time after the public announcement or other disclosure of a Major
        Transaction or a Change of Control.

       

      (b)
         Unless
        Shareholder Approval has been obtained or such approval is no longer required
        under the applicable listing requirements of the Nasdaq Stock Market, in
        no
        event shall a Holder be permitted to convert any Preferred Shares to the
        extent
        that, upon the Conversion of such Preferred Shares, the number of Conversion
        Shares that such Holder would receive upon such Conversion, when added to
        (i)
        the number of Conversion Shares previously received by such Holder pursuant
        to
        the provisions of this Certificate plus
        (ii) the
        number of Warrant Shares previously received by such Holder pursuant to such
        Holder’s Warrant(s) plus
        (iii)
        such Holder’s pro
        rata
        share of
        the shares of Common Stock issued by the Company to Perceptis, L.P. in
        connection with the acquisition of Instantel Inc., would exceed the
        product of (A) the Cap Amount multiplied
        by
        (B) a
        fraction, the numerator of which is the aggregate Stated Value of the Preferred
        Shares purchased by such Investor and the denominator of which is the aggregate
        Stated Value of all Preferred Shares purchased by the Investors (such product,
        the “Allocation
        Amount”).
        In
        the event that any Investor shall sell or otherwise transfer any of such
        Investor’s Preferred Shares, the shares of Common Stock constituting such
        transferring Investor’s Allocation Amount shall be allocated between the
        transferring Investor and transferee pro
        rata
        in
        proportion to the Stated Value of the Preferred Shares transferred to such
        transferee and the Stated Value of the Preferred Shares retained by such
        transferring Investor. In the event that any Investor shall convert all of
        such
        Investor’s Preferred Shares into a number of Conversion Shares and Warrant
        Shares that, in the aggregate, is less than such Investor’s Allocation Amount,
        then

       

      
        
          
          

        

        
          -11-

          
            

          

        

        
          
          

        

      

      the
        difference between such Investor’s Allocation Amount and the number of
        Conversion Shares and Warrant Shares actually issued to such Investor shall
        be
        allocated to the remaining Investors on a pro
        rata
        basis in
        proportion to number of Registrable Securities then issuable to each Investor.
        In the event that, at any time, the sum of (i) the number of Conversion Shares
        issuable under the Preferred Shares owned by a Holder (without regard to
        any
        restrictions on such issuance contained in this Certificate) plus (ii) the
        number of Warrant Shares issuable upon exercise of the Warrant(s) owned by
        such
        Holder (without regard to any restrictions on such exercise contained in
        the
        Warrants), plus (iii) the number of Conversion Shares and Warrant Shares
        previously issued to such Holder, exceeds eighty percent (80%) of such Holder’s
        Allocation Amount, the Company shall, upon the written request of such Holder,
        hold as promptly as reasonably practicable a special meeting of its stockholders
        for the purpose of obtaining, and use its best efforts to obtain, Shareholder
        Approval. In the event that the Company does not obtain Shareholder Approval
        at
        such meeting, the Company shall continue to use its best efforts to seek
        such
        approval as soon as practicable after such meeting but no less frequently
        than
        annually thereafter.

      

      7.     ADJUSTMENT
        TO CONVERSION PRICE.
        The
        Conversion Price shall be subject to adjustment from time to time as provided
        in
        this Section 7. In the event that any adjustment of the Conversion Price
        required herein results in a fraction of a cent or fraction of a share, as
        applicable, the Conversion Price shall be rounded up or down to the nearest
        cent
        or share, as applicable.

      

      (a) Subdivision
        or Combination of Common Stock.
        If the
        Company, at any time after the Issue Date, subdivides (by any stock split,
        stock
        dividend, recapitalization, reorganization, reclassification or otherwise)
        the
        outstanding shares of Common Stock into a greater number of shares, then
        after
        the date of record for effecting such subdivision, the Conversion Price in
        effect immediately prior to such subdivision will be proportionately reduced.
        If
        the Company, at any time after the Issue Date, combines (by reverse stock
        split,
        recapitalization, reorganization, reclassification or otherwise) the outstanding
        shares of Common Stock into a smaller number of shares, then, after the date
        of
        record for effecting such combination, the Conversion Price in effect
        immediately prior to such combination will be proportionally
        increased.

      

      (b)
         Distributions.
        If the
        Company shall declare or make any distribution of its assets (or rights to
        acquire its assets) to holders of Common Stock (including any dividend or
        distribution to the Company’s stockholders in cash or shares (or rights to
        acquire shares) of capital stock of a subsidiary) (a “Distribution”),
        the
        Company shall deliver written notice of such Distribution (a “Distribution
        Notice”)
        to
        each Holder at least fifteen (15) Business Days prior to the earlier to occur
        of
        (i) the record date for determining stockholders entitled to such Distribution
        (the “Record
        Date”)
        and
        (ii) the date on which such Distribution is made (the “Distribution
        Date”).
        In
        the Distribution Notice, the Company shall indicate that each Holder shall
        be
        entitled to receive either (A) the same amount and type of assets being
        distributed in such Distribution as though the Holder were a holder on the
        Record Date therefor of a number of shares of Common Stock into which the
        Preferred Shares held by such Holder are convertible as of such Record Date
        (such number of shares to be determined at the Conversion Price then in effect
        and without giving effect to any limitations on such conversion) or (B) a
        reduction in the

       

      
        
          
          

        

        
          -12-

          
            

          

        

        
          
          

        

      

      Conversion
        Price as of the Record Date therefor, such reduction to be effected by reducing
        the Conversion Price in effect on the Business Day immediately preceding
        the
        Record Date by an amount equal to the fair market value of the assets to
        be
        distributed divided
        by
        the
        number of shares of Common Stock as to which such Distribution is to be made,
        such fair market value to be reasonably determined in good faith by the
        independent members of the Company’s Board of Directors. If the Company does not
        notify the Holders of whether it has elected clause (A) or (B) in the preceding
        sentence on or prior to the Distribution Date, the Company shall be deemed
        to
        have elected clause (A) of the preceding sentence. 

       

      (c) Dilutive
        Issuances.
        

      

      (i) Adjustment
        Upon Dilutive Issuance.
        If, at
        any time after the Closing Date, the Company issues or sells or, pursuant
        to
        subparagraph (iii) of this paragraph (c), is deemed to have issued or sold,
        any
        shares of Common Stock for per share consideration less than the Conversion
        Price on the date of such issuance or sale (or deemed issuance or sale) (a
        “Dilutive
        Issuance”),
        then
        the Conversion Price shall be adjusted as follows:

       

      (A) If
        such
        Dilutive Issuance occurs prior to the Effective Date, then effective immediately
        upon the Dilutive Issuance, the Conversion Price shall be adjusted so as
        to
        equal the value of the consideration received or receivable by the Company
        (on a
        per share basis) for the additional shares of Common Stock so issued, sold
        or
        deemed issued or sold in such Dilutive Issuance (which, in the case of a
        deemed
        issuance or sale, shall be calculated in accordance with subparagraph (iii)
        below). 

