(2) INTEREST. Simple interest (“**Interest**”) shall accrue on the outstanding Principalat the Interest Rate from and including the date set forth above opposite the caption “IssuanceDate” (the “**Issuance Date**”) until the Principal is paid in full, shall be computed on the basis ofa 365-day year and actual days elapsed and, subject to the right of the Holder to includeaccrued and unpaid Interest in the Conversion Amount (as defined below) in accordance with Section3(b)(i) below, shall be payable in arrears for each Interest Period no later than the date that isten (10) Business Days after the last day of the applicable Interest Period (each such date, an**“Interest Payment Date”**).(a) Payment of Interest. Interest shall be payable on each Interest Payment Date tothe record holder of this Note as of the last day of the applicable Interest Period, subject toSection 2(b), (i) in cash (“**Cash Interest**”) or (ii) prior to the Mandatory Conversion EligibilityDate, at the option of the Company, either (x) entirely as Cash Interest, (y) in the form of sharesof Company Common Stock (“**Interest Shares**”) or (z) in a combination of Cash Interest and InterestShares, provided that the Interest may be payable in Interest Shares pursuant to this clause (ii)if, and only if, the Company delivers written notice (each an “**Interest Election Notice**”) of suchelection to each holder of the Notes on or prior to the tenth (10th) Company Trading Dayprior to the Interest Payment Date (each, an “**Interest Election Date**”). Each Interest ElectionNotice must specify the amount of Interest that shall be paid as Cash Interest or PIK Interest, ifany, and the amount of Interest that shall be paid in Interest Shares. Interest to be paid on anInterest Payment Date in Interest Shares shall be paid in a number of fully paid and nonassessableshares (rounded to the nearest whole share in accordance with Section 3(a)) of Company Common Stockequal to the quotient of (a) the amount of Interest payable to the Holder on such Interest PaymentDate less any Cash Interest or PIK Interest paid and (b) the Interest Conversion Price. If anyInterest Shares are to be paid on an Interest Payment Date, then the Company shall issue anddeliver within two (2) business days after the applicable Interest Payment Date, to the address setforth in the register maintained by the Company for such purpose or to such address as specified bythe Holder in writing to the Company at least two (2) Business Days prior to the applicableInterest Payment Date, a certificate, registered in the name of the Holder or its designee, for thenumber of Interest Shares to which the Holder shall be entitled. The Company shall pay any and alltaxes that may be payable by the Holder with respect to the issuance and delivery of InterestShares; provided that the Company shall not be required to pay any tax that may be payablein respect of any issuance of Interest Shares to any Person other than the Holder or with respectto any income tax due by the Holder with respect to such Interest Shares. Notwithstanding theforegoing, unless the Required Holders otherwise agree in writing, the Company shall not beentitled to pay Interest in Interest Shares and shall instead, subject to Section 2(b), be requiredto pay all accrued and unpaid Interest in the form of Cash Interest on the applicable InterestPayment Date if, during the period commencing on the applicable Interest Election Date through theapplicable Interest Payment Date the Equity Conditions have not been satisfied.(b) Restrictions on Cash Interest Payments. Notwithstanding the foregoing, in theevent that the Company would otherwise be required under this Section 2 to pay Interest in the formof Cash Interest but is not permitted to do so pursuant to Section 33 hereof, the Company shallinstead pay such Interest through the addition of the amount of such Interest to the thenoutstanding Principal (any Interest paid in such manner, “**PIK Interest**”). Interest that is paid inthe form of PIK Interest shall be considered paid or duly provided for, for all purposes under thisNote, and shall not be considered overdue.
 
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(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’scommon stock, par value $.01 per share (the **“Company Common Stock”**), on the terms and conditionsset forth in this Section 3.(a) Conversion Right. At any time or times on or after the Issuance Date, the Holdershall be entitled to convert any portion of the outstanding Principal and accrued and unpaidInterest thereon, in multiples of $10,000 (or, if less, any remaining Principal and accrued andunpaid Interest thereon), into fully paid and nonassessable shares of Company Common Stock inaccordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall notissue any fraction of a share of Company Common Stock upon any conversion. If the issuance wouldotherwise result in the issuance of a fraction of a share of Company Common Stock, the Companyshall round such fraction of a share of Company Common Stock down to the nearest whole share andpay to the Holder such fractional share in cash. The Company shall pay any and all taxes that maybe payable with respect to the issuance and delivery of Company Common Stock upon conversion of anyConversion Amount; provided that the Company shall not be required to pay any tax that maybe payable in respect of any transfer involved in the issue and delivery of Company Common Stock toany Person other than the Holder or with respect to any income tax due by the Holder with respectto such Company Common Stock issued upon conversion.(b) Conversion Rate. The number of shares of Company Common Stock issuable uponconversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x)such Conversion Amount by (y) the Conversion Price (as defined below) (the **“Conversion Rate”**). (i) “**Conversion Amount**” means the sum of (A) the portion of the Principal to beconverted, redeemed or otherwise with respect to which this determination is beingmade, and (B) accrued and unpaid Interest with respect to such portion of thePrincipal.  (ii) “**Conversion Price**” means as of any Conversion Date (as defined below) or otherdate of determination during the period beginning on the Issuance Date and ending onand including the Maturity Date, the Fixed Conversion Price. (iii) “**Fixed Conversion Price**” means $0.07, subject to adjustment as providedherein.
 
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(c) Mechanics of Conversion. (i) Optional Conversion. To convert any Conversion Amount into shares ofCompany Common Stock on any date (a **“Conversion Date”**), the Holder shall (A) transmitby facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., PacificTime, on such date, a copy of an executed notice of conversion in the form attachedhereto as Exhibit I (the **“Conversion Notice”**) to the Company and (B) ifrequired by Section 3(c)(iii), surrender this Note to a common carrier for delivery tothe Company as soon as practicable on or following such date (oran indemnification undertaking with respect to this Note in the case of its loss,theft or destruction). On or before the second (2nd) Business Dayfollowing the date of receipt of a Conversion Notice, the Company shall transmit byfacsimile a confirmation of receipt of such Conversion Notice to the Holder and theTransfer Agent. On or before the third (3nd) Business Day following thedate of receipt of a Conversion Notice (the **“Share Delivery Date”**), the Companyshall issue and deliver to the address as specified in the Conversion Notice, acertificate, registered in the name of the Holder or its designee, for the number of shares of Company Common Stock to which the Holder shall be entitled. If this Noteis physically surrendered for conversion as required by Section 3(c)(iii) and theoutstanding Principal of this Note is greater than the portion of the ConversionAmount constituting principal, then the Company shall as soon as practicable and inno event later than three Business Days after receipt of this Note (the **“NoteDelivery Date”**) and at its own expense, issue and deliver to the holder a new Note(in accordance with Section 21(d)) representing the outstanding Principal notconverted. The Person or Persons entitled to receive the shares of Company CommonStock issuable upon a conversion of this Note shall be treated for all purposes asthe record holder or holders of such shares of Company Common Stock on theConversion Date to the extent permitted by applicable law. (ii) Company’s Failure to Timely Convert. If the Company shall fail toissue a certificate to the Holder for the number of shares of Company Common Stock towhich the Holder is entitled upon conversion of any Conversion Amount on or prior tothe date which is five (5) Business Days after the Conversion Date (a **“ConversionFailure”**), then (A) the Company shall pay damages in cash to the Holder for each dateof such Conversion Failure in an amount equal to 1.5% of the product of (I) the sum ofthe number of shares of Company Common Stock not issued to the Holder on or prior tothe Share Delivery Date and to which the Holder is entitled, and (II) the Closing SalePrice of the Company Common Stock on the Share Delivery Date and (B) the Holder, uponwritten notice to the Company, may void its Conversion Notice with respect to, andretain or have returned, as the case may be, any portion of this Note that has not beenconverted pursuant to such Conversion Notice; provided that the voiding of a ConversionNotice shall not affect the Company’s obligations to make any payments which haveaccrued prior to the date of such notice pursuant to this Section 3(c)(ii) orotherwise. At the Holder’s option in lieu of the foregoing, if within three (3)Company Trading Days after the Company’s receipt of the facsimile copy of a ConversionNotice the Company shall fail to issue and deliver a certificate to the Holder for thenumber of shares of Company Common Stock to which the Holder is entitled upon suchholder’s conversion of any Conversion Amount, and if on or after such Company TradingDay the Holder purchases (in an open market transaction or otherwise) Company CommonStock to deliver in satisfaction of a sale by the Holder of Company Common Stockissuable upon such conversion that the Holder anticipated receiving from the Company (a“**Company Common Stock Buy-In**”), then the Company shall, within three 
 
