NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE ARE CONVERTIBLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ACCORDINGLY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE BE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO AIR INDUSTRIES GROUP THAT
SUCH REGISTRATION IS NOT REQUIRED.
 
No. AIRI-
Principal Amount: $_____
 
Issue Date: August 19, 2016

 
12% Subordinated Convertible Note due December 31, 2017

                   FOR VALUE RECEIVED, AIR INDUSTRIES GROUP, a Nevada
corporation (the “Company”) hereby promises to pay to the order of _______ or
his assigns (the "Holder"), without demand, the sum of _________ Dollars
($_____), together with accrued interest thereon from the date hereof at the
rate of twelve percent (12%) per annum, on December 31, 2017 (the "Maturity
Date"), or such earlier date as the same may become due as provided in Section 3
hereof.  Upon the occurrence and continuation of an Event of Default (as defined
in Section 3 below), interest shall accrue at the rate of 19% per annum.
Interest on this Note shall be calculated based upon a year consisting of 365
days and actual days elapsed (including the first day but excluding the last
day) occurring in the period for which interest is payable.
 
This Note is one of a series of Notes in the aggregate principal amount of up to
$4,250,000 (the “Notes”) issued pursuant to a Securities Purchase Agreement
dated August 19, 2016 between the purchasers of the Notes and the Company (the
“Securities Purchase Agreement”). Capitalized terms used herein without
definition shall have the meanings assigned to them in the Securities Purchase
Agreement.

           This Note may be prepaid in whole or in part at any time.  All
payments made pursuant to this Note shall be applied first to reimbursable
expenses, interest accrued, if any, and then principal.
 
 
The following is a statement of rights of the Holder and the conditions to which
this Note is subject, and to which the Holder, by acceptance of this Note,
agrees:

1.           Subordination.  (a)   This Note will be subordinate and inferior to
the Company’s Senior Indebtedness (as hereinafter defined).  The Company for
itself, its successors and assigns, covenants and agrees and the Holder of this
Note, for himself, his successors and assigns, by his acceptance of this Note
likewise covenants and agrees that, to the extent provided below, the payment of
all amounts due pursuant to this Note is hereby expressly subordinated and
junior in right of payment to the extent and in the manner hereinafter set
forth, to the Company’s Senior Indebtedness.  As used herein, the term “Senior
Indebtedness” shall mean the principal of, and interest and premium, if any, on
any and all, (i) indebtedness of the Company for borrowed money or obligations
with respect to which the Company is a guarantor, to banks, insurance companies,
or other financial institutions or entities regularly engaged in the business of
lending money, in each case as in effect as of the date hereof (other than the
Notes), or as may be borrowed hereafter, including without limitation,
indebtedness incurred by one or more of the Company’s subsidiaries under the
Amended and Restated Revolving Credit, Term Loan, Equipment Line and Security
Agreement, dated as of June 27, 2013 among Air Industries Machining, Corp.,
Welding Metallurgy, Inc., Nassau Tool Works, Inc.,  Woodbine Products Inc.,
Eur-Pac Corporation, Electronic Connection Corporation, AMK Welding, Inc., The
Sterling Engineering Corporation, and PNC Bank, National Association, as agent
for the various lenders named therein, as amended as of the date hereof (the
“Loan Agreement”), the payment of which has been guaranteed by the Company and
Air Realty Group, LLC (the “Guarantors”), (ii) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for or to
refinance such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a Guarantor, provided that such
indebtedness issued in exchange for or to refinance Senior Indebtedness or
arising from the satisfaction of Senior Indebtedness by a Guarantor is on
commercially reasonable terms as of the date of incurrence not to exceed the
principal amount under such Senior Indebtedness and provided further that the
Company provides the Holder with prior written notice of such action.
 