       

      (B) If
        such
        Dilutive Issuance occurs on or after the Effective Date, then effective
        immediately upon the Dilutive Issuance, the Conversion Price shall be adjusted
        so as to equal an amount determined by multiplying such Conversion Price
        by the
        following fraction:

       

      N0
        +
        N1

      N0
        +
        N2

      

      where:

       

      N0
        =  
        the number of shares of Common Stock outstanding immediately prior to the
        issuance, sale or deemed issuance or sale of such additional shares of Common
        Stock in such Dilutive Issuance (without taking into account any shares of
        Common Stock issuable upon conversion, exchange or exercise of any securities
        or
        other instruments which are convertible into or exercisable or exchangeable
        for
        Common Stock (“Convertible
        Securities”)
        or
        options, warrants or other rights to purchase or subscribe for Common Stock
        or
        Convertible Securities (“Purchase
        Rights”));

       

      
        
          
          

        

        
          -13-

          
            

          

        

        
          
          

        

      

      N1
        =   the number of shares of Common Stock which the aggregate
        consideration, if any, received or receivable by the Company for the total
        number of such additional shares of Common Stock so issued, sold or deemed
        issued or sold in such Dilutive Issuance (which, in the case of a deemed
        issuance or sale, shall be calculated in accordance with subparagraph (iii)
        below) would purchase at the Conversion Price in effect immediately prior
        to
        such Dilutive Issuance; and

       

      N2
        =
        the
        number of such additional shares of Common Stock so issued, sold or deemed
        issued or sold in such Dilutive Issuance.

       

      Notwithstanding
        the foregoing, no adjustment shall be made pursuant to paragraph (A) or (B)
        above if such adjustment would result in an increase in the Conversion
        Price.

       

      (ii) Adjustment
        Upon Below Market Issuance.
        If, at
        any time after the Closing Date, the Company issues or sells, or in accordance
        with subparagraph (iii) of this paragraph (c), is deemed to have issued or
        sold,
        any shares of Common Stock for a consideration per share less than the Market
        Price for the Common Stock on the date of such issuance or sale (or deemed
        issuance or sale) (a “Below
        Market Issuance”),
        then
        effective immediately upon the Below Market Issuance, the Conversion Price
        shall
        be adjusted so as to equal an amount determined by multiplying such Conversion
        Price by the following fraction:

       

      N0
        +
        N1

      N0
        +
        N2

      

      where:

       

      N0
        =  
        the number of shares of Common Stock outstanding immediately prior to the
        issuance, sale or deemed issuance or sale of such additional shares of Common
        Stock in such Below Market Issuance (without taking into account any shares
        of
        Common Stock issuable upon conversion, exchange or exercise of any Convertible
        Securities or Purchase Rights);

       

      N1
        =   the number of shares of Common Stock which the aggregate
        consideration, if any, received or receivable by the Company for the total
        number of such additional shares of Common Stock so issued, sold or deemed
        issued or sold in such Below Market Issuance (which, in the case of a deemed
        issuance or sale, shall be calculated in accordance with subparagraph (iii)
        below) would purchase at the Market Price for the Common Stock in effect
        on the
        date of such Below Market Issuance; and

       

      
        
          
          

        

        
          -14-

          
            

          

        

        
          
          

        

      

      N2
        =
        the
        number of such additional shares of Common Stock so issued, sold or deemed
        issued or sold in such Below Market Issuance.

       

      Notwithstanding
        the foregoing, no adjustment shall be made pursuant to this paragraph (c)(ii)
        if
        such adjustment would result in an increase in the Conversion Price. In the
        event that the Company effects an issuance that is both a Dilutive Issuance
        and
        a Below Market Issuance, the Conversion Price will be adjusted to the lower
        of
        the prices calculated pursuant to subparagraphs (i) and (ii) of this paragraph
        (c).

       

      (iii) Effect
        On Conversion Price Of Certain Events.
        For
        purposes of determining the adjusted Conversion Price under subparagraph
        (i) or
        (ii) of this paragraph (c), the following will be applicable:

       

      (A) Issuance
        of Purchase Rights.
        If the
        Company issues or sells any Purchase Rights, whether or not immediately
        exercisable, and the price per share for which Common Stock is issuable upon
        the
        exercise of such Purchase Rights (and the price of any conversion of Convertible
        Securities, if applicable) is less than either or both of the Conversion
        Price
        and the Market Price for the Common Stock in effect on the date of issuance
        or
        sale of such Purchase Rights, then the maximum total number of shares of
        Common
        Stock issuable upon the exercise of all such Purchase Rights (assuming full
        conversion, exercise or exchange of Convertible Securities, if applicable)
        shall, as of the date of the issuance or sale of such Purchase Rights, be
        deemed
        to be outstanding and to have been issued and sold by the Company for 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 Purchase Rights” shall
        be determined by dividing (x) the total amount, if any, received or receivable
        by the Company as consideration for the issuance or sale of all such Purchase
        Rights, plus the minimum aggregate amount of additional consideration, if
        any,
        payable to the Company upon the exercise of all such Purchase Rights, plus,
        in
        the case of Convertible Securities issuable upon the exercise of such Purchase
        Rights, the minimum aggregate amount of additional consideration payable
        upon
        the conversion, exercise or exchange thereof (determined in accordance with
        the
        calculation method set forth in subparagraph (iii)(B) below) at the time
        such
        Convertible Securities first become convertible, exercisable or exchangeable,
        by
        (y) the maximum total number of shares of Common Stock issuable upon the
        exercise of all such Purchase Rights (assuming full conversion, exercise
        or
        exchange of Convertible Securities, if applicable). No further adjustment
        to the
        Conversion Price shall be made upon the actual issuance of such Common Stock
        upon the exercise of such Purchase Rights or upon the conversion, exercise
        or
        exchange of Convertible Securities issuable upon exercise of such Purchase
        Rights.

       

      (B) Issuance
        of Convertible Securities.
        If the
        Company issues or sells any Convertible Securities, whether or not immediately
        convertible, exercisable or exchangeable, and the price per share for which
        Common Stock is issuable upon such conversion, exercise or exchange is less
        than
        either or both of the Conversion Price and the Market Price for the Common
        Stock
        in effect on the date of issuance or sale of such

       

      
        
          
          

        

        
          -15-

          
            

          

        

        
          
          

        

      