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(3) Business Daysafter the Holder’s request (which shall include written evidence of a Company Common Stock Buy-In) and in the Holder’s discretion, either (i) pay cash to the Holder inan amount equal to the Holder’s total purchase price (including brokeragecommissions, if any) for the shares of Company Common Stock so purchased (the**“Company Common Stock Buy-In Price”**), at which point the Company’s obligation todeliver such certificate (and to issue such Company Common Stock) shall terminate,or (ii) promptly honor its obligation to deliver to the Holder a certificate orcertificates representing such Company Common Stock and pay cash to the Holder in anamount equal to the excess (if any) of the Company Common Stock Buy-In Price overthe product of (A) such number of shares of Company Common Stock, times (B) theClosing Bid Price on the Conversion Date. (iii) Book-Entry. Notwithstanding anything to the contrary set forth herein,upon conversion of any portion of this Note in accordance with the terms hereof, theHolder shall not be required to physically surrender this Note to the Company unless(A) the full Principal represented by this Note is being converted, together with allaccrued and unpaid Interest thereon, or (B) the Holder has provided the Company withprior written notice (which notice may be included in a Conversion Notice) requestingreissuance of this Note upon physical surrender of this Note. The Holder and theCompany shall maintain records showing the portion of Principal and Interest convertedand the dates of such conversions or shall use such other method, reasonablysatisfactory to the Holder and the Company, so as not to require physical surrender ofthis Note upon conversion. (iv) Pro Rata Conversion; Disputes. In the event that the Company receivesa Conversion Notice from more than one holder of Notes for the same Conversion Date andthe Company can convert some, but not all, of such portions of the Notes submitted forconversion, the Company shall convert from each holder of Notes electing to have aportion of its Notes converted on such date a pro rata amount of such holder’s portionof its Notes submitted for conversion based on the principal portion submitted forconversion on such date by such holder relative to the aggregate principal portions ofall Notes submitted for conversion on such date. In the event of a dispute as to thenumber of shares of Company Common Stock issuable to the Holder in connection with aconversion of this Note, the Company shall issue to the Holder the number of shares ofCompany Common Stock not in dispute and resolve such dispute in accordance with Section26.(4) [Reserved]
 
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(5) EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.(a) Events of Default. Each of the following events (so long as it is continuing)shall constitute an **“Event of Default”**: (i) the Company’s (A) failure to cure a Conversion Failure with respect to any ofthe Notes by delivery of the required number of shares of Company Common Stock withinten (10) Business Days after the applicable Conversion Date or (B) notice, written ororal, to any holder of the Notes, including by way of public announcement or throughany of its agents, at any time, of its intention not to comply with a request forconversion of any Notes into shares of Company Common Stock that is tendered forconversion in compliance with the provisions of the Notes and applicable securitieslaws; (ii) the Company’s failure to pay to any Holder any amount of Principal, premium (ifany), Interest, or other amounts when and as due under this Note (including, withoutlimitation, the Company’s failure to pay any redemption payments hereunder), any otherTransaction Document or any other agreement, document, certificate or other instrumentdelivered in connection with the transactions contemplated hereby and thereby to whichsuch Holder is a party, provided, that in the case of a failure to pay Interest whenand as due, such failure shall constitute an Event of Default only if such failurecontinues for a period of at least five (5) Business Days; (iii) any event of default under, redemption of or acceleration prior to maturity ofany Indebtedness of the Company or any of its Subsidiaries (other than the Notes) in anaggregate principal amount in excess of $500,000; (iv) the Company or any of its Subsidiaries (other than Optex Systems, Inc.(“**Optex**”)) pursuant to or within the meaning of Title 11, U.S. Code, or any similarFederal, foreign or state law for the relief of debtors (collectively, **“BankruptcyLaw”**), (A) commences a voluntary case, (B) consents to the entry of an order for reliefagainst it in an involuntary case, (C) consents to the appointment of a receiver,trustee, assignee, liquidator or similar official (a **“Custodian”**), (D) makes a generalassignment for the benefit of its creditors or (E) admits in writing that it isgenerally unable to pay its debts as they become due; (v) a court of competent jurisdiction enters an order or decree under anyBankruptcy Law that (A) is for relief against the Company or any of its Subsidiaries(other than Optex) in an involuntary case, (B) appoints a Custodian of the Company orany of its Subsidiaries (other than Optex) or (C) orders the liquidation of the Companyor any of its Subsidiaries (other than Optex);
 
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 (vi) other than a judgment in connection with the pending litigation between theCompany and FirstMark for which summary judgment has been granted in favor ofFirstMark, but only to the extent the judgment does not exceed $1,731,900, a finaljudgment or judgments for the payment of money aggregating in excess of $500,000 arerendered 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 pendingappeal, or are not discharged within sixty (60) daysafter the expiration of such stay; provided, however, that any judgment which iscovered by insurance or an indemnity from a creditworthy party shall not be includedin calculating the $500,000 amount set forth above so long as the Company providesthe Holder Representative with a written statement from such insurer or indemnityprovider (which written statement shall be reasonably satisfactory to the HolderRepresentative) to the effect that such judgment is covered by insurance or anindemnity and the Company will receive the proceeds of such insurance or indemnitywithin thirty (30) days of the issuance of such judgment or such later date asprovided by the terms of such insurance policy; (vii) any representation or warranty made by the Company in any Transaction Documentshall prove to be materially false or misleading as of the date made or deemed made; (viii) the Company shall breach any covenant or other term or condition of any TransactionDocument and, in the case of a breach of a covenant or term or condition which iscurable, such breach continues for a period of at least ten (10) consecutive BusinessDays; (ix) any material provision of any Transaction Document ceases to be of full forceand effect other than by its terms, or the Company contests in writing (or supports anyother person in contesting) the validity or enforceability of any provision of anyTransaction Document; (x) the Security Agreement, dated as of July 1, 2011, between the Company and theHolder Representative (the “**Security Agreement**”) shall for any reason (other thanpursuant to the terms thereof) cease to create a valid and perfected lien, with thepriority required by the Security Agreement, on, and security interest in, any materialportion of the Collateral purported to be covered thereby, subject to Permitted Liensand the Liens securing the Existing Secured Note; or (xi) any Event of Default (as defined in the Other Notes) occurs with respect to anyOther Notes.(b) Redemption Right. Upon the occurrence and during the continuance of an Event ofDefault, but subject to Section 33, the Holder Representative may and, at the request of theRequired Holders, shall, take either or both of the following actions: (i) declare all or any partof the outstanding Principal, accrued and unpaid Interest and any other amounts outstanding underthis Note (the aggregate of such amounts, the “**Outstanding Note Obligations**”) and the Other Notesto be immediately due and payable, in each case together with the Event of Default Premium;provided, however, that if an Event of Default shall occur under either clause (iv) orclause (v) of Section 5(a), the outstanding Principal, accrued and unpaid Interest and any otheramounts outstanding under the Notes shall automatically become immediately due and payable, and(ii) exercise of behalf of itself and the other Holders all rights and remedies available to itunder the Security Agreement, the other Transaction Documents and applicable law. Notwithstandingthe
 
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foregoing, to the extent that the Holder Representative declares the Notes tobe immediately due and payable (or the Notes become due and payable following an Event ofDefault under clauses (iv) or (v) of Section 5(a)) and the (x) the sum of the Outstanding NoteObligations plus the Event of Default Premium (if any) (the sum of such amounts, the “**Eventof Default Redemption Price**”) is less than (y) the product of (A) the Conversion Rate that wouldhave been applicable to the Outstanding Note Obligations if the Holder’s Note had been submittedfor conversion into shares of Company Common Stock on the date immediately preceding such Event ofDefault and (B) the Closing Sale Price of the Company Common Stock on the date immediatelypreceding such Event of Default (the product of such amounts, the “**Alternative Event of DefaultRedemption Price**”), the Company shall pay to the Holder in cash, in lieu of the Event of DefaultRedemption Price, the Alternative Event of Default Redemption Price. The Company shall pay theEvent of Default Redemption Price or the Alternative Event of Default Redemption Price, asapplicable, to the Holder within five (5) Business Days after the date that the Outstanding NoteObligations are declared due and payable, and upon full payment, the Notes shall be extinguished.(6) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.(a) Assumption. The Company shall not enter into or be party to a FundamentalTransaction unless (i) the Successor Entity assumes in writing all of the obligations of theCompany under this Note and the other Transaction Documents in accordance with the provisions ofthis Section 6(a) pursuant to written agreements in form and substance satisfactory to the RequiredHolders and approved by the Required Holders (such approval not to be unreasonably withheld ordelayed) prior to such Fundamental Transaction, including agreements to deliver to each holder ofNotes in exchange for such Notes a security of the Successor Entity evidenced by a writteninstrument 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 ratesof the Notes held by such holder and having similar ranking to the Notes, and satisfactory to theRequired Holders (any such approval not to be unreasonably withheld or delayed) and (ii) theSuccessor Entity (including its Parent Entity) is a publicly traded corporation whose common stockis quoted on or listed for trading on an Eligible Market. Upon the occurrence of any FundamentalTransaction, the Successor Entity shall succeed to, and be substituted for (so that from and afterthe 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 Companyand shall assume all of the obligations of the Company under this Note with the same effect as ifsuch Successor Entity had been named as the Company herein. Upon consummation of the FundamentalTransaction, the Successor Entity shall deliver to the Holder Representative confirmation thatthere shall be issued upon conversion or redemption of this Note at any time after the consummationof the Fundamental Transaction, in lieu of the shares of the Company Common Stock (or othersecurities, cash, assets or other property) purchasable upon the conversion or redemption of theNotes prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or anyother property whatsoever (including warrants or other purchase or subscription rights) which theHolder would have been entitled to receive upon the happening of such Fundamental Transaction hadthis Note been converted immediately prior to such Fundamental Transaction, as adjusted inaccordance with the provisions of this Note. The provisions of this Section shall apply similarlyand equally to successive Fundamental Transactions and shall be applied without regard to any limitationson the conversion or redemption of this Note.
 
