ex4-3july2007.htm


    EXHIBIT 4.3

     

    
       

      THE
        SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
        THE
        SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”).  THE SECURITIES MAY
        NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
        STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN
        FORM,
        SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS
        THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT
        TO RULE
        144 OR REGULATION S UNDER SAID ACT.

       

      


       

      CALLABLE
        SECURED CONVERTIBLE NOTE

       

      New
        York,
        New York

      July
        19,
        2007                                                                                                                                                                                                                                                                                                 
 $22,000

       

      FOR
        VALUE RECEIVED, AVITAR INC., a Delaware corporation
        (hereinafter called the “Borrower”), hereby promises to pay to
        the order of AJW PARTNERS, LLC or registered assigns (the
“Holder”) the sum of $22,000, on July 19, 2010 (the
“Maturity Date”), and to pay interest on the unpaid
        principal
        balance hereof at the rate of eight percent (8%) (the “Interest
        Rate”) per annum from July 19, 2007 (the “Issue Date”)
        until the same becomes due and payable, whether at maturity or upon acceleration
        or by prepayment or otherwise.  Any amount of principal or interest on
        this Note which is not paid when due shall bear interest at the rate of fifteen
        percent (15%) per annum from the due date thereof until the same is paid
        (“Default Interest”).  Interest shall commence
        accruing on the Issue Date, shall be computed on the basis of a 365-day year
        and
        the actual number of days elapsed and shall be payable quarterly provided
        that
        no interest shall be due and payable for any month in which the Trading Price
        (as such term is defined below) is greater than $.20 for each Trading Day
        (as
        such term is defined below) of the month. All payments due hereunder (to
        the
        extent not converted into common stock, $.01 par value per share (the
“Common Stock”) in accordance with the terms hereof) shall be
        made in lawful money of the United States of America.  All payments
        shall be made at such address as the Holder shall hereafter give to the Borrower
        by written notice made in accordance with the provisions of this
        Note.  Whenever any amount expressed to be due by the terms of this
        Note is due on any day which is not a business day, the same shall instead
        be
        due on the next succeeding day which is a business day and, in the case of
        any
        interest payment date which is not the date on which this Note is paid in
        full,
        the extension of the due date thereof shall not be taken into account for
        purposes of determining the amount of interest due on such date.  As
        used in this Note, the term “business day” shall mean any day other than a
        Saturday, Sunday or a day on which commercial banks in the city of New York,
        New
        York are authorized or required by law or executive order to remain
        closed.  Each capitalized term used herein, and not otherwise defined,
        shall have the meaning ascribed thereto in that certain Securities Purchase
        Agreement, dated July 24, 2007, pursuant to which this Note was originally
        issued (the “Purchase Agreement”).

       

      This
        Note
        is free from all taxes, liens, claims and encumbrances with respect to the
        issue
        thereof and shall not be subject to preemptive rights or other similar rights
        of
        shareholders of the Borrower and will not impose personal liability upon
        the
        holder thereof.  The obligations of the Borrower under this Note shall
        be secured by that certain Security Agreement and Intellectual Property Security
        Agreement, each dated July 24, 2007 by and between the Borrower and the
        Holder.

       

      The
        following terms shall apply to this Note:

       

       

      ARTICLE
        I. CONVERSION RIGHTS

       

      1.1  Conversion
        Right.  The Holder shall have the right
        from time to time, and at any time on or prior to the earlier of (i) the
        Maturity Date and (ii) the date of payment of the Default Amount (as defined
        in
        Article III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment
        Amount (as defined in Section 5.1 or any payments pursuant to Section 1.7,
        each
        in respect of the remaining outstanding principal amount of this Note to
        convert
        all or any part of the outstanding and unpaid principal amount of this Note
        into
        fully paid and non-assessable shares of Common Stock, as such Common Stock
        exists on the Issue Date, or any shares of capital stock or other securities
        of
        the Borrower into which such Common Stock shall hereafter be changed or
        reclassified at the conversion price  (the “Conversion
        Price”) determined as provided herein (a
“Conversion”); provided, however, that in no
        event shall the Holder be entitled to convert any portion of this Note in
        excess
        of that portion of this Note upon conversion of which the sum of (1) the
        number
        of shares of Common Stock beneficially owned by the Holder and its affiliates
        (other than shares of Common Stock which may be deemed beneficially owned
        through the ownership of the unconverted portion of the Notes or the unexercised
        or unconverted portion of any other security of the Borrower (including,
        without
        limitation, the warrants issued by the Borrower pursuant to the Purchase
        Agreement) subject to a limitation on conversion or exercise analogous to
        the
        limitations contained herein) and (2) the number of shares of Common Stock
        issuable upon the conversion of the portion of this Note with respect to
        which
        the determination of this proviso is being made, would result in beneficial
        ownership by the Holder and its affiliates of more than 4.99% of the outstanding
        shares of Common Stock and providedfurther that the Holder shall
        not be entitled to convert any portion of this Note during any month immediately
        succeeding a Determination Date on which the Borrower exercises its prepayment
        option pursuant to Section 5.2 of this Note.  For purposes of the
        proviso to the immediately preceding sentence, beneficial ownership shall
        be
        determined in accordance with Section 13(d) of the Securities Exchange Act
        of
        1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided
        in clause (1) of such proviso.  The number of shares of Common Stock
        to be issued upon each conversion of this Note shall be determined by dividing
        the Conversion Amount (as defined below) by the applicable Conversion Price
        then
        in effect on the date specified in the notice of conversion, in the form
        attached hereto as Exhibit A (the “Notice of Conversion”),
        delivered to the Borrower by the Holder in accordance with Section 1.4 below;
        provided that the Notice of Conversion is submitted by facsimile (or by other
        means resulting in, or reasonably expected to result in, notice) to the Borrower
        before 6:00 p.m., New York, New York time on such conversion date (the
“Conversion Date”).  The term “Conversion
        Amount” means, with respect to any conversion of this Note, the sum of
        (1) the principal amount of this Note to be converted in such conversion
        plus (2) accrued and unpaid interest, if any, on such principal amount
        at
        the interest rates provided in this Note to the Conversion Date, provided,
        however, that the Company shall have the right to pay any or all interest
        in
        cash plus (3) Default Interest, if any, on the amounts referred to in the
        immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s
        option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
        hereof or pursuant to Section 2(c) of that certain Registration Rights
        Agreement, dated as of July 24, 2007, executed in connection with the initial
        issuance of this Note and the other Notes issued on the Issue Date (the
“Registration Rights Agreement”).  The term
“Determination Date” means the last business day of each month
        after the Issue Date.

