exv10w1






Exhibit 10.1





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 (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), 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.



Principal Amount: $75,000.00 Issue Date: March 17, 2010 Purchase Price: $75,000.00




CONVERTIBLE PROMISSORY NOTE 



FOR VALUE RECEIVED, CytoCore, Inc., a Delaware corporation (hereinafter called the “Borrower”),
hereby promises to pay to the order of ASHER ENTERPRISES, INC., a Delaware corporation, or
registered assigns (the “Holder”) the sum of $75,000.00 together with any interest as set forth
herein, on December 18, 2010 (the “Maturity Date”), and to pay interest on the unpaid principal
balance hereof at the rate of eight percent (8%) (the “Interest Rate”) per annum from the date
hereof (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise. Except as otherwise explicitly set forth in Section
1.9 herein, this Note may not be prepaid in whole or in part. Any amount of principal or interest
on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%)
per annum from the due date thereof until the same is paid (“Default Interest”). Interest shall
commence accruing on the Issue Date, shall be computed on the basis of a 365-day year and the
actual number of days elapsed. All payments due hereunder (to the extent not converted into common
stock, $0.001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall
be made in lawful money of the United States of America. All payments shall be made at such
address as the Holder shall hereafter give to the Borrower by written notice made in accordance
with the provisions of this Note. 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 payment 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. As used in
this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are authorized or required by law or
executive order to remain closed. Each capitalized term used herein, and not otherwise defined,
shall have the meaning ascribed thereto







 









 







in that certain Securities Purchase Agreement dated the date hereof, pursuant to which this Note
was originally issued (the “Purchase Agreement”).



This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof
and shall not be subject to preemptive rights or other similar rights of shareholders of the
Borrower and will not impose personal liability upon the holder thereof.




     The following terms shall apply to this Note:



ARTICLE I. CONVERSION RIGHTS



1.1 Conversion Right. The Holder shall have the right from time to time, and at any time on
or prior to the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount
(as defined in Article III) pursuant to Section 1.6(a) or Article III, each in respect of the
remaining outstanding principal amount of this Note to convert all or any part of the outstanding
and unpaid principal amount of this Note into fully paid and non- assessable shares of Common
Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified
at the conversion price (the “Conversion Price”) determined as provided herein (a “Conversion”);
provided, however, that in no event shall the Holder be entitled to convert any
portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1)
the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other
than shares of Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Notes or the unexercised or unconverted portion of any other security of
the Borrower subject to a limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the
portion of this Note with respect to which the determination of this proviso is being made, would
result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder,
except as otherwise provided in clause (1) of such proviso, provided, further,
however, that the limitations on conversion may be waived by the Holder upon, at the
election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions of
the conversion limitation shall continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of waiver).. The number of shares of
Common Stock to be issued upon each conversion of this Note shall be determined by dividing the
Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of
Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below;
provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in,
or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York
time on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, with
respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be
converted in such conversion plus (2) at the Borrower’s option, accrued and unpaid
interest, if any, on such





 









 







principal amount at the interest rates provided in this Note to the Conversion Date, provided,
however, that the Company shall have the right to pay any or all interest in cash plus (3)
at the Borrower’s option, Default Interest, if any, on the amounts referred to in the immediately
preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof.




          1.2 Conversion Price.



(a) Calculation of Conversion Price. The conversion price (the “Conversion Price”) shall
equal the Variable Conversion Price (as defined herein)(subject to equitable adjustments for stock
splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities
or the securities of any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events). The “Variable Conversion Price”
shall mean the Applicable Percentage (as defined herein) multiplied by the Market Price (as defined
herein). “Market Price” means the average of the lowest three (3) Trading Prices (as defined
below) for the Common Stock during the ten (10) Trading Day period ending one Trading Day prior to
the date the Conversion Notice is sent by the Holder to the Borrower via facsimile (the “Conversion
Date”). “Trading Price” means, for any security as of any date, the closing bid price on the
Over-the-Counter Bulletin Board, or applicable trading market (the “OTCBB”) as reported by a
reliable reporting service (“Reporting Service”) mutually acceptable to Borrower and Holder and
hereafter designated by Holders of a majority in interest of the Notes and the Borrower or, if the
OTCBB is not the principal trading market for such security, the closing bid price of such security
on the principal securities exchange or trading market where such security is listed or traded or,
if no closing bid price of such security is available in any of the foregoing manners, the average
of the closing bid prices of any market makers for such security that are listed in the “pink
sheets” by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such
security on such date in the manner provided above, the Trading Price shall be the fair market
value as mutually determined by the Borrower and the holders of a majority in interest of the Notes
being converted for which the calculation of the Trading Price is required in order to determine
the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock is
traded for any period on the OTCBB, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded. “Applicable Percentage” shall mean 58%.



