Arotech Corporation Senior Convertible Note

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 17(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

FOR VALUE RECEIVED, Arotech Corporation a Delaware corporation (the " Company "), hereby promises to pay to the order of [HIGHBRIDGE INTERNATIONAL LLC][ CRANSHIRE CAPITAL L.P.][IROQUOIS MASTER FUND LTD.]   or registered assigns (" Holder ") the amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the " Principal ") when due, whether upon the Maturity Date (as defined below), on any Installment Date with respect to the Installment Amount due on such Installment Date (each, as defined herein), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (" Interest ") on any outstanding Principal at a rate per annum equal to the Interest Rate (as defined below), from the date set out above as the Issuance Date (the " Issuance Date ") until the same becomes due and payable, whether upon an Interest Date (as defined below), any Installment Date, the Maturity Date, acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof).  This Senior Convertible Note (including all Senior Convertible Notes issued in exchange, transfer or replacement hereof, this " Note ") is one of an issue of Senior Convertible Notes (collectively, the " Notes " and such other Senior Convertible Notes, the " Other Notes ") issued pursuant to Section 1(a) of the Securities Purchase Agreement (as defined below).  Certain capitalized terms are defined in Section 30.

(1)            MATURITY .  On each Installment Date, the Company shall pay to the Holder an amount equal to the Installment Amount due on such Installment Date in accordance with Section 8.  On the Maturity Date, the Company shall pay to the Holder an amount in cash representing all outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if any, on such Principal and Interest.  The " Maturity Date " shall be August 15, 2011, as may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) or any event shall have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) that with the passage of time and the failure to cure would result in an Event of Default and (ii) through the date that is ten (10) Business Days after the consummation of a Change of Control in the event that a Change of Control is publicly announced or a Change of Control Notice (as defined in Section 5(b)) is delivered prior to the Maturity Date.

(2)            INTEREST; INTEREST RATE .  Interest on this Note shall commence accruing on the Issuance Date and shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30) day months and shall be payable in arrears on each February 15, May 15, August 15 and November 15 of each year (each, an " Interest Date ") with the first Interest Date being November 15, 2008.  Interest shall be payable on each Interest Date, each Conversion Date (as defined below) and other applicable circumstances in cash, unless such Interest is converted pursuant to Section 3(c) hereof.  Prior to the payment of Interest on an Interest Date, Conversion Date or otherwise, Interest on this Note shall accrue at the Interest Rate and be payable by way of inclusion of the Interest in the Conversion Amount on each Conversion Date in accordance with Section 3(b)(i).  From and after the occurrence of an Event of Default, the Interest Rate shall be increased to fifteen percent (15.0%).  In the event that such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall cease to be effective as of the date of such cure; provided that the Interest as calculated at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of cure of such Event of Default.

(3)            CONVERSION OF NOTES .  This Note shall be convertible into shares of common stock of the Company, par value $0.01 per share (the " Common Stock "), on the terms and conditions set forth in this Section 3.

(a)            Conversion Right .  Subject to the provisions of Section 3(e), at any time or times on or after the Issuance Date, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below).  The Company shall not issue any fraction of a share of Common Stock upon any conversion.  If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share.  The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount.

(b)            Conversion Rate .  The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the " Conversion Rate ").

(i)           " Conversion Amount " means the sum of (A) the portion of the Principal to be converted, redeemed or otherwise with respect to which this determination is being made, (B) accrued and unpaid Interest with respect to such Principal and (C) accrued and unpaid Late Charges with respect to such Principal and Interest.

(ii)          " Conversion Price " means, as of any Conversion Date (as defined below) or other date of determination, two dollars and twenty-five cents ($2.25), subject to further adjustment as provided herein.

