SENIOR SUBORDINATED CONVERTIBLE NOTE

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR
TRANSFERRED OR ASSIGNED UNLESS (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
1933 ACT, OR (B) PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a)
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

The Allied Defense Group, Inc.

Senior Subordinated Convertible Note

     
Issuance Date: March 9, 2006
  Original Principal Amount: U.S. $     

FOR VALUE RECEIVED, The Allied Defense Group, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to the order of      or registered assigns
(“Holder”) the amount set out above as the Original Principal Amount (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise,
the “Principal”) when due, whether upon the Maturity Date (as defined below),
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal at a rate
per annum equal to the Interest Rate (as defined below), from the date set out
above as the Issuance Date (the "Issuance Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below), the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Senior Subordinated Convertible Note (including all
Senior Subordinated Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”) is one of an issue of Senior Subordinated
Convertible Notes (collectively, the “Notes” and such other Senior Subordinated
Convertible Notes, the “Other Notes”) issued pursuant to the Securities Purchase
Agreement (as defined below). Certain capitalized terms used herein are defined
in Section 30.

(1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the
Company and the Company shall pay to the Holder an amount in cash representing
all outstanding Principal, accrued and unpaid Interest and accrued and unpaid
Late Charges, if any. The “Maturity Date” shall be March 9, 2011, as may be
extended at the option of the Holder (i) in the event that, and for so long as,
an Event of Default (as defined in Section 4(a)) shall have occurred and be
continuing or any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in an Event of Default and
(ii) through the date that is ten days after the consummation of a Change of
Control in the event that a Change of Control is publicly announced or a Change
of Control Notice (as defined in Section 5) is delivered prior to the Maturity
Date.

(2) INTEREST. Interest on this Note shall commence accruing on the Issuance Date
and shall be computed on the basis of a 365-day year and actual days elapsed and
shall be payable in arrears on the last day of each Calendar Quarter during the
period beginning on the Issuance Date and ending on, and including, the Maturity
Date (each, an “Interest Date”) with the first Interest Date being March 31,
2006. Interest shall be payable on each Interest Date, to the record holder of
this Note on the applicable Interest Date. Prior to the payment of Interest on
an Interest Date, Interest on this Note shall accrue at the Interest Rate and be
payable in cash upon any conversion in accordance with Section 3(c)(i). Upon the
occurrence and during the continuance of an Event of Default, the Interest Rate
shall be increased to twelve and one-half percent (12.5%). In the event that
such Event of Default is subsequently cured, the adjustment referred to in the
preceding sentence shall cease to be effective as of the date of such cure;
provided that the Interest as calculated at such increased rate during the
continuance of such Event of Default shall continue to apply to the extent
relating to the days after the occurrence of such Event of Default through and
including the date of cure of such Event of Default.

(3) CONVERSION OF NOTES. This Note shall be convertible into shares of common
stock of the Company, $0.10 par value per share (the “Common Stock”), on the
terms and conditions set forth in this Section 3.

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

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

(i) “Conversion Amount” means the portion of the Principal to be converted,
redeemed or otherwise with respect to which this determination is being made.

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or
other date of determination, $26.4551, subject to adjustment as provided herein.

(c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York Time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iv), surrender this Note to a nationally recognized
overnight delivery service for delivery to the Company (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction). On or before the second (2nd) Trading Day following the date of
receipt of a Conversion Notice, the Company shall transmit by facsimile a
confirmation of receipt of such Conversion Notice to the Holder and the
Company’s transfer agent (the “Transfer Agent”). On or before the third (3rd )
Trading Day following the date of receipt of a Conversion Notice (the “Share
Delivery Date”), the Company shall (1) (X) provided that the Transfer Agent is
participating in the Fast Automated Securities Transfer Program of the
Depository Trust Company (“DTC”) credit such aggregate number of shares of
Common Stock to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name of the
Holder or its designee, for the number of shares of Common Stock to which the
Holder shall be entitled, (2) pay to the Holder in cash an amount equal to the
accrued and unpaid Interest on the Conversion Amount up to and including the
Conversion Date and (3) for any conversions prior to the third (3rd) anniversary
of the Issuance Date, pay any applicable Make-Whole Amount in accordance with
Section 3(c)(ii). If this Note is physically surrendered for conversion as
required by Section 3(c)(iv) and the outstanding Principal of this Note is
greater than the Principal portion of the Conversion Amount being converted,
then the Company shall as soon as practicable and in no event later than three
Business Days after receipt of this Note and at its own expense, issue and
deliver to the holder a new Note (in accordance with Section 19(d)) representing
the outstanding Principal not converted. The Person or Persons entitled to
receive the  shares of Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on the Conversion Date.

(ii) Make-Whole Amount. If prior to the third (3rd) anniversary of the Issuance
Date, the Holder converts all or any portion of this Note pursuant to Section
3(c)(i) or the Company redeems all or any portion of this Note pursuant to
Section 9, then upon such conversion or redemption, the Holder shall receive the
Make-Whole Amount; provided, however, that in the event that the Closing Sale
Price of the Common Stock exceeds 140% of the initial Conversion Price (as
adjusted for any stock split, combination, reclassification or similar
transaction) for each of twenty (20) Trading Days out of the thirty
(30) consecutive Trading Day period ended on the Trading Day immediately prior
to the Conversion Date, then the Holder shall not be entitled to receive the
Make-Whole Amount. The Company shall pay any Make-Whole Amount in cash.

(iii) Company’s Failure to Timely Convert. If the Company shall fail to issue a
certificate to the Holder or credit the Holder’s balance account with DTC, as
applicable, for the number of shares of Common Stock to which the Holder is
entitled upon conversion of any Conversion Amount on or prior to the date which
is five (5) Trading Days after the Conversion Date (a “Conversion Failure”),
then (A) the Company shall pay damages to the Holder for each Trading Day of
such Conversion Failure in an amount equal to 1.0% of the product of (I) the sum
of the number of shares of Common Stock not issued to the Holder on or prior to
the Share Delivery Date and to which the Holder is entitled, and (II) the
Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the
Holder, upon written notice to the Company, may void its Conversion Notice with
respect to, and retain or have returned, as the case may be, any portion of this
Note that has not been converted pursuant to such Conversion Notice; provided
that the voiding of a Conversion Notice shall not affect the Company’s
obligations to make any payments which have accrued prior to the date of such
notice pursuant to this Section 3(c)(iii) or otherwise. In addition to the
foregoing, if within three (3) Trading Days after the Company’s receipt of the
facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holder’s balance account with
DTC for the number of shares of Common Stock to which the Holder is entitled
upon such holder’s conversion of any Conversion Amount, and if on or after such
Trading Day the Holder purchases (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company (a “Buy-In"), then the Company shall, within three (3) Trading Days
after the Holder’s request and in the Holder’s discretion, either (i) pay cash
to the Holder in an amount equal to the Holder’s total purchase price (including
brokerage commissions and other out-of-pocket expenses, if any) for the shares
of Common Stock so purchased (the “Buy-In Price"), at which point the Company’s
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of Common Stock, times (B) the Closing Bid
Price on the Conversion Date.

