NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES WHICH MAY BE ISSUABLE PURSUANT HERETO HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE BEING
OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER [REGULATION S
(“REGULATION S”)] [REGULATION D (“REGULATION D”)] PROMULGATED UNDER THE ACT. 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
ACT, OR (B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT OR
(II) UNLESS SOLD PURSUANT TO, AND IN ACCORDANCE WITH, RULE 144 OR RULE 144A
UNDER THE ACT OR OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF
REGULATION S UNDER THE ACT AND IN COMPLIANCE WITH APPLICABLE LOCAL LAWS AND
REGULATIONS. NOTWITHSTANDING THE FOREGOING, SUBJECT TO COMPLIANCE WITH
APPLICABLE SECURITIES LAWS, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THIS NOTE IN THE EVENT OF A
PARTIAL CONVERSION. AS A RESULT, FOLLOWING ANY CONVERSION OF ANY PORTION OF THIS
NOTE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN
THE PRINCIPAL AMOUNT SET FORTH BELOW.

SJ ELECTRONICS, INC.

15% SENIOR SECURED CONVERTIBLE NOTE DUE 2009

Issuance Date: May___, 2008
Original Principal Amount:
U.S. $_____________

FOR VALUE RECEIVED, SJ ELECTRONICS, INC. (f/k/a ACHERON, INC.), a Nevada
corporation (hereinafter called the “Company”), hereby promises to pay to the
order of [NAME], [ADDRESS], or registered assigns (the “Holder”), the sum of
                  Dollars ($                                        ), on the
Maturity Date, and to pay interest on the unpaid principal balance hereof at the
Applicable Rate from the date hereof, until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or repurchase in
accordance with the terms hereof or otherwise. Any amount, including, without
limitation, principal of or interest on this Note, the Optional Prepayment Price
and the Repurchase Price, that is payable under this Note that is not paid when
due shall bear interest at the Default Rate from the due date thereof until the
same is paid (“Default Interest”). Regular interest shall accrue monthly and be
payable on the Maturity Date. Regular interest on this Note shall be computed on
the basis of a 360-day year of twelve 30-day months and actual days elapsed. No
regular interest shall be payable on an interest payment date on any portion of
the principal amount of this Note which shall have been prepaid prior to such
interest payment date so long as the Company shall have complied in full with
its obligations with respect to such prepayment.
 
 
 

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All payments of principal, premium, if any, interest, and other amounts on this
Note shall be made in lawful money of the United States of America. All payments
shall be made by wire transfer of immediately available funds to such account as
the Holder may from time to time designate by written notice 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. Certain
capitalized terms used in this Note are defined in Article I.

The obligations of the Company under this Note shall rank in right of payment on
a parity with all other unsubordinated obligations of the Company for
indebtedness for borrowed money or the purchase price of property. This Note is
issued pursuant to the Note Purchase Agreement and the Holder and this Note are
subject to the terms and entitled to the benefits of the Note Purchase
Agreement. This Note is entitled to the benefits of the Pledge and Security
Agreement.

This Note is one of a duly authorized issue of the Company’s 15% Senior Secured
Convertible Notes due 2009 limited to an aggregate principal amount of
$7,000,000.00 (excluding 15% Senior Secured Convertible Notes due 2009 issued in
replacement of lost, stolen, destroyed or mutilated notes or issued on transfer
of such notes).

The following terms shall apply to this Note:

ARTICLE I

DEFINITIONS

1.1 Certain Defined Terms. (a) All the agreements or instruments herein defined
shall mean such agreements or instruments as the same may from time to time be
supplemented or amended or the terms thereof waived or modified to the extent
permitted by, and in accordance with, the terms thereof and of this Note.

(b) The following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):

 
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“Accredited Investor” means an “accredited investor” as that term is defined in
Rule 501 of Regulation D under the 1933 Act.

“Affiliate” means, with respect to any Person, any other Person that directly,
or indirectly through one or more intermediaries, controls, is controlled by or
is under common control with the subject Person. For purposes of this
definition, “control” (including, with correlative meaning, the terms
“controlled by” and “under common control with”), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.

“Aggregation Parties” shall have the meaning provided in Section 6.7(a).

“AMEX” means the American Stock Exchange, Inc.

“Applicable Rate” means 6 percent per annum; provided, however, that if an Event
of Default shall have occurred, then the Applicable Rate shall be increased to
12 percent per annum during the period from the date of such Event of Default
until the date no Event of Default is continuing (or such lesser rate as shall
be the highest rate permitted by applicable law).

“Board of Directors” means the Board of Directors of the Company.

“Board Resolution” means a copy of a resolution certified by the Secretary or an
Assistant Secretary of the Company to have been duly adopted by the Board of
Directors, or duly authorized committee thereof (to the extent permitted by
applicable law), and to be in full force and effect on the date of such
certification, and delivered to the Holder.

“Business Day” means any day other than a Saturday, Sunday or a day on which
commercial banks in The City of New York are authorized or required by law or
executive order to remain closed.

“Collateral” shall have the meaning provided in the Security Agreement.

“Collateral Agent” means Tri-State Title & Escrow, LLC, as collateral agent
under the Security Agreement, or its successors.

“Common Stock” means the Common Stock, par value $.001 per share, of the
Company, or any shares of capital stock of the Company into which such shares
shall be changed or reclassified after the Issuance Date.

“Common Stock Equivalent” means any warrant, option, subscription or purchase
right with respect to shares of Common Stock, any security convertible into,
exchangeable for, or otherwise entitling the holder thereof to acquire, shares
of Common Stock or any warrant, option, subscription or purchase right with
respect to any such convertible, exchangeable or other security.
 
 
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“Company” shall have the meaning provided in the first paragraph of this Note.

“Company Certificate” means a certificate of the Company signed by an Officer.

“Company Notice” means a Company Notice in the form attached hereto as Exhibit
A.

“Computed Market Price” shall mean the arithmetic average of the daily VWAPs for
each of the three Trading Days immediately preceding the applicable Measurement
Date (such VWAPs being appropriately and equitably adjusted for any stock
splits, stock dividends, recapitalizations and the like occurring or for which
the record date occurs during such three Trading Days).

“Conversion Date” means the date on which a Conversion Notice is given in
accordance with Section 6.2(a).

“Conversion Notice” means a duly executed Notice of Conversion of 15% Senior
Secured Convertible Note Due 2009 substantially in the form of Exhibit C to this
Note.

“Conversion Price” means $1.30, subject to adjustment as provided in Section 6.3
hereof and Section 6(i) of the Note Purchase Agreement.

“Current Fair Market Value” when used with respect to the Common Stock as of a
specified date means with respect to each share of Common Stock the average of
the closing prices of the Common Stock sold on all securities exchanges
(including the NYSE, the AMEX, the Nasdaq and the Nasdaq Capital Market) on
which the Common Stock may at the time be listed, or, if there have been no
sales on any such exchange on such day, the average of the highest bid and
lowest asked prices on all such exchanges at the end of regular trading on such
day, or, if on such day the  Common Stock is not so listed, the average of 
the representative bid and asked prices quoted in  the  NASDAQ System as  of
 4:00 p.m., New York City time, or, if on such day the Common Stock is not
quoted in the NASDAQ System, the average of the highest bid and lowest asked
price on such day in the domestic over-the-counter market as reported by the
Pink Sheets, LLC, or any similar successor organization, in each such case
averaged over a period of five Trading Days consisting of the day as of which
the Current Fair Market Value of Common Stock is being determined (or if such
day is not a Trading Day, the Trading Day next preceding such day) and the four
consecutive Trading Days prior to such day. If on the date for which Current
Fair Market Value is to be determined the Common Stock is not listed on any
securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the Current Fair Market Value of Common Stock shall be the greater of
(i) the highest price per share of Common Stock at which the Company has sold
shares of Common Stock or Common Stock Equivalents during the 365 days prior to
the date of such determination and (ii) the highest price per share which the
Company could then obtain from a willing buyer (not an employee or director of
the Company at the time of determination) for shares of Common Stock sold by the
Company, from authorized but unissued shares, as determined in good faith by the
Board of Directors.
 
 
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“Current Market Price” shall mean the arithmetic average of the daily Market
Prices per share of Common Stock for the five consecutive Trading Days
immediately prior to the date in question; provided, however, that (1) if the
“ex” date (as hereinafter defined) for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
Conversion Price pursuant to Section 6.3(a), (b), (c), (d) or (e), occurs during
such five consecutive Trading Days, the Market Price for each Trading Day prior
to the “ex” date for such other event shall be adjusted by multiplying such
Market Price by the same fraction by which the Conversion Price is so required
to be adjusted as a result of such other event, (2) if the “ex” date for any
event (other than the issuance or distribution requiring such computation) that
requires an adjustment to the Conversion Price pursuant to Section 6.3(a), (b),
(c), (d) or (e), occurs on or after the “ex” date for the issuance or
distribution requiring such computation and prior to the day in question, the
Market Price for each Trading Day on and after the “ex” date for such other
event shall be adjusted by multiplying such Market Price by the reciprocal of
the fraction by which the Conversion Price is so required to be adjusted as a
result of such other event, and (3) if the “ex” date for the issuance or
distribution requiring such computation is prior to the day in question, after
taking into account any adjustment required pursuant to clause (1) or (2) of
this proviso, the Market Price for each Trading Day on or after such “ex” date
shall be adjusted by adding thereto the amount of any cash and the fair market
value (as determined by the Board of Directors in a manner consistent with any
determination of such value for purposes of Section 6.3(d), whose determination
shall be conclusive and described in a Board Resolution) of the evidences of
indebtedness, shares of capital stock or assets being distributed applicable to
one share of Common Stock as of the close of business on the day before such
“ex” date. Notwithstanding the foregoing, whenever successive adjustments to the
Conversion Price are called for pursuant to Section 6.3, such adjustments shall
be made to the Current Market Price as may be necessary or appropriate to
effectuate the intent of Section 6.3 and to avoid unjust or inequitable results
as determined in good faith by the Board of Directors. For purposes of this
definition, “‘ex’ date” shall mean, with respect to an event, a security, and a
sale of such security, the first date on which the seller of such security, and
not the buyer, will receive the benefit (or other effect) of the event as to
such security.

“Default Interest” shall have the meaning provided in the first paragraph of
this Note.

“Default Rate” means 20 percent per annum (or such lesser rate equal to the
highest rate permitted by applicable law).

“Disclosure Documents” shall have the meaning provided in the Note Purchase
Agreement.

“DTC” shall have the meaning provided in Section 6.2(b).

“Eligible Bank” means a corporation organized or existing under the laws of the
United States or any state, having combined capital and surplus of at least $100
million and subject to supervision by federal or state authority and which has a
branch located in New York, New York.
 
 
5

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“Event of Default” shall have the meaning provided in Section 4.1.

“Excluded Shares” shall have the meaning provided in Section 6.7.

“Extended Optional Prepayment Date” means with respect to any portion of this
Note to which Section 2.1(d) applies, the date that is 30 Trading Days after the
latest date on which the Restricted Ownership Percentage no longer restricts the
Holder’s right to convert the remaining Unconverted Portion, but in no event
later than the Final Maturity Date.

