EXHIBIT
      4.3

    


    THE
      SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNLESS (I) SUCH SECURITIES
      HAVE BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS
      AMENDED, (II) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144, OR (III) THE
      COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT
      SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES
      ACT
      OF 1933 OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES
      LAWS.

     

    FORM
      OF 10% SENIOR SECURED CONVERTIBLE NOTE

     

    
      
        	$_______________ 	June
                25, 2008


      

    

     

    FOR
      VALUE
      RECEIVED, Precision Optics Corporation, Inc., a Massachusetts corporation (the
      “Company”),
      hereby unconditionally promises to pay to the order of ________________ (the
      “Holder”),
      having an address at [527 Madison Avenue, 26th
      Floor,
      New York, NY 10022][address of other Holders], at such address or at such other
      place as may be designated in writing by the Holder, or its assigns, the
      aggregate principal sum of _____________ United States Dollars
      ($______________), together with interest from the date set forth above on
      the
      unpaid principal balance of this Note outstanding at a rate equal to ten percent
      (10.0%) (computed on the basis of the actual number of days elapsed in a 360-day
      year) per annum and continuing on the outstanding principal until this 10%
      Senior Secured Convertible Note (the “Note”)
      is
      converted into Common Stock as provided herein or indefeasibly and irrevocably
      paid in full by the Company. Subject to the other provisions of this Note,
      the
      principal of this Note and all accrued and unpaid interest hereon shall mature
      and become due and payable on June 25, 2010 (the “Stated
      Maturity Date”).
      Except as provided herein, all payments of principal and interest by the Company
      under this Note shall be made in United States dollars in immediately available
      funds to an account specified by the Holder. At the option of the Holder,
      accrued interest on this Note may be paid in newly issued, fully paid and
      nonassessable shares of Common Stock having an aggregate Market Price on the
      date of payment equal to the interest due hereon.

     

    In
      the
      event that any amount due hereunder is not paid when due, such overdue amount
      shall bear interest at an annual rate of fifteen percent (15%) until paid in
      full. In no event shall any interest charged, collected or reserved under this
      Note exceed the maximum rate then permitted by applicable law and if any such
      payment is paid by the Company, then such excess sum shall be credited by the
      Holder as a payment of principal.

     

    This
      Note
      is one of a series of Notes (the “Company
      Notes”)
      of
      like tenor in an aggregate principal amount of Six Hundred Thousand United
      States Dollars ($600,000) issued by the Company pursuant to the terms of the
      Purchase Agreement (as defined below).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1. Definitions.
      Capitalized terms used herein shall have the respective meanings ascribed
      thereto in the Purchase Agreement unless otherwise defined herein. Unless the
      context otherwise requires, when used herein the following terms shall have
      the
      meaning indicated:

     

    “Additional
      Rights”
has
      the
      meaning set forth in Section 4 hereof.

     

    “Affiliate”
shall
      mean, with respect to any Person, any other Person which directly or indirectly
      through one or more intermediaries Controls, is controlled by, or is under
      common control with, such Person.

     

    “Board”
shall
      mean the Board of Directors of Company.

     

    “Business
      Day”
other
      than a Saturday or Sunday, on which banks in New York City are open for the
      general transaction of business.

     

    “Change
      of Control”
shall
      be deemed to have occurred if, at any time (i) any Person or any Persons acting
      together that would constitute a “group” for purposes of Section 13(d) under the
      1934 Act, or any successor provision thereto (other than one or more of the
      Investors and their Affiliates), shall acquire beneficial ownership (within
      the
      meaning of Rule 13d-3 under the 1934 Act, or any successor provision thereto)
      in
      a single transaction or a series of related transactions, of more than 50%
      of
      the aggregate voting power of the Company, other than one or more Investors
      ;
      (ii) the Company merges into or consolidates with any other Person, or any
      Person merges into or consolidates with the Company and, after giving effect
      to
      such transaction, the stockholders of the Company immediately prior to such
      transaction own less than 50% of the aggregate voting power of the Company
      or
      the successor entity of such transaction; or (iii) the Company sells or
      transfers its assets, as an entirety or substantially as an entirety, to another
      Person.

     

    “Common
      Stock”
shall
      mean the Common Stock, par value $0.01 per share, of the Company or any
      securities into which shares of Common Stock may be reclassified after the
      date
      hereof.

     

    “Company”
has
      the
      meaning set forth in the first paragraph hereof.

     

    “Company
      Notes”
has
      the
      meaning set forth in the third paragraph hereof.

     

    “Control”
      (including the terms “controlling”, “controlled by” or “under common control
      with”) means the possession, direct or indirect, of the power to direct or cause
      the direction of the management and policies of a Person, whether through the
      ownership of voting securities, by contract or otherwise.

     

    “Conversion
      Price”
shall
      mean initially $0.05 per share, subject to adjustment as provided in Section
      4.

     

    “Convertible
      Securities”
has
      the
      meaning set forth in Section 4 hereof.

     

    “Event
      of Default”
has
      the
      meaning set forth in Section 6 hereof.

     

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

     

    “Excluded
      Issuances”
has
      the
      meaning set forth in Section 4(j) hereof.

     

    “Hedging
      Agreement”
means
      any interest rate swap, collar, cap, floor or forward rate agreement or other
      agreement regarding the hedging of interest rate risk exposure executed in
      connection with hedging the interest rate exposure of any Person and any
      confirming letter executed pursuant to such agreement, all as amended,
      supplemented, restated or otherwise modified from time to time.

     

    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    “Holder”
has
      the
      meaning set forth in the first paragraph hereof.

     

    “Indebtedness”
means
      any liability or obligation (i) for borrowed money, other than trade payables
      incurred in the ordinary course of business, (ii) evidenced by bonds,
      debentures, notes, or other similar instruments, (iii) in respect of letters
      of
      credit or other similar instruments (or reimbursement obligations with respect
      thereto), except letters of credit or other similar instruments issued to secure
      payment of trade payables or obligations in respect of workers’ compensation,
      unemployment insurance and other social security laws or regulations, all
      arising in the ordinary course of business consistent with past practices,
      (iv)
      to pay the deferred purchase price of property or services, except trade
      payables arising in the ordinary course of business consistent with past
      practices, (v) as lessee under capitalized leases, (vi) secured by a Lien on
      any
      asset of the Company or a Subsidiary, whether or not such obligation is assumed
      by the Company or such Subsidiary.

     

    “Investment”
means,
      for any Person: (a) the acquisition (whether for cash, property, services or
      securities or otherwise) of capital stock, bonds, notes, debentures, partnership
      or other ownership interests or other securities of any other Person or any
      agreement to make any such acquisition (including, without limitation, any
      “short sale” or any sale of any securities at a time when such securities are
      not owned by the Person entering into such sale); (b) the making of any deposit
      with, or advance, loan or other extension of credit to, any other Person
      (including the purchase of property from another Person subject to an
      understanding or agreement, contingent or otherwise, to resell such property
      to
      such Person), but excluding any such advance, loan or extension of credit having
      a term not exceeding 90 days arising in connection with the sale of inventory
      or
      supplies by such Person in the ordinary course of business; (c) the entering
      into of any guarantee of, or other contingent obligation with respect to,
      Indebtedness or other liability of any other Person and (without duplication)
      any amount committed to be advanced, lent or extended to such Person; or (d)
      the
      entering into of any Hedging Agreement.

     

    “Investors”
has
      the
      meaning set forth in the Purchase Agreement.

     

    “Lien”
means
      any lien, mortgage, deed of trust, pledge, security interest, charge or
      encumbrance of any kind (including any conditional sale or other title retention
      agreement, any lease in the nature thereof and any agreement to give any of
      the
      foregoing).

     

    “Majority
      Holders”
has
      the
      meaning set forth in Section 8 hereof.

