**ISIN:
                  US16936RAE53**
              **EXECUTION
                  VERSION**




**SENIOR
      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 (THE “1933 ACT”), 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 1933 ACT, OR (B) AN OPINION OF COUNSEL,
      IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
      ACT
      (II) UNLESS SOLD OR TRANSFERRED TO A “QUALIFIED INSTITUTIONAL BUYER” WITHIN THE
      MEANING OF RULE 144A UNDER THE 1933 ACT OR TO AN “ACCREDITED INVESTOR” AS THAT
      TERM IS DEFINED IN RULE 501(A) OF REGULATION D**  **OR
      (III) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
      NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
      WITH
      A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY
      THE
      SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF
      THIS NOTE, INCLUDING** **SECTIONS
      3(c)(iii)** **AND** **18(a)** **HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
      SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
      FORTH ON THE FACE HEREOF PURSUANT TO** **SECTION
      3(c)(iii)** **OF THIS NOTE.**




**CHINA
        AUTOMOTIVE SYSTEMS, INC.**
 **SENIOR
          CONVERTIBLE NOTE**


Issuance
                Date: February 15,****2008
            Original
                Principal Amount: U.S. $15,000,000





**FOR
      VALUE RECEIVED,**  **China
      Automotive Systems, Inc.** ,
      a
      Delaware corporation (the “ **Company** ”),
      hereby promises to pay to **TFINN
      & CO. as nominee for**  **Lehman
      Brothers Commercial Corporation Asia Limited** 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 a rate per annum equal to the Interest Rate (as defined
      below) 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 Convertible Note
      (including all Senior Convertible Notes issued in exchange, transfer or
      replacement hereof, this “ **Note** ”)
      is one
      of an issue of Senior Convertible Notes issued pursuant to the Securities
      Purchase Agreement on the Closing Date (collectively, the “ **Notes** ”
and
      such other Senior Convertible Notes, the “ **Other**  **Notes** ”).
      Certain capitalized terms used herein are defined in Section
      29 .




(1)  MATURITY . 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, if any, on such Principal and Interest plus the
      Maturity Make Whole Amount. The
      “ **Maturity**  **Date** ”
shall
      be February 15, 2013, as may be extended at the option of the Holder for a
      period which shall in no event exceed an additional ninety (90) days (i) in
      the
      event that 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) (subject to Section
      5(a) as to
      conversion) from the date of 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 and pursuant to the terms of Section
      5(b ).









(2)
      INTEREST; INTEREST RATE; PAYMENT NOTICE .




(a)  Interest
      on this Note shall commence accruing on the Issuance Date and shall be computed
      on the basis of actual number of days elapsed over a 360-day year and shall
      be
      payable in arrears semi-annually on
      January 15, and July 15 of each year (each, an “ **Interest**  **Date** ”) with the
      first Interest Date being July 15, 2008. Interest shall be payable on each
      Interest Date, to the record holder of this Note on the applicable Interest
      Date
      in cash.




(b)  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 then in effect shall be increased by two percent (2%). 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.




(c)  The
      Company shall provide notice (via email) to the Holder immediately upon the
      making of any payment required pursuant to this Note. In order for the Holder
      to
      claim an Event of Default for the Company’s failure to make payment, the Holder
      must respond within three (3) Business Days of such notice that such payment
      has
      not been received. If the Company fails to provide notice of payment as required
      hereunder the Holder is under no obligation to notify the Company that payment
      was not received.




(3)  CONVERSION
      OF NOTES .
      This
      Note shall be convertible into shares of the Company’s common stock, par value
      $0.0001 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 thirtieth (30 th )
      day
      after the Issuance Date and prior to the thirtieth (30 th )
      Business Day prior to the Maturity Date, 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.




2




(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,
      $8.8527, subject to adjustment as set forth in Section
      3(d) below
      and as otherwise 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 (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 (1 st )
      Trading
      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 Company’s transfer agent (the “ **Transfer
      Agent** ”).
      On or
      before the third (3rd) Trading Day following the date of receipt of a Conversion
      Notice (the “ **Share
      Delivery**  **Date** ”),
      the
      Company shall (x) provided that
      there is an effective Registration Statement and that the Transfer Agent is
      participating in the Depository Trust Company’s (“ **DTC** ”)
      Fast
      Automated Securities Transfer Program, credit such aggregate number of shares
      of
      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 Agent
      Commission system or (y) if there is no effective Registration Statement or
      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) Trading Days after receipt of this Note
      and
      at its own expense, issue and deliver to the holder a new Note (in accordance
      with Section
      18(d) )
      representing the outstanding Principal not converted. The Person or Persons
      entitled to receive the shares of 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.




3




(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 the 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 one and one-half percent (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 Weighted Average Price of the Common Stock on the Share
      Delivery Date and (B) the Holder, upon written notice to the Company within
      five
      (5) Trading Days after the Conversion Failure, 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, i f
      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 (y) 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 (x) pay cash to the Holder in an amount equal
      to the Holder’s total purchase price (including brokerage commissions and other
      out of pocket expenses, if any) for the shares of Common Stock so purchased
      (the
“ **Buy-In
      Price** ”),
      at
      which point the Company’s obligation to deliver such certificate (and to issue
      such Common Stock) shall terminate, or (y) 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 (I) such number of shares of Common Stock,
      times (II) the Weighted Average Price on the Conversion Date.




4




(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 hereunder, notwithstanding notice to the contrary. A Registered Note
      may be assigned or sold in whole or in part only by registration of such
      assignment or sale on the Register. Upon its receipt of a request to assign
      or
      sell all or part of any Registered Note by a Holder, the Company shall record
      the information contained therein in the Register and issue one or more new
      Registered Notes in the same aggregate principal amount as the principal amount
      of the surrendered Registered Note to the designated assignee or transferee
      pursuant to Section
      18 .
      Notwithstanding anything to the contrary 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 Principal 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 reissuance of this Note upon
      physical surrender 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
      23 .




(v)  Mandatory
      Conversion .




