Unassociated Document


    
      EXECUTION
VERSION

    

     

    [FORM
OF SENIOR UNSECURED CONVERTIBLE NOTE]

     

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

    


    CHINA
LINEN TEXTILE INDUSTRY, LTD.

     

    Senior
Unsecured Convertible Note

     

    
      	
              Issuance
      Date: November 3, 2010

            	
              Original
      Principal Amount: U.S. $[__________]

            


    

    


    FOR VALUE RECEIVED, China
Linen Textile Industry, Ltd., an exempted company incorporated in the Cayman
Islands (the “Company”),
hereby promises to pay to [_____] or registered assigns (the “Holder”) the amount set out
above as the Original Principal Amount (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding
Principal at the applicable Interest Rate from the date set out above as the
Issuance Date (the “Issuance Date”) until the same becomes
due and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof).  This Senior Unsecured Convertible
Note (including all Senior Unsecured Convertible Notes issued in exchange,
transfer or replacement hereof, this “Note”) is one of an issue of
Senior Unsecured Convertible Notes issued pursuant to the Securities Purchase
Agreement on the Closing Date (collectively, the “Notes” and such other Senior
Unsecured Convertible Notes, the “Other Notes”).  Certain
capitalized terms used herein are defined in Section 28.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

       

    

    (1)           PAYMENTS OF
PRINCIPAL.  On the Maturity Date, the Company shall pay to the
Holder an amount in cash representing all outstanding Principal, accrued and
unpaid Interest and accrued and unpaid Late Charges (as defined in Section
24(b)), if any, on such Principal and Interest.  The “Maturity Date” shall be November 3,
2012, as may be extended at the option of the Holder (i) in the event that, and
for so long as, an Event of Default (as defined in Section 4(a)) shall have
occurred and be continuing on the Maturity Date (as may be extended pursuant to
this Section 1) or any event shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) that with the
passage of time and the failure to cure would result in an Event of Default and
(ii) through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced or
a Change of Control Notice (as defined in Section 5(b)) is delivered prior to
the Maturity Date.  Other than as specifically permitted by this Note,
the Company may not prepay any portion of the outstanding Principal, accrued and
unpaid Interest or accrued and unpaid Late Charges on Principal and Interest, if
any.

     

    (2)           INTEREST; INTEREST
RATE.  a) Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 360-day year and twelve
30-day months and shall be payable in arrears for each Quarterly Period on the
last date of such Quarterly Period during the period beginning on the Issuance
Date and ending on, and including, the Maturity Date (each, an “Interest Date”), with the first
Interest Date being December 31, 2010.  Interest shall be payable on
each Interest Date, to the record holder of this Note on the applicable Interest
Date, in cash.  Prior to the payment of Interest on an Interest Date,
Interest on this Note shall accrue at the Interest Rate and be payable in
cash.  From and after the occurrence and during the continuance of an
Event of Default, the Interest Rate shall be increased to fifteen percent
(15.0%).  In the event that such Event of Default is subsequently
cured, the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
and unpaid at such increased rate during the continuance of such Event of
Default shall continue to apply to the extent relating to the days after the
occurrence of such Event of Default through and including the date of cure of
such Event of Default.

     

    (3)           CONVERSION OF
NOTES.  This Note shall be convertible into shares of the
Company’s Ordinary Shares, par value $0.002 per share (the “Ordinary Shares”), on the
terms and conditions set forth in this Section 3.

     

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

     

    
      
         

      

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

     

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

     

    (ii)           “Conversion Price” means, as of
any Conversion Date (as defined below) or other date of determination, $1.52,
subject to adjustment as provided herein.

     

    (c)           Mechanics of
Conversion.

     

    (i)           Optional
Conversion.  To convert any Conversion Amount into shares of
Ordinary Shares on any date (a “Conversion Date”), the Holder
shall (A) transmit by facsimile or electronic mail (or otherwise deliver in
accordance with Section 24(a) hereof), for receipt on or prior to 11:59 p.m.,
New York Time, on such date, a copy of an executed notice of conversion in the
form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company, with a courtesy copy by electronic mail to the Company’s legal counsel,
provided, however, failure to deliver such courtesy copy shall not constitute a
failure to deliver the Conversion Notice, and (B) if required by Section
3(c)(iii), surrender this Note to a common carrier for delivery to the Company
as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction).  On or before the first (1st)
Trading Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile or electronic mail a confirmation of receipt of such
Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer
Agent”).  On or before the third (3rd)
Trading Day following the date of receipt of a Conversion Notice, the Company
shall (1) (x) provided that the Transfer Agent is participating in the
Depository Trust Company’s (“DTC”) Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Ordinary
Shares to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit/Withdrawal at Custodian system and
update the Company’s Register of Members or (y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Ordinary Shares to which the Holder shall be entitled and update the
Company’s Register of Members and (2) pay to the Holder in cash, by wire
transfer of immediately available funds, an amount equal to the accrued and
unpaid Interest on the Conversion Amount and Late Charges, if any, as of the
Conversion Date, on such Conversion Amount and Interest.  If this Note
is physically surrendered for conversion as required by Section 3(c)(iii) and
the outstanding Principal of this Note is greater than the Principal portion of
the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than three (3) Business Days after receipt of
this Note and at its own expense, issue and deliver to the holder a new Note (in
accordance with Section 18(d)) representing the outstanding Principal not
converted.  The Person or Persons entitled to receive the shares of
Ordinary Shares issuable upon a conversion of this Note shall be treated for all
purposes as the record holder or holders of such shares of Ordinary Shares on
the Conversion Date, and the Company’s Register of Members shall be updated on
the Conversion Date..

     

    
      
         

      

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

     

    (iii)           Registration;
Book-Entry.  The Company shall maintain a register (the “Register”) for the recordation
of the names and addresses of the holders of each Note and the principal amount
of the Notes held by such holders (the “Registered
Notes”).  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the
holders of the Notes shall treat each Person whose name is recorded in the
Register as the owner of a Note for all purposes, including, without limitation,
the right to receive payments of Principal and Interest, if any, hereunder,
notwithstanding notice to the contrary.  A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or
sale on the Register.  Upon its receipt of a request to assign or sell
all or part of any Registered Note by a Holder, the Company shall record the
information contained therein in the Register and issue one or more new
Registered Notes in the same aggregate principal amount as the principal amount
of the surrendered Registered Note to the designated assignee or transferee
pursuant to Section 18.  Notwithstanding anything to the contrary in
this Section 3(c)(iii), a Holder may assign any Note or any portion thereof to
an Affiliate of such Holder or a Related Fund of such Holder without delivering
a request to assign or sell such Note to the Company and the recordation of such
assignment or sale in the Register; provided, that (x)
the Company may continue to deal solely with such assigning or selling Holder
unless and until such Holder has delivered a request to assign or sell such Note
or portion thereof to the Company for recordation in the Register; (y) the
failure of such assigning or selling Holder to deliver a request to assign or
sell such Note or portion thereof to the Company shall not affect the legality,
validity, or binding effect of such assignment or sale and (z) such assigning or
selling Holder shall, acting solely for this purpose as a non-fiduciary agent of
the Company, maintain a register (the “Related Party Register”)
comparable to the Register on behalf of the Company, and any such assignment or
sale shall be effective upon recordation of such assignment or sale in the
Related Party Register.  Notwithstanding anything to the contrary set
forth herein, upon conversion of any portion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically surrender this Note
to the Company unless (A) the full Conversion Amount represented by this Note is
being converted or (B) the Holder has provided the Company with prior written
notice (which notice may be included in a Conversion Notice) requesting physical
surrender and reissue of this Note.  The Holder and the Company shall
maintain records showing the Principal and Interest and Late Charges, if any,
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of this Note upon conversion.