(iv) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the Company
unless (A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
this Note upon physical surrender. The Holder and the Company shall maintain
records showing the Principal converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon conversion.

(v) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company, subject to Section 3(d), shall
convert from each holder of Notes electing to have Notes converted on such date
a pro rata amount of such holder’s portion of its Notes submitted for conversion
based on the principal amount of Notes submitted for conversion on such date by
such holder relative to the aggregate principal amount of all Notes submitted
for conversion on such date. In the event of a dispute as to the number of
 shares of Common Stock issuable to the Holder in connection with a conversion
of this Note, the Company shall issue to the Holder the number of shares of
Common Stock not in dispute and resolve such dispute in accordance with
Section 24.

(d) Limitations on Conversions.

(i) Beneficial Ownership. The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any
portion of this Note pursuant to Section 3(a), to the extent that after giving
effect to such conversion, the Holder (together with the Holder’s affiliates)
would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Note with
respect to which the determination of such sentence is being made, but shall
exclude the number of  shares of Common Stock which would be issuable upon
(A) conversion of the remaining, nonconverted portion of this Note beneficially
owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this
Section 3(d)(i), in determining the number of outstanding  shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-KSB, Form 10-K, Form
10-QSB, Form 10-Q or Form 8-K, as the case may be (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written request of the Holder, the Company
shall within two (2) Business Days confirm in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this Note, by
the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. By written notice to the
Company, the Holder may from time to time increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such
notice; provided that (i) any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to the Company, and (ii)
any such increase or decrease will apply only to the Holder and not to any other
holder of Notes.

(ii) Principal Market Regulation. The Company shall not be obligated to issue
any shares of Common Stock upon conversion of this Note, and the Holder of this
Note shall not have the right to receive upon conversion of this Note any shares
of Common Stock, if the issuance of such shares of Common Stock would exceed the
aggregate number of shares of Common Stock which the Company may issue upon
conversion or exercise, as applicable, of the Notes and Warrants without
breaching the Company’s obligations under the rules or regulations of the
Principal Market (the number of shares which may be issued without violating
such rules and regulations, the “Exchange Cap”), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of its
stockholders as required by the applicable rules of the Principal Market for
issuances of Common Stock in excess of such amount or (B) obtains a written
opinion from outside counsel to the Company that such approval is not required,
which opinion shall be reasonably satisfactory to the Required Holders. Unless
and until such approval or written opinion is obtained, no purchaser of the
Notes pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be
issued in the aggregate, upon conversion or exercise, as applicable, of Notes or
Warrants, shares of Common Stock in an amount greater than the product of the
Exchange Cap multiplied by a fraction, the numerator of which is the principal
amount of Notes issued to each Purchaser pursuant to the Securities Purchase
Agreement on the Closing Date and the denominator of which is the aggregate
principal amount of all Notes issued to the Purchasers pursuant to the
Securities Purchase Agreement on the Closing Date (with respect to each
Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall
sell or otherwise transfer any of such Purchaser’s Notes, the transferee shall
be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee. In the event that any holder of Notes shall convert all of such
holder’s Notes into a number of shares of Common Stock which, in the aggregate,
is less than such holder’s Exchange Cap Allocation, then the difference between
such holder’s Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective Exchange Cap
Allocations of the remaining holders of Notes on a pro rata basis in proportion
to the aggregate principal amount of the Notes then held by each such holder.

(4) RIGHTS UPON EVENT OF DEFAULT.

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

(i) the failure of the applicable Registration Statement required to be filed
pursuant to the Registration Rights Agreement to be declared effective by the
SEC on or prior to the date that is sixty (60) days after the applicable
Effectiveness Deadline (as defined in the Registration Rights Agreement), or,
while the applicable Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive days or for more than an
aggregate of thirty (30) days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));

(ii) the suspension from trading or failure of the Common Stock to be listed on
an Eligible Market for a period of five (5) consecutive Trading Days or for more
than an aggregate of ten (10) Trading Days in any 365-day period;

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

(iv) at any time following the tenth (10th) consecutive Business Day that the
Holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that the Holder would be entitled to receive upon a conversion of the full
Conversion Amount of this Note (without regard to any limitations on conversion
set forth in Section 3(d) or otherwise);

(v) the Company’s failure to pay to the Holder any amount of Principal
(including, without limitation, the Company’s failure to pay any redemption or
make-whole payments), Interest, Late Charges or other amounts when and as due
under this Note or any other Transaction Document (as defined in the Securities
Purchase Agreement) or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated hereby and
thereby to which the Holder is a party, except, in the case of a failure to pay
Interest and Late Charges when and as due, in which case only if such failure
continues for a period of at least five (5) Business Days;

(vi) the occurrence of any default under, redemption of or acceleration prior to
maturity of any Indebtedness of the Company or any of its Subsidiaries which,
individually or in the aggregate, exceeds $250,000 (as defined in Section 3(a)
of the Securities Purchase Agreement), other than with respect to any Other
Notes;

(vii) the Company or any of its Subsidiaries, pursuant to or within the meaning
of Title 11, U.S. Code, or any similar Federal, foreign or state law for the
relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary
case, (B) consents to the entry of an order for relief against it in an
involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

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

(ix) a final judgment or judgments for the payment of money aggregating in
excess of $100,000 are rendered against the Company or any of its Subsidiaries
and which judgments are not, within sixty (60) days after the entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within sixty
(60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $100,000 amount set forth above
so long as the Company provides the Holder a written statement from such insurer
or indemnity provider (which written statement shall be reasonably satisfactory
to the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within thirty (30) days of the issuance of such judgment;

(x) the Company breaches any representation, warranty, covenant or other
material term or condition of any Transaction Document, except, in the case of a
breach of a covenant which is curable, only if such breach continues for a
period of at least ten (10) consecutive Business Days;

(xi) any breach or failure in any respect to comply with Section 4(r) or Section
4(s) of the Securities Purchase Agreement or Section 15 of this Note, except in
the case of a failure to satisfy the Quarterly Test, in which case only if such
failure continues for a period of at least thirty (30) days; or

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

(b) Redemption Right. Upon the occurrence of an Event of Default with respect to
this Note or any Other Note, the Company shall within two (2) Business Days
deliver written notice thereof via facsimile and overnight courier (an “Event of
Default Notice”) to the Holder. At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall indicate
the portion of this Note the Holder is electing to redeem. Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company at a price equal to the sum of (i) any accrued and
unpaid Interest on the Conversion Amount to be redeemed and any accrued and
unpaid Late Charges on such Conversion Amount and Interest and (ii) the greater
of (A) the product of (1) the Conversion Amount to be redeemed and (2) the
Redemption Premium and (B) the product of (1) the Conversion Rate with respect
to such Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice and (2) the Closing Sale Price of the Common Stock
on the date immediately preceding such Event of Default (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in
the event of the Company’s redemption of any portion of the Note under this
Section 4(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any Redemption Premium due under this Section 4(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder’s actual loss of its investment opportunity and not as a penalty.