       

      1.2  Conversion
        Price.

       

      (a)  Calculation
        of Conversion Price.  The Conversion
        Price shall be the Variable Conversion Price (as defined herein) (subject,
        in
        each case, to equitable adjustments for stock splits, stock dividends or
        rights
        offerings by the Borrower relating to the Borrower’s securities or the
        securities of any subsidiary of the Borrower, combinations, recapitalization,
        reclassifications, extraordinary distributions and similar
        events).  The “Variable Conversion Price” shall mean
        the Applicable Percentage (as defined herein) multiplied by the Market Price
        (as
        defined herein).  “Market Price” means the average of
        the lowest three (3) Trading Prices (as defined below) for the Common Stock
        during the twenty (20) Trading Day period ending one Trading Day prior to
        the
        date the Conversion Notice is sent by the Holder to the Borrower via facsimile
        (the “Conversion Date”).  “Trading
        Price” means, for any security as of any date, the intraday trading
        price on the Over-the-Counter Bulletin Board (the “OTCBB”) as
        reported by a reliable reporting service (“Reporting Service”)
        mutually acceptable to Borrower and Holder and hereafter designated by Holders
        of a majority in interest of the Notes and the Borrower or, if the OTCBB
        is not
        the principal trading market for such security, the intraday trading price
        of
        such security on the principal securities exchange or trading market where
        such
        security is listed or traded or, if no intraday trading price of such security
        is available in any of the foregoing manners, the average of the intraday
        trading prices of any market makers for such security that are listed in
        the
“pink sheets” by the National Quotation Bureau, Inc.  If the Trading
        Price cannot be calculated for such security on such date in the manner provided
        above, the Trading Price shall be the fair market value as mutually determined
        by the Borrower and the holders of a majority in interest of the Notes being
        converted for which the calculation of the Trading Price is required in order
        to
        determine the Conversion Price of such Notes.  “Trading
        Day” shall mean any day on which the Common Stock is traded for any
        period on the OTCBB, or on the principal securities exchange or other securities
        market on which the Common Stock is then being
        traded.  “Applicable Percentage” shall mean
        55.0%.

       

      (b)  Conversion
        Price During Major
        Announcements.  Notwithstanding anything
        contained in Section 1.2(a) to the contrary, in the event the Borrower (i)
        makes
        a public announcement that it intends to consolidate or merge with any other
        corporation (other than a merger in which the Borrower is the surviving or
        continuing corporation and its capital stock is unchanged) or sell or transfer
        all or substantially all of the assets of the Borrower or (ii) any person,
        group
        or entity (including the Borrower) publicly announces a tender offer to purchase
        50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the
        date of the announcement referred to in clause (i) or (ii) is hereinafter
        referred to as the  “Announcement Date”), then the
        Conversion Price shall, effective upon the Announcement Date and continuing
        through the Adjusted Conversion Price Termination Date (as defined below),
        be
        equal to the lower of (x) the Conversion Price which would have been applicable
        for a Conversion occurring on the Announcement Date and (y) the Conversion
        Price
        that would otherwise be in effect. From and after the Adjusted Conversion
        Price
        Termination Date, the Conversion Price shall be determined as set forth in
        this
        Section 1.2(a).  For purposes hereof,  “Adjusted
        Conversion Price Termination Date” shall mean, with respect to any
        proposed transaction or tender offer (or takeover scheme) for which a public
        announcement as contemplated by this Section 1.2(b) has been made, the date
        upon
        which the Borrower (in the case of clause (i) above) or the person, group
        or
        entity (in the case of clause (ii) above) consummates or publicly announces
        the
        termination or abandonment of the proposed transaction or tender offer (or
        takeover scheme) which caused this Section 1.2(b) to become
        operative.