“FAST” shall have the meaning provided in Section 6.2(b)

“Fundamental Change” means

  (a) Any consolidation or merger of the Company or any Subsidiary with or into
another entity (other than a merger or consolidation of a Subsidiary into the
Company or a wholly-owned Subsidiary in connection with which no change in
outstanding Common Stock occurs) where the stockholders of the Company
immediately prior to such transaction do not collectively own at least 51% of
the outstanding voting securities of the surviving corporation of such
consolidation or merger immediately following such transaction; or the sale of
all or substantially all of the assets of the Company and the Subsidiaries in a
single transaction or a series of related transactions; or

(b) The occurrence of any transaction or event in connection with which all or
substantially all the Common Stock shall be exchanged for, converted into,
acquired for or constitute the right to receive consideration (whether by means
of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise) which is not all
or substantially all common stock which is (or, upon consummation of or
immediately following such transaction or event, will be) listed on a national
securities exchange or approved for quotation on Nasdaq or any similar United
States system of automated dissemination of transaction reporting of securities
prices; or

(c) The acquisition by a Person or entity or group of Persons or entities acting
in concert as a partnership, limited partnership, syndicate or group, as a
result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, of beneficial ownership of securities of the
Company representing 50% or more of the combined voting power of the outstanding
voting securities of the Company ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of directors.
 
 
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“Generally Accepted Accounting Principles” for any Person means the generally
accepted accounting principles and practices applied by such Person from time to
time in the preparation of its audited financial statements.

“Holder” shall have the meaning provided in the first paragraph of this Note.

“Holder Notice” means a Holder Notice in the form attached hereto as Exhibit B.

“Indebtedness” means, when used with respect to any Person, without duplication:

(1) all indebtedness, obligations and other liabilities (contingent or
otherwise) of such Person for borrowed money (including obligations of such
Person in respect of overdrafts, foreign exchange contracts, currency exchange
agreements, currency purchase or similar agreements, Interest Rate Protection
Agreements, and any loans or advances from banks, whether or not evidenced by
notes or similar instruments) or evidenced by bonds, debentures, notes or other
instruments for the payment of money, or incurred in connection with the
acquisition of any property, services or assets (whether or not the recourse of
the lender is to the whole of the assets of such Person or to only a portion
thereof), other than any account payable or other accrued current liability or
obligation to trade creditors incurred in the ordinary course of business in
connection with the obtaining of materials or services;
 
(2) all reimbursement obligations and other liabilities (contingent or
otherwise) of such Person with respect to letters of credit, bank guarantees,
bankers’ acceptances, surety bonds, performance bonds or other guaranty of
contractual performance;

(3) all obligations and liabilities (contingent or otherwise) in respect of (a)
leases of such Person required, in conformity with Generally Accepted Accounting
Principles, to be accounted for as capitalized lease obligations on the balance
sheet of such Person and (b) any lease or related documents (including a
purchase agreement) in connection with the lease of real property which provides
that such Person is contractually obligated to purchase or cause a third party
to purchase the leased property and thereby guarantee a minimum residual value
of the leased property to the landlord and the obligations of such Person under
such lease or related document to purchase or to cause a third party to purchase
the leased property;

(4) all direct or indirect guaranties or similar agreements by such Person in
respect of, and obligations or liabilities (contingent or otherwise) of such
Person to purchase or otherwise acquire or otherwise assure a creditor against
loss in respect of, indebtedness, obligations or liabilities of another Person
of the kind described in clauses (1) through (3);

(5) any indebtedness or other obligations described in clauses (1) through (4)
secured by any mortgage, pledge, lien or other encumbrance existing on property
which is owned or held by such Person, regardless of whether the indebtedness or
other obligation secured thereby shall be payable by or shall have been assumed
by such Person; and
 
 
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(6) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation or
liability of the kind described in clauses (1) through (5).

“Interest Rate Protection Agreement” means, with respect to any Person, any
interest rate swap agreement, interest rate cap or collar agreement or other
financial agreement or arrangement designed to protect such Person against
fluctuations in interest rates, as in effect from time to time.

“Issuance Date” means May __, 2008.

“Lien” means any mortgage, lien, pledge, security interest or other charge or
encumbrance, including, without limitation, the lien or retained security title
of a conditional vendor.

“Majority Holders” means, at any time, the holders of a majority of the
aggregate principal amount of this Note and the Other Notes outstanding at such
time.

“Market Price” with respect to any security on any day shall mean the closing
bid price of such security on such day on the Nasdaq, the Nasdaq Capital Market,
the NYSE or the AMEX, as applicable, or, if such security is not listed or
admitted to trading on the Nasdaq, the Nasdaq Capital Market, the NYSE or the
AMEX, on the principal national securities exchange or quotation system on which
such security is quoted or listed or admitted to trading, in any such case as
reported by Bloomberg, L.P. (or if such source ceases to be available,
comparable source selected by the Holder and acceptable to the Company in its
reasonable judgment) or, if not quoted or listed or admitted to trading on any
national securities exchange or quotation system, the average of the closing bid
and asked prices of such security on the over-the-counter market on the day in
question, as reported by Pink Sheets, LLC, or a similar generally accepted
reporting service, or if not so available, in such manner as furnished by any
NYSE member firm selected from time to time by the Board of Directors for that
purpose, or a price determined in good faith by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution.

“Maturity Date” means May __, 2009.

“Measurement Date” means a date on which Computed Market Price is calculated.___

“Nasdaq” means the Nasdaq Global Market.

“1934 Act” means the Securities Exchange Act of 1934, as amended.

“1933 Act” means the Securities Act of 1933, as amended.
 
 
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“Note” means this instrument as originally executed, or if later amended or
supplemented in accordance with its terms, then as so amended or supplemented.

“Note Purchase Agreement” means the Note Purchase Agreement, dated as of May __,
2008, by and between the Company and the original Holder of this Note or its
predecessor instrument.

“NYSE” means the New York Stock Exchange, Inc.

“Officer” means the Chairman of the Board, the Chief Executive Officer, the
President or the Chief Financial Officer of the Company.

“Optional Prepayment Date” means the Business Day on which this Note is to be
prepaid pursuant to Section 2.1.

“Optional Prepayment Notice” means an Optional Prepayment Notice in the form
attached hereto as Exhibit D.

“Optional Prepayment Period” means the period which commences on the date hereof
and ends on the Maturity Date, provided that all conditions set forth in Section
2.1 have been met.

“Optional Prepayment Price” means an amount in cash equal to the sum of (1) 125%
of the outstanding principal amount of this Note plus (2) accrued and unpaid
interest on such principal amount to the Optional Prepayment Date plus (3)
accrued and unpaid Default Interest, if any, on the amount referred to in the
immediately preceding clause (2) at the rate provided in this Note.

“Other Notes” means the several 15% Senior Secured Convertible Notes due 2009,
issued by the Company pursuant to the Note Purchase Agreement.

“Pledge and Security Agreement” means the Pledge and Security Agreement, dated
as of May __, 2008, by and between the Company and the Collateral Agent.

“Permitted Indebtedness” means

(1) Indebtedness outstanding on the Issuance Date prior to issuance of this Note
and reflected in the Company’s financial statements included in the Disclosure
Documents;

(2) Indebtedness evidenced by this Note and the Other Notes;
 
 
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(3) Indebtedness outstanding on, or incurred after, the Issuance Date so long as
(A) such Indebtedness (x) is incurred for the purpose of acquiring equipment
owned or used or to be owned or used by the Company or any Subsidiary (or for
the purpose of acquiring the capital stock or similar equity interests of a
Subsidiary that is formed for the limited purpose of owning same and does not
own or hold any other material assets) and does not exceed the purchase price of
the equipment, capital stock or other equity interest so acquired plus
reasonable transaction expenses and (y) if secured, is secured solely by the
interest of the Company or one of its Subsidiaries in the equipment so acquired
and rights related thereto or (B) is the reimbursement obligations and other
liabilities (contingent or otherwise) of the Company or any Subsidiary with
respect to letters of credit issued in lieu of cash security deposits for leases
of real property or equipment used by the Company or any Subsidiary, or
commercial or standby letters of credit issued in the ordinary course of the
business of the Company and its Subsidiaries (the amount of which shall for this
purpose be deemed to be the maximum reimbursement obligations and other
liabilities (contingent or otherwise) with respect to such letters of credit,
whether or not a drawing thereunder has been made);

(4) Indebtedness incurred after the Issuance Date that is secured solely by raw
materials, works in progress and finished goods inventory and accounts
receivable in a financing by a bank, finance company or other institutional
lender providing receivables or inventory financing;

(5) Indebtedness incurred after the Issuance Date which is unsecured,
subordinated to the Note and the Other Notes as to payment on terms approved in
advance of such incurrence by the Majority Holders as evidenced by the written
approval of the Majority Holders;

(6) endorsements for collection or deposit in the ordinary course of business;

(7) in the case of any Subsidiary, Indebtedness owed by such Subsidiary to the
Company; and

(8) Permitted Refinancing Indebtedness;

in each such case so long as at the time of incurrence of such Indebtedness no
Event of Default has occurred and is continuing or would result from such
incurrence and no event which, with notice or passage of time, or both, would
become an Event of Default has occurred and is continuing or would result from
such incurrence and so long as in the case of such Indebtedness referred to in
the preceding clauses (3) through (5), inclusive, incurrence of such
Indebtedness shall have been approved by the Board of Directors prior to the
incurrence thereof.

“Permitted Liens” means:

(a) Liens upon any property of any Subsidiary or Subsidiaries as security for
indebtedness owing by such Subsidiary to the Company;
 
 
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(b) purchase money Liens upon any property acquired by the Company or any
Subsidiary or Liens existing on such property at the time of acquisition and in
any such case securing Permitted Indebtedness described in clause (3) of the
definition of the term Permitted Indebtedness; provided that (i) no such Lien
shall extend to or cover any other property of the Company or any Subsidiary and
(ii) the principal amount of Indebtedness secured by each such Lien on any such
property shall not exceed the cost (including such principal amount of the
Indebtedness secured thereby) to the Company or the Subsidiary of the property
subject thereto;

(c) Liens securing Indebtedness permitted under clause (4) of the definition of
the term Permitted Indebtedness so long as in each such case such Lien does not
extend to any property of the Company or the Subsidiaries other than the
accounts receivable or inventory of the Company and the Subsidiaries so
financed;

(d) Liens securing this Note and the Other Notes ratably and not securing any
other Indebtedness;

(e) Liens for taxes or assessments or governmental charges or levies on property
of the Company or a Subisidary if such taxes or assessments or charges or levies
shall not at the time be due and payable or if the amount, applicability, or
validity of any such tax, assessment, charge or levy shall currently be
contested in good faith by appropriate proceedings or necessary preliminary
steps are being taken to contest, compromise or settle the amount thereof or to
determine the applicability or validity thereof and if the Company or such
Subsidiary, as the case may be, shall have set aside on its books reserves
(segregated to the extent required by sound accounting practice) deemed by it
adequate with respect thereto; deposits or pledges to secure payment of worker's
compensation, unemployment insurance, old age pensions or other social security;
deposits or pledges to secure performance of bids, tenders, contracts (other
than contracts for the payment of money borrowed or credit extended), leases,
public or statutory obligations, surety or appeal bonds, or other deposits or
pledges for purposes of like general nature in the ordinary course of business;
mechanics', carriers', workers', repairmen's or other like Liens arising in the
ordinary course of business securing obligations which are not overdue for a
period of 180 days, or which are in good faith being contested or litigated, or
deposits to obtain the release of such Liens; Liens created by or resulting from
any litigation or legal proceedings or proceedings being contested in good faith
by appropriate proceedings, provided any execution levied thereon shall be
stayed; leases made, or existing on property acquired, in the ordinary course of
business; landlords' Liens under leases to which the Company or any Subsidiary
is a party; and zoning restrictions, easements, licenses or restrictions on the
use of real property or minor irregularities in title thereto; provided that all
such Liens described in this subsection (e) do not, in the aggregate, materially
impair the use of such property in the operations of the business of the Company
or any Subsidiary or the value of such property for the purpose of such
business; and
 
(f) Liens existing on the Issuance Date.
 
