ITRONICS INC
EXHIBIT 10.2
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>itex1020807.htm
<DESCRIPTION>EXHIBIT 10.2
<TEXT>
<html>

<head>
<title>THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE &#147;ACT</title>
</head>

<body>

<p ALIGN="JUSTIFY"><strong>Exhibit 10.2</strong></p>
<b>

<p ALIGN="JUSTIFY">&nbsp;</p>

<blockquote>
  <blockquote>
    <p ALIGN="JUSTIFY">THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
    UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE &quot;ACT&quot;). THE SECURITIES MAY NOT
    BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
    THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
    CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT
    REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID
    ACT.<br>
    </p>
  </blockquote>
</blockquote>

<p ALIGN="CENTER">CALLABLE SECURED CONVERTIBLE NOTE</p>
</b>

<p>Reno, Nevada<br>
August 21, 2007
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
$225,250</p>
<b>

<p ALIGN="JUSTIFY">FOR VALUE RECEIVED</b>,<b> ITRONICS INC.</b>, a Texas corporation
(hereinafter called the &quot;<b>Borrower</b>&quot;), hereby promises to pay to the order
of AJW MASTER FUND, LTD. or registered assigns (the &quot;<b>Holder</b>&quot;) the sum of
$225,250, on August 21, 2010 (the <b>&quot;Maturity Date</b>&quot;), and to pay interest
on the unpaid principal balance hereof at the rate of eight percent (8%) (the &quot;<b>Interest
Rate</b>&quot;) per annum from August 21, 2007 (the &quot;<b>Issue Date</b>&quot;) until
the same becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. Any amount of principal or interest on this Note which is not
paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the
due date thereof until the same is paid (&quot;<b>Default Interest</b>&quot;). Interest
shall commence accruing on the Issue Date, shall be computed on the basis of a 365-day
year and the actual number of days elapsed and shall be payable quarterly provided that no
interest shall be due and payable for any month in which the Trading Price (as such term
is defined below) is greater than $.025 for each Trading Day (as such term is defined
below) of the month. All payments due hereunder (to the extent not converted into common
stock, $.001 par value per share (the <b>&quot;Common Stock&quot;</b>) in accordance with
the terms hereof) shall be made in lawful money of the United States of America. All
payments shall be made at such address as the Holder shall hereafter give to the Borrower
by written notice made in accordance with the provisions of this Note. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a business
day, the same shall instead be due on the next succeeding day which is a business day and,
in the case of any interest payment date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account for
purposes of determining the amount of interest due on such date. As used in this Note, the
term &quot;business day&quot; shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are authorized or required by law
or executive order to remain closed. Each capitalized term used herein, and not otherwise
defined, shall have the meaning ascribed thereto in that certain Securities Purchase
Agreement, dated August 21, 2007, pursuant to which this Note was originally issued (the
&quot;<b>Purchase Agreement</b>&quot;).</p>

<hr>

<p ALIGN="JUSTIFY">This Note is free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive rights or other
similar rights of shareholders of the Borrower and will not impose personal liability upon
the holder thereof. The obligations of the Borrower under this Note shall be secured by
that certain Security Agreement and Intellectual Property Security Agreement, each dated
August 21, 2007 by and between the Borrower and the Holder.</p>

<p ALIGN="JUSTIFY">The following terms shall apply to this Note:</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="CENTER">Article I. </font>CONVERSION RIGHTS</p>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.1 </font><u>Conversion Right</u>.</b> The Holder shall have the right
from time to time, and at any time on or prior to the earlier of (i) the Maturity Date and
(ii) the date of payment of the Default Amount (as defined in Article III) pursuant to
Section 1.6(a) or Article III, the Optional Prepayment Amount (as defined in Section 5.1
or any payments pursuant to Section 1.7, each in respect of the remaining outstanding
principal amount of this Note to convert all or any part of the outstanding and unpaid
principal amount of this Note into fully paid and non-assessable shares of Common Stock,
as such Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall hereafter be changed or
reclassified at the conversion price (the &quot;<b>Conversion Price</b>&quot;) determined
as provided herein (a &quot;<b>Conversion</b>&quot;); <u>provided</u>, <u>however</u>,
that in no event shall the Holder be entitled to convert any portion of this Note in
excess of that portion of this Note upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by the Holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Notes or the unexercised or unconverted portion of any other
security of the Borrower (including, without limitation, the warrants issued by the
Borrower pursuant to the Purchase Agreement) subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (2) the number of shares of
Common Stock issuable upon the conversion of the portion of this Note with respect to
which the determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of
Common Stock and <u>provided</u> <u>further</u> that the Holder shall not be entitled to
convert any portion of this Note during any month immediately succeeding a Determination
Date on which the Borrower exercises its prepayment option pursuant to Section 5.2 of this
Note. For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in
clause (1) of such proviso. The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing the Conversion Amount (as defined
below) by the applicable Conversion Price then in effect on the date specified in the
notice of conversion, in the form attached hereto as Exhibit A (the &quot;<b>Notice of
Conversion</b>&quot;), delivered to the Borrower by the Holder in accordance with Section
1.4 below; provided that the Notice of Conversion is submitted by facsimile (or by other
means resulting in, or reasonably expected to result in, notice) to</p>