(b) Conversion Price During Major Announcements. Notwithstanding anything contained in
Section 1.2(a) to the contrary, in the event the Borrower (i) makes a public announcement that it
intends to consolidate or merge with any other corporation (other than a merger in which the
Borrower is the surviving or continuing corporation and its capital stock is unchanged) or sell or
transfer all or substantially all of the assets of the Borrower or (ii) any person, group or entity
(including the Borrower) publicly announces a tender offer to purchase 50% or more of the
Borrower’s Common Stock (or any other takeover scheme) (the date of the announcement referred to in
clause (i) or (ii) is hereinafter referred to as the “Announcement Date”), then the Conversion
Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion
Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which
would have been applicable for a Conversion occurring





 









 







on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and
after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as
set forth in this Section 1.2(a). For purposes hereof, “Adjusted Conversion Price Termination Date”
shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which
a public announcement as contemplated by this Section 1.2(b) has been made, the date upon which the
Borrower (in the case of clause (i) above) or the person, group or entity (in the case of clause
(ii) above) consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to become
operative.



1.3 Authorized Shares. The Borrower covenants that during the period the conversion right
exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number
of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full
conversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at all
times to have authorized and reserved three times the number of shares that is actually issuable
upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to
time)(the “Reserved Amount”). The Reserved Amount shall be increased from time to time in
accordance with the Borrower’s obligations pursuant to Section 4(g) of the Purchase Agreement. The
Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and
non-assessable. In addition, if the Borrower shall issue any securities or make any change to its
capital structure which would change the number of shares of Common Stock into which the Notes
shall be convertible at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. The
Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue
certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its
issuance of this Note shall constitute full authority to its officers and agents who are charged
with the duty of executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock in accordance with the terms and conditions of this Note.



If, at any time a Holder of this Note submits a Notice of Conversion, and the Borrower does not
have sufficient authorized but unissued shares of Common Stock available to effect such conversion
in accordance with the provisions of this Article I (a “Conversion Default”), the Borrower shall
issue to the Holder all of the shares of Common Stock which are then available to effect such
conversion. The portion of this Note which the Holder included in its Conversion Notice and which
exceeds the amount which is then convertible into available shares of Common Stock (the “Excess
Amount”) shall, notwithstanding anything to the contrary contained herein, not be convertible into
Common Stock in accordance with the terms hereof until (and at the Holder’s option at any time
after) the date additional shares of Common Stock are authorized by the Borrower to permit such
conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the
Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on
the Conversion Date thereafter elected by the Holder in respect thereof. In addition, the Borrower
shall pay to the Holder payments (“Conversion Default Payments”) for a Conversion Default in the
amount of (x) the sum of (1) the then outstanding principal amount of this Note
plus (2) accrued and unpaid interest on the





 









 







unpaid principal amount of this Note through the Authorization Date (as defined below) plus
(3) Default Interest, if any, on the amounts referred to in clauses (1) and/or (2), multiplied
by (y) .24, multiplied by (z) (N/365), where N = the number of days from the day the
holder submits a Notice of Conversion giving rise to a Conversion Default (the “Conversion Default
Date”) to the date (the “Authorization Date”) that the Borrower authorizes a sufficient number of
shares of Common Stock to effect conversion of the full outstanding principal balance of this Note.
The Borrower shall use its best efforts to authorize a sufficient number of shares of Common Stock
as soon as practicable following the earlier of (i) such time that the Holder notifies the Borrower
or that the Borrower otherwise becomes aware that there are or likely will be insufficient
authorized and unissued shares to allow full conversion thereof and (ii) a Conversion Default. The
Borrower shall send notice to the Holder of the authorization of additional shares of Common Stock,
the Authorization Date and the amount of Holder’s accrued Conversion Default Payments. The accrued
Conversion Default Payments for each calendar month shall be paid in cash or shall be convertible
into Common Stock (at such time as there are sufficient authorized shares of Common Stock) at the
applicable Conversion Price, at the Borrower’s option, as follows:



(a) In the event Holder elects to take such payment in cash, cash payment shall be made to Holder
by the fifth (5th) day of the month following the month in which it has
accrued; and



(b) In the event Holder elects to take such payment in Common Stock, the Holder may convert such
payment amount into Common Stock at the Conversion Price (as in effect at the time of conversion)
at any time after the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article I (so long as there is then a sufficient number of
authorized shares of Common Stock).