(A)  General .
      After
      the Holder’s Henglong Redemption Right has expired, if at any time during a
      six-month period ending on the six-month (or integral multiple of six-month)
      anniversary of the Closing Date (the beginning day of each such six-month
      period, a “ **Mandatory
      Conversion Period Start Date** ”),
      (1)
      the arithmetic average of the Weighted Average Price of the Common Stock for
      a
      period of at
      least
      thirty (30) consecutive Trading Days following
      the Mandatory Conversion Period Start Date (the “ **Mandatory
      Conversion Measuring Period** ”)
      equals
      or exceeds the percentage of the Conversion Price on the Issuance Date (subject
      to appropriate adjustments for any stock dividend, stock split, stock
      combination, reclassification or similar transaction after the Issuance Date)
      set forth in the chart below as applicable to the indicated six month period
      and
      to the Mandatory Conversion Measuring Period related thereto:




0-6
      months:  125%


6-12
      months:  125%


12-18
      months:  135%


18-24
      months:  135%


24-30
      months:  145%


30-36
      months:  145%


36-42
      months:  155%


42-48
      months:  155%




(the
      “ **Pricing
      Condition** ”)
      and
      (2) no Equity Conditions Failure exists, 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, in each
      case **** as
      designated in the Mandatory Conversion Notice (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) 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 are deemed hereunder to have 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 selected for the Mandatory
      Conversion, which Trading Day shall be five (5) Trading Days following the
      Mandatory Conversion Notice Date (the “ **Mandatory
      Conversion Date** ”),
      (II)
      the aggregate Conversion Amount of the Notes subject to Mandatory Conversion
      from the Holder and all of the holders of the Notes pursuant to this Section
      3(c)(v) (and
      analogous provisions under the Other Notes), and (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 and (z) certify that
      the Pricing Condition has been met as to the Mandatory Conversion Measuring
      Period. If the Equity Conditions are satisfied as of the Mandatory Conversion
      Notice Date but if any Equity Condition is no longer satisfied at any time
      on
      each date prior to and including the Mandatory Conversion Date, the Mandatory
      Conversion Notice shall be null and void.




5




(B)  Pro
      Rata Conversion Requirement .
      If the
      Company elects to cause a conversion of any Conversion Amount of this Note
      pursuant to Section
      3(c)(v)(A) ,
      then it
      must to the extent allowable in the Other Notes, 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 (1) 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 (2) the fraction, the numerator of which is the sum of the
      aggregate Original Principal Amount of the Notes purchased by such holder of
      outstanding Notes and the denominator of which is the sum of the aggregate
      Original Principal Amount of the Notes purchased by all holders holding
      outstanding Notes (such fraction with respect to each holder is referred to
      as
      its “ **Conversion**  **Allocation
      Percentage** ,”
and
      such amount with respect to each holder is referred to as its “ **Pro
      Rata Conversion Amount** ”);
      provided, however, that in the event that any holder’s Pro Rata Conversion
      Amount exceeds the outstanding Principal amount of such holder’s Note, then such
      excess Pro Rata Conversion Amount shall not be converted and no holder shall
      be
      required to convert an amount in excess of its Pro Rata Conversion Amount.
      In
      the event that the initial holder of any Notes shall sell or otherwise transfer
      any of such holder’s Notes, the transferee shall be allocated a pro rata portion
      of such holder’s Conversion Allocation Percentage and the Pro Rata Conversion
      Amount.




6




(d)  Conversion
      Price Reset .
      On each
      six month anniversary of the Issuance Date beginning August 15, 2008, the
      Conversion Price shall be adjusted downward to the Reset Reference Price (as
      defined below) if the Weighted Average Price for the twenty (20) consecutive
      Trading Days immediately prior to the applicable six month anniversary (the
      “ **Reset
      Reference Price** ”)
      is
      less than 95% of the Conversion Price in effect as of such applicable six month
      anniversary date, as adjusted pursuant to Section
      7 .
      The
      foregoing notwithstanding, the Conversion Price shall not be reduced pursuant
      to
      this Section
      3(d) to less
      than 80% of the Conversion Price in effect on the Issuance Date, as adjusted
      pursuant to Section
      7(b) ;
      and in
      no event shall the Conversion Price be reduced to less than
      $6.7417.




(e)  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 Section
      3(a) ,
      to the
      extent that after giving effect to such conversion, the Holder (together with
      the Holder’s affiliates) would beneficially own in excess of 4.99% **** (the
      “ **Maximum
      Percentage** ”)
      of the
      number of shares of 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 the Warrants (as defined in the Securities
      Purchase Agreement) and any Other Notes) subject to a limitation on conversion
      or exercise analogous to the limitation contained herein beneficially owned
      by
      the Holder or any of its affiliates. Except as set forth in the preceding
      sentence, for purposes of this Section
      3(e)(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(e)(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 (1)
      the
      Company’s most recent Form 10-K, Form 10-Q, Form 8-K or other public filing with
      the SEC, as the case may be, (2) a more recent public announcement by the
      Company or (3) 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 4.99% specified in such notice; provided that (x)
      any such increase will not be effective until the sixty-first (61 st )
      day
      after such notice is delivered to the Company, and (y) any such increase or
      decrease will apply only to the initial Holder and not to any other Holder
      of
      Notes.




7




(ii)  Mandatory
      Conversion Cap .
      The
      Company shall not effect a Mandatory Conversion of more than twelve percent
      (12%) of the Original Principal Amount of the Notes (with the applicable accrued
      but unpaid Interest and Late Charges on such Conversion Amount) in any six
      month
      period or twenty-four percent (24%) of the Original Principal Amount of the
      Notes (with the applicable accrued but unpaid Interest and Late Charges on
      such
      Conversion Amount) in any twelve (12) month period.




(iii)  Market
      Regulation .
      The
      Company shall not be obligated to issue any shares of Common Stock upon
      conversion of this Note 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 of the Notes 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
      such 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 of Notes, 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 a 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.




8




(4)
      RIGHTS UPON EVENT OF DEFAULT .




(a)  Event
      of Default .
      Each of
      the following events shall constitute an “ **Event
      of Default** ”:




(i)  the
      Company’s (A) failure to cure a Conversion Failure by delivery of the required
      number of shares of Common Stock within ten (10) Trading 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(e) ;




(ii)  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 after written notice of such failure
      as provided for in Section
      2(c) ;




(iii)  any
      material and continuing (past any cure period) default under, redemption of
      (involuntarily on the part of the Company) 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) in excess of US$3,000,000 other than with respect
      to any Other Notes or in connection with a permitted refinancing of Indebtedness
      at a lower interest rate and an at-least-as-generous repayment
      schedule;




(iv)  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;




9




(v)  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;




(vi)  a
      final
      judgment or judgments for the payment of money aggregating in excess of
      $2,000,000 **** 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 $2,000,000 **** 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;




(vii)  other
      than as specifically set forth in another clause of this Section
      4(a) ,
      the
      Company materially breaches and fails to cure within any allowable cure period
      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;




(viii)  any
      breach or failure in any respect to comply with either of Sections
      8 or 14 of this
      Note; or




(ix)  any
      unwaived 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 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 Conversion
      Amount 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 at a price equal to the sum of (i) the Conversion Amount
      to be redeemed and (ii) the Other Make Whole Amount (the “ **Event
      of Default**  **Redemption
      Price** ”).
      Redemptions required by this Section
      4(b) shall be
      made in accordance with the provisions of Section
      12 .
      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 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.




