[FORM OF SENIOR SECURED CONVERTIBLE
NOTE]


 


NEITHER THE ISSUANCE AND SALE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY
TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 17(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.


 


MGT
Capital Investments, Inc.


 


SENIOR
SECURED CONVERTIBLE NOTE


 


	Issuance Date:  May [     ],
    2012	Original Principal Amount: U.S. $3,500,000


 


FOR VALUE RECEIVED,
MGT Capital Investments, Inc., a Delaware corporation (the "Company"), hereby promises to pay to HUDSON BAY MASTER
FUND LTD. or registered assigns (the "Holder") the amount set out above as the Original Principal Amount (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the "Principal") when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof)
and to pay interest ("Interest") on any outstanding Principal at the applicable Interest Rate from the date set
out above as the Issuance Date (the "Issuance Date") until the same becomes due and payable, whether upon
an Interest Date (as defined below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Senior Secured Convertible Note (including all Senior Secured Convertible Notes issued in exchange,
transfer or replacement hereof, this "Note") is one of an issue of Senior Secured Convertible Notes issued pursuant
to the Securities Purchase Agreement on the Closing Date (collectively, the "Notes" and such other Senior Secured
Convertible Notes, the "Other Notes"). Certain capitalized terms used herein are defined in Section 28.


 



    	 



    	 



    

 


(1)         PAYMENTS
OF PRINCIPAL; PREPAYMENT. On the Maturity Date, the Company shall pay to the Holder an amount in
cash representing all outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late Charges on such Principal
and Interest.  The "Maturity Date" shall be [______], 20131, as may be extended at the
option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined in Section 4(a)) shall have occurred
and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) or any event shall have occurred and be
continuing on the Maturity Date (as may be extended pursuant to this Section 1) that with the passage of time and the failure
to cure would result in an Event of Default and (ii) through the date that is ten (10) Business Days after the consummation
of a Change of Control in the event that a Change of Control is publicly announced or a Change of Control Notice (as defined in
Section 5(b)) is delivered prior to the Maturity Date. Other than as specifically permitted by this Note, the Company may not
prepay any portion of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid Late Charges on Principal and
Interest, if any.


 


(2)         INTEREST;
INTEREST RATE. (a) Interest on this Note shall commence accruing on the Issuance Date and shall be computed on the basis
of a 360-day year and twelve 30-day months and shall be payable in arrears on the first Business Day of each Calendar Quarter
after the Issuance Date (each, an "Interest Date") with the first Interest
Date being July 2, 2012. Interest shall be payable on each Interest Date, to the record holder of this Note on the applicable Interest
Date, in shares of Common Stock ("Interest Shares") so long as there has been no Equity Conditions Failure; provided
however, that the Company may, at its option following notice to the Holder, pay Interest on any Interest Date in cash ("Cash
Interest") or in a combination of Cash Interest and Interest Shares. The Company shall deliver a written notice (each,
an "Interest Election Notice") to each holder of the Notes on or prior to the applicable Interest Notice Due Date
(the date such notice is delivered to all of the holders of Notes, the "Interest Notice Date") which notice (i)
either (A) confirms that Interest to be paid on such Interest Date shall be paid entirely in Interest Shares or (B) elects to pay
Interest as Cash Interest or a combination of Cash Interest and Interest Shares and specifies the amount of Interest that shall
be paid as Cash Interest and the amount of Interest, if any, that shall be paid in Interest Shares and (ii) certifies that the
Equity Conditions are satisfied as of such Interest Notice Date. If there is an Equity Conditions Failure as of the Interest Notice
Date, then unless the Company has elected to pay such Interest as Cash Interest, the Interest Notice shall indicate that unless
the Holder waives the Equity Conditions, the Interest shall be paid as Cash Interest. If any portion of Interest for a particular
Interest Date shall be paid in Interest Shares, then (1) contemporaneously with the delivery of the Interest Election Notice on
the applicable Interest Notice Date, the Company shall issue to the Holder, in accordance with Section 2(b), such number of shares
of Common Stock equal to (x) the amount of Interest payable on the applicable Interest Date in Interest Shares divided by (y) the
applicable Initial Interest Conversion Price (the "Pre-Interest Shares") and (2) on the applicable Interest Date,
the Company shall issue to the Holder, in accordance with Section 2(b), any Interest Balance Shares. All Pre-Interest Shares and
Interest Balance Shares shall be fully paid and nonassessable shares of Common Stock (rounded to the nearest whole share in accordance
with Section 3(a)). If the Company confirmed the payment of the applicable Interest in Interest Shares, in whole or in part, and
the Equity Conditions were satisfied as of the applicable Interest Notice Date but an Equity Conditions Failure occurred between
the applicable Interest Notice Date and any time prior to the applicable Interest Date, the Company shall provide the Holder a
subsequent notice to that effect indicating that unless the Holder waives the Equity Conditions, the Interest shall be paid in
cash. If the Equity Conditions are not satisfied (or waived in writing by the Holder) during such period, then at the option of
the Holder, the Holder may require the Company to pay the amount of Interest (including any portion of the Pre-Interest Shares
in which case the Holder shall return such Pre-Interest Shares to the Company) payable on the applicable Interest Date as Cash
Interest.


 





 






 1 Insert eighteen month anniversary of the
Issuance Date.


 



    	- 2 -



    	 



    

 


(b)          When
any Interest Shares are to be paid on an Interest Date, the Company shall (i) (A) provided that the Company's transfer agent (the
"Transfer Agent") is participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer Program, credit such aggregate number of Interest Shares to which the Holder shall be entitled to the Holder's or its
designee's balance account with DTC through its Deposit Withdrawal at Custodian system, or (B) if the Transfer Agent is not participating
in the DTC Fast Automated Securities Transfer Program, issue and deliver on the applicable Interest Date, to the address set forth
in the register maintained by the Company for such purpose pursuant to the Securities Purchase Agreement or to such address as
specified by the Holder in writing to the Company at least two (2) Business Days prior to the applicable Interest Date, a certificate,
registered in the name of the Holder or its designee, for the number of Interest Shares to which the Holder shall be entitled and
(ii) with respect to each Interest Date, pay to the Holder, in cash by wire transfer of immediately available funds, the amount
of any Cash Interest.