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(b) Holder Redemption Right. No later than ten (10) days prior to the consummation ofa Change of Control, the Company shall deliver written notice thereof via facsimile and overnightcourier to the Holder (a “**Change of Control Notice**”). Subject to Section 33, at any time duringthe period beginning after the Holder’s receipt of a Change of Control Notice and ending on thedate of the consummation of such Change of Control (or, in the event a Change of Control Notice isnot delivered at least ten (10) days prior to a Change of Control, at any time on or after the datewhich is ten (10) days prior to a Change of Control and ending ten (10) days after the consummationof such Change of Control), the Holder may require the Company to redeem all or any portion of thisNote in cash by delivering written notice thereof (“**Holder Change of Control Redemption Notice**”) tothe Company, which Holder Change of Control Redemption Notice shall indicate the Conversion Amountthe Holder is electing to redeem. The portion of this Note subject to redemption pursuant to thisSection 6 shall be redeemed by the Company at a price equal to the greater of (i) the product of(x) the Conversion Amount being redeemed and (y) the quotient determined by dividing (A) theClosing Sale Price of the Company Common Stock immediately following the public announcement ofsuch proposed Change of Control by (B) the Conversion Price and (ii) 125% of the Conversion Amountbeing redeemed (the “**Holder Change of Control Redemption Price**”). Redemptions required by thisSection 6(b) shall be made in accordance with the provisions of Section 14 and shall have priorityto payments to common stockholders in connection with a Change of Control. Notwithstandinganything to the contrary in this Section 6(b), until the Holder Change of Control Redemption Price(together with any interest thereon) is paid in full, the Conversion Amount submitted forredemption under this Section 6(b) (together with any interest thereon) may be converted, in wholeor in part, by the Holder into Company Common Stock pursuant to Section 3.(7) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.(a) [Reserved].(b) Other Corporate Events. Subject to Section 6(a) hereof, in addition to and not insubstitution for any other rights hereunder, prior to the consummation of any FundamentalTransaction pursuant to which holders of shares of Company Common Stock are entitled to receivesecurities or other assets with respect to or in exchange for shares of Company Common Stock (a**“Corporate Event”**), the Company shall make appropriate provision to insure that the Holder willthereafter have the right to receive upon a conversion of this Note, (i) in addition to the sharesof Company Common Stock receivable upon such conversion, such securities or other assets to whichthe Holder would have been entitled with respect to such shares of Company Common Stock had suchshares of Company Common Stock been held by the Holder upon the consummation of such CorporateEvent (without taking into account any limitations or restrictions on the convertibility of thisNote) or (ii) in lieu of the shares of Company Common Stock otherwise receivable upon suchconversion, such securities or other assets received by the holders of shares of Company Common
 
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Stock in connection with the consummation of suchCorporate Event in such amounts as the Holder would have been entitled to receive had thisNote initially been issued with conversion rights for the form of such consideration (as opposed toshares of Company Common Stock) at a conversion rate for such consideration commensurate with theConversion Rate. Provision made pursuant to the preceding sentence shall be in a form andsubstance satisfactory to the Required Holders. The provisions of this Section shall applysimilarly and equally to successive Corporate Events and shall be applied without regard to anylimitations on the conversion or redemption of this Note.(8) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.(a) Pro Rata Distributions. If the Company, at any time while this Note isoutstanding, distributes to all holders of Company Common Stock (i) evidences of its indebtedness,(ii) any security (other than a distribution of shares of Company Common Stock covered by thepreceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv)any other asset (in each case “**Distributed Property**”), then, unless taken into account pursuant toSection 8(b) below, upon any conversion of this Note that occurs after such record date, the Holdershall be entitled to receive, in addition to the shares of Company Common Stock otherwise issuableupon such conversion, the Distributed Property that the Holder would have been entitled to receivein respect of such number of shares of Company Common Stock immediately prior to such record date.(b) Adjustment of Fixed Conversion Price upon Subdivision or Combination of Company CommonStock. If the Company at any time on or after the Initial Date subdivides (by any stock split,stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares ofCompany Common Stock into a greater number of shares, the Fixed Conversion Price in effectimmediately prior to such subdivision will be proportionately reduced. If the Company at any timeon or after the Initial Date combines (by combination, reverse stock split or otherwise) one ormore classes of its outstanding shares of Company Common Stock into a smaller number of shares, theFixed Conversion Price in effect immediately prior to such combination will be proportionatelyincreased.(c) Adjustment of Conversion Price upon Lower Price Issuance. If the Company at anytime on or after the Initial Date issues or agrees to issue additional shares of Company CommonStock or rights, warrants, options or other securities or debt convertible, exercisable orexchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares ofCommon Stock (or modify any of the foregoing which may be outstanding) to any person or entity atan effective price per share or conversion or exercise price per share that is less than theConversion Price in effect at such time, then the Conversion Price shall automatically be reducedto such other lower price. For purposes of the issuance and adjustment described in this sectionthe issuance of any security of the Corporation carrying the right to convert such security intoshares of Common Stock or of any warrant, right or option to purchase Common Stock shall result inthe adjustments described above upon the sooner of the agreement to issue or actual issuance ofsuch convertible security, warrant, right or option and again at any time upon any subsequentissuances of shares of Common Stock upon exercise of such conversion or purchase rights if suchissuance is at a price lower than the Conversion Price in effect upon such issuance. This Section8(c) shall not apply to Excluded Securities.
 
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(9) [Reserved](10) [Reserved](11) COMPANY’S RIGHT OF MANDATORY CONVERSION.(a) Mandatory Conversion. If at any time from and after the two year anniversary ofthe Initial Date (the “**Mandatory Conversion Eligibility Date**”), (i) the Volume Weighted AveragePrice of the Company Common Stock for thirty (30) consecutive trading days equals or exceeds $0.25(subject to appropriate adjustments for stock splits, stock dividends, stock combinations and othersimilar transactions after the Initial Date) following the Mandatory Conversion Eligibility Date(the “**Mandatory Conversion Measuring Period**”), and (ii) the Equity Conditions have been satisfied(or waived in writing by the Holder), during the period commencing on the Mandatory ConversionNotice Date through the applicable Mandatory Conversion Date (each, as defined below), the Companyshall have the right to require the Holder to convert all, but not less than all, of the ConversionAmount then remaining under this Note as designated in the Mandatory Conversion Notice (as definedbelow) into fully paid, validly issued and nonassessable shares of Company Common Stock inaccordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (asdefined below) (a “**Mandatory Conversion**”). The Company may exercise its right to requireconversion under this Section 11(a), by delivering within not more than five (5) Company TradingDays following the end of such Mandatory Conversion Measuring Period a written notice thereof byfacsimile and overnight courier to all, but not less than all, of the holders of Notes and theTransfer Agent (the **“Mandatory Conversion Notice”**and the date all of the holders received suchnotice by facsimile is referred to as the “**Mandatory Conversion Notice Date**”). The MandatoryConversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i) theCompany Trading Day selected for the Mandatory Conversion in accordance with Section 11(a), whichCompany Trading Day shall be at least twenty (20) Business Days but not more than sixty (60)Business Days following the Mandatory Conversion Notice Date (the “**Mandatory Conversion Date**”),(ii) the aggregate Conversion Amount of the Notes subject to mandatory conversion from all of theholders of the Notes pursuant to this Section 11(a) (and analogous provisions under the OtherNotes) and (iii) the number of shares of Company Common Stock to be issued to such Holder on theMandatory Conversion Date.(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion ofany Conversion Amount of this Note pursuant to Section 11(a), then it must simultaneously take thesame action with respect to the Other Notes. All Conversion Amounts converted by the Holder afterthe Mandatory Conversion Notice Date shall reduce the Conversion Amount of this Note required to beconverted on the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, themechanics of conversion set forth in Section 3(c) shall apply, to the extent applicable, as if theCompany and the Transfer Agent had received from the Holder on the Mandatory Conversion Date aConversion Notice with respect to the Conversion Amount being converted pursuant to the MandatoryConversion.
 