       

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

       

      If,
        at
        any time a Holder of this Note submits a Notice of Conversion, and the Borrower
        does not have sufficient authorized but unissued shares of Common Stock
        available to effect such conversion in accordance with the provisions of
        this
        Article I (a “Conversion Default”), subject to Section 4.8, the
        Borrower shall issue to the Holder all of the shares of Common Stock which
        are
        then available to effect such conversion.  The portion of this Note
        which the Holder included in its Conversion Notice and which exceeds the
        amount
        which is then convertible into available shares of Common Stock (the
“Excess Amount”) shall, notwithstanding anything to the
        contrary contained herein, not be convertible into Common Stock in accordance
        with the terms hereof until (and at the Holder’s option at any time after) the
        date additional shares of Common Stock are authorized by the Borrower to
        permit
        such conversion, at which time the Conversion Price in respect thereof shall
        be
        the lesser of (i) the Conversion Price on the Conversion Default Date (as
        defined below) and (ii) the Conversion Price on the Conversion Date thereafter
        elected by the Holder in respect thereof.  In addition, the Borrower
        shall pay to the Holder payments (“Conversion Default
        Payments”) for a Conversion Default in the amount of (x) the sum
        of (1) the then outstanding principal amount of this Note plus (2)
        accrued and unpaid interest on the unpaid principal amount of this Note through
        the Authorization Date (as defined below) plus (3) Default Interest, if
        any, on the amounts referred to in clauses (1) and/or (2), multiplied by
        (y) .24, multiplied by (z) (N/365), where N = the number of days from the
        day the holder submits a Notice of Conversion giving rise to a Conversion
        Default (the “Conversion Default Date”) to the date (the
“Authorization Date”) that the Borrower authorizes a sufficient
        number of shares of Common Stock to effect conversion of the full outstanding
        principal balance of this Note.  The Borrower shall use its best
        efforts to authorize a sufficient number of shares of Common Stock as soon
        as
        practicable following the earlier of (i) such time that the Holder notifies
        the
        Borrower or that the Borrower otherwise becomes aware that there are or likely
        will be insufficient authorized and unissued shares to allow full conversion
        thereof and (ii) a Conversion Default.  The Borrower shall send notice
        to the Holder of the authorization of additional shares of Common Stock,
        the
        Authorization Date and the amount of Holder’s accrued Conversion Default
        Payments.  The accrued Conversion Default Payments for each calendar
        month shall be paid in cash or shall be convertible into Common Stock (at
        such
        time as there are sufficient authorized shares of Common Stock) at the
        applicable Conversion Price, at the Borrower’s option, as follows:

       

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

       

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

       

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

       

      1.4  Method
        of Conversion.

       

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

       

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

       

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

       

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

       

      (e)  Obligation
        of Borrower to Deliver Common
        Stock.  Upon receipt by the Borrower of
        a Notice of Conversion, the Holder shall be deemed to be the holder of record
        of
        the Common Stock issuable upon such conversion, the outstanding principal
        amount
        and the amount of accrued and unpaid interest on this Note shall be reduced
        to
        reflect such conversion, and, unless the Borrower defaults on its obligations
        under this Article I, all rights with respect to the portion of this Note
        being
        so converted shall forthwith terminate except the right to receive the Common
        Stock or other securities, cash or other assets, as herein provided, on such
        conversion.  If the Holder shall have given a Notice of Conversion as
        provided herein, the Borrower’s obligation to issue and deliver the certificates
        for Common Stock shall be absolute and unconditional, irrespective of the
        absence of any action by the Holder to enforce the same, any waiver or consent
        with respect to any provision thereof, the recovery of any judgment against
        any
        person or any action to enforce the same, any failure or delay in the
        enforcement of any other obligation of the Borrower to the holder of record,
        or
        any setoff, counterclaim, recoupment, limitation or termination, or any breach
        or alleged breach by the Holder of any obligation to the Borrower, and
        irrespective of any other circumstance which might otherwise limit such
        obligation of the Borrower to the Holder in connection with such
        conversion.  The Conversion Date specified in the Notice of Conversion
        shall be the Conversion Date so long as the Notice of Conversion is received
        by
        the Borrower before 6:00 p.m., New York, New York time, on such
        date.

       

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

       

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

       

      1.5  Concerning
        the Shares.  The shares of Common Stock
        issuable upon conversion of this Note may not be sold or transferred
        unless  (i) such shares are sold pursuant to an effective registration
        statement under the Act or (ii) the Borrower or its transfer agent shall
        have
        been furnished with an opinion of  counsel (which opinion shall be in
        form, substance and scope customary for opinions of counsel in comparable
        transactions) to the effect that the shares to be sold or transferred may
        be
        sold or transferred pursuant to an exemption from such registration or
        (iii) such shares are sold or transferred pursuant to Rule 144 under the
        Act (or a successor rule) (“Rule 144”) or (iv) such shares are
        transferred to an “affiliate” (as defined in Rule 144) of the Borrower who
        agrees to sell or otherwise transfer the shares only in accordance with this
        Section 1.5 and who is an Accredited Investor (as defined in the Purchase
        Agreement).  Except as otherwise provided in the Purchase Agreement
        (and subject to the removal provisions set forth below), until such time
        as the
        shares of Common Stock issuable upon conversion of this Note have been
        registered under the Act as contemplated by the Registration Rights Agreement
        or
        otherwise may be sold pursuant to Rule 144 without any restriction as to
        the
        number of securities as of a particular date that can then be immediately
        sold,
        each certificate for shares of Common Stock issuable upon conversion of this
        Note that has not been so included in an effective registration statement
        or
        that has not been sold pursuant to an effective registration statement or
        an
        exemption that permits removal of the legend, shall bear a legend substantially
        in the following form, as appropriate:

       

      “THE
        SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
        THE
        SECURITIES ACT OF 1933, AS AMENDED.  THE SECURITIES MAY NOT BE SOLD,
        TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
        FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
        AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT
        REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE
        144 OR
        REGULATION S UNDER SAID ACT.”