(i)            Optional Conversion .  To convert any Conversion Amount into shares of Common Stock on any date (a " Conversion Date "), the Holder shall (A) transmit by facsimile or electronic mail (with a facsimile within 24 hours of such electronic mail) (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the " Conversion Notice ") to the Company and (B) if required by Section 3(c)(iii), surrender this Note to an overnight courier service for delivery to the Company as soon as practicable on or following such date (or an indemnification undertaking with respect to this Note in the case of its loss, theft or destruction).  On or before the first (1 ^st ) Business Day following the date of receipt of a Conversion Notice, the Company shall transmit by facsimile or electronic mail (with a facsimile within 24 hours of such electronic mail) a notice confirming receipt of such Conversion Notice to the Holder and the Company's transfer agent (the " Transfer Agent ").  On or before the second (2 ^nd ) Business Day following the date of receipt of a Conversion Notice (the " Share Delivery Date "), the Company shall (1) (X) provided the Transfer Agent is participating in the Depository Trust Company (" DTC ") Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with DTC through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled and (2) if applicable, pay to the Holder in accordance with Section 3(d), an amount equal to the Make-Whole Amount.  If this Note is physically surrendered for conversion as required by Section 3(c)(iii) and the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than three (3) Business Days after receipt of this Note and at its own expense, issue and deliver to the holder a new Note (in accordance with Section 18(d)) representing the outstanding Principal not converted.  The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.  In the event of a partial conversion of this Note pursuant hereto, the Principal amount converted shall be deducted from the Installment Amounts relating to the Installment Dates as set forth in the Conversion Notice.

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

(iii)          Registration; Book-Entry .  The Company shall maintain a register (the " Register ") for the recordation of the names and addresses of the holders of each Note and the principal amount of the Notes held by such holders (the " Registered Notes ").  The entries in the Register shall be conclusive and binding for all purposes absent manifest error.  The Company and the holders of the Notes shall treat each Person whose name is recorded in the Register as the owner of a Note for all purposes, including, without limitation, the right to receive payments of Principal and Interest hereunder, notwithstanding notice to the contrary.  A Registered Note may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register.  Upon its receipt of a request to assign or sell all or part of any Registered Note by a Holder, the Company shall record the information contained therein in the Register and issue one or more new Registered Notes in the same aggregate principal amount as the principal amount of the surrendered Registered Note to the designated assignee or transferee pursuant to Section 18.  Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting physical surrender and reissue of this Note.  The Holder and the Company shall maintain records (" Records ") showing the Principal, Interest and Late Charges, if any, converted or paid and the dates of such conversions or payments or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.  Within three (3) Trading Days after each Share Delivery Date, the Company shall send the Holder a copy of its Records showing the Principal and Interest converted or paid and the dates of such conversions or payments as of the day following such Share Delivery Date; failure of the Holder to object to the accuracy of the information contained in such Records within two (2) Trading Days of receipt thereof will establish a rebuttable presumption that such Records were accurate on the day following such Share Delivery Date.  Any dispute as to the accuracy of any Records will be resolved in accordance with Section 23.

(iv)          Pro Rata Conversion; Disputes .  In the event that the Company receives a Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion, the Company, subject to Section 3(e), shall convert from each holder of Notes electing to have Notes converted on such date a pro rata amount of such holder's portion of its Notes submitted for conversion based on the principal amount of Notes submitted for conversion on such date by such holder relative to the aggregate principal amount of all Notes submitted for conversion on such date.  In the event of a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 23.

(i)            General .  On each applicable Share Delivery Date, the Company shall pay to the Holder of this Note the Make-Whole Amount due on such date with respect to such Conversion Amount by converting such Make-Whole Amount pursuant to Section 3(d)(ii) below, provided that the Equity Conditions have been satisfied (or waived in writing by the Holder except that the Holders may not waive any Equity Condition to the extent such waiver would cause the Company to be in violation of the rules and regulations of the Principal Market), in accordance with this Section 3(d) (a " Company Make-Whole Conversion "); provided, however, that the Company may, at its option following an effective Make-Whole Election (as defined below) to the Holder, pay the Make-Whole Amount by redeeming such Make-Whole Amount (a " Company Make-Whole Redemption ") or by any combination of a Company Make-Whole Conversion and a Company Make-Whole Redemption so long as all of the outstanding applicable Make-Whole Amount shall be converted and/or redeemed by the Company on the applicable Share Delivery Date, subject to the provisions of this Section 3(d).  At any time after the Issuance Date, in the event that the Company no longer desires to pay the Make-Whole Amount entirely as a Company Make-Whole Conversion, the Company shall deliver a written notice to all holders (each, a " Make-Whole Election " and the date all of the holders receive such notice is referred to as the " Make-Whole Election Date ") which Make-Whole Election shall (i) indicate the portion of the applicable Make-Whole Amount that shall be converted pursuant to a Company Make-Whole Conversion (such amount to be converted, the " Company Make-Whole Conversion Amount ") and the portion of the applicable Make-Whole Amount that the Company elects to redeem, in whole or in part (such amount to be redeemed, the " Company Make-Whole Redemption Amount ") and (ii) if the Make-Whole Amount is to be paid, in whole or in part, pursuant to a Company Make-Whole Conversion, certify that the Equity Conditions have been satisfied as of the applicable Make-Whole Election Date and the Company reasonably expects that the Equity Conditions will be satisfied as of the Conversion Date.  Notwithstanding the foregoing, a Make-Whole Election shall not be effective with respect to any conversions under this Note until the twenty-fourth (24 ^th ) Trading Day after the applicable Make-Whole Election Date.  If the Company does not deliver a Make-Whole Election in accordance with this Section 3(d), then the Company shall be deemed to have delivered a Make-Whole Election confirming a Company Make-Whole Conversion and shall be deemed to have certified that the Equity Conditions in connection with any such conversion have been satisfied.  The Company Make-Whole Conversion Amount shall be converted in accordance with Section 3(d)(ii) and the Company Make-Whole Redemption Amount shall be redeemed in accordance with Section 3(d)(iii).