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(12) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company willnot, by amendment of its Certificate of Incorporation, Bylaws or through anyreorganization, 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 observanceor performance of any of the terms of this Note, and will at all times in good faith carry out allof the provisions of this Note and take all action as may be required to protect the rights of theHolder of this Note.(13) RESERVATION OF AUTHORIZED SHARES.(a) Reservation. The Company shall reserve out of its authorized and unissued CompanyCommon Stock a number of shares of Company Common Stock for each of the Notes equal to 100% of thenumber of shares of Company Common Stock as shall be necessary to effect the conversion of all ofthe Notes then outstanding as of the Issuance Date at the Conversion Price and any other sharesissuable under the Transaction Documents (the “**Required Reserve Amount**”). Thereafter, so long asany of the Notes are outstanding, the Company shall take all action necessary to reserve and keepavailable out of its authorized and unissued Company Common Stock, solely for the purpose ofeffecting the conversion of the Notes, 100% of the number of shares of Company Common Stock asshall from time to time be necessary to effect the conversion of all of the Notes then outstandingat the then-applicable Conversion Price. The initial number of shares of Company Common Stockreserved for conversions of the Notes and each increase in the number of shares so reserved shallbe allocated pro rata among the holders of the Notes based on the principal amount of the Notesheld by each holder at the Initial Date or increase in the number of reserved shares, as the casemay be (the “**Authorized Share Allocation**”). In the event that a holder shall sell or otherwisetransfer any of such holder’s Notes, each transferee shall be allocated a pro rata portion of suchholder’s Authorized Share Allocation. Any shares of Company Common Stock reserved and allocated toany Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, prorata based on the principal amount of the Notes then held by such holders.(14) HOLDER’S REDEMPTIONS.(a) Mechanics. Subject to Section 33, if the Holder has submitted a Holder Change ofControl Redemption Notice in accordance with Section 6(b), the Company shall deliver the HolderChange of Control Redemption Price to the Holder, concurrently with the consummation of such Changeof Control if such notice is received by the Company at least five (5) Business Days prior to theconsummation of such Change of Control and within seven (7) Business Days after the Company’sreceipt of such notice otherwise. In the event of a redemption of less than all of the Principal ofthis Note, the Company shall promptly cause to be issued and delivered to the Holder (after suchoriginal Note has been delivered to the Company) a new Note (in accordance with Section 21(d))representing the outstanding Principal which has not been redeemed. In the event that the Companydoes not pay the Holder Change of Control Redemption Price to the Holder within the time periodrequired, at any time thereafter and until the Company pays such unpaid Holder Change of ControlRedemption Price in full, the Holder shall have the option, in lieu of redemption, to require theCompany to promptly return to the Holder all or any portion of this Note representing theConversion Amount that was submitted for redemption and for which the Holder Change of ControlRedemption Price has not been paid. Upon the Company’s receipt of such notice, (x) the HolderChange of Control RedemptionNotice shall be null and void with respect to such Conversion Amount and (y) the Company shallimmediately return this Note, or issue a new Note (in accordance with Section 21(d)) to the Holderrepresenting such Conversion Amount.
 
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(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of theholders of the Other Notes for redemption or repayment as a result of an event or occurrencesubstantially similar to the events or occurrences described in Section 6(b) (each, an “**OtherRedemption Notice**”), the Company shall immediately forward to the Holder Representative byfacsimile a copy of such notice. If the Company receives a Holder Change of Control RedemptionNotice and one or more Other Redemption Notices during the seven (7) Business Day period beginningon and including the date which is three (3) Business Days prior to the Company’s receipt of theHolder Change of Control Redemption Notice and ending on and including the date which is three (3)Business Days after the Company’s receipt of the Holder Change of Control Redemption Notice and theCompany is unable to redeem all principal, interest and other amounts designated in such HolderChange of Control 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 theNotes (including the Holder) based on the principal amounts of the Notes submitted for redemptionpursuant to such Holder Change of Control Redemption Notice and pursuant to such Other RedemptionNotices received by the Company during such seven Business Day period.(15) [Reserved](16) RIGHTS. Except as otherwise provided for herein, the Holder shall have no rightsas a stockholder of the Company as a result of being a holder of this Note, except as required bylaw, including, but not limited to, the General Corporation Law of the State of Delaware, and asexpressly provided in this Note.(17) COVENANTS.(a) Incurrence of Indebtedness. So long as this Note is outstanding, the Companyshall 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 (i) the Indebtednessevidenced by this Note and the Other Notes, (ii) Permitted Indebtedness and (iii) the ExistingSecured Note.(b) 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 orsuffer to exist any mortgage, lien, pledge, charge, security interest or other similar encumbranceupon or in any property or assets (including accounts and contract rights) owned by the Company orany of its Subsidiaries (collectively “**Liens**”) other than (i) existing Liens securing the ExistingSecured Note and (ii) Permitted Liens.
 
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(c) Restricted Payments. The Company shall not, and the Company shall not permit anyof its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make anypayments in respect of, by the payment of cash or cash equivalents (in whole or inpart, whether by way of open market purchases, tender offers, private transactions orotherwise), all or any portion of any Indebtedness described in clause (A) of the definition of“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, aftergiving effect to such payment, an event constituting, or that with the passage of time and withoutbeing cured would constitute, an Event of Default has occurred and is continuing.(18) [Reserved](19) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meetingduly called for such purpose or the written consent without a meeting of the Required Holders (orthe Holder Representative acting at the direction of the Required Holders) shall be required forany amendment or waiver to this Note or the Other Notes or to the Security Agreement (including torelease all or substantially all of the Collateral, in any transaction or series of relatedtransactions); provided that no such amendment or waiver shall:(a) postpone (i) the Maturity Date or (ii) any Interest Payment Date, in each case without theconsent of the Holder (it being understood that the Required Holders may waive any increase in theInterest Rate that would otherwise take effect during the continuance of an Event of Default);(b) reduce the Principal of, or the Interest Rate or any premiums specified herein on, theNote, or any other amounts payable hereunder to the Holder, without the consent of the Holder;provided, however, that only the consent of the Required Holders shall be necessary toalter the amount by which the Interest Rate may be increased during the continuance of an Event ofDefault or to waive any of the obligation of the Company to pay such increased rate during thecontinuance of an Event of Default); or(c) change any provision of this Section 19, the definition of “Required Holders” or any otherprovision hereof specifying the number or percentage of holders of Notes required to amend, waiveor otherwise modify any rights hereunder or to make any determination or grant any consenthereunder, without the consent of the Holder and of each of the holders of the Other Notes, in eachcase to the extent adversely affected thereby;and provided further that no amendment, waiver or consent shall, unless in writing and signed bythe Holder Representative in addition to the holders of Notes required above, affect the rights orduties of the Holder Representative under this Note or any other Transaction Document.
 
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(20) HOLDER REPRESENTATIVE(a) Appointment of Holder Representative, etc. By acceptance of this Note, the Holderhereby appoints Costa Brava Partnership III L.P. to serve as Holder Representative. The Holderfurther agrees that the Holder Representative may be removed at any time by a vote of the RequiredHolders, and that if the Holder Representative is so removed, or if it at any time resigns ordeclines to serve as Holder Representative, the successor Holder Representative shall be the holderof the Notes that at any given time holds Notes in an aggregate principal amount that is greaterthan the aggregate principal amount of the Notes held by any other holder of theNotes; provided, that at any time after the Mandatory Conversion Eligibility Date, theRequired Holders may instead designate as the Holder Representative another Person of theirchoosing. The Holder hereby (a) irrevocably authorizes the Holder Representative to (i) enter intothe Security Agreement and (ii) at its discretion, to take or refrain from taking such actions asHolder Representative and to exercise or refrain from exercising such powers under the TransactionDocuments as are delegated by the terms hereof or thereof, as applicable, together with all powersreasonably related thereto and (b) agrees and consents to all of the provisions of the SecurityAgreement.(b) Concerning the Holder Representative. (i) Standard of Conduct. The Holder Representative and its officers,directors, employees and agents shall be under no liability to the Holder or to any ofits successors or assigns for any action or failure to act taken or suffered in itscapacity as Holder Representative in the absence of gross negligence and willfulmisconduct, and any action or failure to act in accordance with an opinion of itscounsel shall conclusively be deemed to be in the absence of gross negligence andwillful misconduct. (ii) No Implied Duties. The Holder Representative shall have no duties orresponsibilities except as set forth in the Note and the other Transaction Documents,nor shall it have any fiduciary relationship with the Holder, and no implied covenants,responsibilities, duties, obligations or liabilities shall be read into the TransactionDocuments or otherwise exist against the Holder Representative. (iii) Validity. The Holder Representative shall not be responsible to theHolder or to any of its successors or assigns (a) for the legality, validity,enforceability or effectiveness of any of the Transaction Documents, (b) for anyrecitals, reports, representations, warranties or statements contained in or made inconnection with any of the Transaction Document, (c) for the existence or value of anyassets included in the Collateral, (d) for the effectiveness of any Lien purported tobe created by the Security Agreement, or (e) unless the Holder Representative shallhave failed to comply with sub-paragraph (i) above, for the perfection of the securityinterests created by the Security Agreement.(c) Compliance. The Holder Representative shall not be obligated to ascertain orinquire as to the performance or observance of any of the terms of this Note.(d) Employment of Agents and Counsel. The Holder Representative may execute any ofits duties as Holder Representative under this Note by or through employees, agents andattorneys-in-fact and shall not be responsible to any of the parties hereto for the default ormisconduct of any such agents or attorneys-in-fact selected by the Holder Representative acting inthe absence of gross negligence and willful misconduct. The Holder Representative shall beentitled to advice of counsel concerning all matters pertaining to the agency hereby created andits duties hereunder.
 