The Holder’s election shall be made in writing to the Borrower at any time prior to 6:00 p.m., New
York, New York time, on the third day of the month following the month in which Conversion Default
payments have accrued. If no election is made, the Holder shall be deemed to have elected to
receive cash. Nothing herein shall limit the Holder’s right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Borrower’s failure to maintain a
sufficient number of authorized shares of Common Stock, and each holder shall have the right to
pursue all remedies available at law or in equity (including degree of specific performance and/or
injunctive relief).




          1.4 Method of Conversion.




     (a) Mechanics of Conversion. Subject to Section 1.1, this Note may be converted by the
Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to
the Borrower a Notice of Conversion (by facsimile or other reasonable means of communication
dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to
Section 1.4(b), surrendering this Note at the principal office of the Borrower.



 









 





     (b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set
forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall
not be required to physically surrender this Note to the Borrower unless the entire unpaid
principal amount of this Note is so converted. The Holder and the Borrower shall maintain records
showing the principal amount so converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical
surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such
records of the Borrower shall, prima facie, be controlling and determinative in the absence of
manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as
aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this
Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder (upon payment by the Holder of any
applicable transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge
and agree that, by reason of the provisions of this paragraph, following conversion of a portion of
this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be
less than the amount stated on the face hereof.



     (c) Payment of Taxes. The Borrower shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or
other securities or property on conversion of this Note in a name other than that of the Holder (or
in street name), and the Borrower shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or persons (other than the Holder or the
custodian in whose street name such shares are to be held for the Holder’s account) requesting the
issuance thereof shall have paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has been paid.



     (d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the
Holder of a facsimile transmission (or other reasonable means of communication) of a Notice of
Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower
shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion within three (3) business days
after such receipt (and, solely in the case of conversion of the entire unpaid principal amount
hereof, surrender of this Note) (such third business day being hereinafter referred to as the
“Deadline”) in accordance with the terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirements of Section 2(g) of the Purchase Agreement that
certificates for shares of Common Stock issued on or after the effective date of the Registration
Statement upon conversion of this Note shall not bear any restrictive legend).



     (e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a
Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, the outstanding principal amount and the amount of accrued and
unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower
defaults on its obligations under this Article I, all rights with respect to the portion of this
Note being so converted shall forthwith terminate except the



 









 




right to receive the Common Stock or other securities, cash or other assets, as herein
provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided
herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be
absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the
same, any waiver or consent with respect to any provision thereof, the recovery of any judgment
against any person or any action to enforce the same, any failure or delay in the enforcement of
any other obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder of any
obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit
such obligation of the Borrower to the Holder in connection with such conversion. The Conversion
Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of
Conversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.




     (f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical
certificates representing the Common Stock issuable upon conversion, provided the Borrower’s
transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions
contained in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause
its transfer agent to electronically transmit the Common Stock issuable upon conversion to the
Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal
Agent Commission (“DWAC”) system.



     (g) Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting the
Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the
parties agree that if delivery of the Common Stock issuable upon conversion of this Note is more
than three (3) business days after the Deadline (other than a failure due to the circumstances
described in Section 1.3 above, which failure shall be governed by such Section) the Borrower shall
pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails
to deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth day of the
month following the month in which it has accrued or, at the option of the Holder (by written
notice to the Borrower by the first day of the month following the month in which it has accrued),
shall be added to the principal amount of this Note, in which event interest shall accrue thereon
in accordance with the terms of this Note and such additional principal amount shall be convertible
into Common Stock in accordance with the terms of this Note. Notwithstanding anything contained
herein to the contrary,


1.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of this
Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective
registration statement under the Act or (ii) the Borrower or its transfer agent shall have been
furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary
for opinions of counsel in comparable transactions) to the effect that the shares to be sold or
transferred may be sold or transferred pursuant to an exemption from such registration or (iii)
such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule
144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the
Borrower who agrees to sell or otherwise transfer the shares only in accordance





 









 







with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock issuable upon conversion
of this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date that can then be
immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note
that has not been so included in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption that permits removal of the legend,
shall bear a legend substantially in the following form, as appropriate:



“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE 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 (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), 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.”



The legend set forth above shall be removed and the Borrower shall issue to the Holder a new
certificate therefore free of any transfer legend if (i) the Borrower or its transfer agent shall
have received an opinion of counsel, in form, substance and scope customary for opinions of counsel
in comparable transactions, to the effect that a public sale or transfer of such Common Stock may
be made without registration under the Act and the shares are so sold or transferred, (ii) such
Holder provides the Borrower or its transfer agent with reasonable assurances that the Common Stock
issuable upon conversion of this Note (to the extent such securities are deemed to have been
acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case of the Common
Stock issuable upon conversion of this Note, such security is registered for sale by the Holder
under an effective registration statement filed under the Act or otherwise may be sold pursuant to
Rule 144 without any restriction as to the number of securities as of a particular date that can
then be immediately sold.