     

    
      
         

      

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

     

    (v)           Mandatory
Conversion.

     

    (1)           General.  If
at any time from and after the one year anniversary of the Issuance Date (the
“Mandatory Conversion
Eligibility Date”), (1) the arithmetic average of the Weighted Average
Price of the Ordinary Shares for any thirty (30) consecutive Trading Days
following the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring
Period”) equals or exceeds 150% of the Conversion Price (subject to
appropriate adjustments for any share dividend, share split, share combination,
reclassification or similar transaction after the Subscription Date) and (2)
there is not then an Equity Conditions Failure, the Company shall have the right
to require the Holder to convert all or any portion of the Company Conversion
Amount then remaining under this Note, in each case as designated in the
Mandatory Conversion Notice (as defined below) into fully paid, validly issued
and nonassessable Ordinary Shares in accordance with Section 3(c) hereof at
the Conversion Rate as of the Mandatory Conversion Date (as defined below) (a
“Mandatory
Conversion”).  The Company may exercise its right to require
conversion under this Section 3(c)(v) by delivering within not more than five
(5) Trading Days following the end of such Mandatory Conversion Measuring Period
a written notice thereof by (i) facsimile or electronic mail and (ii) overnight
courier to all, but not less than all, of the holders of Notes and the Transfer
Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such notice
by facsimile or electronic mail is referred to as the “Mandatory Conversion Notice
Date”).  The Mandatory Conversion Notice shall be
irrevocable.  The Mandatory Conversion Notice shall (y) state (I) the
Trading Day selected for the Mandatory Conversion, which Trading Day shall be no
sooner than twenty (20) Trading Days nor later than sixty (60) Trading Days
following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”),
(II) the aggregate Conversion Amount of the Notes subject to Mandatory
Conversion from the Holder and all of the holders of the Notes pursuant to this
Section 3(c)(v) (and analogous provisions under the Other Notes), (III) the
number of shares of Ordinary Shares to be issued to the Holder on the Mandatory
Conversion Date and (z) certify that there
has been no Equity Conditions Failure.  The mechanics of conversion
set forth in Section 3(c) shall apply to any Mandatory Conversion as if the
Company and the Transfer Agent had received from the Holder on the Mandatory
Conversion Date a Conversion Notice with respect to the Conversion Amount being
converted pursuant to the Mandatory Conversion.  Notwithstanding the
foregoing, the Company may not effect a Mandatory Conversion until a minimum of
ten (10) consecutive Trading Days have elapsed after any prior Mandatory
Conversion Date.

     

    (2)           Pro Rata Conversion
Requirement.  If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 3(c)(v)(1), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes.  If the Company elects a Mandatory Conversion of this
Note pursuant to Section 3(c)(v)(1) (or similar provisions under the Other
Notes) with respect to less than all of the Conversion Amounts of the Notes then
outstanding, then the Company shall require conversion of a Conversion Amount
from each of the holders of the Notes equal to the product of (1) the aggregate
Conversion Amount of Notes which the Company has elected to cause to be
converted pursuant to Section 3(c)(v)(1), multiplied by (2) the fraction, the
numerator of which is the sum of the aggregate Original Principal Amount of the
Notes purchased by such holder of outstanding Notes and the denominator of which
is the sum of the aggregate Original Principal Amount of the Notes purchased by
all holders holding outstanding Notes (such fraction with respect to each holder
is referred to as its “Conversion Allocation Percentage,” and
such amount with respect to each holder is referred to as its “Pro Rata Conversion Amount”);
provided, however, that in the event that any holder’s Pro Rata Conversion
Amount exceeds the outstanding Principal amount of such holder’s Note, then such
excess Pro Rata Conversion Amount shall be allocated amongst the remaining
holders of Notes in accordance with the foregoing formula.  In the
event that the initial holder of any Notes shall sell or otherwise transfer any
of such holder’s Notes, the transferee shall be allocated a pro rata portion of
such holder’s Conversion Allocation Percentage and the Pro Rata Conversion
Amount.

     

    
      
         

      

      
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    (d)           Limitations on Conversions;
Beneficial Ownership.  The Company shall not effect any
conversion of this Note, and the Holder of this Note shall not have the right to
convert any portion of this Note pursuant to Section 3(a), to the extent that
after giving effect to such conversion, the Holder (together with the Holder’s
affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the
number of shares of Ordinary Shares outstanding immediately after giving effect
to such conversion.  For purposes of the foregoing sentence, the
number of shares of Ordinary Shares beneficially owned by the Holder and its
affiliates shall include the number of shares of Ordinary Shares issuable upon
conversion of this Note with respect to which the determination of such sentence
is being made, but shall exclude the number of shares of Ordinary Shares which
would be issuable upon (A) conversion of the remaining, nonconverted portion of
this Note beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any Other Notes)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for
purposes of this Section 3(d), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”).  For purposes of this Section 3(d), in determining the
number of outstanding shares of Ordinary Shares, the Holder may rely on the
number of outstanding shares of Ordinary Shares as reflected in (1) the
Company’s most recent Form 20-F, Form 6-K or other public filing with the SEC,
as the case may be, which shall be prima facie evidence of that fact, (2) a more
recent public announcement by the Company or (3) any other notice by the Company
or the Transfer Agent, including, but not limited to the Register of Members of
the Company, setting forth the number of shares of Ordinary Shares
outstanding.  For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one (1) Business Day confirm
orally and in writing to the Holder the number of shares of Ordinary Shares then
outstanding.  In any case, the number of outstanding shares of
Ordinary Shares shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Note, by the Holder or its
affiliates since the date as of which such number of outstanding shares of
Ordinary Shares was reported.  By written notice to the Company, the
Holder may increase or decrease the Maximum Percentage to any other percentage
not in excess of 9.99%, specified in such notice; provided that the Holder may
waive the 9.99% threshold in its sole discretion; provided further that (x) any
such increase or decrease will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (y) any such increase or
decrease will apply only to the Holder and not to any other holder of
Notes.

     

    
      
         

      

      
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    (4)           RIGHTS UPON EVENT OF
DEFAULT.