(ii)           Mechanics of Company Conversion .  Subject to Section 3(e), in the event of a Company Make-Whole Conversion, then on the Share Delivery Date, the Company shall deliver to the Holder's account with DTC such number of shares of Common Stock (the " Initial Make-Whole Shares ," which for purposes of the Transaction Documents, shall be considered Conversion Shares) equal to the quotient of (x) the Company Make-Whole Conversion Amount with respect to the applicable Conversion Date divided by (y) the Initial Make-Whole Conversion Price.  In addition, on the twenty-fourth (24 ^th ) Trading Day following the applicable Conversion Date (the " Make-Whole Settlement Date "), the Company shall deliver to the Holder's account with DTC an additional number of shares of Common Stock equal to the Make-Whole Balance Shares (which for purposes of the Transaction Documents shall be considered Conversion Shares).  If there is an Equity Conditions Failure at any time during the Additional Make-Whole Measuring Period, then, at the option of the Holder designated in writing to the Company, the Holder may require the Company to pay, by wire transfer of immediately available funds, an amount in cash equal to the product of (x) the Make-Whole Balance Shares by (y) the greatest of, the Initial Make-Whole Conversion Price, the Additional Make-Whole Conversion Price and the Conversion Price.  If the Company fails to deliver the cash required pursuant to the preceding sentence on or before the applicable Make-Whole Settlement Date by payment of such amount on the applicable Make-Whole Settlement Date, then the Holder shall have the rights set forth in Section 10(a) as if the Company failed to pay the applicable Company Make-Whole Redemption Amount and all other rights under this Note (including, without limitation, such failure constituting an Event of Default described in Section 4(a)(v)).

(iii)          Mechanics of Company Redemption .  If the Company elects a Company Make-Whole Redemption in accordance with Section 3(d)(i), then the Company Make-Whole Redemption Amount which is to be paid to the Holder on the applicable Share Delivery Date shall be redeemed by the Company and the Company shall pay to the Holder on such Share Delivery Date, by wire transfer of immediately available funds, an amount in cash equal to 100% of the Company Make-Whole Redemption Amount.  If the Company fails to redeem the Company Make-Whole Redemption Amount on the applicable Make-Whole Settlement Date by payment of the Company Make-Whole Redemption Amount on such date, then at the option of the Holder designated in writing to the Company (any such designation, a " Conversion Notice " for purposes of this Note), the Holder may require the Company to convert all or any part of the Company Make-Whole Redemption Amount at the lowest of (A) the Initial Make-Whole Conversion Price, (B) the Additional Make-Whole Conversion Price, and (C) the Conversion Price.  Conversions required by this Section 3(d)(iii) shall be made in accordance with the provisions of Section 3(c).  Notwithstanding anything to the contrary in this Section 3(d)(iii), but subject to Section 3(e), until the Company Make-Whole Redemption Amount (together with any interest thereon) is paid in full, the Company Make-Whole Redemption Amount (together with any interest thereon) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3.