 


(c)          Prior
to the payment of Interest on an Interest Date, Interest on this Note shall accrue at the Interest Rate and be payable by way of
inclusion of the Interest in the Conversion Amount on each Conversion Date in accordance with Section 3(b)(i). From and after the
occurrence and during the continuance of an Event of Default, the Interest Rate shall be increased to eighteen percent (18%).
In the event that such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall cease
to be effective as of the date of such cure; provided that the Interest as calculated and unpaid at such increased rate during
the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such
Event of Default through and including the date of cure of such Event of Default. The Company shall pay any and all taxes that
may be payable with respect to the issuance and delivery of Interest Shares.


 


(3)         CONVERSION
OF NOTES. At any time after the Issuance Date, this Note shall be convertible into shares of the Company's common stock, par
value $0.001 per share (the "Common Stock"), on the terms and conditions set forth in this Section 3.


 


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


 



    	- 3 -



    	 



    

 


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


 


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


 


(ii)         "Conversion
Price" means, as of any Conversion Date (as defined below) or other date of determination, $3.00, subject to adjustment
as provided herein.


 


(c)          Mechanics
of Conversion.


 


(i)          Optional
Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a "Conversion Date"),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York time, on such
date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the "Conversion Notice")
to the Company and the Transfer Agent and (B) if required by Section 3(c)(iii), surrender this Note to a common carrier for delivery
to the Company as soon as practicable on or following such date (or an indemnification undertaking with respect to this Note in
the case of its loss, theft or destruction). On or before the first (1st) Business Day following the date of receipt of a Conversion
Notice, the Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the Holder and the Transfer
Agent. On or before the third (3rd) Trading Day following the date of receipt of a Conversion Notice (the "Share Delivery
Date"), the Company shall (x) provided that the Transfer Agent is participating in the DTC Fast Automated Securities
Transfer Program, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder's
or its designee's balance account with DTC through its Deposit Withdrawal at Custodian system or (y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion
Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which
the Holder shall be entitled. If this Note is physically surrendered for conversion as required by Section 3(c)(iii) and the outstanding
Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as
soon as practicable and in no event later than three (3) Business Days after receipt of this Note and at its own expense, issue
and deliver to the Holder a new Note (in accordance with Section 17(d)) representing the outstanding Principal not converted. The
Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on the Conversion Date, irrespective of the date such Conversion
Shares are credited to the Holder's account with the Depository or the date of delivery of the certificates evidencing such Conversion
Shares, as the case may be.


 



    	- 4 -



    	 



    

 


(ii)         Company's
Failure to Timely Convert. If the Company shall fail to issue a certificate to the Holder or credit
the Holder's balance account with DTC, as applicable, for the number of shares of Common Stock to which the Holder is entitled
upon conversion of any Conversion Amount on or prior to the date which is three (3) Trading Days after a Conversion Date (a "Conversion
Failure"), then (A) the Company shall pay damages to the Holder for each Trading Day of such Conversion Failure in an
amount equal to 1.5% of the product of (1) the sum of the number of shares of Common Stock not issued to the Holder on or prior
to the Share Delivery Date and to which the Holder is entitled, and (2) the Closing Sale Price of the Common Stock on the Share
Delivery Date and (B) the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain
or have returned, as the case may be, any portion of this Note that has not been converted pursuant to such Conversion Notice;
provided that the voiding of a Conversion Notice shall not affect the Company's obligations to make any payments which have
accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if
within three (3) Trading Days after the Company's receipt of the facsimile copy of a Conversion Notice, the Company shall fail
to issue and deliver a certificate to the Holder or credit the Holder's balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon such holder's conversion of any Conversion Amount or on any date of the Company's obligation
to deliver shares of Common Stock as contemplated pursuant to clause (ii) below, and if on or after such Trading Day the Holder
purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder of Common
Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a "Buy-In"), then
the Company shall, within three (3) Trading Days after the Holder's request and in the Holder's discretion, either (i) pay cash
to the Holder in an amount equal to the Holder's total purchase price (including brokerage commissions and other out-of-pocket
expenses, if any) for the shares of Common Stock so purchased (the "Buy-In Price"), at which point the Company's
obligation to issue and deliver such certificate or credit the Holder's balance account with DTC for the shares of Common Stock
to which the Holder is entitled upon the Holder's conversion of the applicable Conversion Amount shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Closing Bid Price on the Conversion Date.


 



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(iii)        Registration;
Book-Entry. The Company shall maintain a register (the "Register") for the recordation of the names and addresses
of the holders of each Note and the principal amount of the Notes held by such holders (the "Registered Notes").
The entries in the Register shall be conclusive and binding for all purposes absent manifest error. The Company and the holders
of the Notes shall treat each Person whose name is recorded in the Register as the owner of a Note for all purposes, including,
without limitation, the right to receive payments of Principal and Interest, if any, hereunder, notwithstanding notice to the contrary.
A Registered Note may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register.
Upon its receipt of a request to assign or sell all or part of any Registered Note by a Holder, the Company shall record the information
contained therein in the Register and issue one or more new Registered Notes in the same aggregate principal amount as the principal
amount of the surrendered Registered Note to the designated assignee or transferee pursuant to Section 17. Notwithstanding anything
to the contrary in this Section 3(c)(iii), a Holder may assign any Note or any portion thereof to an Affiliate of such Holder or
a Related Fund of such Holder without delivering a request to assign or sell such Note to the Company and the recordation of such
assignment or sale in the Register (a "Related Party Assignment"); provided, that (x) the Company may continue
to deal solely with such assigning or selling Holder unless and until such Holder has delivered a request to assign or sell such
Note or portion thereof to the Company for recordation in the Register; (y) the failure of such assigning or selling Holder to
deliver a request to assign or sell such Note or portion thereof to the Company shall not affect the legality, validity, or binding
effect of such assignment or sale and (z) such assigning or selling Holder shall, acting solely for this purpose as a non-fiduciary
agent of the Company, maintain a register (the "Related Party Register") comparable to the Register on behalf
of the Company, and any such assignment or sale shall be effective upon recordation of such assignment or sale in the Related Party
Register. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion
Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which
notice may be included in a Conversion Notice) requesting physical surrender and reissue of this Note. The Holder and the Company
shall maintain records showing the Principal, Interest and Late Charges, if any, converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of
this Note upon conversion.