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(e) Reliance on Documents and Counsel. The Holder Representative shall be entitled torely, and shall be fully protected in relying, upon any affidavit, certificate, cablegram, consent,instrument, letter, notice, order, document, statement, telecopy, telegram, telex or teletypemessage or writing reasonably believed in good faith by the Holder Representative to be genuine andcorrect and to have been signed, sent or made by the Person in question, including any telephonicor oral statement made by such Person, and, with respect to legal matters, upon an opinion or theadvice of counsel selected by the Holder Representative.(f) Holder Representative’s Reimbursement. The Company agrees to indemnify the HolderRepresentative for any losses arising from its appointment as Holder Representative or from theperformance of its duties hereunder and to reimburse the Holder Representative for any reasonableexpenses; provided, however, that the Holder Representative shall not be indemnified orreimbursed for liabilities or expenses to the extent resulting from its own gross negligence, badfaith or willful misconduct. In addition, if at any time the Holder Representative is a Personthat is not a holder of one or more Notes, such Person shall be entitled to a fee for acting in thecapacity of Holder Representative, in an amount to be agreed between the Holder Representative andthe Required Holders.(21) TRANSFER RESTRICTIONS; REISSUANCE OF THIS NOTE.(a) Transfer. If this Note is to be transferred in compliance with Section 21(e)below, the Holder shall surrender this Note to the Company, whereupon the Company will forthwithissue and deliver upon the order of the Holder a new Note (in accordance with Section 21(d)),registered as the Holder may request, representing the outstanding Principal being transferred bythe Holder and, if less then the entire outstanding Principal is being transferred, a new Note (inaccordance with Section 21(d)) to the Holder representing the outstanding Principal not beingtransferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that,by reason of the provisions of Section 3(c)(iii), following conversion or redemption of any portionof this Note, the outstanding Principal represented by this Note may be less than the Principalstated on the face of this Note.(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidencereasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder tothe Company, in customary form and, in the case of mutilation, upon surrender and cancellation ofthis Note, the Company shall execute and deliver to the Holder a new Note (in accordance withSection 21(d)) representing the outstanding Principal.(c) Note Exchangeable for Different Denominations. This Note is exchangeable, uponthe surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes(in accordance with Section 21(d) and in principal amounts of at least $100,000) representing inthe aggregate the outstanding Principal of this Note, and each such new Note will represent suchportion of such outstanding Principal as is designated by the Holder at the time of such surrender.
 
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(d) Issuance of New Notes. Whenever the Company is required to issue a new Notepursuant 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 (orin the case of a new Note being issued pursuant to Section 21(a) or Section 21(c), the Principaldesignated by the Holder which, when added to the principal represented by the other new Notesissued in connection with such issuance, does not exceed the Principal remaining outstanding underthis Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, asindicated 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 unpaidInterest of this Note from the Issuance Date.(e) Transfer Restrictions. The Holder understands that the Company may, as acondition to the transfer of any Notes or shares of Company Common Stock issuable upon conversionof such Notes (collectively, the “**Securities**”), require that the request for transfer beaccompanied by an opinion of counsel reasonably satisfactory to the Company, to the effect that theproposed transfer does not result in a violation of the Securities Act, unless such transfer iscovered by an effective registration statement or by Rule 144 or Rule 144A under the SecuritiesAct; provided, however, that an opinion of counsel shall not be required for atransfer by the Holder that is (A) a partnership transferring to its partners or former partners inaccordance with partnership interests, (B) a corporation transferring to a wholly owned subsidiaryor a parent corporation that owns all of the capital stock of the Holder, (C) a limited liabilitycompany transferring to its members or former members in accordance with their interest in thelimited liability company, (D) an individual transferring to the Holder’s family member or trustfor the benefit of an individual Holder, or (E) transferring its Securities to any Affiliate of theHolder, in the case of an institutional investor, or other Person under common management with suchHolder; provided, further, that (i) the transferee in each case agrees to besubject to the restrictions in this Section 21(e) and provides the Company with a customarysecurities law representation letter, (ii) the Company satisfies itself that the number oftransferees is sufficiently limited and (iii) in the case of transferees that are partners orlimited liability company members, the transfer is for no consideration. It is understood that thecertificates evidencing any Securities may bear substantially the following legends (in addition toany other legends as legal counsel for the Company deems necessary or advisable under theapplicable state and federal securities laws or any other agreement to which the Company is aparty):“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANYAPPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED ORHYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TOTHE SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OFCOUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESSSOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT.”
 
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(22) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.(a) The remedies provided in this Note shall be cumulative and in addition to all otherremedies 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, subject toSection 22(b) and Section 33 below, nothing herein shall limit the Holder’s right to pursuemonetary damages for any failure by the Company to comply with the terms of this Note. Amounts setforth or provided for herein with respect to payments, conversion and the like (and the computationthereof) shall be the amounts to be received by the Holder and shall not, except as expresslyprovided 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 irreparableharm to the Holder and that the remedy at law for any such breach may be inadequate. The Companytherefore agrees that, in the event of any such breach or threatened breach, the Holder shall beentitled, 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 beingrequired.(b) Notwithstanding the foregoing, but subject to Section 22(c), the Holder may not pursue anyremedy with respect to this Note unless: (i) the Holder has previously given the Holder Representative written notice thatan Event of Default is continuing; (ii) holders of at least 25% in aggregate principal amount of the total outstandingNotes have requested the Holder Representative to pursue the remedy; (iii) such holders of the Notes have offered the Holder Representative security orindemnity reasonably satisfactory to it against any loss, liability or expense; (iv) the Holder Representative has not complied with such request within 60 daysafter the receipt thereof and the offer of security or indemnity; and (v) the Required Holders have not given the Holder Representative a directioninconsistent with such request within such 60-day period.(c) Notwithstanding the foregoing, but subject to Section 33, the right of the Holder toreceive payment of Principal, premium, if any, and Interest on the Note, on or after the respectivedue dates set forth herein (including in connection with a Change of Control), or convert anyportion of the Note into shares of Company Common Stock on the terms and conditions set forthherein, or to bring suit for the enforcement of any such right to payment or conversion, shall notbe impaired or affected without the consent of the Holder.(23) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placedin the hands of an attorney for collection or enforcement or is collected or enforced through anylegal proceeding or the Holder otherwise takes action to collect amounts due under this Note or toenforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,receivership of the Company or other proceedings affecting Company creditors’ rights and involvinga claim under this Note, then the Company shall pay the costs incurred by the Holder for suchcollection, enforcement or action or in connection with such bankruptcy,reorganization, receivership or other proceeding, including, but not limited to, reasonableattorneys’ fees and disbursements.
 
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(24) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by theCompany and all the Holders of Notes and shall not be construed against any person as the drafterhereof. The headings of this Note are for convenience of reference and shall not form part of, oraffect the interpretation of, this Note.(25) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holderin the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, norshall any single or partial exercise of any such power, right or privilege preclude other orfurther exercise thereof or of any other right, power or privilege.(26) DISPUTE RESOLUTION. In the case of a dispute as to the determination of theClosing Bid Price, the Closing Sale Price, the Volume Weighted Average Price, the Weighted AveragePrice, the Redemption Price or the arithmetic calculation of the Conversion Rate or the RedemptionPrice, the Company shall submit the disputed determinations or arithmetic calculations viafacsimile within one (1) Business Day of receipt, or deemed receipt, of the Conversion Notice orthe Holder Change of Control Redemption Notice or other event giving rise to such dispute, as thecase may be, to the Holder Representative. If the Holder Representative and the Company are unableto agree upon such determination or calculation of the Redemption Price or the Conversion Rate, asapplicable, within one (1) Business Day of such disputed determination or arithmetic calculationbeing submitted to the Holder Representative, then the Company and the Holder Representative shall,within one (1) Business Day thereafter submit via facsimile (a) the disputed determination of theClosing Bid Price, the Closing Sale Price, the Volume Weighted Average Price or the WeightedAverage Price to an independent, reputable investment bank selected by the Company and approved bythe Holder Representative or (b) the disputed arithmetic calculation of the Conversion Rate or theRedemption Price to the Company’s independent, outside accountant. The Company, at the Company’sexpense, shall cause the investment bank or the accountant, as the case may be, to perform thedeterminations or calculations and notify the Company and the Holder Representative of the resultsno later than five (5) Business Days from the time it receives the disputed determinations orcalculations. Such investment bank’s or accountant’s determination or calculation, as the case maybe, shall be binding upon all parties absent demonstrable error. To the extent of a good faithdispute by the Company, any related penalty payments due hereunder shall not be made unless anduntil such dispute is resolved against the Company.
 