 
 

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(b)Upon the acceleration of any Senior Indebtedness or upon the maturity of all
or any portion of the principal amount of any Senior Indebtedness by lapse of
time, acceleration or otherwise, all such Senior Indebtedness which has been so
accelerated or matured shall first indefeasibly be paid in full before any
payment is made by the Company or any person acting on behalf of the Company on
account of any obligations evidenced by this Note.

(c)The Company shall not pay any principal portion of this Note, or interest
accrued hereon, if at such time there exists a Blockage Event (as hereafter
defined) and written notice thereof has been given to the Company and the Holder
by the holders of the Senior Indebtedness.

(d)A “Blockage Event” is deemed to exist for the period of time commencing on
the date of receipt by the Holder of written notice of the occurrence of a
Default or an Event of Default (as defined in the instruments evidencing the
Senior Indebtedness), provided that the failure to pay accrued interest on this
Note or the other Notes when due shall not give rise to a Blockage Event in the
absence of another Default or Event of Default, which notice shall specify such
Default or Event of Default, and ending on:

(i)the date such Default or Event of Default under the Senior Indebtedness, as
applicable, is cured or waived, provided that such Default or Event of Default
is in the payment of any amount due thereunder; or

(ii)in the case of any other Default or Event of Default under the Senior
Indebtedness, the earlier of (A) the date on which Holder has received
written  notice of such Default or Event of Default shall have been cured or
waived and (B) the date that is 365 days after the occurrence of such Default or
Event of Default, provided that a Blockage Event with respect to a single
specified Default or Event of Default may be deemed to occur only once for each
twelve-month period, provided, further, that no Default or Event of Default that
existed at the commencement of, or during the pendency of, a Blockage Event
shall serve as the basis for the institution of any subsequent Blockage Event.

A Blockage Event shall not be deemed to have existed during the period of time
commencing on the date upon which the holder of this Note or holders of other
Notes accelerate payment of the principal amount of this Note or such other
Notes as a result of any Event of Default hereunder or under such other Notes
and ending on the 365th day after written notice of such acceleration given by
the holder or such other holders to the Company and the holders of the
instruments evidencing the Senior Indebtedness; provided that in no event shall
the Company pay the holder of this Note or the holders of any other Notes the
principal amount so accelerated if a Blockage Event then exists until the Senior
Indebtedness has been paid in full.
 
 
 

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(e)At any time there exists a Blockage Event, (i) the Company shall not,
directly or indirectly, make any payment of any part of this Note, (ii) the
Holder shall not demand or accept from the Company or any other person any such
payment or cancel, set-off or otherwise discharge any part of the indebtedness
represented by this Note, and (iii) neither the Company nor the Holder shall
otherwise take or permit any action prejudicial to or inconsistent with the
priority position of any holder of Senior Indebtedness over the Holder of this
Note.  

(f)No right of any holder of Senior Indebtedness to enforce the subordination
provisions of this obligation shall be impaired by any act or failure to act by
the Company or the Holder or by their failure to comply with this Note or any
other agreement or document evidencing, related to or securing the obligations
hereunder.  Without in any way limiting the generality of the preceding
sentence, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Holder, without incurring
responsibility to the Holder and without impairing or releasing the
subordination provided in this Note or the obligations of the Holder to the
holders of Senior Indebtedness, do any one or more of the following: (i) change
the manner, place or terms of payment of any Senior Indebtedness provided that
such change does not materially impact Holder in an adverse manner; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing any Senior Indebtedness; (iii) release any person or entity
liable in any manner for the collection of any Senior Indebtedness; and (iv)
exercise or refrain from exercising any rights against the Company or any other
person or entity.

(g)In the event that the Company shall make any payment or prepayment to the
Holder on account of the obligations under this Note which is prohibited by this
Section, such payment shall be held by the Holder, in trust for the benefit of,
and shall  be paid forthwith over and delivered to, the holders of Senior
Indebtedness (pro rata as to each of such holders on the basis of the respective
amounts and priorities of Senior Indebtedness held by them) to the extent
necessary to pay all Senior Indebtedness due to such holders of Senior
Indebtedness in full in accordance with its terms (whether or not such Senior
Indebtedness is due and owing), after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness.