10




(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
      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 prior to such Fundamental Transaction, including agreements
      to
      deliver to each Holder of Notes in exchange for such Notes a security of the
      Successor Entity evidenced by a written instrument substantially similar in
      form
      and substance to the Notes, including, without limitation, having a principal
      amount and interest rate equal to the principal amounts and the interest rates
      of the Notes then outstanding held by such Holder, having similar conversion
      rights and having similar ranking to the Notes. 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, except for (as described in the following sentence) the substitution
      of,
      instead of shares of Common Stock of the Company as initially provided herein,
      the delivery upon conversion of other applicable securities, cash, assets or
      other property. 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 (or exchange note issued under the first
      sentence of this paragraph) 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 , the same
      combination and amount of securities, cash, assets or other property as a holder
      of shares of Common Stock would have been entitled to receive in the Fundamental
      Transaction, in accordance with and as adjusted by the provisions of this Note. The
      provisions of this Section shall apply similarly and equally to successive
      Fundamental Transactions and shall be applied without regard to any limitations
      on the conversion or redemption of this Note.




(b)  Redemption
      Right .
      No
      sooner than fifteen (15) days prior to nor later than ten (10) days prior to
      the
      consummation of a Change of Control (the date of consummation, the “ **Change
      of Control Effective Date** ”),
      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 and from time to time during the period beginning after the Holder’s
      receipt of a Change of Control Notice and ending on the Change of Control
      Effective Date (provided there has been at least ten (10) Trading Days between
      the date of the Change of Control Notice and the Change of Control Effective
      Date), 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 of 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 (the “ **Change
      of Control Redemption Price** ”)
      equal
      to the sum of (i) the Conversion Amount being redeemed and (ii) the Other Make
      Whole Amount .
      Notwithstanding anything to the contrary in this Section
      5(b) ,
      but
      subject to Section
      3(d) and Section
      5(a) ,
      until
      the Holder receives the Change of Control Redemption Price, the Change of
      Control Redemption Price may be converted, in whole or in part, as indicated
      by
      the Holder on a Change of Control Redemption Notice (the “ **Converted
      Portion** ”)
      pursuant to Section
      3(c) and Section
      5(a) hereof. Any
      c onversions
      required by this Section
      5(b) shall
      reduce the Change of Control Redemption Price and shall be made in accordance
      with the provisions of Section
      3(c )
      and Section
      5(a) .




11




(c)  General .
      Redemptions required by this Section
      5 shall be
      made in accordance with the provisions of Section
      12 and
      shall have priority to payments to stockholders in connection with a Change
      of
      Control. To the extent redemptions required by 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) and Section
      5(a) ,
      until
      the Change of Control Redemption Price (together with any interest thereon)
      is
      paid in full, the Conversion Amount submitted for redemption under this Section
      5(c) (together with any interest thereon) may be converted, in whole or in part,
      by
      the Holder into Common Stock pursuant to Section
      3 and Section
      5(a) .
      The
      parties hereto agree that in the event of redemption of any portion of the
      Note
      under Section
      5(b) and
      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, any premium due under 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.




(d)  Make
      Whole Amounts .
      For
      purposes of this Note:




(i)  the
      “ **Maturity
      Make Whole Amount** ”
shall
      mean a premium to the Conversion Amount such that the total amount received
      by
      the Holder at Maturity represents a gross yield to the Holder on the Original
      Principal Amount as of the Maturity Date equal to thirteen percent (13%), with
      interest computed on the basis of actual number of days elapsed over a 360-day
      year.




(ii)  the
      “ **Other
      Make Whole Amount** ”
shall
      mean a premium to the Conversion Amount such that the total amount received
      by
      the Holder upon redemption represents a gross yield to the Holder on the
      Original Principal Amount as of the redemption date equal to thirteen percent
      (13%), with interest computed on the basis of actual number of days elapsed
      over
      a 360-day year.




12




(iii)  the
      “ **Annual
      Redemption Make Whole Amount** ”
shall
      mean a premium to the Conversion Amount such that the total amount received
      by
      the Holder upon any Annual Redemption represents a gross yield on the Original
      Principal Amount of (A) ten percent (10%), if the redemption date occurs during
      2009, (B) eleven percent (11%), if the redemption date occurs during 2010 or
      2011, and (c) thirteen percent (13%), if the redemption date occurs during
      2012,
      in each case with interest computed on the basis of actual number of days
      elapsed over a 360-day year.




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




(a)  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
      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.




(b)  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 reasonably 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.




13




(7)  RIGHTS
      UPON ISSUANCE OF OTHER SECURITIES .




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




NCP  =  AP  x  [ (OCP
      x
      OS) + (C)  ]


[
      (AP x NS)  ]




where:




NCP
            =
            new
                Conversion Price (immediately after such Dilutive
                Issuance)


OCP
            =
            old
                Conversion Price (immediately prior to such Dilutive
                Issuance)


AP
            =
            the
                Applicable Price


NS
            =
            new
                shares of Common Stock Deemed Outstanding (immediately after such
                Dilutive
                Issuance)


OS
            =
            old
                shares of Common Stock Deemed Outstanding (immediately prior to such
                Dilutive Issuance)


C
            =
            the
                consideration, if any, received by the Company upon such Dilutive
                Issuance





For
      purposes of determining the adjusted Conversion Price under this Section
      7(a) ,
      the
      following shall be applicable:




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




14




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




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




(iv)  Calculation
      of Consideration Received .
      In case
      any Option is issued in connection with the issue or sale of other securities
      of
      the Company, together comprising one integrated transaction in which no specific
      consideration is allocated to such Options by the parties thereto, (x) the
      Options will be deemed to have been issued for a value determined by use of
      the
      Black Scholes Option Pricing Model (the “ **Option
      Value** ”)
      and
      (y) the other securities issued or sold in such integrated transaction shall
      be
      deemed to have been issued for the difference of (I) the aggregate consideration
      received by the Company, less (II) the Option Value. If any Common Stock,
      Options or Convertible Securities are issued or sold or deemed to have been
      issued or sold for cash, the consideration received therefor will be deemed
      to
      be the net amount received by the Company therefor. If any Common Stock, Options
      or Convertible Securities are issued or sold for a consideration other than
      cash, the amount of the consideration other than cash received by the Company
      will be the fair value of such consideration, except where such consideration
      consists of securities, in which case the amount of consideration received
      by
      the Company will be the Closing Sale Price of such securities on the date of
      receipt. If any Common Stock, Options or Convertible Securities are issued
      to
      the owners of the non-surviving entity in connection with any merger in which
      the Company is the surviving entity, the amount of consideration therefor will
      be deemed to be the fair value of such portion of the net assets and business
      of
      the non-surviving entity as is attributable to such Common Stock, Options or
      Convertible Securities, as the case may be. The fair value of any consideration
      other than cash or securities will be determined jointly by the Company and
      the
      Required Holders. If such parties are unable to reach agreement within ten
      (10)
      days after the occurrence of an event requiring valuation (the “ **Valuation
      Event** ”),
      the
      fair value of such consideration will be determined within five (5) Business
      Days after the tenth (10 th )
      day
      following the Valuation Event by an independent, reputable appraiser jointly
      selected by the Company and the Required Holders. The determination of such
      appraiser shall be deemed binding upon all parties absent manifest error and
      the
      fees and expenses of such appraiser shall be borne by the Company.




15




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




(b)  Adjustment
      of Conversion Price upon Subdivision or Combination of Common
      Stock .
      If the
      Company at any time on or after the Issuance Date subdivides (by any stock
      dividend, stock split, 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 Issuance
      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.




(c)  Other
      Events .
      If any
      event occurs of the type contemplated by the provisions of this Section
      7 but not
      expressly provided for by such provisions (including, without limitation, the
      granting of stock appreciation rights, phantom stock rights or other rights
      with
      equity features), 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 .




16




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




(e)  Excluded
      Securities .
      The
      issuance of any Excluded Securities shall not result in an adjustment to the
      Conversion Price.




(8)  HOLDER’S
      RIGHT OF MANDATORY REDEMPTION . ****




(a)  General .




(i)  On
      each
      of February 15, 2010 and February 15, 2011 **** (the
      “ **Annual
      Redemption** ”),
      the
      Holder shall have the right (the “ **Annual
      Redemption Right** ”),
      in
      its sole discretion, to require that the Company redeem the Note in whole but
      not in part, by delivering written notice thereof to the Company (an
“ **Annual
      Redemption Notice** ”).




(ii)  In
      the
      event (each of the events set forth in (x) and (y) a “ **Listing
      Default** ”)
      (x)
      the Company has not filed to list the Conversion Shares on its Principal Market
      by the date that is ninety (90) days after the Issuance Date or has not so
      listed the Conversion Shares by the date that is ninety (90) days after the
      Issuance Date (as required pursuant to Section
      3(a) of the
      Registration Rights Agreement); or (y) the shares of the Company’s Common Stock
      are (A) subject to any Grace Periods ((as defined in the Registration Rights
      Agreement), terminated from registration under the Securities Act of 1933,
      as
      amended (the “ **Act** ”),
      during the time in which the Company remains obligated under Section
      2(f) of the
      Registration Rights Agreement to keep the R egistration
      Statement current, effective and free from any material misstatement or omission
      to state a material fact or (B) are delisted from the Principal Market for
      more
      than ten (10) Trading Days, the Holder shall have the right (the “ **Listing
      Default Redemption Right** ”),
      in
      its sole discretion, to require that the Company redeem all or any portion
      of
      the Note by delivering written notice thereof to the Company (a “ **Listing
      Default Mandatory Redemption Notice** ”).




(iii)  At
      anytime following the first anniversary of the Issuance Date, if the Weighted
      Average for twenty (20) consecutive Trading Days is less than forty-five percent
      (45%) of the Conversion Price in effect on the Issuance Date, as adjusted (a
      “ **WAP
      Default** ”),
      the
      Holder shall have the right (a “ **WAP
      Default Redemption Right,** ”
and
      together with the Listing Default Redemption Right, the Annual Redemption Right
      and the Henglong Default Redemption Right (as defined below) a “ **Holder
      Redemption Right** ”),
      in
      its sole discretion, to require that the Company redeem all or any portion
      of
      the Note by delivering written notice thereof to the Company within five (5)
      Business Days after the Company notice described in paragraph (v) below or
      if no
      such Company Notice is received, at any time after a WAP Default upon written
      notice to the Company (a “ **Holder
      WAP Redemption Notice** ”
and
      together with the Listing Default Redemption Notice, the Annual Redemption
      Notice, and the Henglong Default Redemption Notice (as defined below) a
“ **Holder
      Redemption Notice** ”).




(iv)  Henglong
      Redemption Right .
      In the
      event the Company has not consummated the Henglong Transaction by April 15,
      2008
      on terms and conditions satisfactory to the Lead Investor as required by the
      Securities Purchase Agreement (a “ **Henglong
      Default** ”),
      the
      Holder shall have the right (the “ **Henglong
      Default Redemption Right** ”),
      in
      its sole discretion, to require that the Company redeem all but not less than
      all of the Note by delivering written notice thereof to the Company (a
“ **Henglong
      Default Redemption Notice** ”)
      prior
      to April 30, 2008. If the Henglong Transaction is consummated on or prior to
      April 15, 2008 or if the Escrow Amount (as defined in the Securities Purchase
      Agreement) is released to the Company on or prior to April 30, 2008, whichever
      occurs earlier, the Holder’s Henglong Default Redemption Right shall immediately
      expire.




17




(v)  The
      Company shall deliver written notice (the “ **Company
      Notice** ”)
      to the
      Holder no later than two (2) Business Days following a Listing Default, a WAP
      Default or a Henglong Default stating (x) the Mandatory Redemption Price (as
      defined below) and (y) that the Holder’s right of redemption under this Section
      8(a)(ii) , (iii )
      or (iv) is
      effective and the period during which the redemption may be exercised.