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

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

(b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of
Control Notice”). At any time during the period (the “Change of Control Period”)
beginning after the Holder’s receipt of a Change of Control Notice and ending on
the date that is twenty (20) Trading Days after the consummation of such Change
of Control, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (“Change of Control Redemption
Notice”) to the Company, which Change of Control Redemption Notice shall
indicate the Conversion Amount the Holder is electing to redeem. The portion of
this Note subject to redemption pursuant to this Section 5 shall be redeemed by
the Company in cash at a price equal to the greater of (i) the sum of (x) the
product of the Change of Control Redemption Premium and the Conversion Amount
being redeemed and (y) the amount of any accrued but unpaid Interest thereon
through the date of such redemption payment and (ii) the product of (x) the
Equity Value Redemption Premium and (y) the sum of (1) the product of (A) the
Conversion Amount being redeemed multiplied by (B) the quotient determined by
dividing (I) the aggregate cash consideration and the aggregate cash value of
any non-cash consideration per Common Share to be paid to the holders of the
Common Shares upon consummation of the Change of Control (any such non-cash
consideration consisting of marketable securities to be valued at the higher of
the Closing Sale Price of such securities as of the Trading Day immediately
prior to or the Trading Day following the public announcement of such proposed
Change of Control) by (II) the Conversion Price plus (2) the amount of any
accrued but unpaid Interest on such Conversion Amount being redeemed through the
date of such redemption payment, (the “Change of Control Redemption Price”).
Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 12 and shall have priority to payments to shareholders in
connection with a Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this
Section 5, until the Change of Control Redemption Price (together with any
interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(c) may be converted, in whole or in part, by the
Holder into shares of Common Stock, or in the event the Conversion Date is after
the consummation of the Change of Control, shares of publicly traded common
stock (or their equivalent) of the Successor Entity pursuant to Section 3. The
parties hereto agree that in the event of the Company’s redemption of any
portion of the Note under this Section 5(b), the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any redemption
premium due under this Section 5(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty.

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

(a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

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

(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a) Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Subscription Date, the Company issues or sells, or in
accordance with this Section 7(a) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company, but excluding shares of Common
Stock deemed to have been issued or sold by the Company in connection with any
Excluded Security) for a consideration per share less than a price (the
“Applicable Price”) equal to the Conversion Price in effect immediately prior to
such issue or sale (the foregoing a “Dilutive Issuance”), then immediately after
such Dilutive Issuance, the Conversion Price then in effect shall be reduced to
an amount equal the product of (A) the Conversion Price in effect immediately
prior to such Dilutive Issuance and (B) the quotient determined by dividing
(1) the sum of (I) the product derived by multiplying the Conversion Price in
effect immediately prior to such Dilutive Issuance and the number of shares of
Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus
(II) the consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying (I) the Conversion Price in
effect immediately prior to such Dilutive Issuance by (II) the number of shares
of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:

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

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

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

(iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration as determined in good faith by the Board of
Directors other than cash received by the Company will be the fair value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Company will be the Closing
Sale Price of such securities on the date of receipt. If any Common Stock,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be the fair value
of such portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors.

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

(vi) Floor Price. Until such time as the Company receives, the Stockholder
Approval (as defined in the Securities Purchase Agreement), no adjustment
pursuant to Section 7(a) shall cause the Conversion Price to be less than
$23.05, as adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction (the “Conversion Floor Price”).

(b) Adjustment of Conversion Price upon Subdivision or Combination of Common
Stock. If the Company at any time on or after the Subscription Date subdivides
(by any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time on or after the
Subscription Date combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination will be proportionately increased.

(c) Other Events. If any event occurs of the type contemplated by the provisions
of this Section 7 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s Board of
Directors will make an appropriate adjustment in the Conversion Price so as to
protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

(8) HOLDER’S RIGHT OF OPTIONAL REDEMPTION. At any time during the thirty
(30) day period commencing on the earlier of (i) the filing of the Company’s
Form 10-K for the fiscal year ending December 31, 2008, (the “2008 10-K”) and
(ii) the applicable date the Company is required to file the 2008 10-K as set
forth in the Securities Exchange Act of 1934, as amended, the Holder shall have
the right, in its sole discretion, to require that the Company redeem (each, a
“Holder Optional Redemption”) up to all of the Conversion Amount of this Note
plus any accrued and unpaid Interest with respect to such Principal and Interest
and any accrued and unpaid Late Charges, if any, with respect to such Principal
and Interest (the “Available Holder Optional Redemption Amount”) by delivering
written notice thereof (a “Holder Optional Redemption Notice”) to the Company.
The Holder Optional Redemption Notice shall indicate the amount of the Available
Holder Optional Redemption Amount the Holder is electing to have redeemed (the
“Holder Optional Redemption Amount”) and the date of such redemption (the
“Holder Optional Redemption Date”); provided, however that such Holder Optional
Redemption Date shall not be less than three (3) Business Days after the date of
delivery of such Holder Optional Redemption Notice. The portion of this Note
subject to redemption pursuant to this Section 8 shall be redeemed by the
Company in cash on the Holder Optional Redemption Date at a price equal to the
Holder Optional Redemption Amount being redeemed (the “Holder Optional
Redemption Price”). Redemptions required by this Section 8 shall be made in
accordance with the provisions of Section 12. Notwithstanding anything to the
contrary in this Section 8, but subject to Section 3(d), until the Holder
receives the Holder Optional Redemption Price, the Holder Optional Redemption
Amount may be converted, in whole or in part, by the Holder into Common Stock
pursuant to Section 3, and any such conversion shall reduce the Holder Optional
Redemption Amount in the manner set forth by the Holder in the applicable
Conversion Notice. Notwithstanding the foregoing, from and after the filing of
the 2008 10-K, if the Company’s EBITDA for such fiscal year as set forth in the
2008 10-K exceeds $22,500,000, the Holder shall have no right to require
redemption of this Note pursuant to this Section 8.

(9) OPTIONAL REDEMPTION AT THE COMPANY’S ELECTION.