(h)After all Senior Indebtedness indefeasibly is paid in full and until the
obligations under the Note are paid in full, the Holder shall be subrogated to
the rights of holders of Senior Indebtedness to the extent that distributions
otherwise payable to the Holder have been applied to the payment of Senior
Indebtedness.  For purposes of such subrogation, no payments or distributions to
holders of such Senior Indebtedness of any cash, property or securities to which
the Holder would be entitled except for the provisions of this Section and no
payment over pursuant to the provisions of this Section to holders of such
Senior Indebtedness by the Holder, shall, as between the Company, its creditors
other than holders of such Senior Indebtedness, and the Holder, be deemed to be
a payment by the Company to or on account of such Senior Indebtedness, it being
understood that the provisions of this Section are solely for the purpose of
defining the relative rights of the holders of such Senior Indebtedness, on the
one hand and the Holder, on the other hand.

(i)In any insolvency, receivership, bankruptcy, dissolution, liquidation or
reorganization proceeding, or in any other proceeding, whether voluntary or
involuntary, by or against the Company under any bankruptcy or insolvency law or
laws relating to relief of debtors, to compositions, extensions or readjustments
of indebtedness:

(i)the claims of any holders of Senior Indebtedness against the Company shall be
paid indefeasibly in full in cash or such payment shall have been provided for
in a manner acceptable to the holders of at least a majority of the then
outstanding principal amount of the Senior Indebtedness before any payment is
made to the Holder;
 
 
 

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(ii)until all Senior Indebtedness is indefeasibly paid in full in cash or such
payment shall have been provided for in a manner acceptable to the holders of at
least a majority of the then outstanding principal amount of the Senior
Indebtedness before any payment is made to the Holder, any distribution to which
the Holder would be entitled but for this Section shall be made to holders of
Senior Indebtedness, except for distribution of securities issued by the Company
which are subordinate and junior in right of payment to the Senior Indebtedness;
and
 
(iii)   the holders of Senior Indebtedness shall have the right to enforce,
collect and receive every such payment or distribution and give acquittance
therefor.  If, in or as a result of any action case or proceeding under Title 11
of the United States Code, as amended from time to time, or any comparable
statute, relating to the Company, the holders of the Senior Indebtedness return,
refund or repay to the Company, or any trustee or committee appointed in such
case or proceeding receive any payment or proceeds of any collateral in
connection with such action, case or proceeding alleging that the receipt of
such payments or proceeds by the holders of the Senior Indebtedness was a
transfer voidable under state or federal law, then the holders of the Senior
Indebtedness shall not be deemed ever to have received such payments or proceeds
for purposes of this Note in determining whether and when all Senior
Indebtedness has been paid in full and the Company shall pay or cause to be
paid, and the Holder shall be entitled to receive any such funds, proceeds or
collateral to satisfy all amounts due hereunder.  In the event the holders of
Senior Indebtedness receive amounts in excess of payment in full (cash) of
amounts outstanding in respect of Senior Indebtedness (without giving effect to
whether claims in respect of the Senior Indebtedness are allowed in any
insolvency proceeding), the holders of Senior Indebtedness shall pay such excess
amounts to the Holder.

(k)           By its acceptance of this Note, the Holder agrees to execute and
deliver such documents as may be reasonably requested from time to time by the
Company or the holder of any Senior Indebtedness in order to implement the
foregoing provisions of this Section.