       

      The
        legend set forth above shall be removed and the Borrower shall issue to the
        Holder a new certificate therefor free of any transfer legend if (i) the
        Borrower or its transfer agent shall have received an opinion of counsel,
        in
        form, substance and scope customary for opinions of counsel in comparable
        transactions, to the effect that a public sale or transfer of such Common
        Stock
        may be made without registration under the Act and the shares are so sold
        or
        transferred, (ii) such Holder provides the Borrower or its transfer agent
        with
        reasonable assurances that the Common Stock issuable upon conversion of this
        Note (to the extent such securities are deemed to have been acquired on the
        same
        date) can be sold pursuant to Rule 144 or (iii) in the case of the Common
        Stock
        issuable upon conversion of this Note, such security is registered for sale
        by
        the Holder under an effective registration statement filed under the Act
        or
        otherwise may be sold pursuant to Rule 144 without any restriction as to
        the
        number of securities as of a particular date that can then be immediately
        sold.  Nothing in this Note shall (i) limit the Borrower’s obligation
        under the Registration Rights Agreement or (ii) affect in any way the Holder’s
        obligations to comply with applicable prospectus delivery requirements upon
        the
        resale of the securities referred to herein.

       

      1.6  Effect
        of Certain Events.

       

      (a)  Effect
        of Merger, Consolidation, Etc.  At the
        option of the Holder, the sale, conveyance or disposition of all or
        substantially all of the assets of the Borrower, the effectuation by the
        Borrower of a transaction or series of related transactions in which more
        than
        50% of the voting power of the Borrower is disposed of, or the consolidation,
        merger or other business combination of the Borrower with or into any other
        Person (as defined below) or Persons when the Borrower is not the survivor
        shall
        either:  (i) be deemed to be an Event of Default (as defined in
        Article III) pursuant to which the Borrower shall be required to pay to the
        Holder upon the consummation of and as a condition to such transaction an
        amount
        equal to the Default Amount (as defined in Article III) or (ii) be treated
        pursuant to Section 1.6(b) hereof.  “Person” shall
        mean any individual, corporation, limited liability company, partnership,
        association, trust or other entity or organization.

       

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

       

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

       

      (d)  Adjustment
        Due to Dilutive Issuance.  If, at any
        time when any Notes are issued and outstanding, the Borrower issues or sells,
        or
        in accordance with this Section 1.6(d) hereof is deemed to have issued or
        sold,
        any shares of Common Stock for no consideration or for a consideration per
        share
        (before deduction of reasonable expenses or commissions or underwriting
        discounts or allowances in connection therewith) less than the Fixed Conversion
        Price in effect on the date of such issuance (or deemed issuance) of such
        shares
        of Common Stock (a “Dilutive Issuance”), then immediately upon
        the Dilutive Issuance, the Variable Conversion Price will be reduced to the
        amount of the consideration per share received by the Borrower in such Dilutive
        Issuance; provided that only one adjustment will be made for each
        Dilutive Issuance.

       

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

       

      Additionally,
        the Borrower shall be deemed to have issued or sold shares of Common Stock
        if
        the Borrower in any manner issues or sells any Convertible Securities, whether
        or not immediately convertible (other than where the same are issuable upon
        the
        exercise of Options), and the price per share for which Common Stock is issuable
        upon such conversion or exchange is less than the Variable Conversion Price
        then
        in effect, then the Variable Conversion Price shall be equal to such price
        per
        share.  For the purposes of the preceding sentence, the “price per
        share for which Common Stock is issuable upon such conversion or exchange” is
        determined by dividing (i) the total amount, if any, received or receivable
        by
        the Borrower as consideration for the issuance or sale of all such Convertible
        Securities, plus the minimum aggregate amount of additional consideration,
        if
        any, payable to the Borrower upon the conversion or exchange thereof at the
        time
        such Convertible Securities first become convertible or exchangeable, by
        (ii)
        the maximum total number of shares of Common Stock issuable upon the conversion
        or exchange of all such Convertible Securities.  No further adjustment
        to the Variable Conversion Price will be made upon the actual issuance of
        such
        Common Stock upon conversion or exchange of such Convertible
        Securities.