          1.6 Effect of Certain Events.




     (a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale,
conveyance or disposition of all or substantially all of the assets of the Borrower, the
effectuation by the Borrower of a transaction or series of related transactions in which more than
50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other
business combination of the Borrower with or into any other Person (as defined below) or Persons
when the Borrower is not the survivor shall either: (i) be deemed to be an Event of



 









 




Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to
the Holder upon the consummation of and as a condition to such transaction an amount equal to the
Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof.
“Person” shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.




     (b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note is
issued and outstanding and prior to conversion of all of the Notes, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a
result of which shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or substantially all of the assets of
the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the
Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon
the basis and upon the terms and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the
Holder would have been entitled to receive in such transaction had this Note been converted in full
immediately prior to such transaction (without regard to any limitations on conversion set forth
herein), and in any such case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Note to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable
upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon the conversion hereof. The
Borrower shall not affect any transaction described in this Section 1.6(b) unless (a) it first
gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least
fifteen (15) days prior written notice) of the record date of the special meeting of shareholders
to approve, or if there is no such record date, the consummation of, such merger, consolidation,
exchange of shares, recapitalization, reorganization or other similar event or sale of assets
(during which time the Holder shall be entitled to convert this Note) and (b) the resulting
successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations
of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.



     (c) Adjustment Due to Distribution. If the Borrower shall declare or make any
distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or
distribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note
shall be entitled, upon any conversion of this Note after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets which would have
been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion
had such Holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.



 









 





     (d) Adjustment Due to Dilutive Issuance. If, at any time when any Notes are issued and
outstanding, the Borrower issues or sells, or in accordance with this Section 1.6(d) hereof is
deemed to have issued or sold, except for shares of Common Stock issued directly to vendors or
suppliers of the Borrower in satisfaction of amounts owed to such vendors or suppliers (provided,
however, that such vendors or suppliers shall not have an arrangement to transfer, sell or assign
such shares of Common Stock prior to the issuance of such shares), any shares of Common Stock for
no consideration or for a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection therewith) less than the
Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of
Common Stock (a “Dilutive Issuance”), then immediately upon the Dilutive Issuance, the Conversion
Price will be reduced to the amount of the consideration per share received by the Borrower in such
Dilutive Issuance.



     The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in
any manner issues or grants any warrants, rights or options (not including employee stock option
plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such
warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter
referred to as “Options”) and the price per share for which Common Stock is issuable upon the
exercise of such Options is less than the Conversion Price then in effect, then the Conversion
Price shall be equal to such price per share. For purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon the exercise of such Options” is determined by
dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for
the issuance or granting of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate
amount of additional consideration payable upon the conversion or exchange thereof at the time such
Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number
of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion
of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be
made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the
conversion or exchange of Convertible Securities issuable upon exercise of such Options.


Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if the
Borrower in any manner issues or sells any Convertible Securities, whether or not immediately
convertible (other than where the same are issuable upon the exercise of Options), and the price
per share for which Common Stock is issuable upon such conversion or exchange is less than the
Conversion Price then in effect, then the Conversion Price shall be equal to such price per share.
For the purposes of the preceding sentence, the “price per share for which Common Stock is issuable
upon such conversion or exchange” is determined by dividing (i) the total amount, if any, received
or receivable by the Borrower as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time such Convertible Securities first
become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon







 









 







the conversion or exchange of all such Convertible Securities. No further adjustment to the
Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.



(e) Purchase Rights. If, at any time when any Notes are issued and outstanding, the
Borrower issues any convertible securities or rights to purchase stock, warrants, securities or
other property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock,
then the Holder of this Note will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder
had held the number of shares of Common Stock acquirable upon complete conversion of this Note
(without regard to any limitations on conversion contained herein) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.



(f) Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the
Conversion Price as a result of the events described in this Section 1.6, the Borrower, at its
expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the
Holder of a certificate setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The Borrower shall, upon the written
request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such
adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of
shares of Common Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of the Note.