 


(iv)        Pro
Rata Conversion; Disputes. In the event that the Company receives a Conversion Notice from more than one holder of Notes for
the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion,
the Company, subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted on such date a pro
rata amount of such holder's portion of its Notes submitted for conversion based on the principal amount of Notes submitted for
conversion on such date by such holder relative to the aggregate principal amount of all Notes submitted for conversion on such
date. In the event of a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a conversion
of this Note, the Company shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute
in accordance with Section 22.


 



    	- 6 -



    	 



    

 


(v)         Mandatory
Conversion.


 


(A)         If
at any time from and after the Issuance Date (i) the Weighted Average Price of the Common Stock listed on the Principal Market
equals or exceeds 200% of the Conversion Price as of the Issuance Date (subject to appropriate adjustments for stock splits, stock
dividends, stock combinations and other similar transactions after the Issuance Date) for no less than twenty (20) Trading Days
during any thirty (30) consecutive Trading Day period occurring following the Issuance Date (the "Mandatory Conversion
Measuring Period") and (ii) no Equity Conditions Failure has occurred, the Company shall have the right to require the
Holder to convert all or any portion of the Conversion Amount then remaining under this Note, as designated in the Mandatory Conversion
Notice on the Mandatory Conversion Date (each as defined below) into fully paid, validly issued and nonassessable shares of Common
Stock in accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below)
(a "Mandatory Conversion"). The Company may exercise its right to require conversion under this Section 3(c)(v)(A)
by delivering within not more than two (2) Trading Days following the end of such Mandatory Conversion Measuring Period a written
notice thereof by facsimile and overnight courier to all, but not less than all, of the holders of Notes and the Transfer Agent
(the "Mandatory Conversion Notice" and the date all of the holders of the Notes received such notice is referred
to as the "Mandatory Conversion Notice Date"). The Mandatory Conversion Notice shall be irrevocable. The Mandatory
Conversion Notice shall (x) state (I) the Trading Day on which the Mandatory Conversion shall occur, which Trading Day shall not
be less than twenty (20) Trading Days nor more than sixty (60) Trading Days following the Mandatory Conversion Notice Date (the
"Mandatory Conversion Date"), (II) the aggregate Conversion Amount of the Notes which the Company has elected
to be subject to Mandatory Conversion from the Holder (the "Mandatory Conversion Amount") and all of the other
holders of the Notes pursuant to this Section 3(c)(v)(A) (and analogous provisions under the Other Notes), (III) the number of
shares of Common Stock to be issued to the Holder on the Mandatory Conversion Date and (y) certify that there has been no Equity
Conditions Failure. The Company may not effect more than one (1) Mandatory Conversion during any sixty (60) consecutive Trading
Day period. Notwithstanding anything to the contrary in this Section 3(c)(v)(A), until the Mandatory Conversion has occurred,
the Mandatory Conversion Amount may be converted, in whole or in part, by the Holder into shares of Common Stock pursuant to Section
3(c)(i). All Conversion Amounts converted by the Holder after the Mandatory Conversion Notice Date shall reduce the Mandatory Conversion
Amount of this Note required to be converted on the Mandatory Conversion Date, unless the Holder otherwise indicates in the applicable
Conversion Notice.


 



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


 


(d)          Limitations
on Conversions.


 


(i)          Beneficial
Ownership. The Company shall not effect any conversion of this Note, and the Holder of this Note shall not have the right to
convert any portion of this Note pursuant to the terms and conditions of this Note, to the extent that after giving effect to such
conversion, the Holder (together with the Holder's Affiliates) would beneficially own in excess of 9.99% (the "Maximum
Percentage") of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall
include the number of shares of Common Stock issuable upon conversion of this Note with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Note beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion
of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any Other Notes
or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned
by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). For purposes of this Section 3(d)(i), in determining the number of outstanding shares of Common Stock, the Holder
may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-K, Form 10-Q
or Form 8-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or
the Transfer Agent setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written
or oral request of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates
since the date as of which such number of outstanding shares of Common Stock was reported. By written notice to the Company, the
Holder may increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice;
provided that (i) any such increase will not be effective until the sixty-first (61st) day after such notice is delivered
to the Company, and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of Notes. The
provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms
of this Section 3(d)(i) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended
beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect
to such limitation.


 



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(ii)         Principal
Market Regulation. The Company shall not be obligated to issue any shares of Common Stock upon conversion of this Note, and
the Holder of this Note shall not have the right to receive upon conversion of this Note any shares of Common Stock, if the issuance
of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company may issue upon conversion
or exercise, as applicable, of the Notes and Warrants or as Interest Shares without breaching the Company's obligations under the
rules or regulations of the Principal Market (the "Exchange Cap"), except that such limitation shall not apply
in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Principal
Market for issuances of Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably satisfactory to the Required Holders. Until such approval
or written opinion is obtained, no purchaser of the Notes pursuant to the Securities Purchase Agreement (the "Purchasers")
shall be issued in the aggregate, upon conversion or exercise, as applicable, of Notes or Warrants, or as Interest Shares, shares
of Common Stock in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the
principal amount of Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on the Closing Date and the denominator
of which is the aggregate principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase Agreement
on the Closing Date (with respect to each Purchaser, the "Exchange Cap Allocation"). In the event that any Purchaser
shall sell or otherwise transfer any of such Purchaser's Notes, the transferee shall be allocated a pro rata portion of such Purchaser's
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion
of the Exchange Cap Allocation allocated to such transferee. In the event that any holder of Notes shall convert all of such holder's
Notes into a number of shares of Common Stock which, in the aggregate, is less than such holder's Exchange Cap Allocation, then
the difference between such holder's Exchange Cap Allocation and the number of shares of Common Stock actually issued to such holder
shall be allocated to the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in proportion
to the aggregate principal amount of the Notes then held by each such holder. For the avoidance of doubt, the number of shares
of Common Stock outstanding as of May 24, 2012 was 2,105,187, and as such, the Company shall be required to obtain stockholder
approval prior to the Purchasers acquiring more than an aggregate of 421,016 shares of Common Stock as a result of the issuance
of shares of Common Stock upon exercise of the Warrants, Interest Shares and/or Conversion Shares. Additionally, pursuant to the
Principal Market rules, the Purchasers acknowledge that the shares of Common Stock issuable upon exercise of the Warrants, the
Interest Shares and/or the Conversion Shares acquired prior to Stockholder Approval may not be voted for the Resolutions at the
Stockholder Meeting (each as defined in the Securities Purchase Agreement).