(a) General. If at any time, and from time to time, from and after the second
(2nd) anniversary of the Issuance Date (the “Optional Redemption Eligibility
Date”), (i) the average Closing Sale Price of the Common Stock for any twenty
(20) Trading Days out of any thirty (30) consecutive Trading Day period exceeds
175% of the Conversion Price then in effect following the Optional Redemption
Eligibility Date (the “Optional Redemption Condition”) and (ii) there has been
no Equity Conditions Failure, the Company shall have the right, provided the
Optional Redemption Condition is also met on and as of the Optional Redemption
Date, to redeem all or any portion of the Conversion Amount then remaining under
this Note (the “Optional Redemption Amount”) as designated in the Optional
Redemption Notice, as of the Optional Redemption Date (an "Optional
Redemption”). The portion of this Note subject to redemption pursuant to this
Section 9 shall be redeemed by the Company in cash at a price equal to the sum
of (i) the Conversion Amount being redeemed, (B) the applicable Make-Whole
Amount, (C) the amount of any accrued and unpaid Interest on such Conversion
Amount through the Optional Redemption Date and (D) the amount of any accrued
and unpaid Late Charges, if any, on such Conversion Amount and related Interest
through the Optional Redemption Date (the “Optional Redemption Price”). The
Company may exercise its right to require redemption under this Section 9 by
delivering a written notice thereof by facsimile and overnight courier to all,
but not less than all, of the holders of Notes (the “Optional Redemption Notice”
and the date all of the holders received such notice is referred to as the
“Optional Redemption Notice Date”) and each Optional Redemption Notice shall be
irrevocable. The Optional Redemption Notice shall state (1) the date on which
the Optional Redemption shall occur (the "Optional Redemption Date”) which date
shall be not less than five (5) Trading Days nor more than thirty (30) Trading
Days after the Optional Redemption Notice Date, and (2) the aggregate Conversion
Amount of the Notes which the Company has elected to be subject to Optional
Redemption from all of the holders of the Notes pursuant to this Section 9 (and
analogous provisions under the Other Notes) on the Optional Redemption Date;
provided, however, that the Company shall not redeem a Conversion Amount under
this Section in excess of the Holder’s Pro Rata Amount of the aggregate dollar
trading volume (as reported on Bloomberg) of the Common Stock over the thirty
(30) consecutive Trading Day period ending on the Trading Day immediately
preceding the Optional Redemption Notice Date. The Company may not effect more
than one (1) Optional Redemption during any consecutive thirty (30) Trading Day
period. Notwithstanding anything to the contrary in this Section 9, until the
Optional Redemption Price is paid, in full, the Optional Redemption Amount may
be converted, in whole or in part, by the Holders into shares of Common Stock
pursuant to Section 3. All Conversion Amounts converted by the Holder after the
Optional Redemption Notice Date shall reduce the Optional Redemption Amount of
this Note required to be redeemed on the Optional Redemption Date. Redemptions
made pursuant to this Section 9 shall be made in accordance with Section 12.

(b) Pro Rata Redemption Requirement. If the Company elects to cause an Optional
Redemption pursuant to Section 9(a), then it must simultaneously take the same
action with respect to the Other Notes. If the Company elects to cause an
Optional Redemption pursuant to Section 9(a) (or similar provisions under the
Other Notes) with respect to less than all of the Conversion Amounts of the
Notes then outstanding, then the Company shall require redemption of a
Conversion Amount from each of the holders of the Notes equal to the product of
(i) the aggregate Conversion Amount of Notes which the Company has elected to
cause to be redeemed pursuant to Section 9(a), multiplied by (ii) the fraction,
the numerator of which is the sum of the aggregate initial principal amount of
the Notes purchased by such holder of outstanding Notes and the denominator of
which is the sum of the aggregate initial principal amount of the Notes
purchased by all holders holding outstanding Notes (such fraction with respect
to each holder is referred to as its "Redemption Allocation Percentage”, and
such amount with respect to each holder is referred to as its “Pro Rata
Redemption Amount”); provided, however that in the event that any holder’s Pro
Rata Redemption Amount exceeds the outstanding Principal amount of such holder’s
Note, then such excess Pro Rata Redemption Amount shall be allocated amongst the
remaining holders of Notes in accordance with the foregoing formula. In the
event that the initial holder of any Notes shall sell or otherwise transfer any
of such holder’s Notes, the transferee shall be allocated a pro rata portion of
such holder’s Redemption Allocation Percentage and Pro Rata Redemption Amount.

(10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation, Bylaws or through
any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.

(11) RESERVATION OF AUTHORIZED SHARES.

(a) Reservation. The Company initially shall reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes
equal to 120% of the Conversion Rate with respect to the Conversion Amount of
each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 120% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved of the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the “Authorized Share
Allocation”). In the event that a holder shall sell or otherwise transfer any of
such holder’s Notes, each transferee shall be allocated a pro rata portion of
such holder’s Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but
in no event later than ninety (90) days after the occurrence of such Authorized
Share Failure, the Company shall hold a meeting of its shareholders for the
approval of an increase in the number of authorized shares of Common Stock. In
connection with such meeting, the Company shall provide each shareholder with a
proxy statement and shall use its best efforts to solicit its shareholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the shareholders that they approve such
proposal.

(12) HOLDER’S REDEMPTIONS.

(a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder within five (5) Business Days after the Company’s
receipt of the Holder’s Event of Default Redemption Notice. If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 5(b),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five (5) Business Days after the Company’s receipt of such notice
otherwise. The Company shall deliver the Holder Optional Redemption Price to the
Holder on the Holder Optional Redemption Date and the Optional Redemption Price
on the applicable Optional Redemption Date. In the event of a redemption of less
than all of the Conversion Amount of this Note, the Company shall promptly cause
to be issued and delivered to the Holder a new Note (in accordance with
Section 19(d)) representing the outstanding Principal which has not been
redeemed. In the event that the Company does not pay the applicable Redemption
Price to the Holder within the time period required, at any time thereafter and
until the Company pays such unpaid Redemption Price in full, the Holder shall
have the option, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the Conversion
Amount that was submitted for redemption and for which the applicable Redemption
Price (together with any Late Charges thereon) has not been paid. Upon the
Company’s receipt of such notice, (x) the Redemption Notice shall be null and
void with respect to such Conversion Amount, (y) the Company shall immediately
return this Note, or issue a new Note (in accordance with Section 19(d)) to the
Holder representing such Conversion Amount and (z) the Conversion Price of this
Note or such new Notes shall be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the Redemption Notice is voided and
(B) the lowest Closing Bid Price during the period beginning on and including
the date on which the Redemption Notice is delivered to the Company and ending
on and including the date on which the Redemption Notice is voided. The Holder’s
delivery of a notice voiding a Redemption Notice and exercise of its rights
following such notice shall not affect the Company’s obligations to make any
payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 4(b), Section 5(b) or Section 8 (each, an “Other Redemption Notice”),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof), forward to the Holder by facsimile a copy of such notice. If
the Company receives a Redemption Notice and one or more Other Redemption
Notices, during the seven (7) Business Day period beginning on and including the
date which is three (3) Business Days prior to the Company’s receipt of the
Holder’s Redemption Notice and ending on and including the date which is three
Business Days after the Company’s receipt of the Holder’s Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.