2.           Conversion.

 
A.
At the Option of the Holder.

                           (1) The Holder shall have the option at any time
while this Note remains outstanding to convert the unpaid principal amount and
accrued interest thereon into shares of the Company’s Common Stock at a
conversion price of $4.92 per share, subject to adjustment as provided in
Section 2D below (the “Conversion Price”). The number of shares of Common Stock
issuable upon any conversion of this Note shall equal the outstanding principal
amount of this Note to be converted, plus the amount of any accrued but unpaid
interest on this Note through the date (the “Conversion Date”) the Company
receives a notice of conversion in the form of Schedule I annexed hereto (a
“Conversion Notice”), divided by the Conversion Price on the Conversion
Date.  The Holder shall effect conversions under this Section 2A(1) by
delivering to the Company a Conversion Notice, together with a schedule in the
form of Schedule II annexed hereto (the “Conversion Schedule”).  If the Holder
is converting less than all of the principal amount of this Note, the Company
shall promptly deliver to the Holder a Conversion Schedule indicating the
principal amount (and accrued interest) which has not been converted.
 
                          (2) Upon conversion of this Note, the Company shall
promptly (but in no event later than three (3) trading days after the Conversion
Date) issue or cause to be issued and cause to be delivered to or upon the
written order of the Holder and in such name or names as the Holder may
designate a certificate for the shares of Common Stock issuable upon such
conversion (the “Conversion Shares”).  The Holder, or any person so designated
by the Holder to receive the Conversion Shares, shall be deemed to have become
holder of record of such Conversion Shares as of the Conversion Date.  The
Company shall, upon request of the Holder, use its reasonable best efforts to
deliver the Conversion Shares electronically through DTC.
 
 
 

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                          (3) The Holder shall not be required to deliver the
original Note in order to effect a conversion hereunder.  Execution and delivery
of the Conversion Notice shall have the same effect as cancellation of the
original Note and issuance of a new Note representing the remaining outstanding
principal amount; provided that the cancellation of the original Note shall not
be deemed effective until a certificate for the Conversion Shares is delivered
to the Holder, or the Holder or its designee receives a credit for the
Conversion Shares to its balance account with DTC through its Deposit Withdrawal
Agent Commission System.  The Holder shall deliver the original Note to the
Company within thirty (30) days after the conversion of the entire Note
hereunder, provided, that the Holder’s failure to so deliver the original Note
shall not affect the validity of such conversion or any of the Company’s
obligations under this Note, and the Company’s sole remedy for the Holder’s
failure to deliver the original Note shall be to obtain an affidavit of lost
Note from the Holder.
 
             (4) The Company’s obligations to issue and deliver Conversion
Shares upon conversion of this Note in accordance with the terms and subject to
the conditions hereof are absolute and unconditional, irrespective of any action
or inaction by the Holder to enforce the same, any waiver or consent with
respect to any provision hereof, the recovery of any judgment against any person
or any action to enforce the same, or any set-off, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or any
other person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other person, and irrespective of any
other circumstance which might otherwise limit such obligation of the Company to
the Holder in connection with the issuance of such Conversion Shares (other than
such limitations contemplated by this Note).
 
             (5)   If by the fifth (5th) trading day after a Conversion Date the
Company fails to deliver or cause to be delivered to the Holder such Conversion
Shares in such amounts and in the manner required pursuant to Section 2A(2),
then the Holder will have the right to rescind such conversion.
 
              (6)   If by the third (3rd) trading day after a Conversion Date
the Company fails to deliver or cause to be delivered to the Holder such
Conversion Shares in such amounts and in the manner required pursuant to Section
2A(2), and if after such third (3rd) trading day the holder purchases (in an
open market transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by the holder of the Conversion Shares which the Holder
anticipated receiving upon such conversion (a “buy-in”), then the Company shall,
at the option of the Holder (in his or its sole discretion), either (i) pay cash
to the Holder (in addition to any other remedies available to or elected by the
Holder) in an amount equal to the Holder’s total purchase price (including
brokerage commissions, if any) for the shares of common stock so purchased (the
“buy-in price”), at which point the Company’s obligation to deliver such
certificate (and to issue such common stock) shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates
representing such common stock and pay cash to the holder in an amount equal to
the excess (if any) of the buy-in price over the product of (a) such number of
shares of common stock, times (b) the closing price on the date of the event
giving rise to the Company’s obligation to deliver such certificate.
 