 



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(4)         RIGHTS
UPON EVENT OF DEFAULT.


 


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


 


(i)          the
suspension from trading or failure of the Common Stock to be listed on an Eligible Market for a period of ten (10) consecutive
Trading Days or for more than an aggregate of twenty (20) Trading Days in any 365-day period;


 


(ii)         the
Company's (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within ten (10)
Business Days after the applicable Conversion Date or (B) notice, written or oral, to any holder of the Notes, including by way
of public announcement or through any of its agents, at any time, of its intention not to comply with a request for conversion
of any Notes into shares of Common Stock that is tendered in accordance with the provisions of the Notes, other than pursuant to
Section 3(d);


 


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


 


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


 


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


 


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


 



    	- 10 -



    	 



    

 


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


 


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


 


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


 


(x)          any
breach or failure in any respect to comply with Section 14 of this Note;


 


(xi)         the
Company or any Subsidiary shall fail to perform or comply with any covenant or agreement contained in any Security Documents (as
defined in the Securities Purchase Agreement) to which it is a party;


 


(xii)        any
material provision of any Security Document (as determined by the Collateral Agent (as defined in the Securities Purchase Agreement))
shall at any time for any reason (other than pursuant to the express terms thereof) cease to be valid and binding on or enforceable
against the Company or any Subsidiary intended to be a party thereto, or the validity or enforceability thereof shall be contested
by any party thereto, or a proceeding shall be commenced by the Company, any Subsidiary or any governmental authority having jurisdiction
over any of them, seeking to establish the invalidity or unenforceability thereof, or the Company or any Subsidiary shall deny
in writing that it has any liability or obligation purported to be created under any Security Document;


 


(xiii)       any
Security Document, after delivery thereof pursuant hereto, shall for any reason fail or cease to create a valid and perfected and,
except to the extent permitted by the terms hereof or thereof, first priority Lien in favor of the Collateral Agent for the benefit
of the holders of the Notes on any Collateral (as defined in the Security Documents) purported to be covered thereby;


 



    	- 11 -



    	 



    

 


(xiv)      any
material damage to, or loss, theft or destruction of, a material amount of Collateral, whether or not insured, or any strike, lockout,
labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive
days, the cessation or substantial curtailment of revenue producing activities at any facility of the Company or any Subsidiary,
if any such event or circumstance could reasonably be expected to have a Material Adverse Effect (as defined in the Securities
Purchase Agreement);


 


(xv)       the
Stockholder Approval has not been obtained on or prior to the Stockholder Meeting Deadline (as defined in the Securities Purchase
Agreement);


 


(xvi)      the
Company's failure for any reason after the six (6) month anniversary of the Issuance Date to satisfy the current public information
requirement under Rule 144(c); or


 


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


 


(b)          Redemption
Right. Upon the occurrence of an Event of Default with respect to this Note or any Other Note, the Company shall within one
(1) Business Day deliver written notice thereof via facsimile and overnight courier (an "Event of Default Notice")
to the Holder. At any time after the earlier of the Holder's receipt of an Event of Default Notice and the Holder becoming aware
of an Event of Default, the Holder may require the Company to redeem (an "Event of Default Redemption") all or
any portion of this Note by delivering written notice thereof (the "Event of Default Redemption Notice") to the
Company, which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is electing to require the
Company to redeem. Each portion of this Note subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed
by the Company in cash at a price equal to 125% of the greater of (i) the Conversion Amount to be redeemed and (ii) the product
of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (x) the greatest Closing Sale
Price of the shares of Common Stock during the period beginning on the date immediately preceding such Event of Default and ending
on the date the Holder delivers the Event of Default Redemption Notice, by (y) the lowest Conversion Price in effect during such
period (the "Event of Default Redemption Price"). Redemptions required by this Section 4(b) shall be made
in accordance with the provisions of Section 11. To the extent redemptions required by this Section 4(b) are deemed or determined
by a court of competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be deemed to be voluntary
prepayments. The parties hereto agree that in the event of the Company's redemption of any portion of the Note under this Section
4(b), the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest
rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any
Event of Default redemption premium due under this Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder's actual loss of its investment opportunity and not as a penalty.


 



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


 


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


 



    	- 13 -



    	 



    

 


(b)          Redemption
Right. No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Change of Control, but
not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile
and overnight courier to the Holder (a "Change of Control Notice"). At any time during the period beginning on
the earlier to occur of (x) any oral or written agreement by the Company or any of its Subsidiaries, which upon consummation of
the transaction contemplated thereby would reasonably be expected to result in a Change of Control and (y) the Holder's receipt
of a Change of Control Notice and ending twenty (20) Trading Days after the date of the consummation of such Change of Control,
the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof ("Change
of Control Redemption Notice") to the Company, which Change of Control Redemption Notice shall indicate the Conversion
Amount the Holder is electing to require the Company to redeem. The portion of this Note subject to redemption pursuant to this
Section 5(b) shall be redeemed by the Company in cash at a price equal to 125% of the greater of (i) the Conversion Amount to be
redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing
(x) the greatest Closing Sale Price of the shares of Common Stock during the period beginning on the date immediately preceding
the earlier to occur of (1) the consummation of the Change of Control and (2) the public announcement of such Change of Control
and ending on the date the Holder delivers the Change of Control Redemption Notice, by (y) the lowest Conversion Price in effect
during such period (the "Change of Control Redemption Price"). Redemptions required by this Section 5 shall be
made in accordance with the provisions of Section 11 and shall have priority to payments to stockholders in connection with a Change
of Control. To the extent redemptions required by this Section 5(b) are deemed or determined by a court of competent jurisdiction
to be prepayments of the Note by the Company, such redemptions shall be deemed to be voluntary prepayments. Notwithstanding anything
to the contrary in this Section 5, but subject to Section 3(d), until the Change of Control Redemption Price (together with any
interest thereon) is paid in full, the Conversion Amount submitted for redemption under this Section 5(b) (together with any interest
thereon) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3. The parties hereto agree
that in the event of the Company's redemption of any portion of the Note under this Section 5(b), the Holder's damages would be
uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder. Accordingly, any Change of Control redemption premium
due under this Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder's actual
loss of its investment opportunity and not as a penalty.