(13) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.

(14) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to the Delaware
General Corporation Law, and as expressly provided in this Note.

(15) COVENANTS.

(a) Rank. All payments due under this Note (a) shall rank pari passu with all
Other Notes and (b) shall be senior to all other Indebtedness of the Company and
its Subsidiaries other than Permitted Senior Indebtedness.

(b) Indebtedness. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than Permitted Indebtedness.

(c) Existence of Liens. So long as this Note is outstanding, the Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, “Liens”) other than Permitted Liens.

(d) Restricted Payments. The Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase,
repay or make any payments in respect of, by the payment of cash or cash
equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.

(16) RIGHTS UPON DISTRIBUTION OF ASSETS. Subject to the provisions of Section
4(j) of the Securities Purchase Agreement, if the Company shall declare or make
any dividend or other distribution of its assets (or rights to acquire its
assets) to holders of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, shares or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a “Distribution”), at any time after the issuance of this
Note, then, in each such case any Conversion Price in effect immediately prior
to the close of business on the record date fixed for the determination of
holders of Common Stock entitled to receive the Distribution shall be reduced,
effective as of the close of business on such record date, to a price determined
by multiplying such Conversion Price by a fraction of which (i) the numerator
shall be the Closing Bid Price of the Common Stock on the Trading Day
immediately preceding such record date minus the value of the Distribution (as
determined in good faith by the Company’s Board of Directors) applicable to one
share of Common Stock, and (ii) the denominator shall be the Closing Bid Price
of the Common Stock on the Trading Day immediately preceding such record date.

(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. No term of this Note may be
amended or modified unless pursuant to a writing signed by the Company and the
Required Holders; provided, however, that any amendment or modification that
pursuant to the terms of the Transaction Documents adversely and
disproportionately affects any holder of Notes that holds at least $1 million in
principal amount of Notes (and not because of the nature or situation of such
holder of Notes) shall require the prior written consent of such holder. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the Required Holders shall be required for any
change or amendment to this Note or the Other Notes.

(18) TRANSFER. This Note may be offered, sold, assigned or transferred by the
Holder without the consent of the Company, subject only to the provisions of
Section 2(f) of the Securities Purchase Agreement; provided, however, that no
such sale, assignment or transfer of this Note shall be in a denomination less
than the lesser of (a) $500,000 and (b) the remaining outstanding Principal of
this Note, the accrued and unpaid Interest with respect to such Principal and
the accrued and unpaid Late Charges with respect to such Principal and
Interest;.

(19) REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred, the Holder shall surrender this
Note to the Company, whereupon the Company will, subject to the satisfaction of
the transfer provisions of the Securities Purchase Agreement, forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with
Section 19(d)), registered in the name of the registered transferee or assignee,
representing the outstanding Principal being transferred by the Holder and, if
less then the entire outstanding Principal is being transferred, a new Note (in
accordance with Section 19(d)) to the Holder representing the outstanding
Principal not being transferred. The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of
Section 3(c)(iii) and this Section 19(a), following conversion or redemption of
any portion of this Note, the outstanding Principal represented by this Note may
be less than the Principal stated on the face of this Note.

(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 19(d)) representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Note or Notes (in accordance with Section 19(d) and in principal
amounts of at least $100,000) representing in the aggregate the outstanding
Principal of this Note, and each such new Note will represent such portion of
such outstanding Principal as is designated by the Holder at the time of such
surrender.

(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 19(a) or Section 19(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.

(20) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder’s right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

(21) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys’ fees and disbursements.

(22) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.

(23) FAILURE OR INDULGENCE 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 privilege.

(24) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the
arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within two (2) Business Days of receipt, or deemed receipt, of the
Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation within two (2) Business
Days of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within two (2) Business Days submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or the Weighted Average Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or any Redemption Price to the
Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five (5) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

(25) NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section
9(f) of the Securities Purchase Agreement. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Conversion
Price, setting forth in reasonable detail, and certifying, the calculation of
such adjustment and (ii) at least twenty (20) days prior to the date on which
the Company closes its books or takes a record (A) with respect to any dividend
or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

(b) Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder’s wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day and, in the
case of any Interest Date which is not the date on which this Note is paid in
full, the same shall instead be due on the next succeeding day which is a
Business Day. Any amount of Principal or other amounts due under the Transaction
Documents, other than Interest, which is not paid when due shall result in a
late charge being incurred and payable by the Company in an amount equal to
interest on such amount at the rate of twelve and one-half percent (12.5%) per
annum from the date such amount was due until the same is paid in full (“Late
Charge”).

(26) CANCELLATION. After all Principal, accrued Interest and other amounts at
any time owed on this Note has been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.

(27) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.

(28) GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. The Company hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address it set forth
on the signature page hereto and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of this Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company’s obligations to the Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

(29) SUBORDINATION TO PERMITTED INDEBTEDNESS.

(a) Subordination. The indebtedness represented by this Note and the payment of
any Principal, Interest, Late Charges, redemption amount, liquidated damages,
fees, expenses or any other amounts in respect of this Note (collectively, the
“Subordinated Indebtedness”) is hereby expressly made subordinate and junior and
subject in all respects to the right of payment and to the prior payment in full
of all Permitted Senior Indebtedness of the Company hereinafter incurred.

(b) Payment upon Dissolution, Etc. In the event of any bankruptcy, insolvency,
reorganization, receivership, composition, assignment for benefit of creditors
or other similar proceeding initiated by or against the Company, or any
dissolution or winding up or total or partial liquidation or reorganization in
bankruptcy of the Company (each, a “Proceeding”), all principal, interest and
other obligations due upon any Permitted Senior Indebtedness shall first be paid
or collateralized in full in cash (or cash equivalents) before the Holder shall
be entitled to receive or, if received, to retain any payment or distribution of
any Subordinated Indebtedness and, during the continuance of any such
Proceeding, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the Holder would be
entitled with respect to any Subordinated Indebtedness but for the provisions of
this Section 29 shall be paid by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, or by the Holder who shall have received such payment or
distribution, directly to the holders of the Permitted Senior Indebtedness (pro
rata to each such holder on the basis of the respective amounts of such
Permitted Senior Indebtedness held by such holder) or their representatives to
the extent necessary to pay (or collaterize in cash) all such Permitted Senior
Indebtedness in full after giving effect to any concurrent payment or
distribution to or for the holders of such Permitted Senior Indebtedness, before
any payment or distribution of any of the Subordinated Indebtedness is made to
(or retained by) the Holder or any other holders of any of the Notes.