(b)  In
      order
      to exercise the Holder Redemption Right, the Holder Redemption Notice shall
      indicate the Conversion Amount the Holder is electing to have redeemed (the
      “ **Redemption
      Amount** ”),
      which
      shall be the entire Conversion Amount in the case of the Annual Redemption
      Right
      or the Henglong Default Redemption Right, on the redemption date set forth
      on
      the Holder Redemption Notice (the “ **Holder
      Mandatory Redemption Date** ”),
      which
      date shall be no earlier than five (5) Business
      Days after the date the Holder has delivered the Holder Redemption Notice to
      the
      Company in the case of a Listing Default Redemption Right, thirty (30) days
      after such delivery in the case of a Henglong Default Redemption Right or ninety
      (90) days after such delivery in the case of a WAP Default Redemption Right
      and
      an Annual Redemption Right .
      The
      portion of this Note subject to redemption pursuant to the Holder Redemption
      Right shall be redeemed by the Company in cash at a price equal to the sum
      of
      (i) the Conversion Amount being redeemed and (ii) in the case of an Annual
      Redemption Right, the Annual Redemption Make Whole Amount, or in the case of
      the
      WAP Default Redemption Right or the Listing Default Redemption Right, the Other
      Make Whole Amount **** (the
      “ **Mandatory
      Redemption Price** ”).
      There
      shall be no additional make whole payment associated with the Henglong Default
      Redemption Right.  Notwithstanding
      anything to the contrary in this Section
      8 ,
      but
      subject to Section
      3(d) ,
      beginning on the Holder Mandatory Redemption Date and until the Holder receives
      the Mandatory Redemption Price, the Mandatory Redemption Amount may be
      converted, in whole or in part, as indicated by the Holder on a Holder
      Redemption Notice (the “ **Converted
      Amount** ”)
      into a
      number of shares of Common Stock determined by dividing the Converted Amount
      by
      the lesser of (i) the Conversion Price and (ii) the greater of (A) the
      arithmetic average of the ten (10) Trading Days immediately preceding the
      Conversion Date and (B) $3.5411 and provided that, if
      required by the Principal Market, stockholder approval has been obtained. Any
      such conversion shall reduce the Mandatory Redemption Amount.




(c)  Mechanics
      of Holder Mandatory Redemption .
      If the
      Holder elects a Holder Mandatory Redemption in accordance with Section
      8(a) ,
      then
      the Mandatory Redemption Amount which is to be paid to the Holder on the
      applicable Mandatory Redemption Date shall be redeemed by the Company, and
      the
      Company shall pay to the Holder on such Mandatory Redemption Date by wire
      transfer of immediately available funds, the applicable Mandatory Redemption
      Price.




18




(9)
      COMPANY’S RIGHT OF OPTIONAL REDEMPTION .




(a)  General .
      At any
      time that less than ten percent (10%) of the Original Principal Amount of all
      Notes remains outstanding, the Company shall have the right to redeem all or
      any
      portion of the Conversion Amount under this Note (the “ **Optional
      Redemption Amount** ”)
      as
      designated in the Optional Redemption Notice on the Optional Redemption Date
      (each as defined below) (an “ **Optional
      Redemption** ”).
      The
      portion of this Note subject to redemption pursuant to this Section
      9(a) shall be
      redeemed by the Company in cash at a price (the “ **Optional
      Redemption Price** ”)
      equal
      to the sum of (i) the Conversion Amount being redeemed and (ii) the Other Make
      Whole Amount. The Company may exercise its right to require redemption under
      this Section
      9 by
      delivering a written notice thereof by facsimile and overnight courier to all,
      but not less than all, of the holders of Notes (the “ **Optional
      Redemption Notice** ”
and
      the
      date all of the holders received such notice is referred to as the “ **Optional
      Redemption Notice Date** ”).
      Each
      Optional Redemption Notice shall be irrevocable. The Optional Redemption Notice
      shall state (1) the date on which the Optional Redemption shall occur (the
      “ **Optional
      Redemption Date** ”)
      which
      date shall not be less than five (5) nor more than fifteen (15) Business Days
      following the Optional Redemption Notice Date and (2) the aggregate Conversion
      Amount of the Notes which the Company has elected to be subject to Optional
      Redemption from the Holder and all of the other holders of the Notes pursuant
      to
      this Section
      9(a) (and
      analogous provisions under the Other Notes) on the Optional Redemption Date.
      The
      Company may not effect more than one (1) Optional Redemption. Notwithstanding
      anything to the contrary in this Section
      9 ,
      until
      the Optional Redemption Price is paid, in full, the Optional Redemption Amount
      may be converted, in whole or in part, by the Holders into shares of Common
      Stock pursuant to Section
      3 .
      All
      Conversion Amounts converted by the Holder after the Optional Redemption Notice
      Date shall reduce the Optional Redemption Amount of this Note required to be
      redeemed on the Optional Redemption Date. Redemptions made pursuant to this Section
      9 shall be
      made in accordance with Section
      12 .




(b)  Pro
      Rata Redemption Requirement .
      If the
      Company elects to cause an Optional Redemption pursuant to Section
      9(a) ,
      then it
      must simultaneously take the same action in the same proportion with respect
      to
      the Other Notes. If the Company elects to cause an Optional Redemption pursuant
      to Section
      9(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
      9(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 “ **Redemption
      Allocation Percentage** ”,
      and
      such amount with respect to each holder is referred to as its “ **Pro
      Rata Redemption Amount** ”); provided , however that in
      the event that any holder’s Pro Rata Redemption Amount exceeds the outstanding
      Principal amount of such holder’s Note, then such excess Pro Rata 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 Redemption Allocation
      Percentage and Pro Rata Redemption Amount.




19




(10)  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.




(11)  RESERVATION
      OF AUTHORIZED SHARES .




(a)  Reservation .
      The
      Company shall reserve out of its authorized and unissued Common Stock a number
      of shares of Common Stock for each of the Notes equal to 120% of the Conversion
      Rate with respect to the Conversion Amount of each such Note as of the
      Issuance **** Date.
      So
      long as any of the Notes are outstanding, the Company shall take all action
      necessary to reserve and keep available out of its authorized and unissued
      Common Stock, solely for the purpose of effecting the conversion of the Notes,
      120% 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; 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 the previous 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.




(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 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 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.