      Convertible
        Securities, then the maximum total number of shares of Common Stock issuable
        upon the conversion, exercise or exchange of all such Convertible Securities
        shall, as of the date of the issuance or sale of such Convertible Securities,
        be
        deemed to be outstanding and to have been issued and sold by the Company
        for
        such price per share. If the Convertible Securities so issued or sold do
        not
        have a fluctuating conversion or exercise price or exchange ratio, then for
        the
        purposes of the immediately preceding sentence, the “price per share for which
        Common Stock is issuable upon such conversion, exercise or exchange” shall be
        determined by dividing (x) the total amount, if any, received or receivable
        by
        the Company 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 Company upon the conversion, exercise or exchange thereof
        (determined in accordance with the calculation method set forth in this
        subparagraph (iii)(B)) at the time such Convertible Securities first become
        convertible, exercisable or exchangeable, by (y) the maximum total number
        of
        shares of Common Stock issuable upon the exercise, conversion or exchange
        of all
        such Convertible Securities. If the Convertible Securities so issued or sold
        have a fluctuating conversion or exercise price or exchange ratio (a
“Variable
        Rate Convertible Security”)
        (provided, however, that if the conversion or exercise price or exchange
        ratio
        of a Convertible Security may fluctuate solely as a result of provisions
        designed to protect against dilution, such Convertible Security shall not
        be
        deemed to be a Variable Rate Convertible Security), then for purposes of
        the
        first sentence of this subparagraph (B), the “price per share for which Common
        Stock is issuable upon such conversion, exercise or exchange” shall be deemed to
        be the lowest price per share which would be applicable (assuming all holding
        period and other conditions to any discounts contained in such Variable Rate
        Convertible Security have been satisfied) if the conversion price of such
        Variable Rate Convertible Security on the date of issuance or sale thereof
        were
        seventy-five percent (75%) of the actual conversion price on such date (the
        “Assumed
        Variable Market Price”),
        and,
        further, if the conversion price of such Variable Rate Convertible Security
        at
        any time or times thereafter is less than or equal to the Assumed Variable
        Market Price last used for making any adjustment under this paragraph (c)
        with
        respect to any Variable Rate Convertible Security, the Conversion Price in
        effect at such time shall be readjusted to equal the Conversion Price which
        would have resulted if the Assumed Variable Market Price at the time of issuance
        of the Variable Rate Convertible Security had been seventy-five percent (75%)
        of
        the actual conversion price of such Variable Rate Convertible Security existing
        at the time of the adjustment required by this sentence. No further adjustment
        to the Conversion Price shall be made upon the actual issuance of such Common
        Stock upon conversion, exercise or exchange of such Convertible
        Securities. 

       

      (C) Change
        in Option Price or Conversion Rate.
        If,
        following an adjustment to the Conversion Price upon the issuance of Purchase
        Rights or Convertible Securities pursuant to a Dilutive Issuance or a Below
        Market Issuance, there is a change at any time in (x) the amount of additional
        consideration payable to the Company upon the exercise of any Purchase Rights;
        (y) the amount of additional consideration, if any, payable to the Company
        upon
        the conversion, exercise or exchange of any Convertible Securities; or (z)
        the
        rate at which any Convertible Securities are convertible into or exercisable
        or

       

      
        
          
          

        

        
          -16-

          
            

          

        

        
          
          

        

      

      exchangeable
        for Common Stock (in each such case, other than under or by reason of provisions
        designed to protect against dilution), then in any such case, the Conversion
        Price in effect at the time of such change shall be readjusted to the Conversion
        Price which would have been in effect at such time had such Purchase Rights
        or
        Convertible Securities still outstanding provided for such changed additional
        consideration or changed conversion, exercise or exchange rate, as the case
        may
        be, at the time initially issued or sold.

       

      (D) Calculation
        of Consideration Received.
        If any
        Common Stock, Purchase Rights or Convertible Securities are issued or sold
        for
        cash, the consideration received therefor will be the amount received by
        the
        Company therefor. In case any Common Stock, Purchase Rights or Convertible
        Securities are issued or sold for a consideration part or all of which shall
        be
        other than cash, including in the case of a strategic or similar arrangement
        in
        which the other entity will provide services to the Company, purchase services
        from the Company or otherwise provide intangible consideration to the Company,
        the amount of the consideration other than cash received by the Company
        (including the net present value of the consideration other than cash expected
        by the Company for the provided or purchased services) shall be the fair
        market
        value of such consideration, except where such consideration consists of
        publicly traded securities, in which case the amount of consideration received
        by the Company will be the Market Price thereof on the date of receipt. In
        case
        any Common Stock, Purchase Rights or Convertible Securities are issued in
        connection with any merger or consolidation in which the Company is the
        surviving corporation, the amount of consideration therefor will be deemed
        to be
        the fair market value of such portion of the net assets and business of the
        non-surviving corporation as is attributable to such Common Stock, Purchase
        Rights or Convertible Securities, as the case may be. Notwithstanding anything
        else herein to the contrary, if Common Stock, Purchase Rights or Convertible
        Securities are issued or sold in conjunction with each other as part of a
        single
        transaction or in a series of related transactions, a Holder may elect to
        determine the amount of consideration deemed to be received by the Company
        therefor by deducting the fair value of any type of securities (the
“Disregarded
        Securities”)
        issued
        or sold in such transaction or series of transactions. If a Holder makes
        an
        election pursuant to the immediately preceding sentence, no adjustment to
        the
        Conversion Price shall be made pursuant to this paragraph (c) for the issuance
        of the Disregarded Securities or upon any conversion, exercise or exchange
        thereof. The independent members of the Company’s Board of Directors shall
        calculate reasonably and in good faith, using standard commercial valuation
        methods appropriate for valuing such assets, the fair market value of any
        consideration other than cash or securities.

       

      (E) Issuances
        Without Consideration Pursuant to Existing Securities.
        If the
        Company issues (or becomes obligated to issue) shares of Common Stock pursuant
        to any anti-dilution or similar adjustments (other than as a result of stock
        splits, stock dividends and the like) contained in any Convertible Securities
        or
        Purchase Rights outstanding as of the date hereof, then all shares of Common
        Stock so issued shall be deemed to have been issued for no consideration.
        

       

      
        
          
          

        

        
          -17-

          
            

          

        

        
          
          

        

      

      (iv) Exceptions
        To Adjustment Of Conversion Price.
        Notwithstanding the foregoing, no adjustment to the Conversion Price shall
        be
        made pursuant to this paragraph (c) upon the issuance of any Excluded
        Securities. For purposes hereof, “Excluded Securities” means (I) securities
        purchased under this Agreement; (II) securities issued or issuable pursuant
        to
        the terms of the Certificate of Designations or upon exercise of the Warrants
        or
        the VeriChip Warrant; (III) the 2004 Warrants and securities issued or issuable
        thereunder; (IV) shares of Common Stock (or the common stock of any Subsidiary)
        issuable or issued to (x) employees or directors of the Company or any such
        Subsidiary from time to time either directly or upon the exercise of options,
        in
        such case granted or to be granted in the discretion of the Company’s or such
        Subsidiary’s Board of Directors (or a duly authorized committee thereof) as an
        inducement to join the Company or such Subsidiary or pursuant to one or more
        stock option plans, restricted stock plans or stock purchase plans in effect
        as
        of the Execution Date or adopted after the Execution Date by the Company’s or
        such Subsidiary’s Board of Directors (or a duly authorized committee thereof) or
        by the Company’s shareholders, (y) vendors, service providers or consultants,
        either directly or pursuant to options or warrants to purchase Common Stock
        that
        are outstanding on the Execution Date or issued thereafter, provided such
        issuances are approved by the Company’s or such Subsidiary’s Board of Directors
        (or a duly authorized committee thereof) or by the Company’s or such
        Subsidiary’s shareholders, or (z) third parties, either directly or pursuant to
        options or warrants to purchase Common Stock, in connection with the settlement
        of a bona fide litigation approved by the Company’s or such Subsidiary’s Board
        of Directors; (V) shares of Common Stock issued in connection with any stock
        split, stock dividend or recapitalization of the Company or any of its
        Subsidiaries; (VI) shares of Common Stock issued in connection with the
        acquisition by the Company or any Subsidiary of any corporation or other
        entity
        occurring after the Effective Date; (VII) shares of Common Stock issued pursuant
        to the terms of any convertible securities of the Company that are outstanding
        on the Execution Date and disclosed on Schedule
        3.5
        hereof;
        (VIII) shares issued to Persons with whom the Company or any of its Subsidiaries
        is entering into a joint venture, strategic alliance or other commercial
        relationship in connection with the operation of the Company’s or such
        Subsidiary’s business and not in connection with a transaction the primary
        purpose of which is to raise equity capital; and (IX) shares issued to a
        Subsidiary pursuant to a share exchange.