(c) Certain Rights. Nothing contained in this Section 29 or elsewhere in this
Note or any other Transaction Document, is intended to or shall impair, as among
the Company, its creditors including the holders of Permitted Senior
Indebtedness and the Holder, the right, which is absolute and unconditional, of
the Holder to convert this Note in accordance herewith.

(d) Rights of Holder Unimpaired. The provisions of this Section 29 are and are
intended solely for the purposes of defining the relative rights of the Holder
and the holders of Permitted Senior Indebtedness and nothing in this Section 29
shall impair, as between the Company and the Holder, the obligation of the
Company, which is unconditional and absolute, to pay to the Holder the Principal
hereof (and premium, if any), accrued Interest hereon and all other Subordinated
Indebtedness payable hereunder, all in accordance with the terms of this Note.

(30) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:

(a) "Approved Stock Plan” means any employee benefit plan or long term stock
incentive plan which has been approved by the Board of Directors of the Company,
pursuant to which the Company’s securities may be issued to any employee,
consultant, officer or director for services provided to the Company.

(b) "Bloomberg” means Bloomberg Financial Markets.

(c) "Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.

(d) "Calendar Quarter” means each of: the period beginning on and including
January 1 and ending on and including March 31; the period beginning on and
including April 1 and ending on and including June 30; the period beginning on
and including July 1 and ending on and including September 30; and the period
beginning on and including October 1 and ending on and including December 31.

(e) "Change of Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

(f) "Change of Control Consideration” means, for any Change of Control, an
amount equal to the sum of the aggregate cash consideration and the aggregate
cash value of any marketable securities per share of Common Stock to be paid to
the holders of the Common Stock upon consummation of such Change of Control,
with any such marketable securities to be valued at the Closing Sale Price of
such securities as of the Trading Day following the public announcement of such
proposed Change of Control.

(g) "Change of Control Redemption Premium” means (i) for Change of Control
events consummated prior to the third (3rd) anniversary of the Issuance Date,
120% and (ii) for Change of Control events consummated following the third (3rd)
anniversary of the Issuance Date, 110%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration
(A) consists solely of cash, marketable securities or a combination thereof and
(B) equals or exceeds 150% of the initial Conversion Price, then the Change of
Control Redemption Premium shall equal 100%.

(h) "Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 24. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

(i) "Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued Notes pursuant to
the terms of the Securities Purchase Agreement.

(j) "Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Sections 7(a)(i) and
7(a)(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any Common Stock owned or held
by or for the account of the Company or issuable upon conversion or exercise, as
applicable, of the Notes and the Warrants.

(k) "Consolidated EBITDA” means, with respect to any Person for any applicable
Calendar Quarters, the Consolidated Net Income of such Person and its
Subsidiaries as set forth in the financial statements of the Company contained
in the Form 10-Q or Form 10-K for the most recent Calendar Quarters for which
financials are publicly available, plus without duplication, the sum of the
following amounts of such Person and its Subsidiaries for such period and to the
extent deducted in determining Consolidated Net Income of such Person for such
period: (i) Consolidated Net Interest Expense, (ii) income tax expense,
(iii) depreciation expense, (iv) amortization expense, and (v) any non-cash
impact of hedge or derivative accounting adjustments.

(l) "Consolidated Net Income” means, with respect to any Person for any period,
the net income (loss) of such Person and its Subsidiaries for such period,
determined on a consolidated basis and in accordance with GAAP, but excluding
from the determination of Consolidated Net Income (without duplication) (i) any
extraordinary or non recurring gains or losses or gains or losses from
dispositions of assets, (ii) restructuring charges, (iii) any tax refunds, net
operating losses or other net tax benefits, (iv) effects of discontinued
operations and (v) interest income (including interest paid-in-kind)

(m) "Consolidated Net Interest Expense” means, with respect to any Person for
any period, gross interest expense of such Person and its Subsidiaries for such
period determined on a consolidated basis and in accordance with GAAP
(including, without limitation, interest expense paid to affiliates of such
Person), less (i) the sum of (A) interest income for such period and (B) gains
for such period on hedging agreements (to the extent not included in interest
income above and to the extent not deducted in the calculation of gross interest
expense), plus (ii) the sum of (A) losses for such period on hedging agreements
(to the extent not included in gross interest expense) and (B) the upfront costs
or fees for such period associated with hedging agreements (to the extent not
included in gross interest expense), in each case, determined on a consolidated
basis and in accordance with GAAP.

(n) "Contingent Obligation” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

(o) "Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.

(p) "EBITDA Target” means, from and after the Effective Date, the Company has
reported LTM Consolidated EBITDA from or after the Calendar Quarter ended
March 31, 2006 equal to or greater than $4,000,000.

(q) "EBITDA Test” means that (i) the Equity Conditions have been satisfied as of
the applicable date of determination and (ii) the Company has either (A) for the
Calendar Quarter ended March 31, 2006, for the two (2) consecutive Calendar
Quarters ended June 30, 2006 and for the three (3) consecutive Calendar Quarters
ended September 30, 2006, reported a Consolidated EBITDA in excess of
$10,000,000 or (B) for Calendar Quarters ended from and after December 31, 2006,
reported LTM Consolidated EBITDA in excess of $10,000,000.

(r) "Effective Date” has the meaning set forth in the Registration Rights
Agreement.

(s) "Eligible Market” means , the Principal Market, The New York Stock Exchange,
Inc., the Nasdaq National Market or The Nasdaq Capital Market.