       

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

       

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

       

      1.7  Trading
        Market Limitations. Unless permitted by the
        applicable rules and regulations of the principal securities market on which
        the
        Common Stock is then listed or traded, in no event shall the Borrower issue
        upon
        conversion of or otherwise pursuant to this Note and the other Notes issued
        pursuant to the Purchase Agreement more than the maximum number of shares
        of
        Common Stock that the Borrower can issue pursuant to any rule of the principal
        United States securities market on which the Common Stock is then traded
        (the
“Maximum Share Amount”), which shall be 19.99% of the total
        shares outstanding on the Closing Date (as defined in the Purchase Agreement),
        subject to equitable adjustment from time to time for stock splits, stock
        dividends, combinations, capital reorganizations and similar events relating
        to
        the Common Stock occurring after the date hereof.  Once the Maximum
        Share Amount has been issued (the date of which is hereinafter referred to
        as
        the “Maximum Conversion Date”), if the Borrower fails to
        eliminate any prohibitions under applicable law or the rules or regulations
        of
        any stock exchange, interdealer quotation system or other self-regulatory
        organization with jurisdiction over the Borrower or any of its securities
        on the
        Borrower’s ability to issue shares of Common Stock in excess of the Maximum
        Share Amount (a “Trading Market Prepayment Event”), in lieu of
        any further right to convert this Note, and in full satisfaction of the
        Borrower’s obligations under this Note, the Borrower shall pay to the Holder,
        within fifteen (15) business days of the Maximum Conversion Date (the
“Trading Market Prepayment Date”), an amount equal to 130%
times the sum of (a) the then outstanding principal
        amount of this
        Note immediately following the Maximum Conversion Date, plus (b) accrued
        and unpaid interest on the unpaid principal amount of this Note to the Trading
        Market Prepayment Date, plus (c) Default Interest, if any, on the amounts
        referred to in clause (a) and/or (b) above, plus (d) any optional amounts
        that may be added thereto at the Maximum Conversion Date by the Holder in
        accordance with the terms hereof (the then outstanding principal amount of
        this
        Note immediately following the Maximum Conversion Date, plus the amounts
        referred to in clauses (b), (c) and (d) above shall collectively be referred
        to
        as the “Remaining Convertible Amount”).  With respect
        to each Holder of Notes, the Maximum Share Amount shall refer to such Holder’s
prorata share thereof determined in accordance with Section 4.8
        below.  In the event that the sum of (x) the aggregate number of
        shares of Common Stock issued upon conversion of this Note and the other
        Notes
        issued pursuant to the Purchase Agreement plus (y) the aggregate number
        of shares of Common Stock that remain issuable upon conversion of this Note
        and
        the other Notes issued pursuant to the Purchase Agreement, represents at
        least
        one hundred percent (100%) of the Maximum Share Amount (the “Triggering
        Event”), the Borrower will use its best efforts to seek and obtain
        Shareholder Approval (or obtain such other relief as will allow conversions
        hereunder in excess of the Maximum Share Amount) as soon as practicable
        following the Triggering Event and before the Maximum Conversion
        Date.  As used herein, “Shareholder Approval” means
        approval by the shareholders of the Borrower to authorize the issuance of
        the
        full number of shares of Common Stock which would be issuable upon full
        conversion of the then outstanding Notes but for the Maximum Share
        Amount.

       

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

       

       

      ARTICLE
        II.  CERTAIN COVENANTS

       

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

       

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

       

      2.3  Borrowings.  So
        long as the Borrower shall have any obligation under this Note, the Borrower
        shall not, without the Holder’s written consent, create, incur, assume or suffer
        to exist any liability for borrowed money, except (a) borrowings in existence
        or
        committed on the date hereof and of which the Borrower has informed Holder
        in
        writing prior to the date hereof, (b) indebtedness to trade creditors or
        financial institutions incurred in the ordinary course of business or (c)
        borrowings, the proceeds of which shall be used to repay this Note.

       

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

       

      2.5  Advances
        and Loans.  So long as the Borrower
        shall have any obligation under this Note, the Borrower shall not, without
        the
        Holder’s written consent, lend money, give credit or make advances to any
        person, firm, joint venture or corporation, including, without limitation,
        officers, directors, employees, subsidiaries and affiliates of the Borrower,
        except loans, credits or advances (a) in existence or committed on the date
        hereof and which the Borrower has informed Holder in writing prior to the
        date
        hereof, (b) made in the ordinary course of business or (c) not in excess
        of
        $50,000.

       

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

       

       

      ARTICLE
        III.  EVENTS OF DEFAULT

       

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

       

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

       

      3.2  Conversion
        and the Shares.  The Borrower fails to
        issue shares of Common Stock to the Holder (or announces or threatens that
        it
        will not honor its obligation to do so) upon exercise by the Holder of the
        conversion rights of the Holder in accordance with the terms of this Note
        (for a
        period of at least sixty (60) days, if such failure is solely as a result
        of the
        circumstances governed by Section 1.3 and the Borrower is using its best
        efforts
        to authorize a sufficient number of shares of Common Stock as soon as
        practicable), fails to transfer or cause its transfer agent to transfer
        (electronically or in certificated form) any certificate for shares of Common
        Stock issued to the Holder upon conversion of or otherwise pursuant to this
        Note
        as and when required by this Note or the Registration Rights Agreement, or
        fails
        to remove any restrictive legend (or to withdraw any stop transfer instructions
        in respect thereof) on any certificate for any shares of Common Stock issued
        to
        the Holder upon conversion of or otherwise pursuant to this Note as and when
        required by this Note or the Registration Rights Agreement (or makes any
        announcement, statement or threat that it does not intend to honor the
        obligations described in this paragraph) and any such failure shall continue
        uncured (or any announcement, statement or threat not to honor its obligations
        shall not be rescinded in writing) for ten (10) days after the Borrower shall
        have been notified thereof in writing by the Holder;