(i)            Beneficial Ownership .  The Company shall not effect any conversion of this Note, and the Holder of this Note shall not have the right to convert any portion of this Note pursuant to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together with the Holder's affiliates) would beneficially own in excess of 4.99% (the " Maximum Percentage ") of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any Other Notes) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 3(e)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended.  For purposes of this Section 3(e)(i), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-K, Form 10-Q or Form 8-K, as the case may be (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written or oral request of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that (x) any such increase will not be effective until the sixty-first (61 ^st ) day after such notice is delivered to the Company, and (y) any such increase or decrease will apply only to the Holder and not to any other holder of Notes.  The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 3(e)(i) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.

(ii)           Principal Market Regulation .  Unless and until the Stockholder Approval (as defined in the Securities Purchase Agreement) has been obtained, the Company shall not (A) be obligated to issue any shares of Common Stock upon conversion of this Note and (B) issue any shares of Common Stock under this Note as payment of principal or interest, if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company may issue upon conversion of the Notes without breaching the Company's obligations under the rules or regulations of the Principal Market (the " Exchange Cap ").  Until such Stockholder Approval is obtained, no purchaser of the Notes pursuant to the Securities Purchase Agreement (the " Purchasers ") shall be issued in the aggregate, upon conversion of the Notes, shares of Common Stock (as adjusted for stock splits, stock dividends, stock combinations and other similar transactions) in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the principal amount of Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on the Closing Date and the denominator of which is the aggregate principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on the Closing Date (with respect to each Purchaser, the " Exchange Cap Allocation ").  In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser's Notes, the transferee shall be allocated a pro rata portion of such Purchaser's Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee.  In the event that any holder of Notes shall convert all of such holder's Notes into a number of shares of Common Stock which, in the aggregate, is less than such holder's Exchange Cap Allocation, then the difference between such holder's Exchange Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated to the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in proportion to the aggregate principal amount of the Notes then held by each such holder.

(a)            Event of Default .  Each of the following events shall constitute an " Event of Default ":

(i)          [reserved]

(ii)         the suspension from trading (other than a general suspension of trading of all stocks on the Principal Market) or failure of the Common Stock to be listed on the Principal Market or on an Eligible Market for a period of five (5) consecutive Trading Days or for more than an aggregate of five (5) Trading Days in any 365-day period;

(iii)        the Company's (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within ten (10) Trading Days after the applicable Conversion Date or (B) notice, written or oral, to any holder of the Notes, including by way of public announcement or through any of its agents, at any time, of its intention not to comply with a request for conversion of any Notes into shares of Common Stock that is tendered in accordance with the provisions of the Notes;

(iv)        [reserved]

(v)         the Company's failure to pay to the Holder any amount of Principal (including any Installment Amount), Interest, Late Charges, Make-Whole Amount or other amounts when and as due under this Note (including, without limitation, the Company's failure to pay any redemption amounts hereunder) or any other Transaction Document (as defined in the Securities Purchase Agreement) or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated hereby and thereby to which the Holder is a party, except, (i) in the case of a failure to pay Interest and/or Late Charges when and as due, in which case only if such failure continues for a period of at least five (5) Trading Days and (ii) in the case of a failure to pay in full the amount of cash due pursuant to a Buy-In within seven (7) days after notice thereof is delivered or a failure to pay liquidated damages due pursuant to the Transaction Documents within seven (7) days of the date of the request for such payments;

(vi)        the Company or any Subsidiary defaults in any of its obligations under any other debenture or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness in excess of $500,000, whether such Indebtedness now exists or is hereafter created, and such default results in such Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;

(vii)       the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively, " Bankruptcy Law "), (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official or such appointment is not discharged or stayed within sixty (60) days (a " Custodian "), (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due or any such involuntary case is not dismissed within sixty (60) days of commencement;

(viii)      a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the Company or any of its Subsidiaries;

(ix)         a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against the Company or any of its Subsidiaries and which judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $1,000,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of such judgment;

(x)          other than as specifically set forth in another clause of this Section 4(a), the Company breaches any representation, warranty, covenant or other term or condition of any Transaction Document; provided, however, that in the case of a breach of a covenant which is curable, only if such breach continues for a period of at least ten (10) calendar days after the date on which written notice of such default is first given by the Holder or any holder of Other Notes;

(xi)         any breach or failure to comply in (A) any material respect with Sections 8 or 9 of this Note or (B) any respect with Section 14 of this Note or;

(xii)        any Event of Default (as defined in the Other Notes) occurs with respect to any Other Notes.