             (7) Except as otherwise provided in the Securities Purchase
Agreement, each certificate for Conversion Shares shall bear a restrictive
legend and any certificate issued at any time in exchange or substitution for
any certificate bearing such legend, shall also bear such legend.
 
 
 

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B. Automatic Conversion
 
                            (1) The unpaid principal amount and accrued interest
on this Note shall be automatically converted (the “Automatic Conversion”) into
shares of the Company’s Series A Convertible Preferred Stock (“Series A
Preferred Stock”) upon the filing with the Office of the Secretary of State of
Nevada of a Certificate of Amendment to the Articles of Incorporation of the
Company increasing the number of authorized shares of Preferred Stock of the
Company, including the Series A Preferred Stock (the “Effective Time”). The
number of shares of Series A Preferred Stock issuable upon Automatic Conversion
of this Note shall be the number determined by dividing the outstanding
principal amount of this Note to be converted, plus the amount of any accrued
but unpaid interest on this Note through the conversion date, by $10.00, the
Stated Value of the Series A Preferred Stock.

                            (2) Promptly following the Effective Time, the
Company shall send a written notice of the Automatic Conversion of this Note to
the holder of record of this Note by first class or registered mail, postage
prepaid, at such holder's address last shown on the records of the Company. Upon
receipt of any such notice, the holder of record shall surrender this Note to
the Company for cancellation at the place designated in such notice, and shall
thereafter receive certificates for the number of shares of Series A Preferred
Stock to which such holder is entitled.  Following the Effective Time, this Note
shall be deemed to have been cancelled and all rights of the Holder with respect
to this Note shall terminate, except the right, upon surrender of this Note, to
receive certificates for the number of shares of Series A Preferred Stock into
which this Note has been converted, plus any cash that may be payable in respect
of any fraction of a share of Series A Preferred Stock otherwise issuable upon
such conversion, unless the Company has elected to settle such fractional share
by issuing one additional share of Series A Preferred Stock in lieu of such cash
payment. As soon as practicable after the Effective Time and the surrender of
this Note, the Company shall cause to be issued and delivered to such holder, or
on his, her or its written order, a certificate or certificates for the number
of shares of Series A Preferred Stock issuable on such conversion in accordance
with the provisions of this Note, together with the cash payment for any
fractional share of Series A Preferred Stock otherwise issuable upon such
conversion, unless the Company has elected to settle such fractional share by
issuing one additional share of Series A Preferred Stock in lieu of such cash
payment.

                            (3)    If there shall occur a “Fundamental
Transaction” (as defined in Section D.3 below), the Holder of this Note will be
entitled to receive the consideration such Holder would have received under the
Certificate of Designation authorizing the issuance of the Series Preferred
Stock as a holder of the number of shares of Series A Preferred Stock into which
this Note would have been automatically converted into immediately prior to the
occurrence of such Fundamental Transaction had that been the Effective Time.
 
                            (4)  Except as provided in the securities Purchase
Agreement, each certificate for Conversion Shares shall bear a restrictive
legend and any certificate issued at any time in exchange or substitution for
any certificate bearing such legend, shall also bear such legend.
 
C. No Fractional Shares. No fractional shares or scrip representing fractional
shares shall be issued upon the conversion of this Note.   As to any fraction of
a share which a Holder would otherwise be entitled to purchase upon such
conversion, the Company shall at its election, either pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the volume weighted average price on the Conversion Date or round up to the next
whole share.

D. Adjustments to Conversion Price.  The Conversion Price is subject to
adjustment from time to time as set forth in this Section 2D.
 