       

      3.3  Failure
        to Timely File Registration or Effect
        Registration.Failure to Timely File
        Registration or Effect
        Registration.  The Borrower fails to
        file the Registration Statement within thirty (30) days following an Investor
        Demand (as set forth in the Registration Rights Agreement) or obtain
        effectiveness with the Securities and Exchange Commission of the Registration
        Statement within one hundred twenty (120) days following the Investor Demand
        (as
        defined in the Registration Rights Agreement) or such Registration Statement
        lapses in effect (or sales cannot otherwise be made thereunder effective,
        whether by reason of the Borrower’s failure to amend or supplement the
        prospectus included therein in accordance with the Registration Rights Agreement
        or otherwise) for more than twenty (20) consecutive days or forty (40) days
        in
        any twelve month period after the Registration Statement becomes
        effective;

       

      3.4  Breach
        of Covenants.  The Borrower breaches any
        material covenant or other material term or condition contained in Sections
        1.3,
        1.6 or 1.7 of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of
        the
        Purchase Agreement and such breach continues for a period of ten (10) days
        after
        written notice thereof to the Borrower from the Holder;

       

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

       

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

       

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

       

      3.8  Bankruptcy.  Bankruptcy,
        insolvency, reorganization or liquidation proceedings or other proceedings
        for
        relief under any bankruptcy law or any law for the relief of debtors shall
        be
        instituted by or against the Borrower or any subsidiary of the Borrower,
        unless
        such proceeding shall be stayed within thirty (30) days;

       

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

       

      3.10  Default
        Under Other Notes.  An Event of Default
        has occurred and is continuing under any of the other Notes issued pursuant
        to
        the Purchase Agreement,

       

      then,
        upon the occurrence and during the continuation of any Event of Default
        specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
        of the Holders of a majority of the aggregate principal amount of the
        outstanding Notes issued pursuant to the Purchase Agreement exercisable through
        the delivery of written notice to the Borrower by such Holders (the
“Default Notice”), and upon the occurrence of an Event of
        Default specified in Section 3.6 or 3.8 (unless, under Section 3.8, such
        proceeding shall be stayed within 30 days), the Notes shall become immediately
        due and payable and the Borrower shall pay to the Holder, in full satisfaction
        of its obligations hereunder, an amount equal to the greater of (i) 130%
        times the sum of (w) the then outstanding principal amount of this
        Note plus (x) accrued and unpaid interest on the unpaid principal amount
        of this Note to the date of payment (the “Mandatory Prepayment
        Date”) plus (y) Default Interest, if any, on the amounts
        referred to in clauses (w) and/or (x) plus (z) any amounts owed to the
        Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
        2(c) of
        the Registration Rights Agreement (the then outstanding principal amount
        of this
        Note to the date of payment plus the amounts referred to in clauses (x),
        (y) and (z) shall collectively be known as the “Default Sum”)
        or (ii) the “parity value” of the Default Sum to be prepaid, where parity value
        means (a) the highest number of shares of Common Stock issuable upon conversion
        of or otherwise pursuant to such Default Sum in accordance with Article I,
        treating the Trading Day immediately preceding the Mandatory Prepayment Date
        as
        the “Conversion Date” for purposes of determining the lowest applicable
        Conversion Price, unless the Default Event arises as a result of a breach
        in
        respect of a specific Conversion Date in which case such Conversion Date
        shall
        be the Conversion Date), multiplied by (b) the highest Closing Price for
        the Common Stock during the period beginning on the date of first occurrence
        of
        the Event of Default and ending one day prior to the Mandatory Prepayment
        Date
        (the “Default Amount”) and all other amounts payable hereunder
        shall immediately become due and payable, all without demand, presentment
        or
        notice, all of which hereby are expressly waived, together with all costs,
        including, without limitation, legal fees and expenses, of collection, and
        the
        Holder shall be entitled to exercise all other rights and remedies available
        at
        law or in equity.  If the Borrower fails to pay the Default Amount
        within five (5) business days of written notice that such amount is due and
        payable, then the Holder shall have the right at any time, so long as the
        Borrower remains in default (and so long and to the extent that there are
        sufficient authorized shares), to require the Borrower, upon written notice,
        to
        immediately issue, in lieu of the Default Amount, the number of shares of
        Common
        Stock of the Borrower equal to the Default Amount divided by the Conversion
        Price then in effect.

       

       

      ARTICLE
        IV.  MISCELLANEOUS

       

      4.1  Failure
        or Indulgence Not Waiver.  No failure or
        delay on the part of the Holder in the exercise of any power, right or privilege
        hereunder shall operate as a waiver thereof, nor shall any single or partial
        exercise of any such power, right or privilege preclude other or further
        exercise thereof or of any other right, power or privileges.  All
        rights and remedies existing hereunder are cumulative to, and not exclusive
        of,
        any rights or remedies otherwise available.