(b)            Redemption Right .  Promptly after becoming aware of the occurrence of an Event of Default with respect to this Note or any Other Note, the Company shall deliver written notice thereof via facsimile and overnight courier (an " Event of Default Notice ") to the Holder.  At any time after the earlier of the Holder's receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (the " Event of Default Redemption Notice ") to the Company, which Event of Default Redemption Notice shall indicate the Conversion Amount of this Note the Holder is electing to redeem.  Each portion of this Note subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to the greater of (i) the product of (x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii) the product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time as the Holder delivers an Event of Default Redemption Notice and (B) the greater of (1) the Closing Sale Price of the Common Stock on the date immediately preceding such Event of Default, (2) the Closing Sale Price of the Common Stock on the date immediately after such Event of Default and (3) the Closing Sale Price of the Common Stock on the date the Holder delivers the Event of Default Redemption Notice (the " Event of Default Redemption Price ").  Redemptions required by this Section 4(b) shall be made in accordance with the provisions of Section 10.  In the event of a partial redemption of the Note pursuant hereto, the Principal amount redeemed shall be deducted from the Installment Amounts relating to the applicable Installment Dates as set forth in the Event of Default Redemption Notice.  To the extent redemptions required by this Section 4(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be deemed to be voluntary prepayments.  The parties hereto agree that in the event of the Company's redemption of any portion of the Note under this Section 4(b), the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder.  Accordingly, any Redemption Premium due under this Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder's actual loss of its investment opportunity and not as a penalty.

(5)            RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL .

(a)            Assumption .  The Company shall not enter into or be party to a Fundamental Transaction unless (i)  the Successor Entity assumes in writing all of the obligations of the Company under this Note and the other Transaction Documents in accordance with the provisions of this Section 5(a) pursuant to written agreements in form and substance satisfactory to the Required Holders and approved by the Required Holders prior to such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Notes held by such holder and having similar ranking to the Notes, and satisfactory to the Required Holders and (ii) the Successor Entity (including its Parent Entity) is a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market.  Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note with the same effect as if such Successor Entity had been named as the Company herein.  Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon conversion or redemption of this Note at any time after the consummation of the Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property) issuable upon the conversion or redemption of the Notes prior to such Fundamental Transaction, such shares of publicly traded common stock (or its equivalent) of the Successor Entity (including its Parent Entity), as adjusted in accordance with the provisions of this Note.  The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion or redemption of this Note.

(b)            Redemption Right .  No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier to the Holder (a " Change of Control Notice ").  At any time during the period beginning after the Holder's receipt of a Change of Control Notice and ending on the date of the consummation of such Change of Control (or, in the event a Change of Control Notice is not delivered at least ten (10) days prior to a Change of Control, at any time on or after the date which is ten (10) days prior to a Change of Control and ending ten (10) days after the consummation of such Change of Control), the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (" Change of Control Redemption Notice ") to the Company, which Change of Control Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem.  The portion of this Note subject to redemption pursuant to this Section 5 shall be redeemed by the Company at a price equal to the greater of (i) the product of (x) the Conversion Amount being redeemed and (y) the quotient determined by dividing (A) the Closing Sale Price of the Common Stock immediately following the public announcement of such proposed Change of Control by (B) the Conversion Price and (ii) 125% of the Conversion Amount plus accrued and unpaid Interest thereon being redeemed (the " Change of Control Redemption Price ").  Redemptions required by this Section 5 shall be made in accordance with the provisions of Section 10 and shall have priority to payments to shareholders in connection with a Change of Control.  Notwithstanding anything to the contrary in this Section 5, but subject to Section 3(e), until the Change of Control Redemption Price (together with any interest thereon) is paid in full, the Conversion Amount submitted for redemption under this Section 5(b) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3.  In the event of a partial redemption of this Note pursuant hereto, the Principal amount redeemed shall be deducted from the Installment Amounts relating to the applicable Installment Dates as set forth in the Change of Control Redemption Notice.  The parties hereto agree that in the event of the Company's redemption of any portion of the Note under this Section 5(b), the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder.  Accordingly, any Change of Control redemption premium due under this Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder's actual loss of its investment opportunity and not as a penalty.