       

      (v) Notice
        Of Adjustments.
        Upon
        the occurrence of an adjustment to the Conversion Price pursuant to this
        paragraph (c) or any change in the number or type of stock, securities and/or
        other property issuable upon conversion of the Preferred Shares, the Company,
        at
        its expense, shall promptly compute such adjustment or readjustment or change
        and prepare and furnish to each Holder a notice (an “Adjustment
        Notice”)
        setting forth such adjustment or readjustment or change and showing in detail
        the facts upon which such adjustment or readjustment or change is based and
        shall, on or before the time that it delivers an Adjustment Notice, publicly
        disclose the contents thereof. The failure of the Company to deliver an
        Adjustment Notice shall not affect the validity of any such
        adjustment.

       

      (d)
         Major
        Transactions.
        In the
        event of a merger, consolidation, business combination, tender offer, exchange
        of shares, recapitalization, reorganization, redemption or other similar
        event,
        as a result of which shares of Common Stock shall be changed into the same
        or a
        different number of shares of the same or another class or classes of stock
        or
        securities or

       

      
        
          
          

        

        
          -18-

          
            

          

        

        
          
          

        

      

      other
        assets of the Company or another entity or the Company shall sell all or
        substantially all of its assets (each of the foregoing being a “Major
        Transaction”),
        the
        Company will give each Holder at least ten (10) Trading Days’ written notice
        prior to the earlier of (I) the closing or effectiveness of such Major
        Transaction and (II) the record date for the receipt of such shares of stock
        or
        securities or other assets, and: (i) each Holder shall be permitted to convert
        the Preferred Shares held by such Holder in whole or in part at any time
        prior
        to the record date for the receipt of such consideration and shall be entitled
        to receive, for each share of Common Stock issuable to such Holder upon such
        conversion, the same per share consideration payable to the other holders
        of
        Common Stock in connection with such Major Transaction, and (ii) if and to
        the
        extent that a Holder retains any Preferred Shares following such record date,
        the Company will cause the surviving or, in the event of a sale of assets,
        purchasing entity, as a condition precedent to such Major Transaction, to
        assume
        the obligations of the Company with respect to the Series D Preferred Stock,
        with such adjustments to the Conversion Price and the securities covered
        hereby
        as may be necessary in order to preserve the economic benefits of the Series
        D
        Preferred Stock to such Holder.

      

      (e)
         Adjustments;
        Additional Shares, Securities or Assets.
        In the
        event that at any time, as a result of an adjustment made pursuant to this
        Section 7, each Holder shall, upon conversion of such Holder’s Preferred Shares,
        become entitled to receive securities or assets (other than Common Stock)
        then,
        wherever appropriate, all references herein to shares of Common Stock shall
        be
        deemed to refer to and include such shares and/or other securities or assets;
        and thereafter the number of such shares and/or other securities or assets
        shall
        be subject to adjustment from time to time in a manner and upon terms as
        nearly
        equivalent as practicable to the provisions of this Section 7. 

      

      8.    MANDATORY
        REDEMPTION.

      

      (a)
         Mandatory
        Redemption.
        In the
        event that a Fundamental Change occurs, each Holder shall have the right
        to
        require the Company to redeem all or any portion of the Preferred Shares
        held by
        such Holder (a “Mandatory
        Redemption”)
        at the
        Mandatory Redemption Price (as defined herein) applicable to such Mandatory
        Redemption. In order to exercise its right to effect a Mandatory Redemption,
        a
        Holder must deliver a written notice (a “Mandatory
        Redemption Notice”)
        to the
        Company at any time on or before 6:00 p.m. (eastern time) on the third
        (3rd)
        Business Day following the later to occur of (i) last Business Day on which
        the
        Fundamental Change to which such Mandatory Redemption Notice relates is
        continuing or, if such Fundamental Change constitutes a Change of Control,
        at
        any time following the consummation of such Change of Control and (ii) the
        Business Day on which the Holder is notified of such Fundamental Change in
        writing by the Company. The Mandatory Redemption Notice shall specify the
        effective date of such Mandatory Redemption (the “Mandatory
        Redemption Date”)
        and
        the number of such shares to be redeemed. 

      

      (b) Mandatory
        Redemption Price.
        The
“Mandatory
        Redemption Price”
        shall
        be equal to the greater of (A) the Stated Value of the Preferred Shares being
        redeemed multiplied
        by
        one
        hundred and twenty percent (120%) plus
        accrued
        and unpaid Dividends thereon and (B) the product

       

      
        
          
          

        

        
          -19-

          
            

          

        

        
          
          

        

      

      of
        the
        number of Conversion Shares issuable upon Conversion of the Preferred Shares
        being redeemed (without regard to any limitation on Conversion set forth
        in this
        Certificate) times
        the
        Market Price for the Common Stock then in effect.

      

      (c) Payment
        of Mandatory Redemption Price.
        The
        Company shall pay the Mandatory Redemption Price to the Holder exercising
        its
        right to redemption on the Mandatory Redemption Date. If Company fails to
        pay
        the Mandatory Redemption Price to the Holder on or before the Mandatory
        Redemption Date, the Holder shall be entitled to interest thereon, from and
        after the Mandatory Redemption Date until the Mandatory Redemption Price
        has
        been paid in full, at an annual rate equal to the Default Interest
        Rate.

      

      8A.   MANDATORY
        CONVERSION.

      

      (a) Mandatory
        Conversion.
        The
        Company shall have the right, exercisable at any time after the thirtieth
        (30th)
        day
        following the Effective Date, in the event that all of the Mandatory Conversion
        Conditions are satisfied on each of any fifteen (15) consecutive Trading
        Days
        occurring after the Effective Date (a “Mandatory
        Conversion Period”),
        to
        require Conversion of the Preferred Stock (a “Mandatory
        Conversion”).
        In
        the event of a Mandatory Conversion, the Company and each Holder shall follow
        the procedures for Conversion set forth in Section 3 above, with the Mandatory
        Conversion Date (as defined below) deemed to be the Conversion Date for purposes
        of Section 5, except that the Holder shall not be required to send a Conversion
        Notice as contemplated by paragraph (b) of Section 5.