1.7 Trading Market Limitations. Unless permitted by the applicable rules and regulations of
the principal securities market on which the Common Stock is then listed or traded, in no event
shall the Borrower issue upon conversion of or otherwise pursuant to this Note and the other Notes
issued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stock
that the Borrower can issue pursuant to any rule of the principal United States securities market
on which the Common Stock is then traded (the “Maximum Share Amount”), which shall be 4.99% of the
total shares outstanding on the Closing Date (as defined in the Purchase Agreement), subject to
equitable adjustment from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after the date hereof.
Once the Maximum Share Amount has been issued (the date of which is hereinafter referred to as the
“Maximum Conversion Date”), if the Borrower fails to eliminate any prohibitions under applicable
law or the rules or regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or any of its securities on the
Borrower’s ability to issue shares of Common Stock in excess of the Maximum Share Amount (a
“Trading Market Prepayment Event”), in lieu of any further right to convert this Note, and in full
satisfaction of the Borrower’s obligations under this Note, the Borrower shall pay to the Holder,
within fifteen (15) business days of the Maximum Conversion Date (the “Trading Market Prepayment
Date”), an amount equal to 150% times the sum of (a) the then outstanding principal
amount of this Note immediately following the Maximum Conversion Date, plus (b) accrued and
unpaid interest on the unpaid principal amount of this Note to the Trading Market Prepayment Date,
plus (c)





 











 




Default Interest, if any, on the amounts referred to in clause (a) and/or (b) above, plus
(d) any optional amounts that may be added thereto at the Maximum Conversion Date by the Holder in
accordance with the terms hereof (the then outstanding principal amount of this Note immediately
following the Maximum Conversion Date, plus the amounts referred to in clauses (b), (c) and
(d) above shall collectively be referred to as the “Remaining Convertible Amount”). In the event
that the sum of (x) the aggregate number of shares of Common Stock issued upon conversion of this
Note and the other Notes issued pursuant to the Purchase Agreement plus (y) the aggregate
number of shares of Common Stock that remain issuable upon conversion of this Note and the other
Notes issued pursuant to the Purchase Agreement, represents at least one hundred percent (100%) of
the Maximum Share Amount (the “Triggering Event”), the Borrower will use its best efforts to seek
and obtain Shareholder Approval (or obtain such other relief as will allow conversions hereunder in
excess of the Maximum Share Amount) as soon as practicable following the Triggering Event and
before the Maximum Conversion Date. As used herein, “Shareholder Approval” means approval by the
shareholders of the Borrower to authorize the issuance of the full number of shares of Common Stock
which would be issuable upon full conversion of the then outstanding Notes but for the Maximum
Share Amount.



1.8 Status as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i) the
shares covered thereby (other than the shares, if any, which cannot be issued because their
issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share
Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a
Holder of such converted portion of this Note shall cease and terminate, excepting only the right
to receive certificates for such shares of Common Stock and to any remedies provided herein or
otherwise available at law or in equity to such Holder because of a failure by the Borrower to
comply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Deadline with respect to a conversion of any portion of this Note for any reason,
then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so
notifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect to
such unconverted portions of this Note and the Borrower shall, as soon as practicable, return such
unconverted Note to the Holder or, if the Note has not been surrendered, adjust its records to
reflect that such portion of this Note has not been converted. In all cases, the Holder shall
retain all of its rights and remedies (including, without limitation, (i) the right to receive
Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion
Price with respect to subsequent conversions determined in accordance with Section 1.3) for the
Borrower’s failure to convert this Note.



1.9 Prepayment. Notwithstanding anything to the contrary contained in this Note, so long
as: (i) no Event of Default shall have occurred and be continuing, (ii) the Borrower has a
sufficient number of authorized shares of Common Stock reserved for issuance upon full conversion
of the Note, and (iii) the Borrower has not received a Notice of Conversion from the Holder, then
at any time during the period beginning on the Issue Date and ending on the date prior to the
Maturity Date, the Borrower shall have the right, exercisable on not
less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding
Note (principal and accrued interest), in full, in accordance with this Section 1.9. Any notice of





 









 







prepayment hereunder (an “Optional Prepayment”) shall be delivered to the Holder of the Note at its
registered addresses and shall state: (1) that the Borrower is exercising its right to prepay the
Note, and (2) the date of prepayment (the “Optional Prepayment Notice”) which shall be not more
than three (3) Trading Days from the date of the Optional Prepayment Notice. On the date fixed for
prepayment (the “Optional Prepayment Date”), the Borrower shall make payment of the Optional
Prepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder
in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If
the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder
of an amount in cash (the “Optional Prepayment Amount”) equal to 150%, multiplied by the sum of:
(w) the then outstanding principal amount of this Note plus
(x) accrued and unpaid interest on the unpaid principal amount of this Note to the Optional
Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses
(w) and
(x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof (the
then outstanding principal amount of this Note to the date of payment plus the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the “Optional Prepayment
Sum”). If the Borrower delivers an Optional Prepayment Notice and fails to pay the Optional
Prepayment Amount due to the Holder of the Note within two (2) business days following the Optional
Prepayment Date, the Borrower shall forever forfeit its right to redeem the Note pursuant to this
Section 1.9.