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(27) NOTICES; PAYMENTS.(a) Notices. All notices, requests, consents, and other communications under thisNote shall be in writing and shall be deemed delivered (a) when delivered, if delivered personally,(b) four business days after being sent by registered or certified mail, return receipt requested,postage prepaid; (c) one business day after being sent via a reputable nationwide overnight courierservice guaranteeing next business day delivery, or (d) when receipt is acknowledged, in the caseof facsimile, in each case to the intended recipient as set forth below:If to the Holder, at its address set forth on Schedule I heretowith a copy to:Ropes & Gray LLPOne International PlaceBoston, MA 02110Attention: Jeffrey KatzFacsimile No.: (617) 235-0617If to the Company:Irvine Sensors Corporation3001 Red Hill AvenueBuilding 4, Suite 108Costa Mesa, CA 92626Attention: John J. Stuart, Jr.Facsimile No.: (714) 444-8773with a copy to:Dorsey & Whitney LLP38 Technology Drive, Suite 100Irvine, CA 92618Attention: Ellen Bancroft, Esq.Facsimile No: (949) 932-3601or at such other address as the Company or the Holder each may specify by written notice inaccordance with this Section 27.The Company shall provide the Holder with prompt written notice of all actions taken pursuant tothis 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 theHolder (i) within one (1) Business Day upon any adjustment of the Conversion Price, setting forthin reasonable detail, and certifying, the calculation of such adjustment and (ii) at least fifteen(15) days prior to the date on which the Company closes its books or takes a record (A) withrespect to any dividend or distribution upon the Company Common Stock, (B) with respect to any prorata subscription offer to holders of Company Common Stock or (C) for determining rights to votewith respect to any Fundamental Transaction, dissolution or liquidation, provided in each case thatsuch information shall be made known to the public prior to or in conjunction with such noticebeing provided to the Holder.
 
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(b) Payments. Whenever any payment of cash is to be made by the Company to any Personpursuant to this Note, such payment shall be made in lawful money of the United States of Americaby a check drawn on the account of the Company and sent via overnight courier service to suchPerson at such address as previously provided to the Company in writing (which address, in the caseof each of the Holders shall initially be as set forth on Schedule Iattached to this Note); provided that the Holder may elect to receive a payment of cash viawire transfer of immediately available funds by providing the Company with prior written noticesetting out such request and the Holder’s wire transfer instructions. Whenever any amountexpressed to be due by the terms of this Note is due on any day which is not a Business Day, thesame shall instead be due on the next succeeding day which is a Business Day.(c) Withholding Taxes. All payments made by the Company hereunder shall be madewithout withholding for or on account of any present or future taxes (other than overall net incometaxes imposed on the recipient). If any such withholding is so required, the Company shall makethe withholding, pay the amount withheld to the appropriate authority before penalties attachthereto or interest accrues thereon and pay to the recipient such additional amount as may benecessary to ensure that the net amount actually received by the recipient free and clear of suchtaxes (including taxes on such additional amount) is equal to the amount that the recipient wouldhave received had such withholding not been made. If the recipient is required to pay any suchtaxes, penalties or interest, the Company shall reimburse the recipient for that payment on demand.If the Company pays any such taxes, penalties or interest, it shall deliver official tax receiptsor other evidence of payment to the recipient on whose account such withholding was made on orbefore the thirtieth day after payment. The Holder agrees to provide, promptly following theCompany’s request therefore, such forms or certifications as it is legally able to provide toestablish an exemption from, or a reduction in, any withholding taxes that might otherwise apply.(28) CANCELLATION. After all Principal, accrued Interest and other amounts at anytime owed on this Note have been paid in full, this Note shall automatically be deemed canceled,shall be surrendered to the Company for cancellation and shall not be reissued.(29) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waivesdemand, notice, protest and all other demands and notices in connection with the delivery,acceptance, performance, default or enforcement of this Note.(30) GOVERNING LAW. This Note shall be construed and enforced in accordance with, andall questions concerning the construction, validity, interpretation and performance of this Noteshall be governed by, the internal laws of the State of New York, without giving effect to anychoice of law or conflict of law provision or rule (whether of the State of New York or any otherjurisdictions) that would cause the application of the laws of any jurisdictions other than theState of New York.(31) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall havethe following meanings:(a) “**Approved Stock Plan**” means any employee benefit plan, contract or arrangement which hasbeen approved by the Company Board of Directors, pursuant to which the Company’s securities may beissued to any employee, consultant, officer or director for services provided to the Company.
 
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(b) “**Bankruptcy Code**” means Chapter 11 of Title 11 of the United States Code, as amended fromtime to time and any successor statute and all rules and regulations promulgated thereunder.(c) “**Bloomberg**” means Bloomberg Financial Markets.(d) “**Bridge Notes**” means the Company’s 10% Unsecured Convertible Promissory Notes due May 31,2011 in the original aggregate principal amount of $3,000,000.(e) “**Business Day**” means any day other than Saturday, Sunday or other day on which commercialbanks in The City of New York are authorized or required by law to remain closed.(f) “**Contractual Obligation**” means, with respect to any Person, any contract, agreement, deed,mortgage, lease, sublease, license, sublicense or other legally enforceable commitment, promise,undertaking, obligation, arrangement, instrument or understanding, whether written or oral, towhich or by which such Person is a party or otherwise subject or bound or to which or by which anyproperty, business, operation or right of such Person is subject or bound.(g) “**Conversion Shares**” means the shares of Company Common Stock into which the Notes areconvertible.(h) “**Change of Control**” means any Fundamental Transaction other than (A) a FundamentalTransaction in which holders of the Company’s voting power immediately prior to the FundamentalTransaction continue after the Fundamental Transaction to hold publicly traded securities and,directly or indirectly, the voting power of the surviving entity or entities necessary to elect amajority of the members of the board of directors (or their equivalent if other than a corporation)of such entity or entities, (B) a Fundamental Transaction with any Holder, any Affiliate of anyHolder or any person otherwise related to or associated with a Holder, or (C) pursuant to amigratory merger effected solely for the purpose of changing the jurisdiction of incorporation ofthe Company.(i) “**Closing Bid Price**” and “**Closing Sale Price**” means, for any security as of any date, thelast closing bid price and last closing trade price, respectively, for such security, as reportedby Bloomberg (whether or not such security is trading on an Eligible Market at such time), or, ifthe market on which the security is trading begins to operate on an extended hours basis and doesnot designate the closing bid price or the closing trade price, as the case may be, then the lastbid 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 market on which the security is trading is not the principalsecurities exchange or trading market for such security, the last closing bid price or last tradeprice, respectively, of such security on the principal securities exchange or trading market wheresuch security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, thelast closing bid price or last trade price, respectively, of such security in the over-the-countermarket on the electronic bulletin board for such security as reported by Bloomberg, or, if noclosing bid price or last trade price, respectively, is
 
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reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any marketmakers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the NationalQuotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculatedfor a security on a particular date on any of the foregoing bases, the Closing Bid Price or theClosing Sale Price, as the case may be, of such security on such date shall be the fair marketvalue as mutually determined by the Company and the Holder Representative. If the Company and theHolder are unable to agree upon the fair market value of such security, then such dispute shall beresolved pursuant to Section 26. All such determinations to be appropriately adjusted for anystock dividend, stock split, stock combination or other similar transaction during the applicablecalculation period.(j) “**Collateral**” has the meaning given to such term in the Security Agreement.(k) “**Company Board of Directors**” means the board of directors of the Company or any authorizedcommittee of the board of directors.(l) “**Company Trading Day**” means any day on which the Company Common Stock is traded on theprincipal securities exchange or securities market on which the Company Common Stock is thentraded; provided that “Company Trading Day” shall not include any day on which the Company CommonStock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that theCompany Common Stock is suspended from trading during the final hour of trading on such exchange ormarket (or if such exchange or market does not designate in advance the closing time of trading onsuch exchange or market, then during the hour ending at 4:00 p.m., New York Time).(m) “**Convertible Securities**” means with respect to any issuer, any stock or securities (otherthan Options) directly or indirectly convertible into or exercisable or exchangeable for suchissuer’s common stock.(n) “**Distribution**” means (i) any payment or distribution made by the Company on account of theNote, whether in the form of cash, securities or other property, by setoff or otherwise, or (ii)any redemption, purchase or other acquisition by the Company of all or a portion of the Note, ineach of cases (i) and (ii), otherthan any payment, distribution, redemption,purchase or other acquisition made (x) through the conversion or exchange of all or a portion ofthe Note into or for (I) equity securities of the Company (including pursuant to the terms hereof)or (II) debt securities of the Company that (A) are subordinated in right of payment to theExisting Secured Note to at least the same extent as the Notes are subordinated to the ExistingSecured Note, (B) do not have the benefit of any obligation of any Person (whether as issuer,guarantor or otherwise) unless the Existing Secured Note has at least the same benefit of theobligation of such Person and the obligation of such Person to the Holder is subordinated to theobligations of such Person to the Existing Secured Note Holder to at least the same extent thatthis Note is subordinated to the Existing Secured Note and (C) is either unsecured or secured byliens that are subordinated to the liens securing the Existing Secured Note, (y) at any time thatno “Default” (as defined in the Existing Secured Note) has occurred and is continuing under Section6(a) or 6(c) of the Existing Secured Note or (z) through the accrual and addition to principal ofcapitalized interest in the amounts and at the times specified in this Note.
 