 


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


 


(a)          Distribution
of Assets. If the Company shall declare or make any dividend or other distributions of its assets (or rights to acquire its
assets) to any or all holders of shares of Common Stock, by way of return of capital or otherwise (including without limitation,
any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction) (the "Distributions"), then the Holder will
be entitled to such Distributions as if the Holder had held the number of shares of Common Stock acquirable upon complete conversion
of this Note (without taking into account any limitations or restrictions on the convertibility of this Note) immediately prior
to the date on which a record is taken for such Distribution or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for such Distributions (provided, however, that to the extent that the Holder's
right to participate in any such Distribution would result in the Holder exceeding the Maximum Percentage, then the Holder shall
not be entitled to participate in such Distribution to such extent (or beneficial ownership of such shares of Common Stock as a
result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the Holder until
such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage).


 



    	- 14 -



    	 



    

 


(b)          Purchase
Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"),
then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which
the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion
of this Note (without taking into account any limitations or restrictions on the convertibility of this Note) immediately prior
to 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 shares of Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights (provided, however, that to the extent that the Holder's right to participate in any such Purchase Right would
result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Purchase Right
to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such
Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not
result in the Holder exceeding the Maximum Percentage, at which time the Holder shall be granted such right to the same extent
as if there had been no such limitation).


 


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


 


(7)         RIGHTS
UPON ISSUANCE OF OTHER SECURITIES.


 


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


 



    	- 15 -



    	 



    

 


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


 


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


 


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


 


(9)         RESERVATION
OF AUTHORIZED SHARES.


 


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


 



    	- 16 -



    	 



    

 


(b)          Insufficient
Authorized Shares. If at any time while any of the Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes
at least a number of shares of Common Stock equal to the Required Reserve Amount (an "Authorized Share Failure"),
then the Company shall immediately take all action necessary to increase the Company's authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes then outstanding. Without limiting
the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall either (x)
obtain the written consent of its stockholders for the approval of an increase in the number of authorized shares of Common Stock
and provide each stockholder with an information statement with respect thereto or (y) hold a meeting of its stockholders for the
approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall
provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such increase
in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such
proposal.


 


(10)        OPTIONAL
REDEMPTION AT THE COMPANY'S ELECTION.


 


(a)          General.
At any time from and after the seven (7) month anniversary of the Issuance Date, so long as no Equity Conditions Failure has occurred,
the Company shall have the right to redeem all or any portion of the Conversion Amount then remaining under this Note (the "Company
Optional Redemption Amount") as designated in the Company Optional Redemption Notice on the Company Optional Redemption
Date (each as defined below) (a "Company Optional Redemption"). The portion of this Note subject to redemption
pursuant to this Section 10(a) shall be redeemed by the Company in cash at a price equal to the greater of (i) 125% of the Conversion
Amount to be redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined
by dividing (x) the greatest Closing Sale Price of the shares of Common Stock during the period beginning on the date immediately
preceding the Company Optional Redemption Notice Date (as defined below) and ending on the date the Company Optional Redemption
Date, by (y) the lowest Conversion Price in effect during such period (the "Company Optional Redemption Price").
The Company may exercise its right to require redemption under this Section 10 by delivering a written notice thereof by facsimile
and overnight courier to all, but not less than all, of the holders of Notes (the "Company Optional Redemption Notice"
and the date all of the holders of the Notes received such notice is referred to as the "Company Optional Redemption Notice
Date"). The Company Optional Redemption Notice shall be irrevocable. The Company Optional Redemption Notice shall (x)
state the date on which the Company Optional Redemption shall occur (the "Company Optional Redemption Date"),
which date shall not be less than twenty (20) Business Days nor more than sixty (60) Business Days following the Company Optional
Redemption Notice Date, (y) state the aggregate Conversion Amount of the Notes which the Company has elected to be subject to Company
Optional Redemption from the Holder and all of the other holders of the Notes pursuant to this Section 10(a) (and analogous provisions
under the Other Notes) and (z) certify that there has been no Equity Conditions Failure as of the Company Optional Redemption Notice
Date. If the Company confirmed that there was no Equity Conditions Failure as of the applicable Company Optional Redemption Notice
Date but an Equity Conditions Failure occurred between the applicable Company Optional Redemption Notice Date and any time through
the applicable Company Optional Redemption Date, the Company shall provide the Holder a subsequent notice to that effect. If the
Equity Conditions are not satisfied (or waived in writing by the Holder) during such period, then the Company Conversion shall
be null and void with respect to all or any part designated by the Holder of the unconverted Company Optional Redemption Amount
and the Holder shall be entitled to all the rights of a holder of this Note with respect to such amount of the Company Optional
Redemption Amount. The Company may not effect more than one (1) Company Optional Redemption during any sixty (60) consecutive Trading
Day period. Notwithstanding anything to the contrary in this Section 10, until the Company Optional Redemption Price is paid, in
full, the Company Optional Redemption Amount may be converted, in whole or in part, by the Holder into shares of Common Stock pursuant
to Section 3. All Conversion Amounts converted by the Holder after the Company Optional Redemption Notice Date shall reduce the
Company Optional Redemption Amount of this Note required to be redeemed on the Company Optional Redemption Date, unless the Holder
otherwise indicates in the applicable Conversion Notice. Redemptions made pursuant to this Section 10 shall be made in accordance
with Section 11.


 



    	- 17 -



    	 



    

 


(b)          Pro
Rata Redemption Requirement. If the Company elects to cause a Company Optional Redemption pursuant to Section 10(a), then it
must simultaneously take the same action in the same proportion with respect to the Other Notes. If the Company elects a Company
Optional Redemption pursuant to Section 10(a) (or similar provisions under the Other Notes) with respect to less than all of the
Conversion Amounts of the Notes then outstanding, then the Company shall require redemption of a Conversion Amount from each of
the holders of the Notes equal to the product of (i) the aggregate Conversion Amount of Notes which the Company has elected to
cause to be redeemed pursuant to Section 10(a), multiplied by (ii) the fraction, the numerator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by such holder of outstanding Notes and the denominator of which is the sum of
the aggregate Original Principal Amount of the Notes purchased by all holders holding outstanding Notes (such fraction with respect
to each holder is referred to as its "Company Redemption Allocation Percentage," and such amount with respect
to each holder is referred to as its "Pro Rata Company Redemption Amount"); provided, however that in the event
that any holder's Pro Rata Company Redemption Amount exceeds the outstanding Principal amount of such holder's Note, then such
excess Pro Rata Company Redemption Amount shall be allocated amongst the remaining holders of Notes in accordance with the foregoing
formula. In the event that the initial holder of any Notes shall sell or otherwise transfer any of such holder's Notes, the transferee
shall be allocated a pro rata portion of such holder's Company Redemption Allocation Percentage and Pro Rata Company Redemption
Amount.