20




(12)  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. 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 concurrently with the consummation of such Change of Control. The Company
      shall deliver the applicable Mandatory Redemption Price on the Holder Mandatory
      Redemption Date. The Company shall deliver the applicable Optional Redemption
      Price on the applicable Optional Redemption 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, against surrender
      of
      the original Note, a new Note (in accordance with Section
      18(d) )
      representing the outstanding Principal which has not been redeemed. In the
      event
      that the Company does not pay the 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. Subject to any different
      conversion price provided for in Section
      8(b) ,
      and
      subject to prior stockholder approval if required by the Principal Market,
      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
      18(d) )
      to the
      Holder representing such Conversion Amount that was 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 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 but
      in no
      event lower than $3.5411. 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
      8 (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.




21




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




(14)  COVENANTS .




(a)  Financial
      Covenants .
      So long
      as this Note is outstanding, the Company shall comply with each of the financial
      covenants set forth below:




(i)  Total
      Indebtedness to EBITDA .
      The
      Company will at all times maintain, on a consolidated basis, a Total
      Indebtedness to EBITDA Ratio of not more than 3.00 to 1.00. For purposes hereof,
      (A) the “ **Total
      Indebtedness to EBITDA Ratio** ”
shall
      mean the ratio of total Indebtedness of the Company to EBITDA (a) calculated
      and
      tested (i) using the Company’s twelve month trailing EBITDA results and (ii)
      total Indebtedness of the Company as of the date of calculation, and (b)
      measured by the Company (as evidenced by a certificate of the Chief Financial
      Officer of the Company delivered to the Holder promptly after the measurement
      date) on the last day of each fiscal quarter (or such other measurement date
      requested by the Required Holders) throughout the period prior to the Maturity
      Date and (B) “ **EBITDA** ”
shall
      mean, as of the date of any determination, the Company’s net income (or loss),
      plus interest expense, plus all charges against income for foreign, federal,
      state and local income taxes, plus depreciation expense, plus amortization
      expense, all as determined on a consolidated basis in accordance with GAAP,
      consistently applied. For purposes of making calculations under this Section
      14(a) on a
      consolidated basis, notwithstanding anything (including GAAP) to the contrary,
      Indebtedness and EBITDA for Subsidiaries shall be calculated as if every
      Subsidiary was wholly-owned and without regard to the percentage ownership
      of
      the Company in such Subsidiary.




(ii)  Acquisitions .
      Without
      the consent of the Required Holders, during the first two (2) years from the
      Issuance Date the Company will not, and will not permit any of the Subsidiaries
      to, purchase, hold or acquire (including pursuant to any merger) any capital
      stock, evidences of indebtedness or other securities of, make or permit to
      exit
      any loans or advances to, or make or permit to exist any investment or any
      other
      interest in, any other Person, or purchase or otherwise acquire (in one
      transaction or a series of transactions (including pursuant to any merger))
      any
      assets of any other Person constituting all or a portion of a business unit
      (“ **Acquisitions** ”),
      except Acquisitions that (i) at the time thereof and immediately after giving
      effect thereto no Event of Default shall have occurred and be continuing and
      (ii) the aggregate cash consideration paid by the Company or any Subsidiary
      for
      all Acquisitions shall (A) prior to the first anniversary of the Issuance Date,
      not exceed $3,000,000 (with the Henglong Transaction not counting against such
      $3,000,000 cap) and (B) after the first anniversary date of the Issuance Date
      but before the second anniversary, not exceed $10,000,000 and notwithstanding
      the foregoing, no new Acquisitions shall be permitted if an Event of Default
      has
      occurred and remains uncured.




22




(b)  Rank .
      All
      payments due under this Note shall rank *pari
      passu* with all
      Other Notes and all other Indebtedness of the Company other than Permitted
      Senior Indebtedness.




(c)  Incurrence
      of Indebtedness .
      Without
      consent of the Required Holders (or as necessary to finance any Note redemptions
      required herein), during the first two (2) years from the Issuance Date, 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 (i) any
      new Indebtedness with lenders duly incorporated, organized under or primarily
      domiciled outside the People’s Republic of China in excess of (A) $5,000,000
      prior to the first anniversary of the Issuance Date or (B) $10,000,000 prior
      to
      the second anniversary of the Issuance Date or (ii) any Indebtedness with
      lenders which are duly incorporated and organized under the law of the People’s
      Republic of China (A) in excess of $10,000,000 prior to the first anniversary
      of
      the Issuance Date or (B) $15,000,000 prior to the second anniversary of the
      Issuance Date. Notwithstanding the foregoing, (x) no new Indebtedness shall
      be
      permitted if an Event of Default has occurred and remains uncured (other than
      as
      necessary to finance any Note redemptions required herein), and (y) the Company
      shall be allowed to renew any or all of its current bank loans of approximately
      $14,000,000 as they mature, should the Company wish to do so.




(d)  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.




(e)  Restricted
      Payments .
      The
      Company shall not, and the Company shall not permit any of its Subsidiaries
      to,
      directly or indirectly, redeem, defease, repurchase, 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 scheduled
      payments of interest or principal or in connection with a refinancing at a
      lower
      interest rate and at-least-as-generous repayment terms.




(f)  Restriction
      on Redemption and Cash Dividends .
      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, repurchase or declare or pay any cash dividend or distribution on its
      capital stock without the prior express written consent of the Required
      Holders.




(g)  Transactions
      with Affiliates .
      Without
      the consent of the Required Holders, the Company shall not, nor shall it permit
      any of its Subsidiaries to, enter into, renew, extend, amend 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,
      (i) 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 provided, however,
      in
      no event shall the Company or any Subsidiary enter into a transaction or series
      of related transactions with an officer, director or employee (each a
“ **Related
      Party** ”)
      of the
      Company or any Subsidiary that results in an account receivable due after March
      31, 2008 to the Company from a Related Party (i) in excess of $100,000 and
      (ii)
      with payment terms greater than ninety (90) days.




23




(h)  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.




(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 use reasonable efforts to maintain and preserve, and cause each
      of
      its Subsidiaries to maintain and preserve, all of its material 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 in all material respects, 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.




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




(16)  VOTE
      TO CHANGE THE TERMS OF NOTES .
      The
      affirmative vote at a meeting duly called for such purpose or the written
      consent without a meeting of the Required Holders shall be required for any
      change or amendment to this Note or the Other Notes. No
      consideration shall be offered or paid to any holder of Notes to amend or
      consent to a waiver or modification of the Notes unless the same consideration
      also is offered to all of the holders of Notes.