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(o) “**Eligible Market**” means a national security exchange that has registered with the SECunder Section 6 of the Securities Exchange Act of 1934.(p) “**Equity Conditions**” means each of the following conditions: (i) during the periodbeginning fifteen (15) Company Trading Days prior to the applicable date of determination andending on and including the applicable date of determination (the “**Equity Conditions MeasuringPeriod**”), the Company shall have delivered Conversion Shares upon conversion of the Notes on atimely basis as set forth in Section 3(c)(i) hereof (and analogous provisions under the OtherNotes); (ii) on each day during the Equity Conditions Measuring Period, any applicable shares ofCompany Common Stock to be issued in connection with the event requiring determination may beissued in full without violating the rules or regulations of the applicable Eligible Market, ifapplicable; (iii) during the Equity Conditions Measuring Period, the Company shall not have failedto timely make any payments within five (5) Business Days of when such payment is due pursuant toany Transaction Document; (iv) during the Equity Conditions Measuring Period, there shall not haveoccurred either (A) the public announcement of a pending, proposed or intended FundamentalTransaction which has not been abandoned, terminated or consummated, or (B) an Event of Default;(v) during the period commencing on the Interest Election Date or the Mandatory Conversion NoticeDate, as applicable, and ending on the Interest Payment Date or the Mandatory Conversion Date, asapplicable, an event that with the passage of time or giving of notice would constitute an Event ofDefault; (vi) during the Equity Conditions Measuring Period, the Company shall have no knowledge ofany fact that would cause any shares of Company Common Stock issuable upon conversion of the Notesnot to be eligible for resale without restriction pursuant to Rule 144 and any applicable statesecurities laws; (vii) during the Equity Conditions Measuring Period, the Company otherwise shallhave been in compliance with and shall not have breached any provision, covenant, representation orwarranty of any Transaction Document to the extent that such breach would have a Material AdverseEffect; (viii) prior to the Mandatory Conversion Eligibility Date the Company Common Stock shall berelisted on an Eligible Market; (ix) prior to the Mandatory Conversion Eligibility Date the Companyshall have timely filed each of its required reports under the Securities Exchange Act of 1934, asamended; and (x) prior to the Mandatory Conversion Eligibility Date any shares required for theMandatory Conversion have been duly authorized and shall be upon issuance fully-paid and validlyissued.(q) “**Event of Default Premium**” means 25% of the Outstanding Note Obligations.(r) “**Excluded Securities**” means any Company Common Stock or other securities or debtobligations issued or issuable: (i) in connection with any Approved Stock Plan; (ii) uponconversion of the Company’s 12% convertible secured notes due 2015 in an aggregate principal amountnot to exceed $11,020,800 owing to Costa Brava Partnership III L.P., The Griffin Fund, LP and tocertain other investors (on substantially the same terms as such Indebtedness owing to Costa BravaPartnership III L.P.); (iii) pursuant to a bona fide firm commitment underwritten public offeringwith an institution that regularly underwrites as a principal part of its business public offeringson a firm commitment basis which generates gross proceeds to the Company in excess of $15,000,000(other
 
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than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and “equitylines”); (iv) in connection with corporate partnering or licensing transactions or in connection with a strategic merger,acquisition, consolidation or purchase of substantially all of the securities or assets of acorporation or other entity, on terms approved by the Board of Directors and the primary purpose ofwhich is not to raise equity capital; (v) upon exercise or conversion of any options, warrants orconvertible securities of the Company which are outstanding on the day immediately preceding thedate herewith, provided that the terms of such options, warrants or convertible securities are notamended, modified or changed on or after the date herewith to decrease the price, increase thenumber of shares issuable thereunder or extend the term of such options or convertible securities;and (vi) in the closings of conversions of Bridge Notes into the Company’s 12% convertible securednotes due 2015.(s) “**Existing Secured Debt**” means all obligations, liabilities and indebtedness of everynature of the Company from time to time owed to the Existing Secured Note Holder under the ExistingSecured Note, including, without limitation, the principal amount of all debts, claims andindebtedness, accrued and unpaid interest and all costs and expenses, whether primary, secondary,direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, dueor payable, whether before or after the filing of a Proceeding under the Bankruptcy Code togetherwith any interest accruing thereon after the commencement of a Proceeding, without regard towhether or not such interest is an allowed claim.(t) “**Existing Secured Note**” means the Secured Promissory Note, dated April 14, 2010, issued bythe Company to Timothy Looney, as in effect as of the date hereof.(u) “**Existing Secured Note Holder**” means Timothy Looney or any of his successors or assigns asthe Payee of the Existing Secured Note (as such term is defined therein).(v) “**Fundamental Transaction**” means that the Company shall, directly or indirectly, in one ormore related transactions, (i) consolidate or merge with or into (whether or not the Company is thesurviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise disposeof all or substantially all of the assets of the Company to another Person, or (iii) allow anotherPerson to make a purchase, tender or exchange offer that is accepted by the holders of more thanthe 50% of the outstanding shares of Company Common Stock (not including any shares of CompanyCommon Stock held by the Person or Persons making or party to, or associated or affiliated with thePersons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stockpurchase agreement or other business combination (including, without limitation, a reorganization,recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Personacquires more than the 50% of the outstanding shares of Company Common Stock (not including anyshares of Company Common Stock held by the other Person or other Persons making or party to, orassociated or affiliated with the other Persons making or party to, such stock purchase agreementor other business combination), or (v) reorganize, recapitalize or reclassify its Company CommonStock. A Fundamental Transaction shall not include any transaction with any Holder, any Affiliateof any Holder, or any Person otherwise related to or associated with a Holder.
 
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(w) “**Guarantee**” means, with respect to any Person, (a) any guarantee of the payment orperformance of, or any contingent obligation in respect of, any Indebtedness or otherLiability of any other Person, (b) any other arrangement whereby credit is extended to anyobligor (other than such Person) on the basis of any promise or undertaking of such Person (i) topay the Indebtedness or other Liability of such obligor, (ii) to purchase any obligation owed bysuch obligor, (iii) to purchase or lease assets under circumstances that are designed to enablesuch obligor to discharge one or more of its obligations or (iv) to maintain the capital, workingcapital, solvency or general financial condition of such obligor and (c) any liability as a generalpartner of a partnership or as a venturer in a joint venture in respect of Indebtedness or otherLiabilities of such partnership or venture.(x) “**Holder Representative**” means, as of the Initial Date, Costa Brava Partnership III L.P.and at any time thereafter, the Person most recently appointed to act as Holder Representativepursuant to Section 20(a).(y) “**Indebtedness**” means, with respect to any Person, and without duplication, allLiabilities, including all obligations in respect of principal, accrued interest, penalties, feesand premiums, of such Person (a) for borrowed money (including amounts outstanding under overdraftfacilities), (b) evidenced by notes, bonds, debentures or other similar Contractual Obligations,(c) in respect of “earn-out” obligations and other obligations for the deferred purchase price ofproperty, goods or services (other than trade payables or accruals incurred in the ordinary courseof business), (d) for the capitalized liability under all capital leases of such Person (determinedin accordance with GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) forContractual Obligations relating to interest rate protection, swap agreements and collaragreements, in each case, to the extent payable if such Contractual Obligation is terminated at theClosing, and (g) in the nature of Guarantees of the obligations described in clauses (a) through(f) above of any other Person.(z) “**Initial Date**” shall mean December 23, 2010.(aa) “**Interest Conversion Price**” means, with respect to any Interest Payment Date, the pricecomputed as the Weighted Average Price of the Company Common Stock on each of the twenty (20)consecutive Company Trading Days ending on the second (2nd) Company Trading Dayimmediately preceding such Interest Payment Date. All such determinations to be appropriatelyadjusted for any stock split, stock dividend, stock combination or other similar transaction duringsuch period.(bb) “**Interest Period**” means, initially, the period beginning on and including the IssuanceDate and ending on and including September 30, 2011 and each successive period for each year untilthe Maturity Date as follows: the period beginning on and including October 1 and ending on andincluding December 31; the period beginning on and including January 1 and ending on and includingMarch 31; the period beginning on and including April 1 and ending on and including June 30; theperiod beginning on and including July 1 and ending on and including September 30.
 