(t) "Equity Conditions” means that each of the following conditions is
satisfied: (i) on each day during the period beginning six (6) months prior to
the applicable date of determination and ending on and including the applicable
date of determination (the “Equity Conditions Measuring Period”), either (x) the
Registration Statement filed pursuant to the Registration Rights Agreement shall
be effective and available for the resale of all remaining Registrable
Securities in accordance with the terms of the Registration Rights Agreement and
there shall not be in effect any Grace Periods (as defined in the Registration
Rights Agreement) or (y) all shares of Common Stock issuable upon conversion of
the Notes and exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; (ii) on each day during the Equity Conditions
Measuring Period, the Common Stock is designated for quotation on the Principal
Market and shall not have been suspended from trading on such exchange or market
(other than suspensions of not more than two days and occurring prior to the
applicable date of determination due to business announcements by the Company)
nor shall delisting or suspension by such exchange or market been threatened or
pending either (A) in writing by such exchange or market or (B) by falling below
the minimum listing maintenance requirements of such exchange or market;
(iii) during the one (1) year period ending on and including the date
immediately preceding the applicable date of determination, the Company shall
have delivered Conversion Shares upon conversion of the Notes shares of Common
Stock upon exercise of the Warrants to the holders on a timely basis as set
forth in Section 3(c)(i) hereof (and analogous provisions under the Other Notes)
and Section 1(a) of the Warrants; (iv) any applicable shares of Common Stock to
be issued in connection with the event requiring determination may be issued in
full without violating Section 3(d) hereof and the rules or regulations of the
Principal Market; (v) during the Equity Conditions Measuring Period, the Company
shall not have failed to timely make any payments within five (5) Business Days
of when such payment is due pursuant to any Transaction Document; (vi) during
the Equity Conditions Measuring Period, there shall not have occurred either
(A) the public announcement of a pending, proposed or intended Fundamental
Transaction which has not been abandoned, terminated or consummated or (B) an
Event of Default or an event that with the passage of time or giving of notice
would constitute an Event of Default; (vii) the Company shall have no knowledge
of any fact that would cause (x) the Registration Statements required pursuant
to the Registration Rights Agreement not to be effective and available for the
resale of all remaining Registrable Securities in accordance with the terms of
the Registration Rights Agreement or (y) any shares of Common Stock issuable
upon conversion of the Notes and shares of Common Stock issuable upon exercise
of the Warrants not to be eligible for sale without restriction pursuant to Rule
144(k) and any applicable state securities laws; (viii) the Company otherwise
shall have been in material compliance with and shall not have materially
breached any provision, covenant, representation or warranty of any Transaction
Document; and (ix) the Stockholder Approval shall have been obtained.

(u) "Equity Conditions Failure” means that during any period commencing with the
Optional Redemption Notice Date through the Optional Redemption Date, the Equity
Conditions have not been satisfied (or waived in writing by the Holder).

(v) "Equity Value Redemption Premium” means (i) for Change of Control events
consummated prior to the third (3rd) anniversary of the Issuance Date, 115% and
(ii) for Change of Control events consummated following the third (3rd)
anniversary of the Issuance Date, 107.5%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration
(A) consists solely of cash, marketable securities or a combination thereof and
(B) equals or exceeds 150% of the Conversion Price, then the Equity Value
Redemption Premium shall equal 100%.

(w) "Excluded Securities” means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion, adjustment or
redemption of the Notes, or the exercise of the Warrants; (iii) pursuant to a
bona fide firm commitment underwritten public offering with a nationally
recognized underwriter which generates gross proceeds to the Company in excess
of $35,000,000 (other than an “at the market” offering as defined in
Rule 415(a)(4) under the Securities Act of 1933, as amended, and “equity
lines”); (iv) in connection with any strategic acquisition or strategic
transaction, whether through an acquisition of shares or a merger of any
business, assets or technologies, the primary purpose of which is not to raise
equity capital in an amount not to exceed, in the aggregate twenty percent (20%)
of the outstanding shares of Common Stock in any twelve (12) month period;
(v) upon conversion, exercise or exchange of any Options or Convertible
Securities which are outstanding on the day immediately preceding the
Subscription Date, provided that the conversion price, exercise price or any
other economic terms of such Options or Convertible Securities are not amended,
modified or changed on or after the Subscription Date; and (vi) in connection
with any stock split, stock dividend, recapitalization or similar transaction by
the Company for which adjustment is made pursuant to Section 7(b).

(x) "Fundamental Transaction” means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person or Persons to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Person or Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of either the outstanding shares of Voting Stock (not
including any shares of Voting 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 purchase agreement or other business combination),
(v) reorganize, recapitalize or reclassify its Common Stock or (vi) any “person”
or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company.

(y) "GAAP” means United States generally accepted accounting principles,
consistently applied.

(z) "Holder Pro Rata Amount” means a fraction (i) the numerator of which is the
Original Principal Amount of this Note and (ii) the denominator of which is the
aggregate original principal amount of all Notes issued to the initial
purchasers pursuant to the Securities Purchase Agreement on the Closing Date.

(aa) "Indebtedness” of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses
(i) through (vi) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (viii) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (i) through (vii) above.

(bb) "Interest Rate” means, initially seven and one-half percent (7.5%) per
annum, subject to adjustment at the beginning of each Calendar Quarter (only
with respect to such Calendar Quarter and not the immediately preceding or
subsequent Calendar Quarter and only with respect to any Principal outstanding
at the time the Company publicly announces the applicable Consolidated EBITDA or
LTM Consolidated EBITDA, as applicable) in the event that the EBITDA Test is
satisfied as of the applicable Calendar Quarter, then the Interest Rate shall
equal five percent (5.0%) per annum for such Calendar Quarter.

(cc) "LTM Consolidated EBITDA” means, with respect to any Person, the
Consolidated Net Income of such Person and its Subsidiaries as set forth in the
financial statements of the Company contained in the Form 10-Q or Form 10-K for
the most recent four (4) Calendar Quarters for which financials are publicly
available, plus (i) without duplication, the sum of the following amounts of
such Person and its Subsidiaries for such period and to the extent deducted in
determining Consolidated Net Income of such Person for such period:
(i) Consolidated Net Interest Expense, (ii) income tax expense,
(iii) depreciation expense, (iv) amortization expense and (v) any non-cash
impact of hedge or derivative accounting adjustments.

(dd) "Make-Whole Amount” means, as to any Conversion Amount being converted
pursuant to Section 3(c)(ii) or redeemed pursuant to Section 9, an amount equal
to the sum of (i) any accrued and unpaid Interest on such Conversion Amount and
(ii) any remaining Interest that, but for the applicable conversion or
redemption would have been due on such Conversion Amount through the third (3rd)
anniversary of the Issuance Date. For purposes of this definition, Interest
shall be computed on the basis of a 360-day year. By way of illustration,
assuming the initial Interest Rate is in effect and assuming conversion or
redemption occurs on the initial Issuance Date on a Principal amount equal to
$1,000, the Make-Whole Amount shall equal $225.00 ($1,000 x (1080/360 x 7.5%)).

(ee) "Mecar Facility” means the Credit Agreement, by and between Wafabank,
Deutsche Bank, Commerzbank AG, CBC Banque and Fortis Banque and Mecar S.A. in
the form attached as Exhibit 10.7 to the Quarterly Report on Form 10-Q of the
Company for the period ending June 30, 2002 and filed with the SEC on August 14,
2002.

(ff) "Options” means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.

(gg) "Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.