     

    (a)           Event of
Default.  Unless otherwise waived by the written consent of the
Required Holders, each of the following events, shall constitute an “Event of
Default”:

     

    (i)           the
failure of the applicable Registration Statement required to be filed pursuant
to the Registration Rights Agreement to be declared effective by the SEC on or
prior to the date that is forty-five (45) days after the applicable
Effectiveness Deadline (as defined in the Registration Rights Agreement), or,
while the applicable Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive days or for more than an
aggregate of thirty (30) days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights
Agreement));

     

    (ii)           the
suspension from trading or failure of the Ordinary Shares to be listed on an
Eligible Market;

     

    (iii)           the
Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of shares of Ordinary Shares or (B) notice, written or oral, to any
holder of the Notes, including by way of public announcement or through any of
its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Ordinary Shares that is tendered in
accordance with the provisions of the Notes, other than pursuant to Section
3(d);

     

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

     

    (v)           the
Company’s failure to pay to the Holder any amount of Principal, Interest, Late
Charges or other amounts when and as due under this Note (including, without
limitation, the Company’s failure to pay any redemption amounts hereunder) or
any other Transaction Document (as defined in the Securities Purchase Agreement)
or any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, except, in the case of a failure to pay Interest and/or Late
Charges when and as due and such failure to pay Interest and/or Late Charges
shall continue for five (5) Business Days after the due date
thereof;

     

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

     

    
      
         

      

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

     

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

     

    (ix)           a
final judgment or judgments for the payment of money aggregating in excess of
$250,000 are rendered against the Company or any of its Subsidiaries and which
judgments are not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty (60)
days after the expiration of such stay; provided, however, that (a) any judgment
which is covered by insurance or an indemnity from a credit worthy party shall
not be included in calculating the $250,000 amount set forth above so long as
the Company provides the Holder a written statement from such insurer or
indemnity provider (which written statement shall be reasonably satisfactory to
the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within thirty (30) days of the issuance of such judgment and (b) the
calculation of the $250,000 amount set forth above shall exclude any judgments
that have been accrued on the Company’s balance sheet as of the Subscription
Date, but only to the extent of such accrual.

     

    (x)           the
Company breaches any representation, warranty, covenant or other term or
condition of this Note or any Transaction Document; or

     

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

     

    (b)           Acceleration
Right.  Upon the occurrence of an Event of Default with respect
to this Note or any Other Note, the Company shall within one (1) Business Day
deliver written notice thereof via (i) facsimile or electronic mail and (ii)
overnight courier (an “Event of
Default Notice”) to the Holder.  At any time after the earlier
of the Holder’s receipt of an Event of Default Notice and the Holder becoming
aware of an Event of Default, the Holder may at its option, accelerate the
Obligations due under this Note and declare all or any portion
of  such Obligations due and payable (the “Acceleration Notice”) to the
Company, which Acceleration Notice shall indicate the Conversion Amount of this
Note the Holders are electing to accelerate.  The Acceleration Notice
shall not be effective against the Company, if, (A) (x) in the case of an Event
of Default pursuant to Section 4(a)(i)-(iv) and (vi) or Section 4(a)(ix)-(xi),
the Company cures such Event of Default within 30 days of such Event of Default
Notice, and (y) such Event of Default does not recur within a period of 60 days
from the date of such cure or (B) such Event of Default is waived in writing by
the Required Holders.

     

    
      
         

      

      
        - 8
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    (5)           RIGHTS UPON FUNDAMENTAL
TRANSACTION AND CHANGE OF CONTROL.

     

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

     

    (b)           Redemption
Right.  No sooner than fifteen (15) days nor later than ten
(10) days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via (i) facsimile or electronic mail and (ii) overnight courier
to the Holder (a “Change of
Control Notice”).  At any
time during the period commencing on the earlier to occur of (x) any oral or
written agreement by the Company or any of its Subsidiaries, which upon
consummation of the transaction contemplated thereby would reasonably be
expected to result in a Change of Control and (y) the Holder’s receipt of a
Change of Control Notice and ending twenty (20) Trading Days after the date of
the consummation of such Change of Control, the Required Holders may require the
Company to redeem all or any portion (and a pro rata portion of all Other Notes)
of this Note by delivering written notice thereof (“Change of Control Redemption
Notice”) to the Company, which Change of Control Redemption Notice shall
indicate the Conversion Amount the Holder is electing to require the Company to
redeem.  The portion of this Note subject to redemption pursuant to
this Section 5(b) shall be redeemed by the Company in cash at a price equal to
the greater of (i) 110% of the Conversion Amount being redeemed  and
(ii) the product of (A) the Conversion Amount being redeemed multiplied by (B)
the quotient determined by dividing (1) the greatest Closing Sale Price of the
shares of Ordinary Shares during the period beginning on the date immediately
preceding the earlier to occur of (x) the consummation of the Change of Control
and (y) the public announcement of such Change of Control and ending on the date
the Holder delivers the Change of Control Redemption Notice by (2) the
Conversion Price (the “Change
of Control Redemption Price”).  Redemptions required by this
Section 5 shall be made in accordance with the provisions of Section 12 and
shall have priority to payments to shareholders in connection with a Change of
Control.  To the extent redemptions required by this Section 5(b) are
deemed or determined by a court of competent jurisdiction to be prepayments of
the Note by the Company, such redemptions shall be deemed to be voluntary
prepayments.  Notwithstanding anything to the contrary in this Section
5, but subject to Section 3(d), until the Change of Control Redemption Price
(together with any interest thereon) is paid in full, the Conversion Amount
submitted for redemption under this Section 5(c) (together with any interest
thereon) may be converted, in whole or in part, by the Holder into Ordinary
Shares pursuant to Section 3.  The parties hereto agree that in the
event of the Company’s redemption of any portion of the Note under this Section
5(b), the Holder’s damages would be uncertain and difficult to estimate because
of the parties’ inability to predict future interest rates and the uncertainty
of the availability of a suitable substitute investment opportunity for the
Holder.  Accordingly, any Change of Control redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder’s actual loss of its investment opportunity
and not as a penalty. This Change of Control Redemption right shall only be
available if the Required Holders do not approve the agreement for the Successor
Entity to assume the obligations of the Company under this Note, as provided for
in Section 5(a).

     

    
      
         

      

      
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    (6)           RIGHTS UPON OTHER CORPORATE
EVENTS.

     

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

     

    (7)           RIGHTS UPON ISSUANCE OF
OTHER SECURITIES.

     

    (a)           Adjustment of Conversion
Price upon Issuance of Ordinary Shares.  If and whenever on or
after the Subscription Date, the Company issues or sells, or in accordance with
this Section 7(a) is deemed to have issued or sold, any shares of Ordinary
Shares (including the issuance or sale of shares of Ordinary Shares owned or
held by or for the account of the Company, but excluding Excluded Securities and
shares of Ordinary Shares deemed to have been issued or sold by the Company in
connection with any Excluded Securities) for a consideration per share (the
“New Issuance Price”)
less than a price (the “Applicable Price”) equal to
the Conversion Price in effect immediately prior to such issue or sale (the
foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance the Conversion
Price then in effect shall be reduced to an amount equal to the New Issuance
Price.  For purposes of determining the adjusted Conversion Price
under this Section 7(a), the following shall be applicable:

     

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

     

    
      
         

      

      
        - 10
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    (ii)           Issuance of Convertible
Securities.  If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Ordinary Shares is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Ordinary Shares shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 7(a)(ii), the “lowest price
per share for which one share of Ordinary Shares is issuable upon the
conversion, exercise or exchange” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to one share of Ordinary Shares upon the issuance or sale of the
Convertible Security and upon conversion, exercise or exchange of such
Convertible Security less any consideration paid or payable by the Company with
respect to such one share of Ordinary Shares upon the issuance or sale of such
Convertible Security and upon conversion, exercise or exchange of such
Convertible Security.  No further adjustment of the Conversion Price
shall be made upon the actual issuance of such shares of Ordinary Shares upon
conversion, exercise or exchange of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment has been or is to be made pursuant to other
provisions of this Section 7(a), no further adjustment of the Conversion Price
shall be made by reason of such issue or sale

     

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

     

    (iv)           Reserved.

     

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

     

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

     

    
      
         

      

      
        - 11
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    (c)           Other
Events.  If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features; unless such rights
are issuable under an Approved Stock Plan), then the Company’s Board of
Directors will make an appropriate adjustment in the Conversion Price so as to
protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

     

    (d)           Voluntary
Decrease.  The Company may at any time during the term of this
Note reduce the then current Conversion Price to any amount and for any period
of time deemed appropriate by the Board of Directors.

     

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

     

    (a)           General.  At
any time after the one year anniversary of the Issuance Date, so long as there
is no Equity Conditions Failure, the Company shall have the right to redeem all
or any portion of the Company Conversion Amount then remaining under this Note
(the “Company Optional Redemption Amount”)
as designated in the Company Optional Redemption Notice on the Company Optional
Redemption Date (each as defined below) (a “Company Optional
Redemption”).  The portion of this Note subject to redemption
pursuant to this Section 8(a) shall be redeemed by the Company in cash at a
price equal to the sum of (i) 107% of the Conversion Amount being redeemed plus
(ii) any accrued and unpaid Interest on the Conversion Amount and Late Charges,
if any, on such Conversion Amount and Interest (the “Company Optional Redemption
Price”).  The Company may exercise its right to require
redemption under this Section 8 by delivering a written notice thereof by (i)
facsimile or electronic mail and (ii) overnight courier to all, but not less
than all, of the holders of Notes (the “Company Optional Redemption
Notice” and the date all of the holders received such notice is referred
to as the “Company Optional
Redemption Notice Date”).  Each Company Optional Redemption
Notice shall be irrevocable.  The Company Optional Redemption Notice
shall state (1) the date on which the Company Optional Redemption shall occur
(the “Company Optional
Redemption Date”), which date shall not be less than twenty (20) Business
Days nor more than sixty (60) Business Days following the Company Optional
Redemption Notice Date, and (2) the aggregate
Conversion Amount of the Notes which the Company has elected to be subject to
Company Optional Redemption from the Holder and all of the other holders of the
Notes pursuant to this Section 8(a) (and analogous provisions under the Other
Notes) on the Company Optional Redemption Date.  The Company may not
effect a Company Optional Redemption until a minimum of five (5) consecutive
Trading Days have elapsed after any prior Company Optional Redemption
Date.  Notwithstanding anything to the contrary in this Section 8,
until the Company Optional Redemption Price is paid, in full, the Company
Optional Redemption Amount may be converted, in whole or in part, by the Holders
into shares of Ordinary Shares pursuant to Section 3.  If the Holder
so elects, any or all of the Conversion Amounts converted by the Holder after
the Company Optional Redemption Notice Date shall reduce the Company Optional
Redemption Amount of this Note required to be redeemed on the Company Optional
Redemption Date.  Redemptions made pursuant to this Section 8 shall be
made in accordance with Section 12.

     

    
      
         

      

      
        - 12
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    (b)           Pro Rata Redemption
Requirement.  If the Company elects to cause a Company Optional
Redemption pursuant to Section 8(a), then it must simultaneously take the same
action in the same proportion with respect to the Other Notes.  If the
Company elects to cause a Company Optional Redemption pursuant to Section 8(a)
(or similar provisions under the Other Notes) with respect to less than all of
the Conversion Amounts of the Notes then outstanding, then the Company shall
require redemption of a Conversion Amount from each of the holders of the Notes
equal to the product of (i) the aggregate Conversion Amount of Notes which the
Company has elected to cause to be redeemed pursuant to Section 8(a), multiplied
by (ii) the fraction, the numerator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by such holder of outstanding
Notes and the denominator of which is the sum of the aggregate Original
Principal Amount of the Notes purchased by all holders holding outstanding Notes
(such fraction with respect to each holder is referred to as its “Company Redemption Allocation
Percentage”, and such amount with respect to each holder is referred to
as its “Pro Rata Company
Redemption Amount”); provided, however that in the event that any
holder’s Pro Rata Company Redemption Amount exceeds the outstanding Principal
amount of such holder’s Note, then such excess Pro Rata Company Redemption
Amount shall be allocated amongst the remaining holders of Notes in accordance
with the foregoing formula.  In the event that the initial holder of
any Notes shall sell or otherwise transfer any of such holder’s Notes, the
transferee shall be allocated a pro rata portion of such holder’s Company
Redemption Allocation Percentage and Pro Rata Company Redemption
Amount.

     

    (9)  
         WITHHOLDING.     All
payments to be made by the Company to the Holder under this Note shall be made
without withholding or deduction for or on account of any present or future
taxes, assessments, imposts, duties or other governmental charge whatsoever
(“Taxes”) unless the
Company is compelled by law to deduct or withhold such taxes, assessments,
imposts, duties or charges.  To the extent any such Taxes are required
to be deducted or withheld, the Company shall pay to the Holder such additional
amounts (“Additional
Amounts”) as may be necessary in order that the net amounts received by
the Holder after such withholding or deduction (including any withholding or
deduction in respect of such Additional Amounts) shall equal the amounts that
would have been received if no withholding or deduction had been
made.

     

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

     

    (11)           RESERVATION OF AUTHORIZED
SHARES.

     

    (a)           Reservation.  The
Company shall initially reserve out of its authorized and unissued Ordinary
Shares a number of shares of Ordinary Shares for each of the Notes equal to 130%
of the Conversion Rate with respect to the Conversion Amount of each such Note
as of the Issuance Date.  So long
as any of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Ordinary
Shares, solely for the purpose of effecting the conversion of the Notes, 130% of
the number of shares of Ordinary Shares as shall from time to time be necessary
to effect the conversion of all of the Notes then outstanding; provided that at
no time shall the number of shares of Ordinary Shares so reserved be less than
the number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve
Amount”).  The initial number of shares of Ordinary Shares
reserved for conversions of the Notes and each increase in the number of shares
so reserved shall be allocated pro rata among the holders of the Notes based on
the principal amount of the Notes held by each holder at the Closing (as defined
in the Securities Purchase Agreement) or increase in the number of reserved
shares, as the case may be (the “Authorized Share
Allocation”).  In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share
Allocation.  Any shares of Ordinary Shares reserved and allocated to
any Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.

     

    
      
         

      

      
        - 13
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    (b)           Insufficient Authorized
Shares.  If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Ordinary Shares to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Ordinary
Shares equal to the Required Reserve Amount (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized share capital to an amount sufficient to allow the Company
to reserve the Required Reserve Amount for the Notes then outstanding, including
by acting in accordance with the provisions of Section 4(l) of the Securities
Purchase Agreement.  Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall either (i) hold a
meeting of its shareholders for the approval of an increase in the authorized
share capital or (ii) obtain such approval by unanimous written consent and take
all action necessary to rectify the Authorized Share Failure.  In
connection with such meeting, the Company shall provide each shareholder with a
proxy statement and shall use its best efforts to solicit its shareholders’
approval of such increase in the authorized share capital and to cause its board
of directors to recommend to the shareholders that they approve such
proposal.  In connection with such unanimous written consent, the
Company shall provide each shareholder with an information statement and shall
use its best efforts to solicit its shareholders’ approval of such increase in
the authorized share capital and to cause its board of directors to recommend to
the shareholders that they approve such proposal.

     

    (12)           REDEMPTIONS.

     

    (a)           Mechanics.  The
Company makes payment of its Obligations as set forth in the Acceleration Notice
(the “Acceleration
Amount”) within five (5) Business Days after the Company’s receipt of the
Holder’s Acceleration Notice.  If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(b), the Company shall
deliver the Change of Control Redemption Price to the Holder (i) concurrently
with the consummation of such Change of Control if such notice is received prior
to the consummation of such Change of Control and (ii) within five (5) Business
Days after the Company’s receipt of such notice otherwise. In the event of the
acceleration or redemption of less than all of the Conversion Amount of this
Note, the Company shall promptly cause to be issued and delivered to the Holder
a new Note (in accordance with Section 18(d)) representing the outstanding
Principal which has not been redeemed.  In the event that the Company
does not pay the Acceleration Amount of the Redemption Price, as the case may
be, to the Holder within the time period required, at any time thereafter and
until the Company pays such unpaid Acceleration Amount or Redemption Price in
full, the Holder shall have the option, in lieu of acceleration or redemption,
to require the Company to promptly return to the Holder all or any portion of
this Note representing the Conversion Amount that was submitted for redemption
and for which the Acceleration Amount or Redemption Price (together with any
Late Charges thereon) has not been paid.  Upon the Company’s receipt
of such notice, (x) the Acceleration Notice or Redemption Notice, as the case
may be, shall be null and void with respect to such Conversion Amount, (y) the
Company shall immediately return this Note, or issue a new Note (in accordance
with Section 18(d)) to the Holder representing such Conversion Amount to be
redeemed and (z) the Conversion Price of this Note or such new Notes shall be
adjusted to the lesser of (A) the Conversion Price as in effect on the date on
which the Acceleration Notice or Redemption Notice, as the case may be, is
voided and (B) the lowest Closing Sale Price of the Ordinary Shares during the
period beginning on and including the date on which the Acceleration Notice or
Redemption Notice, as the case may be, is delivered to the Company and ending on
and including the date on which the Acceleration Notice or Redemption Notice, as
the case may be, is voided.  The Holder’s delivery of a notice voiding
the Acceleration Notice and Redemption Notice, as the case may be, and exercise
of its rights following such notice shall not affect the Company’s obligations
to make any payments of Late Charges which have accrued prior to the date of
such notice with respect to the Conversion Amount subject to such
notice.

     

    
      
         

      

      
        - 14
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    (b)           Redemption by Other
Holders.  Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event
or occurrence substantially similar to the events or occurrences described in
Section 4(b), or Section 5(b) (each, an “Other Redemption Notice”), the
Company shall immediately, but no later than one (1) Business Day of its receipt
thereof, forward to the Holder by (i) facsimile or electronic mail and (ii)
overnight courier a copy of such notice.  If the Company receives a
Redemption Notice and one or more Other Redemption Notices, during the seven (7)
Business Day period beginning on and including the date which is three (3)
Business Days prior to the Company’s receipt of the Holder’s Redemption Notice
and ending on and including the date which is three (3) Business Days after the
Company’s receipt of the Holder’s Redemption Notice and the Company is unable to
redeem all principal, interest and other amounts designated in such Redemption
Notice and such Other Redemption Notices received during such seven (7) Business
Day period, then the Company shall redeem a pro rata amount from each holder of
the Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.

     

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

     

    (14)           COVENANTS.

     

    (a)           Rank &
Security.  All payments due under this Note (A) shall rank
pari passu with all
Other Notes and (B) shall be senior to all other Indebtedness of the Company
entered into after the Subscription Date, subject to Section 14(b), and pari passu with all existing
Indebtedness of the Company which by its terms is not subordinated.

     

    
      
         

      

      
        - 15
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    (b)           Incurrence of
Indebtedness.  So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than Permitted Indebtedness.

     

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

     

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

     

    (e)           Change in Nature of
Business.  The Company shall not make, or permit any of its
Subsidiaries to make, any change in the nature of its business as described in
the Company’s most recent annual report filed on Form 20-F with the
SEC.  The Company shall not modify its corporate structure or
purpose.

     

    (f)           Preservation of Existence,
Etc.  The Company shall maintain and preserve, and cause each
of its Subsidiaries to maintain and preserve, its existence, rights and
privileges, and become or remain, and cause each of its Subsidiaries to become
or remain, duly qualified and in good standing in each jurisdiction in which the
character of the properties owned or leased by it or in which the transaction of
its business makes such qualification necessary.

     

    (g)           Maintenance of Properties,
Etc.  The Company shall maintain and preserve, and cause each
of its Subsidiaries to maintain and preserve, all of its properties which are
necessary or useful in the proper conduct of its business in good working order
and condition, ordinary wear and tear excepted, and comply, and cause each of
its Subsidiaries to comply, at all times with the provisions of all leases to
which it is a party as lessee or under which it occupies property, so as to
prevent any loss or forfeiture thereof or thereunder.

     

    (h)           Maintenance of
Insurance.  The Company shall maintain and cause each of its
Subsidiaries to maintain insurance coverage which is customary in scope and
amount for a business of its size and kind.

     

    
      
         

      

      
        - 16
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    (i)           Transactions with
Affiliates.  The Company shall not, nor shall it permit any of
its Subsidiaries to, enter into, renew, extend or be a party to, any transaction
or series of related transactions (including, without limitation, the purchase,
sale, lease, transfer or exchange of property or assets of any kind or the
rendering of services of any kind) with any Affiliate, except in the ordinary
course of business in a manner and to an extent consistent with past practice
and necessary or desirable for the prudent operation of its business, for fair
consideration and on terms no less favorable to it or its Subsidiaries than
would be obtainable in a comparable arm’s length transaction with a Person that
is not an Affiliate thereof.

     

    (15)           PARTICIPATION.  The
Holder, as the holder of this Note, shall be entitled to receive such dividends
paid and distributions made to the holders of Ordinary Shares to the same extent
as if the Holder had converted this Note into Ordinary Shares (without regard to
any limitations on conversion herein or elsewhere) and had held such shares of
Ordinary Shares on the record date for such dividends and
distributions.  Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Ordinary
Shares.

     

    (16)           VOTE TO ISSUE, OR CHANGE THE
TERMS OF, NOTES.  This Note may not be amended without the
written consent of the Required Holders and the Company.

     

    (17)           TRANSFER.  This
Note and any shares of Ordinary Shares issued upon conversion of this Note may
be offered, sold, assigned or transferred by the Holder without the consent of
the Company, subject only to the provisions of Section 2(f) of the Securities
Purchase Agreement.

     

    (18)           REISSUANCE OF THIS
NOTE.

     

    (a)           Transfer.  If
this Note is to be transferred, the Holder shall surrender this Note to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of the Holder a new Note (in accordance with Section 18(d)), registered as the
Holder may request, representing the outstanding Principal being transferred by
the Holder and, if less then the entire outstanding Principal is being
transferred, a new Note (in accordance with Section 18(d)) to the Holder
representing the outstanding Principal not being transferred.  The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(c)(iii) following conversion or
redemption of any portion of this Note, the outstanding Principal represented by
this Note may be less than the Principal stated on the face of this
Note.

     

    (b)           Lost, Stolen or Mutilated
Note.  Upon receipt by the Company of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.

     

    (c)           Note Exchangeable for
Different Denominations.  This Note is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Note or Notes (in accordance with Section 18(d) and in principal amounts of at
least $100,000) representing in the aggregate the outstanding Principal of this
Note, and each such new Note will represent such portion of such outstanding
Principal as is designated by the Holder at the time of such
surrender.

     

    
      
         

      

      
        - 17
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    (d)           Issuance of New
Notes.  Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 18(a) or Section 18(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges, if any, on the Principal and Interest of this Note,
from the Issuance Date.

     

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

     

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

     

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

     

    
      
         

      

      
        - 18
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    (22)           FAILURE OR INDULGENCE NOT
WAIVER.  No failure or delay on the part of the Holder in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right,
power or privilege.

     

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

     

    (24)           NOTICES;
PAYMENTS.

     

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

     

    (b)           Payments.  Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of America
by wire transfer of immediately available funds in accordance with the Holder’s
wire transfer instructions provided to the Company; provided that the Holder may
elect to receive a payment of cash by a check drawn on the account of the
Company and sent via overnight courier service to such Person at such address as
previously provided to the Company in writing (which address, in the case of
each of the Purchasers, shall initially be as set forth on the Schedule of
Buyers attached to the Securities Purchase Agreement) by providing the Company
with prior written notice setting out such request.  Whenever any
amount expressed to be due by the terms of this Note is due on any day which is
not a Business Day, the same shall instead be due on the next succeeding day
which is a Business Day and, in the case of any Interest Date which is not the
date on which this Note is paid in full, the extension of the due date thereof
shall not be taken into account for purposes of determining the amount of
Interest due on such date.  Any amount of Principal or other amounts
due under the Transaction Documents which is not paid when due shall result in a
late charge being incurred and payable by the Company in an amount equal to
interest on such amount at the rate of ten percent (10%) per annum from the date
such amount was due until the same is paid in full (“Late Charge”).

     

    
      
         

      

      
        - 19
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    (25)           CANCELLATION.  After
all Principal, accrued Interest and other amounts at any time 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.

     

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

     

    (27)           GOVERNING LAW; JURISDICTION;
SERVICE OF PROCESS; JURY TRIAL.  This Note shall be construed
and enforced in accor­dance with, and all questions concerning the
construction, validity, interpretation and performance of this Note shall be
governed by, the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  The
choice of law in the State of New York as the law governing this Note is legal,
valid and binding under the laws of the Cayman Islands.  The Company
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  The Company has
appointed Corporation Service Company, 1180 Avenue of the Americas, Suite 210,
New York, NY 10036 as the Company’s
authorized agent (the “Authorized Agent”) upon whom
process may be served in any action arising out of or based on this Note, or the
transactions contemplated hereby, expressly consents to the jurisdiction of any
such court in respect of any such action, and waives any other requirements of
or objections to personal jurisdiction with respect thereto. Such appointment
shall be irrevocable. The Company represents and warrants that the Authorized
Agent has agreed to act as such agent for service of process and agrees to take
any and all action, including the filing of any and all documents and
instruments that may be necessary to continue such appointment in full force and
effect as aforesaid. Service of process upon the Authorized Agent shall be
deemed, in every respect, effective service of process upon the Company. A copy
of any process served upon the Authorized Agent shall be sent to the Company;
provided, however, that failure
to send such copy shall have no bearing on whether effective service of process
upon the Company has been made.  Nothing contained herein shall be
deemed to limit in any way any right to serve process in any manner permitted by
law.  In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision of this Note.  Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder.  THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     

    
      
         

      

      
        - 20
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    (28)           CERTAIN
DEFINITIONS.  For purposes of this Note, the following terms
shall have the following meanings:

     

    (a)           “Affiliate” means, with respect
to any Person, any other Person that directly or indirectly controls, is
controlled by, or is under common control with, such Person, it being understood
for purposes of this definition that “control” of a Person means the power
directly or indirectly either to vote 10% or more of the stock having ordinary
voting power for the election of directors of such Person or direct or cause the
direction of the management and policies  of such Person whether by
contract or otherwise.

     

    (b)           “Approved Stock Plan” means any
employee benefit plan which has been or may be approved by the Board of
Directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, officer or director for services provided to the
Company; provided that the issuance price, conversion price or exercise price,
as the case may be, may not be less than the Closing Sale Price of the Company’s
Ordinary Shares on the date of any such issuance.

     

    (c)           “Bloomberg” means Bloomberg
Financial Markets.

     

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

     

    (e)           “Change of Control” means any
Fundamental Transaction other than (i) any reorganization, recapitalization or
reclassification of the Ordinary Shares in which holders of the Company’s voting
power immediately prior to such reorganization, recapitalization or
reclassification continue after such reorganization, recapitalization or
reclassification to hold publicly traded securities and, directly or indirectly,
are, in all material respect, the holders of the voting power of the surviving
entity (or entities with the authority or voting power to elect the members of
the board of directors (or their equivalent if other than a corporation) of such
entity or entities) after such reorganization, recapitalization or
reclassification.

     

    
      
         

      

      
        - 21
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    (f)           “Closing Bid Price” and “Closing Sale Price” means, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the
Closing Bid Price or the Closing Sale Price cannot be calculated for a security
on a particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 23.  All such determinations to be appropriately adjusted
for any share dividend, share split, share combination, reclassification or
similar transaction during the applicable calculation period.

     

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

     

    (h)           “Collateral Agent” shall have
the meaning set forth in the Securities Purchase Agreement.

     

    (i)           “Company Conversion Amount”
means as of any date of determination, the lesser of (i) the Conversion Amount
then remaining under the Note and (ii) the product of (A) Holder Pro Rata Amount
and (B) five percent (5.0%) of Daily Dollar Trading Volume during the applicable
Mandatory Conversion Measuring Period.

     

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

     

    
      
         

      

      
        - 22
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    (k)           “Convertible Securities” means
any share or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for Ordinary Shares.

     

    (l)           
“Daily Dollar Trading
Volume” means, on any date of determination, the product of (i) the daily
trading volume of the Ordinary Shares as reported by Bloomberg on such Trading
Day and (ii) the Weighted Average Price of the Ordinary Shares on such Trading
Day.

     

    (m)           “Eligible Market” means the
Principal Market, The New York Stock Exchange, Inc., the NYSE Amex, The Nasdaq
Global Select Market, The Nasdaq Capital Market or The Nasdaq Global
Market.

     

    (n)           “Equity Conditions” means that
each of the following conditions is satisfied:  (i) on each day during
the period beginning six (6) month prior to the applicable date of determination
and ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), either (x) the Registration Statement filed pursuant to the
Registration Rights Agreement shall be effective and available for the resale of
all remaining Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Ordinary Shares issuable upon
conversion of the Notes shall be eligible for sale without restriction or
limitation and without the requirement to be in compliance with Rule 144(c)(1)
and without the need for registration under any applicable federal or state
securities laws; (ii) on each day during the Equity Conditions Measuring Period,
the Ordinary Shares is designated for quotation on the Principal Market or any
other Eligible Market and shall not have been suspended from trading on such
exchange or market (other than suspensions of not more than two (2) days and
occurring prior to the applicable date of determination due to business
announcements by the Company) nor shall delisting or suspension by such exchange
or market been threatened or pending either (A) in writing by such exchange or
market or (B) by falling below the then effective minimum listing maintenance
requirements of such exchange or market; (iii) during the one (1) year period
ending on and including the date immediately preceding the applicable date of
determination, the Company shall have delivered shares of Ordinary Shares upon
conversion of the Notes to the holders on a timely basis as set forth in Section
3(c)(ii) hereof (and analogous provisions under the Other Notes); (iv) any
applicable shares of Ordinary Shares to be issued in connection with the event
requiring determination may be issued without violating the rules or regulations
of the Principal Market or any applicable Eligible Market; (v) the Company shall
not have failed to timely make any payments within five (5) Business Days of
when such payment is due pursuant to any Transaction Document; (vi) during the
Equity Conditions Measuring Period, there shall not have occurred either (A) the
public announcement of a pending, proposed or intended Fundamental Transaction
which has not been abandoned, terminated or consummated, or (B) an Event of
Default or (C) an event that with the passage of time or giving of notice would
constitute an Event of Default; (vii) the Company shall have no knowledge of any
fact that would cause (x) the Registration Statements required pursuant to the
Registration Rights Agreement not to be effective and available for the resale
of all remaining Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) any shares of Ordinary Shares issuable upon
conversion of the Notes not to be eligible for sale without restriction or
limitation pursuant to Rule 144 and without the requirement to be in compliance
with Rule 144(c)(1) and any applicable state securities laws; and (viii) the
Company otherwise shall not have breached any material provision, covenant,
representation or warranty of any Transaction Document.

     

    
      
         

      

      
        - 23
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    (o)           “Equity Conditions Failure”
means that (ii) on any day during the period commencing ten (10) Trading Days
prior to the applicable Mandatory Conversion Notice Date through the applicable
Mandatory Conversion Notice Date, or (ii) on any day during the period
commencing ten (10) Trading Days prior to the applicable Company Optional
Redemption Notice Date through the applicable Company Optional Redemption Date,
the Equity Conditions have not been satisfied (or waived in writing by the
Holder).

     

    (p)           “Excluded Securities” means the
shares of Ordinary Shares issued or issuable: (i) in connection with any
Approved Stock Plan; provided that the option term, exercise price or similar
provisions of any issuances pursuant to such Approved Stock Plan are not
amended, modified or changed on or after the Subscription Date, and (ii) upon
conversion of any Options or Convertible Securities which are outstanding on the
day immediately preceding the Subscription Date, provided that the terms of such
Options or Convertible Securities are not amended, modified or changed on or
after the Subscription Date.

     

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

     

    (r)           “GAAP” means United States
generally accepted accounting principles, consistently applied.

     

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

     

    
      
         

      

      
        - 24
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    (t)           “Indebtedness” of any Person
means, without duplication (i) all indebtedness for borrowed money, (ii) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in
accordance with GAAP (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with GAAP, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii)
all indebtedness referred to in clauses (i) through (vi) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (viii) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i)
through (vii) above.

     

    (u)           “Interest Rate” means seven and a half
percent (7.5%) per annum, subject to adjustment as set forth in Section
2.

     

    (v)           “Options” means any rights,
warrants or options to subscribe for or purchase shares of Ordinary Shares or
Convertible Securities.

     

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

     

    (x)           “Permitted Indebtedness” means
(i) Indebtedness incurred by the Company that is made expressly subordinate in
right of payment to the Indebtedness evidenced by this Note, as reflected in a
written agreement acceptable to the Required Holders and approved by the
Required Holders in writing, and which Indebtedness does not provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon until ninety-one
(91) days after the Maturity Date or later and (2) total interest and fees at a
rate in excess of eight percent (8.00%) per annum, (ii) Indebtedness to trade
creditors incurred in the ordinary course of business; (iii) Indebtedness
secured by Permitted Liens described in clauses (iv) and (v) of the definition
of Permitted Liens; (v) any other current
indebtedness listed on Schedule 28(x) attached hereto, and (vi) extensions,
refinancings and renewals of any items in clauses (i) through (v) above,
provided that the principal amount is not increased or the terms modified to
impose more burdensome terms upon the Company or its Subsidiary, as the case may
be.