     

    “Market
      Price”,
      as of
      a particular date (the “Valuation
      Date”),
      shall
      mean the following with respect to any class of securities: (A) if such security
      is then listed on a national stock exchange, the Market Price shall be the
      closing bid price of one share of such security on such exchange on the last
      Trading Day prior to the Valuation Date, provided that if such security has
      not
      traded in the prior ten (10) trading sessions, the Market Price shall be the
      average closing bid price of such security in the most recent ten (10) trading
      sessions during which such security has traded; (B) if such security is then
      included in the Over-the-Counter Bulletin Board, the Market Price shall be
      the
      closing sale price of one share of such security on the Over-the-Counter
      Bulletin Board on the last Trading Day prior to the Valuation Date or, if no
      such closing sale price is available, the average of the high bid and the low
      ask price quoted on the Over-the-Counter Bulletin Board as of the end of the
      last Trading Day prior to the Valuation Date, provided that if such stock has
      not traded in the prior ten (10) trading sessions, the Market Price shall be
      the
      average closing price of one share of such security in the most recent ten
      (10)
      trading sessions during which such security has traded; or (C) if such security
      is then included in the “pink sheets,” the Market Price shall be the closing
      sale price of one share of such security on the “pink sheets” on the last
      Trading Day prior to the Valuation Date or, if no such closing sale price is
      available, the average of the high bid and the low ask price quoted on the
“pink
      sheets” as of the end of the last Trading Day prior to the Valuation Date,
      provided that if such stock has not traded in the prior ten (10) trading
      sessions, the Market Price shall be the average closing price of one share
      of
      such security in the most recent ten (10) trading sessions during which such
      security has traded.

     

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    “Note”
has
      the
      meaning set forth in the first paragraph hereof.

     

    “Options”
has
      the
      meaning set forth in Section 4 hereof.

     

    “Permitted
      Indebtedness”
      means:

     

    (a) Unsecured
      Indebtedness existing on the Closing Date and refinancings, renewals and
      extensions of any such Indebtedness if (i) the average life to maturity thereof
      is greater than or equal to that of the Indebtedness being refinanced or
      extended (ii) if the principal amount thereof or interest payable thereon is
      not
      increased, and (iii) the terms thereof are not less favorable to the Company
      or
      the Subsidiary incurring such Indebtedness than the Indebtedness being
      refinanced, renewed or extended;

     

    (b) Guaranties
      by any Subsidiary of any “Permitted Indebtedness” of the Company or another
      Subsidiary;

     

    (c) Indebtedness
      representing the deferred purchase price of
      property
      and
      capital lease obligations which collectively does not exceed $100,000 in
      aggregate principal amount;
      and

     

    (d) Indebtedness
      of the Company to any wholly owned Subsidiary and Indebtedness of any wholly
      owned Subsidiary to the Company or another wholly owned Subsidiary which
      constitutes “Permitted Indebtedness.”

     

    “Permitted
      Investments”
      means:

     

    (a) direct
      obligations of the United States of America, or of any agency thereof, or
      obligations guaranteed as to principal and interest by the United States of
      America, or of any agency thereof, in either case maturing not more than 90
      days
      from the date of acquisition thereof;

     

    (b) certificates
      of deposit issued by any bank or trust company organized under the laws of
      the
      United States of America or any State thereof and having capital, surplus and
      undivided profits of at least $500,000,000, maturing not more than 90 days
      from
      the date of acquisition thereof; and

     

    (c) commercial
      paper rated A-1 or better or P-1 by Standard & Poor’s Ratings Services or
      Moody’s Investors Services, Inc., respectively, maturing not more than 90 days
      from the date of acquisition thereof; in each case so long as the same (x)
      provide for the payment of principal and interest (and not principal alone
      or
      interest alone) and (y) are not subject to any contingency regarding the payment
      of principal or interest.

     

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    “Permitted
      Liens”
      means:

     

    (a) Liens
      imposed by law for taxes that are not yet due or are being contested in good
      faith and for which adequate reserves have been established on the Company’s
      books and records in accordance with U.S. generally accepted accounting
      principles, consistently applied;

     

    (b) carriers’,
      warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens
      imposed by law, arising in the ordinary course of business and securing
      obligations that are not overdue by more than 30 days or that are being
      contested in good faith and by appropriate proceedings;

     

    (c) pledges
      and deposits made in the ordinary course of business in compliance with workers’
compensation, unemployment insurance and other social security laws or
      regulations;

     

    (d) deposits
      to secure the performance of bids, trade contracts, leases, statutory
      obligations, surety and appeal bonds, performance bonds and other obligations
      of
      a like nature, in each case in the ordinary course of business;

     

    (e) easements,
      zoning restrictions, rights-of-way and similar encumbrances on real property
      imposed by law or arising in the ordinary course of business that do not secure
      any monetary obligations and do not materially detract from the value of the
      affected property or interfere with the ordinary conduct of business of the
      Company or any of its Subsidiaries; and

     

    (f) Liens
      granted to secure the obligations of the Company or any Subsidiary under any
      Indebtedness permitted under clause (c) of the definition of “Permitted
      Indebtedness” provided the Lien is limited to the property acquired or so
      financed (and any accessions thereto and proceeds thereof).

     

    “Person”
means
      an individual, corporation, partnership, limited liability company, trust,
      business trust, association, joint stock company, joint venture, sole
      proprietorship, unincorporated organization, governmental authority or any
      other
      form of entity not specifically listed herein.

     

    “Purchase
      Agreement”
shall
      mean the Purchase Agreement, dated as of June 25, 2008, and as that agreement
      may be amended from time to time, by and among the Company and the
      Investors.

     

    “Registration
      Rights Agreement”
shall
      mean the Registration Rights Agreement, dated as of June 25, 2008, and as that
      agreement may be amended from time to time, by and among the Company and the
      Investors.

     

    “Restricted
      Payment”
has
      the
      meaning set forth in Section 5(b)(iv) hereof.

     

    “Security
      Agreement”
has
      the
      meaning set forth in the Purchase Agreement.

     

    “Security
      Documents”
means
      the collective reference to the Security Agreement and each other agreement
      or
      writing pursuant to which the Company purports to pledge or grant a security
      interest in any property or assets securing the Company’s obligations or any
      such Person purports to guaranty the payment and/or performance of the Company’s
      obligations and, in each case, as amended, restated, supplemented or otherwise
      modified from time to time.

     

    “Stated
      Maturity Date”
has
      the
      meaning set forth in the first paragraph hereof.

    
       

      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

      

       

    

    “Subsidiary”
of
      any
      Person means another Person, an amount of the voting securities, other voting
      ownership or voting partnership interests of which is sufficient to elect at
      least a majority of its Board of Directors or other governing body (or, if
      there
      are no such voting interests, 50% or more of the equity interests of which)
      is
      owned directly or indirectly by such first Person.

     

    “Trading
      Day”
means
      (i) if the relevant stock or security is listed or admitted for trading on
      a
      national securities exchange, a day on which such exchange is open for business;
      (ii) if the relevant stock or security is quoted on a system of automated
      dissemination of quotations of securities prices, a day on which trades may
      be
      effected through such system; or (iii) if the relevant stock or security is
      not
      listed or admitted for trading on any national securities exchange or quoted
      on
      a system of automated dissemination of quotation of securities prices, a day
      on
      which the relevant stock or security is traded in a regular way in the
      over-the-counter market and for which a closing bid and a closing asked price
      for such stock or security are available, shall mean a day, other than a
      Saturday or Sunday, on which The New York Stock Exchange, Inc. is open for
      trading.

     

    “Trigger
      Issuance”
has
      the
      meaning set forth in Section 4(i) hereof.