 
 

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                             (1) Stock Dividends and Splits.  If the Company, at
any time while this Note is outstanding, (i) pays a stock dividend on its Common
Stock or otherwise makes a distribution on any class of capital stock that is
payable in shares of Common Stock, (ii) subdivides outstanding shares of Common
Stock into a larger number of shares, or (iii) combines outstanding shares of
Common Stock into a smaller number of shares, then in each such case the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding immediately before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event.  Any adjustment made pursuant to
clause (i) of this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clause (ii) or (iii) of this
Section shall become effective immediately after the effective date of such
subdivision or combination.

                               (2)  Pro Rata Distributions.  If the Company, at
any time while this Note is outstanding, distributes to all holders of Common
Stock (i) evidences of its indebtedness, (ii) any security (other than a
distribution of Common Stock described in Section 2D(1)(i)), (iii) rights or
warrants to subscribe for or purchase any security, or (iv) cash or any other
asset (in each case, “Distributed Property”), then the Company shall deliver to
the Holder (on the effective date of such distribution), the Distributed
Property that the Holder would have been entitled to receive in respect of the
Conversion Shares for which this Note could have been converted immediately
prior to the date on which holders of Common Stock became entitled to receive
such Distributed Property.

                               (3) Fundamental Changes.  If, at any time while
this Note is outstanding, (i) the Company, directly or indirectly, in one or
more related transactions effects any merger or consolidation of the Company
with or into another Person, (ii) the Company, directly or indirectly, effects
any sale, lease, license, assignment, transfer, conveyance or other disposition
of all or substantially all of its assets in one or a series of related
transactions, (iii) any, direct or indirect, purchase offer, tender offer or
exchange offer (whether by the Company or another Person) is completed pursuant
to which holders of Common Stock are permitted to sell, tender or exchange their
shares for other securities, cash or property and has been accepted by the
holders of 50% or more of the outstanding Common Stock, (iv) the Company,
directly or indirectly, in one or more related transactions effects any
reclassification, reorganization or recapitalization of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, or (v) the
Company, directly or indirectly, in one or more related transactions consummates
a stock or share purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person or group of Persons whereby such other Person
or group acquires more than 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock or share purchase agreement or other business combination)
(each a “Fundamental Transaction”), then, upon any subsequent conversion of this
Note, the Holder shall have the right to receive, for each share of Common Stock
that would have been issuable upon such conversion immediately prior to the
occurrence of such Fundamental Transaction, at the option of the Holder, the
number of shares of Common Stock of the successor or acquiring corporation or of
the Company, if it is the surviving corporation, and any additional
consideration (the “Alternate Consideration”) receivable as a result of such
Fundamental Transaction by a holder of the number of shares of Common Stock into
which this Note may be converted immediately prior to such Fundamental
Transaction.  For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect
of one share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration.  If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any conversion of this Note following such Fundamental
Transaction.  The Company shall cause any successor entity in a Fundamental
Transaction in which the Company is not the survivor (the “Successor Entity”) to
assume in writing all of the obligations of the Company under this Note and the
other Transaction Documents in accordance with the provisions of this Section
pursuant to written agreements in form and substance reasonably satisfactory to
the Holder and approved by the Holder (without unreasonable delay) prior to such
Fundamental Transaction and shall, at the option of the Holder, deliver to the
Holder in exchange for this Note a security of the Successor Entity evidenced by
a written instrument substantially similar in form and substance to this Note
which is convertible into a corresponding number of shares of capital stock of
such Successor Entity (or its parent entity) equivalent to the shares of Common
Stock acquirable and receivable upon conversion of this Note (without regard to
any limitations on the conversion of this Note) prior to such Fundamental
Transaction, and with conversion price which applies the conversion price
hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction and
the value of such shares of capital stock, such number of shares of capital
stock and such exercise price being for the purpose of protecting the economic
value of this Note immediately prior to the consummation of such Fundamental
Transaction), and which is reasonably satisfactory in form and substance to the
Holder. Upon the occurrence of any such Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the date
of such Fundamental Transaction, the provisions of this Note and the other
Transaction Documents referring to the “Company” shall refer instead to the
Successor Entity), and may exercise every right and power of the Company and
shall assume all of the obligations of the Company under this Note and the other
Transaction Documents with the same effect as if such Successor Entity had been
named as the Company herein.
 