      

      (b) Mandatory
        Conversion Notice; Number of Conversion Shares.
        In
        order to effect a Mandatory Conversion hereunder, the Company must deliver
        to
        the Holder written notice thereof (a “Mandatory
        Conversion Notice”)
        on or
        before 5:00 p.m. (eastern time) on the Business Day immediately following
        the
        last Trading Day of the Mandatory Conversion Period (such Business Day, the
        “Mandatory
        Conversion Date”).
        A
        Mandatory Conversion Notice shall specify the aggregate Stated Value of the
        Preferred Shares that the Company has elected to submit to a Mandatory
        Conversion; provided,
        however, that
        to
        the extent that the aggregate number of Conversion Shares issuable pursuant
        to
        such Mandatory Conversion would exceed (i) the aggregate trading volume for
        the
        Common Stock on the Principal Market during the twenty (20) Trading Days
        immediately prior to the Mandatory Conversion Date and/or (ii) any limitation
        on
        Conversion contained herein would be violated (in either such case, the
“Maximum
        Mandatory Conversion Amount”),
        then
        only such portion of the Preferred Stock as would not result in the Maximum
        Mandatory Conversion Amount being exceeded shall be converted on such Mandatory
        Conversion Date. The Stated Value of the Preferred Stock subject to a Mandatory
        Conversion shall be allocated among the holders of the Preferred Shares on
        a
pro
        rata basis
        in
        proportion to the number of Preferred Shares owned by such Holders at such
        time.
        Notwithstanding the delivery by the Company of a Mandatory Conversion Notice,
        nothing contained herein shall be deemed to limit in any way (x) the right
        of a
        Holder to convert such Holder’s Preferred Shares prior to the Mandatory
        Conversion Date, in which case the number of Preferred Shares so converted
        shall
        be deemed to have been converted pursuant to the applicable Mandatory
        Conversion, or (y) the availability of any and all remedies that are provided
        to
        a Holder hereunder, including without limitation in the event

       

      
        
          
          

        

        
          -20-

          
            

          

        

        
          
          

        

      

      that
        the
        Company fails to deliver Conversion Shares upon a Mandatory Conversion as
        required by the terms of Section 5 hereof, provided,
        that,
        in
        the event of such failure, the Mandatory Conversion shall be terminated with
        respect to a Holder upon the delivery of written notice thereof by such Holder
        to the Company, and the Company shall forfeit its right to require a Mandatory
        Conversion of the Preferred Stock thereafter. In the event of multiple Mandatory
        Conversions, at least sixty (60) days must elapse between Mandatory Conversion
        Dates.

      

      9.    MISCELLANEOUS.

      

      (a) Transfer
        of Preferred Shares.
        Upon
        notice to the Company, a Holder may sell or transfer all or any portion of
        the
        Preferred Shares to any person or entity as long as such sale or transfer
        is the
        subject of an effective registration statement under the Securities Act or
        is
        exempt from registration thereunder and otherwise is made in accordance with
        the
        terms of the Securities Purchase Agreement. From and after the date of such
        sale
        or transfer, the transferee thereof shall be deemed to be a Holder. Upon
        any
        such sale or transfer, the Company shall, promptly following the return of
        the
        certificate or certificates representing the Preferred Shares that are the
        subject of such sale or transfer, issue and deliver to such transferee a
        new
        certificate in the name of such transferee. In connection with any transfer
        of
        shares to the Company pursuant to any redemption provided for in this
        Certificate, the Holder shall deliver to the Company the stock certificates
        representing the Series D Preferred Stock at the closing of such redemption.
        Upon payment, the shares of Series D Preferred Stock shall be cancelled,
        and the
        Holder shall be entitled only to the redemption payment provided for by this
        Certificate.

       

      (b) Notices.
        Any
        notice, demand or request required or permitted to be given by the Company
        or a
        Holder pursuant to the terms of this Agreement shall be in writing and shall
        be
        deemed delivered (i) when delivered personally or by verifiable facsimile
        transmission, unless such delivery is made on a day that is not a Business
        Day,
        in which case such delivery will be deemed to be made on the next succeeding
        Business Day, (ii) on the next Business Day after timely delivery to an
        overnight courier and (iii) on
        the
        Business Day actually received if deposited
        in the U.S. mail (certified or registered mail, return receipt requested,
        postage prepaid), addressed as follows:

      

      If
        to
        the Company:

      

      Applied
        Digital Solutions Inc

      1690
        S.
        Congress Avenue, Suite 200 

      Delray
        Beach, FL 33445

      Attn:  
        Scott
        R.
        Silverman

      Tel:   
        561-805-8000

      Fax:  
        561-805-0002 

       

      
        
          
          

        

        
          -21-

          
            

          

        

        
          
          

        

      

      with
        a copy to:

       

      Holland
        & Knight LLP

      701
        Brickell Avenue, Suite 3000

      Miami,
        Florida 33131

      Mailing
        Address: P.O. Box 015441, Florida, 33101

      Attn:  
        Harvey
        A.
        Goldman, Esq.

      Tel:   
        305-374-8500

      Fax:  
        305-789-7799

      

      and
        if to
        the Holder, to such address for the Holder as shall be designated by the
        Holder
        in writing to the Company.

      

      (c)
         Lost
        or Stolen Certificate.
        Upon
        receipt by the Company of evidence of the loss, theft, destruction or mutilation
        of a certificate representing Preferred Shares, and (in the case of loss,
        theft
        or destruction) of indemnity or security reasonably satisfactory to the Company
        and the Transfer Agent, and upon surrender and cancellation of such certificate
        if mutilated, the Company shall execute and deliver to the Holder a new
        certificate identical in all respects to the original certificate.

      

      (d) No
        Voting Rights.
        Except
        as provided by applicable law and paragraph 9(g) below, the Holders of the
        Preferred Shares shall have no voting rights with respect to the business,
        management or affairs of the Company; provided that the Company shall provide
        each Holder with prior notification of each meeting of stockholders (and
        copies
        of proxy statements and other information sent to such stockholders).
Any
        action that may be taken at any annual or special meeting of the Holders
        of
        Preferred Shares may be taken without a meeting, without prior notice, and
        without a vote if a consent in writing setting forth the action so taken
        is
        signed by all of the holders of such outstanding stock.

      

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

      

      
        
          
          

        

        
          -22-

          
            

          

        

        
          
          

        

      

      (f) Failure
        or Delay not Waiver.
        No
        failure or delay on the part of a Holder in the exercise of any power, right
        or
        privilege hereunder shall operate as a waiver thereof, nor shall any single
        or
        partial exercise of any such power, right or privilege preclude other or
        further
        exercise thereof or of any other right, power or privilege. Notwithstanding
        anything herein to the contrary, and to the extent permitted by Missouri
        law,
        any power, right, privilege, provision or preference set forth in this
        Certificate may be waived, either prospectively or retroactively and either
        generally or in a particular instance, by the written consent or vote of
        the
        holders of two-thirds of the outstanding shares of the Series D Preferred
        Stock.
        Any such waiver shall bind all current and future holders of shares of the
        Series D Preferred Stock.

       

      (g) Protective
        Provisions.

      

      So
        long
        as shares of Series D Preferred Stock are outstanding, the Company shall
        not,
        without first obtaining the approval of the Holders of at least two-thirds
        (2/3)
        of outstanding shares of Series D Preferred Stock:

      

      (i) alter,
        change, waive, modify or amend (x) the terms of the Series D Preferred Stock
        in
        any way or (y) the terms of any other capital stock of the Company so as
        to
        affect adversely the Series D Preferred Stock;

      

      (ii) create
        any new class or series of capital stock having a preference over or ranking
        pari passu with the Series D Preferred Stock as to redemption or distribution
        of
        assets upon a Liquidation Event or any other liquidation, dissolution or
        winding
        up of the Company;

      

      (iii) increase
        the authorized number of shares of Series D Preferred Stock;

      

      (iv)
         re-issue
        any shares of Series D Preferred Stock which have been converted or redeemed
        in
        accordance with the terms hereof;

      

      (v) issue
        any
        Pari Passu Securities or Senior Securities (other than Permitted
        Debt);

      

      (vi)
         redeem,
        or declare, pay or make any provision for any dividend or distribution with
        respect to Junior Securities;

      

      (vii) issue
        any
        Series D Preferred Stock except pursuant to the terms of the Securities Purchase
        Agreement;

      

      (viii)
         increase
        the par value of the Common Stock;

      

      (ix) enter
        into any agreement, commitment, understanding or other arrangement to take
        any
        of the foregoing actions; or

      

      (x) cause
        or
        authorize any subsidiary of the Company to engage in any of the foregoing
        actions.