<p ALIGN="center">2</p>

<hr>

<p ALIGN="JUSTIFY">the Borrower before 6:00 p.m., New York, New York time on such
conversion date (the &quot;<b>Conversion Date</b>&quot;). The term &quot;<b>Conversion
Amount</b>&quot; means, with respect to any conversion of this Note, the sum of (1) the
principal amount of this Note to be converted in such conversion <u>plus</u> (2) accrued
and unpaid interest, if any, on such principal amount at the interest rates provided in
this Note to the Conversion Date, provided, however, that the Company shall have the right
to pay any and all interest in cash, <u>plus</u> (3) Default Interest, if any, on the
amounts referred to in the immediately preceding clauses (1) and/or (2) <u>plus</u> (4) at
the Holder&#146;s option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights Agreement,
dated as of August 21,2007, executed in connection with the initial issuance of this Note
and the other Notes issued on the Issue Date (the &quot;<b>Registration Rights Agreement</b>&quot;).
The term <b>&quot;Determination Date&quot; </b>means the last business day of each month
after the Issue Date.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.2 </font><u>Conversion Price</u>.</p>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(a) </font><u>Calculation of Conversion Price</u>. </b>The Conversion
Price shall be the lesser of (i) the Variable Conversion Price (as defined herein) and
(ii) the Fixed Conversion Price (as defined herein) (subject, in each case, to equitable
adjustments for stock splits, stock dividends or rights offerings by the Borrower relating
to the Borrower&#146;s securities or the securities of any subsidiary of the Borrower,
combinations, recapitalization, reclassifications, extraordinary distributions and similar
events). The &quot;<b>Variable Conversion Price</b>&quot; shall mean the Applicable
Percentage (as defined herein) multiplied by the Market Price (as defined herein). &quot;<b>Market
Price</b>&quot; means the average of the lowest three (3) Trading Prices (as defined
below) for the Common Stock during the twenty (20) Trading Day period ending one Trading
Day prior to the date the Conversion Notice is sent by the Holder to the Borrower via
facsimile (the &quot;<b>Conversion Date</b>&quot;). &quot;<b>Trading Price</b>&quot;
means, for any security as of any date, the intraday trading price on the Over-the-Counter
Bulletin Board (the &quot;<b>OTCBB</b>&quot;) as reported by a reliable reporting service
mutually acceptable to Borrower and Holders and hereafter designated by Holders of a
majority in interest of the Notes and the Borrower or, if the OTCBB is not the principal
trading market for such security, the intraday trading price of such security on the
principal securities exchange or trading market where such security is listed or traded
or, if no intraday trading price of such security is available in any of the foregoing
manners, the average of the intraday trading prices of any market makers for such security
that are listed in the &quot;pink sheets&quot; by the National Quotation Bureau, Inc. If
the Trading Price cannot be calculated for such security on such date in the manner
provided above, the Trading Price shall be the fair market value as mutually determined by
the Borrower and the holders of a majority in interest of the Notes being converted for
which the calculation of the Trading Price is required in order to determine the
Conversion Price of such Notes. &quot;<b>Trading Day</b>&quot; shall mean any day on which
the Common Stock is traded for any period on the OTCBB, or on the principal securities
exchange or other securities market on which the Common Stock is then being traded. &quot;<b>Applicable
Percentage</b>&quot; shall mean 55.0%. The &quot;<b>Fixed Conversion Price</b>&quot; shall
mean $.10.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(b) </font><u>Conversion Price During Major Announcements</u>. </b>Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes
a public announcement that it intends to consolidate or merge with any other corporation
(other than a merger in which the Borrower is the surviving or continuing corporation and
its capital stock is</p>

<p ALIGN="center">3</p>

<hr>

<p ALIGN="JUSTIFY">unchanged) or sell or transfer all or substantially all of the assets
of the Borrower or (ii) any person, group or entity (including the Borrower) publicly
announces a tender offer to purchase 50% or more of the Borrower&#146;s Common Stock (or
any other takeover scheme) (the date of the announcement referred to in clause (i) or (ii)
is hereinafter referred to as the &quot;<b>Announcement Date</b>&quot;), then the
Conversion Price shall, effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of
(x) the Conversion Price which would have been applicable for a Conversion occurring on
the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From
and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be
determined as set forth in this Section 1.2(a). For purposes hereof, &quot;<b>Adjusted
Conversion Price Termination Date</b>&quot; shall mean, with respect to any proposed
transaction or tender offer (or takeover scheme) for which a public announcement as
contemplated by this Section 1.2(b) has been made, the date upon which the Borrower (in
the case of clause (i) above) or the person, group or entity (in the case of clause (ii)
above) consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to
become operative.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.3 </font><u>Authorized Shares</u>.</b> Subject to the Stockholder
Approval (as defined in the Agreement), the Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and unissued Common
Stock a sufficient number of shares, free from preemptive rights, to provide for the
issuance of Common Stock upon the full conversion of this Note and the other Notes issued
pursuant to the Purchase Agreement. The Borrower is required at all times to have
authorized and reserved two times the number of shares that is actually issuable upon full
conversion of the Notes (based on the Conversion Price of the Notes or the Exercise Price
of the Warrants in effect from time to time) (the &quot;<b>Reserved Amount</b>&quot;). The
Reserved Amount shall be increased from time to time in accordance with the
Borrower&#146;s obligations pursuant to Section 4(h) of the Purchase Agreement. The
Borrower represents that upon issuance, such shares will be duly and validly issued, fully
paid and non-assessable. In addition, if the Borrower shall issue any securities or make
any change to its capital structure which would change the number of shares of Common
Stock into which the Notes shall be convertible at the then current Conversion Price, the
Borrower shall at the same time make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from preemptive
rights, for conversion of the outstanding Notes. The Borrower (i) acknowledges that it has
irrevocably instructed its transfer agent to issue certificates for the Common Stock
issuable upon conversion of this Note, and (ii)&nbsp;agrees that its issuance of this Note
shall constitute full authority to its officers and agents who are charged with the duty
of executing stock certificates to execute and issue the necessary certificates for shares
of Common Stock in accordance with the terms and conditions of this Note.</p>

<p ALIGN="JUSTIFY">If, at any time a Holder of this Note submits a Notice of Conversion,
and the Borrower does not have sufficient authorized but unissued shares of Common Stock
available to effect such conversion in accordance with the provisions of this Article I (a
&quot;<b>Conversion Default</b>&quot;), subject to Section 4.8, the Borrower shall issue
to the Holder all of the shares of Common Stock which are then available to effect such
conversion. The portion of this Note which the Holder included in its Conversion Notice</p>