 
 

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                     (4) Calculations.  All calculations under this Section 2D
shall be made to the nearest cent or the nearest 1/100th of a share, as
applicable.  The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company, and
the disposition of any such shares shall be considered an issue or sale of
Common Stock.

                      (5) Notice of Adjustments.  Upon the occurrence of each
adjustment pursuant to this Section 2D, the Company at its expense will promptly
compute such adjustment in accordance with the terms hereof and prepare and
deliver to the Holder a certificate describing in reasonable detail such
adjustment and the transactions giving rise thereto, including all facts upon
which such adjustment is based.

                      (6) Notice of Corporate Events.  If the Company (i)
declares a dividend or any other distribution of cash, securities or other
property in respect of its Common Stock, including without limitation any
granting of rights or warrants to subscribe for or purchase any capital stock of
the Company, (ii) authorizes or approves, enters into any agreement
contemplating or solicits stockholder approval for a Fundamental Change or (iii)
authorizes the voluntary dissolution, liquidation or winding up of the affairs
of the Company, then the Company shall deliver to the holders of the Notes a
notice describing the material terms and conditions of such transaction, at
least twenty (20) trading days prior to the applicable record or effective date
on which a Person would need to hold Common Stock in order to participate in or
vote with respect to such transaction, and the Company will take all steps
reasonably necessary in order to ensure that the holders of the Notes are given
the practical opportunity to convert the Notes prior to such time so as to
participate in or vote with respect to such transaction.
 
             3.        Events of Default.

              (a)  The occurrence of any of the following events shall
constitute a default ("Event of Default"):
 
 
 

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                    (i)   Failure to Pay Principal or Interest. The Company
fails to pay any installment of principal, interest or other sum due under this
Note within ten days after the same becomes due.

                   (ii)    Receiver or Trustee. The Company shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business; or such a receiver or trustee shall otherwise be appointed
without the consent of the Company is not dismissed within sixty (60) days of
appointment.
 

                 (iii)    Bankruptcy. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law, or the issuance of any notice in relation to such event, for the
relief of debtors shall be instituted by or against the Company and if
instituted against Company are not dismissed within sixty (60) days of
initiation.

            (b) Upon the occurrence and during the continuance of any Event of
Default, upon notice to the Company and the holders of the Senior Indebtedness,
the holders of a majority of the unpaid principal amount of the Notes then
outstanding may demand the payment of the unpaid principal amount of the Notes,
which together with all interest accrued thereon and other amounts payable
hereunder shall become immediately due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived, subject
to the provisions of Section 1(a) hereof, and the Holder may immediately enforce
any and all of the Holder's rights and remedies provided herein or any other
rights or remedies afforded by law.

           4.           Pro Rata Treatment of Noteholders.    Each payment or
prepayment of principal of this Note shall be made to the holder of the Notes
pro rata in accordance with the respective unpaid principal amounts of such
holders’ respective Notes.  Each payment of interest on the Notes shall be made
to the holders of the Notes pro rata in accordance with the amounts of interest
due and payable to such holders under such holders’ respective Notes.  Each
distribution of cash, property, securities or other value received by the
holders of the Notes in respect of the indebtedness outstanding under the Notes,
after payment of collection and other expenses as provided in the Notes, shall
be apportioned to such holders pro rata in accordance with the respective unpaid
principal amounts of and interest on such holders’ respective Notes.