     

    2. Purchase
      Agreement.
      This
      Note is one of the several 10% Senior Secured Convertible Notes of the Company
      issued pursuant to the Purchase Agreement. This Note is subject to the terms
      and
      conditions of, and entitled to the benefit of, the provisions of the Purchase
      Agreement. This Note is transferable and assignable to any Person to whom such
      transfer is permissible under the Purchase Agreement and applicable law. The
      Company agrees to issue from time to time a replacement Note in the form hereof
      to facilitate such transfers and assignments. In addition, after delivery of
      an
      indemnity in form and substance reasonably satisfactory to the Company, the
      Company also agrees to promptly issue a replacement Note if this Note is lost,
      stolen, mutilated or destroyed.

     

    3. No
      Right of Prepayment or Redemption; Change of Control.

     

    (a) This
      Note
      shall not be prepayable or redeemable by the Company prior to the Stated
      Maturity Date.

     

    (b) In
      the
      event that a Change of Control occurs prior to the Amendment Effective Date,
      the
      Company shall redeem as of the effective time of the Change of Control (the
      “Redemption
      Date”)
      all,
      but not less than all, of the principal amount of this Note and all accrued
      interest thereon at a cash redemption price equal to the product of (i) the
      number of shares of Common Stock into which this Note and all accrued and unpaid
      interest thereon would have been convertible if the Note was convertible on
      the
      Redemption Date and (ii) the Fair Market Value of the consideration per share
      to
      be received by holders of Common Stock in connection with such Change of Control
      as of the Redemption Date (the “Redemption
      Price”).
      For
      purposes of determining such “Fair
      Market Value”,
      (i)
      publicly traded securities shall be deemed to have a Fair Market Value equal
      to
      their Market Price, and (ii) any other securities or other assets shall be
      deemed to have a Fair Market Value equal to the fair market value thereof as
      determined by the Board in the good faith exercise of its reasonable business
      judgment. The Company shall provide written notice to the Holder of this Note
      of
      any pending Change of Control not less than 15 days prior to the effective
      date
      of such Change of Control, which notice shall include the Company’s estimate of
      the Redemption Price. On the Redemption Date, the Company shall pay the
      Redemption Price to the Holder in immediately available funds to an account
      previously specified in writing by the Holder. The Holder shall not be required
      to surrender this Note prior to payment of the Redemption Price. Upon the
      indefeasible payment in full of the Redemption Price to the Holder as provided
      in this Section 3, this Note shall be deemed to have been paid in full and
      shall
      no longer be outstanding for any purpose.

    
       

      
        
          
          

        

        
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    4. Conversion
      Rights.

     

    (a) Prior
      to
      the Amendment Effective Date, this Note shall not be convertible. From and
      after
      the Amendment Effective Date, prior to the Stated Maturity Date and subject
      to
      and upon compliance with the provisions of this Note, the Holder shall have
      the
      right, at its option at any time, to convert some or all of the Note into such
      number of fully paid and nonassessable shares of Common Stock as is obtained
      by:
      (i) adding (A) the principal amount of this Note to be converted and (B) the
      amount of any accrued but unpaid interest with respect to such portion of this
      Note to be converted; and (ii) dividing the result obtained pursuant to clause
      (i) above by the Conversion Price then in effect. The rights of conversion
      set
      forth in this Section 4 shall be exercised by the Holder by giving written
      notice to the Company that the Holder elects to convert a stated amount of
      this
      Note into Common Stock and by surrender of this Note (or, in lieu thereof,
      by
      delivery of an appropriate lost security affidavit in the event this Note shall
      have been lost or destroyed) to the Company at its principal office (or such
      other office or agency of the Company as the Company may designate by notice
      in
      writing to the Holder) at any time on the date set forth in such notice (which
      date shall not be earlier than the Company’s receipt of such notice), together
      with a statement of the name or names (with address) in which the certificate
      or
      certificates for shares of Common Stock shall be issued.

     

    (b) Promptly
      after receipt of the written notice referred to in Section 4(a) above and
      surrender of this Note (or, in lieu thereof, by delivery of an appropriate
      lost
      security affidavit in the event this Note shall have been lost or destroyed),
      but in no event more than three (3) Business Days thereafter, the Company shall
      issue and deliver, or cause to be issued and delivered, to the Holder,
      registered in such name or names as the Holder may direct in writing, a
      certificate or certificates for the number of whole shares of Common Stock
      issuable upon the conversion of such portion of this Note. To the extent
      permitted by law, such conversion shall be deemed to have been effected, and
      the
      Conversion Price shall be determined, as of the close of business on the date
      on
      which such written notice shall have been received by the Company and this
      Note
      shall have been surrendered as aforesaid (or, in lieu thereof, an appropriate
      lost security affidavit has been delivered to the Company), and at such time,
      the rights of the Holder shall cease with respect to the principal amount of
      the
      Notes being converted, and the Person or Persons in whose name or names any
      certificate or certificates for shares of Common Stock shall be issuable upon
      such conversion shall be deemed to have become the holder or holders of record
      of the shares represented thereby.

     

    (c) No
      fractional shares shall be issued upon any conversion of this Note into Common
      Stock. If any fractional share of Common Stock would, except for the provisions
      of the first sentence of this Section 4(c), be delivered upon such conversion,
      the Company, in lieu of delivering such fractional share, shall pay to the
      Holder an amount in cash equal to the Market Price of such fractional share
      of
      Common Stock. In case the principal amount of this Note exceeds the principal
      amount being converted, the Company shall, upon such conversion, execute and
      deliver to the Holder, at the expense of the Company, a new Note for the
      principal amount of this Note surrendered which is not to be
      converted.

    
       

      
        
          
          

        

        
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    (d) If
      the
      Company shall, at any time or from time to time while this Note is outstanding,
      pay a dividend or make a distribution on its Common Stock in shares of Common
      Stock, subdivide its outstanding shares of Common Stock into a greater number
      of
      shares or combine its outstanding shares of Common Stock into a smaller number
      of shares or issue by reclassification of its outstanding shares of Common
      Stock
      any shares of its capital stock (including any such reclassification in
      connection with a consolidation or merger in which the Company is the continuing
      corporation), then the Conversion Price in effect immediately prior to the
      date
      upon which such change shall become effective, shall be adjusted by the Company
      so that the Holder thereafter converting this Note shall be entitled to receive
      the number of shares of Common Stock or other capital stock which the Holder
      would have received if the Note had been converted immediately prior to such
      event upon payment of a Conversion Price that has been adjusted to reflect
      a
      fair allocation of the economics of such event to the Holder, without regard
      to
      any conversion limitation specified in this Section 4. Such adjustments shall
      be
      made successively whenever any event listed above shall occur.

     

    (e) If
      any
      capital reorganization, reclassification of the capital stock of the Company,
      consolidation or merger of the Company with another corporation in which the
      Company is not the survivor, or sale, transfer or other disposition of all
      or
      substantially all of the Company’s assets to another corporation shall be
      effected, then, as a condition of such reorganization, reclassification,
      consolidation, merger, sale, transfer or other disposition, lawful and adequate
      provision shall be made whereby the Holder shall thereafter have the right
      to
      purchase and receive upon the basis and upon the terms and conditions herein
      specified and in lieu of the shares of Common Stock immediately theretofore
      issuable upon conversion of this Note such shares of stock, securities or assets
      as would have been issuable or payable with respect to or in exchange for a
      number of shares of Common Stock equal to the number of shares of Common Stock
      immediately theretofore issuable upon conversion of this Note, had such
      reorganization, reclassification, consolidation, merger, sale, transfer or
      other
      disposition not taken place, and in any such case appropriate provision shall
      be
      made with respect to the rights and interests of the Holder to the end that
      the
      provisions hereof (including, without limitation, provision for adjustment
      of
      the Conversion Price) shall thereafter be applicable, as nearly equivalent
      as
      may be practicable in relation to any shares of stock, securities or assets
      thereafter deliverable upon the conversion hereof. The Company shall not effect
      any such consolidation, merger, sale, transfer or other disposition unless
      prior
      to or simultaneously with the consummation thereof the successor corporation
      (if
      other than the Company) resulting from such consolidation or merger, or the
      corporation purchasing or otherwise acquiring such assets or other appropriate
      corporation or entity shall assume the obligation to deliver to the Holder,
      at
      the last address of the Holder appearing on the books of the Company, such
      shares of stock, securities or assets as, in accordance with the foregoing
      provisions, the Holder may be entitled to purchase, without regard to any
      conversion limitation specified in Section 4, and the other obligations under
      this Note. The provisions of this paragraph (e) shall similarly apply to
      successive reorganizations, reclassifications, consolidations, mergers, sales,
      transfers or other dispositions.