(6)            RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS .

(a)            Purchase Rights .  If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the " Purchase Rights "), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without taking into account any limitations or restrictions on the convertibility of this Note) 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.

(b)            Other Corporate Events .  In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a " Corporate Event "), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Note, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled  to receive or retain with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Note) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Note initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate.  Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the Required Holders.  The provisions of this Section shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Note.

(7)            RIGHTS UPON ISSUANCE OF OTHER SECURITIES .

(a)            Adjustment of Conversion Price upon Issuance of Common Stock .  If and whenever on or after the Subscription Date and on or prior to the two (2) year anniversary of the Initial Effective Date (as defined in the Registration Rights Agreement), the Company issues or sells, or in accordance with this Section 7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock issued or sold or deemed to have been issued or sold by the Company in connection with any Excluded Security) for a consideration per share (the " Applicable Price ") less than a price equal to the Conversion Price in effect immediately prior to such issue or sale (the foregoing a " Dilutive Issuance "), then immediately after such Dilutive Issuance the Conversion Price then in effect shall be reduced to the Applicable Price with respect to a portion of the Principal amount of this Note, with the portion of the Principal amount that is subject to the adjusted Conversion Price to be determined by multiplying (i) the then outstanding Principal amount of this Note whose Conversion Price is greater than the Applicable Price by (ii) the Adjustment Fraction.  The adjustment of the Conversion Price under this Section 7(a) allows for multiple Conversion Prices to be applicable under this Note.  Further adjustments shall be made successively for successive Dilutive Issuances with adjustments to the Conversion Price affecting portions of the Note with the highest Conversion Price first and then successively to the portions of the Note with the lowest Conversion Price.  For purposes of example only, if the then current Conversion Price is $2.50 and the outstanding Principal is $5,000,000 and the Company issues 1,000,000 shares of Common Stock at a price of $1.50, then the adjusted Conversion Price of $1.50 will be applied with respect to 50% of the Principal amount of this Note such that $2,500,000 of the Note will have an adjusted Conversion Price of $1.50 and the Conversion Price will not be adjusted with respect to the remaining $2,500,000 of the Note.  If there is a subsequent Dilutive Issuance where the Company issues 1,000,000 shares of Common Stock at a price of $2.00, then the adjusted Conversion Price of $2.00 will be applied to all of the Principal amount with the Conversion Price of $2.50 so that $2,500,000 of the Note will have an adjusted Conversion Price of $2.00 and $2,500,000 of the Note will have an adjusted Conversion Price of $1.50.  If there is a third Dilutive Issuance where the Company issues 333,333 shares of Common Stock at a price of $1.00, since the $1.00 is lower than each of the existing portions of the Principal, then the formula will be applied to portion with the higher Conversion Price first so that the Principal amount that will get the Conversion Price adjustment to $1.00 will be $666,666 of the $2,500,000 of the Note that has a Conversion Price of $2.00, such that after such third Dilutive Issuance (A) $666,666 of the Note will have a Conversion Price of $1.00, (B) $1,833,333 of the Note will have a Conversion Price of $2.00, and (C) $2,500,000 of the Note will have a Conversion Price of $1.50.  For purposes of determining the adjusted Conversion Price under this Section 7(a), the following shall be applicable:

(i)            Issuance of Options .  If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section 7(a)(i), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security issuable upon exercise of such Option.  No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange or exercise of such Convertible Securities.

(ii)           Issuance of Convertible Securities .  If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share.  For the purposes of this Section 7(a)(ii), the "lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion or exchange or exercise of such Convertible Security.  No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock upon conversion or exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 7(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

(iii)          Change in Option Price or Rate of Conversion .  If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section 7(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Subscription Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect.

(iv)          Calculation of Consideration Received .  In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, (x) the Options will be deemed to have been issued for a value determined by use of the Black Scholes Option Pricing Model (the " Option Value ") and (y) the other securities issued or sold in such integrated transaction shall be deemed to have been issued for the difference of (I) the aggregate consideration received by the Company, less (II) the Option Value.  If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor.  If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Closing Sale Price of such securities on the date of receipt.  If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined jointly by the Company and the Required Holders.  If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the " Valuation Event "), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10 ^th ) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Required Holders.  The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.

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