<p ALIGN="center">4</p>

<hr>

<p ALIGN="JUSTIFY">and which exceeds the amount which is then convertible into available
shares of Common Stock (the &quot;<b>Excess Amount</b>&quot;) shall, notwithstanding
anything to the contrary contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the Holder&#146;s option at any time after)
the date additional shares of Common Stock are authorized by the Borrower to permit such
conversion, at which time the Conversion Price in respect thereof shall be the lesser of
(i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the
Conversion Price on the Conversion Date thereafter elected by the Holder in respect
thereof. In addition, the Borrower shall pay to the Holder payments (&quot;<b>Conversion
Default Payments</b>&quot;) for a Conversion Default in the amount of (x) the <u>sum of</u>
(1) the then outstanding principal amount of this Note <u>plus</u> (2) accrued and unpaid
interest on the unpaid principal amount of this Note through the Authorization Date (as
defined below) <u>plus</u> (3) Default Interest, if any, on the amounts referred to in
clauses (1) and/or (2), <u>multiplied by</u> (y) .24, <u>multiplied by</u> (z) (N/365),
where N = the number of days from the day the holder submits a Notice of Conversion giving
rise to a Conversion Default (the &quot;<b>Conversion Default Date</b>&quot;) to the date
(the &quot;<b>Authorization Date</b>&quot;) that the Borrower authorizes a sufficient
number of shares of Common Stock to effect conversion of the full outstanding principal
balance of this Note. The Borrower shall use its best efforts to authorize a sufficient
number of shares of Common Stock as soon as practicable following the earlier of (i) such
time that the Holder notifies the Borrower or that the Borrower otherwise becomes aware
that there are or likely will be insufficient authorized and unissued shares to allow full
conversion thereof and (ii) a Conversion Default. The Borrower shall send notice to the
Holder of the authorization of additional shares of Common Stock, the Authorization Date
and the amount of Holder&#146;s accrued Conversion Default Payments. The accrued
Conversion Default Payments for each calendar month shall be paid in cash or shall be
convertible into Common Stock (at such time as there are sufficient authorized shares of
Common Stock) at the applicable Conversion Price, at the Borrower&#146;s option, as
follows:</p>
<font FACE="Times New Roman Bold"><b>

<p ALIGN="JUSTIFY">(a) </b></font>In the event Holder elects to take such payment in cash,
cash payment shall be made to Holder by the fifth (5<sup>th</sup>) day of the month
following the month in which it has accrued; and</p>
<font FACE="Times New Roman Bold"><b>

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

<p ALIGN="JUSTIFY">The Holder&#146;s election shall be made in writing to the Borrower at
any time prior to 6:00 p.m., New York, New York time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no election is
made, the Holder shall be deemed to have elected to receive cash. Nothing herein shall
limit the Holder&#146;s right to pursue actual damages (to the extent in excess of the
Conversion Default Payments) for the Borrower&#146;s failure to maintain a sufficient
number of authorized shares of Common Stock, and each holder shall have the right to
pursue all remedies available at law or in equity (including degree of specific
performance and/or injunctive relief).</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.4 </font><u>Method of Conversion</u>.</p>

<p ALIGN="center"></b>5<b></p>

<hr>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(a) </font><u>Mechanics of Conversion</u>. </b>Subject to Section 1.1,
this Note may be converted by the Holder in whole or in part at any time from time to time
after the Issue Date, by (A)&nbsp;submitting to the Borrower a Notice of Conversion (by
facsimile or other reasonable means of communication dispatched on the Conversion Date
prior to 6:00 p.m., New York, New York time) and (B)&nbsp;subject to Section 1.4(b),
surrendering this Note at the principal office of the Borrower. </p>
<b><font FACE="Times New Roman Bold">

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

<p ALIGN="JUSTIFY">(c) </font><u>Payment of Taxes</u>. </b>The Borrower shall not be
required to pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock or other securities or property on conversion
of this Note in a name other than that of the Holder (or in street name), and the Borrower
shall not be required to issue or deliver any such shares or other securities or property
unless and until the person or persons (other than the Holder or the custodian in whose
street name such shares are to be held for the Holder&#146;s account) requesting the
issuance thereof shall have paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has been paid.</p>
<b><font FACE="Times New Roman Bold">

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

<p ALIGN="center">6</p>

<hr>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(e) </font><u>Obligation of Borrower to Deliver Common Stock</u>.</b>
Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be
the holder of record of the Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid interest on this Note shall be
reduced to reflect such conversion, and, unless the Borrower defaults on its obligations
under this Article I, all rights with respect to the portion of this Note being so
converted shall forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets, as herein provided, on such conversion. If the Holder
shall have given a Notice of Conversion as provided herein, the Borrower&#146;s obligation
to issue and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to enforce the
same, any waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Borrower to the holder of record, or any
setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the Holder in
connection with such conversion. The Conversion Date specified in the Notice of Conversion
shall be the Conversion Date so long as the Notice of Conversion is received by the
Borrower before 6:00 p.m., New York, New York time, on such date.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(f) </font><u>Delivery of Common Stock by Electronic Transfer</u>. </b>In
lieu of delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower&#146;s transfer agent is participating in the Depository
Trust Company (&quot;<b>DTC</b>&quot;) Fast Automated Securities Transfer (&quot;<b>FAST</b>&quot;)
program, upon request of the Holder and its compliance with the provisions contained in
Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause its
transfer agent to electronically transmit the Common Stock issuable upon conversion to the
Holder by crediting the account of Holder&#146;s Prime Broker with DTC through its Deposit
Withdrawal Agent Commission (&quot;<b>DWAC</b>&quot;) system.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(g) </font><u>Failure to Deliver Common Stock Prior to Deadline</u>. </b>Without
in any way limiting the Holder&#146;s right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the Common Stock
issuable upon conversion of this Note is more than two (2) business days after the
Deadline (other than a failure due to the circumstances described in Section 1.3 above,
which failure shall be governed by such Section) the Borrower shall pay to the Holder
$2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to
deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth day of
the month following the month in which it has accrued or, at the option of the Holder (by
written notice to the Borrower by the first day of the month following the month in which
it has accrued), shall be added to the principal amount of this Note, in which event
interest shall accrue thereon in accordance with the terms of this Note and such
additional principal amount shall be convertible into Common Stock in accordance with the
terms of this Note.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.5 </font><u>Concerning the Shares</u>.</b> The shares of Common Stock
issuable upon conversion of this Note may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the Act or (ii) the
Borrower or its transfer agent shall have been furnished with an opinion of counsel (which
opinion shall be in form, substance and scope</p>