 









 







1.10 Short Sales. During the term of this Note, Holder agrees that is shall not “short” the
Common Stock. “Short” shall mean borrowing Borrower’s Common Stock from a broker and selling it,
with the understanding that it must later be bought back and returned to the broker.




ARTICLE II. CERTAIN COVENANTS



2.1 Distributions on Capital Stock. So long as the Borrower shall have any obligation under
this Note, the Borrower shall not without the Holder’s written consent (a) pay, declare or set
apart for such payment, any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of Common Stock solely in the
form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary
make any other payment or distribution in respect of its capital stock except for distributions
pursuant to any shareholders’ rights plan which is approved by a majority of the Borrower’s
disinterested directors.



2.2 Restriction on Stock Repurchases. So long as the Borrower shall have any obligation
under this Note, the Borrower shall not without the Holder’s written consent redeem, repurchase or
otherwise acquire (whether for cash or in exchange for property or other securities or otherwise)
in any one transaction or series of related transactions any shares of capital stock of the
Borrower or any warrants, rights or options to purchase or acquire any such shares.



2.3 Borrowings. So long as the Borrower shall have any obligation under this Note, the
Borrower shall not, without the Holder’s written consent, create, incur, assume or suffer to exist
any liability for borrowed money, except (a) borrowings in existence or committed on the date
hereof and of which the Borrower has informed Holder in writing prior to the date





 









 







hereof, (b) indebtedness to trade creditors or financial institutions incurred in the ordinary
course of business or (c) borrowings, the proceeds of which shall be used to repay this Note.



2.4 Sale of Assets. So long as the Borrower shall have any obligation under this Note, the
Borrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any
significant portion of its assets outside the ordinary course of business. Any consent to the
disposition of any assets may be conditioned on a specified use of the proceeds of disposition.



2.5 Advances and Loans. So long as the Borrower shall have any obligation under this Note,
the Borrower shall not, without the Holder’s written consent, lend money, give credit or make
advances to any person, firm, joint venture or corporation, including, without limitation,
officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits
or advances (a) in existence or committed on the date hereof and which the Borrower has informed
Holder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) not
in excess of $100,000.



2.6 Contingent Liabilities. So long as the Borrower shall have any obligation under this
Note, the Borrower shall not, without the Holder’s written consent, which shall not be unreasonably
withheld, assume, guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any person, firm, partnership, joint venture or corporation, except by the
endorsement of negotiable instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof and which the
Borrower has informed Holder in writing prior to the date hereof, and



(b) similar transactions in the ordinary course of business.




ARTICLE III. EVENTS OF DEFAULT




     If any of the following events of default (each, an “Event of Default”) shall occur:

3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof or
interest thereon when due on this Note, whether at maturity, upon a Trading Market Prepayment Event
pursuant to Section 1.7, upon acceleration or otherwise;



3.2 Conversion and the Shares. The Borrower fails to issue shares of Common Stock to the
Holder (or announces or threatens that it will not honor its obligation to do so) upon exercise by
the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails
to transfer or cause its transfer agent to transfer (electronically or in certificated form) any
certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise
pursuant to this Note as and when required by this Note, or fails to remove any restrictive legend
(or to withdraw any stop transfer instructions in respect thereof) on any certificate for any
shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note
as and when required by this Note (or makes any announcement, statement or threat that it does not
intend to honor the obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to





 









 







honor its obligations shall not be rescinded in writing) for three (3) days after the Borrower
shall have been notified thereof in writing by the Holder;



3.3 Breach of Covenants. The Borrower breaches any material covenant or other material term
or condition contained in this Note and any collateral documents including but not limited to the
Purchase Agreement and such breach continues for a period of ten (10) days after written notice
thereof to the Borrower from the Holder;



3.4 Breach of Representations and Warranties. Any representation or warranty of the
Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto
or in connection herewith (including, without limitation, the Purchase Agreement), shall be false
or misleading in any material respect when made and the breach of which has (or with the passage of
time will have) a material adverse effect on the rights of the Holder with respect to this Note or
the Purchase Agreement;



3.5 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an
assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business, or such a receiver or
trustee shall otherwise be appointed;



3.6 Judgments. Any money judgment, writ or similar process shall be entered or filed
against the Borrower or any subsidiary of the Borrower or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20)
days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld;



3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower;



3.8 Delisting of Common Stock. The Borrower shall fail to maintain the listing of the
Common Stock on at least one of the OTCBB or an equivalent replacement exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock
Exchange;



3.9 Failure to Comply with the Exchange Act. The Borrower shall fail to comply with the
reporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the
reporting requirements of the Exchange Act; or



3.10 Liquidation. Any dissolution, liquidation, or winding up of Borrower or any
substantial portion of its business.



3.11 Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it
is otherwise generally unable to pay its debts as such debts become due,





 









 







provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern”
shall not be an admission that the Borrower cannot pay its debts as they become due.