     

    
      
         

      

      
        - 25
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    (y)           “Permitted Liens” means (i) any
Lien for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or
delinquent, (iii) any Lien created by operation of law, such as materialmen’s
liens, mechanics’ liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (iv) Liens
securing the Company’s obligations under the Notes; (v) Liens (A) upon or in any
equipment acquired or held by the Company or any of its Subsidiaries to secure
the purchase price of such equipment or indebtedness incurred solely for the
purpose of financing the acquisition or lease of such equipment, or (B) existing
on such equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such equipment; (vi) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (i) and (v) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (vii) leases or subleases and licenses
and sublicenses granted to others in the ordinary course of the Company’s
business, not interfering in any material respect with the business of the
Company and its Subsidiaries taken as a whole, (viii) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payments of
custom duties in connection with the importation of goods, and (ix) Liens
arising from judgments, decrees or attachments in circumstances not constituting
an Event of Default under Section 3(a)(ix) and (xii) Liens described on Schedule
28(y) attached hereto, but not the extension of coverage thereof to other
property or assets (other than to replacements, substitutions, attachments,
accessions and proceeds thereof, to the extent covered thereby).

     

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

     

    (aa)           “Principal Market” means the
OTC Bulletin Board.

     

    (bb)           “Quarterly Period” means for
each calendar year each of the calendar periods ending on March 31, June 30,
September 30 and December 31.

     

    (cc)           “Redemption Notices” means,
collectively, the Change of Control Redemption Notices and the Company Option
Redemption Notice, and each of the foregoing, individually, a Redemption
Notice.

     

    (dd)           “Redemption Prices” means,
collectively, the Change of Control Redemption Price and the Company Optional
Redemption Price, and each of the foregoing, individually, a Redemption
Price.

     

    (ee)           “Registration Rights Agreement”
means that certain registration rights agreement dated as of the Subscription
Date by and among the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Ordinary Shares
issuable upon conversion of the Notes.

     

    
      
         

      

      
        - 26
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    (ff)           “Related Fund” means, with
respect to any Person, a fund or account managed by such Person or an Affiliate
of such Person.

     

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

     

    (hh)           “SEC” means the United States
Securities and Exchange Commission.

     

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

     

    (jj)           “Subscription Date” means
November 3, 2010.

     

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

     

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

     

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

     

    (nn)           “Weighted Average Price” means,
for any security as of any date, the dollar volume-weighted average price for
such security on the Principal Market during the period beginning at 9:30:01
a.m., New York Time (or such other time as the Principal Market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg through its “Volume at
Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as such market publicly announces is the official close
of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
price is reported for such security by Bloomberg for such hours, the average of
the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the “pink sheets” by Pink Sheets
LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted
Average Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Weighted Average Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
Holder.  If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 23.  All such determinations to be appropriately adjusted
for any share dividend, share split, share combination, reclassification or
similar transaction during the applicable calculation period.

     

    
      
         

      

      
        - 27
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    (29)           DISCLOSURE. Upon
receipt or delivery by the Company of any notice in accordance with the terms of
this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information
relating to the Company or its Subsidiaries, the Company shall within one (1)
Business Day after any such receipt or delivery publicly disclose such material,
nonpublic information on a Current Report on Form 6-K or
otherwise.  In the event that the Company believes that a notice
contains material, nonpublic information relating to the Company or its
Subsidiaries, the Company so shall indicate to such Holder contemporaneously
with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do
not constitute material, nonpublic information relating to the Company or its
Subsidiaries.

     

    [Signature
Page Follows]

     

    
      
         

      

      
        - 28
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    IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the
Issuance Date set out above.

     

    
      
        	 	      
                CHINA
      LINEN TEXTILE INDUSTRY, LTD.

              	 
	 	 	 	 
	
              	
                By: 
      

              	  	 
	 	 	      
                Name:

              	 
	 	 	      
                Title:

              	 
	 	 	 	 


      

    

    


    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    EXHIBIT
I

    


    CHINA
LINEN TEXTILE INDUSTRY, LTD.

    CONVERSION
NOTICE

     

    Reference
is made to the Senior Unsecured Convertible Note (the “Note”) issued to the
undersigned by CHINA
LINEN TEXTILE INDUSTRY, LTD. (the “Company”).  In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Ordinary Shares par value $0.002 per share (the “Ordinary Shares”) of the
Company, as of the date specified below.

     

    
      	
              Date
      of Conversion:
      ____________________________________________________________________________

            
	 
	
              Aggregate
      Conversion Amount to be converted:
      ______________________________________________________

            
	 
	
              Please
      confirm the following information:

            
	 
	
              Conversion
      Price:
      ______________________________________________________________________________

            
	 
	
              Number
      of shares of Ordinary Shares to be issued:
      ______________________________________________________

            
	 
	
              Please
      issue the Ordinary Shares into which the Note is being converted in the
      following name and to the following address:

            
	 
	
              Issue
      to:
      _____________________________________________________________________________________

            
	
              _____________________________________________________________________________________

            
	
              _____________________________________________________________________________________

            
	 
	
              Facsimile
      Number:
      _____________________________________________________________________________

            
	 
	
              Authorization:
      ________________________________________________________________________________

            
	 
	
              By:
      _________________________________________________________________________________

            
	 
	
              Title:
      ___________________________________________________________________________

            
	 
	
              Dated:
      ___________________________________________________________________________________________

            
	 
	
              Account
      Number:
      _____________________________________________________________________________

            
	
                (if
      electronic book entry transfer)

            
	 
	
              Transaction
      Code Number:
      ______________________________________________________________________

            
	
                (if
      electronic book entry transfer)

            


    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    ACKNOWLEDGMENT

     

    The
Company hereby acknowledges this Conversion Notice and hereby directs Island
Stock Transfer to issue the above indicated number of shares of Ordinary Shares
in accordance with the Transfer Agent Instructions dated November 3, 2010 from the Company and acknowledged and agreed to by
Island Stock Transfer.

     

    
      
        	 	      
                CHINA
      LINEN TEXTILE INDUSTRY, LTD.

              	 
	 	 	 	 
	
              	
                By: 
      

              	  	 
	 	 	      
                Name:

              	 
	 	 	      
                Title:

              	 


      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

         

      

    

    Schedule
28(x)

    Permitted
Indebtedness


    


    1.  On
March 22, 2010, Heilongjiang Lanxi Sunrise Linen Textile Industry Co. Ltd.
(“Lanxi Sunrise”) entered into a Loan Agreement with Lanxi Branch, Agricultural
Bank of China (“Bank of China”) in the principal amount of RMB9,000,000, and
with a maturity date of March 21, 2011.

    


    2.  On
February 24, 2010, Lanxi Sunrise entered into a Loan Agreement with Bank of
China in the principal amount of RMB15,000,000, and with a maturity date of
February 23, 2011.

    


    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Schedule
28(y)

    Permitted
Liens

    


    Pursuant
to the Maximum Pledge Agreement by and between Lanxi Sunrise and Bank of China,
dated March 21, 2008, with respect to transactions up to a maximum of
RMB30,000,000 between Lanxi Sunrise and Bank of China entered into between March
21, 2008 and March 21, 2011, Lanxi Sunrise has pledged to Bank of China certain
of its real estate property and machinery that have an aggregate provisional
assessed value of RMB 48,287,900, and Lanxi Sunrise is a guarantor for such
transactions.