      

      
        
          
          

        

        
          -23-

          
            

          

        

        
          
          

        

      

      In
        the
        event that the Holders of at least two-thirds of the outstanding shares of
        Series D Preferred Stock agrees to allow the Company to alter, waive or change
        the rights, preferences or privileges of the shares of Series D Preferred
        Stock
        pursuant to the terms hereof, then the Company will deliver notice of such
        approved change to the holders of the Series D Preferred Stock that did not
        agree to such alteration or change (the “Dissenting
        Holders”)
        and
        the Dissenting Holders shall have the right for a period of thirty (30) days
        following such delivery to convert their Preferred Shares pursuant to the
        terms
        hereof as they existed prior to such alteration or change, or to continue
        to
        hold such Preferred Shares. No such change shall be effective to the extent
        that, by its terms, it applies to less than all of the Holders of Preferred
        Shares then outstanding.

      

      

      [Remainder
        of Page Intentionally Left Blank]

      
        
          
             

          

          
          

        

        
          -24-

          
            

          

        

        
          
          

        

      

      IN
        WITNESS WHEREOF, the Company has executed this Certificate of Designation
        as of
        the 10 day of June, 2005.

      

      

      

      APPLIED
        DIGITAL SOLUTIONS, INC.

      

      

      By:
        /s/
        Scott Silverman

           Name:
        Scott Silverman

            
Title:
        CEO

      

      
        
          
             

          

          
          

        

        
          -25-

          
            

          

        

        
          
          

          
          

        

      

      EXHIBIT
        A

      

      NOTICE
        OF
        CONVERSION

      

      The
        undersigned hereby elects to convert shares of Series D Convertible Preferred
        Stock (the “Preferred Stock”), represented by stock certificate
        No(s).                   
         (the
        “Preferred Stock Certificates”), into shares of common stock (“Common Stock”) of
APPLIED
        DIGITAL SOLUTIONS, INC. according
        to the terms and conditions of the Certificate of Designation relating to
        the
        Preferred Stock (the “Certificate of Designation”), as of the date written
        below. Capitalized terms used herein and not otherwise defined shall have
        the
        respective meanings set forth in the Certificate of Designation. Unless
        otherwise specified in writing to the Company, the undersigned represents
        to the
        Company that the shares of Common Stock covered by this notice have been
        or will
        be sold pursuant to the terms of an effective registration
        statement.

      

      Date
        of
        Conversion:                                                                                            
        

      

      Stated
        Value of

      Preferred
        Stock to be
        Converted:                                                                      
        

      

      Applicable
        Conversion
        Price:                                                                            
        

      

      Number
        of
        Shares of

      Common
        Stock to be
        Issued:                                                                              
        

      

      Name
        of
        Holder:                                                                                                  
        

      

      Address:                                                                                                         
        

      

                                                                                                                        

      

                                                                                                                        

       

      Signature:                                                                                                              
        

                             Name:

                             Title:

      

      Holder
        Requests Delivery to be made:
        (check
        one)

      

      
        	
                o

              	
                By
                  Delivery of Physical Certificates to the Above
                  Address

              

      

      

      
        	
                o

              	
                Through
                  Depository Trust Corporation

              

      

      (Account
                                                         
        )Exhibit 10.7

    
      
        

      

      Exhibit
        10.7

       

      

      THIS
        NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
        (THE
“SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE OFFERED
        OR SOLD UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
        STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
        AN
        EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE
        SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE.
        NOTWITHSTANDING THE FOREGOING BUT SUBJECT TO COMPLIANCE WITH THE REQUIREMENTS
        OF
        THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, THIS NOTE (I) MAY
        BE
        PLEDGED OR HYPOTHECATED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
        OTHER
        LOAN SECURED BY THIS NOTE AND (II) MAY BE TRANSFERRED OR ASSIGNED TO AN
        AFFILIATE OF THE HOLDER HEREOF.

      

      THIS
        NOTE WAS ISSUED AT A DISCOUNT TO ITS FACE AMOUNT AND SO THE AMOUNT OWED
        HEREUNDER MAY BE LESS THAN THE PRINCIPAL AMOUNT INDICATED
        BELOW.

      

      

      APPLIED
        DIGITAL SOLUTIONS, INC.

      

      FORM
        OF SENIOR UNSECURED NOTE

      

      

      New
        York, New York                                                                            $_______________

      Issue
        Date: June 10, 2005

      

      

      FOR
        VALUE RECEIVED, APPLIED
        DIGITAL SOLUTIONS, INC., a
        Delaware corporation (the
        “Company”),
        hereby unconditionally promises to pay to the order of
        _____________________________________, or its permitted successors or assigns
        (the “Holder”),
        the
        principal sum of up to _______________________________ in same day funds,
        on or
        before the Maturity Date. All payments hereunder shall be made to the Holder
        unconditionally in full without set-off, counterclaim or, to the extent
        permitted by applicable law, other defense, and free and clear of, and without
        reduction for or on account of, any present and future taxes or withholdings,
        and all liabilities with respect thereto.

      

      The
        Company has issued this Senior Unsecured Note (this “Note”)
        pursuant to, and this Note is subject to the terms and conditions of, a certain
        Securities Purchase Agreement, dated as of June 9, 2005 (the “Securities
        Purchase Agreement”).

       

      The
        following additional terms shall apply to this Note:

      

      1.    DEFINITIONS.

       

      “Board
        of Directors”
        means
        the Company’s board of directors.

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      “Business
        Day”
        means
any
        day
        other than a Saturday, a Sunday or a day on which the New York Stock Exchange
        is
        closed or on which banks are authorized by law to close in New York, New
        York.

      

      “Common
        Stock”
        means
        the common stock, par value $0.01 per share, of the Company.

      

      “Default
        Interest Rate”
        means
        the lower of fifteen percent (15%) and the maximum rate permitted by applicable
        law.

       

      “Exchange
        Condition”
        means,
        as of a particular date, each of the following: 

      

      (i)       
        the
        Reserved Amount is equal to the number of shares of Common Stock that the
        Company is required to reserve by the Securities Purchase Agreement as of
        the
        Exchange Date (after giving effect to the Exchange); 

      

      (ii)      
        the
        Common Stock is authorized for quotation on the Nasdaq SmallCap Market or
        Nasdaq
        National Market or listed on the New York Stock Exchange;

      

      (iii)  the
        Initial Registration Statement is effective and available for the resale
        of
        Registrable Securities as required by the Registration Rights Agreement (and
        no
        more than one (1) Allowed Delay (as defined in the Registration Rights
        Agreement) has occurred since the effectiveness of such Registration Statement);
        and

      

      (iv)      
        an
        Event
        of Default (as defined herein) has not occurred and is not continuing, and
        no
        event has occurred that with the giving of notice or passage of time, or
        both,
        would constitute an Event of Default.