<p ALIGN="center">7</p>

<hr>

<p ALIGN="JUSTIFY">customary for opinions of counsel in comparable transactions) to the
effect that the shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration or (iii)&nbsp;such shares are sold or transferred
pursuant to Rule 144 under the Act (or a successor rule) (&quot;<b>Rule 144</b>&quot;) or
(iv) such shares are transferred to an &quot;affiliate&quot; (as defined in Rule 144) of
the Borrower who agrees to sell or otherwise transfer the shares only in accordance with
this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement).
Except as otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock issuable upon
conversion of this Note have been registered under the Act as contemplated by the
Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then be
immediately sold, each certificate for shares of Common Stock issuable upon conversion of
this Note that has not been so included in an effective registration statement or that has
not been sold pursuant to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the following form, as
appropriate:</p>

<blockquote>
  <blockquote>
    <p ALIGN="JUSTIFY">&quot;THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
    REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD,
    TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
    SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY
    FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED
    UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT.&quot;</p>
  </blockquote>
</blockquote>

<p ALIGN="JUSTIFY">The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in form,
substance and scope customary for opinions of counsel in comparable transactions, to the
effect that a public sale or transfer of such Common Stock may be made without
registration under the Act and the shares are so sold or transferred, (ii) such Holder
provides the Borrower or its transfer agent with reasonable assurances that the Common
Stock issuable upon conversion of this Note (to the extent such securities are deemed to
have been acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case
of the Common Stock issuable upon conversion of this Note, such security is registered for
sale by the Holder under an effective registration statement filed under the Act or
otherwise may be sold pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date that can then be immediately sold. Nothing in this Note
shall (i) limit the Borrower&#146;s obligation under the Registration Rights Agreement or
(ii) affect in any way the Holder&#146;s obligations to comply with applicable prospectus
delivery requirements upon the resale of the securities referred to herein.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.6 </font><u>Effect of Certain Events</u>.</p>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(a) </font><u>Effect of Merger, Consolidation, Etc</u>.</b> At the
option of the Holder, the sale, conveyance or disposition of all or substantially all of
the assets of the Borrower, the effectuation by the Borrower of a transaction or series of
related transactions</p>

<p ALIGN="center">8</p>

<hr>

<p ALIGN="JUSTIFY">in which more than 50% of the voting power of the Borrower is disposed
of, or the consolidation, merger or other business combination of the Borrower with or
into any other Person (as defined below) or Persons when the Borrower is not the survivor
shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant
to which the Borrower shall be required to pay to the Holder upon the consummation of and
as a condition to such transaction an amount equal to the Default Amount (as defined in
Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. &quot;<b>Person</b>&quot;
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.</p>
<b><font FACE="Times New Roman Bold">

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

<p ALIGN="JUSTIFY">(c) </font><u>Adjustment Due to Distribution</u>. </b>If the Borrower
shall declare or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Borrower&#146;s shareholders in
cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a &quot;<b>Distribution</b>&quot;), then the Holder of this Note shall be
entitled, upon any conversion of this Note after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets which
would have been payable to the Holder with respect to the shares of Common Stock issuable
upon such conversion had such Holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such Distribution.</p>

<p ALIGN="center">9</p>

<hr>
<b><font FACE="Times New Roman Bold">

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

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

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

<p ALIGN="center">10</p>

<hr>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(e) </font><u>Purchase Rights</u>. </b>If, at any time when any Notes
are issued and outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the &quot;<b>Purchase Rights</b>&quot;)
pro rata to the record holders of any class of Common Stock, then the Holder of this Note
will be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if such Holder had held
the number of shares of Common Stock acquirable upon complete conversion of this Note
(without regard to any limitations on conversion contained herein) immediately before the
date on which a record is taken for the grant, issuance or sale of such Purchase Rights
or, if no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">(f) </font><u>Notice of Adjustments</u>. </b>Upon the occurrence of
each adjustment or readjustment of the Conversion Price as a result of the events
described in this Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the written request at any
time of the Holder, furnish to such Holder a like certificate setting forth (i) such
adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or property
which at the time would be received upon conversion of the Note.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.7 </font><u>Trading Market Limitations</u>. </b>Unless permitted by
the applicable rules and regulations of the principal securities market on which the
Common Stock is then listed or traded, in no event shall the Borrower issue upon
conversion of or otherwise pursuant to this Note and the other Notes issued pursuant to
the Purchase Agreement more than the maximum number of shares of Common Stock that the
Borrower can issue pursuant to any rule of the principal United States securities market
on which the Common Stock is then traded (the &quot;<b>Maximum Share Amount</b>&quot;),
which shall be 19.99% of the total shares outstanding on the Closing Date (as defined in
the Purchase Agreement), subject to equitable adjustment from time to time for stock
splits, stock dividends, combinations, capital reorganizations and similar events relating
to the Common Stock occurring after the date hereof. Once the Maximum Share Amount has
been issued (the date of which is hereinafter referred to as the &quot;<b>Maximum
Conversion Date</b>&quot;), if the Borrower fails to eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the Borrower or any of
its securities on the Borrower&#146;s ability to issue shares of Common Stock in excess of
the Maximum Share Amount (a &quot;<b>Trading Market Prepayment Event</b>&quot;), in lieu
of any further right to convert this Note, and in full satisfaction of the Borrower&#146;s
obligations under this Note, the Borrower shall pay to the Holder, within fifteen (15)
business days of the Maximum Conversion Date (the &quot;<b>Trading Market Prepayment Date</b>&quot;),
an amount equal to 130% <u>times</u> the <u>sum</u> of (a) the then outstanding principal
amount of this Note immediately following the Maximum Conversion Date, <u>plus</u> (b)
accrued and unpaid interest on the unpaid principal amount of this Note to the Trading
Market Prepayment Date, <u>plus</u> (c) Default Interest, if any, on the amounts referred
to in clause (a) and/or (b) above, <u>plus</u> (d) any optional amounts that may be added
thereto at the Maximum Conversion Date by the Holder in accordance with the terms hereof
(the then outstanding principal amount of this Note immediately following the Maximum
Conversion Date, <u>plus</u> the amounts referred to in clauses (b), (c) and (d) above
shall</p>