 
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“Permitted Refinancing Indebtedness” means any Indebtedness of the Company
issued in exchange for, or the net proceeds of which are used to prepay,
Indebtedness represented by this Note and the Other Notes in accordance with
Section 2.1; provided that so long as on or before the date of incurrence of
such Permitted Refinancing Indebtedness the Company shall have (a) given the
Optional Prepayment Notice to the Holder and the holders of the Other Notes in
accordance with Section 2.1 and (b) irrevocably deposited in trust with a
trustee (other than the Company or any Subsidiary), for the exclusive benefit of
the Holder and the holders of the Other Notes being prepaid, an amount at least
equal to the aggregate amount that the Company will be obligated to pay in
respect of such Indebtedness from such date to the date of payment in full of
such Indebtedness.

“Person” means any natural person, corporation, partnership, limited liability
company, trust, incorporated organization, unincorporated association or similar
entity or any government, governmental agency or political subdivision.

“Principal Market” means, at any time, whichever of the OTCBB, Nasdaq, Nasdaq
Capital Market, AMEX, NYSE or such other U.S. market or exchange is at the time
the principal market on which the Common Stock is then listed for trading.

“Record Date” shall mean, with respect to any dividend, distribution or other
transaction or event in which the holders of Common Stock have the right to
receive any cash, securities or other property or in which the Common Stock (or
other applicable security) is exchanged for or converted into any combination of
cash, securities or other property, the date fixed for determination of
stockholders entitled to receive such cash, securities or other property
(whether such date is fixed by the Board of Directors or by statute, contract or
otherwise).

“Registration Statement” means the Registration Statement required to be filed
by the Company with the SEC pursuant to Section 8(a)(1) of the Note Purchase
Agreement.

“Repurchase Event” means the occurrence of any one or more of the following
events:

(a) Any Fundamental Change; or

(b) The adoption of any amendment to the Company's Certificate of Incorporation
(other than any certificate designating a series of preferred stock of the
Company) which materially and adversely affects the rights of the Holder or the
taking of any other action by the Company which materially and adversely affects
the rights of the Holder in respect of the Holder’s interest in the Common Stock
in a different and more adverse manner than it affects the rights of holders of
Common Stock generally.

“Repurchase Price” means with respect to any repurchase pursuant to Sections 5.1
and 5.2 an amount in cash equal to the sum of (1) 100% of the outstanding
principal amount of this Note that the Holder has elected to be repurchased plus
(2) accrued and unpaid interest on such principal amount to the date of such
repurchase plus (3) accrued and unpaid Default Interest, if any, thereon at the
rate provided in this Note to the date of such repurchase.

“Restricted Ownership Percentage” shall have the meaning provided in Section
6.7(a).
 
 
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“Rule 144A” means Rule 144A as promulgated under the 1933 Act.

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

“Security Agreement” means the Pledge and Security Agreement.

“Subsidiary” means any corporation or other entity of which a majority of the
capital stock or other ownership interests having ordinary voting power to elect
a majority of the board of directors or other Persons performing similar
functions are at the time directly or indirectly owned by the Company.

“Tender Offer” means a tender offer or exchange offer.

“Trading Day” means at any time a day on which the Principal Market is open for
general trading of securities.

“Transaction Documents” means this Note, the Note Purchase Agreement, the Pledge
and Security Agreement, the Collateral Agency Agreement, the Lockbox Agreement,
the Guaranty, the Purchase Price Escrow Agreement and the other agreements,
instruments and documents contemplated hereby and thereby.

“Transfer Agent” means Interwest Transfer Co., Inc., or its successor as
transfer agent and registrar for the Common Stock.

“Trigger Event” shall have the meaning provided in Section 6.3(d).

“Unconverted Portion” shall have the meaning provided in Section 2.1(d).

“VWAP” of any security on any Trading Day means the volume-weighted average
price of such security on such Trading Day on the Principal Market, as reported
by Bloomberg Financial, L.P., based on a Trading Day from 9:30 a.m., Eastern
Time, to 4:00 p.m., Eastern Time, using the AQR Function, for such Trading Day;
provided, however, that during any period the VWAP is being determined, the VWAP
shall be subject to equitable adjustments from time to time on terms consistent
with Section 6.3 and otherwise reasonably acceptable to the Majority Holders for
(i) stock splits, (ii) stock dividends, (iii) combinations, (iv) capital
reorganizations, (v) issuance to all holders of Common Stock of rights or
warrants to purchase shares of Common Stock, (vi) distribution by the Company to
all holders of Common Stock of evidences of indebtedness of the Company or cash
(other than regular quarterly cash dividends), and (vii) similar events relating
to the Common Stock, in each case which occur, or with respect to which the “ex”
date occurs, during such period.
 
 
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ARTICLE II

OPTIONAL PREPAYMENT

2.1 Optional Prepayment.  (a) At any time during the Optional Prepayment Period,
the Company shall have the right to prepay at any one time all of the
outstanding principal amount of this Note at the Optional Prepayment Price
pursuant to this Section 2.1 on any Optional Prepayment Date, so long as the
following conditions are met:

(1) on the date the Company gives the Optional Prepayment Notice and at all
times to and including the Optional Prepayment Date, no Event of Default and no
event which, with notice or passage of time, or both, would become an Event of
Default has occurred and is continuing,

(2) on the date the Company gives the Optional Prepayment Notice and at all
times to and including the Optional Prepayment Date, no Repurchase Event has
occurred with respect to which the Holder has the right to exercise repurchase
rights pursuant to Sections 5.1 and 5.2 or with respect to which the Holder has
exercised such repurchase rights and the Repurchase Price has not been paid to
the Holder and no event which, with notice or passage of time, or both, would
become a Repurchase Event has occurred and is continuing, and

(3) on the date the Company gives the Optional Prepayment Notice, the Company
(x) has funds available to pay the Optional Prepayment Price of this Note and
the prepayment prices of the Other Notes, or (y) has funds which, together with
the proceeds to be paid to the Company at the closing of a transaction in which
the Company proposes to issue Permitted Refinancing Indebtedness, will be
sufficient to pay the Optional Prepayment Price of this Note and the prepayment
prices of the Other Notes.

In order to exercise its right of prepayment under this Section 2.1, the Company
shall give the Optional Prepayment Notice to the Holder not less than twenty
(20) Trading Days or more than thirty (30) Trading Days prior to the Optional
Prepayment Date stating: (1) that the Company is exercising its right to prepay
this Note in accordance with this Section 2.1, (2) the principal amount of this
Note to be prepaid, (3) the Optional Prepayment Price, (4) the Optional
Prepayment Date and (5) that all of the conditions of this Section 2.1 entitling
the Company to call this Note for prepayment have been met. On the Optional
Prepayment Date (or such later date as the Holder surrenders this Note to the
Company) the Company shall pay to or upon the order of the Holder, by wire
transfer of immediately available funds to such account as shall be specified
for such purpose by the Holder at least one Business Day prior to the Optional
Prepayment Date, an amount equal to the Optional Prepayment Price of the portion
(which may be all) of this Note to be prepaid.
 
 
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(b) In order that the Company shall not discriminate among the Holder and the
holders of the Other Notes, the Company agrees that it shall not prepay any of
the Other Notes pursuant to the provisions thereof similar to this Section 2.1
or repurchase or otherwise acquire any of the Other Notes (other than a
mandatory prepayment pursuant to provisions of the Other Notes comparable to
Article V) unless the Company offers simultaneously to prepay, repurchase or
otherwise acquire this Note for cash at the same unit price as the Other Note or
Other Notes.

(c) The Company shall not be entitled to give an Optional Prepayment Notice or
to prepay any portion of this Note with respect to which the Holder has given a
Conversion Notice on or prior to the date the Company gives such Optional
Prepayment Notice. Notwithstanding the giving of the Optional Prepayment Notice,
the Holder shall be entitled to convert all or any portion of this Note, in
accordance with the terms of this Note, by giving a Conversion Notice at any
time on or prior to the later of (1) the date which is one Trading Day prior to
the Optional Prepayment Date and (2) if the Company fails to pay and deliver to
the Holder, or deposit in accordance with Section 7.10, the Optional Prepayment
Price payable on the Optional Prepayment Date on or before the Optional
Prepayment Date, the date on which the Company pays and delivers to the Holder,
or deposits in accordance with Section 7.10, such Optional Prepayment Price. If
after giving effect to any such conversion of this Note that occurs after the
date the Company gives the Optional Prepayment Notice to the Holder, the
principal amount of this Note remaining outstanding is less than the amount
thereof to be prepaid as stated in the Optional Prepayment Notice, then the
Optional Prepayment Price set forth in the Optional Prepayment Notice shall be
adjusted to reflect the reduced outstanding principal amount of this Note and
related accrued interest (and Default Interest, if any, thereon at the Default
Rate) on the Optional Prepayment Date resulting from any such conversions of
this Note after the Company gives the Optional Prepayment Notice to the Holder.

(d)  Notwithstanding any other provision of this Note to the contrary, in case
the Company shall give the Optional Prepayment Notice to the Holder, and on the
date the Company gives the Optional Prepayment Notice or at any time thereafter
to and including the Optional Prepayment Date, the Holder shall be restricted
from converting any portion of this Note by reason of the Restricted Ownership
Percentage (such portion, the “Unconverted Portion”), then the Optional
Prepayment Date for such Unconverted Portion may, at the election of the Holder
evidenced by notice to the Company given on or before the Optional Prepayment
Date, be extended to be the Extended Optional Prepayment Date. On the applicable
Extended Optional Prepayment Date, the Company shall pay the Optional Prepayment
Price for any portion of this Note that it prepays on such Extended Optional
Prepayment Date. Any portion of this Note for which there is an Extended
Optional Prepayment Date shall remain convertible by the Holder in accordance
with Section 6 at any time to and including the close of business on the
Business Day prior to the applicable Extended Optional Prepayment Date.