       

      4.2  Notices.  Any
        notice herein required or permitted to be given shall be in writing and may
        be
        personally served or delivered by courier or sent by United States mail and
        shall be deemed to have been given upon receipt if personally served (which
        shall include telephone line facsimile transmission) or sent by courier or
        three
        (3) days after being deposited in the United States mail, certified, with
        postage pre-paid and properly addressed, if sent by mail.  For the
        purposes hereof, the address of the Holder shall be as shown on the records
        of
        the Borrower; and the address of the Borrower shall be 65 Dan Road, Canton,
        MA
        02021, facsimile number: (781) 821-4458.  Both
        the Holder and the Borrower may change the address for service by service
        of
        written notice to the other as herein provided.

       

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

       

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

       

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

       

      4.6  Governing
        Law.  THIS NOTE SHALL BE ENFORCED,
        GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
        YORK
        APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
        WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE BORROWER
        HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL
        COURTS
        LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS
        NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS
        CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE
        OF AN
        INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
        PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A
        PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
        SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
        PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE
        PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES AGREE THAT
        A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE
        CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT
        OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN
        ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND
        EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN
        CONNECTION WITH SUCH DISPUTE.

       

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

       

      4.8  Allocations
        of Maximum Share Amount and Reserved
        Amount.  The Maximum Share Amount and
        Reserved Amount shall be allocated pro rata among the Holders of Notes based
        on
        the principal amount of such Notes issued to each Holder.  Each
        increase to the Maximum Share Amount and Reserved Amount shall be allocated
        pro
        rata among the Holders of Notes based on the principal amount of such Notes
        held
        by each Holder at the time of the increase in the Maximum Share Amount or
        Reserved Amount.  In the event a Holder shall sell or otherwise
        transfer any of such Holder’s Notes, each transferee shall be allocated a pro
        rata portion of such transferor’s Maximum Share Amount and Reserved
        Amount.  Any portion of the Maximum Share Amount or Reserved Amount
        which remains allocated to any person or entity which does not hold any Notes
        shall be allocated to the remaining Holders of Notes, pro rata based on the
        principal amount of such Notes then held by such Holders.

       

      4.9  Damages
        Shares.  The shares of Common Stock that
        may be issuable to the Holder pursuant to Sections 1.3 and 1.4(g) hereof
        and
        pursuant to Section 2(c) of the Registration Rights Agreement (“Damages
        Shares”) shall be treated as Common Stock issuable upon conversion of
        this Note for all purposes hereof and shall be subject to all of the limitations
        and afforded all of the rights of the other shares of Common Stock issuable
        hereunder, including without limitation, the right to be included in the
        Registration Statement filed pursuant to the Registration Rights
        Agreement.  For purposes of calculating interest payable on the
        outstanding principal amount hereof, except as otherwise provided herein,
        amounts convertible into Damages Shares (“Damages Amounts”)
        shall not bear interest but must be converted prior to the conversion of
        any
        outstanding principal amount hereof, until the outstanding Damages Amounts
        is
        zero.

       

      4.10  Denominations.  At
        the request of the Holder, upon surrender of this Note, the Borrower shall
        promptly issue new Notes in the aggregate outstanding principal amount hereof,
        in the form hereof, in such denominations of at least $50,000 as the Holder
        shall request.

       

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

       

      4.12  Notice
        of Corporate Events.  Except as
        otherwise provided below, the Holder of this Note shall have no rights as
        a
        Holder of Common Stock unless and only to the extent that it converts this
        Note
        into Common Stock.  The Borrower shall provide the Holder with prior
        notification of any meeting of the Borrower’s shareholders (and copies of proxy
        materials and other information sent to shareholders).  In the event
        of any taking by the Borrower of a record of its shareholders for the purpose
        of
        determining shareholders who are entitled to receive payment of any dividend
        or
        other distribution, any right to subscribe for, purchase or otherwise acquire
        (including by way of merger, consolidation, reclassification or
        recapitalization) any share of any class or any other securities or property,
        or
        to receive any other right, or for the purpose of determining shareholders
        who
        are entitled to vote in connection with any proposed sale, lease or conveyance
        of all or substantially all of the assets of the Borrower or any proposed
        liquidation, dissolution or winding up of the Borrower, the Borrower shall
        mail
        a notice to the Holder, at least twenty (20) days prior to the record date
        specified therein (or thirty (30) days prior to the consummation of the
        transaction or event, whichever is earlier), of the date on which any such
        record is to be taken for the purpose of such dividend, distribution, right
        or
        other event, and a brief statement regarding the amount and character of
        such
        dividend, distribution, right or other event to the extent known at such
        time.  The Borrower shall make a public announcement of any event
        requiring notification to the Holder hereunder substantially simultaneously
        with
        the notification to the Holder in accordance with the terms of this Section
        4.12.