    
       

      
        
          
          

        

        
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    (f) In
      case
      the Company shall fix a payment date for the making of a distribution to all
      holders of Common Stock (including any such distribution made in connection
      with
      a consolidation or merger in which the Company is the continuing corporation)
      of
      evidences of indebtedness or assets (other than cash dividends or cash
      distributions payable out of consolidated earnings or earned surplus or
      dividends or distributions referred to in Section 4(d)), or subscription rights
      or Notes, the Conversion Price to be in effect after such payment date shall
      be
      determined by multiplying the Conversion Price in effect immediately prior
      to
      such payment date by a fraction, the numerator of which shall be the total
      number of shares of Common Stock outstanding multiplied by the Market Price
      of
      Common Stock immediately prior to such payment date, less the fair market value
      (as determined by the Board in good faith) of said assets or evidences of
      indebtedness so distributed, or of such subscription rights or Notes, and the
      denominator of which shall be the total number of shares of Common Stock
      outstanding multiplied by such Market Price immediately prior to such payment
      date. Such adjustment shall be made successively whenever such a payment date
      is
      fixed.

     

    (g) An
      adjustment to the Conversion Price shall become effective immediately after
      the
      payment date in the case of each dividend or distribution and immediately after
      the effective date of each other event which requires an
      adjustment.

     

    (h) In
      the
      event that, as a result of an adjustment made pursuant to this Section 4, the
      Holder shall become entitled to receive any shares of capital stock of the
      Company other than shares of Common Stock, the number of such other shares
      so
      receivable upon conversion of this Note shall be subject thereafter to
      adjustment from time to time in a manner and on terms as nearly equivalent
      as
      practicable to the provisions contained in this Note.

     

    (i) Except
      as
      provided in Section 4(j) hereof, if and whenever the Company shall issue or
      sell, or is, in accordance with any of Sections 4(i)(i) through 4(i)(vii)
      hereof, deemed to have issued or sold, any shares of Common Stock for no
      consideration or for a consideration per share less than the Conversion Price
      in
      effect immediately prior to the time of such issue or sale, then and in each
      such case (a “Trigger
      Issuance”)
      the
      then-existing Conversion Price, shall be reduced, as of the close of business
      on
      the effective date of the Trigger Issuance, to a price determined as
      follows:

     

    
      
        	
                Adjusted Conversion Price = 
                  

              	
                (A
                  x B) + D

              
	
                 

              	
                A+C

              


      

    

     

    where

    


    “A”
      equals the number of shares of Common Stock outstanding, including Additional
      Shares of Common Stock (as defined below) deemed to be issued hereunder,
      immediately preceding such Trigger Issuance (but excluding the Additional Shares
      included in “C” below);

    


    “B”
      equals the Conversion Price in effect immediately preceding such Trigger
      Issuance;

     

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

    


    “C”
      equals the number of Additional Shares of Common Stock issued or deemed issued
      hereunder as a result of the Trigger Issuance; and

    


    “D”
      equals the aggregate consideration, if any, received or deemed to be received
      by
      the Company upon such Trigger Issuance;

    


    provided,
      however, that in no event shall the Conversion Price after giving effect to
      such
      Trigger Issuance be greater than the Conversion Price in effect prior to such
      Trigger Issuance.

    


    For
      purposes of this subsection (i), “Additional Shares of Common Stock” shall mean
      all shares of Common Stock issued by the Company or deemed to be issued pursuant
      to this subsection (i), other than Excluded Issuances (as defined in subsection
      (j) hereof).


     

    For
      purposes of this Section 4(i), the following subsections (i)(i) to (i)(vii)
      shall also be applicable (subject, in each such case, to the provisions of
      Section 4(j) hereof):

    


    (i) In
      case
      at any time the Company shall in any manner grant (directly and not by
      assumption in a merger or otherwise) any Notes or other rights to subscribe
      for
      or to purchase, or any options for the purchase of, Common Stock or any stock
      or
      security convertible into or exchangeable for Common Stock (such Notes, rights
      or options being called “Options”
and
      such convertible or exchangeable stock or securities being called “Convertible
      Securities”)
      whether or not such Options or the right to convert or exchange any such
      Convertible Securities are immediately exercisable, and the price per share
      for
      which Common Stock is issuable upon the exercise of such Options or upon the
      conversion or exchange of such Convertible Securities (determined by dividing
      (i) the sum (which sum shall constitute the applicable consideration) of (x)
      the
      total amount, if any, received or receivable by the Company as consideration
      for
      the granting of such Options, plus (y) the aggregate amount of additional
      consideration payable to the Company upon the exercise of all such Options,
      plus
      (z), in the case of such Options which relate to Convertible Securities, the
      aggregate amount of additional consideration, if any, payable upon the issue
      or
      sale of such Convertible Securities and upon the conversion or exchange thereof,
      by (ii) the total maximum number of shares of Common Stock issuable upon the
      exercise of such Options or upon the conversion or exchange of all such
      Convertible Securities issuable upon the exercise of such Options) shall be
      less
      than the Market Price of the Common Stock immediately prior to the time of
      the
      granting of such Options, then the total number of shares of Common Stock
      issuable upon the exercise of such Options or upon conversion or exchange of
      the
      total amount of such Convertible Securities issuable upon the exercise of such
      Options shall be deemed to have been issued for such price per share as of
      the
      date of granting of such Options or the issuance of such Convertible Securities
      and thereafter shall be deemed to be outstanding for purposes of adjusting
      the
      Conversion Price. Except as otherwise provided in subsection 4(i)(iii), no
      adjustment of the Conversion Price shall be made upon the actual issue of such
      Common Stock or of such Convertible Securities upon exercise of such Options
      or
      upon the actual issue of such Common Stock upon conversion or exchange of such
      Convertible Securities.

     

    (ii) In
      case
      the Company shall in any manner issue (directly and not by assumption in a
      merger or otherwise) or sell any Convertible Securities, whether or not the
      rights to exchange or convert any such Convertible Securities are immediately
      exercisable, and the price per share for which Common Stock is issuable upon
      such conversion or exchange (determined by dividing (i) the sum (which sum
      shall
      constitute the applicable consideration) of (x) the total amount received or
      receivable by the Company as consideration for the issue or sale of such
      Convertible Securities, plus (y) the aggregate amount of additional
      consideration, if any, payable to the Company upon the conversion or exchange
      thereof, by (ii) the total number of shares of Common Stock issuable upon the
      conversion or exchange of all such Convertible Securities) shall be less than
      the Market Price of the Common Stock immediately prior to the time of such
      issue
      or sale, then the total maximum number of shares of Common Stock issuable upon
      conversion or exchange of all such Convertible Securities shall be deemed to
      have been issued for such price per share as of the date of the issue or sale
      of
      such Convertible Securities and thereafter shall be deemed to be outstanding
      for
      purposes of adjusting the Conversion Price, provided that (a) except as
      otherwise provided in subsection 4(i)(iii), no adjustment of the Conversion
      Price shall be made upon the actual issuance of such Common Stock upon
      conversion or exchange of such Convertible Securities and (b) no further
      adjustment of the Conversion Price shall be made by reason of the issue or
      sale
      of Convertible Securities upon exercise of any Options to purchase any such
      Convertible Securities for which adjustments of the Conversion Price have been
      made pursuant to the other provisions of subsection 6(i).