 



    	- 18 -



    	 



    

 


(11)        REDEMPTIONS.


 


(a)          Mechanics.
The Company shall deliver the applicable Event of Default Redemption Price to the Holder within five (5) Business Days after the
Company's receipt of the Holder's Event of Default Redemption Notice (the "Event of Default Redemption Date").
If the Holder has submitted a Change of Control Redemption Notice in accordance with Section 5(b), the Company shall deliver the
applicable Change of Control Redemption Price to the Holder (i) concurrently with the consummation of such Change of Control if
such notice is received prior to the consummation of such Change of Control and (ii) within five (5) Business Days after the Company's
receipt of such notice otherwise (such date, the "Change of Control Redemption Date"). The Company shall deliver
the applicable Company Optional Redemption Price to the Holder on the applicable Company Optional Redemption Date. The Company
shall pay the applicable Redemption Price to the Holder in cash by wire transfer of immediately available funds on the applicable
due date. In the event of a redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause
to be issued and delivered to the Holder a new Note (in accordance with Section 17(d)) representing the outstanding Principal which
has not been redeemed and any accrued Interest on such Principal which shall be calculated as if no Redemption Notice has been
delivered. In the event that the Company does not pay the applicable Redemption Price to the Holder within the time period required,
at any time thereafter and until the Company pays such unpaid Redemption Price in full, the Holder shall have the option, in lieu
of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Conversion
Amount that was submitted for redemption and for which the applicable Redemption Price (together with any Late Charges thereon)
has not been paid. Upon the Company's receipt of such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note (in accordance with
Section 17(d)) to the Holder representing such Conversion Amount to be redeemed and (z) the Conversion Price of this Note or such
new Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the applicable Redemption
Notice is voided and (B) the lowest Closing Bid Price of the shares of Common Stock during the period beginning on and including
the date on which the applicable Redemption Notice is delivered to the Company and ending on and including the date on which the
applicable Redemption Notice is voided. The Holder's delivery of a notice voiding a Redemption Notice and exercise of its rights
following such notice shall not affect the Company's obligations to make any payments of Late Charges which have accrued prior
to the date of such notice with respect to the Conversion Amount subject to such notice.


 


(b)          Redemption
by Other Holders. Upon the Company's receipt of notice from any of the holders of the Other Notes for redemption or repayment
as a result of an event or occurrence substantially similar to the events or occurrences described in Section 4(b), Section 5(b)
or Section 10 (each, an "Other Redemption Notice"), the Company shall immediately, but no later than one (1) Business
Day of its receipt thereof, forward to the Holder by facsimile a copy of such notice. If the Company receives a Redemption Notice
and one or more Other Redemption Notices, during the seven (7) Business Day period beginning on and including the date which is
three (3) Business Days prior to the Company's receipt of the Holder's Redemption Notice and ending on and including the date which
is three (3) Business Days after the Company's receipt of the Holder's Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and such Other Redemption Notices received during such
seven (7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the Notes (including the Holder)
based on the principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such Other Redemption
Notices received by the Company during such seven Business Day period.


 



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(12)        VOTING
RIGHTS. The Holder shall have no voting rights as the holder of this Note, except as required by law, and as expressly provided
in this Note.


 


(13)        SECURITY.
This Note and the Other Notes are secured to the extent and in the manner set forth in the Security Documents.


 


(14)        COVENANTS.


 


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


 


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


 


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


 


(d)          Cash
Dividend. So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, declare or pay any cash dividends or distributions on any equity securities of the Company or of its
Subsidiaries.


 


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


 


(f)          Restriction
on Redemption. Until all of the Notes have been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem or repurchase its capital stock without the prior express written consent
of the Required Holders.


 


(g)          Change
in Nature of Business. The Company shall not make, or permit any of its Subsidiaries to make, any change in the nature of its
business as described in the Company's most recent annual report filed on Form 10-K with the SEC. The
Company shall not modify its corporate structure or purpose.


 



    	- 20 -



    	 



    

 


(h)          Intellectual
Property. The Company shall not, and the Company shall not permit any of its Subsidiaries, directly or indirectly, to
encumber or allow any Liens on, any of its copyright rights, copyright applications, copyright registrations and like protections
in each work of authorship and derivative work, whether published or unpublished, any patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues, extensions, and continuations-in-part of the same, trademarks,
service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, and the
goodwill of the business of the Company and its Subsidiaries connected with and symbolized thereby, know-how, operating manuals,
trade secret rights, rights to unpatented inventions, and any claims for damage by way of any past, present, or future infringement
of any of the foregoing, other than Permitted Liens.


 


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


 


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


 


(k)          Maintenance
of Insurance. The Company shall maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations (including, without limitation, comprehensive general liability, hazard, rent and business
interruption insurance) with respect to its properties (including all real properties leased or owned by it) and business, in such
amounts and covering such risks as is required by any governmental authority having jurisdiction with respect thereto or as is
carried generally in accordance with sound business practice by companies in similar businesses similarly situated.


 


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


 



    	- 21 -



    	 



    

 


(15)        VOTE
TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The written consent of the Required Holders shall be required for any change or amendment
to the Notes; provided that any such amendment or waiver that complies with the foregoing but that disproportionately, materially
and adversely affects the rights and obligations of any Holder relative to the comparable rights and obligations of the other Holders
shall require the prior written consent of such adversely affected Holder.


 


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


 


(17)        REISSUANCE
OF THIS NOTE.


 


(a)          Transfer.
If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with Section 17(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 17(d)) to the Holder representing the outstanding Principal not being transferred. The Holder
and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) following
conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal
stated on the face of this Note.


 


(b)          Lost,
Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company
shall execute and deliver to the Holder a new Note (in accordance with Section 17(d)) representing the outstanding Principal.