      

      “Floor
        Price”
        means
        $3.25 (subject to adjustment for stock splits, stock dividends and similar
        events affecting the Common Stock).

      

      “Governmental
        Authority”
        means
        any nation or government, any state, provincial or political subdivision
        thereof
        and any entity exercising executive, legislative, judicial, regulatory or
        administrative functions of or pertaining to government, including without
        limitation any stock exchange, securities market or self-regulatory
        organization.

      

      “Issue
        Date”
        means
        the date on which this Note is issued pursuant to the Securities Purchase
        Agreement.

       

      “Liquidation
        Event”
        means
        the (i) institution of any insolvency or bankruptcy proceedings, or any
        receivership, liquidation, reorganization or other similar proceedings in
        connection therewith, relative to the Company,
        any of
        the Company’s Subsidiaries
        or to
        its or their creditors, as such, or to its or their assets, or (ii) the
        dissolution or other winding up, whether voluntary or involuntary and whether
        or
        not involving insolvency or bankruptcy proceedings, of the Company
        or any
        of the Company’s Subsidiaries that had gross revenues, during

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      the
        twelve month period immediately preceding such dissolution or winding up,
        of at
        least $3,000,000,
        (iii)
        any assignment for the benefit of creditors or any marshalling of the material
        assets or material liabilities of the Company
        or any
        of the Company’s Subsidiaries, or (iv) the admission, in writing, by the Company
        of its inability to pay its debts as such debts become due or the failure
        of the
        Company generally to pay its debts as they come due.

      

      “Maturity
        Date”
        means
        the six (6) month anniversary of the Issue Date (or, if such day is not a
        Business Day, on the next succeeding Business Day); provided,
        however,
        that the
        Company shall have the option to extend the Maturity Date by up to an additional
        three (3) months if, on any of the ten (10) Trading Days ending on and including
        the original Maturity Date, the Market Price is less than the Floor Price.
        In
        order to extend the Maturity Date, the Company must deliver written notice
        of
        such extension to the Holder on or before the tenth (10th)
        Business Day prior to the original Maturity Date (such notice to specify
        the
        number of days by which the Company wishes to extend the Maturity
        Date).

      

      “Maximum
        Price”
        means
        two hundred percent (200%) of the Conversion Price for the Initial Preferred
        Shares (subject to adjustment for stock splits, stock dividends and similar
        events affecting the Common Stock).

      

      “Person”
        means
        any individual, corporation, trust, association, company, partnership, joint
        venture, limited liability company, joint stock company, Governmental Authority
        or other entity.

      

      All
        definitions contained in this Note are equally applicable to the singular
        and
        plural forms of the terms defined. The words “hereof”, “herein” and “hereunder”
        and words of similar import referring to this Note refer to this Note as
        a whole
        and not to any particular provision of this Note. Any capitalized term used
        but
        not defined herein has the meaning specified in the Securities Purchase
        Agreement.

      

      2.    INTEREST;
        ORIGINAL ISSUE DISCOUNT; EXCHANGE FOR PREFERRED STOCK.

       

      (a)    Other
        than as specifically provided herein, no interest shall accrue on this
        Note.

      

      (b)    This
        Note
        was issued at a price equal to 93.45% of its face amount (such percentage,
        the
“Original
        Principal Amount”).
        Principal of this Note shall accrue on a daily basis from the Issue Date
        through
        the earlier of the date on which this Note is paid in full or the Exchange
        Date
        (as defined below). The amount of accrued principal of this Note on any date
        (the “Accrued
        Principal Amount”)
        shall
        be equal to the Original Principal Amount increased by 1.092% for each thirty
        day period from and including the Issue Date through and including such date
        (pro rated for partial periods), it being intended that the Accrued Principal
        Amount shall be equal to the face amount of this Note on the six-month
        anniversary of the Issue Date (and shall continue to accrue if not paid on
        such
        six-month anniversary).

      

      (c)    On
        the
        Maturity Date, the Company shall pay to the Holder the Accrued Principal
        Amount
        as of such date in cash or, at the option of the Company, exchange shares
        of the
        Company’s Series D Convertible Preferred Stock (“Preferred
        Stock”)
        for
        this Note (the

      
        
          
             

          

          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      “Exchange”).
        In
        order for the Company to effect an Exchange, all of the Exchange Conditions
        must
        be satisfied on the Maturity Date (as defined below) and on each of the twenty
        (20) Trading Days immediately preceding such date, and the Company must notify
        the Holder in writing (an “Exchange
        Notice”)
        on or
        before the Maturity Date that it wishes to do so. An Exchange Notice shall
        be
        irrevocable once it is delivered to the Holder. In the event that the Company
        delivers an Exchange Notice to the Holder, the Company will, on the tenth
        (10th)
        Trading
        Day following the Maturity Date (the “Exchange
        Date”),
        deliver to the Holder, in exchange for this Note, shares of Preferred Stock
        with
        a Stated Value equal to the Accrued Principal Amount as of the Exchange Date.
        If
        (i) the Company elects to pay the Accrued Principal Amount in cash, (ii)
        the
        Company does not deliver an Exchange Notice to the Holder on or before the
        tenth
        (10th)
        Business Day prior to the Maturity Date, (iii) the Exchange Conditions are
        not
        satisfied as required by this paragraph 2(c), or (iv) the Conversion Price
        on
        the Maturity Date is lower than the Floor Price, the Company will pay such
        amount in cash on the Maturity Date by wire transfer of immediately available
        funds to the Holder. Amounts payable hereunder that are not paid when due
        shall
        accrue interest at the Default Interest Rate.

      

      (d)    The
        Conversion Price applicable to Preferred Stock issued pursuant to the Exchange
        will be equal to one hundred and five percent (105%) of the Market Price
        on the
        Maturity Date; provided,
        however,
        that in
        no event shall the Conversion Price be lower than the Floor Price or greater
        than the Maximum Price. In the event that the Conversion Price is greater
        than
        the Maximum Price on the Maturity Date (and as long as the Company has not
        extended the Maturity Date as specified in the definition thereof), the Company
        may extend the Maturity Date by up to an additional ninety (90) days by
        delivering written notice of such extension to the Holder (such notice to
        specify the number of days by which the Company wishes to extend the Maturity
        Date) on or before the original Maturity Date; if the Company does not extend
        the Maturity Date on or before the original Maturity Date, or if on the Maturity
        Date as so extended the Conversion Price is greater than the Maximum Price,
        the
        Company must either (A) pay the Accrued Principal Amount to the Holder in
        cash
        on the Maturity Date or (B) deliver shares of Preferred Stock in exchange
        for
        this Note as required by paragraph 2(b) above with a Conversion Price equal
        to
        the Maximum Price.

      

      3.    PREPAYMENT.

      

      In
        the
        event that during
        any period of ten (10) consecutive Trading Days occurring after the Issue
        Date,
        the Market Price of the Common Stock is less than the Floor Price, the
        Company may prepay this Note in whole or in part, at any time, by paying
        to the
        Holder an amount of cash equal to one hundred and one percent (101%) of the
        face
        amount of this Note being prepaid or, if greater, the Accrued Principal Amount
        at the time of such prepayment being prepaid. Except as provided in this
        Section
        3, the Company may not prepay this Note without the prior written consent
        of the
        Holder, which consent may be withheld for any reason or for no
        reason.

       

      4.     EVENTS
        OF DEFAULT. 

       

      (a)    Events
        of Default.
        Each of
        the following events shall be deemed an “Event
        of Default”:
        

       

      (i)    The
        Company shall fail to pay when due any amount of principal or other amount
        payable hereunder;

       

      
        
          
             

          

          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      (ii)    
a
        Liquidation Event occurs or is publicly announced;

       

      (iii)    the
        Company breaches or provides notice of its intent to breach, in a material
        respect, any material covenant or other material term or condition of this
        Note
        (including without limitation any payment obligation thereunder), the
        Certificate of Designation, the Securities Purchase Agreement, Registration
        Rights Agreement or any other Transaction Document, and such breach continues
        for a period of five (5) Business Days following written notice thereof from
        the
        Holder;

       

      (iv)    any
        representation or warranty made by the Company in this Note, the Certificate
        of
        Designation, the Securities Purchase Agreement, the Registration Rights
        Agreement or any other Transaction Document was inaccurate or misleading
        in any
        material respect as of the date such representation or warranty was made;
        and

       

      (v)    
a
        default
        occurs or is declared and not waived, or any amounts are accelerated, under
        or
        with respect to any instrument that evidences Debt of the Company or any
        of its
        Subsidiaries in a principal amount exceeding $100,000.

       

      (b)    If
        any
        Event of Default shall occur, the Holder may (i) by notice to the Company,
        declare the entire Accrued Principal Amount of this Note, and all other amounts
        payable hereunder, to be forthwith due and payable, whereupon all unpaid
        principal under this Note and all such other amounts shall become and be
        forthwith due and payable in cash, without presentment, demand, protest or
        further notice of any kind, all of which are hereby expressly waived by the
        Company, provided that if an event described in clause (ii) of Section
        3(a)
        hereof
        shall occur, this Note shall automatically become immediately due and
        payable.

       

      (c)    Upon
        the
        occurrence and during the continuation of an Event of Default, interest shall
        accrue on the outstanding principal balance of this Note at the Default Interest
        Rate until such amount is paid in full. Any interest that accrues at the
        Default
        Interest Rate shall be due and payable on the first day of each month.

       

      (d)    The
        remedies of the Holder in this Note or in the other Transaction Documents,
        or at
        law or in equity, shall be cumulative and concurrent, and may be pursued
        singly,
        successively or together in the Holder’s discretion. The Company agrees to pay
        all costs of collection with respect to amounts owing under this Note,
        including, but not limited to, reasonable legal fees and expenses.

       

      5.    MISCELLANEOUS.

       

      (a)    Failure
        to Exercise Rights 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 any other
        or
        further exercise thereof. All rights and remedies of the Holder hereunder
        are
        cumulative and not exclusive of any rights or remedies otherwise
        available.

       

      (b)    Notices.
        Any
        notice, demand or request required or permitted to be given by the Company
        or
        the Holder pursuant to the terms of this Note shall be in writing and shall
        be
        deemed delivered (i) when delivered personally or by verifiable facsimile
        transmission, unless such

       

      
        
          
             

          

          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      delivery
        is made on a day that is not a Business Day, in which case such delivery
        will be
        deemed to be made on the next succeeding Business Day, (ii) on the next Business
        Day after timely delivery to an overnight courier and (iii) on
        the
        Business Day actually received if deposited
        in the U.S. mail (certified or registered mail, return receipt requested,
        postage prepaid), addressed as follows: 

       

      If
        to
        the Company:

      

      Applied
        Digital Solutions Inc

      1690
        S.
        Congress Avenue, Suite 200 

      Delray
        Beach, FL 33445

      Attn: Scott
        R.
        Silverman

      Tel:     
        561-805-8000

      Fax:    
        561-805-0002 

       

      with
        a copy to:

       

      Holland
        & Knight LLP

      701
        Brickell Avenue, Suite 3000

      Miami,
        Florida 33131

      Mailing
        Address: P.O. Box 015441, Florida, 33101

      Attn: Harvey
        A.
        Goldman, Esq.

      Tel:     305-374-8500

      Fax:    
        305-789-7799

      

      Either
        party may from time to time designate by notice delivered in accordance with
        this Section
        5(b),
        specify
        a different address for notices, demands and requests hereunder.

      

      (c)     Amendments.
        No
        amendment, modification or other change to, or waiver of any provision of,
        this
        Note may be made unless such amendment, modification or change is set forth
        in
        writing and is signed by the Company and the Holder. 

       

      (d)     Transfer
        of Note.
        The
        Holder may not sell, transfer or otherwise dispose of all or any part of
        this
        Note (including without limitation pursuant to a pledge) to any person or
        entity.

       

      (e)     Lost
        or Stolen Note.
        Upon
        receipt by the Company of evidence of the loss, theft, destruction or mutilation
        of this Note, and (in the case of loss, theft or destruction) of indemnity
        or
        security reasonably satisfactory to the Company, and upon surrender and
        cancellation of the Note, if mutilated, the Company shall execute and deliver
        to
        the Holder a new Note identical in all respects to this Note.

       

      (f)     Governing
        Law.
        This
        Note shall be governed by and construed in accordance with the laws of the
        State
        of Delaware applicable
        to contracts made and to be performed entirely within the State of Delaware.

       

      (g)    Successors
        and Assigns.
        The
        terms and conditions of this Note shall inure to the benefit of and be binding
        upon the respective successors (whether by merger or otherwise)
        and

      
        
          
             

          

          
          

        

        
          6

          
            

          

        

        
          
          

        

      

      permitted
        assigns of the Company and the Holder. The Company may not assign its rights
        or
        obligations under this Note except as specifically required or permitted
        pursuant to the terms hereof.

      

      (h)    Usury.
        This
        Note
        is subject to the express condition that at no time shall the Company be
        obligated or required to pay interest hereunder at a rate which could subject
        the Holder to either civil or criminal liability as a result of being in
        excess
        of the maximum interest rate which the Company is permitted by applicable
        law to
        contract or agree to pay.  If by the terms of this Note, the Company
        is at
        any time required or obligated to pay interest hereunder at a rate in excess
        of
        such maximum rate, the rate of interest under this Note shall be deemed to
        be
        immediately reduced to such maximum rate and the interest payable shall be
        computed at such maximum rate and all prior interest payments in excess of
        such
        maximum rate shall be applied and shall be deemed to have been payments in
        reduction of the principal balance of this Note.  

      

      

      

      

      [Signature
        Page to Follow]

      

      

      
        
          
            

          

          
          

        

        
          7

          
            

          

        

        
          
          

          
          

        

      

      IN
        WITNESS WHEREOF, the Company has caused this Note to be signed in its name
        by
        its duly authorized officer on the date first above written.

      

      APPLIED
        DIGITAL SOLUTIONS, INC.

      

      

      By:
        /s/
        Jonathan F. McKeage

      Name:
        /s/
        Jonathan F. McKeage

      Title:
        VP, Business Development

      
 

       

       

       

      8

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