(hh) "Permitted Indebtedness” means (A) Permitted Senior Indebtedness,
(B) Indebtedness evidenced by this Note and the Other Notes, (C) other unsecured
Indebtedness incurred by the Company and/or any of its Subsidiaries that is made
expressly subordinate in right of payment to the Indebtedness evidenced by this
Note, as reflected in a written agreement acceptable to the Holder and approved
by the Holder in writing, and which Indebtedness does not provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon until ninety-one
(91) days after the Maturity Date or later and (2) total interest and fees at a
rate in excess of the Interest Rate hereunder, (D) Indebtedness secured by
Permitted Liens, (E) Indebtedness to trade creditors incurred in the ordinary
course of business, (F) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose more burdensome terms upon the Company or its
Subsidiary, as the case may be, (G) a Promissory Note, dated as of November 1,
2005, issued to Sam Nasiri in the aggregate principal amount of $11,011,083.00,
(H) certain earn out payments based on the performance of Global Microwave
Systems, Inc., payable to Sam Nasiri and not to exceed $4,000,000.00 in the
aggregate and (I) a working capital adjustment not to exceed $550,000.00 in the
aggregate.

(ii) "Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens securing the Company’s obligations under the
Notes, (v) Liens (A) upon or in any equipment (as defined in the Security
Agreement) acquired or held by the Company or any of its Subsidiaries to secure
the purchase price of such equipment or indebtedness incurred solely for the
purpose of financing the acquisition or lease of such equipment, or (B) existing
on such equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such equipment, (vi) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (i) and (v) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (vii) Liens securing the obligations
under Permitted Senior Indebtedness; (viii) leases or subleases and licenses and
sublicenses granted to others in the ordinary course of the Company’s business,
not interfering in any material respect with the business of the Company and its
Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of custom duties in
connection with the importation of goods and (x) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default
under Section 4(a)(ix).

(jj) "Permitted Senior Indebtedness” means (i) the Mecar Facility, and (ii) the
principal of (and premium, if any), interest on, and all fees and other amounts
(including, without limitation, any reasonable out-of-pocket costs, enforcement
expenses (including reasonable out-of-pocket legal fees and disbursements),
collateral protection expenses and other reimbursement or indemnity obligations
relating thereto) payable by Company and/or its Subsidiaries under or in
connection with any credit facility to be entered into by the Company and/or its
Subsidiaries with one or more financial institutions (together with any
amendments, restatements, renewals, refundings, refinancings or other extensions
thereof); provided, however, that the aggregate outstanding amount of such
Indebtedness permitted pursuant to clause (ii) hereof (taking into account the
maximum amounts which may be advanced under the loan documents evidencing such
Permitted Senior Indebtedness) does not as of the date on which any such
Permitted Senior Indebtedness is incurred, or as of the end of any Calendar
Quarter (the “Quarterly Test”), exceed (x) in the event the EBITDA Target has
not been met, (A) $5,000,000 prior to the Effective Date if the Company has
publicly announced receipt of one or more purchase orders for an aggregate
amount in excess of $40,000,000 for goods to be shipped or services to be
provided within twelve (12) months from the date of such order or orders (B)
$10,000,000 following the Effective Date (y) otherwise, 2.5x LTM Consolidated
EBITDA.

(kk) "Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

(ll) "Principal Market” means the American Stock Exchange.

(mm) "Redemption Notices” means, collectively, the Event of Default Redemption
Notices, Change of Control Redemption Notices, the Holder Optional Redemption
Notice and the Optional Redemption Notices and, each of the foregoing,
individually, a Redemption Notice.

(nn) "Redemption Premium” means (i) in the case of the Events of Default
described in Section 4(a)(i) — (vi) and (ix) — (xii), 125% or (ii) in the case
of the Events of Default described in Section 4(a)(vii) — (viii), 100%.

(oo) "Redemption Prices” means, collectively, the Event of Default Redemption
Price, Change of Control Redemption Price, the Holder Optional Redemption Price
and the Optional Redemption Price and, each of the foregoing, individually, a
Redemption Price.

(pp) "Registration Rights Agreement” means that certain registration rights
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the Notes and
exercise of the Warrants.

(qq) "Required Holders” means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.

(rr) "SEC” means the United States Securities and Exchange Commission.

(ss) "Securities Purchase Agreement” means that certain securities purchase
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes.

(tt) "Subscription Date” means March 9, 2006.

(uu) "Successor Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common stock or equivalent equity security
is quoted or listed for trading on an Eligible Market, Successor Entity shall
mean such Person’s Parent Entity.

(vv) "Trading Day” means any day on which the Common Stock are traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock are then traded; provided that
“Trading Day” shall not include any day on which the Common Stock are scheduled
to trade on any such exchange or market for less than 4.5 hours or any day that
the Common Stock are suspended from trading during the final hour of trading on
such exchange or market (or if such exchange or market does not designate in
advance the closing time of trading on any such exchange or market, then during
the hour ending at 4:00:00 p.m., New York Time).

(ww) "Voting Stock” of a Person means capital stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time capital stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).

(xx) "Warrants” has the meaning ascribed to such term in the Securities Purchase
Agreement, and shall include all warrants issued in exchange therefor or
replacement thereof.

(yy) "Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York Time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as the Principal Market
publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply,
the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the Weighted Average Price cannot be calculated for such security on
such particular date on any of the foregoing bases, the Weighted Average Price
of such security on such date shall be the fair market value as mutually
determined by the Company and the Required Holders. If the Company and the
Required Holders are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 24. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

(31) DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within two (2) Business Days after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

 
 
THE ALLIED DEFENSE GROUP, INC.
 
 
 
By:
Name:
Title:

2

EXHIBIT I

THE ALLIED DEFENSE GROUP, INC.

CONVERSION NOTICE

Reference is made to the Senior Subordinated Convertible Note (the “Note”)
issued to the undersigned by The Allied Defense Group, Inc. (the “Company”). In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Common Stock par value $0.10 per share (the “Common
Stock”), as of the date specified below.

 
 
Date of Conversion:
 
Aggregate Conversion Amount to be converted:
 
Please confirm the following information:
 
Conversion Price:
 
Number of shares of Common Stock to be issued:
 
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
 
Issue to:
 
Facsimile Number:
 
Authorization:
 
By:
 
Title:
 
Dated:
 
Account Number:
 
  (if electronic book entry transfer)
 
Transaction Code Number:
 
  (if electronic book entry transfer)

ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs Mellon
Investor Services, LLC to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated March 9, 2006
from the Company and acknowledged and agreed to by Mellon Investor Services,
LLC.

 
 
THE ALLIED DEFENSE GROUP, INC.
 
 
 
By:
 
 
 
Name:
 
 
 
Title:
 

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