 


(c)          Note
Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal
office of the Company, for a new Note or Notes (in accordance with Section 17(d) and in principal amounts of at least $100,000)
representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such
outstanding Principal as is designated by the Holder at the time of such surrender.


 


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


 



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


 


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


 


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


 


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


 



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(22)        DISPUTE
RESOLUTION. In the case of a dispute as to the determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price or the arithmetic calculation of the Conversion Rate, the Conversion Price or any Redemption Price, the Company shall
submit the disputed determinations or arithmetic calculations via facsimile within one (1) Business Day of receipt, or deemed receipt,
of the Conversion Notice or Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder. If
the Holder and the Company are unable to agree upon such determination or calculation within one (1) Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the Company shall, within one Business Day submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price to an independent,
reputable investment bank selected by the Holder and approved by the Company, such approval not to be unreasonably withheld or
delayed, or (b) the disputed arithmetic calculation of the Conversion Rate, Conversion Price or any Redemption Price to an independent,
outside accountant, selected by the Holder and approved by the Company, such approval not to be unreasonably withheld or delayed.
The Company, at the Company's expense, shall cause the investment bank or the accountant, as the case may be, to perform the determinations
or calculations and notify the Company and the Holder of the results no later than five (5) Business Days from the time it receives
the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.


 


(23)        NOTICES;
PAYMENTS.


 


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


 


(b)          Payments.
Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful
money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to
such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Purchasers,
shall initially be as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement); provided that the Holder
may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written
notice setting out such request and the Holder's wire transfer instructions. Whenever any amount expressed to be due by the terms
of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a
Business Day and, in the case of any Interest Date which is not the date on which this Note is paid in full, the extension of the
due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such amount at the rate of twenty four percent (24%) per
annum from the date such amount was due until the same is paid in full ("Late Charge").


 



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


 


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


 


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


 


(27)        Severability.
If any provision of this Note is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect
the validity of the remaining provisions of this Note so long as this Note as so modified continues to express, without material
change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability
of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties
or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good
faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which
comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).


 



    	- 25 -



    	 



    

 


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


 


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


 


(b)          "Bloomberg"
means Bloomberg Financial Markets.


 


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


 


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


 


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


 



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(f)          "Closing
Bid Price" and "Closing Sale Price" means, for any security as of any date, the last closing bid price
and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal
Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time,
as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security,
the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security
by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported
in the OTC Link or "pink sheets" by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the Closing Bid Price
or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid
Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined
by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 22. All such determinations to be appropriately adjusted for any stock dividend,
stock split, stock combination, reclassification or similar transaction during the applicable calculation period.


 


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


 


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


 


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


 


(j)          "Eligible
Market" means the Principal Market, The New York Stock Exchange, Inc., The NASDAQ Capital Market, The Nasdaq
Global Market or The Nasdaq Global Select Market.


 



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(k)          "Equity
Conditions" means each of the following conditions: (i) on each day during the period beginning thirty (30) Trading Days
prior to the applicable date of determination and ending on and including the applicable date of determination (the "Equity
Conditions Measuring Period"), either (x) all shares of Common Stock issuable upon conversion
of the Notes, exercise of the Warrants and as Interest Shares shall be eligible for sale without restriction pursuant to Rule 144
and without the need for registration under any applicable federal or state securities laws or (y) a registration statement shall
be, and on each day during the Equity Conditions Measuring Period such registration statement shall have been, effective and available
for the resale of all shares of Common Stock issuable upon conversion of the Notes, exercise of the Warrants and as Interest Shares;
(ii) on each day during the Equity Conditions Measuring Period the Common Stock is designated
for quotation on the Principal Market or any other Eligible Market and shall not have been suspended from trading on such exchange
or market (other than suspensions of not more than two (2) days and occurring prior to the applicable date of determination due
to business announcements by the Company); (iii) during the one (1) year period ending on and including the date immediately preceding
the applicable date of determination, the Company shall have delivered Conversion Shares upon conversion of the Notes and Warrant
Shares upon exercise of the Warrants to the holders on a timely basis as set forth in Section 3(c) hereof (and analogous provisions
under the Other Notes) and Sections 2(a) of the Warrants; (iv) any applicable shares of Common Stock
to be issued in connection with the event requiring determination may be issued in full without violating Section 3(d)(i)
and (ii) hereof and the rules or regulations of the Principal Market or any other applicable Eligible Market; (v) during the Equity
Conditions Measuring Period, the Company shall not have failed to timely make any payments within five (5) Business Days of when
such payment is due pursuant to any Transaction Document; (vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended Fundamental Transaction which has not been abandoned,
terminated or consummated, (B) an Event of Default or (C) an event that with the passage of time
or giving of notice would constitute an Event of Default (vii) the Company shall have no knowledge of
any fact that would cause any shares of Common Stock issuable upon conversion of the Notes, shares of Common Stock issuable upon
exercise of the Warrants and issuable as Interest Shares not to be eligible for sale without restriction pursuant to Rule 144 and
without the requirement to be in compliance with Rule 144(c)(1) (or any successor thereto) promulgated under the 1933 Act and any
applicable state securities laws; (viii) the Company otherwise shall have been in compliance with and shall not have breached
any provision, covenant, representation or warranty of any Transaction Document; (ix) the Stockholder Approval shall have occurred
on or prior to the Stockholder Approval Deadline; (x) no Holder shall be in possession of any material non-public information received
from the Company, any Subsidiary or its respective agents or affiliates; and (xi) solely with respect to the delivery of Pre-Interest
Shares and Post-Interest Shares, in no event shall the Company be permitted to pay Interest by delivering Pre-Interest Shares or
Post-Interest Shares in an amount that exceeds the product obtained by (i) multiplying the arithmetic average of the daily dollar
trading volume of the Common Stock as reported by Bloomberg L.P. for the twenty (20) consecutive Trading Days immediately preceding
such Interest Notice Date or Interest Date, as applicable, by (ii) two (2).


 


(l)          "Equity
Conditions Failure" means that on any day during the period commencing ten (10) Trading Days prior to the applicable date
of determination through the applicable date of determination, the Equity Conditions have not been satisfied (or waived in writing
by the Holder).