(17)  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 Sections
      2(f) and 2(g) of the
      Securities Purchase Agreement and Section
      4(d) of the
      Registration Rights Agreement.




24




(18)  REISSUANCE
      OF THIS NOTE .




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




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




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




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




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




25




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




(21)  CONSTRUCTION;
      HEADINGS .
      This
      Note shall be deemed to be jointly drafted by the Company and all the Holders
      of
      the Notes 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.




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




(23)  DISPUTE
      RESOLUTION .
      In the
      case of a dispute as to the determination of the Closing Bid Price, the Closing
      Sale Price or the Weighted Average Price or the arithmetic calculation of the
      Conversion Rate, the Conversion Price or any Redemption Price, the Company
      shall
      submit the disputed determinations or arithmetic calculations via 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 (1) 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 Company and approved by the Holder or (b) the disputed arithmetic
      calculation of the Conversion Rate, Conversion Price or any Redemption Price
      to
      the Company’s independent, outside accountant. The Company, at the Company’s
      expense, shall cause the investment bank or the accountant, as the case may
      be,
      to perform the determinations or calculations and notify the Company and the
      Holder of the results no later than five (5) Business Days from the time it
      receives the disputed determinations or calculations. Such investment bank’s or
      accountant’s determination or calculation, as the case may be, shall be binding
      upon all parties absent demonstrable error.




26




(24)  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 therefor. 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 ten (10) 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, Interest or other amounts due under this
      Note 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 eighteen percent (18%) per annum from the date such amount was due until
      the
      same is paid in full (“ **Late
      Charge** ”).




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




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




(27)  GOVERNING
      LAW; JURISDICTION; JURY .
      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 Holder and the Company hereby irrevocably submit 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. Nothing contained herein shall be deemed to limit in any way any
      right
      to serve process in any manner permitted by law. The Holder and 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 as provided in Section
      24 hereof
      and agrees that such service shall constitute good and sufficient service of
      process and notice thereof. 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




(28)  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).




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




(a)  “ **Approved
      Stock Plan** ”
means
      any employee benefit plan which has been or is hereafter approved by the Board
      of Directors of the Company, pursuant to which the Company’s securities may be
      issued to any employee, consultant, officer or director for services provided
      to
      the Company.




(b)  “ **Bloomberg** ”
means
      Bloomberg Financial Markets.




28




(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, the voting power of the surviving entity
      or entities necessary to elect a majority of the members of the board of
      directors (or their equivalent if other than a corporation) of such entity
      or
      entities, or (ii) a migratory merger effected solely for the purpose of changing
      the jurisdiction of incorporation of the Company .




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




(f)  “ **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.




(g)  “ **Common
      Stock Deemed Outstanding** ”
means,
      at any given time, the number of shares of Common Stock outstanding at such
      time, plus the number of shares of Common Stock deemed to be outstanding
      pursuant to Sections
      7(a)(i) and 7(a)(ii) hereof
      regardless of whether the Options or Convertible Securities are actually
      exercisable at such time, but excluding any Common Stock owned or held by or
      for
      the account of the Company or issuable upon conversion of the Notes and
      Warrants.




29




(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 Common Stock.




(j)  “ **Eligible
      Market** ”
means
      the Principal Market, The New York Stock Exchange, Inc., the American Stock
      Exchange, The NASDAQ Global Select Market or The NASDAQ Global
      Market.




(k)  “ **Equity
      Conditions** ”
means
      that each of the following conditions is satisfied: (i) on each day during
      the
      period beginning six (6) month prior to the applicable date of determination
      and
      ending on and including the applicable date of determination (the “ **Equity
      Conditions Measuring Period** ”), either
      (x) the Registration Statement filed pursuant to the Registration Rights
      Agreement shall be effective and available for the resale of all remaining
      Registrable Securities in accordance with the terms of the Registration Rights
      Agreement and
      there
      shall not have been any Grace Periods  (as
      defined in the Registration Rights Agreement) or (y)
      all
      shares of Common Stock issuable upon conversion of the Notes shall be eligible
      for sale without restriction and without the need for registration under any
      applicable federal or state securities laws; (ii) on
      each day during the Equity Conditions Measuring Period, the 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)
      nor shall delisting or suspension by such exchange or market been threatened
      or
      pending either (A) in writing by such exchange or market or (B) by falling
      below
      the then effective minimum listing maintenance requirements of such exchange
      or
      market; (iii) during the Equity Conditions Measuring Period, the Company shall
      have delivered shares of Common Stock upon conversion of the Notes to the
      holders on a timely basis as set forth in Section
      3(c)(ii) hereof
      (and analogous provisions under the Other Notes); (iv) any applicable shares
      of Common
      Stock to
      be
      issued in connection with the event requiring determination may be issued in
      full without violating Section
      3(d) hereof
      and the rules or regulations of the Principal Market or any applicable Eligible
      Market; (v) the Company shall not have failed to timely make any payments within
      five (5) Business Days of when such payment is due pursuant to any Transaction
      Document; (vi) on the Mandatory Conversion Date no Event of Default exists;
      and (vii)
      the
      Company shall have no knowledge of any fact that would cause (x) the
      Registration Statements required pursuant to the Registration Rights Agreement
      not to be effective and available for the resale of all remaining Registrable
      Securities in accordance with the terms of the Registration Rights Agreement
      or
      (y) any shares of Common Stock issuable upon conversion of the Notes not to
      be
      eligible for sale without restriction pursuant to any applicable securities
      laws
      (assuming proper prospectus delivery).




30




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




(m)  “ **Excluded
      Securities** ”
means,:
      (i) as a stock dividend to holders of Common Stock or upon any subdivision
      or
      combination of shares of Common Stock; (ii) in connection with any Approved
      Stock Plan; (iii) any securities issued to the seller as consideration for
      the
      acquisition of another entity by the Company by merger or share exchange
      (whereby the Company owns no less than 51% of the voting power of the surviving
      entity) or purchase of substantially all of such entity’s stock or assets that
      otherwise complies with this Note; (iv) any securities issued in connection
      with
      a license, strategic partnership, joint venture or other similar agreement, provided that the
      purpose of such arrangement is not primarily the raising of capital; (v) upon
      exercise of warrants issued as a part of the issuance of straight debt
      securities (with no equity or equity-linked feature) issued to a financial
      institution or lender in connection with a bank loan, credit, lease, or other
      debt transaction with such financial institution or lender (where warrant
      coverage is not greater than 5% of the principal amount of any such loan);
      or
      (vi) upon conversion of any Options or Convertible Securities which are
      outstanding on the day immediately preceding the Closing Date, provided that the
      terms of such Options or Convertible Securities are not amended, modified or
      changed on or after the Closing Date.




(n)  “ **Fundamental
      Transaction** ”
means
      that the Company shall, directly or indirectly, in one or more related
      transactions, (i) consolidate or merge with or into (whether or not the Company
      is the surviving corporation) another Person or Persons, or (ii) sell, assign,
      transfer, convey or otherwise dispose of all or substantially all of the
      properties or assets of the Company to another Person, or (iii) allow another
      Person to make a purchase, tender or exchange offer that is accepted by the
      holders of more than 50% of the outstanding shares of Voting Stock (not
      including any shares of Voting Stock 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 (not including any shares of Voting Stock
      held by the other Person or other Persons making or party to, or associated
      or
      affiliated with the other Persons making or party to, such stock purchase
      agreement or other business combination), or (v) reorganize, recapitalize or
      reclassify its Common Stock or (vi) any “person” or “group” (as these terms are
      used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall
      become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
      directly or indirectly, of 50% of the aggregate Voting Stock of the Company
      other than Mr. Hanlin Chen and only to the extent of his ownership as of the
      Issuance Date.




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




(p)  “ **Henglong
      Transaction** ”
shall
      have the meaning assigned to such term in the Securities Purchase Agreement
      and
      the schedules thereto; and the meanings of the Henglong Transaction being
      consummated “on terms and conditions satisfactory” to the Lead Investor shall
      also have the meanings assigned to such terms in the Securities Purchase
      Agreement and the schedules thereto.




31




(q)  “ **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 and notes payable in respect of 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 (provided, for avoidance of doubt, that the Company’s support (prior
      to any actual payment by the Company to its banks) of its banks’ guaranty of the
      trade payables does not constitute Indebtedness), (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.




(r)  “ **Interest**  **Rate** ”
means
      for each applicable period indicated below, a rate per annum equal
      to:




2008:  3.0%


2009:  3.5%


2010:  4.0%


2011:  4.5%


2012:  5.0%




The
      Interest Rate is subject to adjustment as set forth in Section
      2 .




(s)  “ **Lead
      Investor** ”
means
      the Lead Buyer as identified in the Securities Purchase Agreement or such other
      Person as it may designate.




(t)  “ **Options** ”
means
      any rights, warrants or options to subscribe for or purchase shares of Common
      Stock or Convertible Securities.




(u)  “ **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.




32




(v)  **Reserved** .




(w)  “ **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 clauses (i) and (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)(ix) ,
      and
      (ix) Liens securing Permitted Senior Indebtedness.




(x)  “ **Permitted
      Senior Indebtedness** ”
means
      the principal of (and premium, if any), interest on, and all fees and other
      amounts (including, without limitation, any reasonable out-of-pocket costs,
      enforcement expenses (including reasonable out-of-pocket legal fees and
      disbursements), collateral protection expenses and other reimbursement or
      indemnity obligations relating thereto) payable by Company and/or its
      Subsidiaries under or in connection with any inventory and receivables credit
      facility based on a customary borrowing base entered into by the Company and/or
      its Subsidiaries with one or more financial institutions (and on terms and
      conditions) to fund the working capital needs of the Company and its
      Subsidiaries, in form and substance satisfactory to the Required Holders; provided , however ,
      that
      the Total Indebtedness to EBITDA Ratio is maintained.




(y)  “ **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.




(z)  “ **Principal
      Market** ”
means
      The NASDAQ Capital Market.




(aa)  “ **Redemption
      Notices** ”
means,
      collectively, the Event of Default Redemption Notices, the Change of Control
      Redemption Notices, the Company Notices, the Optional Redemption Notices, each
      of the foregoing, individually, a Redemption Notice.




33




(bb)  “ **Redemption
      Prices** ”
means,
      collectively, the Event of Default Redemption Price, Change of Control
      Redemption Price, and the Holder Mandatory Redemption Price, and the Optional
      Redemption Price, each of the foregoing, individually, a Redemption
      Price.




(cc)  “ **Registration
      Rights Agreement** ”
means
      that certain registration rights agreement dated as of the Issuance Date by
      and
      among the Company and the initial holders of the Notes relating to, among other
      things, the registration of the resale of the Common Stock issuable upon
      conversion of the Notes.




(dd)  “ **Required
      Holders** ”
means
      (i) the Lead Investor and (ii) other holders of Notes representing in the
      aggregate with the Lead Investor’s Notes at least a majority **** of
      the
      aggregate principal amount of the Notes then outstanding.




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




(ff)  “ **Securities
      Purchase Agreement** ”
means
      that certain securities purchase agreement dated as of February 1, 2008 by
      and
      among the Company and the initial holders of the Notes pursuant to which the
      Company issued the Notes.




(gg)  “ **Subsidiary** ”
means
      any entity in which the Company, directly or indirectly, owns any of the capital
      stock or holds an equity or similar interest.




(hh)  “ **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.




(ii)  “ **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).




(jj)  “ **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).




34




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




(30)  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* ]




35





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




**CHINA
                  AUTOMOTIVE SYSTEMS, INC.**By:
            /s/
              Hanlin
              ChanName:
                Hanlin ChanTitle:
                Chairman




*[Signature
        Page to Senior Convertible Note (A-3)]*










**EXHIBIT
      I**





**CHINA
      AUTOMOTIVE SYSTEMS, INC.**


**CONVERSION
      NOTICE**




Reference
      is made to the Senior Convertible Note (the “ **Note** ”)
      issued
      to the undersigned by China Automotive Systems, Inc. (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 $0.0001 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 Securities
      Transfer Corporation to issue the above indicated number of shares of Common
      Stock in accordance with the Transfer Agent Instructions dated February
      1, **** 2008 **** from
      the
      Company and acknowledged and agreed to by Securities Transfer
      Corporation.




**CHINA
                AUTOMOTIVE SYSTEMS, INC.**By:
            /s/
              Hanlin
              ChanName:
                Hanlin ChanTitle:
                Chairman