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    (iii) Upon
      the
      happening of any of the following events, namely, if the purchase price provided
      for in any Option referred to in subsection 4(i)(i) hereof, the additional
      consideration, if any, payable upon the conversion or exchange of any
      Convertible Securities referred to in subsections 4(i)(i) or 4(i)(ii), or the
      rate at which Convertible Securities referred to in subsections 4(i)(i) or
      4(i)(ii) are convertible into or exchangeable for Common Stock shall change
      at
      any time (including, but not limited to, changes under or by reason of
      provisions designed to protect against dilution), the Conversion Price in effect
      at the time of such event shall forthwith be readjusted to the Conversion Price
      which would have been in effect at such time had such Options or Convertible
      Securities still outstanding provided for such changed purchase price,
      additional consideration or conversion rate, as the case may be, at the time
      initially granted, issued or sold. On the termination of any Option for which
      any adjustment was made pursuant to this subsection 4(i) or any right to convert
      or exchange Convertible Securities for which any adjustment was made pursuant
      to
      this subsection 4(i) (including without limitation upon the redemption or
      purchase for consideration of such Convertible Securities by the Company),
      the
      Conversion Price then in effect hereunder shall forthwith be changed to the
      Conversion Price which would have been in effect at the time of such termination
      had such Option or Convertible Securities, to the extent outstanding immediately
      prior to such termination, never been issued.

     

    (iv) Subject
      to the provisions of this Section 4(i), in case the Company shall declare a
      dividend or make any other distribution upon any stock of the Company (other
      than the Common Stock) payable in Common Stock, Options or Convertible
      Securities, then any Common Stock, Options or Convertible Securities, as the
      case may be, issuable in payment of such dividend or distribution shall be
      deemed to have been issued or sold without consideration.

     

    (v) In
      case
      any shares of Common Stock, Options or Convertible Securities shall be issued
      or
      sold for cash, the consideration received therefor shall be deemed to be the
      net
      amount received by the Company therefor, after deduction therefrom of any
      expenses incurred or any underwriting commissions or concessions paid or allowed
      by the Company in connection therewith. In case any shares of Common Stock,
      Options or Convertible Securities shall be issued or sold for a consideration
      other than cash, the amount of the consideration other than cash received by
      the
      Company shall be deemed to be the fair value of such consideration as determined
      in good faith by the Board, after deduction of any expenses incurred or any
      underwriting commissions or concessions paid or allowed by the Company in
      connection therewith. In case any Options shall be issued in connection with
      the
      issue and sale of other securities of the Company, together comprising one
      integral transaction in which no specific consideration is allocated to such
      Options by the parties thereto, such Options shall be deemed to have been issued
      for such consideration as determined in good faith by the Board of Directors
      of
      the Company. If Common Stock, Options or Convertible Securities shall be issued
      or sold by the Company and, in connection therewith, other Options or
      Convertible Securities (the “Additional
      Rights”)
      are
      issued, then the consideration received or deemed to be received by the Company
      shall be reduced by the fair market value of the Additional Rights (as
      determined using the Black-Scholes option pricing model or another method
      mutually agreed to by the Company and the Holder). The Board shall respond
      promptly, in writing, to an inquiry by the Holder as to the fair market value
      of
      the Additional Rights. In the event that the Board and the Holder are unable
      to
      agree upon the fair market value of the Additional Rights, the Company and
      the
      Holder shall jointly select an appraiser, who is experienced in such matters.
      The decision of such appraiser shall be final and conclusive, and the cost
      of
      such appraiser shall be borne evenly by the Company and the Holder.

     

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    (vi) In
      case
      the Company shall take a record of the holders of its Common Stock for the
      purpose of entitling them (i) to receive a dividend or other distribution
      payable in Common Stock, Options or Convertible Securities or (ii) to subscribe
      for or purchase Common Stock, Options or Convertible Securities, then such
      record date shall be deemed to be the date of the issue or sale of the shares
      of
      Common Stock deemed to have been issued or sold upon the declaration of such
      dividend or the making of such other distribution or the date of the granting
      of
      such right of subscription or purchase, as the case may be.

     

    (vii) The
      number of shares of Common Stock outstanding at any given time shall not include
      shares owned or held by or for the account of the Company or any of its
      wholly-owned subsidiaries, and the disposition of any such shares (other than
      the cancellation or retirement thereof) shall be considered an issue or sale
      of
      Common Stock for the purpose of this subsection (i).

     

    (j) Anything
      herein to the contrary notwithstanding, the Company shall not be required to
      make any adjustment of the Conversion Price in the case of the issuance of
      (A)
      capital stock, Options or Convertible Securities issued to (i) directors,
      officers, employees or consultants of the Company in connection with their
      service as directors of the Company, their employment by the Company or their
      retention as consultants by the Company pursuant to an equity compensation
      program approved by the Board of Directors of the Company or the compensation
      committee of the Board of Directors of the Company or (ii) landlords and/or
      commercial lenders; provided, that in the case of any issuance pursuant to
      this
      clause (A), the exercise or conversion price of any such Options or Convertible
      Securities shall be at least equal to the Market Price on the date of grant,
      (B)
      shares of Common Stock issued upon the conversion or exercise of Options or
      Convertible Securities issued prior to the date hereof, provided such securities
      are not amended after the date hereof, (C) securities issued pursuant to the
      Purchase Agreement and securities issued upon the exercise or conversion of
      those securities, and (D) shares of Common Stock issued or issuable by reason
      of
      a dividend, stock split or other distribution on shares of Common Stock (but
      only to the extent that such a dividend, split or distribution results in an
      adjustment in the Conversion Price pursuant to the other provisions of this
      Note) (collectively, “Excluded
      Issuances”).

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

    (k) In
      case
      at any time:

     

    (i) the
      Company shall declare any dividend upon its Common Stock or any other class
      or
      series of capital stock of the Company payable in cash or stock or make any
      other distribution to the holders of its Common Stock or any such other class
      or
      series of capital stock;

     

    (ii) the
      Company shall offer for subscription pro rata
      to the
      holders of its Common Stock or any other class or series of capital stock of
      the
      Company any additional shares of stock of any class or other rights;
      or

     

    (iii) there
      shall be any capital reorganization or reclassification of the capital stock
      of
      the Company, any acquisition or a liquidation, dissolution or winding up of
      the
      Company; 

     

    then,
      in
      any one or more of said cases, the Company shall give, by delivery in person
      or
      by certified or registered mail, return receipt requested, addressed to the
      Holder at the address of such Holder as shown on the books of the Company,
      (a)
      at least 20 Business Days’ prior written notice of the date on which the books
      of the Company shall close or a record shall be taken for such dividend,
      distribution or subscription rights or for determining rights to vote in respect
      of any event set forth in clause (iii) of this Section 4(k) and (b) in the
      case
      of any event set forth in clause (iii) of this Section 4(k), at least 20
      Business Days’ prior written notice of the date when the same shall take place.
      Such notice in accordance with the foregoing clause (a) shall also specify,
      in
      the case of any such dividend, distribution or subscription rights, the date
      on
      which the holders of Common Stock or such other class or series of capital
      stock
      shall be entitled thereto and such notice in accordance with the foregoing
      clause (b) shall also specify the date on which the holders of Common Stock
      and
      such other series or class of capital stock shall be entitled to exchange their
      Common Stock and other stock for securities or other property deliverable upon
      consummation of the applicable event set forth in clause (iii) of this Section
      4(k).

    (l) Upon
      any
      adjustment of the Conversion Price, then and in each such case the Company
      shall
      give prompt written notice thereof, by delivery in person or by certified or
      registered mail, return receipt requested, addressed to the Holder at the
      address of such Holder as shown on the books of the Company, which notice shall
      state the Conversion Price resulting from such adjustment and setting forth
      in
      reasonable detail the method upon which such calculation is based.