       

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

       

       

      ARTICLE
        V.  CALL OPTION

       

      5.1  Call
        Option.  Notwithstanding anything to the
        contrary contained in this Article V, so long as (i) no Event of Default or
        Trading Market Prepayment Event shall have occurred and be continuing,
        (ii) the Borrower has a sufficient number of authorized shares of Common
        Stock reserved for issuance upon full conversion of the Notes, then at any
        time
        after the Issue Date, and (iii) the Common Stock is trading at or below
        $.25 per share, the Borrower shall have the right, exercisable on not less
        than
        ten (10) Trading Days prior written notice to the Holders of the Notes (which
        notice may not be sent to the Holders of the Notes until the Borrower is
        permitted to prepay the Notes pursuant to this Section 5.1), to prepay all
        of
        the outstanding Notes in accordance with this Section 5.1.  Any notice
        of prepayment hereunder (an “Optional Prepayment”) shall be
        delivered to the Holders of the Notes at their registered addresses appearing
        on
        the books and records of the Borrower and shall state (1) that the Borrower
        is
        exercising its right to prepay all of the Notes issued on the Issue Date
        and (2)
        the date of prepayment (the “Optional Prepayment
        Notice”).  On the date fixed for prepayment (the
“Optional Prepayment Date”), the Borrower shall make payment of
        the Optional Prepayment Amount (as defined below) to or upon the order of
        the
        Holders as specified by the Holders in writing to the Borrower at least one
        (1)
        business day prior to the Optional Prepayment Date.  If the Borrower
        exercises its right to prepay the Notes, the Borrower shall make payment
        to the
        holders of an amount in cash (the “Optional Prepayment Amount”)
        equal to either (i) 120% (for prepayments occurring within thirty (30) days
        of the Issue Date), (ii) 125% for prepayments occurring between thirty-one
        (31) and sixty  (60) days of the Issue Date, or (iii) 135% (for
        prepayments occurring after the sixtieth (60th) day
        following the
        Issue Date), multiplied by the sum of (w) the then outstanding principal
        amount
        of this Note plus (x) accrued and unpaid interest on the unpaid
        principal amount of this Note to the Optional Prepayment Date plus (y)
        Default Interest, if any, on the amounts referred to in clauses (w) and (x)
        plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and
        1.4(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement
        (the then outstanding principal amount of this Note to the date of payment
        plus the amounts referred to in clauses (x), (y) and (z) shall
        collectively be known as the “Optional Prepayment Sum”).
        Notwithstanding notice of an Optional Prepayment, the Holders shall at all
        times
        prior to the Optional Prepayment Date maintain the right to convert all or
        any
        portion of the Notes in accordance with Article I and any portion of Notes
        so
        converted after receipt of an Optional Prepayment Notice and prior to the
        Optional Prepayment Date set forth in such notice and payment of the aggregate
        Optional Prepayment Amount shall be deducted from the principal amount of
        Notes
        which are otherwise subject to prepayment pursuant to such notice.  If
        the Borrower delivers an Optional Prepayment Notice and fails to pay the
        Optional Prepayment Amount due to the Holders of the Notes within two (2)
        business days following the Optional Prepayment Date, the Borrower shall
        forever
        forfeit its right to redeem the Notes pursuant to this Section 5.1.

       

      5.2  Partial
        Call Option.  Notwithstanding anything to the contrary
        contained in this Article V, in the event that the Average Daily Price of
        the
        Common Stock, as reported by the Reporting Service, for each day of the month
        ending on any Determination Date is below the Initial Market Price, the Borrower
        may, at its option, prepay a portion of the outstanding principal amount
        of the
        Notes equal to 104% of the principal amount hereof divided by thirty-six
        (36)
        plus one month’s interest.  The term “Initial Market
        Price” means shall mean $.25.

       

      


       

      


       

      


       

      


       

      


       

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      IN
        WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
        by its duly authorized officer this 19th day of
        July,
        2007.

       

      


      AVITAR
        INC.

      


      


      


      By:           ______________________________

      Peter
        Phildius

      Chief
        Executive Officer


      
        
           

        

        
           

          
            

          

        

        
           

        

      


      EXHIBIT
        A

       

      NOTICE
        OF CONVERSION

       

      (To
        be
        Executed by the Registered Holder

       

      in
        order
        to Convert the Notes)

       

      The
        undersigned hereby irrevocably elects to convert $__________ principal amount
        of
        the Note (defined below) into shares of common stock, par value $.01 per
        share
        (“Common Stock”), of Avitar Inc., a Delaware corporation (the
“Borrower”) according to the conditions of the
        convertible
        Notes of the Borrower dated as of July 19, 2007 (the “Notes”),
        as of the date written below.  If securities are to be issued in the
        name of a person other than the undersigned, the undersigned will pay all
        transfer taxes payable with respect thereto and is delivering herewith such
        certificates.  No fee will be charged to the Holder for any
        conversion, except for transfer taxes, if any.  A copy of each Note is
        attached hereto (or evidence of loss, theft or destruction
        thereof).

       

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

       

      Name
        of
        DTC Prime
        Broker:                                                                                                                     

      Account
        Number:                                                                                                                     

       

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

       

      Name:                                                                                                                     

      Address:                                                                                                                     

       

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

       

      Date
        of
        Conversion:___________________________

      Applicable
        Conversion Price:____________________

      Number
        of
        Shares of Common Stock to be Issued Pursuant to

      Conversion
        of the Notes:______________

      Signature:___________________________________

      Name:______________________________________

      Address:____________________________________

       


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