3.12 Maintenance of Assets. The failure by Borrower to maintain any material intellectual
property rights, personal, real property or other assets which are necessary to conduct its
business (whether now or in the future).



3.13 Financial Statement Restatement. The restatement of any financial statements filed by
the Borrower with the SEC for any date or period from two years prior to the Issue Date of this
Note and until this Note is no longer outstanding, if the result of such restatement would, by
comparison to the unrestated financial statement, have constituted a material adverse effect on the
rights of the Holder with respect to this Note or the Purchase Agreement.



3.14 Reverse Splits. The Borrower effectuates a reverse split of its Common Stock without
twenty (20) days prior written notice to the Holder.



Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1
(solely with respect to failure to pay the principal hereof or interest thereon when due at the
Maturity Date), the Borrower shall pay to the Holder, in full satisfaction of its obligations
hereunder, an amount equal to the Default Sum (as defined herein). Upon the occurrence and during
the continuation of any Event of Default specified in Sections 3.1 (solely with respect to failure
to pay the principal hereof or interest thereon when due on this Note upon a Trading Market
Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.2, 3.3, 3.4, 3.6, or 3.8
exercisable through the delivery of written notice to the Borrower by such Holders (the “Default
Notice”), and upon the occurrence of an Event of Default specified the remaining sections of
Articles III (other than failure to pay the principal hereof or interest thereon at the Maturity
Date specified in Section 3,1 hereof), the Note shall become immediately due and payable and the
Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount
equal to the greater of (i) 150% times the sum of (w) the then outstanding
principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal
amount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y)
Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding
principal amount of this Note to the date of payment plus the amounts referred to in
clauses (x), (y) and (z) shall collectively be known as the “Default Sum”) or (ii) the “parity
value” of the Default Sum to be prepaid, where parity value means (a) the highest number of shares
of Common Stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordance
with Article I, treating the Trading Day immediately preceding the Mandatory Prepayment Date as the
“Conversion Date” for purposes of determining the lowest applicable Conversion Price, unless the
Default Event arises as a result of a breach in respect of a specific Conversion Date in which case
such Conversion Date shall be the Conversion Date), multiplied by (b) the highest Closing
Price for the Common Stock during the period beginning on the date of first occurrence of the Event
of Default and ending one day prior to the Mandatory Prepayment Date (the “Default Amount”) and all
other amounts payable hereunder shall immediately become due and payable, all without demand,
presentment or notice, all of which hereby are expressly waived, together with all costs,
including, without





 









 







limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity.



If the Borrower fails to pay the Default Amount within five (5) business days of written notice
that such amount is due and payable, then the Holder shall have the right at any time, so long as
the Borrower remains in default (and so long and to the extent that there are sufficient authorized
shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default
Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by
the Conversion Price then in effect.




ARTICLE IV. MISCELLANEOUS



4.1 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 privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.



4.2 Notices. All notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall
be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid,
or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to
such other address as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be deemed effective (a)
upon hand delivery or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if delivered on a
business day during normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received) or (b) on the second business day following the
date of mailing by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for such communications
shall be:



If to the Borrower, to:



CytoCore, Inc.



414 North Orleans Street, Suite 510

Chicago, IL 60654

Attn: Robert F. McCullough, Jr.

Chief Executive Officer and Chief Financial Officer

facsimile: [enter fax number]



With a copy by fax only to (which copy shall not constitute notice):



[enter name of law firm]





 









 







Attn: [attorney name] [enter
address line 1]

 [enter city,
state, zip]

 facsimile: [enter fax
number]



If to the
Holder: ASHER ENTERPRISES, INC. 1 Linden Pl., Suite 207 Great Neck, NY. 11021 Attn: Curt Kramer, President facsimile: [enter fax number]



With a copy by fax only to (which copy shall not constitute notice):



Naidich Wurman Birnbaum & Mayday LLP

80 Cuttermill Road, Suite 410 Great Neck,

NY 11021 Attn: Bernard S. Feldman, Esq.

facsimile: [enter fax number]



4.3 Amendments. This Note and any provision hereof may only be amended by an instrument in
writing signed by the Borrower and the Holder. The term “Note” and all reference thereto, as used
throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended
or supplemented.



4.4 Assignability. This Note shall be binding upon the Borrower and its successors and
assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Each
transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the 1933
Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral
in connection with a bona fide margin account or other lending arrangement.