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(cc) “**Interest Rate**” means twelve percent (12.0%) per annum; provided that upon theoccurrence and during the continuance of an Event of Default, the Interest Rate shall be increasedto twenty percent (20.0%) per annum. In the event that such Event of Default issubsequently cured or waived, the Interest Rate shall be reduced to twelve percent (12.0%) perannum as of the date of such cure or waiver, it being understood, however, that unless the RequiredHolders otherwise agree in writing, such reduction shall not apply retroactively to the period whensuch Event of Default was continuing.(dd) “**Issuance Date**” has the meaning set forth in Section 2 hereof.(ee) “**Liability**” means, with respect to any Person, any liability or obligation of such Personwhether known or unknown, whether asserted or unasserted, whether determined, determinable orotherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated orunliquidated, whether directly incurred or consequential, whether due or to become due and whetheror not required under GAAP to be accrued on the financial statements of such Person.(ff) “**Material Adverse Effect**” means any (i) adverse effect on the issuance or validity of theNotes or the transactions contemplated hereby or on the ability of the Company to perform itsobligations under the Notes or the other Transaction Documents, or (ii) material adverse effect onthe condition (financial or otherwise), properties, assets, liabilities, business or operations ofthe Company and its Subsidiaries taken as a whole.(gg) “**Options**” means with respect to any issuer, any rights, warrants or options to subscribefor or purchase such issuer’s common stock or such issuer’s Convertible Securities.(hh) “**Outstanding Note Obligations**” shall have the meaning given to such term in Section 5(b).(ii) “**Parent Entity**” of a Person means an entity that, directly or indirectly, controls theapplicable Person and whose common stock or equivalent equity security is quoted or listed on anEligible Market, or, if there is more than one such Person or Parent Entity, the Person or ParentEntity with the largest public market capitalization as of the date of consummation of theFundamental Transaction.(jj) “**Permitted Indebtedness**” means (A) Indebtedness incurred by the Company that is madeexpressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflectedin a written agreement reasonably acceptable to the Holder Representative and approved by theHolder Representative in writing, and which Indebtedness does not provide at any time for (1) thepayment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principalor 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 six percent (6%) per annum, (B) Indebtedness securedby Permitted Liens, (C) Indebtedness to trade creditors or for professional services incurred inthe ordinary course of business, (D) any Bridge Notes, (E) senior subordinated Indebtedness in anaggregate principal amount not to exceed $4,000,000 owing to Costa Brava Partnership III L.P., TheGriffin Fund, LP and to certain other investors (on substantially the same terms as suchIndebtedness owing to Costa Brava Partnership III L.P.), (F) Indebtedness owing under the Company’s12% convertible
 
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secured notes due 2015 in an aggregate principal amount not to exceed $11,020,800 owing to Costa Brava Partnership IIIL.P., The Griffin Fund, LP and to certain other investors (on substantially the same terms as suchIndebtedness owing to Costa Brava Partnership III L.P.), (G) Indebtedness owing to or held bySummit Financial Resources, L.P. incurred by the Company (but in the case of any such obligationsin respect of principal, limited to an aggregate principal amount not more than $500,000 in excessof the aggregate principal amount of the Indebtedness owing under this clause (G) on March 16,2011) to factor or finance its accounts receivable, and (H) extensions, refinancings and renewalsof any items of Permitted Indebtedness described in clauses (A) through (F) above, provided thatthe principal amount is not increased or the terms modified to impose more burdensome terms uponthe Company or its Subsidiary, as the case may be.(kk) “**Permitted Liens**” means (i) any Lien for taxes not yet due or delinquent or beingcontested in good faith by appropriate proceedings for which adequate reserves have beenestablished in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course ofbusiness 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 othersimilar liens, arising in the ordinary course of business with respect to a liability that is notyet 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 equipmentacquired or held by the Company or any of its Subsidiaries to secure the purchase price of suchequipment or indebtedness incurred solely for the purpose of financing the acquisition or lease ofsuch equipment, or (B) existing on such equipment at the time of its acquisition, provided that theLien is confined solely to the property so acquired and improvements thereon, and the proceeds ofsuch equipment, (vi) Liens securing the Company’s obligations under the Indebtedness described inclauses (E), (F) and (G) of the definition of “Permitted Indebtedness” (but in the case of anyIndebtedness described in such clause (G), limited to the security interests granted under theagreement governing such Indebtedness as in effect on the Initial Date), (vii) Liens incurred inconnection with the extension, renewal or refinancing of the indebtedness secured by Liens of thetype described in clauses (i) through (vi) above, provided that any extension, renewal orreplacement Lien shall be limited to the property encumbered by the existing Lien and the principalamount of the Indebtedness being extended, renewed or refinanced does not increase, (viii) leasesor subleases and licenses and sublicenses granted to others in the ordinary course of the Company’sbusiness, not interfering in any material respect with the business of the Company and itsSubsidiaries taken as a whole, (ix) Liens in favor of customs and revenue authorities arising as amatter 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 Eventof Default under Section 5(a)(vi).(ll) “**Person**” means an individual, a limited liability company, a partnership, a jointventure, a corporation, a trust, an unincorporated organization, any other entity and a governmentor any department or agency thereof.(mm) “**Principal Market**” means the following markets or exchanges on which the Common Stock islisted or quoted for trading on the date in question: the American Stock Exchange, the NasdaqCapital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York StockExchange or the OTC Bulletin Board.
 
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(nn) “**Proceeding**” means any voluntary or involuntary insolvency, bankruptcy, receivership,custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors,appointment of a custodian, receiver, trustee or other officer with similar powers or any otherproceeding for the liquidation, dissolution or other winding up of a Person.(oo) “**Redemption Price**” means any of an Event of Default Redemption Price, Alternative Eventof Default Redemption Price or Holder Change of Control Redemption Price.(pp) “**Required Holders**” means the holders of Notes representing at least a majority of theaggregate principal amount of the Notes then outstanding.(qq) “**SEC**” means the United States Securities and Exchange Commission.(rr) “**Subsidiary**” means any corporation, association trust, limited liability company,partnership, joint venture or other business association or entity (i) at least 50% of theoutstanding voting securities of which are at the time owned or controlled directly or indirectlyby the Company or (ii) with respect to which the Company possesses, directly or indirectly, thepower to direct or cause the direction of the affairs or management of such Person.(ss) “**Successor Entity**” means the Person, which may be the Company, formed by, resulting fromor surviving any Fundamental Transaction or the Person with which such Fundamental Transactionshall have been made, provided that if such Person is not a publicly traded entity whose commonstock or equivalent equity security is quoted or listed for trading on an Eligible Market,Successor Entity shall mean such Person’s Parent Entity.(tt) “**Transaction Documents**” means this Note, the Other Notes, the Security Agreement and anyother documents or agreements which the parties agree shall constitute a “Transaction Document”.(uu) “**Volume Weighted Average Price**” for a period of days means the quotient of (i) the sum of(a) the Weighted Average Price for a particular day multiplied by the trading volume for such day,plus (b) the same calculation for each successive day in the period, divided by (ii) the sum of thetrading volume for the entire period.(vv) “**Weighted Average Price**” means, for any security as of any date, the dollarvolume-weighted average price for such security on the Principal Market during the period beginningat 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces isthe official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as thePrincipal Market publicly announces is the official close of trading) as reported by Bloombergthrough its “Volume at Price” functions, or, if the foregoing does not apply, the dollarvolume-weighted average price of such security in the over-the-counter market on the electronicbulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (orsuch other time as such market publicly announces is the official open of trading), and ending at4:00:00 p.m., New York Time (or such other time as such market publicly announces is the officialclose of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price isreported for such security by Bloomberg for such hours, the average of the highest closing bidprice and the lowest closing ask price of any of the market makers forsuch security as reported in the “pink sheets” by Pink Sheets LLC (formerly the NationalQuotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on aparticular date on any of the foregoing bases, the Weighted Average Price of such security on suchdate shall be the fair market value as mutually determined by the Company and the HolderRepresentative. If the Company and the Holder Representative are unable to agree upon the fairmarket value of such security, then such dispute shall be resolved pursuant to Section 26. Allsuch determinations to be appropriately adjusted for any stock dividend, stock split, stockcombination or other similar transaction during the applicable calculation period.
 
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(32) SECURITY. The Notes shall be secured by and to the extent provided in theSecurity Agreement.(33) SUBORDINATION. It is a requirement of the Existing Secured Note that any securedIndebtedness of the Company, including this Note, be subordinated in right of payment to theExisting Secured Note. Accordingly, each of the Company and, by acceptance of this Note, theHolder and each of its successors and assigns hereby covenants and agrees that for so long (butonly for so long) as the Outstanding Note Obligations are secured by any of the assets of theCompany, the following provisions of this Section 33 shall apply:(a) Subordination of Note to Existing Secured Debt. Notwithstanding anything to thecontrary set forth herein or in any of the Transaction Documents, this Note shall be subordinatedin right and time of payment, to the extent and in the manner set forth in this Section 33, to theprior indefeasible payment in full in cash of the Existing Secured Debt.(b) Payment Restrictions. The Company hereby agrees that it may not make, and theHolder hereby agrees that it will not accept, any Distribution with respect to this Note until theearlier of (a) the date that is one (1) day following the date the Existing Secured Debt isindefeasibly paid in full in cash and (b) in the event that the Existing Secured Note Holder hasacknowledged in writing that the Existing Secured Debt has been indefeasibly paid in full in cash,the date of such payment and acknowledgment in writing.(34) Registered Obligation. The Company shall establish and maintain a record ofownership (the “Register”) in which it will register by book entry the interest of theinitial Holder and of each subsequent assignee in this Note, and in the right to receive anypayments of principal and interest or any other payments hereunder, and any assignment of any suchinterest. Notwithstanding anything herein to the contrary, this Note is intended to be treated asa registered obligation for federal income tax purposes and the right, title, and interest of theHolder and its assignees in and to payments under this Note shall be transferable only uponnotation of such transfer in the Register. This Section shall be construed so that the Note is atall times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and881(c)(2) of the Internal Revenue Code and any related regulations (or any successor provisions ofthe Code or such regulations).**[Signature Page Follows]**
 
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**IN WITNESS WHEREOF,**the Company has caused this Note to be duly executed as of the IssuanceDate set out above.      **IRVINE SENSORS CORPORATION**