5.          Note Register. The Company shall maintain a transfer agent, which
may be the transfer agent for the Common Stock or the Company itself, for the
registration of Notes.  Upon any transfer of this Note in accordance with the
provisions hereof, the Company shall register or cause the transfer agent to
register such transfer on the Note register.

6.          Record Owner. The Company may deem the person in whose name this
Note shall be registered upon the registry books of the Company to be, and may
treat such person as, the absolute owner of this Note, and the Company shall not
be affected by any notice to the contrary.  All such payments and such
conversion shall be valid and effective to satisfy and discharge the liability
upon this Note to the extent of the sum or sums so paid or the conversion so
made.
 
 
             7.          Miscellaneous.
 
(a)           Waiver. The holders of a majority of the unpaid principal amount
of the Notes then outstanding may waive any provision or term of this Note. No
failure or delay on the part of Holder hereof in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
 
 
 

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             (b)     Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii)deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Company to: Air Industries Group,
360 Motor Parkway, Suite 100, Hauppauge, New York 11788, Attn: Daniel R. Godin,
President and CEO,  facsimile: (631) ___ -_____, with a copy by  facsimile only
to: Eaton & Van Winkle LLP, Three Park Avenue, 16th floor, New York, NY
10016,  Attn: Vincent J. McGill, Esq., facsimile: (212) 779-9928, and (ii) if to
the Holder, at the address(es) set forth in the Securities Purchase Agreement.
 
           (c)           Terms.   The term "Note" and all reference thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented.

           (d)           Successors and Assigns. This Note shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
the Holder and its successors and assigns.

           (e)           Expenses. The Company shall reimburse Holder for all
reasonable costs and expenses, including without limitation, reasonable
attorneys’ fees and expenses, incurred in connection with (i) drafting,
negotiating, executing and delivering any amendment, modification or waiver of,
or consent with respect to, any matter relating to the rights of Holder
hereunder and (ii) enforcing any provisions of this Note and/or collecting any
amounts due under this Note.

           (f)           Governing Law.   This Note shall be governed by and
construed in accordance with the laws of the State of New York. Any action
brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the civil or state
courts of New York or in the federal courts located in the State and county of
New York. Both parties and the individual signing this Agreement on behalf of
the Company agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs.

           (g)           Savings Clause.  Nothing contained herein shall be
deemed to establish or require the payment of a rate of interest or other
charges in excess of the maximum permitted by applicable law. In the event that
the rate of interest required to be paid or other charges hereunder exceed the
maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Holder and thus refunded to
the Company.
 
[signature page is on the following page]
 
 
 

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IN WITNESS WHEREOF, Company has caused this Note to be signed in its name by an
authorized officer as of the 19th day of August, 2016.

  AIR INDUSTRIES GROUP          
 
By:
        Daniel R. Godin       President and Chief Executive Officer          

 
 
 

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Schedule I
 
FORM OF CONVERSION NOTICE
 
(To be executed by the registered Holder in order to convert Note)
 
The undersigned hereby elects to convert the specified principal amount of the
12% Subordinated Convertible Note (the “Note”) into shares of common stock, par
value $0.001 per share (the “Common Stock”), of AIR INDUSTRIES GROUP, a Nevada
corporation, according to the conditions hereof, as of the date written below.
 

             
Date to Effect Conversion
               
Principal amount of Note owned prior to conversion
               
Principal amount of Note to be converted
(including accrued but unpaid interest thereon)
               
Number of shares of Common Stock to be Issued
               
Applicable Conversion Price
               
Principal amount of Note owned subsequent to Conversion
               
Name of Holder
         
By
 
 
   
Name:
   
Title:
 

 
 
 

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Schedule II
 
CONVERSION SCHEDULE
 
This Conversion Schedule reflects conversions of the 12% Subordinated
Convertible Note issued by AIR INDUSTRIES GROUP
 
Date of Conversion
Amount of Conversion
Aggregate Principal Amount Remaining
Subsequent to Conversion