     

    (m) From
      and
      after the Amendment Effective Date, the Company shall at all times reserve
      and
      keep available out of its authorized Common Stock, solely for the purpose of
      issuance upon conversion of this Note as herein provided, such number of shares
      of Common Stock as shall then be issuable upon the conversion of this Note.
      The
      Company covenants that all shares of Common Stock which shall be so issued
      shall
      be duly and validly issued and fully paid and nonassessable, and free from
      all
      taxes, liens and charges with respect to the issue thereof, and, without
      limiting the generality of the foregoing, and that the Company will from time
      to
      time take all such action as may be requisite to assure that the par value
      per
      share of the Common Stock is at all times equal to or less than the Conversion
      Price in effect at the time. The Company shall take all such action as may
      be
      necessary to assure that all such shares of Common Stock may be so issued
      without violation of any applicable law or regulation, or of any requirement
      of
      any national securities exchange or trading market upon which the Common Stock
      may be listed. The Company shall not take any action which results in any
      adjustment of the Conversion Price if the total number of shares of Common
      Stock
      issued and issuable after such action upon conversion of this Note would exceed
      the total number of shares of Common Stock then authorized by the Company’s
      Certificate of Incorporation.

    
       

      
        
          
          

        

        
          -13-

          
            

          

        

        
          
          

        

      

       

    

    (n) The
      issuance of certificates for shares of Common Stock upon conversion of this
      Note
      shall be made without charge to the holders thereof for any issuance tax in
      respect thereof, provided that the Company shall not be required to pay any
      tax
      which may be payable in respect of any transfer involved in the issuance and
      delivery of any certificate in a name other than that of the
      Holder.

     

    (o) The
      Company will not at any time close its transfer books against the transfer,
      as
      applicable, of this Note or of any shares of Common Stock issued or issuable
      upon the conversion of this Note in any manner which interferes with the timely
      conversion of this Note, except as may otherwise be required to comply with
      applicable securities laws.

     

    (p) To
      the
      extent permitted by applicable law and the listing requirements of any stock
      exchange or trading market on which the Common Stock is then listed, the Company
      from time to time may decrease the Conversion Price by any amount for any period
      of time if the period is at least twenty (20) days, the decrease is irrevocable
      during the period and the Board shall have made a determination that such
      decrease would be in the best interests of the Company, which determination
      shall be conclusive. Whenever the Conversion Price is decreased pursuant to
      the
      preceding sentence, the Company shall provide written notice thereof to the
      Holder at least fifteen (15) days prior to the date the decreased Conversion
      Price takes effect, and such notice shall state the decreased Conversion Price
      and the period during which it will be in effect.

     

    5. Covenants.

     

    (a) So
      long
      as any amount due under this Note is outstanding and until indefeasible payment
      in full of all amounts payable by the Company hereunder:

     

    (i) The
      Company shall and shall cause each of its Subsidiaries to (A) carry on and
      conduct its business in substantially the same manner and in substantially
      the
      same fields of enterprise as it is presently conducting, (B) do all things
      necessary to remain duly organized, validly existing, and in good standing
      as a
      domestic corporation under the laws of its state of incorporation and (C)
      maintain all requisite authority to conduct its business in those jurisdictions
      in which its business is conducted.

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

     

    (ii) The
      Company shall promptly notify the Holder in writing of (A) any change in the
      business or the operations the Company or any Subsidiary which could reasonably
      be expected to have a Material Adverse Effect, and (B) any information which
      indicates that any financial statements which are the subject of any
      representation contained in the Transaction Documents, or which are furnished
      to
      the Holder pursuant to the Transaction Documents, fail, in any material respect,
      to present fairly, as of the date thereof and for the period covered thereby,
      the financial condition and results of operations purported to be presented
      therein, disclosing the nature thereof.

     

    (iii) The
      Company shall promptly notify the Holder of the occurrence of any Event of
      Default or any event which, with the giving of notice, the lapse of time or
      both
      would constitute an Event of Default, which notice shall include a written
      statement as to such occurrence, specifying the nature thereof and the action
      (if any) which is proposed to be taken with respect thereto.

     

    (iv) The
      Company shall promptly notify the Holder of any action, suit or proceeding
      at
      law or in equity or by or before any governmental instrumentality or other
      agency against the Company or any Subsidiary or to which the Company or any
      Subsidiary may be subject which alleges damages in excess of One Hundred
      Thousand United States Dollars ($100,000).

     

    (v) The
      Company shall promptly notify the Holder of any default in the performance,
      observance or fulfillment of any of the obligations, covenants or conditions
      contained in any agreement or instrument to which the Company or any Subsidiary
      is a party which default could reasonably be expected to have a Material Adverse
      Effect.

     

    (vi) The
      Company shall and shall cause each Subisidiary to promptly take any and all
      actions necessary to execute any definitive documentation (which documentation
      shall include customary representations, warranties, covenants, conditions
      and
      agreements, and any UCC financing statements) reasonably requested by the
      Holder, for obtaining the benefits of the Security Agreement, subject to the
      terms and conditions stated therein.

     

    (vii) The
      Company shall deliver to the Holder, within thirty (30) days after the end
      of
      each fiscal quarter, a certificate signed by either the Chief Executive Officer
      or the Chief Financial Officer of the Company (which shall include an updated
      perfection certification) as to such officer’s knowledge, of the Company’s
      compliance with the covenants contained herein and in the Security Documents
      (without regard to any period of grace or requirement of notice provided
      hereunder) and in the event any Event of Default or any event which, with the
      giving of notice, the lapse of time or both would constitute an Event of Default
      exists, such officer shall specify the nature thereof.

     

    (viii) The
      Company shall and shall cause each Subsidiary to pay when due all taxes,
      assessments and governmental charges and levies upon it or its income, profits
      or property, except those that are being contested in good faith by appropriate
      proceedings and with respect to which adequate reserves have been set
      aside.

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

    


    (ix) The
      Company shall and shall cause each Subsidiary to all times maintain with
      financially sound and reputable insurance companies insurance covering its
      assets and its businesses in such amounts and covering such risks (including,
      without limitation, hazard, business interruption and public liability) as
      is
      consistent with sound business practice and as may be obtained at commercially
      reasonable rates. The insurance policies will comply with the provisions of
      Section 11 of the Security Agreement.

     

    (x) The
      Company shall and shall cause each Subsidiary to comply with all laws, rules,
      regulations, orders, writs, judgments, injunctions, decrees or awards to which
      they may be subject except where the failure to so comply could not reasonably
      be expected to have a Material Adverse Effect.

     

    (xi) The
      Company shall and shall cause each Subsidiary to use commercially reasonable
      efforts to do all things necessary to maintain, preserve, protect and keep
      its
      properties in good repair, working order and condition and use commercially
      reasonable efforts to make all necessary and proper repairs, renewals and
      replacements so that its business carried on in connection therewith may be
      properly conducted.

     

    (xii) At
      its
      own expense, the Company shall and shall cause each Subsidiary to make, execute,
      endorse, acknowledge file and/or deliver any documents and take all actions
      necessary or required to maintain its ownership rights in its Intellectual
      Property, including, without limitation, (i) any action reasonably required
      to
      protect the Intellectual Property in connection with any infringement, suspected
      infringement, passing off, act of unfair competition or other unlawful
      interference with the rights of the Company or any Subsidiary in and to such
      Intellectual Property, and (ii) any registrations with the United States Patent
      & Trademark Office and any corresponding foreign patent and/or trademark
      office required for the Company or any Subsidiary to carry on its business
      as
      presently conducted and as presently proposed to be conducted. Except for
      non-exclusive licenses granted in the ordinary course of business, the Company
      shall not and shall cause each Subsidiary not to transfer, assign or otherwise
      convey the Intellectual Property, any registrations or applications thereof
      and
      all goodwill associated therewith, to any person or entity.