<p ALIGN="center">11</p>

<hr>

<p ALIGN="JUSTIFY">collectively be referred to as the &quot;<b>Remaining Convertible
Amount</b>&quot;). With respect to each Holder of Notes, the Maximum Share Amount shall
refer to such Holder&#146;s <u>pro</u> <u>rata</u> share thereof determined in accordance
with Section 4.8 below. In the event that the sum of (x) the aggregate number of shares of
Common Stock issued upon conversion of this Note and the other Notes issued pursuant to
the Purchase Agreement <u>plus</u> (y) the aggregate number of shares of Common Stock that
remain issuable upon conversion of this Note and the other Notes issued pursuant to the
Purchase Agreement, represents at least one hundred percent (100%) of the Maximum Share
Amount (the &quot;<b>Triggering Event</b>&quot;), the Borrower will use its best efforts
to seek and obtain Shareholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion Date. As used herein,
&quot;<b>Shareholder Approval</b>&quot; means approval by the shareholders of the Borrower
to authorize the issuance of the full number of shares of Common Stock which would be
issuable upon full conversion of the then outstanding Notes but for the Maximum Share
Amount.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">1.8 </font><u>Status as Shareholder</u>. </b>Upon submission of a
Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares,
if any, which cannot be issued because their issuance would exceed such Holder&#146;s
allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed
converted into shares of Common Stock and (ii) the Holder&#146;s rights as a Holder of
such converted portion of this Note shall cease and terminate, excepting only the right to
receive certificates for such shares of Common Stock and to any remedies provided herein
or otherwise available at law or in equity to such Holder because of a failure by the
Borrower to comply with the terms of this Note. Notwithstanding the foregoing, if a Holder
has not received certificates for all shares of Common Stock prior to the tenth (10th)
business day after the expiration of the Deadline with respect to a conversion of any
portion of this Note for any reason, then (unless the Holder otherwise elects to retain
its status as a holder of Common Stock by so notifying the Borrower) the Holder shall
regain the rights of a Holder of this Note with respect to such unconverted portions of
this Note and the Borrower shall, as soon as practicable, return such unconverted Note to
the Holder or, if the Note has not been surrendered, adjust its records to reflect that
such portion of this Note has not been converted. In all cases, the Holder shall retain
all of its rights and remedies (including, without limitation, (i) the right to receive
Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for
such Conversion Default and any subsequent Conversion Default and (ii) the right to have
the Conversion Price with respect to subsequent conversions determined in accordance with
Section 1.3) for the Borrower&#146;s failure to convert this Note.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="CENTER">Article II. </font>CERTAIN COVENANTS</p>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">2.1 </font><u>Distributions on Capital Stock</u>.</b> So long as the
Borrower shall have any obligation under this Note, the Borrower shall not without the
Holder&#146;s written consent (a) pay, declare or set apart for such payment, any dividend
or other distribution (whether in cash, property or other securities) on shares of capital
stock other than dividends on shares of Common Stock solely in the form of additional
shares of Common Stock or (b) directly or indirectly or through any subsidiary make any
other payment or distribution in respect of its capital stock except for distributions
pursuant to any shareholders&#146; rights plan which is approved by a majority of the
Borrower&#146;s disinterested directors.</p>

<p ALIGN="center">12</p>

<hr>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">2.2 </font><u>Restriction on Stock Repurchases</u>.</b> So long as the
Borrower shall have any obligation under this Note, the Borrower shall not without the
Holder&#146;s written consent redeem, repurchase or otherwise acquire (whether for cash or
in exchange for property or other securities or otherwise) in any one transaction or
series of related transactions any shares of capital stock of the Borrower or any
warrants, rights or options to purchase or acquire any such shares.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">2.3 </font><u>Borrowings</u>.</b> So long as the Borrower shall have
any obligation under this Note, the Borrower shall not, without the Holder&#146;s written
consent, create, incur, assume or suffer to exist any liability for borrowed money, except
(a) borrowings in existence or committed on the date hereof and of which the Borrower has
informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors
or financial institutions incurred in the ordinary course of business or (c) borrowings,
the proceeds of which shall be used to repay this Note.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">2.4 </font><u>Sale of Assets</u>.</b> So long as the Borrower shall
have any obligation under this Note, the Borrower shall not, without the Holder&#146;s
written consent, sell, lease or otherwise dispose of any significant portion of its assets
outside the ordinary course of business. Any consent to the disposition of any assets may
be conditioned on a specified use of the proceeds of disposition.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">2.5 </font><u>Advances and Loans</u>.</b> So long as the Borrower shall
have any obligation under this Note, the Borrower shall not, without the Holder&#146;s
written consent, lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers, directors, employees,
subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in
existence or committed on the date hereof and which the Borrower has informed Holder in
writing prior to the date hereof, (b) made in the ordinary course of business or (c) not
in excess of $50,000.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">2.6 </font><u>Contingent Liabilities</u>.</b> So long as the Borrower
shall have any obligation under this Note, the Borrower shall not, without the
Holder&#146;s written consent, which shall not be unreasonably withheld, assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable upon the
obligation of any person, firm, partnership, joint venture or corporation, except by the
endorsement of negotiable instruments for deposit or collection and except assumptions,
guarantees, endorsements and contingencies (a) in existence or committed on the date
hereof and which the Borrower has informed Holder in writing prior to the date hereof, and
(b) similar transactions in the ordinary course of business. </p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="CENTER">Article III. </font>EVENTS OF DEFAULT</p>
</b>

<p ALIGN="JUSTIFY">If any of the following events of default (each, an &quot;<b>Event of
Default</b>&quot;) shall occur:</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.1 </font><u>Failure to Pay Principal or Interest</u>.</b> The
Borrower fails to pay the principal hereof or interest thereon when due on this Note,
whether at maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon
acceleration or otherwise;</p>

<p ALIGN="center">13</p>

<hr>
<b><font FACE="Times New Roman Bold">

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

<p ALIGN="JUSTIFY">3.3 </font><u>Failure to Timely File Registration or Effect
Registration</u>.</b> The Borrower fails to file the Registration Statement within one
hundred and twenty (120) days following the Closing Date (as defined in the Purchase
Agreement) or obtain effectiveness with the Securities and Exchange Commission of the
Registration Statement within two hundred and ten (210) days following the Closing Date
(as defined in the Purchase Agreement) or such Registration Statement lapses in effect (or
sales cannot otherwise be made thereunder effective, whether by reason of the
Borrower&#146;s failure to amend or supplement the prospectus included therein in
accordance with the Registration Rights Agreement or otherwise) for more than ten (10)
consecutive days or twenty (20) days in any twelve month period after the Registration
Statement becomes effective;</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.4 </font><u>Breach of Covenants</u>.</b> The Borrower breaches any
material covenant or other material term or condition contained in Sections 1.3, 1.6 or
1.7 of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase Agreement
and such breach continues for a period of ten (10) days after written notice thereof to
the Borrower from the Holder;</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.5 </font><u>Breach of Representations and Warranties</u>.</b> Any
representation or warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith (including, without
limitation, the Purchase Agreement and the Registration Rights Agreement), shall be false
or misleading in any material respect when made and the breach of which has (or with the
passage of time will have) a material adverse effect on the rights of the Holder with
respect to this Note, the Purchase Agreement or the Registration Rights Agreement;</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.6 </font><u>Receiver or Trustee</u>.</b> The Borrower or any
subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply
for or consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such a receiver or trustee shall otherwise be
appointed;</p>

<p ALIGN="center">14</p>

<hr>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.7 </font><u>Judgments</u>.</b> Any money judgment, writ or similar
process shall be entered or filed against the Borrower or any subsidiary of the Borrower
or any of its property or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the
Holder, which consent will not be unreasonably withheld;</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.8 </font><u>Bankruptcy</u>.</b> Bankruptcy, insolvency,
reorganization or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower;</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.9 </font><u>Delisting of Common Stock</u>.</b> The Borrower shall
fail to maintain the listing of the Common Stock on at least one of the OTCBB or an
equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market,
the New York Stock Exchange, or the American Stock Exchange; or</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">3.10 </font><u>Default Under Other Notes</u>.</b> An Event of Default
has occurred and is continuing under any of the other Notes issued pursuant to the
Purchase Agreement,</p>

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

<p ALIGN="center">15</p>

<hr>

<p ALIGN="JUSTIFY">the right at any time, so long as the Borrower remains in default (and
so long and to the extent that there are sufficient authorized shares), to require the
Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the
number of shares of Common Stock of the Borrower equal to the Default Amount divided by
the Conversion Price then in effect.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="CENTER">Article IV. </font>MISCELLANEOUS</p>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.1 </font><u>Failure or Indulgence Not Waiver</u>.</b> No failure or
delay on the part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any other
right, power or privileges. All rights and remedies existing hereunder are cumulative to,
and not exclusive of, any rights or remedies otherwise available.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.2 </font><u>Notices</u>.</b> Any notice herein required or permitted
to be given shall be in writing and may be personally served or delivered by courier or
sent by United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or sent by
courier or three (3) days after being deposited in the United States mail, certified, with
postage pre-paid and properly addressed, if sent by mail. For the purposes hereof, the
address of the Holder shall be as shown on the records of the Borrower; and the address of
the Borrower shall be 6490 S. McCarran Blvd., Building C-23, Reno, NV 89509, <b>facsimile
number: </b>(775) 689-7691. Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein provided.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.3 </font><u>Amendments</u>.</b> This Note and any provision hereof
may only be amended by an instrument in writing signed by the Borrower and the Holder. The
term &quot;Note&quot; and all reference thereto, as used throughout this instrument, shall
mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as
originally executed, or if later amended or supplemented, then as so amended or
supplemented.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.4 </font><u>Assignability</u>.</b> This Note shall be binding upon
the Borrower and its successors and assigns, and shall inure to be the benefit of the
Holder and its successors and assigns. Each transferee of this Note must be an
&quot;accredited investor&quot; (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Note to the contrary, this Note may be pledged as
collateral in connection with a <u>bona</u> <u>fide</u> margin account or other lending
arrangement.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.5 </font><u>Cost of Collection</u>.</b> If default is made in the
payment of this Note, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys&#146; fees.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.6 </font><u>Governing Law</u>.</b> THIS NOTE SHALL BE ENFORCED,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION
OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY
DISPUTE ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH</p>

<p ALIGN="center">16</p>

<hr>

<p ALIGN="JUSTIFY">OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES
IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY
FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE
PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY&#146;S
RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A
FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY
BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER.
THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE
RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS&#146; FEES, INCURRED BY THE
PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.</p>
<b><font FACE="Times New Roman Bold">

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

<p ALIGN="JUSTIFY">4.8 </font><u>Allocations of Maximum Share Amount and Reserved Amount</u>.</b>
The Maximum Share Amount and Reserved Amount shall be allocated pro rata among the Holders
of Notes based on the principal amount of such Notes issued to each Holder. Each increase
to the Maximum Share Amount and Reserved Amount shall be allocated pro rata among the
Holders of Notes based on the principal amount of such Notes held by each Holder at the
time of the increase in the Maximum Share Amount or Reserved Amount. In the event a Holder
shall sell or otherwise transfer any of such Holder&#146;s Notes, each transferee shall be
allocated a pro rata portion of such transferor&#146;s Maximum Share Amount and Reserved
Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated
to any person or entity which does not hold any Notes shall be allocated to the remaining
Holders of Notes, pro rata based on the principal amount of such Notes then held by such
Holders.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.9 </font><u>Damages Shares</u>.</b> The shares of Common Stock that
may be issuable to the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to
Section 2(c) of the Registration Rights Agreement (&quot;<b>Damages Shares</b>&quot;)
shall be treated as Common Stock issuable upon conversion of this Note for all purposes
hereof and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without limitation, the
right to be included in the Registration Statement filed pursuant to the Registration
Rights Agreement. For purposes of calculating interest payable on the</p>

<p ALIGN="center">17</p>

<hr>

<p ALIGN="JUSTIFY">outstanding principal amount hereof, except as otherwise provided
herein, amounts convertible into Damages Shares (&quot;<b>Damages Amounts</b>&quot;) shall
not bear interest but must be converted prior to the conversion of any outstanding
principal amount hereof, until the outstanding Damages Amounts is zero.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.10 </font><u>Denominations</u>.</b> At the request of the Holder,
upon surrender of this Note, the Borrower shall promptly issue new Notes in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations of at least
$50,000 as the Holder shall request.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.11 </font><u>Purchase Agreement</u>.</b> By its acceptance of this
Note, each Holder agrees to be bound by the applicable terms of the Purchase Agreement.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">4.12 </font><u>Notice of Corporate Events</u>.</b> Except as otherwise
provided below, the Holder of this Note shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Note into Common Stock. The Borrower
shall provide the Holder with prior notification of any meeting of the Borrower&#146;s
shareholders (and copies of proxy materials and other information sent to shareholders).
In the event of any taking by the Borrower of a record of its shareholders for the purpose
of determining shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire (including by way
of merger, consolidation, reclassification or recapitalization) any share of any class or
any other securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the Borrower or any
proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a
notice to the Holder, at least twenty (20) days prior to the record date specified therein
(or thirty (30) days prior to the consummation of the transaction or event, whichever is
earlier), of the date on which any such record is to be taken for the purpose of such
dividend, distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent known at
such time. The Borrower shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously with the notification to
the Holder in accordance with the terms of this Section 4.12.</p>
<b><font FACE="Times New Roman Bold">

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

<p ALIGN="center">18</p>

<hr>
<b><font FACE="Times New Roman Bold">

<p ALIGN="CENTER">Article V. </font>CALL OPTION</p>
<font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">5.1 </font><u>Call Option</u>.</b> Notwithstanding anything to the
contrary contained in this Article V, so long as &nbsp;no Event of Default or Trading
Market Prepayment Event shall have occurred and be continuing, &nbsp;the Borrower has a
sufficient number of authorized shares of Common Stock reserved for issuance upon full
conversion of the Notes, then at any time after the Issue Date, and &nbsp;the Common Stock
is trading at or below $.10 per share, the Borrower shall have the right, exercisable on
not less than ten (10) Trading Days prior written notice to the Holders of the Notes
(which notice may not be sent to the Holders of the Notes until the Borrower is permitted
to prepay the Notes pursuant to this Section 5.1), to prepay all of the outstanding Notes
in accordance with this Section 5.1. Any notice of prepayment hereunder (an &quot;<b>Optional
Prepayment</b>&quot;) shall be delivered to the Holders of the Notes at their registered
addresses appearing on the books and records of the Borrower and shall state (1) that the
Borrower is exercising its right to prepay all of the Notes issued on the Issue Date and
(2) the date of prepayment (the &quot;<b>Optional Prepayment Notice</b>&quot;). On the
date fixed for prepayment (the &quot;<b>Optional Prepayment Date</b>&quot;), the Borrower
shall make payment of the Optional Prepayment Amount (as defined below) to or upon the
order of the Holders as specified by the Holders in writing to the Borrower at least one
(1) business day prior to the Optional Prepayment Date. If the Borrower exercises its
right to prepay the Notes, the Borrower shall make payment to the holders of an amount in
cash (the &quot;<b>Optional Prepayment Amount</b>&quot;) equal to either&nbsp;(i) 125%
(for prepayments occurring within thirty (30) days of the Issue Date),&nbsp;(ii) 135% for
prepayments occurring between thirty-one (31) and sixty (60) days of the Issue Date, or
(iii) 150% (for prepayments occurring after the sixtieth (60<sup>th</sup>) day following
the Issue Date), multiplied by the sum of (w) the then outstanding principal amount of
this Note <u>plus</u> (x)&nbsp;accrued and unpaid interest on the unpaid principal amount
of this Note to the Optional Prepayment Date <u>plus</u> (y) Default Interest, if any, on
the amounts referred to in clauses (w) and (x) <u>plus</u> (z) any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the
Registration Rights Agreement (the then outstanding principal amount of this Note to the
date of payment <u>plus</u> the amounts referred to in clauses (x), (y) and (z) shall
collectively be known as the &quot;<b>Optional Prepayment Sum</b>&quot;). Notwithstanding
notice of an Optional Prepayment, the Holders shall at all times prior to the Optional
Prepayment Date maintain the right to convert all or any portion of the Notes in
accordance with Article I and any portion of Notes so converted after receipt of an
Optional Prepayment Notice and prior to the Optional Prepayment Date set forth in such
notice and payment of the aggregate Optional Prepayment Amount shall be deducted from the
principal amount of Notes which are otherwise subject to prepayment pursuant to such
notice. If the Borrower delivers an Optional Prepayment Notice and fails to pay the
Optional Prepayment Amount due to the Holders of the Notes within two (2) business days
following the Optional Prepayment Date, the Borrower shall forever forfeit its right to
redeem the Notes pursuant to this Section 5.1.</p>
<b><font FACE="Times New Roman Bold">

<p ALIGN="JUSTIFY">5.2 </font><u>Partial Call Option.</u></b> Notwithstanding anything to
the contrary contained in this Article V, in the event that the Average Daily Price of the
Common Stock, as reported by the Reporting Service, for each day of the month ending on
any Determination Date is below the Initial Market Price, the Borrower may, at its option,
prepay a portion of the outstanding principal amount of the Notes equal to the principal
amount hereof divided by thirty-six (36) plus one month&#146;s interest. The term <b>&quot;Initial
Market Price&quot;</b> means shall mean the volume weighted average price of the Common
Stock for the five (5)</p>

<p ALIGN="center">19</p>

<hr>

<p ALIGN="JUSTIFY">Trading Days immediately preceding the Closing which is $.02. The term <b>&quot;Reporting
Service&quot;</b> means a reliable reporting service mutually acceptable to and
hereinafter designated by the Holder.</p>

<p ALIGN="JUSTIFY">&nbsp;</p>

<p ALIGN="JUSTIFY">&nbsp;</p>

<p ALIGN="CENTER">[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]</p>

<p ALIGN="CENTER">&nbsp;</p>

<p ALIGN="CENTER">20</p>

<hr>
<b>

<p ALIGN="JUSTIFY">IN WITNESS WHEREOF</b>, Borrower has caused this Note to be signed in
its name by its duly authorized officer this 21<sup>st</sup> day of August, 2007.</p>
<b>

<p ALIGN="JUSTIFY">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; ITRONICS
INC.</p>

<p ALIGN="JUSTIFY">&nbsp;</p>

<p ALIGN="JUSTIFY">&nbsp;</p>
</b>

<p ALIGN="JUSTIFY">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; By:
______________________________</p>

<p ALIGN="JUSTIFY">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Dr.
John W. Whitney</p>

<p ALIGN="JUSTIFY">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; President</p>

<p ALIGN="JUSTIFY">&nbsp;</p>

<p ALIGN="center">21</p>

<hr>
<b>

<p ALIGN="CENTER">EXHIBIT A</p>

<p ALIGN="CENTER">NOTICE OF CONVERSION <br>
</b>(To be Executed by the Registered Holder<br>
in order to Convert the Notes)</p>

<p ALIGN="JUSTIFY">The undersigned hereby irrevocably elects to convert $__________
principal amount of the Note (defined below) into shares of common stock, par value $.001
per share (&quot;<b>Common Stock</b>&quot;), of Itronics Inc., a Texas corporation (the
&quot;<b>Borrower</b>&quot;) according to the conditions of the convertible Notes of the
Borrower dated as of August 21,2007 (the &quot;<b>Notes</b>&quot;), as of the date written
below. If securities are to be issued in the name of a person other than the undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates. No fee will be charged to the Holder for any conversion,
except for transfer taxes, if any. A copy of each Note is attached hereto (or evidence of
loss, theft or destruction thereof).</p>

<p ALIGN="JUSTIFY">The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its nominee
with DTC through its Deposit Withdrawal Agent Commission system (&quot;<b>DWAC Transfer</b>&quot;).</p>

<blockquote>
  <blockquote>
    <p ALIGN="JUSTIFY">Name of DTC Prime Broker:_____________________________<u></p>
  </blockquote>
</blockquote>
</u>

<p ALIGN="JUSTIFY">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Account
Number:______________________________________<u></p>
</u>

<p ALIGN="JUSTIFY">In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests that the
Borrower issue a certificate or certificates for the number of shares of Common Stock set
forth below (which numbers are based on the Holder&#146;s calculation attached hereto) in
the name(s) specified immediately below or, if additional space is necessary, on an
attachment hereto:</p>

<blockquote>
  <blockquote>
    <p ALIGN="JUSTIFY">Name:____________________________________<u></p>
  </blockquote>
</blockquote>
</u>

<p ALIGN="JUSTIFY">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Address:__________________________________<u></p>
</u>

<p ALIGN="JUSTIFY">The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable to the undersigned upon conversion of the Notes
shall be made pursuant to registration of the securities under the Securities Act of 1933,
as amended (the &quot;<b>Act</b>&quot;), or pursuant to an exemption from registration
under the Act.</p>

<blockquote>
  <blockquote>
    <blockquote>
      <blockquote>
        <p ALIGN="JUSTIFY">Date of Conversion:___________________________</p>
        <p ALIGN="JUSTIFY">Applicable Conversion Price:____________________</p>
        <p ALIGN="JUSTIFY">Number of Shares of Common Stock to be Issued Pursuant to</p>
        <p ALIGN="JUSTIFY">Conversion of the Notes:______________</p>
        <p ALIGN="JUSTIFY">Signature:___________________________________</p>
        <p ALIGN="JUSTIFY">Name:______________________________________</p>
        <p ALIGN="JUSTIFY">Address:____________________________________</p>
        <p ALIGN="JUSTIFY">&nbsp;</p>
        <p ALIGN="JUSTIFY">&nbsp;</p>
      </blockquote>
    </blockquote>
  </blockquote>
</blockquote>

<p ALIGN="center">22</p>

<hr>

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

<p ALIGN="JUSTIFY">&nbsp;</p>

<p ALIGN="JUSTIFY">&nbsp;</p>

<p align="center">23</p>

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