2.2 No Other Prepayment. Except as specifically provided in Section 2.1, this
Note may not be prepaid, redeemed or repurchased at the option of the Company
prior to the applicable Maturity Date, as the case may be.

 
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ARTICLE III

CERTAIN COVENANTS

So long as the Company shall have any obligation under this Note, unless
otherwise consented to in advance by the Majority Holders:

3.1 Limitations on Certain Indebtedness. The Company will not itself, and will
not permit any Subsidiary to, create, assume, incur or in any manner become
liable in respect of, including, without limitation, by reason of any business
combination transaction (all of which are referred to herein as “incurring”),
any Indebtedness other than Permitted Indebtedness.

3.2 Payment of Obligations. The Company will pay and discharge, and will cause
each Subsidiary to pay and discharge, all their respective material obligations
and liabilities, including, without limitation, tax liabilities, except where
the same may be contested in good faith by appropriate proceedings and the
Company shall have established adequate reserves therefor on its books.

3.3 Maintenance of Property. The Company will keep, and will cause each
Subsidiary to keep, all property useful and necessary in its business in good
working order and condition, ordinary wear and tear excepted.

3.4 Conduct of Business and Maintenance of Existence. The Company will continue,
and will cause each Subsidiary to continue, to engage in business of the same
general type as now conducted by the Company and each Subsidiary, and will
preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect their respective
corporate existence and their respective rights, privileges and franchises
necessary or desirable in the normal conduct of business except where (other
than the Company’s corporate existence) the failure to do so would not have a
material adverse effect on (i) the business, properties, operations, condition
(financial or other), results of operation or prospects of the Company and the
Subsidiaries, taken as a whole, (ii) the ability of the Company to perform and
comply with its obligations under the Transaction Documents or (iii) the rights
and remedies of the Holder or the Collateral Agent under or in connection with
the Transaction Documents.

 3.5 Compliance with Laws. The Company will comply, and will cause each
Subsidiary to comply, in all material respects with all material applicable
laws, ordinances, rules, regulations, decisions, orders and requirements of
governmental authorities and courts (including, without limitation,
environmental laws) except (i) where compliance therewith is contested in good
faith by appropriate proceedings or (ii) where non-compliance therewith could
not reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), operations, performance, properties or
prospects of the Company and the Subsidiaries, taken as a whole.
 
 
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3.6 Investment Company Act. The Company will not be or become an open-end
investment trust, unit investment trust or face-amount certificate company that
is or is required to be registered under Section 8 of the Investment Company Act
of 1940, as amended.

3.7 Limitations on Asset Sales, Liquidations, Etc.; Certain Matters. The Company
shall not

(a) sell, convey or otherwise dispose of all or substantially all of the assets
of the Company as an entirety or substantially as an entirety in a single
transaction or in a series of related transactions; or

(b) sell one or more Subsidiaries, or permit any one or more Subsidiaries to
sell their respective assets, if such sale individually or in the aggregate is
material to the Company and the Subsidiaries taken as a whole, other than any
such sale or sales which individually or in the aggregate could not reasonably
be expected to have a material adverse effect on (i) the business, properties,
operations, condition (financial or other), results of operation or financial
prospects of the Company and the Subsidiaries, taken as a whole, (ii) the
validity or enforceability of, or the ability of the Company to perform its
obligations under, the Transaction Documents, or (iii) the rights and remedies
of the Holder under the terms of the Transaction Documents; or

(c) liquidate, dissolve or otherwise wind up the affairs of the Company.

3.8 Limitations on Liens. The Company will not itself, and will not permit any
Subsidiary to, create, assume or suffer to exist any Lien upon all or any part
of its property of any character, whether owned at the date hereof or thereafter
acquired, except Permitted Liens.

3.9 Transactions with Affiliates. The Company will not, and will not permit any
Subsidiary, directly or indirectly, to pay any funds to or for the account of,
make any investment (whether by acquisition of stock or Indebtedness, by loan,
advance, transfer of property, guarantee or other agreement to pay, purchase or
service, directly or indirectly, any Indebtedness, or otherwise) in, lease,
sell, transfer or otherwise dispose of any assets, tangible or intangible, to,
or participate in, or effect any transaction in connection with, any joint
enterprise or other joint arrangement with, any Affiliate of the Company,
except, on terms to the Company or such Subsidiary no less favorable than terms
that could be obtained by the Company or such Subsidiary from a Person that is
not an Affiliate of the Company, as determined in good faith by the Board of
Directors.
 
3.10 Certain Obligations. The Company shall not enter into any agreement which
would adversely affect the Collateral Agent's Lien on and Security Interest in
the Collateral. The Company shall perform, and comply in all material respects
with each agreement it enters into relating to the Collateral, the failure to
comply with which could affect the Collateral Agent's lien on and security
interest in the Collateral.
 
 
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3.11 Notice of Defaults. The Company shall notify the Holder promptly, but in
any event not later than ten business days after the Company becomes aware of
the fact, of any failure by the Company to comply with this Article III.
 
3.12 Listing Eligibility Reporting. The Company shall notify the Holder from
time to time within five Business Days after the Company first learns that it
does not meet any of the applicable requirements for the continued listing of
the Common Stock on the Principal Market and shall make appropriate public
announcement thereof so that the content of such notice shall not constitute
material non-public information for purposes of the 1934 Act.

ARTICLE IV

EVENTS OF DEFAULT

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

(a) Failure to Pay Principal, Interest, Etc. The Company fails to pay the
principal, the Optional Prepayment Price or the Repurchase Price hereof when
due, whether at maturity, upon acceleration or otherwise, as applicable; or

(b) Conversion and the Shares. The Company fails to issue or cause to be issued
shares of Common Stock to the Holder or the holder of any Other Note upon
exercise of the conversion rights of the Holder or such holder, in any such case
within ten Trading Days after the due date therefor in accordance with the terms
of this Note, any Other Note or fails to transfer any certificate for any such
shares of Common Stock or any shares of Common Stock issued in payment of
interest on this Note or any Other Note as and when required by this Note and
the Note Purchase Agreement, as the case may be; or

(c) Breach of Covenant. The Company (1) fails to comply in any material respect
with any material provision of Article III of this Note or breaches any other
material covenant or other material term or condition of this Note or any of the
other Transaction Documents (other than as specifically provided in clauses (a),
(b) or (c)(1) of this Section 4.1), and in the case of this clause (2) of this
Section 4.1(c) only, such breach continues for a period of ten Trading Days
after written notice thereof to the Company from the Holder; or

(d) Breach of Representations and Warranties. Any representation or warranty of
the Company made herein or in any agreement, statement or certificate given in
writing pursuant hereto or in connection herewith (including, without
limitation, the Transaction Documents) shall be false or misleading in any
material respect when made; or
 
 
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(e) Certain Voluntary Proceedings. The Company or any Subsidiary shall commence
a voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent to any
such relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to pay
its debts as they become due or shall admit in writing its inability generally
to pay its debts as they become due; or

(f) Certain Involuntary Proceedings. An involuntary case or other proceeding
shall be commenced against the Company or any Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of 60 consecutive days; or

(g) Judgments. Any court of competent jurisdiction shall enter one or more final
judgments against the Company or any Subsidiary or any of their respective
properties or other assets in an aggregate amount in excess of $1,000,000, which
is not vacated, bonded, stayed, discharged, satisfied or waived for a period of
30 consecutive days; or

(h) Default Under Other Agreements and Instruments. (1) The Company or any
Subsidiary shall (i) default in any payment with respect to any Indebtedness for
borrowed money (other than this Note) which Indebtedness has an outstanding
principal amount in excess of $1,000,000, individually or $2,000,000 in the
aggregate, for the Company and its Subsidiaries, beyond the period of grace, if
any, provided in the instrument or agreement under which such Indebtedness was
created or (ii) default in the observance or performance of any agreement,
covenant or condition relating to any such Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or holders of such
Indebtedness (or a trustee or agent on behalf of such holder or holders) to
cause, any such Indebtedness to become due prior to its stated maturity and such
default or event shall continue beyond the period of grace, if any, provided in
the instrument or agreement under which such Indebtedness was created (after
giving effect to any consent or waiver obtained and then in effect thereunder);
or (2) any Indebtedness of the Company or any Subsidiary which has an
outstanding principal amount in excess of $1,000,000, individually or $2,000,000
in the aggregate, shall, in accordance with its terms, be declared to be due and
payable, or required to be prepaid other than by a regularly scheduled or
required payment prior to the stated maturity thereof; or
 
 
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(i) Security Agreement. The occurrence of any “Event of Default” as defined in
the Security Agreement; or

(j) Delisting of Common Stock. The Common Stock shall cease to be listed on the
Principal Market;

then, (W) upon the occurrence and during the continuation of any Event of
Default specified in clause (a), (b), (c), (d), (g), (h), (i) or (j) of this
Section 4.1, at the option of the Holder the Company shall, and upon the
occurrence of any Event of Default specified in clause (e) or (f) of this
Section 4.1, the Company shall, in any such case, pay to the Holder an amount
equal to the sum of (1) 150% of the outstanding principal amount of this Note
plus (2) accrued and unpaid interest on such principal amount to the date of
payment plus (3) accrued and unpaid Default Interest, if any, thereon at the
rate provided in this Note to the date of payment, (X) all other amounts payable
hereunder or under any of the other Transaction Documents 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, reasonable legal fees and expenses of collection, (Y) the Collateral
Agent shall be entitled to exercise all rights and remedies under the Pledge and
Security Agreement, and (Z) the Holder shall be entitled to exercise all other
rights and remedies available at law or in equity.
 
ARTICLE V

REPURCHASE UPON A REPURCHASE EVENT

5.1 Repurchase Right Upon Repurchase Event. If a Repurchase Event occurs, in
addition to any other right of the Holder, the Holder shall have the right, at
the Holder’s option, to require the Company to repurchase all of this Note, or
any portion hereof, on the repurchase date that is five Business Days after the
date of the Holder Notice delivered with respect to such Repurchase Event. The
Holder shall have the right to require the Company to repurchase all or any such
portion of this Note if a Repurchase Event occurs at any time while any portion
of the principal amount of this Note is outstanding at a price equal to the
Repurchase Price. If the Holder exercises its right to require the repurchase of
less than all of the outstanding principal amount of this Note, the Holder may
specify the manner in which the principal amount repurchased shall be allocated
between the outstanding installments of principal.

5.2 Notices; Method of Exercising Repurchase Rights, Etc. (a) On or before the
fifth Business Day after the occurrence of a Repurchase Event, the Company shall
give to the Holder a Company Notice of the occurrence of the Repurchase Event
and of the repurchase right set forth herein arising as a result thereof. Such
Company Notice shall set forth:

(i) the date by which the repurchase right must be exercised, and
 
 
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(ii) a description of the procedure (set forth in this Section 5.2) which the
Holder must follow to exercise the repurchase right.

No failure of the Company to give a Company Notice or defect therein shall limit
the Holder’s right to exercise the repurchase right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.