     

    (xiii) Promptly
      after the occurrence thereof, the Company shall and shall cause each Subsidiary
      to inform the Holder of the following material developments: (i) entering into
      material agreements outside the ordinary course of business consistent with
      past
      practice, (ii) any issuance of debt securities by the Company or any Subsidiary,
      (iii) the incurrence of any Indebtedness by the Company or any Subsidiary,
      other
      than Permitted Indebtedness, (iv) a change in the number of the Board of
      Directors of the Company, (v) a sale, lease or transfer of any material portion
      of the assets of the Company or any Subisdiary and (vi) any change in ownership
      of any Subsidiary (specifying the details of any such change, including the
      identity and ownership amount of any new owner).

     

    (b) So
      long
      as any amount due under this Note is outstanding and until indefeasible payment
      in full of all amounts payable by the Company hereunder:

    
       

      
        
          
          

        

        
          -16-

          
            

          

        

        
          
          

        

      

       

    

    (i) The
      Company shall not and shall cause each Subsidiary not to create, incur,
      guarantee, issue, assume or in any manner become liable in respect of any
      Indebtedness, other than Permitted Indebtedness.

     

    (ii) The
      Company shall not and shall cause each Subsidiary not to create, incur, assume
      or suffer to exist any Lien upon any of its property, whether now owned or
      hereafter acquired other than (i) Liens created pursuant to the Security
      Documents and (ii) Permitted Liens. The Company shall not, and shall cause
      each
      Subsidiary not to, be bound by any agreement which limits the ability of the
      Company or any Subsidiary to grant Liens other than the Security
      Documents.

     

    (iii) The
      Company shall not and shall cause each Subsidiary not to, directly or
      indirectly, enter into or permit to exist any transaction or series of related
      transactions (including, without limitation, the purchase, sale, lease or
      exchange of any property or the rendering of any service) with, or for the
      benefit of, any of its Affiliates other than a wholly owned Subsidiary, except
      for consulting arrangements with directors approved by the Board and except
      that
      the Company may continue to lease its principal executive offices from its
      existing Chief Executive Officer on an arms’-length basis on terms and
      conditions approved by a majority of the disinterested members of the
      Board.

     

    (iv) The
      Company shall not, and shall cause each of its Subsidiaries not to, directly
      or
      indirectly, declare or pay any dividends on account of any shares of any class
      or series of its capital stock now or hereafter outstanding, or set aside or
      otherwise deposit or invest any sums for such purpose, or redeem, retire,
      defease, purchase or otherwise acquire any shares of any class of its capital
      stock (or set aside or otherwise deposit or invest any sums for such purpose)
      for any consideration or apply or set apart any sum, or make any other
      distribution (by reduction of capital or otherwise) in respect of any such
      shares or pay any interest, premium if any, or principal of any Indebtedness
      or
      redeem, retire, defease, repurchase or otherwise acquire any Indebtedness (or
      set aside or otherwise deposit or invest any sums for such purpose) for any
      consideration or apply or set apart any sum, or make any other payment in
      respect thereof or agree to do any of the foregoing (each of the foregoing
      is
      herein called a “Restricted
      Payment”);
      provided, that (i) the Company may make payments of interest, premium if any,
      and principal of the Notes in accordance with the terms hereof, (ii) provided
      that no Event of Default or event which, with the giving of notice, the lapse
      of
      time or both would constitute an Event of Default has occurred and is
      continuing, the Company and its Subsidiaries may make regularly scheduled
      payments of interest and principal of any Permitted Indebtedness, (iii) any
      Subsidiary directly or indirectly wholly owned by the Company may pay dividends
      on its capital stock and (iv) the Company may repurchase capital stock from
      a
      former employee in connection with the termination or other departure of such
      employee, strictly in accordance with the terms of any agreement entered into
      with such employee and in effect on the Closing Date (as defined in the Purchase
      Agreement) or from any employee or consultant to the Company in order to satisfy
      any tax liability incurred by such employee or consultant in connection with
      the
      vesting of any restricted stock grant, provided that (A) such repurchase is
      approved by a majority of the Board, (B) payments permitted under this clause
      (iv) shall not exceed $1,000,000 in the aggregate, and (C) no such payment
      may
      be made if an Event of Default or an event which, with the giving of notice,
      the
      lapse of time or both would constitute an Event of Default has occurred and
      is
      continuing or would result from such payment.

    
       

      
        
          
          

        

        
          -17-

          
            

          

        

        
          
          

        

      

       

    

    (v) The
      Company shall not and shall cause each Subsidiary not to, directly or
      indirectly, engage in any business other than the business of designing and
      producing high-quality medical instruments, micro-optics and other advanced
      optical systems.

     

    (vi) The
      Company shall not and shall cause each Subsidiary not to make or own any
      Investment in any Person, including without limitation any joint venture, other
      than (A) Permitted Investments, (B) operating deposit accounts with banks,
      (C)
      Hedging Agreements entered into in the ordinary course of the Company’s
      financial planning and not for speculative purposes and (D) investments by
      the
      Company in the capital stock of any wholly owned Subsidiary.

     

    (vii) The
      Company shall not and shall cause each Subsidiary not to, directly or
      indirectly, become or remain liable as lessee or as a guarantor or other surety
      with respect to any lease of any property (whether real, personal or mixed),
      whether now owned or hereafter acquired, which the Company or any Subsidiary
      (a)
      has sold or transferred or is to sell or to transfer to any other Person, or
      (b)
      intends to use for substantially the same purpose as any other property which
      has been or is to be sold or transferred by the Company or any Subsidiary to
      any
      Person in connection with such lease.

     

    (viii) The
      Company shall not and shall cause each Subsidiary not to settle, or agree to
      indemnify or defend third parties against, any material lawsuit, except as
      may
      be required by judicial or regulatory order or by agreements entered into prior
      to the date hereof on a basis consistent with past practice. A material lawsuit
      shall be any lawsuit in which the amount in controversy exceeds
      $100,000.

     

    (ix) The
      Company shall not and shall cause each Subsidiary not to amend its bylaws,
      certificate of incorporation or other charter document in a manner adverse
      to
      the Holder.

     

    6. Event
      of Default.
      The
      occurrence of any of following events shall constitute an “Event
      of Default”
      hereunder:

     

    (a) the
      failure of the Company to make any payment of principal or interest on this
      Note
      when due, whether at maturity, upon acceleration or otherwise;

     

    (b) the
      failure of the Company to make any payment of any other amounts due under this
      Note or the other Transaction Documents (as defined under the Purchase
      Agreement) when due, whether at maturity, upon acceleration or otherwise, and
      such failure continues for more than five (5) days;

     

    (c) the
      Company and/or its Subsidiaries fail to make a required payment or payments
      on
      Indebtedness of One Hundred Thousand United States Dollars ($100,000) or more
      in
      aggregate principal amount and such failure continues for more than ten (10)
      days;

     

    (d) there
      shall have occurred an acceleration of the stated maturity of any Indebtedness
      of the Company or its Subsidiaries of One Hundred Thousand United States Dollars
      ($100,000) or more in aggregate principal amount (which acceleration is not
      rescinded, annulled or otherwise cured within ten (10) days of receipt by the
      Company or a Subsidiary of notice of such acceleration);

     

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

     

    (e) the
      Company or any Subsidiary makes an assignment for the benefit of creditors
      or
      admits in writing its inability to pay its debts generally as they become due;
      or an order, judgment or decree is entered adjudicating the Company or any
      Subsidiary as bankrupt or insolvent; or any order for relief with respect to
      the
      Company or any Subsidiary is entered under the Federal Bankruptcy Code or any
      other bankruptcy or insolvency law; or the Company or any Subsidiary petitions
      or applies to any tribunal for the appointment of a custodian, trustee, receiver
      or liquidator of the Company or any Subsidiary or of any substantial part of
      the
      assets of the Company or any Subsidiary, or commences any proceeding relating
      to
      it under any bankruptcy, reorganization, arrangement, insolvency, readjustment
      of debt, dissolution or liquidation law of any jurisdiction; or any such
      petition or application is filed, or any such proceeding is commenced, against
      the Company or any Subsidiary and either (i) the Company or any Subsidiary
      by
      any act indicates its approval thereof, consents thereto or acquiescence therein
      or (ii) such petition application or proceeding is not dismissed within sixty
      (60) days;

     

    (f) a
      final,
      non-appealable judgment which, in the aggregate with other outstanding final
      judgments against the Company and its Subsidiaries, exceeds One Hundred Thousand
      United States Dollars ($100,000) shall be rendered against the Company or a
      Subsidiary and within sixty (60) days after entry thereof, such judgment is
      not
      discharged or execution thereof stayed pending appeal, or within sixty (60)
      days
      after the expiration of such stay, such judgment is not discharged; provided,
      however, that a judgment that provides for the payment of royalties subsequent
      to the date of the judgment shall be deemed to be discharged so long as the
      Company or the Subsidiary affected thereby is in compliance with the terms
      of
      such judgment;

     

    (g) the
      Company is in breach of the requirements of Section 5(b) hereof;

     

    (h) if
      any
      representation or statement of fact made in any Transaction Document or
      furnished to the Holder at any time by or on behalf of the Company proves to
      have been false in any material respect when made or furnished;

     

    (i) any
      Liens
      created by the Security Documents shall at any time not constitute a valid
      and
      perfected first priority Lien on the collateral intended to be covered thereby
      (to the extent perfection by filing, registration, recordation or possession
      is
      required herein or therein) in favor of the Holders, free and clear of all
      other
      Liens (other than Permitted Liens), or any of the security interests granted
      pursuant to the Security Documents shall be determined to be void, voidable,
      invalid or unperfected, are subordinated or are ineffective to provide the
      Holder with a perfected, first priority security interest in the collateral
      covered by the Security Documents, free and clear of all other Liens (other
      than
      Permitted Liens) or, except for expiration or termination in accordance with
      their terms, the Security Agreement shall for whatever reason be terminated
      or
      cease to be in full force and effect, or the enforceability thereof or any
      other
      Transaction Documents shall be contested by the Company;

     

    (j) the
      Company fails to observe or perform in any material respect any of its covenants
      contained in the Transaction Documents (other than any failure which is covered
      by Section 5(a), (b) or (g)), and such failure continues for thirty (30) days
      after receipt by the Company of notice thereof; or

     

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

     

    (k) the
      Amendment Effective Date does not occur on or prior to the earlier of (i) two
      (2) Business Days following the completion of the Stockholders Meeting and
      (ii)
      December 15, 2008.

     

    Upon
      the
      occurrence of any such Event of Default all unpaid principal and accrued
      interest under this Note shall become immediately due and payable (A) upon
      election of the Holder, with respect to (a) through (d) and (f) through (k),
      and
      (B) automatically, with respect to (e). Upon the occurrence of any Event of
      Default, the Holder may, in addition to declaring all amounts due hereunder
      to
      be immediately due and payable, pursue any available remedy, whether at law
      or
      in equity, including, without limitation, exercising its rights under the other
      Transaction Documents. If an Event of Default occurs, the Company shall pay
      to
      the Holder the reasonable attorneys' fees and disbursements and all other
      reasonable out-of-pocket costs incurred by the Holder in order to collect
      amounts due and owing under this Note or otherwise to enforce the Holder's
      rights and remedies hereunder and under the other Transaction
      Documents.

     

    7. No
      Waiver.
      No
      delay or omission on the part of the Holder in exercising any right under this
      Note shall operate as a waiver of such right or of any other right of the
      Holder, nor shall any delay, omission or waiver on any one occasion be deemed
      a
      bar to or waiver of the same or any other right on any future
      occasion.

     

    8. Amendments
      in Writing.
      Any
      term of this Note may be amended or waived upon the written consent of the
      Company and the holders of Company Notes representing at least 50% of the
      principal amount of Company Notes then outstanding (the “Majority
      Holders”);
      provided,
      that
      (x) any such amendment or waiver must apply to all outstanding Company Notes;
      and (y) without the consent of the Holder hereof, no amendment or waiver shall
      (i) change the Stated Maturity Date of this Note, (ii) reduce the principal
      amount of this Note or the interest rate due hereon, (iii) change the Conversion
      Price or (iv) change the place of payment of this Note. No such waiver or
      consent on any one instance shall be construed to be a continuing waiver or
      a
      waiver in any other instance unless it expressly so provides.

     

    9. Waivers.
      The
      Company hereby forever waives presentment, demand, presentment for payment,
      protest, notice of protest, notice of dishonor of this Note and all other
      demands and notices in connection with the delivery, acceptance, performance
      and
      enforcement of this Note.

     

    10. Waiver
      of Jury Trial.
      THE
      COMPANY HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
      ARISING OUT OF OR BASED UPON THIS NOTE OR ANY CONTEMPLATED TRANSACTION,
      INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THE COMPANY
      HAS
      REVIEWED THIS WAIVER WITH ITS COUNSEL.

     

    11. Secured
      Obligation.
      This
      Note is one of the Notes referred to in the Security Agreement and is secured
      by
      the collateral described therein. The Security Agreement grants the Holder
      certain rights with respect to such collateral upon an Event of
      Default.

     

    12. Governing
      Law; Consent to Jurisdiction.
      This
      Note shall be governed by and construed under the law of the State of New York,
      without giving effect to the choice of law principles thereof (other than
      Section 5-1401 of the New York General Obligation Law). The Company and, by
      accepting this Note, the Holder, each irrevocably submits to the exclusive
      jurisdiction of the courts of the State of New York located in New York County
      and the United States District Court for the Southern District of New York
      for
      the purpose of any suit, action, proceeding or judgment relating to or arising
      out of this Note and the transactions contemplated hereby. Service of process
      in
      connection with any such suit, action or proceeding may be served on each party
      hereto anywhere in the world by the same methods as are specified for the giving
      of notices under this Note. The Company and, by accepting this Note, the Holder,
      each irrevocably consents to the jurisdiction of any such court in any such
      suit, action or proceeding and to the laying of venue in such court. The Company
      and, by accepting this Note, the Holder, each irrevocably waives any objection
      to the laying of venue of any such suit, action or proceeding brought in such
      courts and irrevocably waives any claim that any such suit, action or proceeding
      brought in any such court has been brought in an inconvenient
      forum.

     

    
      
        
        

      

      
        -20-

        
          

        

      

      
        
        

      

    

    


    13. Costs.
      If
      action is instituted to collect on this Note, the Company promises to pay all
      costs and expenses, including reasonable attorney’s fees, incurred in connection
      with such action.

     

    14. Notices.
      All
      notices hereunder shall be given in writing and shall be deemed delivered when
      received by the other party hereto at the address set forth in the Purchase
      Agreement or at such other address as may be specified by such party from time
      to time in accordance with the Purchase Agreement.

     

    15. Successors
      and Assigns.
      This
      Note shall be binding upon the successors or assigns of the Company and shall
      inure to the benefit of the successors and assigns of the Holder.

     

    [Remainder
      of Page Intentionally Left Blank]


    
       

      
        
          
          

        

        
          -21-

          
            

          

        

        
          
          

        

      

       

    

    IN
      WITNESS WHEREOF, the Company has caused this 10% Senior Secured Convertible
      Note
      to be signed in its name effective as of the date first above
      written.

    


    


    
      	
              PRECISION OPTICS CORPORATION, INC.

            
	 
	
              By:

            	 
	
              Name:
                Richard E. Forkey

            
	
              Title:  
                President, Chief Executive Officer and Treasurer

            


    

     

    
      
        
        

      

      
        -22-