4.5 Cost of Collection. If default is made in the payment of this Note, the Borrower shall
pay the Holder hereof costs of collection, including reasonable attorneys’ fees.



4.6 Governing Law. This Note shall be governed by and construed in accordance with the laws
of the State of New York without regard to principles of conflicts of laws. Any action brought by
either party against the other concerning the transactions contemplated by this Note shall be
brought only in the state courts of New York or in the federal courts located in the state and
county of Nassau. The parties to this Note hereby irrevocably waive any objection to jurisdiction
and venue of any action instituted hereunder and shall not assert any defense based on lack of
jurisdiction or venue or based upon forum non conveniens. The Borrower and Holder waive trial by
jury. The prevailing party shall be entitled to recover from the other party its reasonable
attorney’s fees and costs. In the event that any provision of this Note or any other agreement
delivered in connection herewith 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 any agreement. Each party hereby
irrevocably waives personal service of process and consents to process being served in any suit,
action or proceeding in connection with this Agreement or any other Transaction Document by mailing
a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any other manner
permitted by law.



4.7 Certain Amounts. Whenever pursuant to this Note the Borrower is required to pay an
amount in excess of the outstanding principal amount (or the portion thereof required to be paid at
that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower
and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this
Note may be difficult to determine and the amount to be so paid by the Borrower represents
stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of
the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock
acquired upon conversion of this Note at a price in excess of the price paid for such shares
pursuant to this Note. The Borrower and the Holder hereby agree that such amount of stipulated
damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a
cash payment without the opportunity to convert this Note into shares of Common Stock.



4.8 Purchase Agreement. By its acceptance of this Note, each party agrees to be bound by
the applicable terms of the Purchase Agreement.



4.9 Notice of Corporate Events. Except as otherwise provided below, the Holder of this Note
shall have no rights as a Holder of Common Stock unless and only to the extent that it converts
this Note into Common Stock. The Borrower shall provide the Holder with prior notification of any
meeting of the Borrower’s shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Borrower of a record of its shareholders for the
purpose of determining shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire (including by way of
merger, consolidation, reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of determining
shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of
all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or
winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to the consummation of
the transaction or event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and a brief statement
regarding the amount and character of such dividend, distribution, right or other event to the
extent known at such time. The Borrower shall make a public announcement of any





 












 




event requiring notification to the Holder hereunder substantially simultaneously with the
notification to the Holder in accordance with the terms of this Section 4.9.



4.10 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder
will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction
contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of
its obligations under this Note will be inadequate and agrees, in the event of a breach or
threatened breach by the Borrower of the provisions of this Note, that the Holder shall be
entitled, in addition to all other available remedies at law or in equity, and in addition to the
penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any
breach of this Note and to enforce specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other security being required.




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     IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly
authorized officer this March 17, 2010.



 









 





	 	 	 	 	 
	 	CytoCore, Inc.

 	 
	 	By:  	 	 
	 	 	Robert F. McCullough, Jr.  	 
	 	 	Chief Executive Officer and Chief Financial Officer 	 
	 




 











 





EXHIBIT A




NOTICE OF CONVERSION




(To be Executed by the Registered Holder

in order to Convert the Notes)


The undersigned hereby irrevocably elects to convert $                     principal amount of the Note
(defined below) into shares of common stock, $0.001 par value per share (“Common Stock”), of
CytoCore, Inc., a Delaware corporation (the “Borrower”) according to the conditions of the
convertible note of the Borrower dated as of                      (the “Notes”), as of the date written
below. If securities are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates. No fee will be charged to the Holder for any conversion, except for transfer
taxes, if any. A copy of each Note is attached hereto (or evidence of loss, theft or destruction
thereof).



The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of
Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal
Agent Commission system (“DWAC Transfer”).



Name of DTC Prime Broker:



Account Number:



In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way
of a DWAC Transfer, the undersigned hereby requests that the Borrower issue a certificate or
certificates for the number of shares of Common Stock set forth below (which numbers are based on
the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:



Name:



Address:



The undersigned represents and warrants that all offers and sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Notes shall be made pursuant to
registration of the securities under the Securities Act of 1933, as amended (the “Act”), or
pursuant to an exemption from registration under the Act.



Date of Conversion:                                                        

Applicable Conversion Price:                                          Number

of Shares of Common Stock to be Issued Pursuant to

Conversion of the Notes:                      Signature:

                                                             Name:

                                                             Address:

                                                            




 









 




The Borrower shall issue and deliver shares of Common Stock to an overnight courier not later than
three business days following receipt of the original Note(s) to be converted, and shall make
payments pursuant to the Notes for the number of business days such issuance and delivery is late.