(b) To exercise the repurchase right, the Holder shall deliver to the Company on
or before the 30th day after a Company Notice (or if no such Company Notice has
been given, within 40 days after the Holder first learns of the Repurchase
Event) (i) a Holder Notice setting forth the name of the Holder and the
principal amount of this Note to be repurchased, and (ii) this Note, duly
endorsed for transfer to the Company of the portion of the outstanding principal
amount of this Note to be repurchased. A Holder Notice may be revoked by the
Holder at any time prior to the time the Company pays the applicable Repurchase
Price to the Holder.

(c) If the Holder shall have given a Holder Notice, then on the date which is
five Business Days after the date such Holder Notice is given (or such later
date as the Holder surrenders this Note) the Company shall make payment in
immediately available funds of the applicable Repurchase Price to such account
as specified by the Holder in writing to the Company at least one Business Day
prior to the applicable repurchase date.

5.3 Other. (a) If the Company fails to repurchase on the applicable repurchase
date this Note (or portion hereof) as to which the repurchase right has been
properly exercised pursuant to this Article V, then the Repurchase Price for the
portion (which, if applicable, may be all) of this Note which is required to
have been so repurchased shall bear interest to the extent not prohibited by
applicable law from the applicable repurchase date until paid at the Default
Rate.
 
(b) If a portion of this Note is to be repurchased, upon surrender of this Note
to the Company in accordance with the terms of this Article V, the Company shall
execute and deliver to the Holder without service charge, a new Note or Notes,
having the same date hereof and containing identical terms and conditions, in
such denomination or denominations as requested by the Holder in aggregate
principal amount equal to, and in exchange for, the unrepurchased portion of the
principal amount of the Note so surrendered.
 
(c) A Holder Notice given by the Holder shall be deemed for all purposes to be
in proper form unless the Company notifies the Holder within three Business Days
after such Holder Notice has been given (which notice shall specify all defects
in such Holder Notice), and any Holder Notice containing any such defect shall
nonetheless be effective on the date given if the Holder promptly undertakes to
correct all such defects. No such claim of defect shall limit or delay
performance of the Company's obligation to repurchase any portion of this Note,
the repurchase of which is not in dispute.
 
 
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ARTICLE VI

CONVERSION

6.1 Right to Convert.  (a) Subject to and upon compliance with the provisions of
this Note, the Holder shall have the right, at the Holder's option, at any time
prior to the close of business on the Maturity Date (except that, if the Holder
shall have exercised repurchase rights under Sections 5.1 and 5.2 or the Company
shall have exercised its prepayment rights under Section 2.1, such conversion
right shall terminate with respect to the portion of this Note to be repurchased
or prepaid, as the case may be, at the close of business on the last Trading Day
prior to the later of (x) the date the Company is required to make such
repurchase or the Optional Prepayment Date, as the case may be, and (y) the date
the Company pays or deposits in accordance with Section 7.10 the applicable
Repurchase Price or the Optional Prepayment Price unless in any such case the
Company shall default in payment due upon repurchase or prepayment hereof) to
convert the principal amount of this Note, or any portion of such principal
amount which is at least $1,000 (or such lesser principal amount of this Note as
shall be outstanding at such time), plus accrued and unpaid interest, into that
number of fully paid and non-assessable shares of Common Stock (as such shares
shall then be constituted) obtained by dividing (1) the sum of (x) the principal
amount of this Note or portion thereof being converted plus (y) accrued and
unpaid interest on the portion of the principal amount of this Note being
converted to the applicable Conversion Date plus (z) accrued and unpaid Default
Interest, if any, on the amount referred to in the immediately preceding clause
(y) to the applicable Conversion Date by (2) the Conversion Price in effect on
the applicable Conversion Date, by giving a Conversion Notice in the manner
provided in Section 6.2; provided, however, that, if at any time this Note is
converted in whole or in part pursuant to this Section 6.1, the Company does not
have available for issuance upon such conversion as authorized and unissued
shares or in its treasury at least the number of shares of Common Stock required
to be issued pursuant hereto, then, at the election of the Holder made by notice
from the Holder to the Company, this Note (or portion hereof as to which
conversion has been requested), to the extent that sufficient shares of Common
Stock are not then available for issuance upon conversion, shall be converted
into the right to receive from the Company, in lieu of the shares of Common
Stock into which this Note or such portion hereof would otherwise be converted
and which the Company is unable to issue, payment in an amount equal to the
product obtained by multiplying (x) the number of shares of Common Stock which
the Company is unable to issue times (y) the arithmetic average of the Market
Price for the Common Stock during the five consecutive Trading Days immediately
prior to the applicable Conversion Date. Any such payment shall, for all
purposes of this Note, be deemed to be a payment of principal plus a premium
equal to the total amount payable less the principal portion of this Note
converted as to which such payment is required to be made because shares of
Common Stock are not then available for issuance upon such conversion. The
Holder is not entitled to any rights of a holder of Common Stock until the
Holder has converted this Note to Common Stock, and only to the extent this Note
is deemed to have been converted to Common Stock under this Article VI. For
purposes of Sections 6.5 and 6.6, whenever a provision references the shares of
Common Stock into which this Note (or a portion hereof) is convertible or the
shares of Common Stock issuable upon conversion of this Note (or a portion
hereof) or words of similar import, any determination required by such provision
shall be made as if a sufficient number of shares of Common Stock were then
available for issuance upon conversion in full of this Note.
 
 
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(b) In case the Company shall on or after the Issuance Date sell or issue any
Common Stock or any securities convertible into or exchangeable for Common Stock
for gross proceeds in excess of seven million dollars ($7,000,000) in aggregate,
the Note shall automatically convert into such newly issued security in the most
recent issuance for gross proceeds in excess of three million dollars
($3,000,000) at a conversion price which is lesser of (x) $1.30 per share or (y)
a product obtained by multiplying average price per share or conversion price of
such newly issued securities by 0.85.

6.2 Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No
Adjustment for Interest or Dividends. (a) In order to exercise the conversion
privilege with respect to this Note, the Holder shall give a Conversion Notice
(or such other notice which is acceptable to the Company) to the Company and the
Transfer Agent or to the office or agency designated by the Company for such
purpose by notice to the Holder. A Conversion Notice may be given by telephone
line facsimile transmission to the numbers set forth on the form of Conversion
Notice.

(b) As promptly as practicable, but in no event later than five Trading Days,
after a Conversion Notice is given, the Company shall issue and shall deliver to
the Holder or the Holder's designee the number of full shares of Common Stock
issuable upon such conversion of this Note or portion hereof in accordance with
the provisions of this Article and deliver a check or cash in respect of any
fractional interest in respect of a share of Common Stock arising upon such
conversion, as provided in Section 6.2(f) and, if applicable, any cash payment
required pursuant to the proviso to the first sentence of Section 6.1 (which
payment, if any, shall be paid no later than three Trading Days after the
applicable Conversion Date). In lieu of delivering physical certificates for the
shares of Common Stock issuable upon any conversion of this Note, provided the
Company's transfer agent is participating in the Depository Trust Company
(“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the
Holder, the Company shall use commercially reasonable efforts to cause its
transfer agent electronically to transmit such shares of Common Stock issuable
upon conversion to the Holder (or its designee), by crediting the account of the
Holder’s (or such designee’s) broker with DTC through its Deposit Withdrawal
Agent Commission system (provided that the same time periods herein as for stock
certificates shall apply).
 
 
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(c) Each conversion of this Note (or portion hereof) shall be deemed to have
been effected on the applicable Conversion Date, and the person in whose name
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become on such Conversion Date the
holder of record of the shares represented thereby; provided, however, that if a
Conversion Date is a date on which the stock transfer books of the Company shall
be closed such conversion shall constitute the person in whose name the
certificates are to be issued as the record holder thereof for all purposes on
the next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Price in effect on the applicable
Conversion Date.  Upon conversion of this Note or any portion hereof, the
accrued and unpaid interest on this Note (or portion hereof) to (but excluding)
the applicable Conversion Date shall be deemed to be paid to the Holder of this
Note through receipt of such number of shares of Common Stock issued upon
conversion of this Note or portion hereof as shall have an aggregate Current
Fair Market Value on the Trading Day immediately preceding such Conversion Date
equal to the amount of such accrued and unpaid interest.
 
(d) No fractional shares of Common Stock shall be issued upon conversion of this
Note but, in lieu of any fraction of a share of Common Stock which would
otherwise be issuable in respect of such conversion, the Company may round the
number of shares of Common Stock issued on such conversion up to the next
highest whole share or may pay lawful money of the United States of America for
such fractional share, based on a value of one share of Common Stock being equal
to the Market Price of the Common Stock on the applicable Conversion Date.

6.3 Adjustment of Conversion Price. The Conversion Price shall be adjusted from
time to time by the Company as follows:

(a) Adjustments for Certain Dividends and Distributions in Common Stock. In case
the Company shall on or after the Issuance Date pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of Common
Stock, the Conversion Price in effect at the opening of business on the date
following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution shall be reduced by multiplying such
Conversion Price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the Record Date
fixed for such determination and the denominator shall be the sum of such number
of shares and the total number of shares constituting such dividend or other
distribution, such reduction to become effective immediately after the opening
of business on the day following the Record Date. If any dividend or
distribution of the type described in this Section 6.3(a) is declared but not so
paid or made, the Conversion Price shall again be adjusted to the Conversion
Price which would then be in effect if such dividend or distribution had not
been declared.
 
 
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(b) Weighted Adjustments for Certain Issuances of Rights or Warrants. In case
the Company shall on or after the Issuance Date issue rights or warrants (other
than any rights or warrants referred to in Section 6.3(d)) to all holders of its
outstanding shares of Common Stock entitling them (for a period expiring within
45 days after the date fixed for the determination of stockholders entitled to
receive such rights or warrants) to subscribe for or purchase shares of Common
Stock at a price per share less than the Current Market Price on the Record Date
fixed for the determination of stockholders entitled to receive such rights or
warrants, the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in effect at the
opening of business on the date after such Record Date by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Current Market Price, and the denominator shall be the number of shares
of Common Stock outstanding on the close of business on the Record Date plus the
total number of additional shares of Common Stock so offered for subscription or
purchase. Such adjustment shall become effective immediately after the opening
of business on the day following the Record Date fixed for determination of
stockholders entitled to receive such rights or warrants. To the extent that
shares of Common Stock are not delivered pursuant to such rights or warrants,
upon the expiration or termination of such rights or warrants, the Conversion
Price shall be readjusted to the Conversion Price which would then be in effect
had the adjustments made upon the issuance of such rights or warrants been made
on the basis of delivery of only the number of shares of Common Stock actually
delivered. In the event that such rights or warrants are not so issued, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such date fixed for the determination of stockholders
entitled to receive such rights or warrants had not been fixed. In determining
whether any rights or warrants entitle the holder to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received for such rights or
warrants, the value of such consideration, if other than cash, to be determined
by the Board of Directors. Notwithstanding the foregoing, if any of the
adjustments as set forth in this Section 6.3(b) will require the Company to seek
stockholder approval and such stockholder approval has not yet been obtained,
then the adjustment shall not take effect until such stockholder approval is
obtained. The Company shall use its commercially reasonable best efforts to
obtain, as promptly as practicable, but in no event later than 90 days
thereafter, the necessary stockholder approval.

(c) Adjustments for Certain Subdivisions of the Common Stock. In case the
outstanding shares of Common Stock shall on or after the Issuance Date be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the earlier of the day following the day
upon which such subdivision becomes effective and the day on which “ex-” trading
of the Common Stock begins with respect to such subdivision shall be
proportionately reduced, and conversely, in case outstanding shares of Common
Stock shall be combined into a smaller number of shares of Common Stock, the
Conversion Price in effect at the opening of business on the earlier of the day
following the day upon which such combination becomes effective and the day on
which “ex-” trading of the Common Stock with respect to such combination begins
shall be proportionately increased, such reduction or increase, as the case may
be, to become effective immediately after the opening of business on the earlier
of the day following the day upon which such subdivision or combination becomes
effective and the day on which “ex-” trading of the Common Stock begins with
respect to such subdivision or combination.
 
 
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(d) Adjustments for Certain Dividends and Distributions. In case the Company
shall on or after the Issuance Date, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the Company
(other than any dividends or distributions to which Section 6.3(a) applies) or
evidences of its indebtedness, cash or other assets (including securities, but
excluding any rights or warrants referred to in Section 6.3(b) and dividends and
distributions paid exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a merger or
consolidation to which Section 6.6 applies) (the foregoing hereinafter in this
Section 6.3(d) called the “Securities”)), then, in each such case, subject to
the second paragraph of this Section 6.3(d), the Conversion Price shall be
reduced so that the same shall be equal to the price determined by multiplying
the Conversion Price in effect immediately prior to the close of business on the
Record Date with respect to such distribution by a fraction of which the
numerator shall be the Current Market Price on such date less the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) on such date of the portion of
the Securities so distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following the
Record Date; provided, however, that in the event the then fair market value (as
so determined) of the portion of the Securities so distributed applicable to one
share of Common Stock is equal to or greater than the Current Market Price on
the Record Date, in lieu of the foregoing adjustment, adequate provision shall
be made so that the Holder shall have the right to receive upon conversion of
this Note (or any portion hereof) the amount of Securities such holder would
have received had such holder converted this Note (or portion hereof)
immediately prior to such Record Date. In the event that such dividend or
distribution is not so paid or made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared. If the Board of Directors
determines the fair market value of any distribution for purposes of this
Section 6.3(d) by reference to the actual or when issued trading market for any
Securities comprising all or part of such distribution, it must in doing so
consider the prices in such market over the same period used in computing the
Current Market Price, to the extent possible.

Rights or warrants distributed by the Company to all holders of Common Stock
entitling the holders thereof to subscribe for or purchase shares of the
Company's capital stock (either initially or under certain circumstances), which
rights or warrants, until the occurrence of a specified event or events (a
“Trigger Event”): (i) are deemed to be transferred with such shares of Common
Stock; (ii) are not exercisable; and (iii) are also issued in respect of future
issuances of Common Stock, shall not be deemed to have been distributed for
purposes of this Section 6.3 (and no adjustment to the Conversion Price under
this Section 6.3 will be required) until the occurrence of the earliest Trigger
Event. If any such rights or warrants, including any such existing rights or
warrants distributed prior to the Issuance Date, are subject to Trigger Events,
upon the satisfaction of each of which such rights or warrants shall become
exercisable to purchase different securities, evidences of indebtedness or other
assets, then the occurrence of each such Trigger Event shall be deemed to be
such date of issuance and record date with respect to new rights or warrants
(and a termination or expiration of the existing rights or warrants without
exercise by the holder thereof) (so that, by way of illustration and not
limitation, the dates of issuance of any such rights shall be deemed to be the
dates on which such rights become exercisable to purchase capital stock of the
Company, and not the date on which such rights may be issued, or may become
evidenced by separate certificates, if such rights are not then so exercisable).
In addition, in the event of any distribution of rights or warrants, or any
Trigger Event with respect thereto, that was counted for purposes of calculating
a distribution amount for which an adjustment to the Conversion Price under this
Section 6.3 was made (1) in the case of any such rights or warrants which shall
all have been redeemed or repurchased without exercise by any holders thereof,
the Conversion Price shall be readjusted upon such final prepayment or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share prepayment or
repurchase price received by a holder or holders of Common Stock with respect to
such rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such prepayment
or repurchase, and (2) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.
 
 
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For purposes of this Section 6.3(d) and Sections 6.3(a) and (b), any dividend or
distribution to which this Section 6.3(d) is applicable that also includes
shares of Common Stock, or rights or warrants to subscribe for or purchase
shares of Common Stock to which Section 6.3(b) applies (or both), shall be
deemed instead to be (1) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or warrants other than
such shares of Common Stock or rights or warrants to which Section 6.3(b)
applies (and any Conversion Price reduction required by this Section 6.3(d) with
respect to such dividend or distribution shall then be made) immediately
followed by (2) a dividend or distribution of such shares of Common Stock or
such rights or warrants (and any further Conversion Price reduction required by
Sections 6.3(a) and (b) with respect to such dividend or distribution shall then
be made), except (A) the Record Date of such dividend or distribution shall be
substituted as “the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution”, “Record Date fixed for such
determination” and “Record Date” within the meaning of Section 6.3(a) and as
“the date fixed for the determination of stockholders entitled to receive such
rights or warrants”, “the Record Date fixed for the determination of the
stockholders entitled to receive such rights or warrants” and “such Record Date”
within the meaning of Section 6.3(b) and (B) any shares of Common Stock included
in such dividend or distribution shall not be deemed “outstanding at the close
of business on the Record Date fixed for such determination” within the meaning
of Section 6.3(a).
 
 
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(e) Adjustments for Certain Cash Dividends. In case the Company shall on or
after the Issuance Date, by dividend or otherwise, distribute to all holders of
its Common Stock cash (excluding any cash that is distributed upon a merger or
consolidation to which Section 6.5 applies or as part of a distribution referred
to in Section 6.3(d)) in an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders of its Common
Stock made exclusively in cash within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment pursuant to
this Section 6.3(e) has been made, and (2) the aggregate of any cash plus the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and set forth in a Board Resolution) of consideration
payable in respect of any Tender Offer by the Company or any Subsidiary for all
or any portion of the Common Stock concluded within the 12 months preceding the
date of payment of such distribution, exceeds 1% of the product of (x) the
Current Market Price on the Record Date with respect to such distribution times
(y) the number of shares of Common Stock outstanding on such date, then, and in
each such case, immediately after the close of business on such date, unless the
Company elects to reserve such cash for distribution to the Holder upon the
conversion of this Note (and shall have made adequate provision) so that the
Holder will receive upon such conversion, in addition to the shares of Common
Stock to which the Holder is entitled, the amount of cash which the Holder would
have received if the Holder had, immediately prior to the Record Date for such
distribution of cash, converted this Note into Common Stock, the Conversion
Price shall be reduced so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the close of
business on such Record Date by a fraction (i) the numerator of which shall be
equal to the Current Market Price on the Record Date less an amount equal to the
quotient of (x) the excess of such combined amount over such 1% and (y) the
number of shares of Common Stock outstanding on the Record Date and (ii) the
denominator of which shall be equal to the Current Market Price on the Record
Date; provided, however, that in the event the portion of the cash so
distributed applicable to one share of Common Stock is equal to or greater than
the Current Market Price of the Common Stock on the Record Date, in lieu of the
foregoing adjustment, adequate provision shall be made so that the Holder shall
have the right to receive upon conversion of this Note (or any portion hereof)
the amount of cash the Holder would have received had the Holder converted this
Note (or portion hereof) immediately prior to such Record Date. In the event
that such dividend or distribution is not so paid or made, the Conversion Price
shall again be adjusted to be the Conversion Price which would then be in effect
if such dividend or distribution had not been declared.

(f) Additional Reductions in Conversion Price. The Company may make such
reductions in the Conversion Price, in addition to those required by Sections
6.3(a), (b), (c), (d), and (e), as the Board of Directors considers to be
advisable to avoid or diminish any income tax to holders of Common Stock or
rights to purchase Common Stock resulting from any dividend or distribution of
stock (or rights to acquire stock) or from any event treated as such for income
tax purposes.

(g) De Minimus Adjustments. No adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or decrease of at
least 1% in such price; provided, however, that any adjustments which by reason
of this Section 6.3(h) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Article VI shall be made by the Company and shall be made to the nearest cent or
to the nearest one hundredth of a share, as the case may be.
 
 
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No adjustment need be made for a change in the par value of the Common Stock or
from par value to no par value or from no par value to par value.

(h)  Company Notice of Adjustments. Whenever the Conversion Price is adjusted as
herein provided, the Company shall promptly, but in no event later than five
days thereafter, give a notice to the Holder setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment, but which statement shall not include any information which
would be material non-public information for purposes of the 1934 Act. Failure
to deliver such notice shall not affect the legality or validity of any such
adjustment.

(i) Effectiveness of Certain Adjustments. In any case in which this Section 6.3
provides that an adjustment shall become effective immediately after a Record
Date for an event, the Company may defer until the occurrence of such event (i)
issuing to the Holder in connection with any conversion of this Note after such
Record Date and before the occurrence of such event the additional shares of
Common Stock issuable upon such conversion by reason of the adjustment required
by such event over and above the Common Stock issuable upon such conversion
before giving effect to such adjustment and (ii) paying to such holder any
amount in cash in lieu of any fraction pursuant to Section 6.2(f).

(j) Outstanding Shares. For purposes of this Section 6.3, the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
will not pay any dividend or make any distribution on shares of Common Stock
held in the treasury of the Company other than dividends or distributions
payable only in shares of Common Stock.

6.4 Effect of Reclassification, Consolidation, Merger or Sale.  (a) If any of
the following events occur, namely:

(i) any reclassification or change of the outstanding shares of Common Stock
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination),

(ii) any consolidation, merger or combination of the Company with another
corporation as a result of which holders of Common Stock shall be entitled to
receive stock, securities or other property or assets (including cash) with
respect to or in exchange for such Common Stock, or

(iii) any sale or conveyance of the properties and assets of the Company as, or
substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock,
 
 
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then the Company or the successor or purchasing Person, as the case may be,
shall execute with the Holder a written agreement providing that:

(x) this Note shall be convertible into the kind and amount of shares of stock
and other securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, statutory exchange,
combination, sale or conveyance by the holder of the number of shares of Common
Stock issuable upon conversion of this Note in full (assuming, for such
purposes, a sufficient number of authorized shares of Common Stock available to
convert this Note) immediately prior to such reclassification, change,
consolidation, merger, statutory exchange, combination, sale or conveyance
assuming such holder of Common Stock did not exercise such holder's rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, combination,
sale or conveyance (provided that, if the kind or amount of securities, cash or
other property receivable upon such consolidation, merger, statutory exchange,
sale or conveyance is not the same for each share of Common Stock in respect of
which such rights of election shall not have been exercised (“non-electing
share”), then for the purposes of this Section 6.4 the kind and amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, combination, sale or conveyance for each non-electing share
shall be deemed to be the kind and amount so receivable per share by a plurality
of the non-electing shares),

(y) in the case of any such successor or purchasing Person, upon such
consolidation, merger, statutory exchange, combination, sale or conveyance such
successor or purchasing Person shall be jointly and severally liable with the
Company for the performance of all of the Company's obligations under this Note
and the Note Purchase Agreement and

(z) if registration or qualification is required under the 1933 Act or
applicable state law for the public resale by the Holder of such shares of stock
and other securities so issuable upon conversion of this Note, such registration
or qualification shall be completed prior to such reclassification, change,
consolidation, merger, statutory exchange, combination, sale or conveyance.

Such written agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Article. If, in the case of any such reclassification, change, consolidation,
merger, statutory exchange, combination, sale or conveyance, the stock or other
securities and assets receivable thereupon by a holder of shares of Common Stock
includes shares of stock or other securities and assets of a corporation other
than the successor or purchasing corporation, as the case may be, in such
reclassification, change, consolidation, merger, statutory exchange,
combination, sale or conveyance, then such written agreement shall also be
executed by such other corporation and shall contain such additional provisions
to protect the interests of the Holder as the Board of Directors shall
reasonably consider necessary by reason of the foregoing, including, to the
extent practicable, the provisions providing for the repurchase rights set forth
in Article V herein.
 
 
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(b) The above provisions of this Section shall similarly apply to successive
reclassifications, changes, consolidations, mergers, statutory exchanges,
combinations, sales and conveyances.

(c) If this Section 6.4 applies to any event or occurrence, Section 6.3 shall
not apply.

6.5 Reservation of Shares; Shares to Be Fully Paid; Listing of Common Stock.

(a) The Company shall reserve and keep available, free from preemptive rights,
out of its authorized but unissued shares of Common Stock or shares of Common
Stock held in treasury, solely for issuance upon conversion of this Note, and in
addition to the shares of Common Stock required to be reserved by the terms of
the Other Notes, Warrants and the Other Warrants, sufficient shares to provide
for the conversion of this Note from time to time as this Note is converted.

(b) Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the shares of Common Stock
issuable upon conversion of this Note, the Company will take all corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue shares of such Common Stock at such
adjusted Conversion Price.

(c) The Company covenants that all shares of Common Stock issued upon conversion
of this Note will be fully paid and non-assessable by the Company and free from
all taxes, liens and charges with respect to the issue thereof.

(d) The Company covenants that if any shares of Common Stock to be provided for
the purpose of conversion of, or payment of interest on, this Note hereunder
require registration with or approval of any governmental authority under any
federal or state law before such shares may be validly issued upon conversion or
in payment of interest, the Company will in good faith and as expeditiously as
possible endeavor to secure such registration or approval, as the case may be.

(e) The Company covenants that, in the event the Common Stock shall be listed on
the Nasdaq, the Nasdaq Capital Market, the NYSE, the AMEX or any other national
securities exchange, the Company shall obtain and, so long as the Common Stock
shall be so listed on such market or exchange, maintain approval for listing
thereon of all Common Stock issuable upon conversion of or in payment of
interest on this Note.

6.6 Notice to Holder Prior to Certain Actions. In case on or after the Issuance
Date:

(a) the Company shall declare a dividend (or any other distribution) on its
Common Stock (other than in cash out of retained earnings); or
 
 
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(b) the Company shall authorize the granting to the holders of its Common Stock
of rights or warrants to subscribe for or purchase any share of any class or any
other rights or warrants; or

(c) the Board of Directors shall authorize any reclassification of the Common
Stock of the Company (other than a subdivision or combination of its outstanding
Common Stock, or a change in par value, or from par value to no par value, or
from no par value to par value), or any consolidation or merger or other
business combination transaction to which the Company is a party and for which
approval of any stockholders of the Company is required, or the sale or transfer
of all or substantially all of the assets of the Company; or

(d) there shall be pending the voluntary or involuntary dissolution, liquidation
or winding-up of the Company;

the Company shall give the Holder, as promptly as possible but in any event at
least ten Trading Days prior to the applicable date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution or rights are to be determined, or (y) the date
on which such reclassification, consolidation, merger, other business
combination transaction, sale, transfer, dissolution, liquidation or winding-up
is expected to become effective or occur, and the date as of which it is
expected that holders of Common Stock of record who shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, other business combination
transaction, sale, transfer, dissolution, liquidation or winding-up shall be
determined. Such notice shall not include any information which would be
material non-public information for purposes of the 1934 Act. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
such dividend, distribution, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up. In the case of any such action
of which the Company gives such notice to the Holder or is required to give such
notice to the Holder, the Holder shall be entitled to give a Conversion Notice
which is contingent on the completion of such action.

6.7 Restricted Ownership Percentage Limitation. (a) Notwithstanding anything to
the contrary contained herein, the number of shares of Common Stock that may be
acquired at any time by the Holder upon conversion of the Note shall not exceed
a number that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder that have limitations on the holder's right to
convert, exercise or purchase similar to the limitation set forth herein (the
“Excluded Shares”), together with all shares of Common Stock beneficially owned
at such time (other than by virtue of the ownership of Excluded Shares) by
Persons whose beneficial ownership of Common Stock would be aggregated with the
beneficial ownership by the Holder for purposes of determining whether a group
exists or for purposes of determining the Holder’s beneficial ownership (the
“Aggregation Parties”), in either such case for purposes of Section 13(d) of the
1934 Act and Regulation 13D-G thereunder (including, without limitation, as the
same is made applicable to Section 16 of the 1934 Act and the rules promulgated
thereunder), would result in beneficial ownership by the Holder or such group of
more than 9.9% of the shares of Common Stock for purposes of Section 13(d) or
Section 16 of the 1934 Act and the rules promulgated thereunder (as the same may
be modified by a particular Holder as provided herein, the “Restricted Ownership
Percentage”). The Holder shall have the right at any time and from time to time
to reduce its Restricted Ownership Percentage immediately upon notice to the
Company in the event and only to the extent that Section 16 of the 1934 Act or
the rules promulgated thereunder (or any successor statute or rules) is changed
to reduce the beneficial ownership percentage threshold thereunder to a
percentage less than 10%. If at any time the limits in this Section 6.7 make the
Note inconvertible in whole or in part, the Company shall not by reason thereof
be relieved of its obligation to issue shares of Common Stock at any time or
from time to time thereafter upon conversion of the Note as and when shares of
Common Stock may be issued in compliance with such restrictions.
 
 
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(b) For purposes of this Section 6.7, in determining the number of outstanding
shares of Common Stock at any time the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's then most
recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may
be, (2) a public announcement by the Company that is later than any such filing
referred to in the preceding clause (1) or (3) any other notice by the Company
or its transfer agent setting forth the number shares of Common Stock
outstanding and knowledge the Holder may have about the number of shares of
Common Stock issued upon conversions or exercises of this Note, the Other Notes,
the Warrants, the Other Warrants or other Common Stock Equivalents by any
Person, including the Holder, which are not reflected in the information
referred to in the preceding clauses (1) through (3). Upon the written request
of any Holder, the Company shall within three Business Days confirm in writing
to such 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 Common Stock Equivalents,
including the Notes and the Warrants, by the Holder or its Affiliates, in each
such case subsequent to, the date as of which such number of outstanding shares
of Common Stock was reported.
 
ARTICLE VII

MISCELLANEOUS

7.1 Failure or Indulgency Not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privileges. All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise available.
The Company stipulates that the remedies at law of the Holder in the event of
any default or threatened default by the Company in the performance of or
compliance with any of the terms of this Note are not and will not be adequate,
and that such terms may be specifically enforced (x) by a decree for the
specific performance of any agreement contained herein, including, without
limitation, a decree for issuance of the shares of Common Stock (or other
securities) issuable upon conversion of this Note or (y) by an injunction
against a violation of any of the terms hereof or (z) otherwise.
 
 
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7.2 Notices. Except as otherwise specifically provided herein, any notice herein
required or permitted to be given shall be in writing and may be personally
served, sent by telephone line facsimile transmission or delivered by courier or
sent by United States mail and shall be deemed to have been given upon receipt
if personally served, sent by telephone line facsimile transmission or sent by
courier or three days after being deposited in the facilities of the United
States Postal Service, certified, with postage pre-paid and properly addressed,
if sent by mail. For the purposes hereof, the address and facsimile line
transmission number of the Holder shall be as furnished by the Holder for such
purpose and shown on the records of the Company; and the address of the Company
shall be SJ Electronics, Inc., 5F, No. 166, Sinhu 2nd Road, Neihu District,
Taipei City, Taiwan, Attention: Agatha Shen (telephone line facsimile number
886-2-8791-1368). The Holder or the Company may change its address for notice by
service of written notice to the other as herein provided.

7.3 Amendment, Waiver. (a) Neither this Note or any Other Note nor any terms
hereof or thereof may be changed, amended, discharged or terminated unless such
change, amendment, discharge or termination is in writing signed by the Company
and the Majority Holders, provided that no such change, amendment, discharge or
termination shall, without the consent of the Holder and the holders of the
Other Notes affected thereby (i) extend the scheduled Maturity Date of this Note
or any Other Note, or reduce the rate or extend the time of payment of interest
(other than as a result of waiving the applicability of any post-default
increase in interest rates) hereon or thereon or reduce the principal amount
hereof or thereof or the Repurchase Price or the Optional Prepayment Price
hereof or thereof, (ii) increase or decrease the Conversion Price except as set
forth in this Note, (iii) release the Collateral or reduce the amount of
Collateral required to be deposited or maintained by the Company pursuant to the
Security Agreement, except as expressly provided in the Security Agreement, (iv)
amend, modify or waive any provision of this Section 7.3 or (v) reduce any
percentage specified in, or otherwise modify, the definition of Majority
Holders.  Notwithstanding anything to the contrary contained herein, no
amendment or waiver shall increase or eliminate the Restricted Ownership
Percentage, whether permanently or temporarily, unless, in addition to complying
with the other requirements of this Note, such amendment or waiver shall have
been approved in accordance with the General Corporation Law of the State of
Nevada and the Company's By-laws by holders of the outstanding shares of Common
Stock entitled to vote at a meeting or by written consent in lieu of such
meeting.
 
 
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(b) Any term or condition of this Note may be waived by the Holder or the
Company at any time if the waiving party is entitled to the benefit thereof, but
no such waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No waiver
by any party of any term or condition of this Note, in any one or more
instances, will be deemed to be or construed as a waiver of the same or any
other term or condition of this Note on any future occasion.

7.4 Assignability. This Note shall be binding upon the Company and its
successors, and shall inure to the benefit of and be binding upon the Holder and
its successors and permitted assigns. The Company may not assign its rights or
obligations under this Note.

7.5 Certain Expenses.  The Company shall pay on demand all expenses incurred by
the Holder, including reasonable attorneys' fees and expenses, as a consequence
of, or in connection with (x) any amendment or waiver of this Note or any other
Transaction Document, (y) any default or breach of any of the Company’s
obligations set forth in the Transaction Documents and (z) the enforcement or
restructuring of any right of, including the collection of any payments due, the
Holder under the Transaction Documents, including any action or proceeding
relating to such enforcement or any order, injunction or other process seeking
to restrain the Company from paying any amount due the Holder.

7.6 Governing Law. This Note shall be governed by the internal laws of the State
of New York, without regard to the principles of conflict of laws.
 
7.7 Transfer of Note. This Note has not been and is not being registered under
the provisions of the 1933 Act or any state securities laws and this Note may
not be transferred prior to the end of the holding period applicable to sales
without volume restrictions under Rule 144 unless (1) the transferee is an
“accredited investor” (as defined in Regulation D under the 1933 Act) and (2)
the Holder shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that
this Note may be sold or transferred without registration under the 1933 Act.
Prior to any such transfer, such transferee shall have represented in writing to
the Company that such transferee has requested and received from the Company all
information relating to the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company and the
Subsidiaries deemed relevant by such transferee; that such transferee has been
afforded the opportunity to ask questions of the Company concerning the
foregoing and has had the opportunity to obtain and review the reports and other
information concerning the Company which at the time of such transfer have been
filed by the Company with the SEC pursuant to the 1934 Act. If such transfer is
intended to assign the rights and obligations under Section 5, 8, 9 and 10 of
the Note Purchase Agreement, such transfer shall otherwise be made in compliance
with Section 10(j) of the Note Purchase Agreement.

7.8 Enforceable Obligation. The Company represents and warrants that at the time
of the original issuance of this Note it received the full purchase price
payable pursuant to the Note Purchase Agreement in an amount at least equal to
the original principal amount of this Note, and that this Note is an enforceable
obligation of the Company which is not subject to any offset, reduction,
counterclaim or disallowance of any sort.
 
 
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7.9 Note Register; Replacement of Notes. The Company shall maintain a register
showing the names, addresses and telephone line facsimile numbers of the Holder
and the registered holders of the Other Notes. The Company shall also maintain a
facility for the registration of transfers of this Note and the Other Notes and
at which this Note and the Other Notes may be surrendered for split up into
instruments of smaller denominations or for combination into instruments of
larger denominations. Upon receipt by the Company of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Note and (a) in the case of loss, theft or destruction, of
indemnity from the Holder reasonably satisfactory in form to the Company (and
without the requirement to post any bond or other security) or (b) in the case
of mutilation, upon surrender and cancellation of this Note, the Company will
execute and deliver to the Holder a new Note of like tenor without charge to the
Holder.

7.10 Payment of Note on Prepayment or Repurchase; Deposit of Optional Prepayment
Price or Repurchase Price, Etc. (a) If this Note or any portion of this Note is
to be prepaid as provided in Section 2.1 or repurchased as provided in Sections
5.1 and 5.2 and any notice required in connection therewith shall have been
given as provided therein and the Company shall have otherwise complied with the
requirements of this Note with respect thereto, then this Note or the portion of
this Note to be so prepaid or repurchased and with respect to which any such
notice has been given shall become due and payable on the date stated in such
notice at the Optional Prepayment Price or Repurchase Price. On and after the
Optional Prepayment Date or repurchase date so stated in such notice, provided
that the Company shall have deposited with an Eligible Bank on or prior to such
Optional Prepayment Date or repurchase date, an amount in cash sufficient to pay
the Optional Prepayment Price or Repurchase Price, interest on this Note or the
portion of this Note to be so prepaid or repurchased shall cease to accrue, and
this Note or such portion hereof shall be deemed not to be outstanding and shall
not be entitled to any benefit  with respect to principal of or interest on the
portion to be so prepaid or repurchased except to receive payment of the
Optional Prepayment Price or Repurchase Price. On presentation and surrender of
this Note or such portion hereof, this Note or the specified portion hereof
shall be paid and repurchased at the Optional Prepayment Price or Repurchase
Price. If a portion of this Note is to be prepaid or repurchased, upon surrender
of this Note to the Company in accordance with the terms hereof, the Company
shall execute and deliver to the Holder without service charge, a new Note or
Notes, having the same date hereof and containing identical terms and
conditions, in such denomination or denominations as requested by the Holder in
aggregate principal amount equal to, and in exchange for, the unprepaid or
unrepurchased portion of the principal amount of this Note so surrendered.

(b) Upon the payment in full of all amounts payable by the Company under this
Note or the deposit thereof as provided in Section 7.10(a), thereafter the
obligations of the Company under this Note shall be as set forth in this Article
VII, and, in the case of such deposit, to pay the Repurchase Price, from the
funds so deposited. Upon such payment or deposit, any Event of Default which
occurred prior to such payment or deposit by reason of one or more provisions of
this Note with which the Company thereafter is no longer obligated to comply,
then shall no longer exist.
 
 
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7.11 Construction. The language used in this Note will be deemed to be the
language chosen by the Company and the original Holder of this Note (or its
predecessor instrument) to express their mutual intent, and no rules of strict
construction will be applied against the Company or the Holder.
 
[Remainder of Page Intentionally Left Blank]
 
 
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IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by
its duly authorized officer on of the day and in the year first above written.

Date: May __, 2008

SJ ELECTRONICS, INC.
 
By:
   
Name:
 
Title:

 
 
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ASSIGNMENT

FOR VALUE RECEIVED, _________________________ hereby sell(s), assign(s) and
transfer(s) unto _________________________ (Please insert social security or
other Taxpayer Identification Number of assignee:
______________________________) the within Note, and hereby irrevocably
constitutes and appoints _________________________ attorney to transfer the said
Note on the books of SJ Electronics, Inc., a Nevada corporation (the “Company”),
with full power of substitution in the premises.

In connection with any transfer of the Note within the period prior to the
expiration of the holding period applicable to sales thereof under Rule 144
under the 1933 Act (or any successor provision) (other than any transfer
pursuant to a registration statement that has been declared effective under the
1933 Act), the undersigned confirms that such Note is being transferred:
 
o
To the Company or a subsidiary thereof; or

o
To a “qualified institutional buyer” pursuant to and in compliance with Rule
144A; or

o
To a non-US Person and in compliance with Regulation S under the 1933 Act; or

o
Pursuant to and in compliance with Rule 144 under the 1933 Act;

 
and unless the box below is checked, the undersigned confirms that, to the
knowledge of the undersigned, such Note is not being transferred to an Affiliate
of the Company.

o
The transferee is an Affiliate of the Company.

 
Capitalized terms used in this Assignment and not defined in this Assignment
shall have the respective meanings provided in the Note.

 Dated:_____________________
 
  NAME:_____________________

 ___________________________
  Signature(s)
 
 
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Exhibit A

COMPANY NOTICE
(Section 5.2(a) of 15% Senior Secured Convertible Note due 2009)

TO:  ______________________________
(Name of Holder)

(1) A Repurchase Event described in the 15% Senior Secured Convertible Note due
2009 (the “Note”) of SJ Electronics, Inc., a Nevada corporation (the “Company”),
occurred on                     ,       . As a result of such Repurchase Event,
the Holder is entitled to exercise its repurchase rights pursuant to Section 5.2
of the Note.

(2) The Holder’s repurchase right must be exercised on or before               ,
       .

(3) At or before the date set forth in the preceding paragraph (2), the Holder
must:

(a) deliver to the Company a Holder Notice, in the form attached as Exhibit B to
the Note; and

(b) the Note, duly endorsed for transfer to the Company of the portion of the
principal amount to be repurchased.

(4) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
 
Date:__________________

SJ ELECTRONICS, INC.
 
By:
   
Name:
 
Title:

 
 
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Exhibit B

HOLDER NOTICE
(Section 5.2(b) of 15% Senior Secured Convertible Note due 2009)

TO:       SJ ELECTRONICS, INC.

(1) Pursuant to the terms of the 15% Senior Secured Convertible Note due 2009
(the “Note”), the undersigned Holder hereby elects to exercise its right to
require repurchase by the Company pursuant to Sections 5.2(a) and 5.2(b) of
$                          of the Note, equal to the sum of
$                     principal amount of the Note, $                     of
accrued and unpaid interest on such principal amount and $                    
of Default Interest on the Note at the Repurchase Price provided in the Note.

(2) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
 
Date:________________

NAME OF HOLDER:
     
By:
   
Signature of Registered Holder
 
(Must be signed exactly as name
 
appears in the Note)

 
 
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Exhibit C

NOTICE OF CONVERSION
OF 15% SENIOR SECURED CONVERTIBLE NOTE DUE 2009
OF SJ ELECTRONICS, INC.

To:
SJ Electronics, Inc.
 
5F, No. 166, Sinhu 2nd Road,
 
Neihu District, Taipei City, Taiwan
   
Attention: Chief Financial Officer
Facsimile No.: (886) 8791-1368

 
1. Pursuant to the terms of the 15% Senior Secured Convertible Note Due 2009
(the “Note”), the undersigned hereby elects to convert $_______________ of the
Note, equal to the sum of $_______________ principal amount of the Note,
$_______________ of accrued and unpaid interest on such principal amount and
$_______________ of Default Interest on such interest into shares of Common
Stock of SJ Electronics, Inc., a Nevada corporation (the “Company”), at a
Conversion Price per share equal to $_______________. Capitalized terms used
herein and not otherwise defined herein have the respective meanings provided in
the Note.

2. The number of shares of Common Stock issuable upon the conversion of the Note
to which this Notice relates is _______________ (the “Conversion Shares”).

3. Please issue a certificate or certificates for _______________ shares of
Common Stock in the name(s) specified immediately below or, if additional space
is necessary, on an attachment hereto:
 
_______________________________
Name
_______________________________
Address
_______________________________
SS or Tax ID Number
 
________________________________________________________________________
Delivery Instructions for Common Stock 

Date:________________
NAME OF HOLDER:
             
By:
     
Signature of Registered Holder
   
(Must be signed exactly as name
   
appears in the Note.)

 
 
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Exhibit D

OPTIONAL PREPAYMENT NOTICE
(Section 2.1 of 15% Senior Secured
Convertible Note due 2009)

TO:_________________________________     
(Name of Holder)

(1) Pursuant to the terms of the 15% Senior Secured Convertible Note due 2009
(the “Note”), SJ Electronics, Inc., a Nevada corporation (the “Company”), hereby
notifies the above-named Holder that the Company is exercising its right to
prepay the Note in accordance with Section 2.1 of the Note as set forth below:

(i) The principal amount of the Note to be prepaid is $             .

(ii) The Optional Prepayment Price is $               .

(iii) The Optional Prepayment Date is               .

(2) All of the conditions specified in Section 2.1 of the Note entitling the
Company to call the Note for prepayment have been satisfied.

(3) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
 
 Date:__________________

SJ ELECTRONICS, INC.
 
By:
   
Name:
 
Title:

 
 
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