 


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


 



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


 


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


 


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


 


(q)          "Initial
Interest Conversion Price" means, with respect to any Interest Notice Date, the lower of (i) the applicable Conversion
Price and (ii) the price computed as 75% of the arithmetic average of the Weighted Average Price
of the Common Stock during the ten (10) consecutive Trading Day period immediately preceding the Interest Notice Date. All such
determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction
during such period.


 



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(r)          "Interest
Balance Shares" means, for any Interest Date, a number of shares of Common Stock equal to (i) the Post-Interest Shares
for such date minus (ii) the amount of any Pre-Interest Shares delivered in respect of the Interest Date; provided
that in the event that the amount of Pre-Interest Shares exceeds the Post-Interest Shares for such date (such excess, the "Interest
Shares Excess"), the Interest Balance Shares shall equal zero (0) for such date and in no event shall the Interest Shares
Excess reduce the number of Pre-Interest Shares payable on the next Interest Notice Date, if any.


 


(s)          "Interest
Conversion Price" means, with respect to any Interest Date, the lower of (i) the applicable Conversion Price and (ii)
that price which shall be computed as arithmetic average of the 75% of the Weighted Average Price of the Common Stock during the
ten (10) consecutive Trading Day period immediately preceding the applicable Interest Date. All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar transaction during such period.


 


(t)          "Interest
Notice Due Date" means the thirtieth (30th) Trading Day prior to the applicable Interest Date.


 


(u)          "Interest
Rate" means 8.00% per annum, subject to adjustment as set forth in Section 2.


 


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


 


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


 


(x)          "Permitted
Indebtedness" means (i) Indebtedness evidenced by this Note and the Other Notes, (ii) unsecured Indebtedness incurred
by the Company that is made expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected
in a written agreement acceptable to the Required Holders and approved by the Required Holders in writing, and which Indebtedness
does not provide at any time for (A) the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any
principal or premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (B) total interest and fees
at a rate in excess of 8.00% per annum, (iii) the Acquisition Indebtedness (as defined in the Securities Purchase Agreement)
and (iv) Indebtedness secured by Permitted Liens described in clauses (iv) and (v) of the definition of Permitted Liens.


 



    	- 30 -



    	 



    

 


(y)          "Permitted
Liens" means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings
for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course
of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen's liens, mechanics' liens and other similar liens, arising in the ordinary course of business with
respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings,
(iv) Liens (A) upon or in any equipment acquired or held by the Company or any of its Subsidiaries to secure the purchase price
of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (B)
existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired
and improvements thereon, and the proceeds of such equipment, (v) Liens incurred in connection with the extension, renewal or refinancing
of the indebtedness secured by Liens of the type described in clause (iv) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (vi) leases or subleases and licenses and sublicenses granted to others in the ordinary
course of the Company's business, not interfering in any material respect with the business of the Company and its Subsidiaries
taken as a whole, (vii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of
custom duties in connection with the importation of goods, (viii) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default under Section 4(a)(viii) and (ix) Liens on the patents
set forth on Schedule 28(y)(ix) attached hereto.


 


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


 


(aa)         "Post-Interest
Shares" means, for any Interest Date, that number of shares of Common Stock equal to the applicable amount of Interest
to be paid in Interest Shares on such Interest Date divided by the Interest Conversion Price (without taking into
account the delivery of any Pre-Interest Shares), rounded up to the nearest whole share of Common Stock.


 


(bb)         "Principal
Market" means NYSE MKT LLC.


 


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


 


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


 


(ee)         "Related
Fund" means, with respect to any Person, a fund or account managed by such Person or an Affiliate of such Person.


 


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


 


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


 



    	- 31 -



    	 



    

 


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


 


(ii)         "Subscription
Date" means May 24, 2012.


 


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


 


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


 


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


 


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


 


(nn)         "Weighted
Average Price" means, for any security as of any date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the Principal Market
publicly announces is the official close of trading) as reported by Bloomberg through its "Volume at Price" functions,
or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time
as such market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume-weighted
average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in the OTC Link or "pink sheets" by OTC Markets
Group Inc. (formerly Pink OTC Markets Inc.). If the Weighted Average Price cannot be calculated for a security on a particular
date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value
of such security, then such dispute shall be resolved pursuant to Section 22. All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or similar transaction during the applicable calculation
period.


 



    	- 32 -



    	 



    

 


(29)        DISCLOSURE.
Upon receipt or delivery by the Company of any notice in accordance with the terms of this Note, unless the Company has in good
faith determined that the matters relating to such notice do not constitute material, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or delivery publicly disclose such material,
nonpublic information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its Subsidiaries, the Company so shall indicate to such Holder contemporaneously
with delivery of such notice, and in the absence of any such indication, the Holder shall be allowed to presume that all matters
relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries.


 


[Signature Page Follows]


 



    	- 33 -



    	 



    

 


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


 


	 	MGT CAPITAL INVESTMENTS, INC.
	 	 	 
	 	By:	 
	 	 	Name:
	 	 	Title:


 



    	 



    	 



    

 


EXHIBIT I


 


MGT
CAPITAL INVESTMENTS, INC.


CONVERSION NOTICE


 


Reference is made to the Senior Secured
Convertible Note (the "Note") issued to the undersigned by MGT Capital Investments, Inc., a Delaware corporation
(the "Company"). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion
Amount (as defined in the Note) of the Note indicated below into shares of Common Stock par value $0.001 per share (the "Common
Stock") of the Company, as of the date specified below.


 


	Date of Conversion:	 


 


	Aggregate Conversion Amount to be converted:	 


 


	Please confirm the following information:


 


	Conversion Price:	 


 


	Number of shares of Common Stock to be issued:	 


 


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


 


	Issue to:	 
	 	 
	 	 
	 	 
	 	 


 


	Facsimile Number:	 


 


	Authorization:	 


 


	By:	 


 


	Title:	 


 


	Dated:	 


 


	Account Number:	 





	  (if electronic book entry transfer)	 


 


	Transaction Code Number:	 





	  (if electronic book entry transfer)	 




 



    	 



    	 



    

 


ACKNOWLEDGMENT


 


The Company hereby acknowledges
this Conversion Notice and hereby directs VStock Transfer, LLC to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated May __, 2012 from the Company and acknowledged and agreed to by VStock Transfer,
LLC.


 


	 	MGT CAPITAL INVESTMENTS, INC.
	 	 	 
	 	By:	 
	 	 	Name:
	 	 	Title: